Updates to the Capital Requirements Directive (CRD) IV

Our review of the implications

The banking sector is bracing for significant change to regulatory reporting. The European Banking Authority (EBA) has released the ‘Final Draft’ technical standards for COREP and FINREP. This relates directly to the Capital Requirements Regulation released in June this year and contains the templates and validation for CRD IV reporting. This draft has a 3 month consultation period for proposed amendments.

Changes to submission dates

There have been alterations to the dates of the first submissions. Whilst many reports suggested the first submission date would be 30 business days from the 31st of March, the technical standards produced for the EBA state that the monthly reports should be completed 30 calendar days after the 31st. These changes only apply to the first submission. For all monthly reporting after the first submission, a 15 calendar day period will apply.

SME Support – a positive change to help both lenders and SMEs

A reduction in the capital held to cover exposures to small and medium sized enterprises (SMEs) is also implemented in this latest update from the EBA. This is not a change to risk weight but instead a new factor in the calculation of capital holding. This “SME supporting factor” is designed to boost lending to SMEs; therefore any capital gained should ideally be used to lend more to the sector. This change was led by Germany but will have impact across Europe.

The purpose of this change is to remove the impact of the capital conservation buffer for SMEs. The minimum capital requirement is calculated as 8% of the Risk Weighted Exposure (RWE) and the Capital Conservation Buffer is 2.5% of RWE. This means that combined a total of 10.5% is held. The factor is 0.7619 which is equal to 8/10.5. This means in practice, instead of holding 10.5% in total, there is effectively a total of 8% held for SME lending.

ALMIS caters for this change in its latest release, enabling clients to take full advantage of this change and minimise their capital holding requirements.

Large Exposures

Large Exposures reporting is supplemented with an expected maturity breakdown for any exposures to the counterparty. This means that for large exposures including retail lending there can be a significant volume of calculation to produce the new LE4 and LE5 reports. ALMIS International are prepared for this change, and ALMIS already has a maturity analysis tool which clients are successfully using to assist with reporting.

The PRA Response

The Prudential Regulation Authority has released consultations on these new items. It is expected that the PRA will enforce 100% Risk Weighting on Commercial Mortgages and 35% for Buy to Let Mortgages if less than 80% Loan to Value.

In terms of Capital the PRA has voiced the intention for a firm specific capital buffer in addition to the combined CRD IV Buffer constituted of CET1 capital. The impact depends on the proportionality that the PRA impose.

Working to a Solution

These changes to capital calculations and levels of reporting increase the burden of compliance and reporting for banks and building societies. Firms need to understand the impact of these regulations before the implementation date of 1st January 2014.

ALMIS International provides a full CRD IV submission system, with the option to calculate the reports directly from a firm’s balance sheet. We have a dedicated team of staff working to stay up to date with the changing regulations and to help firms meet their regulatory compliance requirements.

For more information on how the ALMIS solution can work for you email us or call on 0131 452 8898.