CRD IV framework

1. CRD IV – Implementing BASEL III reforms in Europe
A Reference guide to understand the framework and Banking Implications
By Megha Gupta
Email: megha6788@yahoo.com

2. CRD IV Framework
Contents
 CRD IV Framework
 Capital Requirements
 Liquidity Rules
 Leverage Ratio
 Supervisory Review
 Disclosure
 Large Exposures
 IT Implications
 Transitional Changes
 Appendix
• Introduction of new Capital Buffers
• Minimum Capital Requirements and Capital ratiosCapital Requirements
• Introduction of two new liquidity ratios
• Liquidity Coverage requirement (LCR)
• Net stable Funding Requirement (NSFR)
Liquidity Rules
• Introduction of leverage ratio to encourage firm’s asset s to be inline with
Capital thus containing build up of leverage within banking systemLeverage Ratio
• Supervisory processes aimed to enhance link between institution’s risk
profile, its risk management, risk mitigation systems and capital
• Internal Capital Adequacy assessment process (ICAAP)
• Supervisory Review and Evaluation Process (SREP)
Supervisory Review
• Country by Country reporting requirements (CBCR)
• COREP ( up to 60 additional returns)
• FINREP ( up to 30 additional returns)
Disclosure
• Requires bank and Investment Firms to monitor and control their large
exposures and entails reporting on large exposures
• Large exposure limits for connected Clients/ Institutions
Large Exposures
Post 2008-2009 European crisis, Basel Committee of Banking supervision proposed BASEL III . The proposal has been implemented
through 2 legislative instruments – Capital requirements Directive (CRD IV) and Capital requirement Regulation (CRR) collectively
known as CRD IV package. The new rules have been applicable post Jan 2014 with key focus on following areas : 1. Improvisation of
quality and quantity of capital base 2. Improvisation of short term and long term liquidity standards 3. Reduce Leverage in banking
systems 4. Enhancing risk coverage 5. Disclosure requirements

3. Capital Requirements
Contents
 CRD IV Framework
 Capital
Requirements
 Liquidity Rules
 Leverage Ratio
 Supervisory Review
 Disclosure
 Large Exposures
 IT Implications
 Transitional Changes
 Appendix
Capital Ratio and Minimum Capital Requirement
• Under Basel III, bank’s capital consists of Tier 1 and Tier 2 Capital.
• Tier 1 capital : Used to absorb losses without ceasing business operations
• Tier 2 capital : supplementary and less reliable than Tier 1.
• Shareholder’s equity
• Retained Earnings
Tier 1 Capital
Tier 1 Capital ratio > = 6 % = Bank’s Tier 1 capital
Total Risk Based Assets
Tier 2 Capital
* Supplementary Capital
Tier 2 Capital ratio > = 2% = Bank’s Tier 2 capital
Total Risk Based Assets
Minimum Capital ratio required as 8 %
Introduction of new Capital Buffers
Capital Conservation Buffer Common Equity Tier 1 equivalent to 2.5 % of total risk exposure
Counter Cyclical Capital Buffer • Sufficient capital base during periods of credit growth.
• Common equity Tier 1 capital from (0 – 2.5%) of Risk weighted assets (RWA)
Systemic important institution
Buffer ( SII)
• Additional loss absorption capacity of Institutions deemed as systematically important
• Mandatory G-SII surcharge - from 2016 between 1- 3.5 % of RWA
• Optional other – SII surcharge - up to 2% of RWA from 2016
Systemic Risk Buffer Additional Buffer to mitigate long term non-cyclical systemic or macro prudential risk.
Must be atleast 1% of common equity tier 1

