29 September 2011

Commission requests Spain and The Netherlands to implement capital rules (CRD II)

Spain and The Netherlands have been asked to notify to the European Commission within the next two months the measures they are taking to implement important rules concerning capital adequacy for banks and investment firms as laid down in the Second Capital Requirements Directives (known as CRD II).

The Directives reinforce the stability of the financial system, reduce banks' risk exposure and improve the supervision of banks that operate in more than one EU country, to the benefit of citizens, businesses and the European economy as a whole.

Spain needs to complete implementation by adopting certain technical measures required by the Directive. The Netherlands has yet to adopt measures to implement the Directives, which include a legislative proposal and a ministerial decision, and is only due to do so at the end of 2011, more than a year after the implementation deadline.

The Commission's request takes the form of a reasoned opinion. If the national authorities do not notify the necessary implementing measures within two months, the Commission may refer the Member States concerned to the Court of Justice of the European Union and may request the Court to impose financial penalties.

What are the new bank capital rules?

Directive 2009/111/EC amends the original Capital Requirements Directives (2006/48/EC and 2006/49/EC) and, together with Directives 2009/27/EC and 2009/83/EC, is part of the second legislative package (CRD II). It boosts the financial soundness of banks and investment firms and it stipulates how much of their own financial resources banks and investment firms must have in order to cover their risks and protect their depositors. This legal framework needs to be regularly updated and refined to respond to the needs of the financial system as a whole.

The main changes introduced by the CRD II package are as follows:

• Improving the management of large exposures: Banks are restricted in lending beyond a certain limit to any one party. As a result, in the inter-bank market, banks cannot lend or place money with other banks beyond a certain amount, while borrowing banks are effectively restricted in how much and from whom they can borrow. This limits the risks any one bank can take and the chances of a domino effect if one bank faces a serious problem.
• Improving supervision of cross-border banking groups: 'Colleges of supervisors' must be established for banking groups that operate in multiple EU countries. The rights and responsibilities of the respective national supervisory authorities are made clearer and their cooperation more effective.
• Improving the quality of banks' capital: The Directives set down clear EU-wide criteria for assessing when 'hybrid' capital, i.e. capital including both equity and debt, is eligible to be counted as part of a bank's overall capital – the amount of which determines how much the bank can lend.
• Improving liquidity risk management: For banking groups that operate in multiple EU countries, their liquidity risk management – i.e. how they fund their operations on a day-to-day basis – must be discussed and coordinated within 'colleges of supervisors'.
• Improving risk management for securitised products: Rules on securitised debt – the repayment of which depends on the performance of a dedicated pool of loans – are tighter. Firms (known as 'originators') that re-package loans into tradable securities are required to retain some risk exposure to these securities, while firms that invest in the securities are allowed to make their decisions only after conducting comprehensive due diligence. If they fail to do so, they are subject to heavy capital penalties.

Press release

© European Commission