On 17 July 2013, the CRD IV package which transposes - via a Regulation and a Directive - the new global standards on bank capital (the Basel III agreement) into EU law, entered into force. The rules, which have applied from 1 January 2014, tackle some of the vulnerabilities shown by the banking institutions during the crisis which resulted in the need for unprecedented support from national authorities. They set stronger prudential requirements for banks, requiring them to keep capital reserves which are greater in amount, better in quality and more liquid in nature. This new framework aims to make EU banks more solid, strengthen their capacity to adequately manage the risks linked to their activities, and absorb any losses they may incur in doing business.
Why was CRD IV needed?
CRD IV is a revision of the original Capital Requirements Directive (CRD), which was deemed insufficient in light of the recent financial crisis. The quality and the level of the capital base, the availability of the capital base, liquidity management and the effectiveness of internal and corporate governance of some financial institutions were found to be inadequate and consequently, the decision was taken to replace the CRD with a new regulatory framework including a Regulation, the Capital Requirements Regulation (CRR), and a Directive, CRD IV.
CRD IV offers a number of enhancements to the previous legislation, notably:
- Enhanced governance. CRD IV strengthens the requirements with regard to corporate governance arrangements and processes and introduces new rules aimed at increasing the effectiveness of risk oversight by Boards, improving the status of the risk management function and ensuring effective monitoring by supervisors of risk governance.
- Enhanced transparency. CRD IV improves transparency regarding the activities of banks and investment funds in different countries, in particular as regards profits, taxes and subsidies in different jurisdictions. This is considered essential for regaining the trust of EU citizens in the financial sector.
Timeline and implementation of CRR and CRD IV
- The new legislation entered into force on 17 July 2013.
- Institutions are required to apply the new rules from 1 January 2014, with full implementation on 1 January 2019.
- A number of CRD IV implementing measures still need to be finalised by the European Banking Authority.
For more information on CRD IV, please visit the European Union website.
Last updated: 9 July 2015