Free movement of capital in the EU

Council Directive 88/361/EEC — the capital liberalisation directive

It was designed to give the European Union (EU) single market its full financial dimension.
Its purpose was to progressively abolish all restrictions on the free movement of capital between EU countries, implementing Article 67 of the Treaty establishing the European Communities (Article 67 was subsequently repealed).
The rules of the directive became obsolete following the entry into force of the new Article 63 of the Treaty on the Functioning of the European Union which ensures the free movement of capital between EU countries as well as between EU countries and non-EU countries.

However, as indicated in the case-law of the Court of Justice of the European Union, the nomenclature of capital movements included in its Annex I is still used for the purposes of defining the notion of capital movements.

Key Points

The directive enshrines the principle of full liberalisation of capital movements* between EU countries with effect from 1 July 1990. Transactions representing capital movements are listed in its Annex I.

Transitional arrangements were offered for Spain, Greece, Ireland and Portugal, and Portugal and Greece were given the possibility of a further extension of a maximum of 3 years.

The directive seeks to abolish the general arrangements for restrictions on movements of capital between persons resident in EU countries.

A ‘safeguard clause’ was introduced. Capital movements can impose a very severe strain on foreign-exchange markets, which leads to serious disturbances in the conduct of a country’ s monetary and exchange rate policies. In this case, the European Commission, after consulting the Monetary Committee and the Committee of Governors of the Central Banks, can authorise that country to take protective measures.

The protective measures related to the capital movements listed in Annex II of the directive, and must not exceed 6 months.
With effect as of 1 July 1990, the directive repealed:

the first directive for the implementation of Article 67 of the Treaty;
Council Directive 72/156/EEC on regulating international capital flows and neutralising their undesirable effects on domestic liquidity*.


It applied between 7 July 1988 and 31 December 1999. EU countries had to incorporate it into national law by 1 July 1990. The directive is now replaced by the new Treaty rules on the free movement of capital but is still used for the purposes of defining the notion of capital movements.


Capital movements: capital transfers between countries carried out by a person, organisation or business. They include direct investments, investments in real estate, operations in securities and in current and deposit accounts, as well as financial loans and credits.

Domestic liquidity: The amount of cash or cash-equivalents (i.e. assets that can be quickly converted into cash) in circulation within a country’s economy.


Council Directive 88/361/EEC of 24 June 1988 for the implementation of Article 67 of the Treaty (OJ L 178, 8.7.1988, pp. 5-18)

Capital Adequacy

There are two consultative bodies which advise the Commission with regard to banking.  The European Banking Commission is an advisory body.   The Committee of European Banking Supervisors liaises between the Commission and national public authorities that oversee community measures.

The CEBS deals with cooperation between national authorities.  It fosters cooperation and convergence of supervisory practices.  It evaluates developments of the banking sector and reports to the commission on risks and vulnerability.

European Union directives provide for the capital adequacy of credit institutions and investment firms.  The rules are intended to implement the Basel II requirements in a consistent manner.  They are a key part of the prudential framework.

The framework establishes different approaches to capital adequacy for different types of risks.  It is designed to enable firms to put in place risk management systems which best suit their risk profile in their areas.  Supervisory activities assess the amount of capital which investment firms must have at their disposal to cover their risks.

The quantity of the capital required is assessed by reference to credit risk, market risk, and operational risks.  A separate directive deals with credit risks.  Directive relating to market risk covers investment firms and credit institution.

Prudential Requirements

Under a 2013 Regulation, banks have to hold a total amount of capital that corresponds to at least 8% of their assets measured according to their risks. Safe assets (e.g. cash) are disregarded; other assets (such as loans to other institutions) are considered riskier and get a higher weight. The more risky assets an institution holds, the more capital it has to have.

Liquidity measures. To ensure banks have sufficient liquidity means (e.g. cash or other assets that can be quickly converted into cash with no or little loss of value), the regulation introduces liquidity buffers:

the liquidity coverage ratio which aims to ensure that banks have enough liquidity means in the short term;
the net stable funding requirement which aims to ensure that banks have an acceptable amount of stable funding to support their assets and activities over the medium term.

The regulation introduces a the leverage ratio. Its aim is to limit banks from incurring excessive debts on financial markets. From 2015, banks have to publicly disclose their leverage ratio. If appropriate, the Commission will propose legislation to make this new ratio binding for banks as of 2018.

