   
CRD IV (Capital
Requirements Directive IV)
Capital
Requirements Directive IV - Part 1
Capital Requirements Directive IV - Part 3
Proposal
for a DIRECTIVE OF THE EUROPEAN PARLIAMENT AND OF THE
COUNCIL amending Directives 2006/48/EC and 2006/49/EC as regards
capital requirements for the trading book and for
re-securitisations, and the supervisory review of remuneration
policies SEC(2009) 974 final SEC(2009) 975
final
EXPLANATORY MEMORANDUM
CONTEXT OF THE
PROPOSAL
A new capital requirements framework, based on the
'Basel-II' revised international capital framework, was adopted in
June 2006 as the Capital Requirements Directive ('CRD'): this
comprises Directive 2006/48/EC relating to the taking up and pursuit
of the business of credit institutions (recast) and Directive
2006/49/EC on the capital adequacy of investment firms and credit
institutions (recast).
There is widespread recognition that
further regulatory reform is needed to address weaknesses in the
regulatory capital framework and in the risk management of financial
institutions that contributed to the turmoil in global financial
markets.
As part of its response to the financial crisis,
in
November 2008 the Commission mandated a High Level Group chaired by
Mr. Jacques de Larosière to propose recommendations for reforming
the European financial supervision and regulation.
The thirty one
recommendations of that Group represented a comprehensive set of
proposals for regulatory and supervisory repair.
With regard to remuneration structures,
the Larosière Report recommends
that compensation incentives should be better aligned with
shareholder interests and long-term profitability by basing the
structure of financial sector compensation schemes on the
principles that bonuses should reflect actual performance,
should not be guaranteed, and that the assessment of bonuses
should be set in a multi-year framework, spreading bonus
payments over the cycle.
Building on
the Group's recommendations, in its Communication "Driving European
Recovery" for the spring European Council of March 4, 20093 the
Commission set out an ambitious programme of financial services
reform.
The present proposal is one of the several measures that the
Commission has already taken to implement that programme.
The
Communication stated that a proposal for the revision of the CRD to
be presented by the Commission by June 2009 would:
• include
provisions to reinforce capital requirements for assets that banks
hold in the trading book for short-term resale;
• upgrade the
capital requirements for complex securitisations, both in the
banking and in the trading book; and
• enable supervisory
authorities to impose capital 'sanctions' on financial institutions
the remuneration policies of which are found to generate
unacceptable risk.
Similar objectives were also agreed by
leaders
of the G20 at the meeting in London on 2 April 2009.
The Declaration
on Strengthening of the Financial System announces an agreement to
take action, once recovery is assured, to improve the quality,
quantity, and international consistency of capital in the
banking system; and to endorse and implement the
Financial
Stability Forum’s principles on pay and compensation and to
support sustainable compensation schemes.
On the same date, the Financial
Stability Forum ('FSF') published a report on Addressing
Procyclicality in the Financial System and Principles on Sound
Compensation Practices in the financial industry,6 aimed at aligning
employees' incentives with the long-term profitability of the
firm.
The report of the FSF on Addressing Procyclicality sets out
recommendations to mitigate procyclicality which cover three areas:
bank capital framework, bank loan loss provisions, and leverage and
valuation.
The Basel Committee on Banking Supervision has issued
Recommendations intended to mitigate the risk that the regulatory
capital framework might amplify the transmission of shocks between
the financial and real sectors.
This includes proposals to reduce
the reliance on cyclical VAR-based capital estimates and enhance the
risk coverage for re-securitization instruments and default and
migration risk for non-securitized credit products.
In support of
the recommendations of the FSF and the G20, the Basel Committee is
working on developing more detailed changes to the current rules to
a timetable set by the G20.
The FSF Principles on Sound
Compensation Practices call for effective governance of
compensation, and for compensation to be adjusted for all types of
risk, to be symmetric with risk outcomes, and to be sensitive to the
time horizon of risks.
