EU implementation can therefore commence on 1 January 2014, provided the legislation is published in the European Official Journal before the end of June this year. This removes one half of the uncertainty around US and EU implementation of Basel 3, and the timelines in the CRR and CRD mean that the EU will meet the Basel 3 timetable for full implementation by 2019.
The new legislation consists of two instruments governing capital requirements for investment firms and credit institutions, including banks.
As a Regulation, the CRR will apply directly in every member state. It imposes a single set of rules across the EU, leaving little scope for national discretion. The CRR replicates in large part the Basel 3 capital and liquidity package, with the addition of some national flexibility in the use of macro-prudential instruments.
As a Directive, the CRD will have to be incorporated into the national laws of member states. It covers the basis on which firms can pursue banking and investment business; the freedom of establishment and free movement of services; supervisory processes, powers and sanctions; corporate governance and remuneration; and capital buffers (including for systemically important firms).
We identified below what we believe are the most important implications of the Regulation and Directive. However, the combined legislation is so vast and covers so much ground, that it is highly likely that there will be unintended consequences for firms – which will emerge in the coming months. Developments must be monitored closely.
Implications for firms…
- Concerns have been expressed about whether a "level playing field" in the implementation of Basel 3 exists, as some regions have already made considerable progress in some areas, and others have not. The differing regional implementation progress and timescales could prove problematic.
- The CRR and CRD will necessitate strategic, business model and operational changes in many firms in response to the cost of holding additional capital and liquidity, and the cost of undertaking particular types of business. Product ranges and product pricing will need to be re-assessed.
- Firms should also be considering not just their ability to meet the new requirements today, but also the medium-term impact of the requirements as they plan their medium-term capital and funding strategies.
- Firms still face continuing uncertainties. These include the yet to be finalised leverage ratio, liquidity coverage ratio and net stable funding ratio; the use of national discretion by member states in the setting of macro-prudential requirements such as the new systemic risk buffer; the setting of "pillar 2" capital (and liquidity) requirements following the introduction of much tougher "pillar 1" requirements; and the use of national discretion in accelerating the phasing-in of the new requirements (differences here – in the EU and globally - could pose particular challenges for international banking groups).
- There will be a significant increase in the reporting burden for firms, and firms will need to adjust to changes in the detail and the timing the final version of COREP implementation.
- Firms also need to take into account the collective impact of multiple regulatory reforms, including recovery and resolution planning, structural change (Liikanen, and the UK, French and German legislative proposals), the reviews under way of large exposures, the trading book regime, securitisation and risk weightings under both internal model and standardised approaches, and risk governance and data aggregation and reporting.
Key differences from Basel 3
The CRD goes beyond Basel 3 in covering areas such as corporate governance, remuneration, sanctions and a broader set of tools to address systemic risk than the counter-cyclical capital ratio. These additional requirements and tools are covered in later sections of this alert. Areas where the CRR and Basel 3 cover the same ground include:
- Capital requirements on small and medium sized enterprises (SMEs)
- Credit value adjustment (CVA) exemption for non-financial counterparties
- Defining an event of default by a borrower
- Insurance subsidiaries
- Investment in insurance companies
- Deferred tax assets
- Definition of common equity tier 1 (CET1) capital
- Bail-in of subordinated debt
- The cut-off date for no longer eligible capital instruments
- The minimum floor level of capital
- Liquidity Coverage Ratio (LCR)
For more information on the detail of the proposals and potential implications, please contact: