Capital requirements directive (CRD2)
This document looks at the latest capital requirement directive. The capital requirements directive first came into force on 1st January 2007. It was designed to introduce a supervisory framework in the EU to ensure the financial soundness of credit institutions (i.e. banks, building societies and certain investment firms) and reflects the Basel II rules on capital measurement and capital standards..
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The FSA's consultation papers, CP09/29 and CP10/17 set out the proposals for implementing changes, to be applied on 31st December 2010, that are required - following the first major amendments to the CRD (CRD 2 & 3).
Why have the changes been introduced?
The wide range of changes address some of the lessons learned from the financial crisis and follows up on aspects of the Turner Review.
- Improving the quality of firms' capital by establishing clear EU-wide criteria for assessing the eligibility of hybrid capital to be counted as part of a firm‟s overall capital. The proposals specify the features that hybrid capital must have regarding permanence, flexibility of payments and loss absorbency to be eligible as tier one capital;
- Enhancing the management of large exposures by restricting a firm's lending beyond a certain limit to any one party;
- Improving the risk management of securitisation, including a requirement to ensure that a firm does not invest in a securitisation unless the originator retains an economic interest; so called 'skin in the game'; [FSA]
