The European Parliament adopted by 595 votes to 40 with 76 abstentions, a legislative resolution on the proposal for a regulation of the European Parliament and of the Council on prudential requirements for credit institutions and investment firms. Parliament adopted its position at first reading under the ordinary legislative procedure. The amendments adopted in plenary are the result of a compromise agreement between Parliament and Council. They amend the Commission’s proposal as follows: Merger of provisions applicable both to credit institutions and investment firms: in order to ensure a coherent application of those provisions, the text stresses the need to merge these provisions into new legal acts: a Directive and this Regulation. A Regulation would ensure that all credit institutions and investment firms defined as such follow the same rules in the entire Union, which would also boost confidence in the stability of credit institutions and investment firms, especially in times of stress. In order to avoid market distortions and regulatory arbitrage, the measures will ensure maximum harmonisation. Transitional periods are provided for in this Regulation for smooth implementation and to avoid uncertainty for the markets. In areas not covered in this Regulation, competent authorities or Member States will be able to impose national rules, provided that they are not inconsistent with the Regulation. Macroprudential and systemic risks: a number of tools to prevent and mitigate macroprudential and systemic risks have been built into the Directive and Regulation ensuring flexibility.  The use of these tools is subject to appropriate control in order not to harm the functioning of the internal market.  Where macro-prudential or systemic risks concern a Member State, the competent or designated authorities of the relevant Member State will be able to address those risks by certain specific national macro-prudential measures, when this is considered more effective to tackle those risks. The European Systemic Risk Board (ESRB) and the European Banking Authority (EBA) will have the opportunity to provide their opinions on whether the conditions for such national macro-prudential measures are met. A Union mechanism will prevent national measures from proceeding, where there is very strong evidence that the relevant conditions are not satisfied. Until the harmonisation of liquidity requirements in 2015 and the harmonisation of a Leverage Ratio in 2018 Member States may apply these measures as they find appropriate, including mitigation of macroprudential or systemic risk in the sense of a risk of disruption in the financial system with the potential to have serious negative consequences to the financial system and the real economy in a specific Member State. Stricter requirements: the Commission shall be empowered to adopt a temporary increase in the level of own funds, risk weights, requirements for large exposures and public disclosure. Such provisions will be applicable for a period of one year, unless the European Parliament or the Council has objected to the delegated act within a period of 2 months. The Commission shall state the reasons for the use of this procedure. The Commission is only empowered to impose stricter prudential requirements for exposures that arise from market developments in the Union or outside the Union affecting all Member States. Extension of tasks for EBA: given the inevitable extension of powers and tasks for the EBA set out by the Regulation, the European Parliament, the Council and the Commission should see to it that adequate human and financial resources are made available without delay. Close cooperation between the EBA and the ESRB is essential to give full effectiveness to the functioning of the ESRB and the follow-up to its warnings and recommendations. In particular, the EBA should be able to transmit to the ESRB all relevant information gathered by competent authorities in accordance with the reporting obligations set out in the Regulation. It should also keep an up-to-date list of all of the forms of capital instruments in each Member State that qualify as CET1 instruments.  Encourage economically useful banking activities: considering the devastating effects of the last financial crisis the overall objectives of the Regulation are to encourage economically useful banking activities that serve the general interest and to discourage unsustainable financial speculation without real added value. This implies a comprehensive reform of the ways savings are channelled into productive investments. Alongside surveillance aimed at ensuring financial stability, the text stresses the need for enhancing mechanisms designed to develop an effective surveillance and prevention of potential bubbles in order to ensure optimum allocation of capital, in particular with respect to long term investment in the real economy. In order to safeguard a sustainable and diverse banking environment in Europe, competent authorities will be empowered to impose higher capital requirements for systemically important institutions that, due to their business activities, are able to pose a threat to the global economy. Small and medium sized enterprises: the new rules aim to fill the existing funding gap for SMEs and ensure an appropriate flow of bank credit to them. Capital charges for exposures to SMEs will be reduced to allow credit institutions increase lending to SMEs. To achieve this objective, credit institutions will effectively use the capital relief for the exclusive purpose of providing an adequate flow of credit to EU SMEs. Intermediate financial holding companies: the amended text states that the minority interests arising from intermediate financial holding companies that are subject to the requirements of the Regulation on a sub consolidated basis may also be eligible (within the relevant limits) to the Common Equity Tier 1 of the group on a consolidated basis. Proportionality principle: Member States should ensure that the requirements laid down in this Regulation apply in a manner proportional to the nature, scale and complexity of the risks associated with an institution's business model and activities. The EBA should ensure that all regulatory and implementing technical standards are drafted in such a way that they are consistent with and uphold the principle of proportionality.  Large exposures: the Commission will review the rules for large exposures by 31 December 2015 at the latest. Pending the outcome of this review, Member States will continue being allowed to decide on the exemption of certain large exposures from those rules for a sufficiently long transitional period.  