The CRD IV package will turn into EU law a comprehensive set of international standards known as the Basel III agreement. These new European rules are also aimed at increasing financial stability, by making the banking sector more resilient to financial shocks, and at contributing to sustainable economic growth, by introducing harmonised rules required by the single market and at the same time ensuring that credit continues to flow to the real economy. The Council deliberation focused on six key issues as set out in a report by the Irish Presidency, including bankers' bonuses.
The Irish Presidency concluded the discussion by noting a broad majority in favour of the compromise package. On that basis it mandated the Permanent Representatives Committee to finalise the negotiations with the Parliament. "There are some outstanding technical points, including the date of entry into force and some details of how the remuneration cap is to be implemented, which we will try to iron out with the Parliament over the coming weeks", said Finance Minister of Ireland Michael Noonan, who chaired the meeting. The final adoption of the package requires a qualified majority in the Council, in agreement with the Parliament.
Highlights
The Council today broadly endorsed the outcome of the most recent political trilogue with the EP on the so-called CRD IV package amending the EU's rules on capital requirements for banks and investment firms. On that basis, it mandated the Permanent Representatives Committee to finalise negotiations with the Parliament on outstanding technical issues, with the aim of reaching a final deal in the second half of March.
The two proposals set out to amend and replace 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. They are aimed at transposing into EU law an international agreement approved by the G20 in November 2010. The so-called "Basel III" agreement, concluded by the Basel Committee on Banking Supervision, strengthens bank capital requirements, introduces a mandatory capital conservation buffer and a discretionary countercyclical buffer, and foresees a framework for new regulatory requirements on liquidity and leverage, as well as additional capital surcharges for systemically important institutions.
Negotiations between the Council and the Parliament started in May last year, after the two parties established their respective negotiating positions. During the latest round of negotiations, the Council presidency and Parliament agreed on five key issues:
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Requirements for national systemic risk buffers and buffers for systemically important financial institutions;
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Flexibility for Member States to impose stricter national measures to address increased macro-prudential risks to financial stability;
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Reporting requirements for banks on a country-by-country basis;
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Restrictions on bankers' bonuses;
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Additional own-initiative mediation powers for the European Banking Authority.
The Regulation
Capital requirements
The regulation will be directly applicable in order to prevent divergences in implementation at national level. It will require banks and investment firms to hold common equity tier 1 (CET 1) capital of 4.5 per cent of risk weighted assets (until December 2014 between 4 per cent to 4.5 per cent), up from 2 per cent applicable under current rules. The total capital requirement, which includes tier 1 and tier 2 capital, remains unchanged at 8 per cent of risk weighted assets. The regulation defines CET 1 capital instruments using 14 criteria, similar to those set out in Basel III, and mandates the European Banking Authority to monitor the quality of instruments issued by institutions. Additional capital requirements in the form of buffers are introduced in the directive (see below).
Liquidity requirements
The regulation will introduce EU liquidity requirements from 2015, after an initial observation period. Institutions will be required to hold liquid assets, the total value of which would cover the net liquidity outflows that might be experienced under gravely stressed conditions over a period of 30 days. During times of stress, institutions would be allowed to use their liquid assets to cover their net liquidity outflows.
The liquidity coverage ratio1 (LCR) will be phased-in gradually, starting at 60 per cent in 2015 and reaching 100 per cent in 2018. A review in 2016 will enable the Commission to delay the introduction of the 100 per cent ratio, if justified by international developments. Until the LCR is fully introduced, Member States may maintain or introduce national liquidity requirements.
The regulation also limits liquidity inflows to 75 per cent of liquidity outflows to ensure that banks don't rely only on expected inflows to meet their outflows and instead hold a minimum amount of liquid assets equal to 25 per cent of outflows.
Net stable funding ratio
To address longer term funding issues, the Commission will have to submit by 31 December 2016 a legislative proposal aimed at ensuring that institutions use stable sources of funding.