They also recommend that implementation by
firms should be reinforced through supervision.
The Commission
took the first step towards addressing the problems that arise from
poorly designed compensation structures when, on
30th April 2009, it
adopted Recommendations on the regime for the remuneration of
directors of listed companies and on remuneration policies in the
financial services sector.
The Communication that accompanied the
Recommendations indicated that the CRD would be modified to bring
the remuneration arrangements of banks and investment firms
within
The
Committee of European Banking Supervisors ('CEBS') has
also developed principles on remuneration policies, which were
published on 20th April 2009.
The scope of the principles covers
remuneration policies applying throughout an organisation, and
focuses on key aspects including the alignment of company and
individual objectives; governance with respect to oversight and
decision-making; performance measurement; and forms of
remuneration.
The current proposal is intended to give effect to
the commitments set out in the Commission Communication of 4 March,
and is consistent with the high level international objectives
agreed by G20 leaders.
Finally, in accordance with the
undertakings set out in its Communication of 4 March, the Commission
will propose further changes to the CRD in October 2009 to address
liquidity risk and excessive leverage, introduce provisions for
dynamic capital reserving, and remove national options and
discretions to advance progress towards a common rule book.
PUBLIC CONSULTATION
An open internet consultation on proposed
draft revisions to trading book and securitization provisions was
conducted from March 25 until April 29, 2009. Eighteen responses
were received.
The responses generally supported the
objectives of the Commission's draft proposals. Some respondents
expressed concerns that the approach to re-securitisations was not
sufficiently targeted.
However, such concerns arose from an
assumption that the Commission intended what would in effect be a
general ban by requiring the deduction from capital of all
re-securitisations.
This was not the Commission's intention, and
that has been made clear by modifications which represent a more
differentiated approach.
A separate online public consultation on
a proposed draft of remuneration policy provisions ran from April 29
until May 6, 2009 on DG MARKT website. Twenty three responses were
received from financial institutions and industry representatives,
Member States and regulators.
The majority of respondents
expressed support for the principle that remuneration policies
within the banking sector should be consistent with sound and
effective risk management, and that this should be brought within
the scope of supervisory review under the CRD.
Some expressed
concerns that because remuneration policies and practices are
tailored to the structure and business model of individual
institutions, the principles set out in the CRD should not be too
prescriptive.
The Commission believes that the text permits the
necessary flexibility by requiring firms to comply with the
principles in a way that is appropriate to their size, internal
organisation and nature, scope and complexity of their activities.
In addition, other respondents were concerned that including
remuneration for employees, other than executives, within the scope
of supervisory review might impact adversely on collective
agreements that banks and investment firms have in place for
non-management employees.
IMPACT ASSESSMENT
Altogether,
fourteen different policy options have been assessed. The summary
below describes the preferred policy option and its expected
impact.
Trading Book
With respect to capital requirements for
bank trading books, the following targeted amendments, aligned with
what is envisaged by the Basel Committee, will be
introduced:
– Adding an additional capital buffer based on
stress scenario VAR to the ordinary VAR. This change is expected to
roughly double current trading book capital
requirements.
– Extending the existing charge for default risk
in the trading book to capture losses short of issuer default, e.g.
rating downgrades, to address the fact that recent losses on traded
debt most of the time did not involve issuers actually defaulting.
The impact of this change will depend on the composition of banks'
portfolios in the post-crisis environment.
– Basing the charge
for securitisation positions in the trading book on the existing
simple risk weights for the banking book. Again, the impact of this
change will depend on the composition of banks' portfolios in the
post-crisis environment.
Generally, banks tend to maintain
capital levels that are in line with internally developed 'targets',
and which may lead to higher capital levels than those required by
minimum capital requirements.
Therefore, it is not straightforward
to estimate how much additional capital banks would have to raise in
order to comply with the proposed amendments.
