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CRD II (Capital
Requirements Directive II)
From the
Basel ii Compliance Professionals Association
(BCPA)
the largest
association of Basel ii Professionals in the world
Capital
Requirements Directive II - Part 1
Capital Requirements Directive II - Part 2
Capital Requirements Directive II - Part 3
The CRD II, covering amendments
related to own funds, large exposures, supervisory arrangements,
qualitative standards for liquidity risk management and
securitisation, was adopted by Member States and the European
Parliament in September 2009 and will enter into force on 31
December 2010.
CRD II
consists of revision Directives 2009/27/EC, 2009/83/EC and
2009/111/EC.
The European Commission has
produced a set of amendments to the CRD in 2008, in the context of
on-going work related to the CRD at various supervisory and
industry fora. The review of the CRD is, in part, also a response
to the recent recommendations of the G-7 Financial Stability Forum
(FSF) and the market crisis.
The
content of CRD II covers:
(i) large exposures,
(ii) hybrid capital instruments,
(iii) supervisory arrangements
(colleges),
(iv) liquidity risk management,
(v) securitisations,
(vi) the waivers for banks
organised in networks and
(vii) adjustments to certain
technical provisions.
The measures concerning large
exposures, hybrid capital instruments and the adjustments to the
technical provisions are largely based on technical advice from
the Committee of European Banking Supervisors (CEBS).
The comitology amendments,
which make technical amendments to the annexes, were approved by
the European Banking Committee on 24 September 2008.
Most amendments here had already
been through the CEBS CRD Transposition Group (CRD-TG).
These amendments did not cause
further significant debate.
The final text was published in
the Official Journal on 28 July 2009.
The co-decision amendments,
which included large exposures, hybrid capital and
securitisations, took longer than expected to get through the
co-decision process. The French Presidency held Council
negotiations towards the end of 2008 and compromise text was
finally agreed by European Parliament on 6 May 2009.
DIRECTIVE 2009/111/EC
OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL
of 16 September
2009 amending Directives 2006/48/EC, 2006/49/EC and 2007/64/EC as
regards banks affiliated to central institutions, certain own
funds items, large exposures, supervisory arrangements, and crisis
management
(Text with EEA relevance)
THE EUROPEAN
PARLIAMENT AND THE COUNCIL OF THE EUROPEAN UNION,
Having regard
to the Treaty establishing the European Community, and in
particular Article 47(2) thereof,
Having regard to the proposal
from the Commission,
Having regard to the opinion of the
European Economic and Social Committee
Opinion of 24 March 2009
(not yet published in the Official Journal).
Having regard to
the opinion of the European Central Bank
After consulting the
Committee of the Regions,
Acting in accordance with the
procedure laid down in Article 251 of the Treaty Opinion of the
European Parliament of 6 May 2009 (not yet published in the
Official Journal) and Council Decision of 27 July 2009.
Whereas:
(1) In accordance with the
European Council and Ecofin Conclusions
and international initiatives such as the
Group of Twenty (G-20) summit on 2 April 2009, this
Directive represents a first important step to address
shortcomings revealed by the financial crisis ahead of further
initiatives announced by the Commission and set out in Commission
Communication of 4 March 2009 entitled ‘Driving European
recovery’.
(2) Article 3 of Directive
2006/48/EC of the European Parliament and of the Council of 14
June 2006 relating to the taking up and pursuit of the business of
credit institutions allows Member States to provide for
special prudential regimes for credit
institutions which are permanently affiliated to a central
body since 15 December 1977, provided that those regimes were
introduced into national law by 15 December 1979.
Those time limits prevent Member
States, especially those which acceded to the European Union since
1980, from introducing or maintaining such special prudential
regimes for similarly affiliated credit institutions which were
set up on their territories.
It is therefore appropriate to remove
the time limits set out in Article 3 of that Directive, in order
to ensure equal conditions for competition between credit
institutions in Member States. The Committee of European Banking
Supervisors should provide for guidelines in order to enhance the
convergence of supervisory practices in this regard.
(3)
Hybrid capital instruments play an important role in the
ongoing capital management of credit institutions.
