The Capital Requirements Directive (CRD) rules stipulate the minimum amount of own funds that credit institutions and investment firms must have in order to cover the risks to which they are exposed. The aim is to ensure the financial soundness of these institutions – in particular to ensure that they can weather difficult periods. This is aimed at protecting depositors and clients and ensuring the stability of the financial system.
In the EU, harmonised capital requirements are a key component in the single market in financial services: mutual recognition of requirements is the basis for banks’ and investment firms’ “single market passport”, which basically means that they can operate throughout the EU on the basis of approval by the appropriate regulatory authority in their own Member State.
The CRD is split into 3 pillars: minimum capital requirements, supervisory review process and market discipline. All three pillars together are intended to achieve a level of capital commensurate with a firm's overall risk profile.
Pillar 1, which represents the minimum capital requirements, is made up of operational risk, credit risk and market risk. Pillar 1 is being achieved via 2 pieces of legislation (regulations), 6 guidance notes and a glossary of terms, as well as the reporting returns, which are accompanied by notes for completion, for both Banks and Investment Firms.
Pillar 2, the supervisory review process, is the internal capital adequacy process and is covered in detail in the ICAAP guidance note.
Pillar 3, market discipline, deals with disclosure.
Please note that the various guidance notes and returns are currently in draft format. Any comments or queries should be forwarded via e-mail to the Banking and Investment Services Division.
Frequently Asked Questions on the Capital Requirements Directive.