An increase in the
minimum capital required might be partially absorbed by existing
capital buffers. For instance, the overall solvency ratio for large
euro-area financial institutions at the end of first half of 2008
was on average 11.4%, implying an average capital buffer (over the
minimum capital requirements) of 3.4% of risk-weighted assets.
Re-securitizations
In line with the approach developed by
the Basel Committee, re-securitization positions would be assigned a
higher capital requirement than other securitisation positions to
reflect the higher risk of unexpected impairment losses.
For
particularly complex re-securitizations, the proposals reinforce
both the due diligence requirements and the supervisory process to
enforce them.
For investments in re-securitizations of particularly
high complexity, banks will have to demonstrate to their supervisor
that necessary due diligence standards have been met.
If they cannot
do so, a general deduction from capital would apply. In instances
where compliance with required due diligence is found to be
inadequate, institutions would be debarred from future investment in
such instruments.
The impact of these measures on the future
credit supply – the funding of which is facilitated in part by
issuance of re-securitizations such as
certain collateralized debt
obligations (CDOs) - should be assessed in the light of the level of
their issuance in the post-crisis market environment.
Evidence shows
that total CDO issuance in Europe contracted from €88.7 billion in
2007 to €47.9 billion in 2008.
This contraction would have been even
more pronounced had the European Central Bank and the Bank of
England not been accepting securitization as collateral: in 2008,
95% of all securitization issuance was retained by banks for 'repo'
purposes, with primary market remaining effectively closed due to
significantly diminished investor appetite for these instruments.
Against such trends, any incremental impact on the CDO issuance and
credit supply would appear to be limited. However, this measure
could limit recovery of the secondary market for the affected
instruments.
Disclosure of Securitization Risks
Disclosure
requirements, in line with internationally agreed standards, would
be enhanced in several areas such as securitization exposures in the
trading book and sponsorship of off-balance sheet vehicles.
These
changes will improve investor understanding of banks' risk profile
and, by enhancing transparency, reinforce banks' risk management.
The incremental administrative burden for the EU banking industry is
estimated at €1.3 million per year and is expected to fall mostly on
larger institutions with more advanced approaches to risk
management.
Supervisory Review of Remuneration Policies
The
proposed amendments will impose oblige credit institutions and
investment firms to have remuneration policies that are consistent
with effective risk management.
The relevant principles will be set
out in the CRD, but will be closely aligned with those set out in
Commission Recommendation C(2009) 3159 of 30 April 2009 on
remuneration policies in the financial services sector.
Making
the relevant principles of the Recommendation binding will increase
the rate of compliance by credit institutions and investment
firms.
The proposal allows firms the flexibility to comply with
the new obligation and high level principles in a way that is
appropriate to their size and internal organisation and the nature,
scope and complexity of their activities.
This approach is likely to
minimise the up-front and on-going compliance costs for firms, and
was therefore preferred over an alternative of requiring a strict
and uniform compliance by all firms, irrespective of their size,
with the principles set out in Commission Recommendation C(2009)
3159 of 30 April 2009 on remuneration policies in the financial
services sector.
BUDGETARY IMPLICATION
The proposal
has no implication for the Community budget.
LEGAL ELEMENTS OF
THE PROPOSAL
Given that changes need to be introduced into an
existing Directive, an amending Directive is the most appropriate
instrument.
This amending Directive should have
the same legal basis
as the Directive it amends.
Therefore, the proposal is based on
Article 47(2) EC, which provides the legal basis for the
harmonisation of rules relating to the taking up and pursuit of the
business of, inter alia, credit institutions.
In accordance with
the principles of proportionality and subsidiarity as set out in
Article 5 EC, the objectives of the proposed action cannot be
sufficiently achieved by the Member States and can therefore be
better achieved by the Community.
Its provisions do not go beyond
what it is necessary to achieve the objectives pursued.
