Financial Crime World

EU Regulators Introduce Tougher Capital Requirements for Banks

In a bid to strengthen financial stability across the European Union, regulators have introduced stricter capital requirements for banks. Regulation (EU) No 575/2013 (CRR), also known as CRD IV and CRR, sets out minimum requirements for capital and liquidity that banks must maintain.

Capital Adequacy Requirements

The regulation introduces a number of new minimum requirements, including:

  • A common equity tier 1 ratio of at least 4.5%
  • A tier 1 ratio of at least 6%
  • An overall capital ratio of at least 8%

These ratios are fully binding and if breached, can lead to the withdrawal of a bank’s licence.

In addition to these minimum requirements, the regulation also introduces four types of capital buffers:

  • Capital conservation buffer
  • Institution-specific countercyclical capital buffer
  • Systemic risk buffer
  • Buffer for systemically important institutions

These buffers aim to provide a more formal framework for contingent capital arrangements and are designed to vary depending on the existence of cyclical and structural systemic risks.

Enforcement

The Swedish Financial Supervisory Authority (SFSA) is responsible for overseeing and enforcing compliance with the capital adequacy framework. This includes:

  • Reviewing periodic reports submitted by banks
  • Conducting ad hoc investigations

Undercapitalisation

If a bank becomes undercapitalised, it will be subject to restrictions on distributions, such as dividend payments. The SFSA may also reduce the share capital of the bank, incurring losses for direct shareholders.

Foreign Ownership

There are no restrictions on foreign ownership of banks.

Implications for Controlling Entities

Controlling entities must be approved by the SFSA and will be subject to stricter regulations. If a controlling entity becomes insolvent, it may be liable for any losses incurred by the bank.

The regulation also introduces new requirements for financial holding companies and mixed financial holding companies, which will be subject to consolidated supervision by the SFSA.

Conclusion

The introduction of these tougher capital requirements aims to strengthen financial stability across the European Union. Banks must now maintain higher levels of capital and liquidity to ensure they are better equipped to withstand economic shocks. The regulation also introduces stricter regulations for controlling entities, aimed at protecting the integrity of the financial system.