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 will 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 will affect 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

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
  • prudential supervision
  • sanctions
  • capital buffers
  • corporate governance

Directive 2013/36/EU replaces 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;

Leverage ratio
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.

Amendments to CRD IV/CRR (CRDV/CRRII)

On 23rd November 2016, the European Commission published a number of proposed changes to the CRD IV framework (CRD V and CRRII). 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 Baking Supervision (BCBS) which is set to be fully phased in by 2019. The package also implements 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)).

In addition to the binding 3% LR and binding detailed NSFR, the new CRD V/CRR II proposals introduce:

  • a fundamental review of the trading book (FRTB);
  • a new standardised approach for counterparty credit risk (SA-CCR);
  • a requirement for G-SIIs to hold minimum levels of capital and other instruments which bear losses in resolution (TLAC);
  • a reduction in the administrative burden for smaller and non-complex banks without compromising their stability; and
  • measures to promote investment in the economy encouraging SME lending and infrastructure.

The proposals significantly increase capital requirements. However, the European Commission (EC) has clarified that it wants to minimise the impact of capital requirements on the real economy.  The EC proposes a number of targeted measures for the implementation of the new Basel standards into EU law to avoid disproportionate capital requirements for trading book positions, including those related to market-making activities; reduce the costs of issuing/holding certain instruments; and mitigate potential disincentives for those institutions that act as intermediaries for clients in relation to trades cleared by CCPs.

On 28th December 2017, Regulation 2017/2395 (CRR IFRS 9 Regulation) was published in the Official Journal which introduces transitional provisions on the introduction of IFRS 9 on own funds (new Article 473a of the CRR) and large exposure treatment of certain public sector exposures denominated in non-domestic currencies of Member States (amending Article 493 of the CRR).

New prudential risk-sensitive rules

On 20 December 2017, the Commission set out its proposals for a two-track overhaul for smaller investment firms. 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/CRDIV 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 proposals mean that:

  • The largest firms would remain under the prudential regime of CRR/CRDIV. This also means that these firms would be supervised as significant credit institutions
  • Smaller firms would 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.
Topics covered by Better Regulation include
  • BRRD
  • Banking Structural Reform
  • Basel
  • Benchmarks Regulation
  • Brexit
  • Capital Markets Union
  • Capital Requirements Legislation
  • Central Securities Depositories Regulation
  • Credit Rating Agencies Regulation
  • Deposit Guarantee Schemes Directive
  • Dodd-Frank
  • EMIR
  • GDPR
  • Solvency II
  • Insurance Distribution Directive
  • Interchange Fees Regulation
  • Liquidity
  • Market Abuse/Insider Dealing
  • Markets in Financial Instruments Legislation
  • Money Laundering Directives
  • Money Market Funds Regulation
  • Mortgage Credit Directive
  • Payment Services Directive
  • PRIIPs Regulation
  • Prospectus Directive
  • Ring-fencing
  • Securities Financing Transactions Regulation
  • Securitisation Regulation
  • Senior Insurance Managers Regime
  • Senior Managers Regime
  • UCITS Directive