Only
Community legislation can ensure that credit institutions operating
in more than one Member State are subject to the same requirements
for prudential supervision, in this case by ensuring that the
already harmonised capital requirements framework for credit
institutions and investment firms is further strengthened by
reinforced capital requirements for trading book items, appropriate
due diligence and upgraded capital requirements for complex
re-securitisations, and the introduction of explicit rules and
appropriate supervisory measures and sanctions with regard to
remuneration structures.
DETAILED EXPLANATION OF THE
PROPOSAL
5.1. Capital requirements for
re-securitisation
(Article 1(1) and (9) and Annex I, paragraph
(3))
Re-securitisations are securitisations that have underlying
securitisation positions, typically in order to repackage
medium-risk securitisation exposures into new securities.
They have
generally been considered low credit risk by rating agencies and
market participants.
However, given their complexity and sensitivity
to correlated losses, such re-securitisations entail higher risks
than straight securitisations.
Therefore, this proposal comprises a
set of capital requirements that are higher than for straight
securitisation positions of the same rating.
Furthermore,
the
proposal includes a strengthened supervisory process for
re-securitisations that are particularly complex.
The sample-based
supervisory review that applies to securitisations and
re-securitisations of normal complexity is not sufficiently rigorous
for some re-securitisations, where the high level of complexity of
the instrument in question casts doubt on the ability of the bank to
understand fully the nature and risks of the underlying exposures.
The proposal therefore requires that compliance with the applicable
due diligence standards for banks that invest in such products be
checked for each individual investment made.
CEBS will converge
supervisory practice by agreeing which types of re-securitisations
are 'highly complex', so that the ability of institutions to perform
proper due diligence in relation to such instruments can be verified
by supervisors on a case-by-case basis.
In exceptional cases where a
bank cannot demonstrate to its regulator that it has complied with
the required due diligence in respect of a highly complex
re-securitisation, a risk weight of 1250% will be applied to the
position in that re-securitisation.
This capital treatment applies
to new re-securitisations issued after 31 December 2010, and will
only apply to an existing re-securitisation position after 31
December 2014 if new underlying exposures are added or substituted after that date.
Accordingly,
the 1250% risk
weight cannot be applied to banks' legacy positions in
re-securitisations (unless the underlying exposures of those
positions are changed after the end of 2014).
5.2. Technical
changes
(Article 1(5) and Annex II, point (4); Article 1(7);
Article 2(2) and (3); Annex I, point (2) and Annex II, point
(2))
In 2006 the Commission and CEBS set up the Capital
Requirements Directive Transposition Group (CRDTG) in 2006 to
facilitate a coherent implementation and application throughout the
EU of the CRD.
According to the CRDTG, certain technical provisions
of that Directive need to be further specified. For instance, this
directive will clarify that capital requirements for settlement risk
also apply in the non-trading book.
5.3. Disclosure
requirements
(Article 1(11) and Annex I, point (4))
The
existing disclosure requirements in the CRD regarding institutions'
securitisation exposures are strengthened by this proposal. In
particular, the disclosure requirements will in future cover the
risks not only of securitisation positions in the non-trading book,
but also those in the trading book.
5.4. Market risk capital
requirements for securitisations
(Article 1(4), (6) and (8);
Article 2(1); Annex II, point (1))
Capital requirements for
securitisations in the trading book are currently calculated as if
these instruments were normal debt positions.
This contrasts with
the banking book, where there is a separate, more differentiated and
risk sensitive set of capital requirements.
This proposal envisages
that the trading book capital requirements be based on those for
equivalent securities in the banking book.
5.5. Internal models
based capital requirements for market risks
(Annex II, point
(3)
Institutions may currently calculate their capital
requirements for market risks in the trading book using their own
models that estimate the potential losses from future adverse market
movements.
Over 2007-2008, it became clear that internal models
systematically underestimated the potential loss in stressed
conditions.
This led to inadequate capital requirements and cyclical
volatility of banks' capital as the market environment deteriorated.
