Definition of capital conceptual:I. solidity / loss absorption capacityII. “distance to default” (measurement)III. public disclosure (comparability)IV. going and gone-concern concepts

Capital requirements conceptual:I. level of public’s risk acceptanceII. demands / expectations III. base for public disclosureIV. base to compare institutions

Thoughts on solvency supervision:I. solvency is primary objective of prudential

supervision II. own funds requirement is the core of prudential

supervision III. but not the only means of achieving supervisory

goals

TREA conceptual:I. all risk types managed, measured and quantified

in one quantityII. proportionate with size and riskIII. institutions' own risk assessment captured via

internal models + ICAAP

Types of capital (Basel III end state definitions)

* Special terminology: definition applicable in context of large exposures, and qualified holdings outside the financial sector.** Special terminology: definition only applicable to initial capital requirements / initial own funds requirements.

I. Calculation of capital instrumentsCalculation of capital step by step1) Apply prudential filters for CET12) Determine capital in relevant Tier:Common Equity Tier 1 (CET1) CRR.50 = CRR.25 – CRR.36

Additional Tier 1 (AT1) CRR.61 = CRR.51 – CRR.56

Tier 1 (T1) CRR.25 = CRR.50 + CRR.61 = CET1 + AT1

Tier 2 (T2) CRR.71 = CRR.62 – CRR.66

Own funds (OF) CRR.72 = CRR.25 + CRR.71 = T1 + T2

Eligible capital* CRR.4.71 = T1 + minimum (T2; 1/3 T1)

Initial capital** CRD.12.2 = CET1 instruments

+ Positive elements

• Items acceptable in relevant tier

• Instruments eligible in relevant tier

• Instruments grandfathered in relevant tier

• Amount grandfathered in higher tier exceeding limits

- Negative elements

• Deductions required in relevant tier taking into account grandfathering of deductions

• Excess deductions from lower tiers

= Amount of capital in relevant tier

Prudential filters• Valuation correction: apply requirements of prudent valuation (CRR.105) to all assets measured at fair value (CRR.34-35).• Securitized assets: exclude any increase in equity under applicable acc. stand. that result from securitized assets (CRR.32).• Filter on cash flow hedges: correct fair value reserves related to cash flow hedges of financial instruments (CRR.33.1.a).• Filter on own credit standing: correct for changes in value of own liabilities resulting in own credit standing (CRR.33.1.b).

II. Deductions from capital instrumentsDeductions CET1

CRR.36.1AT1CRR.56

Tier2CRR.66

Losses for the current financial year. a)

Intangible assets. b) + CRR.37

Deferred Tax assets. c) + CRR.38-39, 48

IRB expected losses. d) + CRR.40, 162-163

Defined Benefit Pension Fund assets. e) + CRR.41

Direct, indirect and synthetic holdings of own capital instruments. f) + CRR.42 a) + CRR.57 a) + CRR.67

Holdings of capital instruments designed to artificially inflate own funds g) + CRR.44 b) + CRR.58 b) + CRR.68

Non significant holdings in financial sector. h) + CRR.44-46 c) + CRR.58-60 c) + CRR.68-70

Significant holdings in financial sector. i) + CRR.43-45, 47-49 d) + CRR.58-59 d) + CRR.68-69

Alternative for an 1250% risk weight in:i. Holdings outside the financial sector.ii. Certain securitization positions.iii-v. Certain free deliveries and undeterminable IRB weights.

k)

Any foreseeable tax charge relating to capital instruments. l) f)

Excess of items to be deducted from Additional Tier 1. j)

Excess of items to be deducted from Tier 2. e)

Leverage ratio (LR)Exposure value of assets CRR.429.5-11Determining the exposure value of assets:• Exposure value of assets, excl. derivatives in CRR.Annex-

II, shall be its accounting value remaining after specific credit risk adjustments, additional value adjustments, other own funds reductions related to the asset item.

• Off-balance sheet items listed in CRR.Annex-I shall be the following percentage of its nominal value after reduction of specific credit risk adjustments.a. 100% if it is a full-risk item.b. 50% if it is a medium-risk item.c. 20% if it is a medium/low-risk item.d. 0% if it is a low-risk item.

• Netting only allowed if recognized on accounting balance sheet, subject to additional constraints:• Physical or financial collateral, guarantees or credit risk

mitigation purchased shall not be recognized.• Loans shall not be netted with deposits.

• The exposure value of contracts listed in CRR.Annex-II shall be determined in accordance with the Mark-to-Market method, CRR.274, taken into account the effects of contracts for novation and other netting agreements.

Pillar III - calculation of leverage ratio CRR.429• An institution’s capital measure divided by that institution’s

total exposure measure.

• Arithmetic mean of monthly leverage ratios over a quarter.• Capital measure consists only of Tier1 capital as defined

in CRR.25.

Pillar III - Total exposure measure CRR.429.4Total exposure measure is the sum of the exposure values of all assets and off-balance sheet items not deducted when determining the capital measure.

Pillar II - use of leverage ratio CRD.87Competent authorities shall take into account all information received form institutions with regard to the leverage ratio when undertaking the supervisory review as in CRD.97.

Reporting of leverage ratio CRR.429.1Institutions shall submit to competent authorities all necessary information on the leverage ratio and its components.

Requirements on leverage• Pillar I: no obligation to comply with leverage ratio.• Pillar II: obligation to identify, monitor and manage the risk

of excessive leverage (CRD.87).• Pillar III: disclosure requirement.• Reporting: yes.

GovernanceArrangements, processes and mechanisms • Institution shall have recovery + resolution plans, CRD.74• Institution shall periodically review the strategies and

policies by the management body, CRD.76.1• Institution shall Manage:o Internal approaches for calculating OF, CRD.77o Credit and counterparty risk, CRD.79o Residual risk, CRD.80o Concentration risk, CRD.81o Securitisation risk, CRD.82o Market risk, CRD.83o Interest risk from non-trading book activities, CRD.84o Operational risk, CRD.85o Liquidity rick, CRD.86o Risk of excessive leverage, CRD.87

Remuneration CRD.92-96• Remuneration polices and principles, CRD.92• Remuneration for institutions that benefit from government

intervention, CRD.93• Variable elements of remuneration, CRD.94• Remuneration committee, CRD.95• Maintenance of a website o corporate governance and

remuneration, CRD.96

Governance CRD.88The management body defines, oversees and is accountable for the governance arrangements that shall comply with the following principles: a. the management body must have overall responsibility,

approve and oversee implementation of strategic objectives, risk strategy and internal governance;

b. the management body must ensure the integrity of the accounting and financial reporting systems, including financial and operational controls and compliance with the law and relevant standards;

c. the management body must oversee the process of disclosure and communications;

d. the management body must be responsible effective oversight of senior management;

e. the chairman of the management body in its supervisory function of an institution must not exercise simultaneously the functions of a chief executive officer within the same institution.

Management body CRD.91Members of the management body shall be of sufficiently good repute, possess sufficient knowledge, skills and experience to perform their duties, not hold more than one of the following combinations of directorships at the same time: a. one executive with two non-executive directorships; b. four non-executive directorships.

Elements of the capital ratio

Pillar I requirements CRR.92.3Elements of Total Risk Exposure Amount (TREA)a. Credit risk – banking book.b. Position risk and LE risk – trading book.c. FX, commodities and settlement risk.d. CVA risk for OTC derivatives.e. Operational risk.f. Counterparty credit risk.

Pillar II risks CRD.97+98Measured and quantified in TREA, at least risk concepts: • Stress testing (including market risks)• Concentration risk • Residual risks from credit risk mitigation• Securitisation risk • Liquidity risk • Diversification (including geographical location)• Business model risk • System risk

Capital requirements:Pillar I (4,5/6/8/8%*) + Pillar II

Buffer expectation level:Buffer on top of Pillar I + Pillar II

Pillar I capital ratiosCET 1 capitalTotal risk exposure amount

4,5%≥

Tier 1 capitalTotal risk exposure amount

6%≥

Own fundsTotal risk exposure amount

8%≥

Own fundsTotal risk exposure amount *

8%≥

* TREA corrected by either 80% (Basel I or SA) for CR and no OpRisk

Common equity tier 1 capital ratio -requirement

Tier 1 capital ratio – requirement

Total capital ratio – requirement

Basel I floor – requirement

CRR.92.1.a

CRR.92.1.b

CRR.92.1.c

CRR.500.1.b

b. Capital requirement for Market risk in trading bookCRR.Part-3.Title-IVStandardised approach for calculation of capital requirementfor market risk:• OF requirements for position risk, CRR.326-250o Interest rate futures and forwards, CRR.328o Options and warrants, CRR.329o Swaps, CRR.330o Interest rate risk on derivative instruments, CRR.331o Credit derivatives, CRR.332o Securities under repurchase agreement, CRR.333o Debt instrument, CRR.334-340o Equities, CRR.341-344o Underwriting, CRR.345o Positions hedged by credit derivatives, CRR.346-347o CIU’s, CRR.348-350