Covering liquidity needs: the text provides that credit institutions and investment firms should hold a diversified buffer of liquid assets that they can use to cover liquidity needs in a short term liquidity stress. The Commission is empowered to adopt a delegated act to introduce a detailed and harmonised liquidity coverage requirement for the Union.  To this end, during the observation period set out in the Regulation, the EBA should review and assess, the appropriateness of a threshold of 60% on level 1 liquid assets, a cap of 75% of inflows to outflows and the phase-in of the LCR from 60% from 1 January 2015 increasing on a graduated basis to 100%. The EBA should set up a coherent reporting framework on the basis of a harmonised set of standards for liquidity requirements that should be applied across the Union. Until the date of application of the full liquidity requirements, institutions should continue to meet their national reporting requirements. Separation of retail and investment banking activities: the amended text states that the structural separation of retail and investment banking activities within a banking group could be one of the key tools to support the objective of ensuring the operation of vital services to the real economy while limiting the risk of moral hazard. No provision in the regulation will therefore prevent the introduction of measures to effect such a separation. The Commission will be required to analyse the issue of structural separation in the Union and produce a report, accompanied, if appropriate, by legislative proposals, to the European Parliament and Council.  Protecting depositors: with a view to protecting depositors and preserving financial stability, Member States will be permitted to adopt structural measures that require credit institutions authorised in that Member State to reduce their exposures to different legal entities depending on their activities, irrespective of where those activities are located. However, because such measures could have a negative impact by fragmenting the single market, they will only be approved subject to strict conditions pending the entry into force of a future legislative proposal explicitly harmonising such measures. Implementation of Basel III: the Commission must provide updated reports on an ongoing basis, and at least following the publication of each Progress Report on Basel III by the Basel Committee on Banking Supervisors, on the implementation and domestic adoption of Basel III in other major jurisdictions, including an assessment of the consistency of other countries' legislation or regulations with the international minimum standard, to identify differences that could raise concerns regarding a level playing field.

The Council broadly endorsed the outcome of the most recent political trilogue with the European Parliament on the “CRD 4 package” of legislation amending the EU's rules on capital and liquidity requirements for banks and investment firms. The package sets out to amend and replace existing capital requirements Directives with two new legislative instruments: (i) a Regulation establishing prudential requirements that institutions must fulfil, and (ii) a Directive governing access to deposit-taking activities. As regards the Regulation, the Council Presidency and the Parliament came to an agreement on the following key issues: Capital requirements: the Regulation will be directly applicable in order to prevent divergences in implementation at national level. The Regulation: will require banks and investment firms to hold common equity tier 1 (CET 1) capital of 4.5% of risk weighted assets (until December 2014 between 4% to 4.5%), up from 2% applicable under current rules. The total capital requirement, which includes tier 1 and tier 2 capital, remains unchanged at 8% of risk weighted assets; defines CET 1 capital instruments using 14 criteria, similar to those set out in Basel 3, and mandates the European Banking Authority (EBA) to monitor the quality of instruments issued by institutions. Additional capital requirements in the form of buffers are introduced in the Directive. Liquidity requirements: from 2015, EU liquidity requirements from 2015 will be introduced, after an initial observation period, by means of a delegated act by the Commission. The Regulation also: requires institutions to hold liquid assets, the total value of which would cover the net liquidity outflows that might be experienced under gravely stressed conditions over a period of 30 days; allows institutions, during times of stress, to use their liquid assets to cover their net liquidiy outflows; phases in the liquidity coverage ration (LCR) starting at 60% in 2015 and reaching 100% in 2018. A review in 2016 will enable the Commission to delay the introduction of the 100% ratio, if justified by international developments. Until the LCR is fully introduced, Member States may maintain or introduce national liquidity requirements; limits liquidity inflows to 75% of liquidity outflows to ensure that banks don't rely only on expected inflows to meet their outflows and instead hold a minimum amount of liquid assets equal to 25% of outflows. Net stable funding ratio: to address longer term funding issues, the Commission will have to submit by 31 December 2016 a legislative proposal aimed at ensuring that institutions use stable sources of funding. Leverage ratio: the Regulation will provide for the introduction of a leverage ratio from 1 January 2018, if agreed by Council and Parliament on the basis of a report to be presented by the Commission by 31 December 2016. This will follow an initial observation period; from 1 January 2015, institutions will be required to disclose their leverage ratio. The leverage ratio is a non-risk based measure and defined as an institution's tier 1 capital divided by its average total consolidated assets. Different levels would be set for institutions following different business models. National flexibility - Macro-prudential powers: the Regulation will enable Member States to impose, for up to two years (extendable), stricter macro-prudential requirements for domestically authorised financial institutions in order to address increased risks to financial stability. These stricter measures can apply to: (i) the level of own funds, (ii) liquidity requirements, (iii) large exposures requirements, (iv) the level of the capital conservation buffer, (v) public disclosure requirements, (vi) intra-financial sector exposures, and risk weights for targeting asset bubbles in the property sector. The Council can reject, by qualified majority, stricter national measures proposed by a Member State. 

