Background
The CRD IV, derived from the EU legislative mandate to strengthen the regulation of the banking sector, entered into force on the 17th July 2013, building upon the previous rules and stipulations placed on banks, building societies and investment firms from the previous Basel Accords. The directive is proposed to try and assist the implementation of the latest Basel Accord (Basel III) in the European Economic Area (EEA).
With the financial crisis exposing serious flaws and weaknesses in the way banks were handling capital, liquid funds and assets, CRD IV forms part of a wider EU proposal for stricter capital requirements and better corporate governance for banks and investment firms.
Impact
CRD IV comprises of the Capital Requirements Regulation (CRR) – which covers all companies within the EU – and the Capital Requirements Directive (CRD) – which itself is essential through national law. It covers the three pillars of requirements: capital, leverage and liquidity.
Ultimately, banks and investments firms will be required to hold more (and better quality) capital to restrict the impact of losses in the future, building up ‘capital buffers’ to form a cushion against such a development. Banks and investment firms also need to handle their liquidity in a more reliable way, managing cash flow to ensure that both short term and long term liquidity are available.
Regarding leverage, banks will be required to work within fresh parameters on asset management in relation to their available capital, and will be required to hold further capital if they trade in complex financial products such as derivatives.
Finally, penalties are to be imposed should firms and banks not adhere to the rules set out, with the hope that these will provide an effective deterrent in the future against transgressions.
Who will it affect?
Inevitably, banks and investment firms operating with the EEA will come under the influence of CRD IV. The move is expected to positively affect depositors – who have better protection with the new banking capital requirements; borrowers – who should find bankers are less likely to cut down on their loans; taxpayers – who should be less likely to have to bail out failing banks; and finally, the banks themselves, who will be able to offer competitive products across the EU without different supervisory banking rules causing them issues.
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