Regulatory Reporting: Basel III

Background: Basel III

In addition to explicit new regulatory reporting requirements, Basel III includes the Basel II framework agreement, "International Convergence of Capital Measurement and Capital Requirements" from 2004, as well as subsequent decisions of the Basel Committee on Banking Supervision. Thus, the Basel Committee already reacted (in 2009) to the financial crisis with an initial set of measures and stricter regulations. This amendment to Basel II is known colloquially as "Basel II Plus" or "Basel 2.5". In the EU, this was adopted as the 2010 "Capital Requirements Directive CRD III": adjustments to Pillar 2 were included in market risk amendment 2009, and remuneration requirements were realized with the institutional remuneration review in 2010. In Pillar 3, additional enhanced disclosure requirements were added to allow market participants a clearer understanding of banks' overall risk profile.

On April 17th 2013, the European Parliament adopted the CRD IV/CRR (Capital Requirements Directive IV / Capital Requirements Regulation); the new rules are expected to take effect starting on January 1st of 2014. The CRD IV package should provide for improved quantitative and (especially) qualitative capital holding for banks. It will also establish a harmonized liquidity requirements throughout the EU. The final rules for liquidity coverage ratios (LCR) were published in January of 2013.

The CRR Regulation is directly applicable throughout the EU and is primarily aimed directly at institutions. However, existing national law must be adapted to any conflicting provisions. This applies especially in Germany: German credit law ("Kreditwesengesetz", KWG), solvency regulation ("Solvabilitätsverordnung", SolvV), and large exposure and credit regulation ("Groß- und Millionenkreditverordnung", GroMiKV). The CRR enacts the quantitative and disclosure requirements in Basel III. The CRR regulates, for example, the definition of capital, and minimum capital and liquidity requirements. The regulation also provides, for the first time, a method to calculate and report a debt ratio (or leverage ratio) as a basis for which regulatory authorities may assess an institution. From 2015 on, institutions will be required to publish their leverage ratio.

The CRD IV Directive, which each EU member state must implement in its own national law, primarily includes provisions for national supervision. In addition, it features the qualitative requirements of Pillar II for in-house assessment of capital adequacy (Internal Capital Adequacy Assessment Process - ICAAP), and the supervisory review and evaluation process (Supervisory Review and Evaluation Process - SREP). The implementation of CRD IV also affects German credit law (KWG) and solvency regulation (SolvV), and German regulation on institutional remuneration (Instituts-Vergütungsverordnung, InstitutsVergV). German consolidated financial statements reconciliation regulation ("Konzernabschlussüberleitungs-Verordnung", KonÜV) and German fee regulation will be repealed by this framework.

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