Leverage ratio
The regulation will provide for the introduction of a leverage ratio from 1 January 2018, if agreed by Council and Parliament on the basis of a report to be presented by the Commission by 31 December 2016. This will follow an initial observation period; from 1 January 2015 institutions will be required to disclose their leverage ratio. The leverage ratio is a non-risk based measure and defined as an institution's tier 1 capital divided by its average total consolidated assets. Different levels would be set for institutions following different business models.
National flexibility: Macro-prudential powers
The regulation will enable Member States to impose, for up to two years (extendable), stricter macro-prudential requirements for domestically authorised financial institutions in order to address increased risks to financial stability. These stricter measures can apply to the level of own funds, liquidity requirements, large exposures requirements, the level of the capital conservation buffer, public disclosure requirements, intra-financial sector exposures, and risk weights for targeting asset bubbles in the property sector. The Council can reject, by qualified majority, stricter national measures proposed by a member state.
The Directive
Capital buffers
The Directive will introduce additional requirements for a capital conservation buffer of CET 1 capital of 2.5 per cent of total risk exposure, identical for all banks in the EU, and an institution-specific countercyclical capital buffer of up to 2.5 per cent. Moreover, Member States will have the possibility to introduce a systemic risk buffer of additional CET 1 capital for the financial sector or one or more subsets of it, or buffers for systemically important institutions.
Member States will be able to apply systemic risk buffers of 1 per cent to 3 per cent for all exposures and up to 5 per cent for domestic and third country exposures, without having to seek prior approval from the Commission. They will be able to impose even higher buffers with prior Commission authorisation in the form of an implementing act. If a Member State decides to impose a buffer of up to 3 per cent for all exposures, the buffer has to be set equally on all exposures located within the EU.
The buffer requirements specific to systemic institutions will be mandatory for global systemically important institutions (G-SIIs), but voluntary for other (i.e. EU or domestic) systemically important institutions (O-SIIs). Buffers will apply on a consolidated basis for G-SIIs and on an individual, subconsolidated or consolidated basis for O-SIIs. The O-SII buffer will be capped at 2 per cent.
G-SIIs will be assigned to one of five sub-categories, depending on their systemic importance. They will be subject to progressive additional CET 1 capital requirements, ranging from 1 per cent to 2.5 per cent for the first four groups, while a buffer of 3.5 per cent will apply to the highest sub-category.
The systemic risk buffer and buffers for G-SIIs and O-SIIs will generally not be cumulative; only the highest of the three buffers will apply. However, if the systemic risk buffer applies to domestic exposures only, it can be added to the SIFI buffer.
Bankers' bonuses
Bonuses will be capped at a ratio of 1:1 fixed to variable remuneration, i.e. bonuses are equal to fixed salary. This ratio can be raised to a maximum of 2:1, if a quorum of shareholders representing 50 per cent of shares participates in the vote and a 66 per cent majority of them supports the measure. If the quorum cannot be reached, the measure can also be approved if it is supported by 75 per cent of shareholders present.
For the purposes of applying this ratio, variable remuneration may include long-term deferred instruments that can be appropriately discounted. The EBA will prepare guidelines on the applicable discount factor, taking into account all relevant aspects, including inflation rate, risk and appropriate incentive structures. Moreover, the long-term instruments have to be fully "claw-back-able" and "bail-in-able".
These provisions will also apply to the staff of subsidiaries of European companies operating outside the European Economic Area and the European Free Trade Area. The Commission will review and report on the impact of this provision, in close cooperation with the EBA, taking into account its impact on competitiveness and financial stability.
Governance and transparency
From 1 January 2014, institutions will be required to make public the number of employees per institution in the group and net banking income. At the same time, all European G-SIIs and O-SIIs have to report to the Commission on profits made, taxes paid and subsidies received. During 2014, the European supervisory authorities will help the Commission to analyse this data and conduct an assessment looking at the economic impact (i.e. competitiveness, credit availability and levels of investment) and broader financial stability implications of their potential disclosure. From 2015, banks would have to publicly disclose the data unless the Commission, by delegated act, either delays or amends the relevant provisions.
A "sunset" clause provides for expiry of this provision, if/when it has been dealt with in other forthcoming legislation (i.e. Accounting Directive).
Press release
Full Council Conclusions
© European Council
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