4. Liquidity Rules
Contents
 CRD IV Framework
 Capital Requirements
 Liquidity Rules
 Leverage Ratio
 Supervisory Review
 Disclosure
 Large Exposures
 IT Implications
 Transitional Changes
 Appendix
Liquidity Coverage Ratio (LCR) Net Stable Funding Ratio (NSFR)
Cash, central bank
reserves, liquid
marketable securities
qualifying for 0% risk
weight
• Available stable funds eg: Tier 1 /Tier2 capital after deductions,
preferred stock, secured/unsecured borrowing with maturity < 1 yr
• Highly liquid assets assigned zero weights in RSA
• Strengthen short – term liquidity profile
• Time Horizon : 30 days
• Monthly reporting frequency with operational capacity
to report weekly/daily
• Implementation date : phased-in gradually , starting at
60 % in 2015 and reaching 100% in 2018
• Strengthen medium to long term liquidity profile;
Incentivizes institutions to use stable sources of funding
• Time Horizon : 1 yr
• Quarterly reporting frequency
• Implementation date : Scheduled for 2018
Stock of highly Liquid assets > = 100 %
Net cash outflows over
30-day horizon
Available amount of stable funding (ASA) > = 100 %
Required amount of stable funding (RSA)
(Assets)
* Stable funding: Portion of those types of equity and
liability financing expected to provide reliable sources of funds over a
•one year
Highly Liquid Assets
> = 60 % Level 1 assets < = 40 % Level 2 assets
Corporate bonds (AA-
rating), Covered bonds
(AA – rating) , liquid
marketable securities
qualifying 20% risk
weight)
Introduction of two new Liquidity Ratios

5. Leverage Ratio
Contents
 CRD IV Framework
 Capital Requirements
 Liquidity Rules
 Leverage Ratio
 Supervisory Review
 Disclosure
 Large Exposures
 IT Implications
 Transitional Changes
 Appendix
Jan’ 13 Jan’ 15 Jan’ 17 Jun’ 17
Jan’ 18
Institutions to publically
disclose their leverage ratios
and components
Start of parallel run period;
Monitoring interaction
between risk based capital
requirement and leverage
ratio Parallel run phase ends
Final adjustments
to definition and
calibration
Full Implementation
Time Lining
• Exposures and commitments of bank do not
exceed a certain multiple of capital.
• Leverage ratio will be set at 3% limit during the
testing phase (known as ‘Parallel run’ period)
• Banks are required to report their leverage ratio
on consolidated basis from 1st Jan 2015
Frequency : Concurrent to financial statement
(quarterly or half yearly)Total Exposure
Derivative exposure comprising PFE (potential
future exposure)
Unfunded Lending
commitments
Stand by letters of
credit and other
guarantees
Additional Exposure
Off Balance sheet
assets
On Balance sheet
Assets
Tier 1 Capital > = 3%
Total Exposure
* Tier 1 capital comprises of shareholder’s equity and retained earnings
CRD IV introduced Leverage ratio requirement

6. Supervisory Review
Contents
 CRD IV Framework
 Capital Requirements
 Liquidity Rules
 Leverage Ratio
 Supervisory
Review
 Disclosure
 Large Exposures
 IT Implications
 Transitional Changes
 Appendix
Internal capital Adequacy assessment process (ICAAP) Supervisory review and Evaluation process (SREP)
• Banks to conduct Internal capital Adequacy assessment process ( ICAAP) to demonstrate they have conducted sufficient procedures to
ensure adequate capital resources
• Regulatory authorities have to conduct Supervisory review and Evaluation process (SREP ) to assess soundness of bank’s ICAAP and take
appropriate actions
• Clear Organisational structure
• Effective risk management processes
• Adequate Internal control mechanism
• Sound administration and accounting procedures
• Adequate remuneration policies and practices
Remuneration policies Credit and Counterparty Risk
Securitisation Risk Operational Risk
Treatment of Risks Residual Risk
Market Risk Liquidity Risk
Internal approaches for calculating Capital requirements
Concentration Risk IRR in banking book
Leverage Risk
• Institution arrangements, strategies, processes and
mechanisms will be reviewed
• Risks to which institutions are or might be exposed will
be evaluated
• Risks that an institution poses to financial system will be
evaluated
Stress Test results Own funds held for securitised assets
Stress Test results
carried out by
bank
Concentration risks
Exposure, measure and management of
liquidity risk
Geographical location of exposures
Application of policies
and procedures
Impact of diversification effect
Business Model of the Institution