The Council was informed by the Presidency of the state of negotiations with the European Parliament on two proposals – the so-called "CRD 4" package – amending the EU's rules on capital requirements for banks and investment firms. The two proposals set out to amend and replace the existing capital requirement directives1 by two new legislative instruments: i) a Regulation establishing prudential requirements that institutions need to respect, and ii) a Directive governing access to deposit-taking activities. The Council held an exchange of views and confirmed its intention to reach a political agreement on the package before the end of the year. A number of issues have yet to be resolved in the negotiations with the Parliament.

The Council was briefed by the Presidency on progress in negotiations with the European Parliament on two proposals amending the EU's rules on capital requirements for banks and investment firms ("CRD 4"). The proposals set out to amend and replace the existing Capital Requirement Directives and divide them into two new legislative instruments: a Regulation establishing prudential requirements that institutions need to respect and a Directive governing access to deposit-taking activities. The Cypriot Presidency stated its objective of finalising negotiations as soon as possible. As the incoming presidency, it has held its first "trilogues" and scheduled further meetings with the Parliament on 11 and 12 July. Work under the previous Danish Presidency was almost completed on the Directive, with only a few key open issues remaining, and talks are now focused on the Regulation. The negotiations with the Parliament are aimed at adoption of the Regulation and Directive at first reading. Outstanding issues include a proposed flexibility package, bankers' remuneration, crisis management, sanctions, the balance of power between the authorities of "home" and "host" countries, corporate governance, and powers to be given to the European Banking Authority (EBA). General approach: the Council agreed a general approach on the two proposals on 15 May with a view to negotiations with the European Parliament. The Regulation would be directly applicable in order to prevent divergences in implementation at national level. Own funds: the presidency's compromise text sets capital requirements and introduces initial liquidity requirements from 2013, according to national provisions, and a fully calibrated EU liquidity requirement from 2015. To address longer term funding issues, the draft regulation calls on the Commission to submit by 31 December 2016 a report and, if appropriate, a legislative proposal for a stable funding requirement. The draft regulation also provides for the introduction of a leverage ratio from 1 January 2018, if agreed by Council and Parliament on the basis of a report to be presented by the Commission in 2016. More specifically, the draft Regulation would require banks and investment firms to hold common equity tier 1 (CET 1) capital of 4.5% of risk weighted assets, up from 2% applicable under current rules (4.5% from 2015 onwards; in 2013 within the range of 3.5% to 4.5%; and in 2014 within the range of 4% to 4.5%). The total capital requirement remains unchanged at 8%. According to the presidency's draft, CET 1 capital instruments are defined using 14 criteria, similar to those set out in Basel 3, and mandates the European Banking Authority (EBA) to monitor the quality of instruments issued by institutions. Stricter prudential rules: the draft Regulation provides the opportunity for Member States to impose, for up to two years (extendable), stricter prudential requirements for domestically authorised financial institutions (i.e. requirements on level of own funds, requirements for large exposures, public disclosure requirements, the level of the capital conservation buffer, liquidity requirements and risk weights for targeting asset bubbles in residential and commercial property). Such a decision by a national authority could only be overruled if, following a negative opinion by the EBA, the European Systemic Risk Board (ESRB) or the Commission, the Council votes by qualified majority against the measures. Member States would also be able to increase risk weights for residential and commercial property and intra financial sector exposures beyond those provided in the regulation and up to 25%. The Commission, for its part, would also have the possibility to impose for one year stricter prudential requirements, via delegated acts addressed to all Member States.

