Regulation of banks has changed significantly since the global financial crisis, creating substantial demands on firms, both large and small. This article describes some of the key regulatory changes that the EU's Capital Requirements Regulation CRR2 / CRD 5, which will be implemented in the UK mostly with effect from 28 June 2021, will introduce.

Banks? responses to support their customers impacted by Covid-19 make the current operating environment challenging at best. To support economic activity and jump start infrastructure investment, some of the elements (notably both the SME and the Infrastructure Projects Supporting Factors) included in CRR2 have been brought forward as part of the ?CRR Quick Fix? which became effective on 27 June 2020. Both of these supporting factors mean that the risk exposure amounts are now lower, so less regulatory capital is required to support them. These supporting factors are a positive step to help the economy, but firms will be required to make adjustments to their systems to ensure that exposures are treated correctly and reported appropriately.

A minimum leverage ratio requirement of three per cent will be introduced for all firms regulated by the Prudential Regulation Authority (PRA). It is recognised that some larger institutions may already be subject to the PRA leverage ratio framework so this change could have little effect. From 1 January 2023, global systemically important institutions (G-SII) will be required to maintain additional capital (?G-SII leverage ratio buffer?) of 50 per cent of the G-SII buffer rate, multiplied by the firm's Total Risk Exposure Amount.

The introduction of this three per cent minimum requirement supports regulators? views that a minimum capital requirement should be achieved by all firms regardless of risk density. A leverage ratio is seen as a valuable metric to assess a firm's capital adequacy, regardless of the risk weightings of its different portfolios.  

MREL
CRR2 is introducing two minimum requirements on own funds and Eligible Liabilities (MREL) that are applicable to global systemically important firms.

1. 18 per cent of the Total Risk Exposure Amount (16 per cent until 31 December 2021)
2. 6.75 per cent of leverage ratio exposures (six per cent until 31 December 2021)

Strengthening of the capital position and reducing the risk of taxpayer bail-out, can only be welcomed. These measures should help to provide the economy with stronger and more credible systemic firms capable of delivering support to businesses as well as individuals in this incredibly challenging period.

Also, capital related, CRR2 will apply ?grandfathering? to Additional Tier 1 and Tier 2 capital instruments until 28 June 2025. Only those issued before 27 June 2019 (satisfying all other conditions for regulatory capital) and not allowing conversion to equity or write down, but permitting set off, will be affected. To avoid a lower level of qualification as regulatory capital, firms will obviously be required to make appropriate changes, in line with business models and this regulation.

The existing standardised methods to calculate the counterparty credit risk exposure are to be revised and will mean that the Mark to Market calculation will be replaced by the new Standardised Method (SA-CCR). A simplified SA-CCR is to be introduced and will be available where a firm's on and off balance sheet derivative business is no more than:

• ten per cent of the firm's total assets
• 300 million euros.

The Original Exposure Method (also a standardised method) will be permitted where a firm satisfies the above conditions, but at five per cent and 100 million euros respectively.

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