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Contents
- Preliminary Material
- Preface
- Series Editors’ Preface
- Contents
- Editors’ Biographies
- Contributors’ Biographies
- List of Abbreviations
- Table of Cases
- List of Legislation and Standards
- Basel Committee on Banking Supervision
- European Union—Level 1 and 2 Legislation
- European Banking Authority Level 3 Guidelines, Opinions, and Recommendations (and Q&A)
- European Central Bank
- European Systemic Risk Board
- Bank for International Settlement
- de Larosière Group
- ECOFIN
- EEA Joint Committee
- European Union
- Financial Stability Board
- G-20
- International Accounting Standards (IAS)
- ICF and Centre for European Policy Studies
- International Financial Reporting Standards
- International Monetary Fund
- IOSCO
- Single Resolution Board
- UNIDROIT
- National Legislation
- Main Text
- Part I Origin and Context of Capital Requirements for European Credit Institutions
- Preliminary Material
- 1 Historical Evolution of Bank Capital Requirements in the European Union
- 1.1 Introduction
- 1.2 Bank Capital Adequacy Requirements as Part of Prudential Banking Regulation
- 1.3 The Gradual Evolution of the Global and the European Union (EU) Bank Capital Adequacy Frameworks until the Outbreak of the Global Financial Crisis (GFC)
- 1.3.1 The international financial standards developed by the Basel Committee on Banking Supervision in relation to bank capital adequacy
- 1.3.1.1 The Basel Committee on Banking Supervision (BCBS)
- 1.3.1.2 The first wave of capital adequacy requirements: the 1988 Basel Capital Accord (‘Basel I’)
- 1.3.1.3 The second wave: the 1996 ‘Amendment to the Basel Capital Accord to incorporate market risks’
- 1.3.1.4 The third wave: the 2004 ‘Basel II Capital Adequacy framework’
- 1.3.2 The impact of the international financial standards in the shaping of EU banking legislation in relation to bank capital adequacy requirements
- 1.3.1 The international financial standards developed by the Basel Committee on Banking Supervision in relation to bank capital adequacy
- 1.4 From the ‘Basel II’ Capital Adequacy Framework to the ‘Basel III’ Regulatory Framework after the Global Financial Crisis (GFC)
- 1.5 An Overview of Key Provisions of the ‘Basel III’ Framework and Current Developments
- 1.5.1 Systematic classification
- 1.5.2 Amendments and additions to the applicable regulatory framework governing the capital adequacy of banks
- 1.5.3 New micro-prudential rules
- 1.5.4 New macro-prudential rules
- 1.5.5 Provisions on banks’ minimum equity capital
- 1.5.6 Recent and current developments
- 1.6 The Incorporation of the Basel III Regulatory Framework into EU Banking Law
- 1.6.1 The new banks’ capital adequacy framework of 2013 in the context of the Banking Union
- 1.6.2 The legislative acts incorporating the Basel III framework and amendments thereto
- 1.6.3 The system of rules on the ‘three pillars’ of the regulatory framework
- 1.6.4 The provisions of the CRR on the minimum own fund requirements
- 1.6.5 The impact of the current pandemic crisis: the ‘CRR quick fix’
- Part II Qualitative Capital Requirements
- Preliminary Material
- 2 The Definition of Common Equity Tier 1 Capital and of Contingent Capital
- 3 The Use of EU Regulations to Establish Qualitative Requirements in the Fields of Banking Supervision and Resolution: Their impact on civil law and corporate relationships
- 3.1 The Proliferating Use of EU Regulations in the Area of EU Financial Services Regulation
- 3.2 Principles Traditionally Governing the EU Legislator’s Regulatory Approach
- 3.3 The Differences between EU Regulations and EU Directives
- 3.4 Causes for the Increased Use of EU Regulations Instead of EU Directives
- 3.5 The Consequences of this Proliferation
- 3.6 Select Qualitative Requirements under Revised CRR and SRMR and their Impact on Civil Law and Corporate Relationships
