European Union: Update On The Transposition Of The CRD With Respect To Credit Institutions

The 2008 financial crisis revealed vulnerabilities in the regulation and supervision of the banking system at both a global and a European level, leading to the review of the capital adequacy standards of the Basel Committee on Banking Supervision ("the BCBS"). As a result, in December 2010, the BCBS issued new global regulatory standards on bank capital adequacy and liquidity, which are collectively referred to as Basel III. The EU implemented Basel III into its legal framework through, inter alia, Directive 2013/36/EU ("the CRD") and Regulation (EU) No 575/2013 ("the CRR"), together known as the CRD IV package, which form part of a single set of harmonised prudential rules referred to as the Single Rule Book. The CRD IV package, which became applicable as of the 1st of January 2014, deals with some of the vulnerabilities shown by credit institutions and investment firms during the financial crisis, namely, the insufficient level of capital, both in quantity and in quality, and sets stronger prudential requirements for credit institutions and investment firms, requiring them to keep sufficient capital reserves and liquidity. Mainly as a result of the financial crisis, banks and investment firms may not all have had sufficient amounts of capital, and the capital they actually had was sometimes of poor quality as it was not readily available to absorb losses as they materialised. Moreover during the financial crisis, public funds had to be used to support various EU institutions to prevent them from defaulting. The CRD IV package makes EU banks and investment firms more solid and strengthens their capacity to adequately manage the risks linked to their activities, and absorb any losses they may incur in doing business.

The provisions of the CRD with respect to credit institutions were transposed into local legislation mainly through the amendment of the Banking Act (Chapter 371 of the Laws of Malta) ("the Act"), as well as through the introduction of various legal notices issued thereunder, which entered into force on the 10th of April 2015. The main amendments made to the Act include changes with respect to the role and composition of the Board of Directors of credit institutions which are considered significant in terms of size, internal organisation and the nature, scope and complexity of their activities, the introduction of the requirement for credit institutions to establish appropriate procedures for employees to report breaches internally and the need to consider the preparation of a recovery plan for situations where such institutions experience a significant financial deterioration. Furthermore, the provisions on large exposures, own funds and capital adequacy have been repealed from the Act, since these are now provided for in the CRR, which is directly applicable, whereas the provisions on supervision on a consolidated basis, as well as the provisions on the supervisory review and evaluation process have also been removed from the Act and are being more comprehensively dealt with in the Banking Act and Investment Services Act (Supervisory Consolidation) Regulations, 2014 and the Banking Act (Supervisory Review) Regulations, 2015, respectively.

Similarly, the provisions relating to criminal offences and administrative penalties have been revised, with administrative penalties being more comprehensively dealt with in the Administrative Penalties, Measures and Investigatory Powers Regulations, 2015, whereas the provisions relating to the right of establishment and the freedom to provide services are being provided for in the European Passport Rights for Credit Institutions Regulations, 2015. In addition, the options and discretions taken by Malta with respect to the provisions of the CRR have been established in the CRR (Implementing and Transitional Provisions) Regulations, 2015, whereas in view of the provisions on capital adequacy which are now provided for in the CRR, the Banking Act (Capital Adequacy) Regulations, 2008 have been repealed.

Moreover, pursuant to the entry into force of the CRD IV package, a number of Banking Rules were repealed or amended. In particular, Banking Rules BR/02/2011, BR/03/2012, BR/04/2013 and BR/08/2012 on large exposures, own funds, capital requirements and capital adequacy, respectively, have been repealed since such provisions are being catered for in the CRR, which is directly applicable, whereas Banking Rule BR/10/2013 on supervision on a consolidated basis has been repealed since such provisions are being provided for in the Banking Act and Investment Services Act (Supervisory Consolidation) Regulations, 2014. Furthermore, Banking Rule BR/07/2014 on the publication of annual reports and audited financial statements has been amended to cater for the provisions of the CRD on country-by-country reporting and public disclosure by credit institutions, Banking Rule BR/12/2015 has been brought in line with the provisions of the CRD on the supervisory review and evaluation process, the internal capital adequacy assessment process, governance and remuneration, whereas Banking Rule BR/15/2015 on capital buffers has been introduced in order to partly transpose the provisions on capital buffers in the CRD. Banking Rule BR/15/2015 is complementary to Directive No. 11 of the Central Bank of Malta on Macro-Prudential Policy, which also transposes, in part, the provisions on capital buffers in the CRD.

Footnotes

1—Directive 2013/36/EU of the European Parliament and of the Council of 26 June 2013 on access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms, amending Directive 2002/87/EC and repealing Directives 2006/48/EC and 2006/49/EC.

2—Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and invest-ment firms and amending Regulation (EU) No 648/2012.

MFSA Newsletter - April 2015

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