Basel III Changes in the Bank Regulatory Framework
The Basel Committee for Banking Supervision has issued international standards under the name "Basel III" that impose strict capital and liquidity rules aimed at increasing the resiliency of the banking sector. The EU directive and regulation built on these standards were transposed into Austrian law in the middle of 2013.
On 20 July 2011, the European Commission submitted a proposal for a directive ("CRD IV") and a regulation ("CRR I") aimed at increasing financial market stability, the ability of financial enterprises to withstand crises, and investor confidence in the financial system. In addition to transposing the "Basel III" international standards of the Basel Committee for Banking Supervision, these two legal instruments also provide for harmonisation of EU bank supervision (single rule book), improved corporate governance by financial firms and a harmonised sanction regime. During ongoing negotiations at the EU level, a provisional political agreement was reached on 27 February 2013 between the Council of the European Union and the European Parliament. Directive 2013/36/EU and Regulation (EU) No. 575/2013 were published in the Official Journal of the EU on 27 June 2013. National transposition took place in July 2013 and the extensive legislative package was published in the Austrian Federal Law Gazette on 7 August 2013 as BGBl. I No. 184/2013. The new rules came into effect on 1 January 2014.
Basel III changes the previous structure and quality of eligible capital. A distinction is now made between "hard" (Core Equity Tier 1) and "additional " (Additional Tier 1) core capital. These types of capital are mainly intended to help institutions absorb losses better. In addition to core capital, eligible capital also includes supplementary capital (Tier 2), which primarily serves to satisfy creditor claims in the case of insolvency. The Basel III capital requirements transposed in the EU by Regulation "CRR I" include strict criteria for each of these capital types that improve the quality of the current capital structure and are intended to ensure that adequate capital is available for stress phases.
In addition to increased capital requirements for institutions, Basel III also introduces a variety of capital buffers. The capital conservation buffer is a permanent mandatory reserve of hard core capital equal to 2.5% of risk-weighted assets intended to cushion losses suffered by institutions. This is different from the institution-specific countercyclical capital buffer, which is a variable reserve intended to reduce the risk due to lending growth during an economic upswing. Specifying the size of this countercyclical buffer is the responsibility of each national supervisory authority. Systemic capital buffers (systemic risk buffers, buffers for systemically important institutions) consisting of hard core capital are also introduced. Systemic risk buffers are a preventative measure to reduce the danger of future severe disruptions of the financial system due to systemic risks or macroprudential risks. Due to the scale and composition of their systemic risk, systemically important credit institutions will be subject to stricter supervisory requirements. At the same time, systemically important institutions will require an additional capital buffer of hard core capital that depends on their level of importance to the global, European or national financial sector and is aimed at improving their ability to withstand crises.
Basel III also aims for a globally harmonised system with regard to quantitative liquidity standards. The goal is to impose new minimum standards that allow banks to compensate for cash outflows themselves during pre-defined stress scenarios. In particular, two different liquidity measures will be used in the future. The liquidity coverage ratio (LCR) is a short-term liquidity measure equal to the ratio of high-quality liquid assets to net cash outflows during a 30-day stress period. The net stable funding ratio (NSFR) is based on a long-term horizon, during which available stable funding must exceed required stable funding.
The leverage ratio was introduced to improve system stability in two ways. First, it was aimed at limiting the risk due to incorrect models being used to calculate the risk of financial instruments (and therefore the capital cover required). Second, an upper limit was introduced for leverage of a bank's capital during boom phases. The leverage ratio is calculated as the ratio of an institution's core capital to the value of its on- and off-balance sheet assets.
Single Rule Book
CRD IV and CRR I are bound by the principles of the EU Better Regulation Strategy. This goal is to be achieved by extensive waiver of member state options for national transposition of CRD IV, promotion of maximum harmonisation and the avoidance of unnecessary administrative costs (gold plating).
CRD IV introduces a limit on the maximum number of management and supervisory board positions held. In addition, it makes it clear that in the future the supervisory board of an institution must collectively have the qualifications needed to fulfil its monitoring and control responsibilities for the institution-specific transactions performed by management. A nomination committee is also introduced that is responsible for preparing recommendations on selecting members of the management and supervisory boards. These are based in particular on whether the individuals concerned have adequate knowledge and skills in the area of banking law for their area of responsibility, and on factors related to diversity. A risk committee must also be established in the future to examine the strategy and risk management of the institution concerned. A further change is that in the future institutions must set up internal procedures for anonymous reports of potential breaches of regulatory provisions (whistle-blowing hotline).
CRD IV leads to a harmonisation of the range of punishments for administrative penalties. In addition to the current options for imposing official measures and administrative penalties, in the future competent authorities must, taking into account certain criteria, publish the names of the natural persons or institutions against which administrative sanctions are imposed. To improve prevention and prosecution of administrative breaches, mechanisms for reporting potential regulatory breaches (whistle blowing) will be introduced at the FMA. Furthermore, it will also be possible to impose administrative penalties against legal entities and the FMA will have a greater list of measures available.