Overview of Capital Requirements Directive IV Prudential Supervision: Part 1

The new Capital Requirements Directive IV (Directive 2013/36/EU) (CRD IV) together with the Capital Requirements Regulation (EU) (No 575/2013) (CRR IV), form the latest package of regulatory reforms aimed at strengthening the financial system in the European Union (EU). CRR IV provides detailed harmonised rules regarding new prudential requirements for credit institutions and investment firms. These broadly cover areas such as counterparty credit risk, leverage, capital (own funds and capital requirements), large exposures; liquidity (stable funding and liquidity coverage), and institutional disclosure. CRD IV provides new rules governing access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms (Institutions). This covers areas such as capital buffers, corporate governance, sanctions, Institutional remuneration practices, freedom of establishment and the freedom to provide services, relations with third countries, and authorisation of credit institutions. CRD IV Title VII (Articles 49-142) covers the new and in-depth Prudential Supervision requirements for Institutions.

CHAPTER 1 (Principles of Prudential Supervision)

This Chapter sets out the obligation for Host Member State Competent Authorities (HMSCA) to collaborate closely in order to supervise the activities of Institutions, as well as powers of HMSCA to carry out on-the-spot checking and inspection of branches of Institutions in their territory. All persons working for or who have worked for HMSCA (including auditors or other experts acting on behalf of HMSCA) are bound by an obligation of professional secrecy regarding confidential information and its use. The new requirements for cooperation agreements between Member States, the European Banking Authority (EBA) and third countries, and exchange of information between authorities and oversight bodies are also set out. The Chapter covers requirements for the transmission and disclosure of information (relating to monetary, deposit protection, systemic and payment aspects, and clearing and settlement services); the processing of personal data; the duty of persons responsible for the legal control of annual and consolidated accounts; new supervisory powers; and administrative penalties and measures.

CHAPTER 2 (Review Processes)

This Chapter details the required internal capital adequacy assessment process for Institutions, as well as obligations relating to robust internal governance arrangements and recovery and resolution plans. HMSCA are now required to oversee Institutional remuneration policies, to benchmark remuneration trends and practices, and to set out remuneration committee requirements. The EBA must now also issue guidelines on sound remuneration policies. The Chapter details the new technical criteria for Institutional organisation and treatment of risks (i.e. credit and counterparty, residual, concentration, securitisation, market, non-trading book activities interest, liquidity, operational and excess leverage risks). The risk framework lays out new internal approaches for calculating own funds requirements and supervisory benchmarking of internal approaches for calculating own funds requirements. The new supervisory review and evaluation process and technical criteria, supervisory examination programme, stress testing requirements, liquidity requirements, and supervisory measures and powers are laid out.

If you would like to discuss any of the implications of CRD IV on your business, or for more information on our CRD IV reporting solutions and prices, please email DataTracks at: enquiry@datatracks.eu

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