The Committee on Economic and Monetary Affairs adopted the report drafted by Othmar KARAS (EPP, AT) on the proposal for a regulation of the European Parliament and of the Council on prudential requirements for credit institutions and investment firms. It recommends that the European Parliament’s position at first reading, under the ordinary legislative procedure, should amend the Commission’s proposal as follows: Objective of the Regulation: considering the devastating effects of the latest financial crisis the overall objectives of this regulation are to encourage economically useful banking activities that shall serve the general interest and to discourage unsustainable financial speculation without a real added value. This implies a comprehensive reform of the ways savings are channelled into productive investments. Capital: in order to safeguard a sustainable and diverse banking environment in Europe, competent authorities should be empowered to impose significantly higher capital requirements for systemically important institutions that are able, due to their business activities, to pose a threat to the global economy. Monitoring requirements should be equivalent throughout the Union taking into account the different risk profiles of the institutions. This Regulation should not apply to other types of institution, such as financial institutions that do not take deposits from the public. Extending the EBA’s activities: in assessing systemic relevance of institutions EBA should have regard to size, crossborder distribution and spill over effect, taking into account branch or subsidiary structure, interconnectedness via similarity of business model, or cross-guarantee schemes, or insurance clusters of independent entities with similar business models which may have systemic collective effects. Given the inevitable extension of powers and tasks for EBA foreseen by this Regulation, the European Parliament, the Council and the Commission should see to it that adequate human and financial resources are made available without delay. Revising the current regulatory and supervisory framework: supervisory approaches are based on a time horizon of no more than one year (calculation of value at risk, liquidity ratio), thus increasing investors’ propensity to shorten their investment horizons. The current regulatory and supervisory framework therefore needs to be revised in order to introduce provisions that will foster the long-term investment that the real economy needs. Alongside supervisory surveillance aimed at ensuring financial stability, there is a need for enhancing mechanisms designed to develop an effective surveillance and prevention of potential bubbles in order to ensure optimum allocation of capital in the light of the macroeconomic challenges and objectives, in particular with respect to long term investment in the real economy. Loans to SMEs and consumers: in order to stimulate growth and job creation, Members have introduced new rules to reduce the risk weighted exposure amounts for credit risk for loans to SMEs and start-ups. Ensuring maximum harmonisation: for reasons of legal certainty and because of the need for a level playing field within the Union, a single set of regulations for all market participants is a key element for the functioning of the internal market. In order to avoid market distortions and regulatory arbitrage, Pillar 1 measures should therefore ensure maximum harmonisation. As a consequence, the transitional periods provided for in this Regulation are essential for the smooth implementation of this Regulation and to avoid uncertainty for the markets. Member States and competent authorities should avoid adopting any diverging or frontrunning rules that impact or weaken the principle of maximum harmonisation under Pillar Competent authorities should be able to evaluate, under the applicable Pillar 2 processes, whether supervisory action is needed with regard to a certain credit institution or a group of credit institutions. Deduction of the minority interests included in consolidated Common Equity Tier 1 capital: where the deduction of the minority interests included in consolidated Common Equity Tier 1 capital results in a disproportionate increase of capital requirement for certain types of credit institutions or investment firms, such institutions or firms should be exempted from the application of such rule. Intermediate financial holding companies: the minority interests arising from intermediate financial holding companies that are subject to the requirements of this Regulation on a sub-consolidated basis may also be eligible (within the relevant limits) to the Common Equity Tier 1 of the group on a consolidated basis, as the Common Equity Tier 1 capital of an intermediate financial holding company attributable to minority interests and the part of that same capital attributable to the parent company support both pari passu the losses of their subsidiaries when they occur. Overreliance on external credit ratings shall be reduced according to Members and all the automatic effects deriving from ratings should be gradually eliminate. Regulation should, therefore, require credit institutions and investment firms to put in place sound credit granting criteria and credit decision processes. External credit ratings may be used as one factor among others in this process but they should not rely solely or mechanistically on external ratings and these should not prevail. International cooperation and coordination: these are vital in order to achieve an international level playing field and avoid regulatory arbitrage. In the context of the reluctant implementation of Basel III by the United States of America (USA), it is necessary to ensure that the economy and the banking system in the Union are not be placed at a competitive disadvantage. The Commission should therefore establish, by March 2012, which provisions in this Regulation cannot be implemented in the Union without a simultaneous implementation in the USA. Accounting standards: common global accounting standards have still to be agreed, which could lead to inconsistency in comparing global implementation of Basel requirements, especially with regard to the calculation of risk-weighted assets, the leverage ratio, liquidity coverage ratio and the definition of groups. In this respect the Commission must strive towards achieving globally consistent accounting standards and at the very least achieving global comparability for prudential regulatory purposes. Implementation of Basel III: the Commission should provide update reports on an ongoing basis, and at least following the publication of each Progress Report on Basel III implementation by the Basel Committee on Banking Supervisors, on the implementation and domestic adoption of Basel III in other major jurisdictions, including an assessment of the consistency of other countries' legislation or regulations with the international minimum standard to identify differences that could raise level playing field concerns.

