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Council formally adopts CRD 4

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Council formally adopts CRD 4

The Council has adopted today the new bank capital requirements, known as the CRD 4 package.

The key points of the package, made up of a Directive and a Regulation, are as follows:

The Regulation (directly applicable)
  • Capital requirements. It will require banks and investment firms to hold common equity tier 1 (CET 1) capital of 4.5% of risk weighted assets (until December 2014 between 4% to 4.5%), up from 2% applicable under current rules. The total capital requirement, which includes tier 1 and tier 2 capital, remains unchanged at 8% of risk weighted assets. The Regulation defines CET 1 capital instruments using 14 criteria, similar to those set out in Basel 3, and mandates the European Banking Authority (EBA) to monitor the quality of instruments issued by institutions. Additional capital requirements in the form of buffers are introduced in the Directive.
  • Liquidity requirements. The regulation will introduce EU liquidity requirements from 20151, after an initial observation period. The liquidity coverage ratio (LCR) will be phased-in gradually, starting at 60% in 2015 and reaching 100% in 2018. A review in 2016 will enable the Commission to delay the introduction of the 100% ratio, if justified by international developments. Until the LCR is fully introduced, member states may maintain or introduce national liquidity requirements.
  • Net stable funding ratio. To address longer term funding issues, the Commission would submit by 31 December 2016 a legislative proposal aimed at ensuring that institutions use stable sources of funding.
  • Leverage ratio. The Regulation provides for the introduction of a leverage ratio from 1 January 2018, if agreed by the Council and Parliament on the basis of a report to be presented by the Commission by 31 December 2016.
  • National flexibility. The Regulation will enable Member States to impose, for up to two years (extendable), stricter macro-prudential requirements for domestically authorised financial institutions in order to address increased risks to financial stability, however the Council can reject these by a qualified majority.

The Directive (to be transposed into national laws)
  • Capital buffers. The Directive will introduce additional requirements for a capital conservation buffer of CET 1 capital of 2.5% of total risk exposure, identical for all banks in the EU, and an institution-specific countercyclical capital buffer1 of up to 2.5%, amongst other measures.
  • Bankers’ bonuses. Bonuses will be capped at a ratio of 1:1 fixed to variable remuneration, i.e. no greater than equal to fixed salary. This ratio can be raised to a maximum of 2:1, if a quorum of shareholders representing 50% of shares participates in the vote and a 66% majority of them supports the measure.
  • Governance and transparency. From 1 January 2014, institutions will be required to make public the number of employees per institution in group and net banking income, amongst other measures.
The decision to adopt the new rules was taken by a qualified majority, with the UK voting against the new rules on the basis that they are out of line with what was agreed at global level, and with UK Chancellor George Osborne having accused the European Commission of offering concessions to French and German banks that breached the global agreement. The UK will nonetheless be obliged to apply the new legislation.

Rules will apply from 1 January 2014.