Use of internal models for market risk, CRR.362-377

e. Capital requirement for operational riskCRR.Part-3.Title-IIIInstitutions shall use one, or under permission, acombination of 3 approaches for calculating the capitalrequirement for Operational risk, CRR.312-314.• Basic indicator approach, CRR.315-316• Standardised approach, CRR,317-320• Advanced measurement approaches, CRR.321-324

f. Capital requirement for Counterparty credit riskCRR.Part-3.Title-II.Chapter-6Counterparty credit risk, CRR.271-311• CCR methods, CRR.273• Mark-to-Market method, CRR.274• Original exposure method, CRR.275• Standardised method, CRR.276-294• Exposures to CCP’s, CRR.299-311

d. Capital requirement for CVA risk for OTCCRR.Part-3.Title-VICVA means an adjustment to the mid-market valuation of theportfolio of transactions with a counterparty. That adjustmentreflects the current market value of the counterparty creditrisk to the institution, CRR.381.• Transactions excluded from CVA, CRR.382.4• Advanced method, CRR.383• Standardised method, CRR.384

a2. Capital requirement for Credit riskCRR.Part-3.Title-II• Credit risk mitigation, CRR.192-241o Definitions and principles, CRR.192-194o Funded credit protection, CRR.195-200o Unfunded credit protection, CRR.201-204o Requirements on eligibility of CRM, CRR.205-217o Calculating CRM, CRR.218-241

• Significant risk transfer, CRR.243-244• Securitisation, CRR.242-270

Total risk exposure amount (TREA)Pillar I requirements CRR.92.3Total Risk Exposure Amount calculation is included in CRR.92.3 and contains the following elements:a. Credit risk (banking book).b. Market risk for position risk and Large Exposure risk (trading book).c. Market risk for foreign-exchange and commodities risk and Settlement risk.d. CVA risk for OTC derivatives.e. Operational risk.f. Counterparty credit risk.

a1. Capital requirement for Credit riskCRR.Part-3.Title-II• Standardized approach:o Risk weights, CRR.114-134o Recognition of credit risk assessment, CRR.135-137o Use of credit rating for risk weights, CRR.138-141

• Internal ratings based approach:o Permission by competent authorities, CRR.142-150o Requirements for the IRB approach, CRR.169-191o Risk weighted exposure amounts, CRR.151-157o Expected loss amounts, CRR.158-159o PD, LGD and maturity, CRR.160-165o Exposure value, CRR.166-168

c. Capital requirement for Market risk in all booksCRR.Part-3.Title-V• OF requirements for settlement risk, CRR.378• Capital treatment for free delivieries, CRR.379• OF requirements for FX risk, CRR.351-354• OF requirements for commodities risk, CRR.355-361

InitialCapital

CET1 Tier1 Total capital TotalCapital *

0,00%

2,00%

4,00%

6,00%

8,00%

10,00%

12,00%

14,00%

16,00%

18,00%

Total Capital* Total capital requirementincluding 80% Basel I / SA floor. Outcome dependenton floor versus “normal” total capital requirement.

Pillar II – add-onAdds up to the total capitalrequirement. CRD.104.1.a does not define how itadds up.

CRD IV official capital ratio’s

Example assumes: 6% Buffer (as sum of all buffer components) on top of 2% Pillar II add-on. Pillar II add-on is 2%, which is in this example full-filled with Tier 2 capital. CRD.104.1.a does not prescribe the quality of Pillar II capital.

By definition Pillar I equals 8% based on Total Risk Exposure Amount (TREA) for all risk factors.

CET1

T2

T2

AT1

CET1

CET1

0,00%

2,00%

4,00%

6,00%

8,00%

10,00%

12,00%

14,00%

16,00%

18,00%

CET1

T2

T2

AT1

CET1

CET10,00%

2,00%

4,00%

6,00%

8,00%

10,00%

12,00%

14,00%

16,00%

18,00%

CET1

T2

AT1

CRD IV hierachy of requirements CRD IV capital quality hierachy

Buf

fer

Pilla

rII

Pilla

rI

III. Capital instrument criteriaFeature CET 1 instruments:

CRR.28.1AT1 instruments: CRR.52.1

Tier 2 instruments: CRR.63

Issuance a) Issued directly a) Issued and paid up a) Issued and paid up

Funding b) Paid up and not funded by the institution b, c) Not funded by the institution, not purchased by:i. The institution or its subsidiaries.ii. An undertaking in which the institution

has a material holding or a participation.

b, c) Not funded by the institution, not purchased by:i. The institution or its subsidiaries.ii. An undertaking in which the institution

has a material holding or a participation in the form of ownership.

Seniority j, k) Rank below all other claims in the event of insolvency or liquidation and entitle a claim on the residual assets.l, m) Are not secured, subject to a guarantee, or to any arrangements that enhances the seniority of the claim.

d) Rank below Tier 2 instruments in the event of the insolvency.e, f) Are not secured, or subject to a guarantee, or to any arrangements that enhances the seniority of the claim.

d) The claim on the principal amount is wholly subordinated to claims of all non-subordinated creditors.e, f) Are not secured, or subject to a guarantee, or to any arrangements that enhances the seniority of the claim.

Duration e) Are perpetual. g) Are perpetual and have no incentive to redeem.

g, h) Have an original maturity of at least 5 years, no incentive to be redeemed prior to their maturity.

Repayment f, g) The principal amount may not be reduced or repaid and no indication of repayment may be given.

h, i, j, k) The option to call may be exercised at the sole discretion of the issuer, but not before 5 years after date of issuance, no indication of repayment may be given.

i, j, k) The option to call may be exercised at the sole discretion of the issuer, but not before 5 years after date of issuance, no indication of repayment may be given.

IV. Capital instrument criteriaFeature CET 1 instruments:

CRR.28.1AT1 instruments: CRR.52.1

Tier 2 instruments: CRR.63

Distribution h) Conditions as regards distributions:i. There are no preferential distributions.ii. Distributions to holders of the

instruments may be paid only out of distributable items.

iii. No cap or other restriction on the maximum level of distributions.

iv. The level of distributions is not determined on the basis of the amount for which the instruments were purchased at issuance.

v. No obligation for the institution to make distributions to their holders.

vi. Non-payment of distributions does not constitute an event of default of the institution.

vii. The cancellation of distributions imposes no restrictions on the institution.

l) Conditions as regards distributions:i. They shall be paid out of distributable

items.ii. The level of distributions made on the

instruments will not be modified based on the credit standing of the institution or its parent undertaking.

iii. Full discretion at all times to cancel the distributions on the instruments for an unlimited period and.

iv. Cancellation of distributions does not constitute an event of default of the institution.

v. The cancellation of distributions imposes no restrictions on the institution.

Art 53: pushers, stoppers and ACSM are not accepted.

m) The level of interest or dividend payments will not be modified based on the credit standing of the institution.l) No rights for holder of instrument to accelerate the future scheduled payment of interest or principal.

Loss-absorption

i) Absorb the first share of losses as they occur.

n) The principal amount to be written down on a permanent or temporary basis upon trigger event.Art 54: In going concern:

I. Capital intervention ladder

0,00%

2,00%

4,00%

6,00%

8,00%

10,00%

12,00%

14,00%

16,00%

18,00%Buffer regime applies:• Capital conservation plan.• Restrictions on dividend,

bonusses, etc. by MDA.

Breach of Pillar I requirementImmenent withdrawal of authorisation.

Breach of Initial own funds requirement:Immediate withdrawal of authorisation.

16%

10%

8%

€5 mln

Breach of Pillar II requirementPossible withdrawal of authorisation.

Buffer

Pillar II

Pillar I

Capital levels for intervention triggers

CET1

T2

T2

AT1

CET1

CET1

II. Capital intervention powers

0,00%

2,00%

4,00%

6,00%

8,00%

10,00%

12,00%

14,00%

16,00%

18,00%Breach of buffer expectation levelNormal supervisory powers are aimed at enforcing the capital conservation plan and preventing distributions above MDA, but not at maintaining the buffer as a requirement as such.

Point of non-viability:(PON-V) is assessed on CET 1 ratio at 5,125%. Supervisor will trigger AT1 instruments conversion into CET1.In this example triggered at 10,625% TC-ratio.

CET1

T2

T2

AT1

CET1

CET1

Common interpretation of intervention powers

Normal supervisory powers (CRD.104), e.g.:• Capital add-on.• Specific provisioning.• Reduce inherent risk.• Restrict business.• Block dividend.• Additional reporting.• Additional disclosures.

Breach Pillar I or Pillar IIIf Pillar II requirement is breached, supervisor may withdraw authorisation.If Pillar I requirement is breached, supervisor will withdraw authorisation. Presented triggers assume satisfying Total capital and

Pillar II requirements with low quality capital

III. Intervention powers

0,00%

2,00%

4,00%

6,00%

8,00%

10,00%

12,00%

14,00%

16,00%

18,00%

CET1

T2

T2

AT1

CET1

CET1

“Normal” supervisory powers (CRD.104), e.g.:• Capital add-on.• Specific provisioning.• Reduce inherent risk.• Restrict business.• Block dividend.• Additional reporting.• Additional disclosures.