The Council unanimously agreed a general approach on two proposals - the so-called "CRD 4" package - amending the EU's rules on capital requirements for banks and investment firms, with a view to negotiations with the European Parliament. It called on the presidency to start negotiations with the European Parliament, on the basis of the Council's general approach. The aim is to reach agreement on the texts at first reading, if possible by June 2012 as requested by the European Council. The proposals set out to amend and replace the existing capital requirement directives and divide them into two new legislative instruments: this regulation establishing prudential requirements that institutions need to respect and a directive governing access to deposit-taking activities. They are aimed at transposing into EU law an international agreement approved by the G-20 in November 2010 – the so-called Basel 3 agreement – concluded by the Basel Committee on Banking Supervision. The regulation would be directly applicable in order to prevent divergences in implementation at national level. The presidency's compromise text sets capital requirements and introduces initial liquidity requirements from 2013, according to national provisions, and a fully calibrated EU liquidity requirement from 2015. To address longer term funding issues, the draft regulation calls on the Commission to submit by 31 December 2016 a report  and, if appropriate, a legislative proposal for a stable funding requirement. The draft regulation also provides for the introduction of a leverage ratio from 1 January 2018, if agreed by Council and Parliament on the basis of a report to be presented by the Commission in 2016. Specifically, the draft regulation would require banks and investment firms to hold common equity tier 1 (CET 1) capital of 4.5% of risk weighted assets, up from 2% applicable under current rules (4.5% from 2015 onwards; in 2013 within the range of 3.5% to 4.5%; and in 2014 within the range of 4% to 4.5%). The total capital requirement remains unchanged at 8%. The presidency's draft defines CET 1 capital instruments using 14 criteria, similar to those set out in Basel 3, and mandates the European Banking Authority (EBA) to monitor the quality of instruments issued by institutions. Moreover, the draft regulation provides the opportunity for Member States to impose, for up to two years (extendable), stricter prudential requirements for domestically authorised financial institutions (i.e. requirements on level of own funds, requirements for large exposures, public disclosure requirements, the level of the capital conservation buffer, liquidity requirements and risk weights for targeting asset bubbles in residential and commercial property). Such a decision by a national authority could only be overruled if, following a negative opinion by the EBA, the European Systemic Risk Board (ESRB) or the Commission, the Council votes by qualified majority against the measures. Member States would also be able to increase risk weights for residential and commercial property and intra financial sector exposures beyond those provided in the regulation and up to 25%. The Commission, for its part, would also have the possibility to impose for one year stricter prudential requirements, via delegated acts addressed to all Member States.

The Council carried out a detailed examination of proposals to amend the EU's rules on capital requirements for banks and investment firms, the so-called "CRD 4" package, with a view to starting a negotiation with the European Parliament aimed at adoption of the texts at first reading. The proposals set out to amend and replace the existing capital requirement directives and divide them into two new legislative instruments: a regulation establishing prudential requirements that institutions need to respect and a directive governing access to deposit-taking activities. They are aimed at transposing into EU law an international agreement approved by the G-20 in November 2010 – the Basel 3 agreement – which had been prepared by the Basel Committee on Banking Supervision. Concluding the discussions, the president of the Council noted the support of a qualified majority of delegations for a provisional compromise text. With the agreement of the Council, the presidency decided to add the dossier to the agenda for its meeting on 15 May, so as to enable a technical verification to be completed prior to confirmation of the Council's agreement on the overall package.

