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Implementing the New Prudential Rules

CRD IV UPDATE 2013

Next year, 2014, will see the implementation of a new set of ‘Prudential’ rules for financial services businesses such as banks and investment firms. These are the financial rules governing the amount and type of capital that firms must hold according to the type of business they undertake.

The new rules are a key part of the regulatory response to the financial crisis of 2007 - 2008. And they’re likely to impact your business.

There are some changes to the definition of capital. Ordinary share capital remains basically unchanged, but some other types of capital are changing. And two things that could be included previously are now completely disallowed. These are unaudited profits (which were previously allowed as tier 3 capital to support trading book activity) and deferred tax assets (where these can only be realised in the event of future profits).

Additionally, there are new absolute limits on the size of a firm’s gross balance sheet relative to its capital. This is most likely to affect firms engaging in on-balance-sheet activities covered by contractual netting and or good quality collateral.

There are changes to some of the capital calculations for market risk and counterparty risk although several of the more common approaches are substantially the same as before. But for some types of business, it appears that capital requirements may be substantially lower than under the current rules. This may present an opportunity to develop your business in a way that was not previously practical.

One significant implication of the new rules, however, arises from the way they have been made. These are now European rules, common across the whole of the EU. This means that they are not written by the UK regulators but by the EU authorities. Consequently they look and feel different from the old rules. And they bring with them new financial reporting forms. Several of the old FSA000 type returns will be replaced by new EU standard COREP and FINREP reports.

If you’d like to know more about these changes and how they will affect your business, of if you’re interested in the new opportunities they may bring, then as ever we’re here to help. Just contact us in the usual way or send an email to crd-iv@compoundgrowth.co.uk.

The Capital Requirements Directive (CRD IV)