Prudential [EU]
Banks and investment firms — prudential supervision
Directive 2013/36/EU — banks and investment firms — prudential supervision
The capital requirements directive — known as ‘CRD IV’ — governs access to the deposit-taking activities of banks and investment firms.
It replaces the former capital requirements directives (2006/48/EC and 2006/49/EC).
It covers topics previously dealt with by those directives, including those relating to:
— access to the taking up and pursuit of the business of banks;
— the conditions for freedom of establishment; and
— the freedom to provide services.
Key Points
In addition to the aspects covered by the previous capital requirements directives, the directive covers a number of new elements.
Staff bonuses. To prevent banks from giving their staff incentives to take excessive risks, the directive provides for a maximum ratio between fixed and variable pay for all relevant staff. The bonus cannot exceed the identified staff member’s annual fixed pay, unless shareholders decide, subject to certain conditions, to allow bonuses that amount to up to twice the fixed pay. The new rules also include requirements on bonuses that promote a long-term approach to risk taking.
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Better governance and more transparency. The directive introduces rules to ensure effective oversight by the banks’ management bodies and to improve risk management. Diversity in board composition is required in order to contribute to their effective oversight. From January 2015, banks have to disclose certain information on a country-by-country basis, including their profits, taxes and public subsidies received.
Additional capital to be held by banks. The directive provides for more capital requirements in addition to the ones foreseen in the capital requirements regulation (CRR). Known as capital buffers, they aim to protect a bank’s capital by setting safeguards and limits on the amount of dividend and bonus payments a bank can make. Each time a bank ‘eats’ into the buffer, the limits become stricter, thus preventing erosion of a bank’s capital.
Reduced reliance on external ratings. The directive reduces, where possible, reliance by financial institutions on external credit ratings. For example, it requires that all banks’ investment decisions are based not only on ratings but also on their own internal credit opinion.
The CRR/CRD IV package provides for the adoption of delegated and implementing measures. These offer guidance on compliance with the package to the relevant national authorities and market participants.
Application and Background
From 17 July 2013. The deadline for transposition in EU countries’ national law is 31 December 2013.
The directive is part of a package of legislation that seeks to strengthen the resilience of the EU banking sector following the financial crisis in 2008. The package also includes Regulation (EU) No 575/2013, the capital requirements regulation (CRR), which establishes the supervisory requirements that banks need to respect.
Capital requirements regulation and directive — CRR/CRD IV
ACT
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)
Successive amendments and corrections to Directive 2013/36/EU have been incorporated into the basic text. This consolidated version is for reference only.
RELATED ACT
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.
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.
Prudential requirements for credit institutions and investment firms
Regulation (EU) 575/2013 – ensuring banks and investment firms control risks and hold adequate capital
It aims to strengthen the prudential requirements of banks, requiring them to keep sufficient capital reserves and liquidity. The overall objective is to make banks more robust and resilient in periods of economic stress.
Key Points
Generally, the Regulation establishes a single set of harmonised prudential rules which banks throughout the EU must respect. This so-called ‘Single Rule Book’ aims to ensure uniform application of global standards on bank capital (Basel III) in all EU countries.
Specific points include:
Higher and better capital requirements. 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 more risky 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 2 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.
Limiting leverage effect. The regulation introduces a new regulatory instrument called 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.
The Regulation is part of a package of legislation, including a Directive, to strengthen the resilience of the EU banking sector. Directive 2013/36/EU governs the access to deposit-taking activities, while this Regulation establishes the prudential requirements financial institutions need to respect.
Application & Background
From 28 June 2013.
European Commission website on capital requirements legislation
ACT
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
References
Act
Entry into force
Deadline for transposition in the Member States
Official Journal
Regulation (EU) No 575/2013
28.6.2013
OJ L 176, 27.6.2013, pp. 1-337
Successive amendments and changes to Regulation (EU) No 575/2013 have been incorporated in the original text. This consolidated version is of documentary value only.
RELATED ACTS
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)
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)