It is only in a few weeks that the Capital Requirements Regulation (Regulation (EU) No 575/2013 on prudential requirements for credit institutions and investment firms as this regulation is published on 30 November 2013 in the Official Journal of the EU in entire restated Corrigendum, "CRR") will enter into force in the European Union. The 'Siamese Twins' Capital Requirements Directive IV (Directive 2013/36/EU on access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms as corrected by corrigendum published in the OJEU on 2 August 2013) ("CRD IV") must be implemented in the national legislation of all the member states of the EU by 31 December 2013.

In the Netherlands the efforts made by the legislator to implement CRD IV will not result into amendments to the national laws and regulations by 31 December 2013. Rather the expected date of entry into force of the relevant amendments to the Dutch Act on financial supervision ("AFS"), the Decree Prudential Supervision AFS and many more regulations is expected at the earliest by 1 July 2014. The relevant legislative proposal to amend the Dutch AFS is expected to be submitted to Dutch Parliament in the course of December 2013, with the debate in Parliament on this proposal scheduled for the first months of 2014.

On 12 December 2013 the Dutch Central Bank ("DCB") issued a number of "CRD IV Fact Sheets" clarifying a number of technical issues concerning the late implementation of CRD IV in Dutch law and providing the market some guidance on the scope of applicability of the CRR and CRD IV provisions. Particularly, the guidance provided on the scope of the CRR provisions for investment firms gives rise to concerns as to whether or not the DCB interpretation is based on correct assumptions.

In this Newsflash we will highlight the following four CRD IV Fact sheets issued by DCB on 12 December 2013:

  1. CRD IV Factsheet on Basel I floor;
  2. CRD IV Factsheet on definition of credit institution;
  3. CRD IV Factsheet on concurrence of regulations as regards intragroup guarantees;
  4. CRD IV Factsheet on scope capital requirements investment firms.

CRD IV factsheet of 12 December 2013 on Basel I floor

As one of the transitional provisions set out in the CRR, article 500 CRR clarifies the methods to be applied in maintaining capital at levels that are (within certain proportions) at least meeting the Basel I requirements prior to the introduction of the Basel II framework. This so-called "Basel I-floor" had been introduced at the occasion of the introduction of Basel II in order to prevent the overall own funds levels to drop below certain defined floors as a result of the application of more risk sensitive methods of calculating own funds requirements. For instance banks that were permitted to apply the Internal Ratings Based approach for the calculation of the risk weights for credit risk, could as a result of the more risk sensitive approach of its own IRB-models end up with lower own funds requirements as was the case under the Basel I framework.

CRR continues the application of the Basel I floor requirements introduced in 2008. The provision of article 500 CRR provides for the method of calculating the minimum requirements in this respect.

In its guidance notes of 12 December 2013 DCB provides for a set of formulae calculating the exact requirements of the Basel I floor reiterating that the Basel I floor own funds requirements are to be calculated in parallel with the requirements of article 92 CRR and that Basel I floor own funds do not replace the CRR requirements. The relevant to be calculated amount of the Basel I floor will need to be included as a memorandum item in the common reporting (COREP) framework on Own Funds (C.02.00). Furthermore the reconciliation of Basel I floor own funds amounts and CRD IV requirements must be made subject to the Pillar 3 external reporting by the bank.

CRD IV factsheet of 12 December 2013 on the definition of credit institution

DCB issued a Fact sheet on the interpretation of the definition "credit institution" within the meaning of article 4 CRR and the potential conflicts this definition may bring with the legacy definition apparatus of Dutch law. In the Netherlands, the definition of what must be considered a business of "credit institution" has been subject to many (interpretative) regulations and specific law provisions defining the exact scope of market entry provisions for credit institutions.

DCB points out in its Factsheet that, in view of the fact that the transposition to Dutch law of the provisions of CRD IV is delayed and CRR enters into force on 1 January 2014, potential conflicts may arise between the applicable definition of the CRR that will have direct and binding effect from 1 January 2014 and the (deviating) definitions as set forth in the Dutch law provisions that will only be amended in the course of 2014. This (in accordance with the views of DCB) conflict between the CRR definition of credit institution and the Dutch (legacy) law definition may be consequential for all banks established in the Netherlands that obtained a license under the old law provisions as a 'credit institution' but may not qualify as such in the future CRR regime. For these credit institutions Dutch law will continue to regulate a "opt in" regime for businesses not qualifying as a bank but that, for certain compelling reasons, must be regulated as a bank. Examples of such banks are businesses without exposure to the retail savings markets, but active in the markets for fixed income (bond) financing of their own business. The Dutch opt in regime will be continued after the implementation of CRD IV and will, in accordance with the views of DCB, be the mandatory regime for banks currently regulated as a 'credit institution' but not qualifying as such under the definitions of the CRR.

