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CRR 2 and CRD 5 published in June 2019

CRR 2 and CRD 5 published in June 2019

The long legislative process which started at the end of 2016 has been finalized. The Regulation (EU) 2019/876 of the European Parliament and of the Council of 20 May 2019 amending Regulation (EU) No 575/2013 as regards the leverage ratio, the net stable funding ratio, requirements for own funds and eligible liabilities, counterparty credit risk, market risk, exposures to central counterparties, exposures to collective investment undertakings, large exposures, reporting and disclosure requirements, and Regulation (EU) No 648/2012, or briefly CRR 2, was published in the Official Journal of the EU on 7 June 2019. The CRR 2 was published together with the Directive (EU) 2019/878 of the European Parliament and of the Council of 20 May 2019 amending Directive 2013/36/EU as regards exempted entities, financial holding companies, mixed financial holding companies, remuneration, supervisory measures and powers and capital conservation measures, i.e. CRD 5, and amended rules on resolution (BRRD 2 and SRMR 2).

The application date differs according to the amending points but most changes will start to apply from 28 June 2021. However, some amendments have already been applicable since 27 June 2019. Although the changes formally apply to CRR institutions, i.e. investment firms as well as credit institutions, many EU investment firms will soon be removed from the scope of the CRR with the introduction of the new Investment Firms Regulation and Directive on which political agreement was reached in February 2019.

In the aftermath of the financial crisis 2007-2008, the Union started to implement a substantial reform of the financial services regulatory framework to enhance the resilience of its financial institutions. That reform is largely based on international standards agreed by the Basel Committee on Banking Supervision (BCBS) and called Basel III framework. These standards have been published in several steps since 2010. CRR 2 and CRD 5 represent a next phase of their implementation. The future phase of Basel III implementation will follow later.
However, the EU’s implementation deviates from Basel standards in a few areas and some components of CRR 2/CRD 5 reflect Union specificities and broader policy considerations and also drive forward the EU Banking and Capital Markets Unions.

The main changes the CRR 2 and CRD 5 are introducing include:

  • A precise definition of small and non-complex institutions as the application of the proportionality principle.
  • Binding leverage ratio requirement (3 %) to complement the current system of reporting and disclosure of the leverage ratio.
  • Requirements to implement internal systems, use the standardised methodology, or use the simplified standardised methodology, subject to conditions, for the purpose of identifying, evaluating, managing and mitigating the interest rate risk arising from non-trading book activities in terms of its impact on both economic value of equity (EVE) and net interest income (NII).
  • Supervisory powers shall be exercises where EVE declines by more than 15 % of Tier 1 as a result of a sudden and unexpected change in interest rates in any of 6 supervisory shock scenarios, and where NII experiences a large decline as a result of a sudden and unexpected change in interest rates in any of the 2 supervisory shock scenarios.
  • The basis for the calculation of limits on large exposures has been changed from eligible capital to Tier 1 capital.
  • The rules for exposures in the form of units or shares in collective investment undertakings (CIUs) shall be more risk sensitive and promote transparency with respect to the underlying exposures of CIUs. They also set a clear hierarchy of approaches to calculate risk-weighted exposure amounts. That hierarchy reflects the degree of transparency over the underlying exposures.
  • Provisions implementing the international standard on total loss absorbing capacity (TLAC) for EU global systemically important banks (G-SIBs). CRR 2 aligns the EU’s regime on minimum requirements for own funds and eligible liabilities (MREL) – as it applies to G-SIBs – with the international standards.
  • The new rules aim to encourage SME and infrastructure lending. The threshold below which SME exposures can benefit from reduced capital requirements shall be increased. Capital requirements are lowered by 25% for investments in infrastructure fulfilling a set of criteria.
  • The new standardised approach to counterparty credit risk (SA-CCR) which is more risk sensitive, providing better recognition of hedging, netting, diversification and collateral. As the SA-CCR may be too complex and burdensome to implement for some institutions, there will be a simplified version of the SA-CCR (the ‘simplified SA-CCR’) applicable under certain conditions.
  • The reporting requirements for the FRTB (fundamental review of the trading book) approaches shall be considered as a first step towards the full implementation of the FRTB framework in the Union. Where appropriate, a legislative proposal to the European Parliament and to the Council shall be submitted by 30 June 2020 on how the FRTB framework should be implemented in the Union to establish the own funds requirements for market risk.
  • The new binding requirement called the net stable funding ratio (NSFR) requirement. It defines the net stable funding requirement as a ratio of an institution's amount of available stable funding to its amount of required stable funding over a one-year horizon.
  • Some clarifications to the remuneration disclosures.
  • The competent or designated authorities should avoid any form of duplicative or inconsistent use of the macroprudential powers.
  • Some changes in the setting and application of the systemic risk buffer and the risk buffer for systemically important institutions. Apart from all exposures, the systemic risk buffer can be applied also to a subset of exposures, may be applied to all institutions, or to one or more subsets of those institutions, where the institutions exhibit similar risk profiles in their business activities.
  • Financial holding companies and mixed financial holding companies will have to obtain “approval” from a group’s consolidating supervisor. Holding companies are brought under the direct scope of supervisory power and will have to comply with the most important prudential requirements (core capital, large exposures, liquidity and reporting obligations) on a consolidated basis.
  • Two or more institutions in the EU which are part of the same third-country group, shall have a single intermediate EU parent undertaking that is established in the EU.

 

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