“Special” supervisory powers (CRD.66+67), e.g.:• Publication statement• Cease and desist order• Authorisation withdrawal• Ban management• Pecuniary penalty on the

institution of 10% total annual net turnover

• Pecuniary penalty on natural persons of 5 mln

• Pecuniary penalty of up to twice the amount gained by the breach

“General” supervisory powers, e.g.:• Administrative penalties

(CRD.65.1)• Incremental

administrative penalties (CRD.65.1)

Logical interpretation of general intervention powers

Additional powers under Dutch law e.g.:• Appoint custodian (Wft

1:76 + Wft 3:159d).• Transfer plan

(Wft 3:159c).• Winding-up procedure

(Wft 3:160).

IV. Sanctions under CRD IVMinimum applicable sanctions CRD IV CRD.66+67• A public statement concerning the breach of law.• Cease and desist order.• Withdrawal of authorization.• (temporary) ban against the management body.• Administrative pecuniary sanction of up to 10% of total

annual net turnover, in case of legal person.• Administrative pecuniary sanction of up to € 5 mln, in case

of natural person.• Administrative pecuniary sanction of up to twice the

amount of the benefit derived from the breach.

Publication of sanctions CRD IV CRD.68• All applied administrative sanctions need to be made

publicly available.• Under strict conditions publication of administrative

sanctions may be anonymous.

Breaches to be considered for sanctioning CRD.67• Obtained authorization through false statements.• An institution fails to inform:

• Changes of the holdings in the institution (CRD.25)• Changes of the shareholders or members (CRD.26.1)

• Infringements of anti money laundering provisions.• An institution fails to report, or provides incomplete or

inaccurate information:• On own funds requirements (CRR.92+99).• On national property markets (CRR.101).• On large exposures (CRR.394.1).• On liquidity (CRR.415.1+2).• On the leverage ratio (CRR.430.1).

• An institution, repeatedly or continuously:• Fails to hold liquid assets (CRR.412).• Breaches the large exposures limits (CRR.395)• Is exposed to the credit risk of a sec. position without

satisfying condition (CRR.405).• Makes payments to holders of instruments included in

own funds in breach of CRD.141 –buffer requirements.• Fails to have in place governance arrangements

(CRD.74).• Fails to disclose accurate information in accordance

with CRR.431 or CRR.451.• Retains a person failing to comply with the fit and

proper requirements (CRD.91) as a member of the management body.

Breaches to be considered for sanctioning CRD.66• Taking deposits or other repayable funds from the public

without a license (CRD.3).• Commencing activities as a credit institution without

authorization (CRD.9).• Acquiring or further increasing a qualified holding in a

credit institution (CRD.22.1).• Disposing or reducing a qualified holding in a credit

institution (CRD.25).

Market entry credit institutions

Withdrawal of authorization CRD.18Competent authorities may only withdraw the authorisation where an institution:a. does not make use of the authorisation within 12 months,

expressly renounces the authorisation or has ceased to engage in business for more than six months;

b. has obtained the authorisation through false statements or any other irregular means;

c. no longer fulfils the conditions for authorisation granted;d. no longer meets the prudential requirements laid down in

CRR.Part_3, CRR.Part_4 and CRR.Part_6 or CRD.104.1.a or CRD.105 or can no longer be relied on to fulfil its obligations towards its creditors.

e. If national law provides for withdrawal of authorisation; f. commits one of the breaches referred to in CRD.67.1

Requirements for access to activity credit institutions• Before starting operations a credit institution needs to

obtain authorization (CRD.8)• Authorisation to be accompanied by a programme of

operations setting out the types of business envisaged and structural organisation of credit institution (CRD.10)

• Credit institutions have initial capital € 5 mln. (CRD.12.1)• There are at least two persons who effectively direct the

business of the institution (CRD.13.1)• Credit institutions have their head office in the member

state which granted their authorization (CRD.13.2)

Prohibition for taking deposits CRD.9Persons or undertakings that are not credit institutions are prohibited from carrying on the business of taking deposits or other repayable funds from the public.

Credit institution permanently affiliated to a central body CRR.10Competent authorities may waive CRR.Part_2 to CRR.Part_8 to credit institutions situated in the same Member State and are permanently affiliated to a central body which supervises them and which is established in the same Member State, if the following conditions are met:a. the commitments of the central body and affiliated

institutions are joint and several liabilities or the commitments of its affiliated institutions are entirely guaranteed by the central body;

b. the solvency and liquidity of the central body and of all the affiliated institutions are monitored as a whole on the basis of consolidated accounts of these institutions;

c. the management of the central body is can issue instructions to management of the affiliated institutions.

Additional requirements for credit institutions CRD.13.1• The members of the management body have to meet the

requirements laid down in CRD.91.1 (CRD.13.1)• Competent authorities shall be informed in the identity of

the share holders (CRD.14)

Liquidity (LCR and NSFR)

Liquidity reporting CRR.415Institutions shall report in a single currency, regardless of their actual denomination, to the competent authorities:I. the items referred to in CRR.Part_6.Title_II and

CRR.Part_6.Title_III and their components; II. the composition of their liquid assets in accordance with

CRR.416.

The reporting frequency shall not be less than:• Monthly for items referred to in CRR.Part_6.Title_II; and• quarterly for items referred to in CRR.Part_6.Title_III.

Liquidity Coverage Requirement CRR.412Institutions shall hold liquid assets, the sum covers the liquidity outflows less the liquidity inflows under stressed conditions so as to ensure that institutions maintain levels of liquidity buffers which are adequate to face any possible imbalance betweenliquidity inflows and outflows under gravely stressed conditions over a period of thirty days.

Stable Funding requirement CRR.413Institutions shall ensure that long term obligations are adequately met with a diversity of stable funding instruments under both normal and stressed conditions.

Compliance with liquidity requirements CRR.414• Where an institution does not meet, or expects not to

meet CRR.412 or CRR.413, including during times of stress, it shall immediately notify the competent authorities and shall submit without undue delay to the competent authorities a plan for the timely restoration of compliance with CRR.412 or CRR.413.

• Until compliance has been restored, the institution shall report the items referred to in CRR.416-429 daily by the end of each business day.

• Competent authorities shall monitor the implementation of the restoration plan and shall require a more speedy restoration if appropriate.

Liquidity Coverage Requirement Stable Funding Requirement

Retained net economic interest (NEI) CRR.405• Retained NEI (retention) is measured at the origination of

the securitisation.• Shall be maintained on an ongoing basis by the originator.• Shall not be subject to any credit risk mitigation, any short

positions, any other hedge and shall not be sold. • Determined by notional value for off-balance sheet items.• Shall be no less than 5% under the following criteria.

Retention of securitisations

Retained NEI not applicable CRR.405.3Retained NEI shall not apply where securitised exposures are exposures on or fully, unconditionally, irrevocably guaranteed by the following entities:a. Central governments or central banks;b. Regional governments, local authorities and public sector

entities of Member States;c. Institutions to which a 50 % risk weight or less is

assigned under the standardised approach;d. Multilateral development banks.

Due diligence for retained NEI CRD.406Institutions shall:• Establish formal procedures to monitor performance

information on the exposures underlying their securitisation positions.

• Be able to demonstrate that they have a comprehensive and thorough understanding of and have implemented formal policies and procedures for analyzing and recording securitisation positions.

Non-compliance with retained NEI requirement CRR.407• Where an institution does not meet the retained NEI

requirements by negligence or omission, an additional risk weight of no less than 250 % of the risk weight shall be applied to the relevant securitisation positions.

• The additional risk weight shall progressively increase with each subsequent infringement of the provisions.

Disclosure to investors CRR.409Institutions acting as an originator, a sponsor or original lender shall disclose to investors the level of their commitment to maintain a retained NEI in the securitisation.

CRR.405.1.c: Randomly selected

Securitised Assets100

Eligible assets 5

.

CRR.405.1.d: First Loss tranche

Senior45

First Loss 4

Mezzanine501

.

CRR.405.1.a: Vertical slice

Senior

First Loss

Mezzanine

Retain =>5%

.

Investor's Interest

95%

Originator'sInterest

5%

CRR.405.1.b: Revolving exposures

.

CRR.405.1.e: First loss on underlying.

Senior

Mezzanine

Junior

Macro-prudential instruments

Hierarchy of macro-instrumentsIn these provisions accommodating macro-prudential policy create a hierarchy of macro-instruments. Especially the full use of the flexibility package in CRR.458 is limited to situations where sufficient reasoning is provided that it use is proportionate to address macro-prudential concerns. Likewise the employment of the systemic risk buffer (SRB) is subject to scrutiny from the ESRB, the European Commission and others, in two tiers of employment of the SRB. The SRB and “458” both include the concept of exhausting the other possibilities to address the macro-prudential concerns through any of the other provisions and supervisory powers in the CRD.