Additional Capital Protections

The 2013 Directive on Access to the Activity of Credit Institutions and the Prudential Supervision of Credit Institutions and Investment Firms seeks to further strengthen requirements on bank governance and capital in order to make them more robust.

It builds on the regulations making provision for taking up a banking business, prudential supervision of banks and investment firms, freedom of establishment, freedom of movement of services provided by banks.   It provides for enhanced sanctions.

The Directive provides for additional capital requirements.   They are known as capital buffers and are to be of the highest quality (Common Equity Tier 1).

Under the capital conservation buffer, the bank should hold 2.5% of their total exposures in order not to face restrictions on distribution and bonuses.

Countercyclical buffers apply to periods of excess lending activities which might lead to a credit bubble.  National authorities can require banks to hold up to 2.5% of their total risk-weighted asset exposure.

Another buffer is the global systematic institution buffer which applies to major banks identified as globally systemically important.   The additional capital, under the buffer, may go up to 3.5% of the bank\’s total risk-weighted asset’s exposure.

A State may also apply additional capital requirement to mitigate systematic and macro-prudential risks that may have important negative impacts on the financial system and its national economy.  In order to be applied, the systematic risk buffer is subject to certain conditions depending on the percentage of capital added.

The Directive seeks to prevent banks from taking excessive risks through giving their staff incentives.  It fixes a maximum ratio between fixed and variable remuneration for all material risk takers.  The bonus cannot exceed the identified staff member’s actual fixed remuneration, unless the shareholders decide, subject to certain concessions to allow bonuses that amount to up to twice the fixed remuneration.  The rules make requirements on bonuses that promote a long-term approach to risk.

The Directive introduces binding rules to ensure effective oversight by the bank\’s management bodies and improve risk management.   From January 2015, banks must disclose information on a country by country basis, including profits, tax, public subsidies, revealed.

Minimum reserves

Regulation (EC) No 2531/98 concerning the application of minimum reserves by the European Central Bank

Regulation (EU) 2021/378 on the application of minimum reserve requirements (recast) (ECB/2021/1)

The regulations establish the Eurosystem’s minimum reserve framework and lay down rules for the holding of minimum reserves by credit institutions* and their branches in the euro area.

They regulate all relevant aspects, from determining the actual reserve ratio, to the maintenance and remuneration of minimum reserves and the relevant reporting and verification of data. They also provide for exemptions from minimum reserve requirements and the power to impose sanctions.

Key Points

Council Regulation (EC) No 2531/98 determines the basis and ratios for minimum reserves and establishes the right of the European Central Bank (ECB) to collect and verify information necessary for the application of minimum reserves. It also enables the ECB to impose sanctions on an institution for not complying with statistical reporting requirements or failing to hold sufficient minimum reserves.

Regulation (EU) 2021/378 regulates the minimum reserve holdings and provides the formulas to be used by euro-area credit institutions to calculate the minimum reserves which are to be held in euro reserve accounts with their EU Member States’ national central banks (NCBs).

The ECB publishes on its website the list of institutions subject to the Eurosystem’s minimum reserve requirements. The institutions whose authorisation has been withdrawn or renounced and those subject to winding-up proceedings are exempted from the minimum reserve requirements. Further exemptions may be granted to institutions:

which are subject to a reorganisation measure;
on which a freezing order or another measure restricting the institution’s ability to use funds is imposed;
whose access to the Eurosystem’s open market operations or standing facilities has been suspended or excluded;
for which it is not appropriate to require minimum reserves.

The euro-area credit institutions subject to the minimum reserve requirements calculate their own reserve base* (if this is not done by the NCBs) using their statistical information on deposits and debt securities issued. They may hold their minimum reserves indirectly through an intermediary which is resident in the same Member State, is subject to minimum reserve requirements and normally carries out certain administrative tasks.

The NCBs notify the credit institutions on the minimum reserves they should hold (if the NCB does the calculation) or acknowledge the minimum reserves calculated by the institutions themselves.

They also remunerate holdings of minimum reserves according to the formula set by Regulation (EU) 2021/378 and have the right to verify the accuracy and quality of the information on the reserve base provided by the institutions.

Specific rules come into play when:

the reserve base is reported on an aggregated basis;
a merger between two institutions takes place during the maintenance period*;
a Member State adopts the euro.

Application & Background

Regulation (EU) 2021/378 has applied from 26 June 2021, apart from Article 3 (calculation of reserve holdings), which took effect on 28 July 2021 (the first day of the fifth maintenance period).
Regulation (EC) No 2531/98 has applied since 1 January 1999.

