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Capital requirements for banks

Background

Banks and credit institutions, like other financial market operators, are required to meet certain capital and other prudential standards in order to ensure their resilience, particularly during times of market stress.

Much of this work originates in the Basel Committee on Banking Supervision, which sets out (non-binding) global standards that are then enshrined in law by legislators and regulators. For EU member states, the implementation of these international standards on capital requirements comes through EU legislation in the various iterations of the Capital Requirements Directive (or CRD).

CRD IV (the fourth iteration of these standards) and the accompanying CRR (Capital Requirements Regulation) entered into force on 17 July 2013. Taken together these two legal instruments are designed to implement the Basel III rules in the EU with their requirements applying from 1 January 2014 and with full implementation by 1 January 2019.

Invest Europe Position

The prudential regime applying to banks has an impact on the price and availability of the services that banks can provide to their clients, including private equity.

With the creation of a Capital Requirements Regulation, some of the scope for Member State discretion in how they treat their banking sector has been removed, creating a more uniform set of rules across the internal market, including the own funds requirements for those institutions covered.

Under the new rules, there will still be an 8% capital requirement but the share of common tier equity 1 capital (the highest quality – and thus most expensive – capital) will increase from 2% to 4.5%.

Private equity exposures are treated as a counter party credit risk and to calculate this the CRR distinguishes between:

  • a standardised approach
  • a simple risk weight approach
  • an internal model approach