CRD IV

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 represents the minimum capital requirements and is made up of operational, credit and market risk.

Pillar 2 is divided into two major areas.

  • The first is aimed at institutions and sets out expectations for the establishment of sound, effective and complete strategies and processes to assess and maintain, on an ongoing basis, the amounts, types and distribution of internal capital and liquidity commensurate to their risk profiles (ICAAP/ILAAP) and , as well as robust governance and internal control arrangements.
  • The second, aimed at national competent authorities, is the supervisory review and evaluation process (SREP).

Pillar 3 covers market discipline and disclosures.

CRD IV is the fourth amendment of this legislation. Each amendment strengthens the prudential framework for individual institutions and responds to financial stability concerns that arose during the financial crisis.

The aim of CRD IV is to tackle some of the vulnerabilities highlighted during the financial crisis. It aims to minimise the negative effects of firms failing by ensuring that firms hold sufficient financial resources to cover the risk associated with their business.

What has the GFSC done?

CRD IV is divided into two legislative instruments:

The firms subject to CRD IV need to comply with both legislative instruments which are additionally supplemented by technical standards and guidelines from the European Banking Authority (EBA).

Required disclosures under CRD IV

As a competent authority the GFSC is required to publish information on rules and guidance, options and discretions, supervisory review and evaluation process (SREP), alongside submitting the information to the European Banking Authority in line with Article 143 of Directive 2013/36/EU (CRD IV) and Commission Implementing Regulation 650/2014. Below are the links to the relevant disclosures:

 

GFSC Updates

October 2015PowerPoint IconWorkshop: Update on CRD IV

Slides from CRD IV Workshop presented to industry October 8th and 14th.
John Pashley, Technical Consultant, and Amy Ballantine-Latin, Manager for Prudential.