Coronavirus Response: On 28 April 2020 the European Commission adopted a banking package to help facilitate bank lending to households and businesses throughout the European Union. The Commission has proposed a few targeted “quick fix” amendments to the Capital Requirements Regulation in order to maximise the ability of banks to lend and absorb losses related to Coronavirus. These proposed changes will not fundamentally alter the prudential regulatory framework but rather aim to mitigate the impact of the pandemic. Changes include:
- adjusting the transitional arrangements that allow credit institutions to alleviate the impact from expected credit-loss (ECL) provisioning under IFRS 9 on their own funds;
- adjusting the rules on the minimum loss coverage for non-performing exposures (NPEs) by extending temporarily the treatment currently applicable to NPEs guaranteed or insured by export credit agencies to NPEs that would arise as a consequence of the COVID-19 pandemic and that are covered by the various guarantee schemes that were put in place by Member States;
- deferring the date of application of the leverage ratio buffer by one year to 1 January 2023;
- modifying the offsetting mechanism before it becomes applicable which would exclude certain exposures from the calculation of the leverage ratio;
- revising the date of application of the exemption of certain software assets from capital deductions;
- advancing the date of application of the specific treatment envisaged for certain loans backed by pensions or salaries; and
- advancing the date of application of the revised SME supporting factor and the infrastructure supporting factor.
CRD IV is the EU legislative package covering prudential rules for banks, building societies and investment firms. It transposes the Basel III standards with a number of new measures into EU law.
This includes enhanced requirements for the quality and quantity of capital, a basis for new liquidity and leverage requirements, new rules for counterparty risk, and new macroprudential standards including a countercyclical capital buffer and capital buffers for systemically important institutions.
CRD IV also makes changes to rules on corporate governance, including remuneration, and introduces standardised EU regulatory reporting - referred to as COREP and FINREP. These reporting requirements specify the information firms must report to supervisors in areas such as own funds, large exposures and financial information.
The European Banking Authority (EBA) specifies all reporting data required from firms and National Supervisory Authorities (NSAs) via COREP and FINREP. In the UK this is collected via the Financial Conduct Authority’s (FCA) GABRIEL system and in Ireland via Central Bank’s Online Reporting System.
The legislation impacted over 8,000 banks which operate in Europe, changing their behaviour and requiring them to hold more capital and better quality capital, whilst ensuring that they can continue to finance economic activity and growth.
CRD IV consists of two instruments:
1.Directive 2013/36/EU Capital Requirements Directive (CRD) which governs the access to deposit-taking activities
2.Regulation 575/2013/EU Capital Requirements Regulation (CRR)) which governs how activities of credit institutions and investment firms are carried out
Amendments to CRD IV/CRR (CRDV/CRR2)
On 23rd November 2016, the European Commission published a number of proposed changes to the CRD IV framework (CRD V and CRR2). The package complements and builds on the existing European prudential framework set out in CRD IV/CRR. As part of a ‘Banking Reform Package’ (which also includes amendments to the BRRD and to the Single Resolution Mechanism Regulation), the review addresses major developments on an international level and incorporates regulatory standards, developed by the Basel Committee on Banking Supervision (BCBS). The package also implements some of the outstanding elements of Basel III (the Net Stable Funding Ratio (NSFR) and Leverage Ratio (LR) and the new Total Loss Absorbing Capacity (TLAC) requirement for Global Systemically Important Banks (G-SIBs)). Although intended to finalise Basel III implementation in the EU, several aspects have not been included in this raft of regulation eg credit risk, market risk and CVA requirements. The package of measures (EU risk reduction package) aims to further reduce risks in EU banks and are considered an essential element for the completion of Banking Union.
The package of amendments was published in the Official Journal of the European Union on 7 June 2019 and comprises two regulations and two directives, relating to:
-bank capital requirements requiring amendments to regulation 575/2013 and directive 2013/36/EU (CRR2 and CRDV);
-the recovery and resolution of banks in difficulty requiring amendments to directive 2014/59/EU and regulation 806/2014 (BRRDII and SRMRII).
The documents are as follows:
-Regulation (EU) 2019/876 amending Regulation (EU) 575/2013 as regards the leverage ratio, the net stable funding ratio, requirements for own funds and eligible liabilities, counterparty credit risk, market risk, exposures to central counterparties, exposures to collective investment undertakings, large exposures, report and disclosure requirements, and Regulation (EU) 648/2012) (CRR2);
-Directive (EU) 2019/878 of the European Parliament and of the Council of 20 May 2019 amending Directive 2013/36/EU as regards exempted entities, financial holding companies, mixed financial holding companies, remuneration, supervisory measures and powers and capital conservation measures (CRD5);
-Directive (EU) 2019/879 of the European Parliament and of the Council of 20 May 2019 amending Directive 2014/59/EU as regards the loss-absorbing and recapitalisation capacity of credit institutions and investment firms and Directive 98/26/EC (BRRD2);
-Regulation (EU) 2019/877 of the European Parliament and of the Council of 20 May 2019 amending Regulation (EU) No 806/2014 as regards the loss-absorbing and recapitalisation capacity of credit institutions and investment firm (SRMR2).