Provisions available for macro-prudential policy Instruments unconditionally available• Use national options in large exposure rules to prevent

extreme interconnectedness of the financial system

Instruments available depending on circumstances in the member state concerned• Set “real estate” SA risk weights• Set “real estate” IRB LGD factor• Set IRB correlation factor for financial exposures• Set country specific countercyclical buffer rate up to 2,5%

Instruments available provided that other provisions have been explored• Implement the systemic risk buffer (SRB) in national law

and apply it to one or more subsets of the financial sector. The SRB adds up to the buffer expectation level in CET1 capital up to 3% of the TREA, or up to 5% subject to approval of the EC.

• Use pillar II to address systemic risk, both from an institution specific as well as from a system perspective

• Set countercyclical buffer rate in excess of 2,5%

Instruments available only when other macro-prudential options have been exhausted• Member states flexibility package: CRR.458• European Commission‘s flexibility package: CRR.459

Macro-prudential instrument (toolkit)The CRD IV includes a number of provisions specifically introduced to seek a balance between macro-prudential flexibility and maximum harmonisation. Uniform (completely equal) rules across the Union would facilitate the internal market, while macro-prudential provisions may provide a toolkit for authorities to address risks to the financial stability at the national level (e.g. excessive credit growth). A number of provisions has been introduced to allow for macro-prudential policy, while additional procedural arrangements seek to balance this against interest of the internal market. See CRD.recitals.85-88

Flexibility package (CRR.458)

Possible measures to be taken CRR.458.2.di. the level of own funds laid down in CRR.92;ii. the requirements for large exposures laid down in

CRR.392 and CRR.395-403;iii. the public disclosure requirements laid down in

CRR.431-455; iv. the level of the conservation buffer as set out in

CRD.129 v. Liquidity requirements as set out in CRR.Part_6vi. Risk weights for targeting asset bubbles in the

residential and commercial property sector.vii. Intra financial sector exposures

Notification of measures taken according to CRR.458The designated authority shall notify the European Parliament, the Commission, the Council, the ESRB and EBA on any measures taken with respect to CRR.458 and submit relevant quantitative or qualitative evidence of all of the following:a. the changes in the intensity of macro-prudential or

systemic risk;b. the reasons why such changes could pose a threat to

financial stability at national level; c. a justification of why CRR.124 CRR.164, CRD.101,

CRD.103, CRD.104, CRD.105, CRD.133, and CRD.136 cannot adequately address the identified macro-prudential or systemic risk, taking account of the relative effectiveness of these measures.

d. draft national measures for domestically authorised institutions, or a subset of those institutions, intended to mitigate the changes in the intensity of risk (CRR.458.2.d)

e. an explanation as to why such draft measures are deemed by the designated authority to be suitable, effective and proportionate to address the situation;

f. an assessment of the likely positive or negative impact of the measures on the single market based on information which is available to the Member State.

Designated authority CRR.458.1Member States shall designate the authority in charge of the application of CRR.458. This authority shall be the competent authority or the designated authority.

Flexibility package CRR.458If the designated authority identifies changes in the intensity of macro-prudential or systemic risk in the financial system with the potential to have serious negative consequences to the financial system and the real economy in the Member State and which the designated authority considers would better be addressed by means of stricter national measures, the designated authority may impose these specific measures to address the macro-prudential or systemic risks.

I. Large Exposures (LE)

Exposure 1

LE regime - conceptually• limit to loss resulting from the (near) default of a single counterparty• imposing a minimum degree of asset diversification• “single obligor” principle embedded in “groups of connected clients”• data collection, monitoring and reporting the fundamental banking

process

Exposure 2

Exposure n

* CRM = Credit Risk Mitigation, subject to conditions and supervisory approval. CRR.399, CRR.401-403

Assets Value CRM* Liabilities

+ CET1 items

+ AT1 items

- CET1 deductions

- AT1 deductions

+ T2 items

- T2 deductions

……

……

……

….

Other liabilities

Eligible capital (EC)

Large Exposures (LE) - requirementsI. strict limit 25%II. management of exposures 10%III.data-collection and reporting 2%IV.capital requirement for LE arising in trading book

I. LE – strict limit CRR.395Some counterparties and certain contacts excluded

II. LE – management threshold CRR.392All counterparties, but certain contracts excluded

III. LE – reporting threshold EBA.BTSAll counterparties, but certain contracts excluded

II. Buffer to capital requirements

0,00%

2,00%

4,00%

6,00%

8,00%

10,00%

12,00%

14,00%

16,00%

18,00%

CET 1

T2

T2

AT1

CET1

CET10,00%

2,00%

4,00%

6,00%

8,00%

10,00%

12,00%

14,00%

16,00%

18,00%

CRD IV intervention hierachy of requirements CRD IV capital quality hierachy

Buf

fer

Pilla

r II

Pilla

r I

c-Buffer

cc-Buffer

SRB

/SII-buffer

Tier 2A

T1C

ET1

All examples assume 2% Pillar II SREP add-on imposed by supervisor and 6% total buffer for all three buffer components. In this example the TIer1, Own Funds and Pillar II requirements are met with the lowest possible capital quality.

“Buffer expectation level”

I. CRD IV buffer and buffer components

0,00%

2,00%

4,00%

6,00%

8,00%

10,00%

12,00%

14,00%

16,00%

18,00%

Buffer on top of pillar I + II

Buffer

Pillar II

Pillar I

• Countercyclical buffer or “cc-buffer”

• Buffer for systemic risk or systemically important institutions:• Systemic risk buffer or “SRB-buffer”• Global systemically important institution buffer or “G-SII buffer”• Other systemically important institution buffer or “O-SII buffer”

• Conservation buffer or “c-buffer”

Conceptual basis op the buffer:• Buffer set up as “breathing” space between healthy capital level (buffer

expectation level) and full range of supervisory arsenal.• Hence the buffer creates a supervisory intervention ladder.• New supervisory intervention powers connected to buffer-level.

• Buffer serves as “cushion” to absorb macro-economic fluctuations.• Buffer intends to provide a disincentive to excessive credit growth.• Buffer limits pan-system effects of the (near) default of a extremely large

institutions, and limits the necessity of bail-outs with taxpayers-money.• Buffer should prevent institutions to become too-big-to-fail.

“Combined buffer requirement”: 3 buffer components:

Key-concepts:• Buffer is indistinguishable sum of the three buffer components.• Buffer is to be met with CET1 capital.• Breaching the buffer is not a breach of requirements.• Breaching the buffer restrains payments of dividend, bonuses, etc.• Breaching the buffer triggers capital conservation plans.Example

II. LE RequirementsLE – step by step CRR.Part_IVA. Determine the scope of application and

possible exemptions.B. Relevancy of the alternative limit -

supervisory discretion.C. Ignore exp. which are exempted.D. Determine any group of connected

clients.E. Take the exposure value:

• Banking book assets: balance sheet.• Derivatives (annex II): use applicable

CCR method• Trading book: net position per

counterparty + instrument.F. Ignore exposures to exempted

counterparties for 25% limit. G.Reduce exposure values by applicable

CRM for 25% limit.H. Classify exposures above 2%, 10% and

25% thresholds.I. Calculate capital requirements for

trading book exposures.J. Deduct excess of exceeded exp. in

banking book from capital, if supervisor has temporary (10 days) allowed this.

K. Report under EBA COREP-LE binding technical standards.

B. Alternative “interbank limit” CRR.395CRR allows small institutions to use alternative limit for exp. to otherinstitutions, which replaces the 25% limit. This alternative limit is a sector-widesupervisory discretion of up to €150 mln. The institution must still individuallyset a % limit. This % limit may not exceed 100% of its eligble capital. Hence: limit = max ( 25% EC ; min ( €150mln; 100% EC ).

C. Excluded contracts+counterparties CRR.390.6Exp. altogether exempted from LE requirements (also from reporting and data-collection) if exp. are maintained for short period, and within categories:a) first 2 days of settlement leg of foreign exchange transactions.b) first 5 days of settlement leg after payment/delivery (whichever is first) of

securities (re-) purchase transactions. c) first next business day for delayed receipts in funding and other exposures

arising from client activity in case of money transmission (broad concept).d) intra-day to institutions in case of money transmission.e) exposures deducted from own funds (CRR.36, CRR.56, CRR.66).

A. Scope of application• Applicable to all institutions:

• Unconditional exemption for (groups of) investments firms which are onlysubject to fixed overheads requirements (FOR) CRR.95.1/96.1.

• Applicable on levels:• Solo level.• EU parent and/or Member state consolidated level.• Subconsolidated level.

I. Pillar II requirements

ICAAP ILAAP

CRD.73Obligation to institutions to perform an ICAAP.

CRD.86.1Obligation for institutions to perform an ILAAP.

CRD.97.1Obligation for NSA’s to perform SREP.

CRD.97.2SREP covers all CRR + CRD, specifically CRD.74-98, concerning• Procedures and internal control mechanisms.• Credit, market, operational risk, interest risk• Renumeration policies, governance and management body

CRD.98Besides credit, market and op risk:• Stress testing for institutions using IRB.• Concentration risk.• Securitizations.• Liquidity risk.• Diversification.• Geographical location.• Business model.• Systemic risk.

