CRR / CRD IV
Rules on capital requirements for credit institutions and investment firms aim to put in place a comprehensive and risk-sensitive framework and to foster enhanced risk management amongst financial institutions.
The rules are meant to ensure financial stability, maintain confidence in financial institutions and protect consumers.
The CRR / CRD IV package, implementing the Basel 3 agreement, was formally endorsed by the EU authorities in June 2013, and it is applicable since January 1st 2014. The package is composed of a EU Regulation, encompassing technical provisions directly applicable to banks (the Capital Requirement Regulation, the CRR), and of a Directive defining the organisation of the supervision (the Capital Requirement Directive, the CRD). The proposals set out to amend and replace the existing capital requirement directives by two new legislative instruments: a regulation establishing prudential requirements that institutions need to respect and a directive governing access to deposit-taking activities.
Unlike the Regulation, the Directive requires a transposition into Luxembourg law.
The CRR / CRD IV have three main goals:
- Requiring banks to hold more and better capital to resist future shocks by themselves;
- Setting up a new governance framework giving supervisors new powers to monitor banks more closely and take action through possible sanctions when they spot risks, for example to reduce credit when it looks like it’s growing into a bubble;
- Establishing a Single Rule Book for banking regulation by putting together all legislation applicable on this matter. The aim is to improve transparency and enforcement.
In terms of implementation, the main issues at stake for Luxembourg banks are the impacts of the SSM on the decision-making process for granting waivers for the Liquidity Coverage Ratio and intra-group exemptions for large exposures, the internal management and coordination of the CRR / CRD IV project and the consequences of the new rules on the profitability and on the banks’ strategy.
The so-called Basel IV package has been agreed in December 2017. The general purpose of the revisions is to reduce the variability of Risk Weighted Assets (RWAs) across the banking industry in order for banks’ capital frameworks to become more comparable and less complex. The revisions encompass, among others:
- Revisions to the credit risk framework with:
- a revised standardized approach for credit risk,
- adjustments to the internal rating-based (IRB) approaches by reducing the variation of IRB models and constraining their use and by introducing risk-weighted floors based on standardized approaches
- A new approach to operational risk
- A review of the market risk framework
- A review of the credit valuation adjustment (CVA) capital charge framework
- A revised output floor of 72,5% based on the revised standardized approaches