The Basel Committee on Banking Supervision agreed on
voluntary financial regulatory standards in 2010 and 2011. These standards have been adopted by the
European Union and implemented under the fourth amendment to the Capital
Requirements Directive (CRD IV). CRD IV
requires financial institutions to increase their reserves to protect against
losses. The implementation deadline was
originally set for March of 2013 but has currently been extended until March
2019. CRD IV allows flexibility in its
implementation while maintaining broad minimum standards.
The financial crisis of 2007 exposed further possible flaws
in the global banking structure. Because
of the crisis, the Basel Committee recommended regulations that require
financial institutions to carry more capital reserves and increase
liquidity. Greater access to liquid
assets, the committee argues, will provide greater security for the institution
during times of economic and financial crisis.
The reserves banks are required to hold are a set percentage of that
institutions risk assets. That
percentage can be increased during stable periods of high growth. Whether it is increased is at the discretion
of the country or regulatory body.
The Basel Committee regulatory standards were drafted based on
voluntary enforcement. CRD IV and its
corresponding European Union regulation give the standards the force of law
across EU member states. Member states
do have discretion on certain aspects of implementation. Not all financial institutions are required
to maintain the same percentage of reserves.
Small and medium sized investment firms may be exempt from implementing
reserve quotas. Large multinational
banks are the focal point of the legislation.
However, the definition of global systemically important institutions is
left up to the national central banks.
Buffers against long term, systemic risk are at the discretion of each
member state.
CRD IV implementation has been extended until March
2019. A phased approach will be
undertaken than what was originally planned.
Milestones will slowly be phased in until full implementation in
2019. Because of this delay, the impact
of CRD IV is partly theoretical at the moment.
An Organisation for Economic Cooperation and Development study predicts
a medium term average drop in gross domestic product of 1%. Such economic output could be offset by a
reduction, or at least a delayed increase, in monetary policy rates. Further, to meet the new reserve and capital
requirements, banks and financial institutions will, most likely, pass that
cost on to customers. As with all forms
of legislation prior to implementation, critics have argued that regulation
will slow grown while others argue that the regulation does not go far enough
to protect consumers, financial institutions, and global markets and economic
systems.
The intended effect of CRD IV is to strengthen the financial institutions that have a multinational or global influence. Ultimately, the aim is to prevent another recurrence of a financial crisis that the world experienced in the 2000s. It is difficult to tell whether CRD IV will succeed in these terms. A global economic downturn will prove the legislation’s worth. But, given the flexibility in implementation, based on local economic conditions, and the maintenance of minimum reserve requirements across the EU, CRD IV stands a fair chance of dampening the fallout of future financial crises.
The intended effect of CRD IV is to strengthen the financial institutions that have a multinational or global influence. Ultimately, the aim is to prevent another recurrence of a financial crisis that the world experienced in the 2000s. It is difficult to tell whether CRD IV will succeed in these terms. A global economic downturn will prove the legislation’s worth. But, given the flexibility in implementation, based on local economic conditions, and the maintenance of minimum reserve requirements across the EU, CRD IV stands a fair chance of dampening the fallout of future financial crises.
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