Pilla

rII t

asks

of s

uper

viso

rsPi

llarI

I tas

ksof

in

stitu

tions

SREP

I. Application of consolidationTypes of institutions that should be included in consolidation CRR.18I. Institutions: credit institutions and investment firms under

CRR definitions (CRR.4.3)II. Financial institutions: (CRR.4.26)

a. A financial holding company. b. A mixed financial holding company.c. A payment institution within the meaning of Directive

2007/61/EC. d. Asset management company UCITS managers and

alternative investment fund managers including, third country entities, that carry out similar activities.

III.Ancillary services undertakings: attached to one of more members of the group that fall under one of the categories above - CRR.4.18.

Methods of consolidationI. Subsidiaries II. Participations III. Sister entities IV. Joint management V. Significant influence

Full consolidation CRR.18.1 Ѵ Ѵ Ѵ Ѵ Ѵ

Proportional consolidation CRR.18.2 Ѵ Ѵ Ѵ Ѵ Ѵ

Equity method CRR.18.5 Ѵ Ѵ Ѵ Ѵ

Art 12 83/349/EC CRR.18.6 Ѵ Ѵ

Types of connections between entities in a group that require their consolidation CRR.18I. Subsidiaries (including "grandparent“ ties): entities over

which the parent exercises control / dominant influence (directly or indirectly), in the form of holding 50+% of voting rights, the parent bears full liability for debt. (CRR.4.16).

II. Participations: ownership of ≥20% of voting rights, capital or rights in the capital of other undertaking, which, by creating a durable link, are intended to contribute to the company's activities (CRR.4.35).

III. “Sister" entities under de facto common management or pursuant to art. 12 Consolidated Accounts Directive.

IV.Entities under joint management of an entity included in consolidation group and entity not included therewith.

V. Entities under significant de facto influence, but which don't have any legal, capital or other ties.

I. Investment firms (IF)Investment services, activities and ancillary services MIFID.Annex-1A1. Reception and transmission of ordersA2. Execution of orders on behalf of clientsA3. Dealing on own accountA4. Portfolio managementA5. Investment adviceA6. Placing of financial instruments on a firm commitment

basis.A7. Placing of financial instruments without a firm

commitment basisA8. Operation of multilateral trading facilitiesB1. Safekeeping and administration of financial instruments

for clients, including custodianship and related services

MIFID investment firms are: MIFID.4.1.1“investment firm” means any legal person whose regular occupation or business is the provision of one or more investment services to third parties and/or the performance of one or more investment activities on a professional basis.

CRR investment firms are: CRR.4.1.2Defined under MIFID.4.1.1 and subject to requirements of MIFID, excluding:a. Credit institutionsb. Local firmsc. Firms (1) not authorized to perform B1; (2) only

authorized to perform one or more of A1, A2, A4 and A5; and (3) not allowed to hold clients money or securities

Initial capital and own funds requirements Initial capital Own funds (OF)Local firm, CRR.4.1.4 € 50.000 (CRD.30) n.a.

Firms falling under CRR.4.1.2.c that only provide A1 and/or A5 € 50.000 (CRD.31.1) n.a.

Firms falling under CRR.4.1.2.c that only provide A1 and/or A5 + registered under 2002/92/EC € 25.000 (CRD.31.2) n.a.

Firms falling under CRR.4.1.2.c that perform at least A2 and/or A4 € 50.000 (CRD.31.1) CRR.95.2

IF not authorized to perform A3 and/or A6, does not hold clients money / securities € 50.000 (CRD.29.3) CRR.95.1

IF not authorized to perform A3 and/or A6, holds clients money / securities € 125.000 (CRD.29.1) CRR.95.1

IF’s that only perform A3 to execute client orders € 730.000 (CRD.28.2) CRR.96.1.a

IF’s that do not hold client money, only perform A3, have no external clients € 730.000 (CRD.28.2) CRR.96.1.b

All other IF’s € 730.000 (CRD.28.2) CRR.92

Qualified holdingsQualified holdings held by others in credit institutions CRD.22Any natural or legal person or group of persons acting in concert (proposed acquirer) is required to notify the competent authorities before acquiring a) 20%, 30% or 50%, of the voting rights or b) any stake that would make the credit institution its subsidiary.• Which credit institution (or in case of a group: institutions).• Size of the intended holding.• Any relevant information ex-ante specified by competent

authorities.

Holdings by institutions resulting from underwriting or placing of financial instruments on a firm commitment basis are not taken into account.

Assessment criteria for qualified holdings CRD.23+27Competent authorities shall asses the suitability of the proposed acquirer and the financial soundness of the proposed acquisition, subject to:• Reputation of the acquirer.• Experience and reputation of management of new org.• Financial soundness of the acquirer.• Ability of the credit institution to comply with CRD + CRR.• Ability of the credit institution to comply with AMLD.• No other assessment criteria allowed.

Exceptions to QHOS CRR.91Shares of undertakings not referred to in CRR.89.1 shall not be included in calculating the QHOS limits if any of the following conditions is met. Those shares are held:a. Temp. during financial reconstruction, rescue operation;b. In an underwriting position for 5 working days or fewer;c. In the own name of the institution and on behalf of others.

Qualified holdings outside the financial sector (QHOS) CRR.89-91QHOS of which the amount exceeds 15% of eligible capital of the institution. The following are not considered QHOS’s:a. Holdings in a financial sector entity.b. Holdings in an undertaking carrying on activities which the

competent authority considers to be the following:i. A direct extension of banking.ii. An ancillary (undertaking) to banking.iii. Leasing, factoring, unit trusts, data processing services

or any similar activity.Amount of QHOS of institution that exceeds 60% of eligible capital shall either be (subject to discretion of authorities):a. Prohibited.b. Subject to 1250% to the greater of:

i. Amount of QHOS in excess of 15% eligible capital.ii. Amount of all QHOS that exceeds 60% eligible capital.

As an alternative to 1250% risk weight, institutions may deduct excess from CET1 in accordance with CRR.36.1.k.

Competent authorities overrule of SRT CRR.243.2No more TREA relieve than risk transferred

Risk transfer = sold-TREA / TREA after sec = 17.5/98 = 17.9TREA relief = original TREA - retained TREA = 100-80.5 = 19.5Conclude : Risk transfer < TREA relief -> SRT not met

Example case mortgage portfolio of 100 nominal at 100% RWSenior Mezz. Junior Total

Securitisation set-up 90 5 5 100Risk-weights 20% 350% 1250%TREA after securitisation 18 17.5 62.5 98Retained TREA (example) 18 0 62.5 80.5Sold-TREA (example) 0 17.5 0 17.5

Significant risk transfer (SRT)Significant Risk Transfer (SRT) CRR.243+244The originator institution of a securitisation may only exclude exposures from calculation of TREA and expected loss amounts if originator meets either SRT or alternative to SRT.

SRT methods of complianceSRT shall be considered to be met in the following cases, (however competent authorities may overrule):1. The originator does not retain more than 50% of

mezzanine securitisation positions, where these are:• Positions with a risk weight lower than 1250%; • More junior than the most senior position in the

securitisation and more junior than any position in the securitisation rated Credit Quality Step 1 or 2.

2. If no mezzanine position, originator does not hold more than 20% of sec. positions that are subject to deduction from CET1 capital or 1250% risk weight and originator can demonstrate that exp. value of such sec. positions exceeds reasoned estimate of expected loss on securitised exp.

3. The competent authority may allow an originator to make its own assessment if it is satisfied that the originator can meet certain requirements.

Alternatives to SRT requirement • Originator applies 1250% risk weight to retained positions.• Originator deducts retained positions from CET1 capital.

Additional SRT conditions CRR.243.5 // CRR.244.5a. Documentation reflect economic substance of transaction.b. Credit protection meets standard CRM requirements.c. Documentation / credit protection meets requirements:

• No materiality threshold trigger.• No credit quality trigger.• No credit (quality) enhancement (except amortisation).• No fee / yield increase triggers.

d. Legal opinion confirming enforceability of CRM // Originator does not maintain effective control.

e. Documentation clearly states ‘arm’s length.f. Possible clean-up calls are subject to restrictions.

IV. Application of the LE regime

Exposure to an institution

Exposure to a corporate

Exposure to a government

Intraday exposure to institution

8%

30%

15% 6%

2%

4%

30%

3%

0%

2%

Assets Value CRM

+ CET1 instruments

+ AT1 instruments

- CET1 deductions

- AT1 deductions

+ T2 instruments

- T2 deductions

Exposure to a government

Exposure to a corporate 1% 0%

€165 mln

€125 mln

€25 mln

€60 mln

€10 mln

€40 mln

Liabilities Value

e.

a.

b.

c.

d.

f.

5.

1.

2.

3.

4.

6.

Exposures subject to LE-limit and thresholds1. Reported as the exposure >2% before CRM.2. Violation of LE regime as the exposure >25% after CRM).3. Exempted from 25% limit, still reported and managed as

the counterparty is exempted, but exposure > 2%, >10%. 4. All-together outside LE-regime as the exposure type

(intraday to institutions) is excluded.5. Reported and managed as CRM does not apply to 2%

and 10% thresholds.6. Not above LE-limits or thresholds as the exposure < 1%.