Accordingly, this directive will strengthen the capital requirements
based on internal models in several respects:
• there will be
a requirement to estimate separately the potential losses in a
protracted period of adverse circumstances, thereby enhancing the
resilience of models under stress conditions and reducing their
potential for pro-cyclicality;
• institutions will be required
to estimate not only the risk of losses from default of debt items
in the trading book, but also the potential losses from
deterioration in credit quality short of default;
• to address
doubts about the ability of internal models to adequately capture
the particular risk profile of securitisation positions,
institutions will be required to assess a separate standardised
capital charge for the risks of securitisation positions in the
trading book.
5.6 Remuneration policies
(Article
1(2) and (3); Annex I, point (1) and point (4)(iii))
Under the
current European supervisory framework, there is no express
requirement that the remuneration policies of financial institutions
should be subject to supervisory oversight. As a result, supervisory
authorities have generally not focused on the implications of
remuneration policies for risk and effective risk management.
The
purpose of this proposed amendment to the CRD is:
• to impose
a binding obligation on credit institutions and investment firms to
have remuneration policies and practices that are consistent with
and promote sound and effective risk management, accompanied by high
level principles on sound remuneration;
• to bring
remuneration policies within the scope of the supervisory review
under the CRD, so that supervisors would be able to require the firm
to take measures to rectify any problems that they might
identify;
• to ensure that supervisors may also impose
financial or non-financial penalties (including fines) against firms
that fail to comply with the obligation.
The proposed requirement
will apply to credit institutions and, by virtue of Article 34 of
Directive 2006/49/EC, to investment firms that are authorised and
regulated under Directive 2004/39/EC on markets in financial
instruments.
The scope of the proposed obligation is restricted
to remuneration for staff whose professional activities have a
material impact on the risk profile of the bank or investment firm.
This targets the remuneration policies for those individuals who
take decisions that may affect the level of risk assumed by the
institution.
The proposed high-level principles on sound
remuneration are not intended to prescribe the amount and form of
remuneration, and institutions remain responsible for the design and
application of their particular remuneration policy.
Firms have
flexibility as to how the principles are applied in a way that is
appropriate to their size, internal organisation and the nature,
scope and complexity of their activities.
Credit institutions and
investment firms carry out different activities and have different
levels of tolerated risk: remuneration structures and application of
the principles will vary accordingly.
Prudential oversight in the
course of the supervisory review would focus on whether the
remuneration policies and practices are consistent with sound risk
management given the nature of the firm's business.
In order to
align supervisory assessments, and to assist firms in complying with
the principles, the proposal requires CEBS to ensure the existence
of guidelines on sound remuneration policies.
If a supervisor
identifies problems it may require the credit institution or
investment firm to take qualitative or quantitative measures to
address those problems.
Those measures may include a ('qualitative')
requirement for the firm to rectify the situation by changing its
remuneration structure to reduce the inherent risk and – in
appropriate cases – a ('quantitative') requirement for the firm to
hold additional own funds against the risk.
In addition,
competent authorities must also have the power under the CRD to
impose penalties for a breach of any requirement of the Directive
(including the proposed requirement in relation to remuneration
policies).
This sanctioning power is separate from the power to
require firms to take qualitative or quantitative measures.
The
proposed amendment to Article 54 CRD is intended to ensure that
supervisors have both financial and non-financial sanctions at their
disposal, and that such sanctions are effective, proportionate and
dissuasive.
This proposed amendment of the CRD
complements the Commission Recommendation on remuneration policies
in the financial services sector.
The more detailed principles set
out in the Commission Recommendation, along with the CEBS
guidelines, will be relevant to compliance with the obligation under
the CRD.
They should provide further guidance as to how the
obligation might be met, and a framework for regulators when
assessing firms' remuneration structures.
