Capital Requirements Regulation, which among other things transposes Basel III into European law, is expected to be applied from 1 January 2014. The Regulation, CRR, is directly applicable, i.e. it does not have to be implemented. However, existing national legislation has to be adjusted for all competing provisions or for those provisions contrary to the Regulation. CRD IV, by contrast, has to be transposed into national law by an act of legislation.
The aim of the CRD IV package is to bring about a quantitative and especially qualitative enhancement in financial institutions’ capital adequacy and for the first time provide for liquidity requirements harmonized throughout the EU. Moreover, a Single Rule Book will be created under CRD IV and CRR. This harmonized legislation ensures a uniform legislative framework within the European Single Market and prevents regulatory arbitrage. The Member States nevertheless will have certain freedoms in the area of macro prudential or systemic risks so as to reflect national specificities, for example the relationship of the aggregate economy to the trend in lending. The CRD IV package applies to all deposit-taking credit institutions in the EU as well as to investment firms, but in some cases not in its entirety.
According to the German Federal Financial Supervisory Authority (BaFin), the legislation is directly applicable and for the most part is addressed to the financial institutions directly. The Regulation for the first time prescribes a procedure for calculating and reporting a leverage ratio on the basis of which the competent supervisory authorities can examine and assess a financial institution. From 2015, the financial institutions will also have to publish the leverage ratio. A harmonized EU-wide concept for the leverage ratio is to be determined by early 2018. Currently it is not foreseeable whether it will apply as a binding risk-dependent criterion alongside of the (then already applicable) risk-based minimum own funds requirements (Pillar I) or instead will be adopted as part of an institution’s Supervisory Review and Evaluation Process (SREP) (Pillar II).
The Regulation forms an essential part of the Single Rule Book: since it applies directly, it ensures that largely uniform rules will apply in the Member States in future. Apart from narrowly defined exceptions, there are no longer any options for national supervisory authorities. The few options remaining in the Regulation are limited in term.
The Directive, CRD IV, which still has to be implemented by the individual Member States, covers provisions addressed to the national supervisory authorities or requiring action on their part. Besides provisions on cooperation in supervisory matters, these notably include the qualitative provisions of Pillar II on the Internal Capital Adequacy Assessment Process (ICAAP) and the SREP.
Also covered are provisions on the authorization procedure, shareholder control as well as supervisory measures and sanctions. These have been harmonized under CRD IV. So far, the regime of measures and sanctions has varied considerably within the EU. In future, a uniform minimum set of tools will be available to the national supervisory authorities throughout the EU. The catalogue of fines has also been harmonized.
Governance rules have also been revised under CRD IV. The financial crisis revealed shortcomings in financial institutions’ internal risk control. The core element of the new provisions is a more rigorous supervision of risks by directors as well as management or supervisory boards, noted BaFin. Greater importance is also being attached to the corporate risk control function and sustainability of the business strategy. In addition, there will be more stringent requirements to be met in terms of the make-up and qualification of executive bodies as well as management or supervisory boards.
The Directive also provides for a cap on managers’ variable remuneration. Bonuses are not to exceed the fixed components of their remuneration, unless a firm’s general meeting gives its consent to that by way of qualified majority, in which case variable remuneration may be no more than two times the amount of the fixed remuneration. The European Banking Authority will develop qualitative and quantitative criteria for identifying the risk takers who are to be subject to this provision.
BaFin Chief Executive Director Raimund Röseler emphasized that managing risks responsibly is incumbent above all of the financial institutions and their controlling bodies, which is why corporate governance requirements are so important. He also noted that company supervisory boards in particular will have to do a better job than in the past when it comes to performing their controlling function. BaFin will be watching closely to see whether that actually happens, he said.