Eligible capital recognition of capital instruments• Eligible capital = Tier1 + minimum (Tier2; 1/3 Tier1)• CET1 capital = a.- b. = 125 - 25 = 100• AT1 capital = c. - d. = 60 – 10 = 50• Tier2 capital = e. - f. = 165 – 40 = 125• Tier1 capital = CET1 + AT1 = 100 + 50 = 150• Eligible capital = 150 + minimum (125; 1/3*150) = 200

II. Pillar II measuresSupervisory measures and powers: CRD.104.1a. Require institution to hold own funds in excess of the capital

requirements laid down in the CRR and the capital buffers.b. Require reinforcements of arrangements, processes, mechanisms

and strategies implemented to comply with CRD.73-74.c. Require institution to present a plan to restore compliance with the

CRD and CRR, set a deadline for implementation of the plan, including improvements to that plan regarding scope and deadline.

d. Require institution to apply a specific provisioning policy or treatment of assets in terms of own funds requirements.

e. To restrict or limit the business, operations or network of institutions or to request the divestment of activities that pose excessive risks to the soundness of an institution.

f. Require the reduction of risk inherent in the activities, products and systems of institutions.

g. Require institutions to limit variable remuneration as a percentage of net revenues when it is inconsistent with the maintenance of a sound capital base.

h. Require institutions to use net profits to strengthen own funds.i. To restrict or prohibit distributions by the institution to shareholders,

members or holders of Additional Tier 1 instruments where the prohibition does not constitute an event of default of the institution.

j. Impose additional or more frequent reporting requirements, including reporting on capital and liquidity positions.

k. Impose specific liquidity requirements, including restrictions on maturity. mismatches between assets and liabilities.

l. Require additional disclosures.

The additional own funds requirement shall be imposed in at least the following situations: CRD.104.2a. The institution does not meet the requirement

laid down in CRD73-74 (ICAAP) or CRR.393 (Large Exposures).

b. Risks or elements of risks are not covered by the own funds requirements laid down in the CRD and CRR.

c. The sole application of other measures is unlikely to improve the arrangements, processes, mechanisms and strategies sufficiently within an appropriate timeframe.

d. The review referred to in CRD.98.4 or CRD.101.4 reveals that the non-compliance with the requirements for the application of the respective approach will likely lead to inadequate own funds requirements;

e. The risks are likely to be underestimated despite compliance with the applicable requirements of the CRR and the CRD.

f. The institution reports to the competent authority in accordance with CRR.377.5 that the stress test results referred to in that Article materially exceed its own funds requirement for the correlation trading portfolio.

II. Supervision on consolidated basis

(mixed) financial holding company

institution

institution

Mem

ber s

tate

Le

vel

EU L

evel

Non

-EEA

Le

vel

institution

institution institution

(mixed) financial holding company

(mixed) financial holding company

institution

institution

institution

institution institution

(mixed) financial holding company

(mixed) financial holding company

institution

institution

institution

institution institution

(mixed) financial holding company

EU consolidation Member state consolidation Sub-consolidation

Consolidated requirements• Own Funds, Capital Requirement, Large

Exposures, Leverage (CRR.11.1+2).• Liquidity (CRR.11.3).• Disclosure (CRR.13.1).• Exposures to Transferred Credit Risk

(CRR.14.1).• CRD requirements (CRR.109.2).

Consolidated requirements• Own Funds, Capital Requirement,

Large Exposures, Leverage (CRR.11.1+2).

• Exposures to Transferred Credit Risk (CRR.14.1).

• CRD requirements (CRR.109.2).

Consolidated requirements• Capital requirement (CRR.22)• Qualified Holdings (CRR.22)• Exposures to Transferred Credit

Risk (CRR.22).• CRD requirements (CRR.109.2).

II. Applicability of CRD and CRR to IFs

Applicability of CRD to SME IF’sCRD is fully applicable, with limited exceptions for small and medium investment firms on the following requirements:• Capital conservation buffer ;• Institution specific counter cyclical buffer.

Inidivual basis Consolidated basis

CRR.Part-2: Own fundsCRR.6.1 – Yes > CRR.6.2, exemption for qualifying holdings outside the financial sector;CRR.498 exemption for ‘Commodity Dealers’

CRR.11.1 – Yes

CRR.Part-3: Capital requirements CRR.6.1 – Yes > CRR.93.3, CRR.95.1 and CRR.95.2, CRR. 96.1 and CRR 96.2 and CRR.97 for specific rules

CRR.11.1 – Yes, unless CRR.15 applies see CRR.98 for specific rules for a group consisting of IFs that are meant in CRR.95.1 and CRR.96.1

CRR.Part-4: Large exposures CRR.6.1 – Yes > CRR.388, exemption for IFs that fulfill the criteria of CRR. 95.1 or 96.1;CRR.493 exemption for ‘Commodity Dealers’

CRR.11.1 – Yes > CRR.388 exempts groups if the group only consists of IFs referred to in CRR.95.1 and CRR.96.1

CRR.Part-5: Exposures to transferred credit risk CRR.6.1 – Yes CRR.14 – Yes

CRR.Part-6: Liquidity CRR.6.4 – Only applicable to IF’s that perform activity A3 and A6

CRR.11.3 – Only applicable to IF’s that perform activity A3 and A6

CRR.Part-7: Leverage CRR.6.5 – Only applicable to IF’s that have an own funds requirement according to CRR.92 CRR.11.1 – Yes, unless CRR.16 applies

CRR.Part-8: disclosure CRR.6.3 – No, unless CRR.17 waiver granted CRR.13 – Yes

Commodity Dealer CRR.498Exemption from CRR.Part-2 for IF’s whose main business consists exclusively of providing investment services or activities in relation to MIFID.Annex-1.C points 5, 6, 7, 9 and 10 and which do not fall under 93/22/EEC as per 31-12-2006.

Applicability of CRR to IF’s on individual and consolidated basis

Disclosure by institutionsDisclosure requirements – information CRR.431Institutions shall publicly disclose information on their:• Risk management objectives + policies (CRR.435.1).• Governance arrangements (CRR.435.2).• Remuneration policy (CRR.450).• Scope of application (consolidation level and scope) of

the requirements (CRR.436).• Own funds (definition of capital) (CRR.437).• Use of External Credit Rating Agencies (CRR.444).• Capital requirements compliance (CRR.438).• Countercyclical capital buffer compliance (CRR.440).• Indicators of global systemic importance (CRR.441)• Leverage ratio compliance (CRR.451).• Exposure to credit risk and dilution risk (CRR.442).• Exposure to counterparty credit risk (CRR.439).• Exposure to market risk (CRR.445).• Exposure to operational risk (CRR.446).• Exposure to equity not incl. in trading book (CRR.447).• Exposure to int. rate risk in banking book (CRR.448).• Exposure to securitization positions (CRR.449).

Disclosures on model methodologiesInstitutions shall publicly disclose information on use of:• IRB Approach to credit risk (CRR.452).• Credit risk mitigation techniques (CRR.453).• AMA to operational risk (CRR.454).• Internal Market Risk Models (CRR.455).

Disclosure by institutions CRR.431Institutions shall :• Adopt formal policy to comply with disclosure requirements. • Have policies for assessing appropriateness of disclosures. • Have policies for assessing whether disclosures convey their

risk profile comprehensively to market participants.

Exemptions from disclosure requirements CRR.432Institutions may omit one or more of the disclosures if:1. Information provided by disclosure is not regarded material

• Information is material if omission or misstatement could change or influence the assessment or decision of a user relying for the purpose of making economic decisions.

2. Information is regarded as proprietary• Information is proprietary to an institution if disclosing it

publicly would undermine its competitive position.3. Information is regarded as confidential

• Information is confidential if there are obligations to customers or other counterparty relationships binding an institution to confidentiality.

Frequency of disclosures CRR.433• Publish required disclosures at least annually.• Institutions shall assess the need to publish more frequently.• Annual disclosures shall be published in conjunction with the

date of publication of the financial statements.

III. Exposures, counterparties and CRM

I. Trading Book (TB) Limit CRR.397• 25% limit is not strict on TB-exp. subject to conditions.• First 10 days after individual GCC-set breaches 25%

limit, the maximum exposure in trading book ≤ 500% EC. • Sum of exp. breaching the limit for more then 10 days

must be ≤ 600% EC. Trading book weights

Over limit of EC Factor

< 10 days 2

<40% 2

40-60% 3

60-80% 4

80-100% 5

100-250% 6

>250% 9

G. CRM – application CRR.401 - CRR.403401 - CRM recognition according to normal CRM rules: • Recog. of collateral subject approval for F- IRB / A – IRB.• Recog. of collateral subject approval for FCC – method:

• FCC - method reguires additional LE - CRM stress test.402 - In addition approach for exp. secured by real estate:• 50% market value / 60% mortgage.403 - In addition name substitution approach:• FCC or FCS method, subject to restrictions and conditions.

Irrespective of duration the excess of any exposure in the TB above 25% limit receivesadditional capital requirement.The additional capitalrequirement is equal to sum of all capital requirements(TREA) of the excessexposure, multiplied by the relevant factor in table 1.