Those instruments allow credit
institutions to achieve a diversified capital structure and to
access a wide range of financial investors.
On 28
October 1998, the Basel Committee on Banking Supervision adopted
an agreement on both the eligibility criteria and limits to
inclusion of certain types of hybrid capital instruments in
original own funds of credit institutions.
(4) It is therefore important
to lay down criteria for those capital instruments to be eligible
for original own funds of credit institutions and to align the
provisions in Directive 2006/48/EC to that agreement.
The amendments to Annex XII to
Directive 2006/48/EC result directly from the establishment of
those criteria. Original own funds referred to in Article 57(a) of
Directive 2006/48/EC should include all instruments that are
regarded under national law as equity capital, rank pari passu
with ordinary shares during liquidation and fully absorb losses on
a going-concern basis pari passu with ordinary shares.
It should
be possible for those instruments to include instruments providing
preferential rights for dividend payment on a non-cumulative
basis, provided that they are included in Article 22 of Council
Directive 86/635/EEC of 8 December 1986 on the annual accounts and
consolidated accounts of banks and other financial institutions
rank pari passu with ordinary shares during liquidation and fully
absorb losses on a going-concern basis pari passu with ordinary
shares.
Original own funds referred to in
Article 57(a) of Directive 2006/48/EC should
also include any other instrument under a credit institution’s
statutory terms taking into account the specific constitution of
mutuals, cooperative societies and similar institutions and
which are deemed equivalent to ordinary shares in terms of their
capital qualities in particular as regards loss absorption.
Instruments that do not rank pari
passu with ordinary shares during liquidation or which do not
absorb losses on a going-concern basis pari passu with ordinary
shares should be included in the category of hybrids referred to
in Article 57(ca) of Directive 2006/48/EC.
(5) In order to avoid
disruption of markets and to ensure continuity in overall levels
of own funds it is appropriate to provide for specific
transitional arrangements for the new regime on capital
instruments.
Once recovery is assured, the
quality of original own funds should be further enhanced.
In this regard,
the Commission should report to the European
Parliament and the Council together with any appropriate proposals
by 31 December 2011.
(6) For the purpose of
strengthening the crisis management
framework of the Community, it is essential that competent
authorities coordinate their actions with other competent
authorities and, where appropriate, with central banks in an
efficient way, including with the aim of mitigating systemic risk.
In order to strengthen the
efficiency of the prudential supervision of a banking group on a
consolidated basis, supervisory activities should be coordinated
in a more effective manner.
Colleges of
Supervisors should therefore be established.
The establishment of Colleges of
Supervisors should not affect the rights and
responsibilities of the competent authorities under Directive
2006/48/EC. Their establishment should be an instrument for
stronger cooperation by means of which competent authorities reach
agreement on key supervisory tasks.
The Colleges of Supervisors
should facilitate the handling of ongoing supervision and
emergency situations.
The consolidating supervisor
should, in association with the other members of the college, be
able to decide to organise meetings or activities that are not of
general interest and should therefore be able to streamline the
attendance as appropriate.
(7) The mandates of competent
authorities should take into account, in an appropriate way, the
Community dimension. Competent authorities should therefore duly
consider the effect of their decisions on the stability of the
financial system in all other Member States concerned.
Subject to national law, that
principle should be understood as a broad objective for promoting
financial stability across the European Union and should not
legally bind competent authorities to achieve a specific result.
(8) The competent authorities
should be able to participate in colleges
established for the supervision of credit institutions having
their parent in a third country.
The Committee of European Banking
Supervisors should, where necessary, provide for guidelines and
recommendations in order to enhance the convergence of supervisory
practices pursuant to Directive 2006/48/EC.
In order to
avoid inconsistencies and regulatory arbitrage, which could
result from differences in the approaches and rules applied by the
various colleges and the application of discretion by Member
States, guidelines on the procedures and rules governing colleges
should be developed by the Committee of European Banking
Supervisors.
(9) Article 129(3) of
Directive 2006/48/EC should not change the allocation of
responsibilities between competent supervisory authorities on a
consolidated, sub-consolidated and individual basis.
(10)
Information deficits between the home and the host competent
authorities may prove detrimental to the financial stability in
host Member States.
