Basel III aims to considerably increase both the quality and quantity of capital of credit institutions and investment firms with the ultimate aim of improving loss-absorption capacity in both going concern and liquidation scenarios. It also intends to reduce systemic risk. The implementation of Basel III in Europe occurred via CRD IV, which is divided into two legislative instruments: the Capital Requirements Directive (CRD) and the Capital Requirements Regulation (CRR). On 9 January 2015, CySEC informed CIFs regarding the transposition of the CRD IV package to Cyprus Investment Firms by amending the Investment Services and Activities and Regulated Markets Law to accommodate a number of the articles in the European Directive.
CRD IV package includes enhanced requirements for:
- Quality and quantity of capital (tightened definition of capital, including focus on common equity);
- A basis for new liquidity and leverage requirements;
- New macroprudential standards including a capital conservation buffer, a countercyclical capital buffer and capital buffers for systemically important institutions, and;
- Effective risk management.
CRD IV also applies changes to rules on corporate governance, including remuneration, diversity and specific limits on the number of directorships, and introduces standardised EU regulatory reporting.
The Regulation framework consists of a three “Pillar” approach:
- Pillar Iestablishes minimum capital requirements, defines eligible capital instruments, and prescribes rules for calculating Risk Exposure. CIFs have to submit their CoRep returns to the CySEC in line with European regulation;
- Pillar II requires firms and supervisors to take a view on whether a firm should hold additional capital against risks considered under Pillar I that are not fully captured by the Pillar I process, those risks not taken into account by the Pillar I process and factors external to the firm (e.g., business cycle effects). Pillar II connects the regulatory capital requirements to the CIF’s internal capital adequacy assessment procedures (ICAAP) and to the reliability of its internal control structures. The function of Pillar II is to provide communication between supervisors and investment firms on a continuous basis and to evaluate how well the investment firms are assessing their capital needs relative to their risks. If a deficiency arises, prompt and decisive action is taken to restore the appropriate relationship of capital to risk, and;
- Pillar III – Market Discipline requires the disclosure of information regarding the risk management policies of the Company and its corporate governance, as well as the results of the calculations of minimum capital requirements together with concise information on the composition of original own funds.
Our team of high calibre professionals with years of experience in the financial services industry stands ready to assist in the following ways:
- Analysis and impact of CRD IV on your business and its operations;
- Offer a comprehensive CoRep Reporting Service;
- Preparation of the ICAAP (Pillar II) and Pillar III Reports, and;
- Consultation regarding CRD IV enquiries (e.g., capital structure, acquisitions, etc.)
For more information, please feel free to contact us