F. Exempted exposures from 25% limit (not from 2%, 10%)

Fixed CRR.400.1 Possible CRR.400.2

To or explicitly guaranteed by: a,c,d,e) governments, central banks or PSE’s if 0%

b,c,d) International organizations, or multilateral development banks if 0 %

f) To subsidiaries, permanently affiliated institutions or institutional protection scheme partners, subject to prior approval of the supervisor;

g,h) Secured by cash deposits or deposit certificates placed at the institution or its parent institution

i) Undrawn credit facilities low-risk off balance provided that drawing facility will not exceed the 25% limit of the GCC

j) Trade exposures to CCP’s and default fund contributions to CCP’s

k) Pre-paid DGS exposures if DGS is obliged requirement.

a) CRR covered bonds

b) Regional governments or local authorities of Member States if 20%

c, d) To members of same EU consolidation group or network

e) To (structures of) promotional loans provided by credit institutions.

f) To institutions ≤ 1 day

g,h) To central banks or governments under statutoryliquidity requirements

i) 50% of exp. of low/medium risk documentary credit

i) 80% of guarantee withinmutual guarantee schemeswith credit institutions

j) Legally required guaranteesto mortgages bonds in rare cases; only if no CRM applied

k) To recognized exchanges

Transition of CRD IV 2015 2016 2017 2018 2019

c-buffer 0% 0.625% 1.25% 1.875% 2.5%

cc-buffer (max) 0% 0.625% 1.25% 1.875% 2.5%

SRB-buffer (max) 0% 0.75% 1.5% 2.25% 3%

Buffer (max) 0% 2% 4% 6% 8%

IV. Calculation of countercyclical bufferRelevant credit exposures for cc-buffer CRD.140.4exposures belonging to exposures classes in CRR.107:(c) To public sector entities.(g) To corporates.(h) Retail.(i) Secured by mortgages on immovable property.(j) In default.(ja) Items associated with particularly high risk.(k) In the form of covered bonds.(l) Items representing securitization positions.(m) Institutions, corporates short-term credit assessment.(n) In the form of units or shares in CIUs.(o) Equity.(p) Other items.

Relevant credit exposures if subject to:a. Own funds requirements for credit risk.b. Own funds requirements for specific, incremental risk.c. Own funds requirements for securitizations.

Calculation of cc-buffer• Weighted average of countercyclical buffer rates that apply in

the jurisdictions where relevant credit exposures of the institution are located.

• cci,t: roughly represents the credit cycle ≈ % credit growth above average.

• cci,t: countercyclical buffer rate set at country level by designated authority.

• cci,t: set according to ESRB guidelines + recommendations to countries.

• National supervisors set cci,t for non EEA-states (BIS advice).• Subject to EU Commission approval cci,t: may be above 2,5%.

Country Type TREA creditrisk % total country-

ratecc-buffer rate

Country A Mortgages €10 mln 40% 1% 0,40%

Country B Retail €5 mln 20% 1% 0,20%

Country C Securitizations €5 mln 20% 0% 0,00%

Country D Credit cards €2,5 mln 10% 1,5% 0,15%

Country E Corporates €2,5 mln 10% 2% 0,20%

Total €25 mln 100% cc-buffer rate 0,95%

Example calculation of cc-buffer (only relevant exposures)

III. Buffer components

0,00%

2,00%

4,00%

6,00%

8,00%

10,00%

12,00%

14,00%

16,00%

18,00%

Buffer expectation level(sum of all buffer components)

cc-buffer (time-varying):• Up to 2,5% CET1 capital – depending on institution’s exp.• Conditional exemptions for investment firms, and IF-

groups.

SRB/SII-buffer (optional and time-varying):• Up to 5% CET1 capital – depending on national

implementation, supervisory decisions and institution characteristics.

• Optional national implementation of:• Systemic risk buffer (SRB), and• Systemically important institutions buffer (SII-buffer).

• Buffer component equals highest of SRB and SII-buffer.• SRB designed to balance domestic imbalances.• SII-buffer designed to limit “too-big-too-fail” risks.

c-buffer (fixed and unconditional):2,5% CET1 capital – applicable to all institutions.

cc-buffer

“Com

bined buffer requirement” (C

RD

.122)

c-buffer

SRB

/SII-buffer

cci,t: countercyclical buffer rate set at country level (i), in every period (t).

TREAi,t = Total Risk Exposure Amount for relevant credit risk in country (i) in period (t).

Buf

fer

Pilla

r II

Pilla

r I

Available CET1 above Pillar I and Pillar II requirements

%MDA(of profit in last accounting year)

75-100% 60%

50-75% 40%

25-50% 20%

0-25% 0%

V. Constraints below buffer expectationCalculation of maximum distributable amount (MDA)Step-by-step determination of available profit for distribution.1. Assert institution’s CET1 capital*. 2. Deduct CET1 capital needed for Pillar I+II requirements**.3. Determine combined buffer requirement as % CET1 cap.4. Calculate ratio of available CET1 above pillar I & II to the

combined buffer requirement.5. Determine %MDA according to table (below).6. Assert institution’s profit last completed accounting year.7. Absolute MDA = profit x %MDA.***

Important notes to the MDA calculation* Assuming the normal CET 1 capital definition** Some CET1 capital may be needed to satisfy T1 and TC requirements*** Payment restriction calculated on basis of profit, but applies to payments irrespective of source.

Items subject to payment restriction CRD.141.1+2+10• Payments on CET1 capital:

• Cash dividends.• Distribution in form of bonus shares, other instruments.• Redemption of CET1 instruments or other shares.• Repayment of notional amount of CET1 instruments.• Repayment of other CET1 items (e.g. reserves).

• Payments on AT1 instruments.• Bonuses to all staff.

Requirements when buffer expectation level is not met1. Institution is required to prepare capital conservation plan.2. The institution is banned from making any payments

before calculation the MDA (maximum distributable amount) and reporting the MDA to the supervisors.

3. The institution is banned from making any payments above the calculated MDA.

4. When making any payment the institution shall notify its supervisors and provide additional information.

Capital conservation plan, comprises at least• Estimates of income and expenditure and a forecast

balance sheet.• Measures to increase the capital ratios of the institution.• A plan and timeframe for the increase of own funds to meet

the combined buffer requirement.• Other information competent authority deems necessary.

Waterfall use of capital (in example case)

Step 2.a. Pillar I –CET1 requirement CET1 4,5%

Step 2.b Pillar I – Tier1 requirement AT1 1,5%

Step 2.c Pillar I – TC requirement T2 1,0%

Step 2.d Pillar I – TC requirement AT1 1,0%

Step 2.e Pillar II – requirment AT1 1,5%

Step 2.f Pillar II - requirement CET1 1,5%

Step 2.g Buffer – expectation met CET1 2,0%

Step 2.h Buffer – exp. not met Lacking CET1 1,2%

Step 3. Calculate ratio of available CET 1 for buffer to expected buffer

• Ratio = 2% / 3,2% = 62,5% • Hence MDA = 40% (see table)

0,00%2,00%4,00%6,00%8,00%

10,00%12,00%14,00%16,00%18,00%

Expected Available

LackingCET1

T2

AT1

CET1

VI. Example calculationCalculation of compliance with buffer expectation level1. Establish the buffer expectation level:

• The three buffer components are subject to maxima during transition phase (see table).

2. Determine available CET1 capital to meet buffer:• Note that some CET1 capital may be required for Tier

1, Total Capital and Pillar II requirements.3. Calculate the ratio of available CET1 for buffer to buffer

expectation level (above Pillar I + Pillar II).

Step 1. Establish buffer expectation level (example)Institution has (after deductions) CET1: 8%, Additional Tier 1: 4%, Tier 2: 1%. Institution is expected to hold (example).Pillar I requirement (8%). + Pillar II requirement (3%). + c-buffer component (1,25%).+ cc-buffer component (0,95%). + SII-buffer component (1%).Buffer expectation level = 14,2%, expected buffer = 3,2%.

13%14,2%

Hence expected buffer is met in part

Step 2. Determine available CET1 capital to meet buffer

Controlled subsidiary

V. Connected clients (GCC)Group of connected clients (GCC):• Legal dependency.• Economic dependency:

“if pay-out difficulties of one member of the group lead to pay-out difficulties of the other”.

Supervisedinstitution

Corporate B Corporate E

Corporate FCorporate A

Shared branding and economic activity

GCC IV

Connected clients references• CRR.4.39 - definition• CRR.392 – inclusion in 10% threshold• CRR.395.1 – inclusion in 25% limit• EBA BTS - large exposure reporting• EBA BTS - group of connected clients

GCC I. (exposures 1, 2)Direct capital ties A and B:The capital tie between A and its subsidiary B creates a group of connected clients. Needs to be reported even if irrelevant, because included in group III.

Corporate C Corporate D

GCC I

GCC II

Controlled subsidiaryGCC III

GCC II. (exposures 2, 3)Indirect capital ties B and D:The capital tie between A and its subsidiary C which owns a corporate D, may also create a group of connected clients, if the intensity of relations is strong.

