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Erscheinung:15.01.2014 Birgit Höpfner, BaFin

CRD IV: New regulatory package for banks in force

1 January 2014 will go down as a historic date for European banks. This is the date on which key parts of a huge regulatory package took effect, ushering in a sweeping and fundamental transformation of EU banking supervision law in terms of both procedural and substantive aspects: the Capital Requirements Directive IV (CRD IV) and the Capital Requirements Regulation (CRR).

The CRD-IV Implementing Act (only available in German) has also been in force in Germany since 1 January.

The European framework had been negotiated over a period of more than two and a half years before being finally promulgated at the end of June 2013. With the CRD IV and the CRR, the EU fulfilled the mandate handed to it by the G 20 to strengthen the supervisory framework for banks on a sustainable basis in response to the financial market crisis. Among other things, the framework transposed the requirements of Basel III into European law.

Single Rule Book

In a strictly formal sense, the regulatory package merely represents the third amendment to the Capital Requirements Directive made up of the Banking Directive and the Capital Adequacy Directive. Unlike the previous amending directives, however, the existing framework not only will be completely replaced by the CRD IV and the CRR, but also a significant part of the requirements will be transferred to the CRR under a “Single Rule Book”, with the CRR, as an EU regulation, being directly applicable.

Also new is the fact that the additional technical provisions will be incorporated in around 100 binding Technical Standards. These are being drawn up by the European Banking Authority (EBA) and will likewise be adopted by the European Commission in the form of directly applicable EU regulations.

New legislative hierarchy

The provisions set out in the CRR and the Technical Standards are thus uniform and binding throughout the EU. They also apply to banking supervision law in Germany: whereas hitherto this was for the most part covered exhaustively by the German Banking Act (KreditwesengesetzKWG) and its subordinate statutory instruments, the CRR and the Technical Standards have added two new levels of directly applicable EU law ranking above national law in the legislative hierarchy. They contain the rules that are directly addressed to the institutions, such as the minimum capital requirements of Pillar I and the disclosure obligations of Pillar III.

The provisions of the German Banking Act and the regulations adopted under it primarily regulate areas covered in the CRD IV, i.e. areas for which national implementation was required. For the most part these are provisions either addressed to the supervisory authorities or requiring them to act. For example, they concern questions of supervisory co-operation, ownership control procedures, requirements of the banking supervisory review process, capital buffers, supervisory measures and sanctions. Issues not dealt with in the CRD IV or CRR, such as reporting obligations for loans of € 1.5 million or more, will continue to fall under national legislation.

The Regulation: Own funds and minimum capital

Four of the areas of major importance covered by Basel III were directly incorporated in the CRR: definition of own funds/minimum capital requirements, counterparty default risk, liquidity and leverage ratio. Only the requirements for capital buffers are found in the CRD IV and were transposed into national law.

The CRR contains a completely revised definition of regulatory capital which clearly distinguishes three categories of own funds: Core Tier 1 capital (CET 1 capital), additional Tier 1 capital (AT 1 capital) and Tier 2 capital (Tier 2 capital). Tier 3 capital disappeared altogether. Unlike Basel III, the CRR here follows a substance-over-form approach, i.e. a capital instrument is classified under a certain capital class solely on the basis of the criteria catalogues of the CRR and irrespective of the relevant institution’s legal form.

In keeping with the objective of strengthening the institutions’ capital adequacy not only quantitatively but also qualitatively, Core Tier 1 capital now assumes particular significance. For example, the vast majority of the minimum capital requirements are to be met by Core Tier 1 capital. Before an institution can issue a new instrument of Core Tier 1 capital, the supervisory authority must give its express consent to such issuance. For this purpose it assesses whether the planned instrument satisfies the criteria. The EBA monitors the quality of the own funds instruments on an ongoing basis. Moreover, Core Tier 1 capital replaces liable capital as the decisive measuring and reference value for further supervisory requirements.

CVA risk, liquidity and leverage ratio

For over-the-counter derivatives (OTC derivatives), the CRR for the first time generally provides for capital requirements for credit valuation adjustment risk (CVA risk). Unlike counterparty default risk, this is understood as the risk of the positive exposure diminishing because of an increase in the credit risk premium for the counterparty without a default by the latter.

Under the CRR, there are now two liquidity ratios: the liquidity-coverage ratio (LCR) is to ensure short-term liquidity for a period of 30 days, while the net stable funding ratio (NSFR) refers to medium-to-long-term liquidity for one year. This creates an EU-wide liquidity regime for the first time. Both ratios were initially introduced for an observation period; they will apply as binding minimum requirements only from 1 January 2015 (LCR) and from 1 January 2018 (NSFR).

One of the key demands made by the G 20 was the creation of a non-risk-based supplementary measure to the Basel II framework (leverage ratio). The goal was to prevent institutions from incurring excessive debt. This leverage ratio places an institution's Tier 1 capital in relation to the sum of its non-risk-weighted exposure values. The leverage ratio was also initially introduced for an observation period. It is to undergo a final review in 2017 based on the data available up to then. At that time a decision will be made on its final design.

German Banking Act

The German Banking Act (KWG) and its subordinate statutory instruments underwent two significant amendments as a result of the regulatory package from Brussels. First of all, they were stripped of all provisions found in the CRR and supplemented by procedural and other provisions required for adoption of the CRR in practice. Secondly, the provisions that were required for implementing the CRD IV were incorporated in the KWG and the statutory instruments. The most important amendments to the KWG1 are explained below.

Scope of application

Traditionally, the concept of an institution provided for in the KWG is broader than the one provided for under EU law. In the past, the national regulations that were based on EU directives were applicable to all institutions within the meaning of KWG save where an exception was explicitly provided for in section 2 of the KWG.