5.7 General
clarification of supervisory review under Article 136(2)
The
proposed new sub-paragraph of Article 136(2) is intended to clarify
that, when carrying out the supervisory review, competent
authorities should take into account both the quantitative and the
qualitative aspects of credit institutions' assessment of internal
capital under Article 123, and credit institutions' arrangements,
processes, mechanisms and strategies under Articles 22.
This
clarification applies to the entire review process, and is not
restricted to the review of the new requirement relating to
remuneration policies and practices. The objective is to facilitate
further convergence of supervisory practices across the
EU.
Proposal for a DIRECTIVE OF THE EUROPEAN PARLIAMENT
AND OF THE COUNCIL amending Directives 2006/48/EC and 2006/49/EC
as regards capital requirements for the trading book and for
re-securitisations, and the supervisory review of remuneration
policies (Text with EEA relevance)
THE EUROPEAN PARLIAMENT AND
THE COUNCIL OF THE EUROPEAN UNION,
Having regard to the Treaty
establishing the European Community, and in particular Article 47(2)
thereof,
Having regard to the proposal from the
Commission,
Having regard to the opinion of the European Economic
and Social Committee,
Acting in accordance with the procedure
laid down in Article 251 of the Treaty,
Whereas:
(1)
Excessive and imprudent risk-taking in the banking sector has led to
the failure of individual financial institutions and systemic
problems in Member States and globally.
While the causes of such
risk-taking are many and complex, there is agreement by supervisors
and regulatory bodies, including the G20 and the Committee of
European Banking Supervisors, that the inappropriate remuneration
structures of some financial institutions have been a contributory
factor.
Remuneration policies which give incentives to take risks
that exceed the general level of risk tolerated by the institution
can undermine sound and effective risk management and exacerbate
excessive risk-taking behaviour.
(2) Directive 2006/48/EC of the
European Parliament and of the Council of 14 June 2006 relating to
the taking up and pursuit of the business of credit institutions11
requires credit institutions to have arrangements, strategies,
processes and mechanisms to manage the risks to which they are
exposed.
By virtue of Directive 2006/49/EC of the European
Parliament and of the Council of 14 June 2006 on the capital
adequacy of investment firms and credit institutions that
requirement applies to investment firms within the meaning of
Directive 2004/39/EC of the European Parliament and of the Council
of 21 April 2004 on markets in financial instruments amending
Council Directives 85/611/EEC and 93/6/EEC and Directive 2000/12/EC
of the European Parliament and of the Council and repealing Council
Directive 93/22/EEC.
Directive 2006/48/EC requires competent
authorities to review those arrangements, strategies, processes and
mechanisms, and to determine whether the own funds held by the
credit institution or investment firm concerned ensure a
sound management and coverage of the risks to which the institution
or firm is or might be exposed.
That supervision is carried out on a
consolidated basis in relation to banking groups, and includes
financial holding companies and affiliated financial institutions in
all jurisdictions.
(3) In order to
address the potentially
detrimental effect of poorly designed remuneration structures on the
sound management of risk and control of risk-taking behaviour by
individuals, the requirements of Directive 2006/48/EC should be
supplemented by an express obligation for credit institutions and
investment firms to establish and maintain, for those categories of
staff whose professional activities have a material impact on their
risk profile, remuneration policies and practices that are
consistent with effective risk management.
(4) Because excessive
and imprudent risk-taking may undermine the financial soundness of
financial institutions and destabilise the banking system, it is
important that the new obligation concerning remuneration policies
and practices should be implemented in a consistent manner.
It is
therefore appropriate to specify core principles on sound
remuneration to ensure that the structure of remuneration does not
encourage excessive risk-taking by individuals and is aligned with
the risk appetite, values and long-term interests of the
institution.
In order to ensure that the design of remuneration
policies is integrated in the risk management of the financial
institution, the management body (supervisory function) of each
credit institution or investment firm should establish the general
principles to be applied, and the policies should be subject to at
least annual independent internal review.
