Banks must set aside a relatively higher core capital as a cushion against unexpected losses. Additional capital requirements apply in the form of buffers.
These buffers consist of a capital conservation buffer, the anti-cyclical buffer, and the systemic risk buffer. The European capital requirements framework introduced this for banks and investment firms (CRD IV), and it entered into force on 17 July 2013. The rules are incorporated in a directive and a regulation, which will become applicable in several stages from 1 January 2014. All rules will have to be implemented by 1 January 2019. In addition to stricter core capital rules, the CRD IV package includes the following measures:
- Banks must maintain specific capital for a temporary deterioration in a counterparty’s creditworthiness in a derivatives contract
- An international standard for uniform liquidity rules is introduced
- A mandatory leverage ratio is intended to apply as per 1 January 2018
- The EU wants to stimulate lending to small and medium-sized businesses. To encourage this, the nominal risk that banks must assign to these loans is reduced
- Bankers’ bonuses are restricted to the amount of the annual salary. Only under specific circumstances can the bonus be increased to twice the annual salary
- Banks have to disclose profits, taxes paid, and subsidies received country by country, as well as turnover and number of employees
- The national prudential supervisors will have the power to impose sanctions for violations listed in the directive. Sanctions can also be imposed on individuals. In the Netherlands, the latter is already possible
FAQ about CRD IV
The European Commission has placed a list of frequently asked questions about the new capital requirements for banks (CRD IV) on its website.