The Capital Requirements Regulation (CRR) is a significant European regulation, specifically referred to as "Regulation (EU) No. 575/2013 of June 26, 2013, on prudential requirements for credit institutions and investment firms and amending Regulation (EU) No. 646/2012." This regulation, also known as, came into effect on June 28, 2018, and plays a central role in the regulation of the banking sector in the European Union.
Together with the provisions of the Capital Requirements Directive IV (CRD IV), the CRR forms a comprehensive framework aimed at implementing the international standards of Basel III within the EU and ensuring the stability of the European financial system.
The CRR establishes detailed requirements for the equity and liquidity of credit institutions and investment firms. It contains provisions for calculating risk-weighted assets, minimum capital requirements, the Liquidity Coverage Ratio (LCR), and the Net Stable Funding Ratio (NSFR), as well as disclosure requirements for financial institutions.
The regulation also provides for the application of various approaches to risk assessment, including the Credit Risk Standard Approach and the Internal Ratings-Based Approach (IRB Approach), to ensure adequate capital backing for credit risks.
The CRR is an essential part of European banking supervision and contributes to ensuring the safety and stability of the European financial sector. It undergoes occasional updates and adjustments to accommodate changing economic and regulatory conditions.
The CRR is currently being adapted as part of the changes to the EU banking package, see also our focus topic "Changes to the EU banking package: Basel IV on its way".
In the context of CRR, some important terms and concepts should be mentioned:
- capital requirements: The CRR stipulates how much capital a bank must hold in relation to its risk-weighted assets. This serves to ensure that banks have sufficient financial reserves to absorb losses and minimise insolvency risks.
- risk-weighted assets (RWA): These are the assets of a bank that are weighted according to different risk categories, depending on how risky they are. The CRR contains detailed rules on the calculation of RWA to ensure that capital is allocated appropriately to the various risks.
- capital buffers: The CRR requires banks to hold additional capital buffers over and above the minimum requirements. These buffers should be utilised in stressful times to ensure financial stability.
- leverage ratio: This is a ratio that measures a bank's core capital to its total assets, without taking risk weightings into account. The CRR sets minimum requirements for the leverage ratio to ensure that banks are not excessively leveraged.
- Liquidity requirements: In addition to capital requirements, the CRR also includes liquidity coverage requirements to ensure that banks are able to service short-term liabilities.
- reporting obligations: Banks are obliged to submit regular reports on their financial situation and capitalisation to the supervisory authorities. This enables the supervisory authorities to monitor compliance with the CRR and take measures if necessary.
