Banks Face European Capital Squeeze

Terry Flanagan

With its approval of the Capital Requirements Directive, known as CRD IV, the European Parliament has capped banker’s bonuses to curb speculative risk-taking, and has stepped up capital provisions to help banks cope better with crises.

Under CRD IV, which is slated to go into effect for credit institutions (including banks) and investment firms (such as broker-dealer or wealth management firms) in January 2014, the basic rule is that bonus payments will be capped at 100% of total fixed pay or, with shareholder approval, 200% of total fixed pay.

“This update to the Capital Requirements Directive and the new Capital Requirements Regulation are arguably the most significant developments in the European regulatory arena for many years, and represent a significant challenge for many financial institutions,” said Robin Bridge, director of regulatory compliance at Lombard Risk.

When asked how well prepared their organizations were to meet the requirements of CRR/CRD IV when introduced in January 2014, 32% of respondents to an online poll conducted by Lombard Risk on April 19 indicated that they had “the basics in place,” while 67% felt they were not at all well prepared. Most interestingly, 24% doubted that their firms would have everything they needed in place in time.

Asked how they viewed the impact of the new regulations on financial markets within the EU, respondents were broadly positive, with more than half indicating that they see it as either a “Positive” or “Very positive” development.

“It is not surprising that so many respondents felt their firms were not yet well prepared for its introduction,” Bridge said. “There have been significant delays at European level over the past year as the politicians have concentrated more of their time on the problems of the Eurozone and the proposals for European Banking Union and the Single Supervisory Mechanism.”

CRD IV greatly amends the EU’s rules on capital requirements for credit institutions (including banks) and investment firms.

“Notably, the bonus cap is not only an issue for E.U. employees, but will also apply to certain U.S. employees of financial institutions that are in the E.U. and to E.U.-based employees of financial institutions, regardless of where the institutions are headquartered,” according to a memo by Simon Witty, a partner in Davis Polk’s London office. “And, while the bonus cap has received the most press, there are several other items of interest, including certain pension deferral requirements and the collection of information relating to employees receiving €1,000,000 or more per fiscal year.”

While the new reporting requirements are now reasonably firm, following approval of the CRR and CRD texts at the recent, much delayed, EU Plenary session, they have still not been finalized, according to Bridge.

The final Implementing Technical Standards may not be available until early August, given the timelines previously indicated by the European Banking Authority, which is responsible for defining the detailed reporting requirements and collecting the regulatory data across Europe.

“Clearly a number of firms could have been waiting for the requirements to become clearer before fully committing to the preparations they will need to undertake,” said Bridge. “However, our advice is that firms cannot afford to wait any longer – the implementation date may still be eight months away.”

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