On the basis of the Statute of the European System of Central Banks and of the European Central Bank, the ECB may require euro-area credit institutions to hold minimum reserves for monetary policy purposes.

Minimum reserves help to stabilise money market interest rates and enable credit institutions to handle daily liquidity fluctuations.
Reserves held with national central banks increase demand for central bank credit, making it easier for the ECB to steer money market rates through regular liquidity-providing operations.
For more information, see:
Minimum reserves (European Central Bank).

Minimum reserves: amount of funds an institution must hold in its reserve accounts with the relevant national central bank.
Credit institution: an undertaking receiving deposits or other repayable funds from the public and granting credits.
Reserve base: the sum of eligible liabilities used to calculate an institution’s minimum reserves.
Maintenance period: the period over which compliance with minimum reserve requirements is assessed.


Council Regulation (EC) No 2531/98 of 23 November 1998 concerning the application of minimum reserves by the European Central Bank (OJ L 318, 27.11.1998, pp. 1–3)

Successive amendments to Regulation (EC) No 2531/98 have been incorporated into the original text. This consolidated version is of documentary value only.

Regulation (EU) 2021/378 of the European Central Bank of 22 January 2021 on the application of minimum reserve requirements (recast) (ECB/2021/1) (OJ L 73, 3.3.2021, pp. 1–15)

Consolidated version of the Treaty on the Functioning of the European Union – Protocol (No 4) on the Statute of the European System of Central Banks and of the European Central Bank (OJ C 202, 7.6.2016, pp. 230–250)

Directive 2013/36/EU of the European Parliament and of the Council of 26 June 2013 on access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms, amending Directive 2002/87/EC and repealing Directives 2006/48/EC and 2006/49/EC (OJ L 176, 27.6.2013, pp. 338–436)

Council Regulation (EC) No 2532/98 of 23 November 1998 concerning the powers of the European Central Bank to impose sanctions

Liquidity coverage requirement for credit institutions

Delegated Regulation (EU) 2015/61 supplementing Regulation (EU) No 575/2013 with regard to liquidity coverage requirement for Credit Institutions

This delegated regulation sets out in detail how to apply the general principle introduced in Regulation (EU) No 575/2013, the Capital Requirements Regulation, that credit institutions must have enough funds to meet withdrawal demands over a 30-day period.

Known as the LCR (liquidity coverage ratio) delegated regulation, it specifies which assets are to be considered as liquid assets*. It sets out how expected cash outflows and inflows over a 30-day period should be calculated.

Key Points

Credit institutions must maintain a liquidity coverage ratio of at least 100%. This is equal to the ratio between its liquidity buffer* and net liquidity outflows* over 30 days.

A credit institution is under stress* in the following situations (non-exhaustive list):

run-off of a significant amount of its retail deposits;
partial or total loss of its unsecured wholesale funding capacity or its secured short-term funding;
additional liquidity outflows from credit rating downgrade;
impact of increased market volatility on the value of its collateral;
unscheduled drawing on its liquidity and credit facilities;
potential obligation to buy back debt or honour non-contractual obligations.

Liquid assets must:

be a property, right, entitlement or interest, held by a credit institution, that may provide cash within 30 days;
not be issued by the credit institution itself or by other bodies such as investment firms, insurance undertakings or financial holding companies;
be able to have their value determined on the basis of easily available market prices;
be listed on a recognised exchange, or tradable by a direct sale or simple repurchase agreement*;

Liquid assets are divided into various categories:

Level 1 (the most liquid), such as coins and banknotes or assets guaranteed by the European Central Bank, national central banks or regional governments and local authorities;
Level 2A, such as assets guaranteed by regional governments, local authorities or public sector bodies in the EU with a weighted risk of 20%;
Level 2B, such as asset-backed securities, corporate debt securities, shares provided they meet certain requirements and certain securitisations* which must satisfy a range of strict conditions to be accepted as a Level 2B asset.

Credit institutions must ensure:

the assets in their liquidity buffer are always sufficiently diversified, readily accessible and can be turned into cash within 30 days;
they hold a minimum of 60% of the buffer in level 1 assets and a maximum of 15% in level 2B assets;
within 30 days, they do not treat as liquid assets those that no longer meet the criteria.

Detailed rules and calculations are used to determine and measure liquidity outflows and inflows and the procedures to be taken.

