On Wednesday 23 November, the European Commission presented its long-awaited revision of the Capital Requirements Regulation (CRR) and Capital Requirements Directive (CRD IV), including the regulatory changes that mark the finalisation of the Basel III agreements.
This revision follows five years of consultations conducted by the Basel Committee. It aims to foster financial stability and to enhance the resilience of credit institutions and investment firms at the European level.
The innovations or developments included in this revision, which now await the endorsement of the European Parliament and of the European Council before coming into effect (probably at the start of 2019), are as follows:
– A leverage ratio to reduce excessive leverage risk and thus to constrain institutions with low risk weighted portfolios with a requirement of at least 3% in pillar 1
– A net stable funding ratio (NSFR) in additional to the liquidity coverage ratio (LCR) which has been in place since October 2015 (via the delegated act of 10 October 2014), to reduce excess maturity transformation risk (long term assets versus short-term funding)
– The introduction of new standards for total loss-absorbing capacity (TLAC) for global systemically important institutions, requiring a minimum of capital and eligible liabilities (bail-in), in order to have more loss-absorbing and recapitalisation capacity in the event of resolution. A chapter on eligible liabilities has been introduced to this end, and TLAC requirements will be integrated into the MREL system set out in the Bank Recovery and Resolution Directive (BRRD).
– A change in the method of calculating the EAD of derivatives due to the new SA-CCR approach, amending the Current Exposure Method and replacing the Standard method
– A Fundamental Review of the Trading Book (FRTB), one of the main changes of this revision, aiming to reduce regulatory arbitrage and to improve the account taken of certain risks by revising standard and internal methods of measuring market risks (“Expected Shortfall”)
– A review of the large exposures framework, notably with the exclusion of Tier 2 capital from eligible capital
– Enhanced proportionality for transparency and the addition of new reporting requirements, in particular for financial conglomerates
– Enhanced management of the Interest Rate Risk in the Banking Book (IRRBB) in line with the Basel Committee standards published in April 2016 (standardised approach for poorly understood risks, outlier test, disclosure requirements, etc.)
There are also changes to requirements for equities in investment funds, exposures to central counterparties and the SME supporting factor.
We will shortly present a more detailed analysis of these developments in a special report.
More information can be found at: http://ec.europa.eu/finance/bank/regcapital/crr-crd-review/index_en.htm#161123.