Understanding CRR II and CRD V

Understanding CRR II and CRD V

Richard, could you please tell the Risk Insights’ readers about yourself and your professional experiences?

Having worked in the financial technology sector since the late 1980s I have seen the financial industry change dramatically. I have worked for numerous risk specialist companies over this time which has given me both insight and real experience of the changes that have taken place in the way risks are measured and controlled across investment, corporate and retail banking, front, middle & back office systems.  As vice president of regulatory reporting, I now oversee the success of Wolters Kluwer’s regulatory reporting solution and business in EMEA, using what I have learnt in the past to help me identify growth areas and shape strategy as we move forward.

At Risk EMEA 2017, you will be delivering a presentation on CRD V. Why is this a key talking point at the Summit?

Just three years after CRD IV and CRR were finalised, the EU’s banking sector now faces a revised Capital Requirements Directive and Capital Requirements Regulation, CRD V and CRR II. In a 500+ page package these revisions to CRD IV and CRR are likely to stretch significant regulatory change into the next decade.

Can you provide a brief overview of the CRD V regulation?

1. Measures to increase the resilience of EU institutions and enhance financial stability

The proposals incorporate the remaining elements of the regulatory framework agreed recently within the Basel Committee on Banking Supervision (BCBS) and the Financial Stability Board (FSB). They include:

• More risk-sensitive capital requirements, particularly in the areas of market risk and counterparty credit risk, and for exposures to central counterparties (CCPs);
• Implementing methodologies that can reflect more accurately the actual risks to which banks are exposed;
• A binding Leverage Ratio (LR) to prevent institutions from excessive leverage;
• A binding Net Stable Funding Ratio (NSFR) to address the excessive reliance on short-term wholesale funding and to reduce long-term funding risk.
• A requirement for Global Systemically Important Institutions (G-SIIs) to hold minimum levels of capital and other instruments which bear losses in resolution. This requirement, known as ‘Total Loss-Absorbing Capacity’ or TLAC, will be integrated into the existing MREL (Minimum Requirement for own funds and Eligible Liabilities) system, which is applicable to all banks, and will strengthen the EU’s ability to resolve failing G-SIIs while protecting financial stability and minimising risks for taxpayers.

2. Measures to improve banks’ lending capacity to support the EU economy

In particular, specific measures are proposed to:

• Enhance the capacity of banks to lend to SMEs and to fund infrastructure projects;
• For non-complex, small banks, reduce the administrative burden linked to some rules in the area of remuneration (namely those on deferral and remuneration using instruments, such as shares), which appear disproportionate for these banks;
• Make CRD/CRR rules more proportionate and less burdensome for smaller and less complex institutions where some of the current disclosure, reporting and complex trading book-related requirements appear not to be justified by prudential considerations. The Call for Evidence and the analysis carried out by the Commission showed that the present framework can be applied in a more proportionate way, taking account of their specific situation.

3. Measures to further facilitate the role of banks in achieving deeper and more liquid EU capital markets to support the creation of a Capital Markets Union

Specific adjustments to the proposed measures are envisaged, in order to:

• Avoid disproportionate capital requirements for trading book positions, including those related to market-making activities;
• Reduce the costs of issuing/holding certain instruments (covered bonds, high quality securitisation instruments, sovereign debt instruments, derivatives for hedging purposes);
• Avoid potential disincentives for those institutions that act as intermediaries for clients in relation to trades cleared by CCPs.

How should banks better prepare for the CRD V regulation?

The CRD V regulation (once approved) will be among the most important regulatory developments for banks operating in the EU in the coming years and will demand in-depth analysis. In particular, banks should assess the likely impact of these new rules on their capital and liquidity requirements, risk measurement and management capabilities.

This will be difficult to do, especially given that CRD V is likely to be followed by yet another round of EU legislation in the coming years implementing the remaining elements of the so called ‘Basel IV’. The EU’s declining appetite to ‘copy out’ all aspects of the BCBS agenda, and the potential for greater international regulatory fragmentation arising from a new administration in the United States make such an assessment all the more challenging.

What happens now?

These legislative proposals will now be submitted to the European Parliament and the Council for their consideration and adoption. The proposals discuss being adopted in 2019. The CRD V, CRR II proposals will be among the most important regulatory developments for banks operating in the EU in the coming years and will demand in-depth analysis. For UK banks, Brexit adds an additional layer of complexity. Assuming the UK government proceeds with its plan to trigger Article 50 next year, the UK will be involved, in some form, in most of the EU’s negotiating process for CRD V, CRR II, but will then likely exit the EU just before or after the rules come into force.

How do you see the role of the capital management professional changing over the next 6-12 months?

There will still be an ongoing work with implementing EBA, ECB and National Bank interpretations on CRDIV, and other relevant regulation that has been passed. At the same time, optimization of data, making calculations transparent and automating Regulatory reporting processes is needed for Capital Management to deliver value and cope with constantly changing reporting requirements.

Capital, Risk and Treasury Management needs to work closely together in the ongoing evaluation of capital and funding strategy in light of regulatory uncertainties.