Shearman & Sterling LLP | FinReg | European Commission Proposes Draft "CRD5" Among Various EU Banking Sector Legislative Amendments 
Financial Regulatory Developments Focus
This links to the home page
Financial Regulatory Developments Focus
  • European Commission Proposes Draft "CRD5" Among Various EU Banking Sector Legislative Amendments 

    The European Commission published a package of proposed legislative amendments in relation to the Bank Recovery and Resolution Directive, the Single Resolution Mechanism Regulation, the Capital Requirements Regulation and the Capital Requirements Directive. The amendments aim in part to introduce some of the revised global prudential standards from latest FSB/Basel developments, to apply a more proportionate approach to regulating banks and investment firms depending on their size and complexity and to remove some of the options and discretions that are currently available to EU Member States.

    The changes to CRR and CRD IV include a new requirement on non-EU G-SIBs (or non-EU banking groups that have EU firms with total assets of at least EUR 30 billion) that have two or more EU firms to establish an EU intermediate holding company.  This controversial proposal does not square well with US or other third country bank structural laws nor will it be reflected in banks' existing resolution and recovery plans, and so will doubtless be a contentious issue as it is developed further.

    Other amendments include:

    i. introducing a binding leverage ratio of 3% of Tier 1 capital which firms must meet in addition to their risk-based capital requirements as well as other adjustments to the ratio which will allow firms to reduce the leverage ratio exposure measure in certain circumstances;

    ii. introducing a binding net stable funding ratio of 100% and harmonized NSFR reporting requirements;

    iii. implementing Basel Committee on Banking Supervision standards in relation to equity investment in funds, counterparty credit risk and exposures to CCPs;

    iv. amendments to the rules on capital requirements for market risk in the trading book. These are mostly in line with the Basel Committee on Banking Supervision framework but with some differences for EU specificities such as simple, transparent and standardized securitizations and covered bonds, and to allow the requirement to be phased-in over a period of three years after the proposed legislation enters into force;

    v. amending the capital base that can count towards calculation of the large exposures limit so that only Tier 1 capital counts and introducing a lower limit of 15% for G-SIBs exposures to other G-SIBs;

    vi. imposing the use of SA-CCR methods for determining exposures to OTC derivative transactions; and

    vii. amending the rules around the use of Pillar 2 additional requirements to harmonize approaches adopted across the EU.

    On the recovery and resolution side, the Commission is proposing to, amongst other things, amend the ranking of unsecured debt instruments in the insolvency hierarchy for the purpose of bank resolution and insolvency proceedings and to implement the global total loss absorbing capacity (TLAC) standard into EU legislation for global systemically important banks in the EU by introducing a minimum Pillar 1 MREL requirement applicable only to EU G-SIBs. Resolution entities that are part of EU G-SIBs will therefore be subject to an external Pillar 1 MREL by 2022 of the greater of 18% risk weighted assets and 6.75% of the leverage ratio exposure measure. 

    An EU G-SIB may also be subject to a Pillar 2 add-on requirement, if its resolution authority assesses this to be justified. In addition, the Commission is seeking to introduce a power for national regulators to waive the requirements on contractual recognition of bail-in for contracts governed by the laws of a third country (for third country market infrastructure and certain other troublesome situations) and to give resolution authorities the power to impose temporary stays on termination rights. Most of these changes will be made through amendments to BRRD and the SRM Regulation. However, the implementation of TLAC will mostly be done through CRR amendments. CRR is directly applicable throughout the EU, which means that EU Member States will have little flexibility to adopt different approaches to implementing the EU version of TLAC. 

    The proposals are now subject to approval by the European Parliament and the Council of the European Union. The Commission is proposing that the changes to the creditor hierarchy would apply from July 2017. The Commission intends the other revisions to be transposed by Member States 12 months after the date of entry into force of the revised BRRD and the requirements to apply six months after that transposition date. Implementation of any of the proposed changes will depend on the legislative process. 

    View the proposals to amend BRRD on creditor hierarchy.

    View the other proposals to amend BRRD.

    View the proposals to amend the SRM.

    View the proposals to amend CRR.

    View the proposals to amend CRD.