The information rights of host
supervisors, in particular in a crisis involving significant
branches, should therefore be reinforced.
For that purpose, the notion of
significant branches should be defined. The competent authorities
should transmit information which is essential for the pursuance
of the tasks of central banks and of Ministries of Finance with
respect to financial crises and systemic risk mitigation.
(11) The current supervisory
arrangements should be subject to further developments. Colleges
of Supervisors are a further and important step forward in
streamlining European Union’s supervisory cooperation and
convergence.
(12) Cooperation between
supervisory authorities, dealing with groups
and holdings and their subsidiaries and branches, by means of
colleges is a phase in a development towards further regulatory
convergence and supervisory integration.
Trust between supervisors and
respect for their respective responsibilities is essential. In the
event of a conflict between members of a college linked to those
different responsibilities, neutral and independent advice,
mediation and conflict-resolving mechanisms at Community level are
essential.
(13) The crisis in
international financial markets has demonstrated that it is
appropriate to examine further the need for reform of the
regulatory and supervisory model of the European Union’s financial
sector.
(14) The Commission announced
in its Communication of 29 October 2008 entitled
‘From financial crisis to recovery: A
European framework for action’, that it had set up a group
of experts, chaired by Mr Jacques de
Larosière (the de Larosière Group), to consider the
organisation of European financial institutions to ensure
prudential soundness, the orderly functioning of markets and
stronger European cooperation on financial stability oversight,
early warning mechanisms and crisis management, including the
management of cross-border and cross-sectoral risks, and also to
look at cooperation between the European Union and other major
jurisdictions to help safeguard financial stability at the global
level.
(15) In order to achieve the necessary level of
supervisory convergence and cooperation at the European Union
level, and to underpin the stability of the financial system,
further wide-ranging reforms of the regulatory and supervisory
model of the European Union’s financial sector are highly needed
and should be put forward swiftly by the Commission, with due
consideration of the conclusions presented by the de Larosière
Group on 25 February 2009.
(16) By 31 December 2009, the
Commission should report to the European Parliament and the
Council and propose appropriate legislation needed to tackle the
shortcomings identified regarding the provisions related to
further supervisory integration, taking into account that a
stronger role for a European Union level supervisory system should
be achieved by 31 December 2011.
(17)
Excessive concentration of exposures to a single client or group
of connected clients may result in an unacceptable risk of loss.
Such a situation could be
considered prejudicial to the solvency of a credit institution.
The monitoring and control of the
large exposures of a credit institution should therefore be an
integral part of its supervision.
(18) The current large
exposures regime dates back to 1992. Therefore, the existing
requirements on large exposures set out in Directive 2006/48/EC
and in Directive 2006/49/EC of the European Parliament and of the
Council of 14 June 2006 on the capital adequacy of investment
firms and credit institutions should be reviewed.
(19) Since
credit institutions in the internal market
are engaged in direct competition, the essential rules for
the monitoring and control of the large exposures of credit
institutions should be further harmonised.
In order to reduce the
administrative burden on credit institutions, the number of
options for Members States as far as large exposures are concerned
should be reduced.
(20) In determining the
existence of a group of connected clients and thus exposures
constituting a single risk, it is also important to take into
account risks arising from a common source
of significant funding provided by the credit institution or
investment firm itself, its financial group or its connected
parties.
(21) While it is desirable to
base the calculation of the exposure value on that provided for
the purposes of minimum own funds requirements, it is appropriate
to adopt rules for the monitoring of large exposures without
applying risk weightings or degrees of risk.
Moreover, the credit risk
mitigation techniques applied in the solvency regime were designed
with the assumption of a well-diversified credit risk. In the case
of large exposures dealing with single name concentration risk,
credit risk is not well-diversified.
The effects of those techniques
should therefore be subject to prudential safeguards. In this
context, it is necessary to provide for an effective recovery of
credit protection for the purposes of large exposures.
(22)
Since a loss arising from an exposure to a credit institution or
an investment firm can be as severe as a loss from any other
exposure, such exposures should be treated and reported in the
same manner as any other exposures.
However, an alternative
quantitative limit has been introduced to alleviate the
disproportionate impact of such an approach on smaller
institutions.
