Media Briefing Note: New Year, New EU Capital Requirements Regulation, Warns Hogan Lovells

LONDON, 20 December 2013 - On 1 January 2014, the new EU Capital Requirements Regulation (the CRR) will come into effect throughout the EU.  It will have significant effects:

  • It will implement Basel III in the EU.
  • It will replace many of the existing regulatory rules that apply to EU banks and investment firms.
  • It will increase the amount of capital and the quality of capital that EU banks and investment firms are required to hold.  The increases will apply gradually between 2014 and 2019.
  • It will lay the foundation for new liquidity requirements to be introduced in 2015 and for new leverage requirements to be introduced in 2018.

Commenting on the new regulation, Steven McEwan, partner in Hogan Lovells' Financial Institutions Group, said:

"This marks an important step for the EU as for the first time capital rules will apply through a single piece of legislation to all EU banks and investment firms.  At a regulatory level, banks are concerned about how this will affect the role of the Prudential Regulation Authority (PRA), which is no longer the rule-maker.  In practice, however, the PRA will still have very significant powers in determining bank capital requirements.

"UK banks are likely to be able to accommodate the new requirements effectively, given what is already expected of them by the PRA.  The new leverage rules have been the factor causing them the most concern, especially given the strict early implementation by the PRA for the largest eight banks, though the PRA has recently relaxed its position slightly.  The operational burden of the new central EU reporting process is also causing considerable anxiety.

"There is some overlap between the CRR and other EU regulations, particularly EMIR which will require clearing of derivatives.  The need to implement so many new requirements is likely to put considerable strain on banks.  This is a process that it likely to continue for some time, as the EU Commission will be publishing numerous further requirements under both the CRR and EMIR for many years to come."

Other points to note include:

  • The CRR takes effect as a directly effective piece of EU legislation, whereas the rules that it replaces were rules made by local regulators (which in the UK was the PRA) based on EU directives.
  • The FSA implemented detailed new liquidity requirements in 2009, following the collapse of Lehman Brothers.  Although the CRR regime will be different, UK banks are expected to be in a good position to comply with the new EU regime when it is introduced in 2015.
  • Despite the leverage requirements in the CRR not creating a binding capital requirement until at least 2018, the PRA has already introduced such a requirement for the largest eight UK banks and building societies.

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