Capital Requirements Directive

Developed by the Basel Committee on Banking Supervision to help resolve part of the global financial crisis, Basel III provisions came into force in the European Economic Area (EEA) in January 2013 following the Capital Requirements Directive IV (CRD IV).

The move formed one of the most substantial pieces of legislation the banking industry had seen in years and has already been criticised by many as being too strict to stimulate growth.

CRD IV itself is made up of the Capital Requirements Directive (CRD) and the Capital Requirements Regulations (CRR), and will affect more than 8,000 banks across the continent, amounting to 53% of global bank assets. The move is estimated to raise an extra 460 billion Euros of new capital by 2019, accompanying the Basel III provisions to help increase bank liquidity and bank leverage.

Background

After the financial market crises in the late 2000s, the original Basel rules were strengthened to try to counter and address the deficiencies that lay within the complex systems. The new proposals, which applied to credit institutions in particular, were aimed at strengthening regulation and therefore aiding growth in the medium to long term.

Implementation

The implementation process was originally scheduled for the next two years, but further changes in January 2013 extended this until 2019. The implementation of Basel III has meant that banks have to hold on to higher capital, a consequence that has been criticised by some banks who feel the consequential cost of credit is detrimental to long term financial growth.

Difficulties

Aside from the core criticism of the regulation, the Basel III agreement also faces serious difficulties implementing its rules across localised markets where the biggest players regularly operate across several countries. A progress report from the Basel Committee in April 2013 noted that three months after the historic agreement was first to be phased in, just 11 out of the 27 countries in the Basel committee have actually implemented their own rules – and those that haven’t include the US, UK and Germany, who are all currently still writing their rules. The long transition period should allow for significant leeway in implementing such complex rules, but it further highlights the length of time the changes will require to be put into place.

Progress

Despite the difficulties in implementing specific rules into each country’s complex financial markets, the legislation has still taken significant steps across all the 27 countries. Many global banks have already started to push up their capital stocks, even in the absence of formal rules, and as of last year were already well on their way to meeting the requirements outlined by Basel III.  Time will tell as to how such changes will progress as 2019 nears.