- 3.7 Prior Permissions Regimes
- 3.8 Conclusions
- 4 Qualitative Capital Requirements and their Relationship with MREL/TLAC
- 4.1 Introduction
- 4.2 The Relevance of the Loss-absorbing Capacity of Bank Capital and Debt
- 4.3 Qualitative Capital Requirements for Own Funds and TLAC/MREL Instruments
- 4.13
- 4.3.1 Loss absorption in going concern scenarios
- 4.3.2 Loss absorption in gone concern scenarios
- 4.4 Interrelation of Capital Components
- Part III Quantitative Capital Requirements
- Preliminary Material
- 5 The Construction of the Total Risk Exposure Amount and the Relationship with the Combined Buffer Requirements
- 5.1 Introduction
- 5.2 The Evolution of the Total Risk Exposure Amount
- 5.3 The TREA in CRR
- 5.3.1 Article 92(3) and (4) CRR
- 5.3.2 Credit risk (banking book)
- 5.3.3 Counterparty credit risk
- 5.3.4 Market risk for position risk and large exposure risk (trading book)
- 5.3.5 Market risk for foreign-exchange risk, commodities risk, and settlement risk
- 5.3.6 CVA risk for OTC derivatives
- 5.3.7 Operational risk
- 5.4 Relationship of TREA with Combined Buffer Requirements
- 5.5 Leverage Ratio
- 6 The Definition of Default, Loss Distribution, Expected and Unexpected Loss, and Provisioning in the Context of Credit Risk
- 6.1 Introduction
- 6.2 The Loss-absorbing Function of Bank Capital
- 6.3 Manifest Losses, Expected Losses, and Unexpected Losses
- 6.4 The Capital Conservation Buffer as Superlative to Cover for Unexpected Losses
- 6.5 The Definition of Default in European Banking Law
- 6.6 Credit Risk Adjustments
- 6.7 Revisions to CRR to Address Non-performing Exposures
- 6.8 Conclusion
- 7 Credit Risk Weighting—SA and IRB Approaches
- 7.1 Evolution of the BCBS Standards in Respect of Credit Risk
- 7.2 Standardized Approach, Foundations, and Developments
- 7.2.1 Origins in Basel I
- 7.2.2 Processing the SA in European legislation
- 7.2.3 Implementing in Europe the changes to the SA of the Basel III-Reform
- 7.2.3.1 Introduction
- 7.2.3.2 Due diligence and avoidance of automatic reliance on external credit ratings
- 7.2.3.3 Risk weightings of sovereigns and PSEs
- 7.2.3.4 Risk weightings of ‘institutions’
- 7.2.3.5 Risk weightings on corporates
- 7.2.3.6 Risk weightings on retail exposures
- 7.2.3.7 Real estate exposures
- 7.2.3.8 Risk weightings on miscellaneous asset categories
- 7.3 Internal Ratings-based Approach, Foundations, and Developments
- 8 Credit Risk-Mitigation Techniques and Credit Risk Protection
- 8.1 Introduction
- 8.2 Developments in the Regulation of CRM
- 8.2.1 Limited recognition of CRM in Basel I
- 8.2.2 Comprehensive CRM framework in Basel II
- 8.2.3 Transposition of Basel II in European law
- 8.2.4 No major corrections in the CRM rules as a result of Basel III
- 8.2.5 Developments in Europe in respect of CRM after the financial crisis of 2007/2008
- 8.2.6 Concluding remarks as to CRM regulation
- 8.3 General Principles of Credit Risk Mitigation
- 8.3.1 Overarching principles for all CRM techniques
- 8.3.2 No higher risk-weighted exposure after applying CRM
- 8.3.3 No double counting of credit protection
- 8.3.4 Generic affirmation of CRM effectiveness for SA and IRB approaches
- 8.3.5 Repos, securities, or commodities lending
- 8.3.6 Multiple forms of CRM
- 8.3.7 Maturity mismatch
- 8.3.8 Legal effectiveness and enforceability
- 8.3.9 Proper risk management
- 8.3.10 General principles funded credit protection
- 8.3.11 General principles unfunded credit protection
- 8.3.12 Full credit risk assessment underlying exposure
- 8.4 Funded Credit Protection
- 8.4.1 The general principles of funded credit protection translated to detailed rules
- 8.4.2 Eligible collateral
- 8.4.3 Additional eligibility for collateral under the IRB approach
- 8.4.4 Requirements for other funded credit protection