In addition, very short-term
exposures related to money transmission including the execution of
payment services, clearing, settlement and custody services to
clients are exempt to facilitate the smooth functioning of
financial markets and of the related infrastructure.
Those services cover, for
example, the execution of cash clearing and settlement and similar
activities to facilitate settlement.
The related exposures include
exposures which might not be foreseeable and are therefore not
under the full control of a credit institution, inter alia,
balances on inter-bank accounts resulting from client payments,
including credited or debited fees and interest, and other
payments for client services, as well as collateral given or
received.
(23) The provisions related
to external credit assessment institutions
(ECAIs) under Directive 2006/48/EC should be consistent
with Regulation (EC) No 1060/2009 of
the European Parliament and of the Council of 16 September 2009 on
credit rating agencies (2).
In particular, the Committee of
European Banking Supervisors should review its guidelines on the
recognition of ECAIs to avoid duplication of work and reduce the
burden of the recognition process where an ECAI is registered as a
credit rating agency (CRA) at Community level.
(24) It is important that the
misalignment between the interest of firms that ‘re-package’ loans
into tradable securities and other financial instruments
(originators or sponsors) and firms that invest in these
securities or instruments (investors) be removed.
It is also important that the
interests of the originator or sponsor and the interests of
investors be aligned.
To achieve this, the originator
or sponsor should retain a significant interest in the underlying
assets.
It is therefore important for the
originators or the sponsors to retain exposure to the risk of the
loans in question.
More generally, securitisation
transactions should not be structured in such a way as to avoid
the application of the retention requirement, in particular
through any fee or premium structure or both.
Such retention
should be applicable in all situations where the economic
substance of a securitisation according to the definition of
Directive 2006/48/EC is applicable, whatever legal structures or
instruments are used to obtain this economic substance.
In particular
where credit risk is transferred by
securitisation, investors should make their decisions only after
conducting thorough due diligence, for which they need adequate
information about the securitisations.
(25) The
measures to address the potential
misalignment of those structures need to be consistent and
coherent in all relevant financial sector regulation.
The Commission should put forward
appropriate legislative proposals to ensure such consistency and
coherence. There should be no multiple applications of the
retention requirement.
For any given
securitisation it suffices that only one of the originator, the
sponsor or the original lender is subject to the requirement.
Similarly, where securitisation transactions contain other
securitisations as an underlying, the retention requirement should
be applied only to the securitisation which is subject to the
investment.
Purchased receivables should not
be subject to the retention requirement if they arise from
corporate activity where they are transferred or sold at a
discount to finance such activity.
Competent authorities should
apply the risk weight in relation to non-compliance with due
diligence and risk management obligations in relation to
securitisation for non-trivial breaches of policies and procedures
which are relevant to the analysis of the underlying risks.
(26) In their
Declaration on Strengthening the Financial
System of 2 April 2009, the leaders of the G20 requested the Basel
Committee for Banking Supervision and authorities to consider due
diligence and quantitative retention requirements for
securitisation by 2010.
In view of those international
developments, and in order best to mitigate
systemic risks arising from securitisation markets, the
Commission should, before the end of 2009 and after consulting the
Committee of European Banking Supervisors, decide whether an
increase of the retention requirement should be proposed, and
whether the methods of calculating the retention requirement
deliver the objective of a better alignment of the interests of
the originators or sponsors and the investors.
(27) Due diligence should be
used in order properly to assess the risks arising from
securitisation exposures for both the trading book and the
non-trading book. In addition, due diligence obligations need to
be proportionate.
Due diligence procedures should
contribute to building greater confidence between originators,
sponsors and investors. It is therefore desirable that relevant
information concerning the due diligence procedures is properly
disclosed.
(28) Member States should
ensure that competent authorities have
sufficient personnel and resources to comply with
their
supervisory obligations under Directive 2006/48/EC and that
employees involved in the supervision of credit institutions in
accordance with that Directive have appropriate knowledge and
experience for the duties assigned.
(29) Annex III to Directive
2006/48/EC should be adapted in order to clarify certain
provisions with a view to enhancing the convergence of supervisory
practices.
