Three years on from CRD IV/CRR being finalized, the EU's
banking sector now faces a revised Capital Requirements
Directive and Capital Requirements Regulation (CRD VandCRR II), and a host of other legislative
amendments (notably on the Bank Recovery and Resolution Directive,
BRRD), in a 500+ page package published by the European Commission
on 23 November 2016.
The stated objective is to further strengthen the resilience of
the banking sector by introducing more risk-sensitive capital
requirements. At the same time, the new measures should make
CRD/CRR rules more proportionate and less burdensome for smaller
financial institutions, and improve banks' lending capacity to
support the EU economy.
Scope of the proposal
The package contains notable reforms, of which the most
impactful for Luxembourg institutions are summarized below.
implementation of Leverage Ratio (LR) andNet Stable Funding Ratio
Binding 3% Leverage Ratio for all banks
Introduction of some exemptions/waivers to reduce the leverage
Binding NSFR, with clarification of rules to calculate the
ratio, including 0% Required Stable Funding (RSF) for High Quality
Liquid Assets (HQLA) Level 1 – eligible sovereign debt
Review of the Trading Book (FRTB)
New standard on treatment of market risk (new standardized
Approach for Counterparty Credit Risk (SA-CCR)
Replacement of the Mark-to-Market Method by the Standardized
Approach for Counterparty Credit Risk and removal of the
Standardized Method (modified Original Exposure Method is
Risk in the Banking Book (IRRBB)
Standardized approach to capture IRRBB
European Banking Authority (EBA) to detail the standardized
approach and define the supervisory shock scenarios to be used as
part of SREP
Changes to capital requirements for exposures to SMEs
Preferential treatment for specialized lending exposures to
Distributable Amount (MDA)
Clarification of the use of Pillar II requirements
Clarification of the rules on MDA triggers
Exemptions for the "smallest and least complex"
institutions from certain remuneration requirements (incl. deferral
rules and pay-out in instruments)
Added flexibility and proportionality
Differentiated reporting and disclosure requirements for firms
based on their categorization ("significant,"
"small," or "other")
Discover a more detailed overview of this new regulatory package
in this PDF presentation.
What's next for these proposals?
The European Council and European Parliament will now begin a
legislative process that should end by Q1 2019. At that point,
secondary rulemaking by the European Banking Authority (EBA) and
national regulators must also occur. As a result, the
implementation of these rules by banks is still several years away,
and some uncertainty will linger for some time as to how and when
the requirements will be applied.
What should banks do now?
The CRD V/CRR II package will be among the most important
regulatory developments for banks operating in the EU in the coming
years and will demand an in-depth analysis. In particular, banks
should assess the likely impact of these new rules on their
product-by-product capital and liquidity requirements, risk
management, and risk measurement capabilities.
This will be difficult to do, especially given that CRD V/CRR II
is likely to be followed by yet another round of EU legislation in
the coming years, implementing the remaining elements of the so
called "Basel IV" framework. The EU's declining
appetite to "copy out" all aspects of the BCBS agenda,
and the potential for greater international regulatory
fragmentation arising from a new administration in the United
States make such an assessment all the more challenging.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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