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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
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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