7. FINREPCOREPCBCR
There is a significant impact on organizations in implementation of disclosure requirements as several new datasets have been introduced for the first
time, with increased requirement of granularity of data and mandatory reporting in XBRL format. The restrictive timelines have forced institutions to
implement tactical approach however the need for strategic solution remains intact in changing regulatory framework and stricter norms on bank’s
internal process reviews.
Disclosure
Contents
 CRD IV Framework
 Capital Requirements
 Liquidity Rules
 Leverage Ratio
 Supervisory
Review
 Disclosure
 Large Exposures
 IT implications
 Transitional Changes
 Appendix
Institutions will be required to report
following information on consolidated basis
annually.
• Name(s), nature of activities,
geographical location
• Turnover
• Number of employees on full time
equivalent bases.
• Profit or loss before tax
• tax on profit or loss and
• public subsidies received
• Detailed reporting requirements,
unprecedented level of granularity in fully
standardized format
• COREP reporting effective from 1st Jan 2014
• Volume of reporting required as below
Capital Adequacy ( 6 templates) ; Quarterly
Group Solvency ( 1 template) ; Quarterly
Credit and counterparty credit risk
(12 templates) ; Quarterly
Operational risk (2 templates) ; Quarterly
Market risk (8 templates) ; Quarterly
Large exposure (6 templates) ; Quarterly
Leverage ratio (7 templates) ; Quarterly
Liquidity ratios (3 templates) ; Monthly
• Requirement of granular data relating
to income statement and balance
sheet most likely requiring sourcing
from general ledger, finance source
systems
• Requirement of 53 new forms with
around 6500+ data fields on quarterly
basis.
• FINREP implementation date : 1 July
2014, first reporting date 30th Sep
2014
CRD IV implemented Country by Country
reporting (CBCR) to give a clearer picture of
company’s tax position.
Common Reporting (COREP) is European
Banking Authority’s (EBA) prudential
reporting framework in accordance with
CRR/CRDIV
Financial reporting (FINREP) covers
financial reporting for supervisory
purposes based on IAS/IFRS. Applicable
to all credit institutions in EU.
CRD IV increased reporting volumes of banks and Investment firms by 9 times

8. All aspects of large exposure framework must be implemented in full by 1 Jan 2019. Banks must adjust their exposures to abide by the large exposure
limit by that date since no grandfathering will be arranged for existing exposures.
Large Exposures
Contents
 CRD IV Framework
 Capital Requirements
 Liquidity Rules
 Leverage Ratio
 Supervisory
Review
 Disclosure
 Large Exposures
 IT implications
 Transitional Changes
 Appendix • Information to be reported on each large exposure atleast twice a year
• Identification of Clients or group of connected clients
• Exposure before credit risk mitigation
• Exposure after credit risk mitigation
CRD IV attempts to prevent risk arising from large exposure to individual clients or group of connected clients by
limiting its value
Large Exposure Upper Limits
Exposure to counterparty,
group of connected clients or
connected counterparties
<= 25%
Small Institutions having
exposure to other institutions
in excess of 25%
Cap limit : min (100% eligible
Capital, 150m )
Large exposure Lower Limits : Ring fencing
Lower limit of 15% until June 2015 post
which lower limit set at 10%

9. Data
Processes
Technology
• Direct implications on how bank handles
data with need to demonstrate traceability
• Capabilities to handle adhoc regulatory
reporting requests
• Need of high quality, consistent data due
to inter-related, detailed reporting
requirements
• Need of sourcing cross product, cross
functional data requiring high data integrity
• Compliance of new processes for risk data
aggregation and risk reporting by 2016
IT Implications
Contents
 CRD IV Framework
 Capital Requirements
 Liquidity Rules
 Leverage Ratio
 Supervisory
Review
 Disclosure
 Large Exposures
 IT implications
 Transitional Changes
 Appendix
BASEL III
and CRD IV
IT impact
Processes
DataTechnology
•`Impact on monitoring processes of Intra-day LCR and NSFR
• Business processes to handle new rules and standards
• Capability to produce integrated
reports
• Remove dependency on legacy
systems and implement more flexible
solutions
• Extensive reconciliation capacity
• Capability to handle real time data to
meet intra-day monitoring
requirements
• Capability to integrate third party, in-
house risk calculation applications
Data Sources Collection Preparation and Calculation Reporting
Implementation chain
Operations and Monitoring
Data historisation and Archiving
*Need of external and Internal
Data sets
*Collection and transformation
of data, Quality control,
correction, Validation
*Calculation of technical
provisions, aggregation and
consolidation
* XBRL conversion, Internal and
External reporting, Validation of
reports
Implementing voluminous changes in tight timelines have resulted in adoption of Tactical solutions by IT.
Permanent strategic solutions will however be needed to handle evolving requirements in long run.