In addition to the binding 3% LR and an additional 50% buffer for global systemically important institutions (GSIIs), and binding detailed NSFR, the new CRD V/CRR2 texts introduce:
-a leverage ratio requirement for all institutions as well as a leverage ratio buffer for all global systemically important institutions;
-a net stable funding requirement (NSFR);
-a new market risk framework for reporting purposes (FRTB);
-a requirement for third-country institutions having significant activities in the EU to have an EU intermediate parent undertaking (IPU rule);
-revised rules on capital requirements for counterparty credit risk and for exposures to central counterparties (SA-CCR);
-a revised Pillar 2 framework;
-an updated macro-prudential toolkit;
-the exclusion of certain banks from the scope of application of the CRR and the CRD;
-a number of measures aimed at reducing the administrative burden related to reporting and disclosure requirements for small non-complex banks, as well as simplified market risk and liquidity rules for those banks;
-a new discount on capital requirements for investments in infrastructure and a more generous discount on capital requirements for exposures to SMEs;
-targeted amendments to the credit risk framework to facilitate the disposal of non-performing loans and to reflect EU specificities;
-targeted amendments related to the incorporation of environmental, social and governance aspects into prudential rules;
-enhanced prudential rules in relation to anti-money laundering;
-a new total loss absorbing capacity (TLAC) requirement for global systemically important institutions;
-enhanced Minimum Requirement for own funds and Eligible Liabilities (MREL) subordination rules for global systemically important institutions (G-SIIs) and other large banks referred to as top-tier banks;
-a new moratorium power for the resolution authority;
-restrictions to distributions in case of MREL breaches; and
-Home-host related measures.
New prudential risk-sensitive rules (IFR/IFD)
On 20 December 2017, the Commission set out its proposals for a two-track overhaul for smaller investment firms (the Investments Firms Package). This proposal aims to ensure that investment firms are subject to key prudential requirements and corresponding supervisory arrangements that are adapted to their risk profile and business model, without compromising financial stability. The current prudential rules in the CRR/CRD IV were developed for banks, based on standards developed by the Basel Committee on Banking Supervision (BCBS) for large banks. The rules have become increasingly more complex, without taking into account the different business profiles and risks of investment firms.
The Council of the EU adopted the package on 11 November 2019.
The proposals mean that:
-The largest firms will remain under the prudential regime of CRR/CRDIV. This also means that these firms would be supervised as significant credit institutions
-Smaller firms will be subject to a new regime with simpler dedicated prudential requirements which in most cases, would be different from those applicable to banks. In areas where risks of credit institutions and investment firms are similar, the proposal introduces a simplified version of some of the current prudential requirements into the new regime.
ECON published a draft report in April on the European Commission’s proposals in which it broadly supported the Commission’s objectives and approach, but recommended several changes to increase regulatory certainty, introduce more flexibility, and provide a fair, level playing field for third-country firms.
Proposal for a Directive of the European Parliament and of the Council on the prudential supervision of investment firms and amending Directives 2013/36/EU and 2014/65/EU (2017/0358 (COD))
Proposal for a Regulation of the European Parliament and of the Council on the prudential requirements of investment firms and amending Regulations (EU) No 575/2013, (EU) No 600/2014 and (EU) No 1093/2010 (2017/0359 (COD))
Directive 2013/36/EU - CRD IV
The Directive covers areas of the current Capital Requirements Directive where EU provisions need to be transposed by Member States in a way suitable to their own environment. This concerns, in particular, the powers and responsibilities of national authorities, the requirements on internal risk management that are intertwined with national company law as well as the corporate governance provisions:
-the requirements for access to the taking up and pursuit of the business of banks
-the conditions for their exercise of the freedom of establishment and the freedom to provide services, and
-the definition of competent authorities and the principles governing prudential supervision
Directive 2013/36/EU replaced the former CRD Directives, 2006/48/EC and 2006/49/EC
Regulation 575/2013/EU - CRR
(note that the Regulation has also been subject to a subsequent corrigendum)
The Regulation contains the Basel III standards and harmonises other provisions of the current legislation. It also unifies prudential requirements on credit institutions and investment firms setting out detailed and highly prescriptive provisions on calculating capital requirements.
Increases the amount of own funds banks need to hold as well as the quality of those funds and harmonises the deductions from own funds in order to determine the amount of regulatory capital that is prudent to recognise for regulatory purposes; Liquidity The introduction of a Liquidity Coverage Ratio (LCR) - the exact composition and calibration of which will be determined after an observation and review period;
A leverage ratio will be subject to supervisory review. Implications of a leverage ratio will be closely monitored prior to its possible move to a binding requirement on 1 January 2018.
Counterparty credit risk
Consistent with the Commission's policy vis-à-vis OTC (over the counter) derivatives, changes are made to encourage banks to clear OTC derivatives on CCPs (central counterparties).
credit valuation adjustment (CVA) risk
applies to credit institutions and investment firms entering into uncleared OTC derivatives transactions and securities financing transactions which are not subject to an exemption
Single rule book
a single rule book which aims to provide a single set of harmonised prudential rules throughout the EU ensuring uniform application of Basel III in all Member States.
The Regulation deals with disclosures made by firms under Pillar 3 transitional provisions. The Regulation is directly applicable without the need for national transposition and accordingly eliminates one source of such divergence. The Regulation sets a single set of capital rules applicable across the EU leading to a more resilient and transparent banking sector.