1

Strengthening the European banking system

- CRD IV

Technical briefing-20 July-2011

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Why do we have the CRD IV project?

• To enhance financial stability and limit the damage of the next financial crisis for taxpayers

• To create a more resilient banking sector that can absorb economic shocks

• To live up to our G20 commitment to implement Basel III

• To enhance the single market in banking services • To ensure an international level playing field for

European banks

3

Basel III agreement: key elements

CAPITAL LIQUIDITY LEVERAGE

Each bank:

- More and better capital

- Better risk weights

- Conservation buffer

- Countercyclical buffer

BASEL III

Short-term stress Liquidity Coverage Ratio –2015

Longer term stressNet Stable Funding Ratio – 2018

Leverage Ratio – back stop (with a view to migrating to a binding measure in 2018)

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CRD IV: Single Rule Book

Legislative form: Regulation

SINGLE

RULE

BOOK

EUROPEAN COUNCIL OF JUNE 2009:

“The European Council also recommends […] establishing a European single rule book applicable to all financial institutions in the Single Market.”

Removing options and discretions

Maximum harmonisation of “Pillar 1” & “Pillar 3”

measures

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Capital: Improved quantity

4%

8%

Total

8%

Total

Certain Tier 1 items

2%CET1

4.5%

6%

Tier 1

8%

Total

Tier 1

Today Tomorrow

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Extra Capital buffers

Capital conservation buffer

• A fixed target buffer of common equity of 2.5% to absorb losses in

stressed periods

• If buffer breached, constraints on bank’s discretionary distributions

Countercyclical capital buffer

• Banks required to build-up extra buffers in economic upturns of

common equity, which can be draw down in a downturn

• Macro-prudential tool. ESRB role in assuring transparency and

coherence of buffer decisions

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Assessing the impact

• Short-term costs limited (pre-2019)– Capital 1 percentage point GDP 0.14-0.17% (EC,

Basel)

• Long-term benefits substantial (post-2019)– Banking crises less likely and if they occur, impact reduced– Financial system more stable and in line with economy

• Benefits exceed costs– Annual EU GDP growth 0.3-2% (Basel)

• Transition to new rules (pre-2019)– Larger banks need to reinforce their capital– Smaller banks already exceed new rules

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Thank you.

http://ec.europa.eu/internal_market/bank/index_en.htm