These and other resolution changes (including the relationship between MREL and regulatory capital) are explained in greater detail in our separate client alert.Д¬RR2 brings holding companies within the supervisory perimeter and submits them to a requirement to obtain вЂњapprovalвЂќ from a groupвЂ™s consolidating supervisor. CRR2 achieves this by aligning the EUвЂ™s regime on minimum requirements for own funds and eligible liabilities (MREL) вЂ“ as it applies to G-SIBs вЂ“ with the international standard. However, CRR2 contains important provisions implementing the international standard on total loss absorbing capacity (TLAC) for EU G-SIBs.

TLAC for G-SIBsД«RRD2 (and in the Banking Union, SRMR2) are the key parts of the package relating to resolution. The relationship between mandatory Pillar 2 add-ons and supervisory expectations to hold more capital (so-called Pillar 2 Guidance) is clarified. Notably, Pillar 2 requirements will only be used to address micro-prudential risks, not macro-prudential ones. Changes to Pillar 2Д¬RR2 and CRDV overhaul the approach to institution-specific (Pillar 2) capital add-ons. The new approach is more risk sensitive, providing better recognition of hedging, netting, diversification and collateral. Counterparty credit riskД¬RR2 constitutes the EUвЂ™s implementation of the new Basel standardised approach to counterparty credit risk (SA-CCR). Nonetheless, for affected third country groups, the IPU requirement will present a significant restructuring challenge. In the final text the IPU regime has been softened slightly, with an asset threshold of в‚¬40bn, no automaticity for G-SIBs and scope for the requirement to be satisfied through the use of two IPUs where necessary to satisfy the structural separation rules of a third country.

Intermediate parent undertakings for third country groupsДЄ controversial element of the CommissionвЂ™s original legislative proposal for CRDV was a requirement for certain large third country groups to establish an intermediate parent undertaking (IPU) in the EU by the end of 2023. Since work on FRTB is continuing at the level of the Basel Committee, the new framework will only be implemented as a binding capital requirement in the EU at a later date, subsequent to a separate legislative proposal from the Commission. Initially the new framework will only apply as a reporting requirement. Market riskД¬RR2вЂ™s new approach to market risk reflects the Basel CommitteeвЂ™s Fundamental Review of the Trading Book (FRTB). The NSFR has been calibrated with a view to avoiding disruption to EU covered bond, derivatives and repo markets with discrete divergences from the international standard. Unlike the liquidity coverage ratio (which focuses on the quality and liquidity of institutionsвЂ™ assets) the NSFR focuses on the liabilities side of the balance sheet and is designed to ensure that exposures are broadly matched with stable funding sources. Net stable funding ratio (NSFR)Д¬RR2 imposes a net stable funding requirement. Unlike the Basel standard, CRR2 allows initial margin to reduce the exposure measure when applying the leverage ratio to derivatives. An additional leverage ratio buffer will apply to global systemically important institutions (G-SIIs). The new rules impose a binding leverage ratio requiring institutions to maintain Tier 1 capital of at least 3% of their non-risk-weighted assets. However, the EUвЂ™s implementation deviates from Basel standards in a few areas and some components of CRR2/CRDV are unrelated to international standards but instead aim to drive forward the EU Banking and Capital Markets Unions. Many of the changes made by CRR2 and CRDV continue the EUвЂ™s implementation of internationally agreed Basel standards. What are CRR2 and CRDV?Д¬RR2 and CRDV amend the Capital Requirements Regulation (CRR) and Capital Requirements Directive (CRDIV), which provide the legal architecture for the prudential regulation of banks in the EU. Although the changes ostensibly apply to CRR investment firms as well as banks, many EU investment firms will soon be removed from the scope of the CRR with the introduction of the new Investment Firms Regulation and Directive.Д¬lick here for a more detailed discussion of CRR2/CRD V and here for an analysis of the resolution related parts of the package.

Most changes will start to apply from mid-2021. The revised rules on capital and liquidity (CRR2 and CRDV) and resolution (BRRD2 and SRMR2) were published in the Official Journal on 7 June following a legislative process which began at the end of 2016.

Sa ccr