This principle was maintained. Since the CRR applies to the institutions falling under its scope directly – which roughly correspond to the deposit-taking credit institutions and securities trading firms existing under the KWG –, the newly inserted section 1a of the KWG explicitly also includes all other institutions within the meaning of the KWG in the scope of application of the CRR and the Technical Standards. Exceptions continue to be explicitly provided for in section 2 of the KWG.

Capital adequacy

The key remaining components of the central provision on capital adequacy hitherto stipulated in section 10 of the KWG are the power to issue statutory instruments for the Solvency Regulation (SolvabilitätsverordnungSolvV) as well as the revised authorisation basis for imposing higher capital requirements (section 10 (3) of the KWG).

The latter is distinguished from the previous section 10 (1b) sentence 1 of the KWG in two key aspects. Firstly, the list of possible cases in which higher capital requirements can be imposed is no longer exhaustive. Secondly, the elements specified in section 10 (3) sentence 2 of the KWG are circumscribed powers, i.e. in the matters in question BaFin no longer enjoys discretionary powers with regard to taking action in these cases.

Capital buffers

Sections 10c to 10i of the KWG stipulate the capital buffer requirements as well as provisions on the ratio of the capital buffers to one another and the legal consequences arising if the buffers fail to meet the requirements. Unlike Basel III, which stipulates only a capital conservation buffer and a countercyclical capital buffer, the CRD IV and thus also the KWG provide for a total of five capital buffers. In addition to the capital conservation buffer and countercyclical capital buffer, there are now a capital buffer for systemic risks, a capital buffer for global systemically important institutions and a capital buffer for other systemically important institutions. What all capital buffers have in common is that they are intended to create a capital cushion which exceeds the minimum capital requirements and which can be released in times of economic downturn or in stress situations. The aim is to make the institutions more resilient to such events. Also common to all capital buffers is that they are exclusively made up of Core Tier 1 capital and must be complied with in addition to the minimum capital requirements as well as any other higher capital requirements that might be imposed on the institution.

Except for the capital conservation buffer, which is legally fixed at 2.5 per cent of the total risk exposure amount pursuant to Article 92(3) of the CRR, all other capital buffers must be set by the competent supervisory authority. They differ both in terms of the risks they address and in respect of the range of their possible amount. As of 1 January 2014, initially only the capital buffer for systemic risks is available. The capital buffers for global or other systemically important institutions will apply as of 1 January 2016. The capital conservation buffer and the countercyclical capital buffer will be phased-in from 1 January 2016.

Provisions on loans of 1.5 million euros or more and governance

Sections 14, 19, 20 and 22 of the KWG contain the revised provisions on reporting obligations for loans of 1.5 million euros or more. Among other things, the existing reporting threshold of 1.5 million euros will be replaced by a threshold of one million euros as of 1 January 2015. Moreover, the borrower unit is now different from the one defined in the large exposures regime. Both are purely national rules that do not go back to the CRD IV.

CRD IV provides for broadened requirements for governance of the institutions. This was taken as an occasion to structure the existing regime in the KWG more clearly. For example, section 25a of the KWG now only contains the provisions on proper management organisation. The new provisions here include the requirement for the institutions to establish a compliance function. Moreover, a cap on variable remuneration components was introduced. The provisions on outsourcing were transferred to the new section 25b of the KWG. Sections 25c and 25d of the KWG for the first time expressly stipulate requirements to be met by members of supervisory and administrative bodies. They range from qualitative requirements to be met by mandate holders, specific obligations regarding the exercise of the mandates, as well as mandate restrictions and provisions on incompatibilities. The new requirements are intended to address the weaknesses in the performance of mandates by directors and members of supervisory bodies that were exposed by the financial market crisis. In particular, they are intended to ensure that such persons are not only sufficiently qualified but also have sufficient time to perform their mandate in an appropriate manner.

Sanctions

The provision on administrative fines in section 56 of the KWG underwent a fundamental revision. Firstly, contraventions of the obligations to act under the CRR were included in the catalogue of administrative offences subject to fines. Secondly, the range of administrative fines was increased significantly. The administrative fine is to exceed the economic advantage that the perpetrator gains from the administrative offence. Where the range of administrative fines provided for in the KWG does not suffice for this purpose, it may be increased in the case of natural persons to 5 million euros maximum and in the case of legal persons even to as much as 10 per cent of the net revenue for the financial year preceding the administrative offence, or to twice the additional earnings stemming from the offence.

Also new is the provision contained in section 60b of the KWG requiring BaFin to publish any final non-appealable banking supervisory measures and any non-appealable administrative fines. To protect legal and other interests of higher value, the publication may take place in anonymised form in individual cases.

Transitional provisions

Like Basel III, the CRR in principle also provides for the gradual introduction of the new capital requirements. Given the requirements that were already in force in the individual member states, the CRR gives the competent supervisory authority the right to determine how quickly the transition is to take place.

In its decision, BaFin has taken the criteria specified in Basel III as a reference. It is set out in sections 23 et seq. of the SolvV (new).

1Important amendments to the German Banking Act (KWG)*

  • Scope of application (section 1a of the KWG, exceptions: section 2 of the KWG)
  • Capital adequacy (section 10 of the KWG)
  • Capital buffers (sections 10c to 10i of the KWG)
  • Provisions on loans of 1.5 million euros or more (sections 14, 19, 20, 22 of the KWG)
  • Governance (sections 25a et seq. of the KWG)
  • Sanctions (sections 56, 60b of the KWG)

*Transitional provisions: Sections 23 et seq. of the Solvency Regulation (SolvV)

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