EN    EN EN 
 
EN    EN  COMMISSION OF THE E UROPEAN COMMUNITIES 
Brussels, 13.7.2009 
SEC(2009) 975 final 
  
COMMISSION STAFF WORKING DOCUMENT 
Accompanying document to the 
 
Proposal for a 
 
DIRECTIVE OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL 
 
amending Capital Requirements Directive on trading book, securitization issues and 
remuneration policies 
 
SUMMARY OF THE IMPACT ASSESSMENT 
 
[COM(2009) 362 final] 
[SEC(2009) 974] 
 
EN 2   EN 1. BACKGROUND  
The financial crisis has prompted a broad EU and international (G20, the Financial Stability 
Forum, the Basel Committee) effort to identi fy the reasons behind the problems and develop 
effective policies to tackle them head-on. In the buoyant years preceding the turmoil, credit 
institutions aggressively took ri sks that turned out to be not adequately captured by capital 
requirements, including the risks contained in  the trading book. In or der to achieve higher 
capital ratios considered appropr iate by market participants, ba nks have had to seek fresh 
capital in a difficult economic environment that, in turn, led to tightening of their lending 
standards, exacerbating negative cyclic al trends in the real economy.  
In tackling another aspect of the high propens ity to aggressive risk taking, the Commission 
has already issued a Recommendation on remune ration policies in the financial services 
sector explaining the role these arrangements played in precipitating the financial crisis1. The 
Commission Communication2 accompanying it set out additional steps necessary for their 
more effective implementation, referring to a need to modify the Capital Requirements 
Directive3 (CRD) in order to bring banks' and inve stment firms' remuneration policies and 
their link with risk manageme nt clearly within prudential  oversight laid out under the 
Directive. 
2. STAKEHOLDER CONSULTATION  
– The Commission discussed possible improvements to the current legislative text at the 
CRD working group, whose members are nominated by the European Banking Committee, three times in spring of 2009. 
An online public consultation on proposed draft  revisions to trading book and securitization 
provisions ran from March 25 until April 29, 2009. The comme nts were generally supportive 
of the objectives of the Commission's draft propos als. With regard to proposed treatment of 
trading book and securitization activities, throughout the project the Commission has 
followed and participated in the work of international forums, the Basel Committee in 
particular.  
A separate online public consultation on a pro posed draft of remune ration policy provisions 
ran from April 29 until May 6, 2009. Twenty three responses were received from a wide range of stakeholders including banking, insura nce and asset management sectors, national 
supervisory and regulatory authoritie s as well as worker trade unions  
                                                
 
1 Commission Recommendation on remuneration policies in the financial services sector (C(2009) 
3159/2) 
2 Communication from the Commission accompanying Commission Recommendation complementing 
Recommendations 2004/913/EC and 2005/162/EC as regards the regime for the remuneration of 
directors of listed companies and Commission Recommendation on remuneration policies in the 
financial services sector (COM(2009) 211/2) 
3 Consisting of Directive 2006/48/EC relating to th e taking up and pursuit of the business of credit 
institutions and Directive 2006/49/EC on the capital adequacy of investment firms and credit 
institutions 
 
EN 3   EN 3. PROBLEM DEFINITION  
3.1. Capital Requirements for Trading Book 
Credit institutions and investment firms ('institutions') may calculate their capital 
requirements for market risk using their intern al 'value-at-risk' (VAR ) models under Annex V 
of Directive 2006/49/EC. Market risk  is the risk of losses due to price fluctuations of financial 
instruments in the trading book, the trading book comprising thos e instruments held for short-
term resale or to hedge other financial instrume nts that are held for short-term resale. Under 
the current provisions, institutions' VAR models shall provide an assessm ent of the loss that 
would not be exceeded with a 99% confidence leve l if the institution held on to its portfolio 
over a 10-day horizon. 
However, VAR models are based on short periods  of historical data which may not capture 
relevant market stress episode s. In addition, VAR models' a ssumption of independent returns 
did not hold at times of market  stress when correlations between risk factors increased. 
Therefore, capital requirements  as determined by using VAR models were not robust enough 
to absorb potential trading book losses and cont ributed to the sub-op timal level of risk 
management. Resultant swings in capital position exacerbated procyclicality of bank lending and investment with negative imp lications for the real economy. 
Additional losses were caused by the fact that trading book charge for de fault risk currently 
does not capture the credit rating migration risk
4 and by the absence of a robust institutions' 
internal modelling methodology for default and mi gration risk for securi tization positions in 
the trading book. 
3.2. Capital Requirements for Re-securitization Positions 
Annex IX Part 4 of Directiv e 2006/48/EC sets out the risk  weights determining capital 
requirements for securitisation positions in ba nks' non-trading books. In most cases, banks 
will determine capital requirements for securiti sation positions by reference to the external 
rating of the securitisation positions. However, so  far, no distinction is being made between 
normal securitisation positions and re-securitisation positions that have other securitisation positions as underlying assets. As a result, ca pital required for re-sec uritizations does not 
adequately reflect their higher risk compared to 'normal' securitisations.  
In April 2008, the IMF estimated that mark-t o-market losses on the Collateralized Debt 
Obligations (CDOs) of US sub-prime and alt-A mortgage backed securities incurred by the 
euro area and UK banks totalled $32 billion, with losses for banks globally reaching $153 
billion
5, assuming on average 60% loss on these instruments since the preceding year. 
Deterioration in bank capital positions, driven by losses from re-securitizations, exacerbated 
procyclicality of bank lending with follow-on negative implications for the real economy. 
3.3. Disclosure of Securitization Risks 
Annex XII of Directive 2006/48/EC sets out disc losure requirements that banks, subject to a 
materiality threshold, have to make about their risk positions. There is  a dedicated section on 
securitisation risks, however this section currently only requires information on securitisation risks in the banking, not  in the trading book. 
                                                