GCC III. (exposures 1, 2, 3)Capital ties A, B and D:Larger GCC’s, may overlap with smaller GCC’s, but are not necessarily the sum of subset exposures due to CRM and exemptions of counterparties.

GCC IV. (exposures 4, 5)Economic relation E and FThe source of economic connectedness varies – see EBA BTS. Connectedness never runs through the balance sheet of the supervised institution.

Controlled subsidiary

VI. Consolidated application of LE Application of group of connected client rules in consolidated supervision

LE – groups of connected clients (I and II) – assessed from the consolidated perspective the parent institutionGCC I - Exposures 1, 2 and 3 are to be reported. CRM on exposure 3 is recognized on group I up to amount of exposure 3.GCC II - Exposures 4, 5 and 6 are to be reported for the purposes of the 25% limit and 10% threshold. However exposure 5 to

an exempted counterparty does not count towards 25% limit. Exposure 5 still has to be reported and still counts to 10% threshold.

Supervisedparent institution

Corporate A

Corporate D

Corporate C

Supervisedinstitution

Exempted counterparty

Control Control

GCC I

GCC II

Control

ControlCorporate B

III. Colleges of supervisors

ICAAP ILAAP

Joint decisionon capital

Joint decisionon liquidity

Joint decisions on prudential requirements: CRD.113The consolidated supervisor and competent authorities responsible for the supervision of subsidiaries shall do everything in their power to reach a joint decision:a. To determine the adequacy level of own funds.b. Institution-specific liquidity requirements.

Colleges of supervisors: CRD.111Established by consolidated supervisor and provides a framework for the following tasks:• Exchange of information CRD.50 + CRD.114.• Entrustment of tasks and delegation of responsibilities.• Determining supervisory examination programs.• Increasing efficiency of supervision.• Consistently applying CRD and CRR across all entities in a group.• Coordination of supervisory activities CRD.112.• Joint decisions on institution-specific prudential requirements

CRD.113.

Cooperation between home and host supervisors: CRD.50Supervisors of the Member States involved in the supervision of an institution and its subsidiaries and / or branches shall collaborate closely in order the supervise the activities of that institution.

SREP / Pillar II

Determining consolidated supervisor : CRD.111The consolidating supervisor is the supervisor which has granted the authorization for the:• Parent institution in a Member State.• Parent of institution is a parent mixed financial holding company in a member state.

III. Solo supervisionApplication of requirements on “individual” basis Institutions shall comply with the following obligations on “individual” (solo) basis CRR.6:• Own funds, CRR.Part_2.• Capital requirements (CRR.Part_3).• Large exposures (CRR.Part_4).• Transferred credit risk (CRR.Part_5).• Liquidity (CRR.Part_6).• Leverage ratio (CRR.Part_7, except).:

• Investment firms referred to in CRR.95+96; and• Institutions falling under CRR.7.1 or CRR.7.3.

Derogation to the application of prudential requirements on “individual” basis CRR.61. Supervisors may waive the application of CRR.6.1 to any

subsidiary of an institution, where both the subsidiary and the institution are subject to authorization and supervision by the Member State, the subsidiary is included in the supervision on a consolidated basis of the institution, and all of the following conditions are satisfied:a. There is no current or foreseen material practical or

legal impediment to the prompt transfer of own funds or repayment of liabilities by the parent institution.

b. Either the institution guarantees the commitments entered into by the subsidiary, or the risks in the subsidiary are of negligible interest.

c. The risk evaluation, measurement and control procedures of the institution cover the subsidiary (or parent institution).

d. The institution holds more than 50 % of the voting rights attached to shares in the capital of the subsidiary or has the right to appoint or remove a majority of the members of the management body of the subsidiary.

3. Supervisors may waive the application of CRR.6.1 to a parent institution in a Member State where that institution is subject to authorization and supervision by the Member State concerned, it is included in the supervision on a consolidated basis, and if conditions a. and c. under 1 are satisfied.

Derogation to the application of liquidity requirements on an “individual” basis CRR.8I. Supervisors may waive the application of Part Six to an

institution and supervise it as a single liquidity sub-group if it fulfills all of the following conditions:a. The institution, on a consolidated or a subsidiary

institution on a sub-consolidated basis: • complies with the obligations laid down in Part Six.• monitors and has oversight over liquidity positions of

all institutions within the (sub)group and ensures sufficient liquidity in case of all institutions.

b. The institutions have contracts to the satisfaction of the competent authorities that provide for free movement of funds between them to enable them to meet individual and joint obligations.

III. Applicability of CRD and CRR to IFsSupervision of IF’s waived from consolidated own funds requirements CRR.17• IF’s in a group which has a waiver as in CRR.15 shall

notify the competent authorities of the risks which could undermine their financial positions, including those associated with the composition and sources of their own funds, internal capital and funding.

• Where the competent authorities responsible for the prudential supervision of the IF waive the obligation of supervision on a consolidated basis as provided for in CRR.15, they shall take other measures to monitor the risks, notably large exposures, of the whole group, including any undertakings not located in a Member State.

• Where the competent authorities responsible for the prudential supervision of the IF waive the application of own funds requirements on a consolidated basis as provided for in CRR.15, the requirements of CRR.Part_8 shall apply on an individual basis.

Waiver for consolidated own funds requirements for groups of IF’s CRR.15The consolidating supervisor may waive application of CRR.Part_3 and the capital buffer on a consolidated basis provided that the following conditions exist:a. each EU IF in the group calculates TREA as in

CRR.95.2; b. all IF’s in the group fall within in CRR.95.1 and CRR.96.1;c. each EU IF in the group meets CRR.95 on an individual

basis and applies the deductions in CRR.15.1.c to its CET1.

d. The parent financial holding company in a Member State of any IF in the group holds at least as much capital as defined in CRR.15.1.d

e. the group does not include credit institutions

Waiver for consolidated leverage ratio requirements for groups of IF’s CRR.16Where all IF’s in a group of IF’s are exempt from the application Leverage ratio on an individual basis, CRR.6.5, the parent IF may choose not to apply the requirements laid down in CRR.Part-7 on a consolidated basis.

Small and medium sized enterprisesSmall and medium sized enterprises are defined by the EC recommendation 2003/361 based on:• number of employees and• either turnover or balance sheet total.Company category Employees Turnover Balance sheet

Medium-sized < 250 ≤ € 50 m ≤ € 43 m

Small < 50 ≤ € 10 m ≤ € 10 m

Micro < 10 ≤ € 2 m ≤ € 2 m

Supervisory reportingCOREP- reporting on prudential requirements CRR.99.1COREP encompasses reporting to competent authorities on prudential figures and CRD / CRR requirements, based on CRR consolidation scope.

COREP templates (key elements)• Capital adequacy and consolidation group details.• Credit risk, including:

• Credit risk in banking book, including securitizations.• Credit risk for equity exposures in the trading book.• Counterparty credit risk and CVA risk: OTC derivatives.• Settlement risk for both books.

• Market risk, including:• Position risk and LE risk in the trading book.• Foreign exchange and commodities risk.

• Operational risk.• Large exposures.• Liquidity coverage and net stable funding.

FinRep- reporting on financial information CRR.99.2FinRep encompasses reporting to competent authorities on financial information according to the relevant accounting standards, but according to consolidation scope of the CRR.

FinRep templates (key elements)• Consolidated balance sheet + income statement.• Breakdown of financial assets, loan, advances, derivative.• Provisions, impairments and past-due information.• Liabilities.• Assets at fair value, transfer of assets, tangible and

intangible assets.• Geographical breakdown of counterparties.• Defined benefit pensions, loan commitment, guarantees.• Assets under management, custodian services.• Minority interest and related party disclosures.• Scope of consolidation.

Application of COREP• Legally applicable via EBA BTS (EU Regulation).• Applied uniformly, hence no national deviation is allowed.• Applicable on all consolidation levels.• Exceptions / limited application only for:

• Investment firms subject to FOR CRR.95/96• Institutions exempted from solo capital requirements,

subject to approval by competent authorities.

Application of FinRep• Become legally binding to IFRS institutions via EBA BTS.• Applied harmonized to IFRS institutions.• National specification for non-IFRS institutions.• Only on consolidated level (that is the current situation,

new situation is under discussion).

Specific reporting (in addition to COREP and FinRep)Exp. to property market for macro-prudential purposes.

Losse Kopteksten voor A0 poster Capital Requirements Directive ʺCRD IVʺ Capital requirements Definition of capital Intervention ladder General requirements LCR and LR until review Securitisation Macro-prudential Capital buffer Large exposures Pillar II Consolidation Investment firms Qualitative requirements

Disclaimer:

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CRD IV Academy – September 2013 – Introduction to the Capital Requirements Directive ʺCRD IVʺ Prepared by: Jesse Kaijser, Bas-Jan Nieuwenhuijzen, Jaap Braakman, Koen Holtring // crd@dnb.nl

Capital Requirements Directive IVCapital requirements

Definition of capital

Capital buffer Large exposures Pillar II Investment firmsConsolidation Qualitative requirements

Intervention ladder General requirements LCR and LR until review Securitisation Macro-prudential