CRDIV and CRR: A NeverEnding Story….

  • Richard Bennett, Head of Regulatory Reporting, EMEA at Wolters Kluwer Financial Services

  • 20.12.2016 04:45 pm
  • undisclosed

For banks operating in the EU there is seemingly an endless supply of regulatory change – effectively forcing banks to constantly monitor their regulatory reporting technology.Just three years after CRD IV and CRR were finalised, for example, the EU’s banking sector now faces a revised Capital Requirements Directive and Capital Requirements Regulation, CRD V and CRR II. 

In a 500+ page package these revisions to CRD IV and CRR are likely to stretch significant regulatory change into the next decade – and systems will need to adapt as a result. Here Richard Bennett, Head of Regulatory Reporting, EMEA, for Wolters Kluwer’s Finance, Risk & Reporting business, takes a look at what is in store…

The proposals include the following key elements:

1. Measures to increase the resilience of EU institutions and enhance financial stability

The proposals incorporate the remaining elements of the regulatory framework agreed recently within the Basel Committee on Banking Supervision (BCBS) and the Financial Stability Board (FSB). They include:

  • More risk-sensitive capital requirements, particularly in the areas of market risk and counterparty credit risk, and for exposures to central counterparties (CCPs);
  • Implementing methodologies that can reflect more accurately the actual risks to which banks are exposed;
  • A binding Leverage Ratio (LR) to prevent institutions from excessive leverage;
  • A binding Net Stable Funding Ratio (NSFR) to address the excessive reliance on short-term wholesale funding and to reduce long-term funding risk.
  • A requirement for Global Systemically Important Institutions (G-SIIs) to hold minimum levels of capital and other instruments which bear losses in resolution. This requirement, known as 'Total Loss-Absorbing Capacity' or TLAC, will be integrated into the existing MREL (Minimum Requirement for own funds and Eligible Liabilities) system, which is applicable to all banks, and will strengthen the EU's ability to resolve failing G-SIIs while protecting financial stability and minimising risks for taxpayers.

2. Measures to improve banks' lending capacity to support the EU economy

In particular, specific measures are proposed to:

  • Enhance the capacity of banks to lend to SMEs and to fund infrastructure projects;
  • For non-complex, small banks, reduce the administrative burden linked to some rules in the area of remuneration (namely those on deferral and remuneration using instruments, such as shares), which appear disproportionate for these banks;
  • Make CRD/CRR rules more proportionate and less burdensome for smaller and less complex institutions where some of the current disclosure, reporting and complex trading book-related requirements appear not to be justified by prudential considerations. The Call for Evidence and the analysis carried out by the Commission showed that the present framework can be applied in a more proportionate way, taking account of their specific situation.

3. Measures to further facilitate the role of banks in achieving deeper and more liquid EU capital markets to support the creation of a Capital Markets Union

Specific adjustments to the proposed measures are envisaged, in order to:

  • Avoid disproportionate capital requirements for trading book positions, including those related to market-making activities;
  • Reduce the costs of issuing/holding certain instruments (covered bonds, high quality securitisation instruments, sovereign debt instruments, derivatives for hedging purposes);
  • Avoid potential disincentives for those institutions that act as intermediaries for clients in relation to trades cleared by CCPs.

Moving away from International Standards

Commission Vice-President Valdis Dombrovskis, responsible for Financial Stability, Financial Services and Capital Markets Union, said: "Europe needs a strong and diverse banking sector to finance the economy. We need bank lending for companies to invest, remain competitive and sell into bigger markets and for households to plan ahead. Today, we have put forward new risk reduction proposals that build on the agreed global standards while taking into account the specificities of the European banking sector."

Most of this content is driven by the need to adopt various international regulatory standards into EU law.  But the Commission has shown a growing willingness to depart from the BCBSand FSB rules to accommodate what it describes, as can be seen from the above text, European‘specificities’.

Examples of the divergences proposed include:

  • A phasing-in of the BCBS market risk framework over a three-year period, which includes granting the Commission discretion to assess whether the phase-in period should be extended – it is unlikely that the BCBS’s January 2019 implementation deadline will be met;
  • A multi-year reduction in stable funding requirements for interbank funding and derivatives transactions under the NSFR, also with the potential to extend this further;
  • An extension of the EU’s Small and Medium-Sized Enterprises (SME) supporting factor to bank exposures to SMEs above EUR 1.5 million (the BCBS in 2014 described the existence of the SME supporting factor as a ‘material deviation’ which should be phased out; the Commission has instead opted to retain and extend the degree of support provided for SME lending); and
  • A concession on the leverage ratio allowing banks to deduct initial margin received from clients for centrally-cleared derivatives from their leverage exposure measure.  This, notably, has been a key ask of many UK policy makers.

When you combine the above with the apparently last-minute addition of a requirement for some non-EU banks to house all their European operations under a single intermediate EU parent company, these proposals challenge the increasingly fragile state of international regulatory coordination.

What happens now?

These legislative proposals will now be submitted to the European Parliament and the Council for their consideration and adoption. The proposals discuss being adopted in 2019.The CRD V, CRR II proposals will be among the most important regulatory developments for banks operating in the EU in the coming years and will demand in-depth analysis. 

For UK banks, Brexit adds an additional layer of complexity. Assuming the UK government proceeds with its plan to trigger Article 50 next year, the UK will be involved, in some form, in most of the EU’s negotiating process for CRD V, CRR II, but will then likely exit the EU just before or after the rules come into force. 


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