- 8.4.5 Concluding remarks on funded credit protection
- 8.5 Unfunded Credit Protection
- 8.5.1 Introductory remarks
- 8.5.2 The substitution of risk-weight mechanism
- 8.5.3 Eligibility of protection instruments applied
- 8.5.4 Eligibility of protection providers
- 8.5.5 Requirements for unfunded credit protection
- 8.5.5.1 General outline
- 8.5.5.2 The credit protection must be direct
- 8.5.5.3 Clearly defined and incontrovertible
- 8.5.5.4 No clauses outside direct control of the lender
- 8.5.5.5 No unilateral cancellation
- 8.5.5.6 No increase of cost
- 8.5.5.7 Payments in timely manner
- 8.5.5.8 Abbreviation of maturity
- 8.5.5.9 Legally effective and enforceable
- 8.5.5.10 Risk-management requirements
- 8.5.6 Additional requirements for guarantees
- 8.5.7 Mutual guarantee schemes and counter-guarantees
- 8.5.8 Additional requirements for credit derivatives
- 8.5.9 Replacement LGD by that of protection provider
- 8.6 Calculating the Effects of CRM
- 9 Capital Treatment of Securitizations
- 9.1 Overview of Prudential Treatment Securitizations
- 9.2 Evolution in the BCBS Standards
- 9.3 Adopting the Basel Capital Standards in Europe
- 9.3.1 Brief historical overview
- 9.3.2 Transposition of Basel II
- 9.3.3 Introducing the revised BCBS securitization standards of 2014
- 9.3.3.1 General construction of European legislation
- 9.3.3.2 Capital relief rules for ABCP and single securitization transactions
- 9.3.3.4 Hierarchy of methods (SEC-IRBA, SEC-ERBA, and SEC-SA) in Europe
- 9.3.3.5 Determination of KIRB and KSA, Article 255 CRR
- 9.3.3.6 Tranche thickness, Article 256 CRR
- 9.3.3.7 Maturity, Article 257 CRR
- 9.3.3.8 SEC-IRBA—Articles 258–260 CRR
- 9.3.3.9 SEC-SA—Articles 261–262 CRR
- 9.3.3.10 SEC-ERBA—Articles 263–264 CRR
- 9.4 Significant Risk Transfer Rules in Europe
- 10 Position Risk and Market Risk Measures Fundamental Review of the Trading Book
- 10.1 Introduction
- 10.2 Market Risk Measures: Thirty Years of Debate
- 10.3 FRTB: A Helicopter Tour for ‘Quants’
- 10.4 The Standardized and Internal Model Approaches in FRTB
- 10.5 The Question of Value and Risk Factors
- 10.6 The Question of Risk Coverage: Backtesting and Profit and Loss Attribution (PLA)
- 10.7 Prospects of the New Regulation
- 10.8 Transposition of the BCBS Standards in European Law
- 11 Netting and Capital Markets Driven Transactions as Credit Risk Mitigation
- 11.1 Introduction
- 11.2 Funded Credit Protection
- 11.3 Financial Collateral
- 12 Operational Risk in the Capital Requirements Framework for Banks
- 12.1 Introduction
- 12.2 Current Approaches
- 12.3 New Operational Risk Framework
- 12.4 EBA Policy Advice of 2019 on the Proposed Amendments of CRR
- 12.5 Disclosure Requirements
- 12.6 Principles for the Sound Management of Operational Risk
- 12.7 Conclusion
- 13 Capital Conservation Buffer and Countercyclical Capital Buffer
- 13.1 Introduction
- 13.2 Historical Background
- 13.3 The Regulatory and Legislative Framework on the CCoB and the CCyB at International and EU Level
- 13.4 The Implementation of the CCoB and the CCyB in the EU
- 13.5 The post-SSM Institutional Framework for Macro-prudential Policy in the EU
- 13.6 The Macro-prudential Policy Setup for the SSM Member States
- 13.7 The Macro-prudential Policy Setup at EU Level
- 13.8 State of Play and Future Prospects for the CCoB and the CCyB
- 13.9 Conclusion
- 14 Capital Buffers for Systemically Important Banks and the Systemic Risk Buffer
- 14.1 Introduction
- 14.2 Systemic Risk, Macro-Prudential Policy, and Capital Buffers
- 14.3 G-SII and O-SII Buffers
- 14.4 Systemic Risk Buffer
- 14.5 Interrelationship between Buffer and Other Capital Requirements
- Part IV Liquidity Supervision and Requirements
- Preliminary Material
- 15 Liquidity Risk and its Management: The LCR and NSFR
- 16 Covered Bonds and Securitization Positions as HQLA