10. Transitional Changes
Contents
 CRD IV Framework
 Capital Requirements
 Liquidity Rules
 Leverage Ratio
 Supervisory
Review
 Disclosure
 Large Exposures
 IT implications
 Transitional
Changes
 Appendix
Leverage
Timeline 2014 2015 2016 2017 2018 2019 2020 2021
Parallel run
Disclosure
Introduce Minimum standards
Common Equity
4 %
4.5%
Conservation buffer
0.625%
1.25%
1.875%
2.5%
Countercyclical Buffer
0.625%
1.25%
1.875%
2.5%
Tier 1 Capital
5.5%
6 %
Phase out of Capital
instruments
Begin 2014 until Dec 2021
Liquidity Capital ratio Introduce min requirement of 60%,
increase to 100% by 2018
Observation period
Net stable funding ratio Introduce min standardObservation period
Implementation of legislative framework has commenced since 1 Jan 2014 with required full implementation to be completed
by 2021. The transitional period is accompanied with multiple changes in technical standards of reporting required by EBA on
industry consultation and review
* Percentage of Tier 1 capital
* Common equity Tier 1 Capital as a percentage
of risk weighted assets of bank
• Common equity Tier 1 Capital as a
percentage of risk weighted assets of bank
* Percentage of Risk weighted assets of bank

11. Appendix
Contents
 CRD IV Framework
 Capital Requirements
 Liquidity Rules
 Leverage Ratio
 Supervisory
Review
 Disclosure
 Large Exposures
 IT implications
 Transitional
Changes
 Appendix
Annexure of ITS on Supervisory
reporting
Article of ITS No of
Templates
Reporting Frequency First Remittance dates 2014
Annex I solvency
reporting on own funds (“COREP”)
5 – 8 29 Quarterly 30 June at individual and consolidated level
for Q1
Annex III Financial information for
IFRS banks “FINREP”)
9 – 10 31 Quarterly 11 Nov consolidated level for Q3
Annex IV Financial information for
national GAAP banks (“FINREP”;
NB! At Supervisory discretion)
11 31 Quarterly 11 Nov at consolidated level
for Q3
Annex VI real estate Losses 12 1 Semi- annually 11 Aug (Q2);
Annex VIII Large Exposures 13 4 Quarterly 30 June at individual and
consolidated level for Q1
Annex X Leverage Ratio 14 7 Quarterly 30 June at individual and
consolidated level for Q1
Annex XII Liquidity Coverage Ratio 15 4 Quarterly 30 June for the months March, April and May.
June till December 30th calendar day
after end of the month
Annex XII Liquidity Net Stable
Funding Ratio
16 2 Quarterly 30 June at individual and consolidated level
for Q1

12. References
• McKinsey &Company - Basel III and European banking: Its impact, how banks might respond, and the challenges of implementation; 2010
• PWC- Smart implementation:Reining in the risk and cost of regulatory change in banking
• EBA’s Single rulebook : ITS on supervisory reporting
• KATALYSYS LTD – Overview of COREP
• KPMG – Internal Capital adequacy assessment process
• Allen & Overy CRD IV – Capital Buffers
• JP Morgan – Leveraging the leverage ratio
• AFME – Leverage ratio
• AFME – Liquidity Coverage ratio
• AFME – Net Stable Funding ratio
• Allen and Overy – CRD 4 framework – Liquidity requirements
• Allen and Overy - Capital and Capital Adequacy
• Allen and Overy – CRD 4 – Introduction to regulatory capital and liquidity
• Deloitte – IT implications for BASEL III and CRD IV
• A cierco Consulting special report – CRD IV
• KPMG – BASEL III : Issues and implications
• EY – EU CRD IV country by country reporting – Aug 2013
• Deloitte : BASEL III and CRD IV : the impact for investment firms
• CFA institute : Capital requirements directive IV
• Invoke Financial reporting : The state of Data – How financial institutions are rising to the challenge of CRD IV reporting
• Official journal of European Union
• CELEX – 32013R0575