(5) Remuneration policy
should aim at aligning the personal objectives of staff members with
the long-term interests of the credit institution or investment firm
concerned.
The assessment of the performance-based components of
remuneration should be based on longer-term performance and take
into account the outstanding risks associated with the performance.
The assessment of performance should be set in a multi-year
framework, for example of three to five years, in order to ensure
that the assessment process is based on longer term performance and
that the actual payment of performance-based components of
remuneration is spread over the business cycle of the firm
(6)
Commission Recommendation of 30 April 2009 on remuneration policies
in the financial services sector14 also sets out principles on sound
remuneration policies as to how firms might comply with this
obligation, that are consistent with and complement the principles
set out in this Directive.
(7) The provisions on
remuneration
should be without prejudice to the rights, where applicable, of
social partners in collective bargaining.
(8) In order to ensure
fast and effective enforcement, competent authorities should also
have the power to impose either financial or non-financial measures
or penalties for breach of a requirement under Directive 2006/48/EC,
including the requirement to have remuneration policies that are
consistent with sound and effective risk management.
Those measures
and penalties should be effective, proportionate and
dissuasive.
(9) In order to ensure effective supervisory
oversight of the risks posed by inappropriate remuneration
structures, the remuneration polices and practices adopted by
credit institutions and investment firms should be included
in the scope of supervisory review under Directive 2006/48/EC.
In
the course of that review, supervisors should assess whether those
policies and practices are likely to encourage excessive risk-taking
by the staff in question.
(10) In order to promote supervisory
convergences in the assessment of remuneration policies and
practices, the Committee of European Banking Supervisors should
ensure the existence of guidelines on sound remuneration policies in
the banking sector.
The Committee of European Securities
Regulators should assist in the elaboration of such guidelines
to the extent that they also apply to remuneration policies for
persons involved in the provision of investment services and the
carrying out of investment activities by credit institutions and
by investment firms within the meaning of Directive 2004/39/EC
of the European Parliament and of the Council of 21 April 2004
on markets in financial instruments.
(11) Since poorly designed remuneration
policies and incentive schemes are capable of increasing to an
unacceptable extent the risks to which credit institutions and
investment firms are exposed, it is appropriate that competent
authorities impose qualitative or quantitative measures on the
relevant entities that are designed to address problems that have
been identified in relation to remuneration policies in the Pillar 2
supervisory review.
Qualitative measures available to competent
authorities include requiring credit institutions or investment
firms to reduce the risk inherent in their activities, products or
systems, including structures of remuneration to the extent that
they are inconsistent with effective risk management. Quantitative
measures include a requirement to hold additional own funds.
(12)
In order to ensure adequate transparency to the market of their
remuneration structures and the associated risk, credit institutions
and investments forms should disclose information on their
remuneration policies and practices for those staff whose
professional activities have a material impact on the risk profile
of the institution.
However, this obligation should be without
prejudice to Directive 95/46/EC of the European Parliament and of
the Council of 24 October 1995 on the protection of individuals with
the regard to the processing of personal data and the free movement
of such data.
(13) The
review of risks to which the credit
institution might be exposed should result in effective supervisory
measures. It is therefore necessary that further convergence be
reached with a view to supporting joint decisions by supervisors and
ensuring equal conditions of competition within the
Community.
(14) There should be a separate capital treatment for
securitisations which re-package other securitisations and are
subject to a higher credit risk than normal securitisations and
provides credit institutions and investment firms with clear
disincentives against investment in securitisations of particularly
high complexity and risk.
(15) Banks investing in
re-securitisations are required under Directive 2006/48/EC to
exercise due diligence also with regard to the underlying
securitisations and the non-securitisation exposures ultimately
underlying the former.
Depending on the complexity of the layers of
securitisation structures and depending on the complexity and the
diversity (or both) of the non-securitisation exposures that
ultimately underlie the re-securitisations, the required due
diligence may be impossible or uneconomical (or both) to carry out.