The Council took note of a progress report from the presidency on proposals for a fourth amendment of the EU's rules on capital requirements for banks and investment firms ("CRD IV"). The proposals for a regulation and directive are intended to amend and replace existing capital requirement directives 2006/48/EC and 2006/49/EC. They are aimed at transposing into EU law an international agreement approved by the G-20 in November 2010. The so-called Basel III agreement, concluded by the Basel Committee on Banking Supervision, strengthens bank capital requirements and introduces new regulatory requirements on bank liquidity and bank leverage. General remarks: all Member States recognise the importance of quick adoption of this legislative package and are committed to working towards an agreement which would also swiftly transpose the Basel III requirements into legislative acts of the European Union. In the view of the Presidency, there is a broad measure of agreement on a number of proposed provisions to improve current prudential requirements, in particular the need to improve significantly the qualitative and quantitative capital requirements. Member State concerns: in this Progress Report the Presidency aims to inform about some of those principal concerns expressed by Member States, where a solution would be needed to reach a compromise agreement at the Council. This Progress Report is without prejudice to the scope and content of other issues that would require further negotiations in the preparatory bodies of the Council. National discretion and the single market objective (flexibility and maximum harmonisation): ·        A number of Member States have concerns about reduced national discretion and limited scope of flexibility within the framework of harmonised rules. They fear that the proposed approach might have a negative impact on Member States due to differences in their national financial systems. ·        In particular, a number of delegations pointed out that they would favour additional powers for Member States to set stricter requirements within their jurisdictions (e.g. the possibility of increasing minimum level of capital ratio). They have indicated that as the ultimate (fiscal) responsibility for ensuring financial stability within its jurisdiction is borne by a Member State, Member States must have effective supervisory tools at their disposal. On the other hand, some delegations support the framework and the single rule book principle proposed by the Commission. ·        Those delegations consider that the framework proposed by the Commission already provides for sufficient flexibilities, including through a strengthened "Pillar 2" measures and the countercyclical buffer. ·        Lastly, the proposed Article 443 of the Regulation empowers the Commission to impose temporary more stringent prudential requirements by way of delegated acts, where this is necessary to address changes in the intensity of micro-prudential and macro-prudential risks. Some delegations oppose such powers being granted to the Commission, while other delegations generally support this idea, provided that the operational framework of these provisions is fine-tuned and delegation of powers is adequately framed. Liquidity coverage requirement: there is agreement that a liquidity coverage requirement (LCR) should be introduced, in order to close an important gap in EU prudential requirements. In view of this general objective, a number of Member States have raised the concerns set out below: Article 444 of the proposed Regulation foresees that the LCR shall be implemented by a delegated act of the Commission. A number of Member States insist that, given the importance of this issue and its possible impact on the economy, the LCR should be implemented by subsequently amending the Regulation under the ordinary legislative procedure while still ensuring that the 2015 date is met. Moreover, provisions dealing with the principle of having adequate liquid assets at all times, are subject to further examination, given that many Member States wish to render the wording more precise. The Member States’ main concerns are related to the possibility of establishing single liquidity sub-groups and intra-group treatment. The proposed Regulation foresees an obligation to establish a single liquidity sub-group once certain conditions are met. There seems to be a prospect of agreement on the principle of having a single liquidity sub-group, subject to sufficient safeguards being defined, especially in terms of procedure and conditions of application. The proposed Regulation contains a requirement to apply liquidity intra-group treatment where the single liquidity sub-group has not been established. The proposed solution has very similar features to the single liquidity sub-group issue. Some Member States, however, are of the view that there are no safeguards foreseen within the suggested procedure. The structure of liquidity supervision is subject to further examination. Leverage ratio requirement: the proposed Regulation foresees an obligation to disclose the leverage ratio from 2015, before decision is taken whether it becomes a binding measure upon amendment of the Regulation. On this issue, some Member States are of the opinion that such disclosure might have a negative impact on market participants and should be postponed till the leverage ratio calibration requirements are completed. Collaboration between competent authorities in cases of branch supervision: overall, the Presidency is in a position to note an agreement on the principle that supervision of branches of credit institutions should at all times remain efficient and effective. Further work: following the discussions, the Presidency notes that some of Member States have concerns about definition of own funds, in particular the treatment of significant investments in insurers and the "substance over form" approach on Common Equity Tier I capital, and more work is required in this area. Moreover, the Presidency is of the view that further work is also needed on, inter alia, countercyclical buffers, the sanctioning regime, requirements linked to corporate governance, etc. The Permanent Representatives' Committee is invited to recommend that the Council to invite the incoming Presidency and Member States to continue work, with a view to reaching an agreement on a compromise text to advance towards negotiations with the European Parliament, in order to reach an agreement by June 2012.

