The Ministry of Finance has prepared a bill implementing the CRD V directive and CRR II regulation. The new EU legislation brings changes affecting mainly the banking sector as it revises the rules of capital adequacy and capital reserves and introduces the stricter regulation of financial holding companies.
The EU regulator has been preparing the member states’ banking sectors for possible hard times ahead. The banking package aiming to reduce risks on the EU level is now on the agenda of Czech legislators as well. The proposed effective date of the act implementing CRD V and CRR II is 29 December 2020. Below, we comment on the most important changes.
First, the rules to calculate Pillar 2 capital requirements will change. Apart from changing the conditions under which the CNB may impose additional capital requirements, the bill introduces the possibility for supervisory bodies to indicate to institutions the level of capital that they expect them to hold in excess of the capital requirements and reserves, i.e. to give capital guidance. This will be a ‘soft’ requirement by the supervisory bodies, providing them with a new, less strict and formal tool than an additional capital requirement. However, repeated failure to comply may result in a ‘hard’ requirement to increase Pillar 2 capital.
Another change will concern capital reserves: the bill introduces the possibility to create a capital reserve to cover systemic risks, depending on the types of exposures defined in the bill. The rates of capital reserves for other systemically important institutions have been modified as well.
The bill is also to introduce a duty to establish an ‘intermediate parent undertaking’ for large non-EU groups that include at least two subsidiary institutions established in the EU. The regulation aims to facilitate the supervision of these groups and improve the entities’ chances to withstand crises.
Changes will also affect the regulation of financial holding companies and mixed financial holdings, as a financial institution (typically a bank) controlled by a holding entity may not always be able to ensure that requirements are met on a consolidated basis across the group. To ensure compliance with prudential requirements on a consolidated basis, controlling persons will be subjected to the supervisory bodies’ direct jurisdiction.
Finally, the rules for the remuneration of financial institution staff will change, with more emphasis being placed on gender equality and proportionality principles.