Overview

EU rules on prudential requirements mainly concern the amount of capital and liquidity that banks hold. The goal of these rules is to strengthen the resilience of the EU banking sector so that it can better absorb economic shocks, while ensuring that banks continue to finance economic activity and growth.

Legislative history

In 2013, the EU introduced the so-called CRD IV package comprising Directive 2013/36/EU and Regulation no 575/2013. This is the third set of amendments to the original banking directive (CRD), following two earlier sets of revisions adopted by the Commission in 2008 (CRD II) and 2009 (CRD III).

During the financial crisis many banks were vulnerable because

  • the quality and quantity of their capital reserves was insufficient
  • they had insufficient short- and long-term liquidity

As a result, national governments had to give unprecedented financial support to the banking sector.

The current rules aim to prevent this in the future by setting stronger prudential requirements for banks, requiring them to keep sufficient liquidity and capital reserves.

Directive on banking prudential requirements

The directive governs the access to deposit-taking activities. It establishes rules on

  • corporate governance of banks
  • powers and responsibilities of national authorities (e.g. authorisation, supervision, capital buffers and sanctions)
  • requirements on internal risk management that are tied to national company laws

Regulation on prudential requirements for credit institutions and investment firms

The regulation establishes the prudential requirements that institutions need to respect. It sets out

  • the rules for calculating capital requirements
  • reporting and general obligations for liquidity requirements

International banking regulation standards under Basel III

The Basel committee on banking supervision (BCBS) sets the standard for international banking prudential regulation.  It is a forum for regular cooperation on the supervision of the banking system, and is made up of national banks and supervisory authorities from 28 countries.

The current set of standards developed by the committee is known as the Basel III framework.

The Basel rules are not directly applicable legislation and they apply only to internationally active banks. The CRD IV package, on the other hand, are rules that all banks, as well as investment firms, are required by law to obey.

The EU has actively contributed to developing the BCBS standards on capital, liquidity and leverage, and aims to ensure that major European banking specificities and issues are appropriately addressed. The rules introduced in the EU with the CRD IV package therefore respect the balance and ambition of the Basel III framework.