We fundamentally disagree with this view of DCB as regards the alleged differences of the definition of 'credit institution' as set forth in current Dutch law and the future CRR regime. The interpretation of DCB may be harmful for those banks active on the international financial markets and that are required to uphold the 'European passport' for the carrying out of banking business in other member states of the EU. The 'opt in' regime as to be upheld in the Dutch legislation after transposing CRD IV, will in all likelihood not permit the "opt in" bank to obtain an European Passport.

CRD IV Factsheet on intragroup guarantees in the context of article 7 CRR

Article 7 CRR regulates the waiver regime for (authorised) banks or investment firms being a subsidiary of an authorised bank or investment firm to comply with the obligations in Part Two to Five and Eight of the CRR on an individual basis pursuant to article 6 CRR. Such subsidiary banks or investment firms may apply for a waiver with the competent authorities. Certain conditions must be met in order for the subsidiary bank or investment firm to benefit form the waiver of the requirements as set out in article 6 CRR. One of the conditions for the waiver imposed on the parent undertaking of the authorised bank or investment firm is the requirement to guarantee the commitments entered into by the subsidiary bank or investment firm, unless the risks in the subsidiary are of negligible importance.

DCB points out in its Fact sheet that a potential concurrence of requirements of the CRR may occur when the article 7 CRR waiver is applied for, particularly in connection with the application of the requirements of article 28, paragraph 1, 52, paragraph 1 and 63 sub (b) CRR on the (qualitative) requirements for Common Equity Tier 1 instruments ("CET1"), Additional Tier 1 instruments ("AT1") or Tier 2 instruments ("T2"). Pursuant to these provisions, capital instruments issued by a bank or investment firm that are held by third parties and which capital instruments are guaranteed by another entity belonging to the same group, may not qualify as own funds within the meaning of CRR.

In the event the commitments of a bank or investment firm being subsidiary of a parent undertaking are guaranteed by the parent undertaking, in order to qualify for the waiver-regime of article 7 CRR, issues (particularly) AT1 or T2 instruments (as the issue of CET1 instruments to external parties would not be logical in view of the group organisation which suggests that the subsidiaries shares are held for a significant percentage by the parent undertaking), such AT1 or T2 instruments may not be eligible own funds under the CRR provisions.

DCB suggests that this requires the structuring of AT1 or T2 instruments at the level of the parent undertaking rather than at the level of the subsidiary bank or investment firm.

CRD IV Factsheet on scope capital requirements investment firms

In the fourth factsheet of DCB issued on 12 December 2013, further clarifications are given on the scope of applicability of the capital requirements for investment firms. In the political negotiations on the text of CRR and CRD IV it has been agreed to postpone the further evaluation of the capital requirements regime for investment firms to a later date. The relevant evaluation must be completed by 31 December 2015. Until the European Commission has completed its evaluation, the applicable regime for investment firms is, as much as possible, kept at the same levels and with same scope of applicability of the capital requirements as was the case before introduction of the CRR and CRD IV. This political accord is, in our view important to evaluate the various provisions of the CRR regarding the applicable regime for investment firms.

It is, therefore, regrettable that DCB has formulated scope provisions for capital requirements for investment firms that are, in our view, not consistent with the agreed upon political accord at European level.

DCB provides for a schedule of applicable requirements for the different types of investment firms as they are regulated pursuant to the provisions of MiFID. The list of investment firms provided by DCB follows the definitions of MiFID and opposite these types of investment firms the various minimum capital requirements and dynamic solvency requirements are specified. DCB lists in this schedule an interpretation of article 95 CRR which follows the flawed drafting of article 95 CRR concerning the requirements for investment firms carrying out the activities as set forth in points (2) (execution of orders on behalf of clients) and (4) (Portfolio management) of Annex I to MiFID.

Article 95 CRR is flawed, as the calculation set forth in paragraph 2 of that article does deviate significantly form the CRD regime applicable until 31 December 2013. The calculation in article 95 CRR suggests that capital requirements for the investment firms referred to here above are the higher of (i) the total requirements for credit risk and market risk or (ii) the own funds requirements for operational risk based on Fixed Overheads. Obviously the calculation will, in most cases, end up that the capital requirements for credit risk and market risk are higher than the own funds calculated for operational risk (based on Fixed Overheads).

The CRR comparison has been, if an investment firm calculates its own funds requirements for operational risk using the method of  Fixed Overheads and, based on a calculation in the Pillar 2 process, the own funds requirements for operational risk calculated on the common calculation methods (for instance the standardised method) appear to be higher, the competent authority supervising this investment firm may require that the higher level own funds for operational risk are held by the investment firm. It is this principle of the CRD of 2006 that has, erroneously been transposed in the provision of article 95 CRR by making a comparison between apples and pears.

It is not helpful for the market that regulators are issuing guidance notes that are based on (apparently) incorrect interpretations of the CRR provisions and we would hope that there will be shortly further guidance issued by the European Banking Authority or the European Commission on the relevant subject matters. As follows from the institutional European framework, such further guidance of the European authorities replaces interpretations of national authorities of CRR provisions.