The CRR/CRD IV are comprehensive frameworks based on the recommendations of the Basel Committee – the so-called Basel III standards from December 2010. The CRD IV/CRR frameworks contain many Modules related to the regulation of credit institutions, including the definition of and requirements for the size and quality of own funds, requirements for capital buffers and counterparty risks, limits on leverage ratios (lending) and the introduction of new liquidity regulations. The frameworks also contain a number of Modules intended to introduce more uniform rules across the EU in the form of a “single rule book”. Finally, the frameworks include Modules in the area of corporate governance as well as a tightening of sanction requirements etc.
The capital requirements have been increased through higher requirements for common equity tier 1 (CET1) capital and associated deductions. The CRR also tightens the previous conditions for financial institutions’ capital instruments for the purpose of further strengthening these instruments. The CRR is also intended to adjust the capital requirements for the use of internal models in the credit area in order to take into account additional risk factors. This will lead to an increase in the institutions' capital requirements. In addition, CRD IV introduces further buffer requirements in the form of a capital preservation buffer, a countercyclical buffer and a systemic buffer. The aim of the systemic buffer is to introduce additional capital requirements for systemically important financial institutions (SIFIs), and this will increase the capitalisation of the financial sector. The capital buffers will be phased in until 2019. The changed capital deductions will be implemented gradually until 2018, while the capital instruments will be phased out until 2021.
The leverage ratio requirements contained in CRD IV and the CRR determine how large the institutions’ non-risk-weighted exposures must be in relation to their capital resources. Initially, the requirements call for the institutions to report and disclose their leverage ratios (tier 1 capital as a percentage of total lending, guarantees and other assets). In 2016, the European Commission will consider introducing a minimum leverage ratio requirement. Such a requirement would take effect in 2018.
According to CRD IV/the CRR, financial institutions must hold enough liquid assets to maintain appropriate liquidity buffers and thus meet certain liquidity requirements. One requirement is the liquidity coverage ratio (LCR), which is intended to cover imbalances between incoming and outgoing cash flows in severely stressed situations over a 30-day period. The requirement will be phased in from 2015 to 2018, but was fully implemented in 2015 for SIFIs in Denmark. Another requirement is the net stable funding ratio (NSFR), which is intended to ensure that the institutions' liquidity profiles are stable over a 1-year time horizon. The final political decision about the implementation of the requirement will be made sometime in 2016. Such a requirement would take effect in 2018.
Basel I standards introduced risk weights and off-balance-sheet assets.
Market risk measurements introduced in various areas, including the following:
- Exchange rate risk
- Interest rate risk (special and general)
Release of the first version of Basel II standards, based on three pillars:
- Pillar I: Minimum capital requirement
- Pillar II: Supervisory review and evaluation process (SREP)
- Pillar III: Market discipline
Final approval of the Capital Requirements Directive (CRD), based on Basel II.
Implementation of the CRD in Danish law.
Release of Basel III standards.
The European Commission’s proposed revision of the CRD (CRD IV).
Implementation of the CRR; CRD IV implemented in Danish law on 31 March 2014.