International & EU

The Capital Requirements Directive (CRD) came into force on 1 January 2007. It introduced a supervisory framework in the EU designed to ensure the financial soundness of credit institutions (banks, building societies and certain investment firms) and reflects the Basel II rules on capital measurement and capital standards.

Latest developments

The legal framework needs to be regularly updated and refined to respond to the needs of the financial system as a whole. To do this, the European Commission has proposed a series of amendments which they are numbering for ease of reference.

The FSA’s consultation paper, CP09/29 sets out the proposals for implementing changes that are required following the first major amendments to the CRD (CRD 2 and 3). The wide range of changes address some of the lessons learned from the financial crisis and follows up on aspects of the Turner Review.

The proposals include:

CRD 2

  • Improving the quality of firms’ capital by establishing clear EU-wide criteria for assessing the eligibility of hybrid capital to be counted as part of a firm’s overall capital. The proposals specify the features that hybrid capital must have regarding permanence, flexibility of payments and loss absorbency to be eligible as tier one capital;
  • Enhancing the management of large exposures by restricting a firm’s lending beyond a certain limit to any one party;
  • Improving the risk management of securitisation, including a requirement to ensure that a firm does not invest in a securitisation unless the originator retains an economic interest; so called ‘skin in the game’;

CRD 3

  • Strengthening the capital requirements for the trading book to ensure that a firm’s assessment of the risks connected with its trading book better reflects the potential losses from adverse market movements in stressed conditions;
  • Imposing higher capital requirements for re-securitisations to make sure that firms take proper account of the risks of investing in such complex financial products; and
  • Upgrading disclosure standards to increase market confidence.

The consultation period closes on 10 March 2010. The FSA plans to issue feedback to this consultation together with a policy statement confirming the final rules later on in 2010. The rules must come into effect on 1 January 2011.

The consultation paper can be found on our website.

 

Future developments

CRD 4

The Commission consultation closed in September 2009 on a package comprising;

  • removal of options and national discretions;
  • dynamic ‘buffering’ of loans;
  • foreign currency mortgages;
  • the Branch Accounts Directive; and

A further consultation paper is expected to be issued by the Commission in February this year, followed by a proposal expected to be submitted to the Council and parliament between July and September, This consultation will contain further amendments in addition to the above;

  • the definition of capital;
  • further counter-cyclical measures;
  • quantitative liquidity standards; and
  • systemically important financial institutions.
  • supplementary measures (e.g. possible leverage ratio).

Information in this section

Industry groups
This section presents the different industry groups that have been created to provide strategic leadership, to help the FSA formulate its policy before consultation, and to take forward discussion of specific policy issues.

The UK Government’s 2008 Credit Guarantee Scheme

Practical information for firms
This section provides practical information for firms implementing the CRD.

Archived material
This section consists of material that is no longer current but may still be of interest to certain groups or individuals.

CRD-related documents
The most important CRD-related FSA Documents since CP09/29 in December 2009 are available in the FSA library.