(30) Recent market
developments have highlighted the fact that
liquidity risk management is a key determinant of the
soundness of credit institutions and their branches.
The criteria set out in Annex V
and XI to Directive 2006/48/EC should be reinforced in order to
align those provisions to the work conducted by the Committee of
European Banking Supervisors and the Basel Committee on Banking
Supervision.
(31) The measures necessary
for the implementation of Directive 2006/48/EC should be adopted
in accordance with Council Decision 1999/468/EC of 28 June 1999
laying down the procedures for the exercise of implementing powers
conferred on the Commission
(32) In particular the
Commission should be empowered to amend Annex III of Directive
2006/48/EC in order to take account of developments on financial
markets or in accounting standards or requirements which take
account of Community legislation or with regard to convergence of
supervisory practice.
Since those measures are of
general scope and are designed to amend non-essential elements of
Directive 2006/48/EC, they must be adopted in accordance with the
regulatory procedure with scrutiny provided for in Article 5a of
Decision 1999/468/EC.
(33) The financial crisis has
revealed a need for a better analysis of and
response to macro-prudential problems, which lie at the
interface between macroeconomic policy and financial system
regulation.
This will include a need to
examine: measures that mitigate the ups and downs of the business
cycle, including the need for credit institutions to build
counter-cyclical buffers in good times that can be used during a
downturn, which may include the possibility of building up
additional reserves, ‘dynamic provisioning’
and the possibility to reduce capital buffers during difficult
times, thus ensuring adequate availability of capital over the
cycle; the rationale underlying the calculation of capital
requirements in Directive 2006/48/EC; supplementary measures to
risk-based requirements for credit institutions to help constrain
the build-up of leverage in the banking system.
(34)
By 31 December 2009, the Commission should
therefore, review Directive 2006/48/EC as a whole to address those
issues and present a report to the European Parliament and the
Council and any appropriate proposals.
(35) In order to ensure
financial stability, the Commission should review and report on
measures to enhance transparency of OTC markets, to mitigate the
counterparty risks and more generally to reduce the overall risks,
such as by clearing of credit default swaps through central
counterparties (CCPs).
The establishment and development
of CCPs in the EU subject to high operational and prudential
standards and effective supervision should be encouraged. The
Commission should submit its report to the European Parliament and
the Council together with any appropriate proposals, taking into
account parallel initiatives at the global level as appropriate.
(36) The Commission should
review and report on the application of Article 113(4) of
Directive 2006/48/EC including whether exemptions should be a
matter of national discretion.
The Commission should submit that
report to the European Parliament and the Council together with
any appropriate proposals.
The exemptions and options should
be abolished where there is no demonstrated need for their
maintenance with a view of achieving single set of consistent
rules across the Community.
(37) The specific
characteristics of microcredit should
be taken into account in the risk assessment, and
the development of microcredit should be
promoted.
Furthermore, given the low
development of microcredit, the development of adequate rating
systems should be promoted, including the development of standard
rating systems adapted to the risks of microcredit activities.
Member States should endeavour to
ensure that the prudential regulation and supervision of
micro-credit activities at national level are proportionate.
(38) Since the objectives of
this Directive, namely the introduction of rules concerning the
taking up and pursuit of the business of credit institutions, and
their prudential supervision, cannot be sufficiently achieved by
the Member States because it requires the harmonisation of a
multitude of different rules existing in the legal systems of the
various Member States and can therefore be better achieved at
Community level, the Community may adopt measures, in accordance
with the principle of subsidiarity as set out in Article 5 of the
Treaty.
In accordance with the principle
of proportionality, as set out in that Article, this Directive
does not go beyond what is necessary in order to achieve those
objectives.
(39) In accordance with point 34
of the Interinstitutional agreement on
better law-making, Member States are encouraged to draw up,
for themselves and in the interest of the Community, their own
tables illustrating, as far as possible, the correlation between
this Directive and the transposition measures, and to make them
public.
(40)
Directives 2006/48/EC, 2006/49/EC and 2007/64/EC (2) should
therefore be amended accordingly,
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DIRECTIVE:
Capital Requirements Directive II - Part 2
Capital Requirements Directive II - Part 3
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