PURPOSE: to strengthen prudential requirements for credit institutions and investment firms that relate strictly to the functioning of banking and financial services markets and are meant to ensure the financial stability of the operators on these markets as well as a high level of protection of investors and depositors. PROPOSED ACT: Regulation of the European Parliament and of the Council. BACKGROUND: the extent of the financial crisis has exposed unacceptable risks pertaining to the current regulation of financial institutions. According to IMF estimates, crisis-related losses incurred by European credit institutions between 2007 and 2010 are close to €1 trillion or 8% of the EU GDP. In order to restore stability in the banking sector and ensure that credit continues to flow to the real economy, both the EU and its Member States adopted a broad range of unprecedented measures with the taxpayer ultimately footing the related bill. In this context, by October 2010 the Commission has approved €4.6 trillion of state aid measures to financial institutions of which more than €2 trillion were effectively used in 2008 and 2009. The level of fiscal support provided to credit institutions needs to be matched with a robust reform addressing the regulatory shortcomings exposed during the crisis. Priorities and challenges: it should be noted that one of the priorities of the Commission in the reform of EU financial services regulation has been to ensure that the banking sector is able to fulfil its fundamental purpose, namely lending to the real economy and providing services to citizens and businesses in Europe. The proposal is designed to tackle regulatory shortcomings in the following areas: Management of liquidity risk: existing liquidity risk management practices were shown by the crisis to be inadequate in fully grasping risks linked to originate-to-distribute securitization, use of complex financial instruments and reliance on wholesale funding with short term maturity instruments. Definition of capital: institutions entered the crisis with capital of insufficient quantity and quality. Given the risks they faced, many institutions did not posses sufficient amounts of the highest quality capital instruments that can absorb losses effectively as they arise and help to preserve an institution as a going concern. Counterparty credit risk: the crisis revealed a number of shortcomings in the current regulatory treatment of counterparty credit risk arising from derivatives, repo and securities financing activities. It showed that the existing provisions did not ensure appropriate management and adequate capitalisation for this type of risk. Options, discretions and harmonisation (entire Regulation): in 2000, seven banking directives were replaced by a single Directive. This directive was recast in 2006 while introducing the Basel II framework in the EU. As a result, its current provisions include a significant number of options and discretions. Moreover, Member States have been permitted to impose stricter rules than those of the Directive. As a result, there is a high level of divergence which is particularly burdensome for firms operating cross-border. It also gives rise to the lack of legal clarity and an uneven playing field. Action at international level: the G20 Declaration of 2 April 2009 on Strengthening of the Financial System called for internationally consistent efforts that are aimed at strengthening transparency, accountability and regulation by, improving the quantity and quality of capital in the banking system once the economic recovery is assured. In December 2010, the Basel Committee on Banking Supervision (BCBS) issued detailed rules of new global regulatory standards on credit institution capital adequacy and liquidity that collectively are referred to as Basel III. This proposal directly relates to the regulatory standards included in Basel III. At the same time, in the process of developing this legislative proposal, the Commission has made particular efforts in making sure that certain major European specificities and issues are appropriately addressed. Creating a new legal framework: Directive 2006/48/EC relating to the taking up and pursuit of the business of credit institutions and Directive 2006/49/EC on the capital adequacy of investment firms and credit institutions ("institutions") have been significantly amended on several occasions. Many provisions of Directives 2006/48/EC and 2006/49/EC are applicable to both credit institutions and investment firms. In order to ensure a coherent application of those provisions, it would be desirable to merge these provisions into new legislation applicable to both credit institutions and investment firms. For sake of clarity, the provisions of the Annexes to those Directives should be integrated into the enacting terms of this new legislation. That new legislation should consist of two different legal instruments, a Directive and this Regulation. Together, both legal instruments should form the legal framework governing the access to the activity, the supervisory framework and the prudential rules for credit institutions and investment firms. This Regulation should therefore be read together with the Directive. IMPACT ASSESSMENT: altogether, 27 policy options have been assessed and compared with a view to addressing the various issues identified. Preferred options are as follows: ·        Introduce Liquid Coverage Ratio (LCR) adopted by Basel Committee subject to observation period.  ·        Introduce Net Stable Funding ratio (NSFR) adopted by Basel Committee subject to observation period. ·        Modify eligibility criteria and regulatory adjustments based on Basel approach, with some adjustments for EU specificities. ·        Enhance Counterparty credit risk (CCR) requirements and differentiate treatment of exposures to Central Counterparties. ·        Introduce leverage ratio. ·        Conduct extensive monitoring of leverage ratio. ·        Conservation capital buffer. ·        Maximum harmonization with some exceptions. ·        Limit scope of the CRD and propose a regulation. Cumulative impacts of the proposed package are as follows: this proposal together with CRD III is estimated to increase the risk-weighted assets of large credit institutions by 24.5% and of small credit institutions by a modest 4.1%; the need to raise new own funds due to the new requirement and the conservation buffer is estimated to be €84 billion by 2015 and €460 billion by 2019; there are clear net long term economic benefits of an annual increase in the EU GDP in the range of 0.3%-2%. They stem from a reduction in the expected frequency and probability of future systemic crises; the proposal would reduce the probability of a systemic banking crisis in seven Member States within the range of 29% to 89% when credit institutions recapitalise to a total capital ratio of at least 10.5%. LEGAL BASIS: Article 114(1) TFEU provides a legal basis for a Regulation creating uniform provisions aimed at the functioning of the internal market. CONTENT: the proposed Regulation streamlines the prudential requirements for credit institutions and investment firms, which are currently set out in two different Directives (2006/48/EC and 2006/49/EC), in one legal instrument, which considerably simplifies the applicable legal framework. The individual policy measures proposed are as follows: Management of liquidity risk: To improve short-term resilience of the liquidity risk profile of financial institutions, a Liquidity Coverage Ratio (LCR) will be introduced after an observation and review period in 2015. LCR would require institutions to match net liquidity outflows during a 30 day period with a buffer of 'high quality' liquid assets. The outflows covered (the denominator) would reflect both institution-specific and systemic shocks built upon actual circumstances experienced in the global financial crisis. The provisions on the list of high quality liquid assets (the numerator) to cover these outflows should ensure that these assets are of high credit and liquidity quality. Based on the LCR definition included in Basel III, compliance with this requirement in the EU is expected to produce net annual GDP benefits in the range of 0.1% to 0.5%, due to a reduction in the expected frequency of systemic crises. To address funding problems arising from asset-liability maturity mismatches, the Commission will consider proposing a Net Stable Funding Ratio (NSFR) after an observation and review period in 2018. Definition of capital: The proposal builds upon the changes made in CRD2 to strengthen further the criteria for eligibility of capital instruments. Furthermore, it introduces significant harmonisation of the adjustments made to accounting equity in order to determine the amount of regulatory capital that it is prudent to recognise for regulatory purposes. This new harmonised definition would significantly increase the amount of regulatory capital required to be held by institutions. The new requirements for going concern regulatory capital - Common Equity Tier 1 and Tier 1 capital - would be implemented gradually between 2013 and 2015. The new prudential adjustments would also be introduced gradually, 20% per annum from 2014, reaching 100% in 2018. Grandfathering provisions over 10 years would also apply to certain capital instruments in order to help to ensure a smooth transition to the new rules. Counterparty credit risk: Requirements for management and capitalisation of the counterparty credit risk will be strengthened. Institutions would be subject to an additional capital charge for possible losses associated with the deterioration in the creditworthiness of a counterparty. Risk weights on exposures to financial institutions relative to the non-financial corporate sector will be raised. The proposal would also enhance incentives for clearing over-the-counter instruments through central counterparties. Leverage ratio: in order to limit an excessive build-up of leverage on credit institutions' and investment firms' balance sheets and thus help containing the cyclicality of lending, the Commission also proposes to introduce a non-risk based leverage ratio. As agreed by BCBS, it will be introduced as an instrument for the supervisory review of institutions. The impacts of the ratio will be monitored with a view to migrating it to a binding pillar one measure in 2018, based on appropriate review and calibration, in line with international agreements. Single rule book (entire Regulation): the proposal harmonises divergent national supervisory approaches by removing options and discretions almost altogether. Some specific well defined areas, where divergences are driven by risk assessment considerations, market or product specificities and Member States' legal frameworks, are exempted, allowing Member States to adopt stricter rules. BUDGETARY IMPACT: EBA will play an important role in achieving the objective of this Regulation, as the proposals ask it to develop more than 50 binding technical standards (BTS) on various policy issues. BTS – which would eventually be endorsed by the Commission – will be key to ensure that provisions of highly technical nature are implemented uniformly across the EU and that the proposed policies work as intended. For this significant workload, EBA would need more resources than those already provided within the context of its establishment under Regulation (EU) 1093/2010. Further details are set out in the attached legislative financial statement. DELEGATED ACTS: the proposal contains provisions empowering the Commission to adopt delegated acts in accordance with Article 290 of the Treaty on the Functioning of the European Union.