Commission Delegated Regulation (EU) 2018/1620 made certain amendments to the 2015 legislation to improve its practical application. The most important are:

align fully the calculation of expected liquidity outflows and inflows on repurchase agreements, reverse repurchase agreements* and collateral swap transactions* with the Basel Committee on Banking Supervision’s international liquidity standard;
specify the treatment of central banks’ reserves held by subsidiaries or branches;
adjust the waiver of the minimum issue size for certain non-EU-country assets;
improve the unwind mechanism* for calculating the liquid buffer;
integrate the new simple, transparent and standardised criteria for securitisation.

Commission Delegated Regulation (EU) 2018/1620 applies from 30 April 2020.

Application & Background

It has applied since 1 October 2015.

For more information, see:

Prudential requirements (European Commission).


Liquid asset: an asset that can be easily converted into cash.
Liquidity buffer: amount of liquid assets a credit institution holds.
Net liquidity outflows: amount that remains after subtracting incoming from outgoing cash.
Stress: sudden or severe deterioration in a credit institution’s solvency or liquidity.

Repurchase agreement: also known as ‘repo’, this is a short-term loan whereby the seller of the security agrees to buy it back at a specified price and time.
Securitisation: a procedure where various financial assets or contractual debts, such as car loans or mortgages, are repackaged and sold to investors.
Reverse repurchase agreements: also known as ‘reverse repo’, purchase of securities with agreement to sell them at a higher price at a specific future date.
Collateral swap transactions: loan of liquid assets in return for less liquid collateral. The borrower pays a fee to the lender for the risks involved.
Unwind mechanism: closing down of transactions (such as repurchase or reverse repurchase transactions) which mature in the next 30 days.


Commission Delegated Regulation (EU) 2015/61 of 10 October 2014 to supplement Regulation (EU) No 575/2013 of the European Parliament and the Council with regard to liquidity coverage requirement for Credit Institutions (OJ L 11, 17.1.2015, pp. 1-36)


Commission Delegated Regulation (EU) 2018/1620 of 13 July 2018 amending Delegated Regulation (EU) 2015/61 to supplement Regulation (EU) No 575/2013 of the European Parliament and the Council with regard to liquidity coverage requirement for credit institutions (OJ L 271, 30.10.2018, pp. 10-24)

Commission Implementing Regulation (EU) No 680/2014 of 16 April 2014 laying down implementing technical standards with regard to supervisory reporting of institutions according to Regulation (EU) No 575/2013 of the European Parliament and of the Council (OJ L 191, 28.6.2014, pp. 1-1861)

Successive amendments to Regulation (EU) No 680/2014 have been incorporated into the original text. This consolidated version is of documentary value only.

Directive 2014/49/EU of the European Parliament and of the Council of 16 April 2014 on deposit guarantee schemes (OJ L 173, 12.6.2014, pp. 149-178)

See consolidated version.

Directive 2014/17/EU of the European Parliament and of the Council of 4 February 2014 on credit agreements for consumers relating to residential immovable property and amending Directives 2008/48/EC and 2013/36/EU and Regulation (EU) No 1093/2010 (OJ L 60, 28.2.2014, pp. 34-85)

See consolidated version.

Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms and amending Regulation (EU) No 648/2012 (OJ L 176, 27.6.2013, pp. 1-337)

See consolidated version.

Directive 2013/36/EU of the European Parliament and of the Council of 26 June 2013 on access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms, amending Directive 2002/87/EC and repealing Directives 2006/48/EC and 2006/49/EC (OJ L 176, 27.6.2013, pp. 338-436)

See consolidated version.

Regulation (EU) No 648/2012 of the European Parliament and of the Council of 4 July 2012 on OTC derivatives, central counterparties and trade repositories (OJ L 201, 27.7.2012, pp. 1-59)

See consolidated version.

Directive 94/19/EC of the European Parliament and of the Council of 30 May 1994 on deposit-guarantee schemes (OJ L 135, 31.5.1994, pp. 5-14)


Important Notice! This website is provided for informational purposes only! It is a fundamental condition of the use of this website that no liability is accepted for any loss or damage caused by reason of any error, omission, or misstatement in its contents. 

Draft Articles; The articles on this website are in draft form and are subject to further review for typographical errors and, in some cases, updating and correction. It is intended to include references to the sources of materials and acknowledgements in the final version. The content of articles with [EU] in the title and some of the articles in the section on Agriculture are a reproduction of or are based on European or Irish public sector information.

Leave a Reply

Your email address will not be published. Required fields are marked *