Last week representatives of Member States met to discuss the European Commission’s November 2016 proposals for amendments to the Capital Requirements Regulation (CRR 2) and Directive (CRD 5). The proposed amendments, among other objectives, seek to implement some of the outstanding elements of the Basel reform, such as the introduction of a binding 3% leverage ratio, the Net Stable Funding Ratio (NSFR) and the new standard on total loss-absorbing capacity for G-SIIs. The proposed amendments also include requirements for institutions trading in derivatives and securities to hold more risk-sensitive own funds and introduce changes to the large exposure regime, including the adoption of the SA-CCR methodology for determining the institutions’ exposures in OTC derivatives. In addition, targeted amendments to CRD IV seek to introduce more proportionality for the legislation’s contentious remuneration provisions.
Given the volume and technical complexity of the proposed amendments, the Council working group meetings are scheduled as two-day sessions. On the agenda of the 15 and 16 February session all key elements of the proposals were addressed, including the leverage ratio, NFSR and remuneration. With respect to the latter, we understand that while the majority of Member States support the proposed amendments, which provide a derogation from the deferral and pay-out rules for institutions and individuals below certain thresholds (EUR 5 billion asset value and EUR 50,000 annual variable remuneration respectively), there is not yet agreement on these proposed thresholds. With regards to the NSFR, there does not seem to be any opposition to the principle of introducing the NSFR in the EU, however questions remain as to the level of divergence from the Basel standard. Amongst other potentially contentious issues, the proposed amendments introducing phase-in of the Required Stable Funding factor for non-margined derivatives is being questioned by some delegations. Finally, in respect of the leverage ratio, there seems to be broad support for the proposed 3% level as a minimum requirement and some Member States would support the introduction of a higher ratio for G-SIIs and potentially also to O-SIIs.
The legislative review by the other co-legislator, the European Parliament, is yet to commence. The Parliament’s Economic and Monetary Affairs Committee has scheduled its first exchange of views on the proposals on 28 February. The next Council working group addressing CRR / CRD amendments is expected to take place in a second half of March.