EU Commission Proposes Amendments to CRD IV and CRR: Banks Face Enhanced Governance and Remuneration Requirements

The European Union Commission has unveiled a proposal to amend the Capital Requirement Directive (CRD) IV and the Capital Requirement Regulation (CRR), aiming to strengthen capital adequacy guidelines, governance, and remuneration practices in the banking sector.

Enhancing Reporting Requirements

Under the proposed changes, banks will face enhanced reporting requirements, with a focus on risk management and governance. The European Securities and Markets Authority (ESMA) will conduct theme-based inspections and on-site examinations to ensure compliance with these new standards.

Capital Adequacy Guidelines

In the event of undercapitalization, bank CEOs and boards must notify the Financial Supervisory Authority of Norway (FSAN), which will work with the bank to determine necessary measures. The FSAN has broad powers to address the issue, including calling a general meeting or replacing the board of directors.

If a bank becomes insolvent, the FSAN will notify the Central Bank and the Banks’ Guarantee Fund. In such cases, the Ministry of Finance may decide to place the bank under public administration, with the FSAN serving as resolution authority.

Governance and Remuneration

The proposal introduces new rules governing ownership structures in banks. Entities acquiring a controlling interest must undergo a fit-and-proper test by the Ministry of Finance or FSAN. The concept of “control” is defined as more than 10% of capital, voting rights, or other interests that provide material influence.

Additionally, the proposed amendments will restrict foreign ownership to ensure the independence of financial institutions and prevent private banker activities. No single entity may hold more than 25% of shares in a bank, unless the owner is a financial institution itself.

Implications and Responsibilities

Entities controlling banks must comply with terms of approval granted by the Ministry of Finance or FSAN. Failure to meet these conditions may result in revocation of approval. Shareholders holding a 20% or higher stake may be subject to capital requirements on a consolidated basis.

The proposed changes aim to enhance the resilience of the banking sector, improve risk management, and ensure that banks are better equipped to withstand economic shocks. The European Commission’s proposal is now open for public consultation before its expected adoption in 2023.