What European firms should know about CRD IV
About a year ago the European Banking Authority (EBA) introduced a new regulation named the Capital Requirements Directive (CRD IV), which came into effect on 1st January 2014, with full implementation to be completed by 1st January 2019. The European Commission (EU) is the first jurisdiction implementing the Basel III agreement. The CRD IV Directive will apply to credit institutions and to investment firms that fall within the scope of the Markets in Financial Instruments Directive. These institutions are collectively referred to as ‘firms’. After the recent global financial crisis, there has been an emphasis on stringent financial reporting regimes by governments in order to avoid in future such lengthy worldwide liquidity imbalance crises. By mandating the CRD IV requirement, the EBA is pressing for a uniform reporting structure to help it better track firms’ financial strength.
The EU CRD IV package is divided into two legislative instruments: the Capital Requirements Directive (CRD) and the Capital Requirements Regulation (CRR). The CRR contains provisions relating to the ‘single rule book’, including the majority of the provisions relating to the Basel III prudential reforms, while the CRD introduces provisions concerning remuneration, enhanced governance and transparency, and the introduction of buffers.
The Regulation requires firms to hold a minimum 4% of Tier 1 Capital, and this will be gradually increased until it reaches 6% in 2019. Minimum common equity will rise from 2% to 4.5% by 2019, while firms must have total capital of at least 8% of RWAs (risk-weighted assets). Furthermore firms will need to hold some additional capital buffers. A capital conservation buffer of 2.5% is required above the regulatory minimum capital requirement and the countercyclical capital buffer should be between 0% and 2.5% of RWAs of firms. Firms that fail to meet these capital buffers will be subject to constraints on discretionary distributions of earnings. Therefore, the minimum total capital plus capital conservation buffer is set to reach 10.5% by 2019.
Firms in the European region are required to report data to their National Specific Authority (NSA). In the United Kingdom, for example, this means the FCA, and it differs for each country in Europe. In order to meet the requirement, firms affected by CRD IV will need to procure a suitable method of converting data into XBRL format (eXtensible Business Reporting Language), which is based on XML (eXtensible Markup Language). You will therefore need to decide which software to use in order to create the XBRL report that needs to be assessed against the business validation rules issued by the European Banking Authority (EBA).
If you need a proven CRD IV solution that will meet this challenging regulatory change within the tight deadlines, the best approach will be an automated enterprise solution rather than just a simple Excel to XML convertor. A solution that can connect the underlying disparate sources to automatically generate XBRL reports can put your organisation in a position to meet any future compliance requirements in an efficient and consistent manner.
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