This is in particular the case where the ultimate underlying
exposures are, for example, leveraged buy-out or project finance
debt. In these cases, institutions should not invest in such highly
complex re-securitisations.
In their review of the required due
diligence, competent authorities should devote particular attention
to such highly complex securitisations and require their full
deduction from capital, unless it has been convincingly demonstrated
to their satisfaction that in each individual case of highly complex
re-securitisation exposures, the institution has performed the due
diligence required by Directive 2006/48/EC, including with regard to
the ultimate underlying exposures.
(16) In order to promote the
convergence of supervisory practices with regard to the supervision
of due diligence for highly complex re-securitisations, the
Committee of European Banking Supervisors should establish
guidelines, which should include a definition of or criteria for the
types of re-securitisations that should be considered as 'highly
complex' for this purpose. That definition or those criteria should
be adapted to developments in market practices.
(17) The
provisions on prudent valuation in Directive 2006/49/EC should apply
to all instruments measured at fair value, whether in the trading
book or non-trading book of institutions. It should be clarified
that, where the application of prudent valuation would lead to a
lower carrying value than actually recognised in the accounting, the
absolute value of the difference should be deducted from own
funds.
(18) Institutions should have a choice whether to apply a
capital requirement to or deduct from own funds those securitisation
positions that receive a 1 250 % risk weight under this Directive,
irrespective of whether the positions are in the trading or the
non-trading book.
(19) Capital requirements for settlement risks
should also apply to the non-trading book.
(20) Originator or
sponsor institutions should not be able to circumvent the
prohibition of implicit support by using their trading books in
order to provide such support.
(21) Without prejudice to the
disclosures explicitly required by this Directive, the aim of the
disclosure requirements should be to provide market participants
with accurate and comprehensive information regarding the risk
profile of individual institutions. Therefore institutions should be
required to disclose additional information not explicitly listed in
this Directive if necessary to meet this objective.
(22) In order
to ensure a coherent implementation throughout the Community of
Directive 2006/48/EC, the Commission and the Committee of European
Banking Supervisors set up a working group (Capital Requirements
Directive Transposition Group - CRDTG) in 2006, entrusted with the
task of discussing and resolving issues related to the
implementation of that Directive. According to the CRDTG, certain
technical provisions of Directives 2006/48/EC and 2006/49/EC need to
be further specified. It is therefore appropriate to adjust those
provisions.
(23) Where an external credit assessment for a
securitisation position incorporates the effect of credit protection
provided by the investing institution itself, the institution should
not be able to benefit from the lower risk weight resulting from
that protection.
This should not lead to the deduction from capital
of the securitisation if there are other ways to determine a risk
weight in line with the actual risk of the position, not taking into
account such credit protection.
(24) In the field of
securitisation, disclosure requirements of institutions should be
considerably strengthened. They should in particular also take into
account the risks of securitisation positions in the trading
book.
(25) Specific risk charges for securitisation positions
should be aligned with the capital requirements in the banking book
since the latter provide for a more differentiated and
risk-sensitive treatment of securitisation positions.
(26) Given
recent weak performance, the standards for internal models to
calculate market risk capital requirements should be strengthened.
In particular, their capture of risks should be completed regarding
credit risks in the trading book. Furthermore, capital charges
should include a component adequate to stress conditions to
strengthen capital requirements in view of deteriorating market
conditions and in order to reduce the potential for pro-cyclicality.
Given the recent particular difficulties of treating securitisation
positions using approaches based on internal models, institutions'
ability to model securitisation risks in the trading book should be
limited and a standardised capital charge for securitisation
positions in the trading book should be required by default.
(27)
Directives 2006/48/EC and 2006/49/EC should therefore be amended
accordingly
Capital
Requirements Directive IV - Part 1
Capital Requirements Directive IV - Part 3
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