- 16.1 Introduction
- 16.2 Definition and Purpose of HQLA
- 16.3 Eligibility of Covered Bonds as HQLA under the Basel and EU Frameworks
- 16.4 Eligibility of Securitizations as HQLA under the Basel and EU Frameworks
- 16.5 Preferential treatment of covered bonds and securitizations to take account of ‘Union specificities’
- 16.6 Covered Bonds Directive: Harmonizing the Conditions for the Issue of Covered Bonds in the EU
- 16.7 Conclusion
- Part V Supervisory Review and Evaluation Process and Pillar 2 Capital
- Preliminary Material
- 17 The ECB Guide to Internal Liquidity Adequacy: A Principles-Based Approach
- 18 Supervisory Review and Evaluation Process (SREP) in the Context of the Exercise of Supervisory Powers and Extraordinary Measures
- 18.1 SREP: Legal Basis and Interaction with Pillar 2 Capital Requirements
- 18.2 SSM SREP Methodology and its Outcomes in Terms of Capital
- 18.3 Supervisory Powers and Other Extraordinary Measures Based on the SREP Findings
- 18.4 Supervisory Powers and Other Extraordinary Measures Based on the SREP Findings (II). The Relationship with Early Intervention and Resolution
- 19 Stress-testing in Banking in the EU: Critical Issues and New Prospects
- 19.1 Introduction
- 19.2 EU Stress Testing: Concept, Origins, and Regulatory Framework
- 19.3 The EU-wide Stress Test: Implementation, Outcome, and International Comparisons
- 19.4 EU-wide Stress Tests: Some Possible Improvements over the Next Few Years
- 19.5 Conclusion
- Part VI Reporting and Disclosures
- Preliminary Material
- 20 Applying Proportionality to the Prudential RegimeReporting and Disclosure Requirements for Smaller Banks
- 20.1 Introduction
- 20.2 Prudential Requirements and the Demand for Proportionality
- 20.3 Proportional Application of the Prudential Norms under CRD V/CRR II
- 20.4 Proportionality and Differentiation of Reporting Requirements
- 20.4.1 Prudential reporting
- 20.4.2 Disproportionality of reporting requirements: dimensions of the problem
- 20.4.3 Structure and scope of the reporting requirements
- 20.4.4 Concretization of the reporting framework by the EBA
- 20.4.5 Proportionality of the reporting framework under the CRR
- 20.4.6 Layers of proportionality in CRR II’s provisions on reporting
- 20.4.7 Cost of compliance study
- 20.5 Proportionality and Differentiation of Disclosure Obligations
- 20.6 Integration of Banks’ Information-related Obligations
- 21 Applicable Accounting Principles, IFRS, Local GAAP, and Compatibility with Prudential Reporting
- 21.1 Introduction
- 21.2 Consolidation under IFRS and Prudential Consolidation
- 21.3 Own Funds, Prudential Filters, Own Funds Deductions, and their Interdependencies with Financial Accounting
- 21.3.1 Introduction
- 21.3.2 Determination of own funds on the basis of the applicable accounting framework
- 21.3.3 Prudential filters
- 21.3.4 Deductions from Common Equity Tier 1 items
- 21.46
- 21.3.4.1 Losses for the current fiscal year
- 21.3.4.2 Intangible assets
- 21.3.4.3 Deferred tax assets
- 21.3.4.4 Negative amounts resulting from the calculation of expected loss amounts
- 21.3.4.5 Defined benefit pension fund assets
- 21.3.4.6 The applicable amount of insufficient coverage for non-performing exposures
- 21.4 Accounting for Expected Credit Losses under IFRS 9 and Capital Requirements for Credit Risk
- 21.79
- 21.80
- 21.81
- 21.4.1 The expected credit loss model under IFRS 9
- 21.4.2 Expected loss under CRR II and calculation of IRB excess and IRB shortfall
- 21.4.3 Commonalities and differences between regulatory expected loss and IFRS 9 expected credit losses
- 21.4.4 The impact of the applicable accounting framework’s impairment rules on own funds requirements and own funds
- 21.5 Conclusion
- Part I Origin and Context of Capital Requirements for European Credit Institutions
- Further Material
