As 2014 begins emerging from its nascent months, it is worth taking a look at the new Capital Requirements Directive, due to come into effect later this year, and how it is set to influence banks, building societies, and investment firms.
The Capital Requirements Directive IV directive is made up of both the Capital Requirement Regulation (CRR) and the Capital Requirements Directive (CRD). The former will be directly applicable to all firms across the EU from the start of 2014; the latter will need to be legislated for by member states.
The directive has been created to implement the Basel III agreements within the EU. Up-to-date requirements for quality and quantity of capital are central to this agreement, as are a basis for new liquidity and leverage requirements, new rules for counterparty risk, and new macro-prudential standards – these will include a countercyclical capital buffer and capital buffers for systematically important institutions. Banks will be required to set aside capital amounting to a minimum of 8% of their risk-weighted assets, of which just over half must be in the form of tier-one capital.
Standardised EU regulatory reporting is also one of the big changes being instigated. Own funds, large exposures, and financial information will all be parts of the reports filed – referred to as COREP and FINREP. In the UK the data for these reports will arrive via XBRL, covering all data currently included within the EBA Implementing Technical Standards. The FCA will be communicating regularly with all affected firms in order to make this process as smooth as possible.
COREP will apply from the 1 January whereas FINREP will come in on the 1 July. In the autumn, the FCA will consult on non-COREP supervisory information. The FCA handbook will need to be restructured after COREP and FINREP are introduced.
Bonuses and Remuneration
A more contentious aspect of CRD IV is the notion of capping bonuses at 100% of fixed remuneration or 200% if shareholders approve. All Code Staff would be affected by the cap, including those outside the EU. Some banks are expected to raise salaries for senior staff in order to mitigate the effects of any cap, which could render these changes superficial.
An announcement has made clear that the issue of bonuses is to be deferred. Guidelines for how this cap could operate are likely to be issued by the EBA by the end of this year. It is believed that if these capping measures are initiated, the requirement to get a shareholder vote to increase a cap from 100% to 200% could put EU banks at a great disadvantage to US banks. The current rule on the ratio between fixed and variable remuneration is 300%.
The new laws were voted through by a qualified majority of EU members, although the UK voted against. All in all, the new directive is an attempt to be as far reaching as possible in response to the recent banking crisis.