 
4 Risk of losses due to credit rating downgrades 
5 IMF, Containing Systemic Risks and Restoring Financial Soundness  ,Global Financial Stability Report, 
April 2008 
 
EN 4   EN As more and more banks kept posting more  and more losses relating to securitisation 
positions, market confidence in banks' stability declined further and further.  
3.4. Remuneration Schemes 
The impact assessment accompanying th e recent Commission Recommendation on 
remuneration policies in the financial services sector examined in detail the shortcomings of the remuneration arrangements pr evalent in the financial servi ces industry and explained the 
role these arrangements played in  precipitating the financial crisis
6. These shortcomings were 
shown to pertain to the structure of remune ration policies and in appropriate corporate 
governance systems. Furthermore, the ensuing ri sks to the institutions themselves and, more 
generally, to financial stability were not subj ect to adequate oversi ght by supervisors.  
However, since a recommendation is not a legall y enforceable instrument, there is a case in 
the context of prudential superv ision for a legally binding EU instrument reinforcing the role 
of the supervisors and empowering them to assess the remuneration schemes of certain 
regulated financial institutions in a broader cont ext of sound risk management so that relevant 
policy objectives are achieved more effectively. Th ere is also a possibility that in the absence 
of binding EU legislation there might be a poten tial for regulatory arbitrage, if companies 
chose to relocate jurisdictions where the Recommendation does not apply.  
4. OBJECTIVES  
The overarching goal of this initiative is to ensure that the effectiveness of bank capital 
regulation in the EU, represented by the Capita l Requirements Directive,  is strengthened and 
any of its excessive pro-cycli cal impacts on the real economy are contained while maintaining 
the competitive position of the EU banking indust ry. This translates into the following four 
general policy objectives to:  
– Enhance financial stability; 
– Enhance safeguarding of creditor interests; 
– Ensure international competitiveness of EU banking sector; 
– Reduce pro-cyclicality of the financial system. 
In light of the problems outlined, ten operationa l objectives have been identified to address 
the problem drivers. Effective realization of such operational objectives should contribute to 
the achievement of the longer term specific objectives aiming at enhancing adequacy and 
minimizing cyclicality of capital requirements, eliminating regulatory arbitrage opportunities, 
reinforcing bank risk management, improving inve stor understanding of bank risk profile and 
enhancing legal clarity. In turn, this should facilitate the atta inment of the general policy 
objectives.  
5. POLICY OPTIONS , IMPACT ANALYSIS AND COMPARISON  
Altogether, fourteen different  policy options have been designed, impact-assessed and 
compared with a view to addressing the various i ssues identified in the analysis. This section 
describes the expected impacts of policy measures in each area. 
                                                 
6 For more in-depth description and analysis of the problems please see the impact assessment 
accompanying the recommen dation (SEC(2009) 580) 
 
EN 5   EN 5.1. Trading Book 
With respect to capital requirements for bank trading books, the following targeted 
amendments will be introduced to re spond to the individual problems: 
– Adding an additional capital buffer based on stress scenario VAR to  the ordinary VAR. 
This change may be expected to roughly double the trading book ca pital requirements 
given the current environment.  
– Extending the existing charge for default risk in  the trading book to capture losses short of 
issuer default, e.g. rating downgrades, to addre ss in particular the fact  that losses on traded 
debt most of the time did not involve issuers actually defaulting. The overall impact of this 
change on the capital requirements will depe nd on how banks portfolios will adjust in 
terms of composition to the post-crisis environment. 
– Basing the charge for securiti sation positions in the trad ing book on the (simple) risk 
weights that already exist for the banking book, addressing the methodo logical difficulties 
of modelling.  
Such enhancement of the adequacy of bank capit al requirements is of a paramount importance 
in order to enhance financial stability and minimize any exce ssive procyclicality of the 
financial system.  
5.2. Re-securitizations 
Capital requirements for re-securitization positions  of banks will be increased. In line with the 
approach developed by the Basel Committee, fo r every credit rating grade, re-securitization 
positions would be assigned a higher risk weight  than other securitisatio n positions, with such 
higher risk weights being set in accordance with a higher risk of unexpected impairment losses.  
For particularly complex re-securitizations , the proposals would reinforce both the due 
diligence requirements and the supervisory process to enforce them. The supervisors will have to establish on a periodic basis whether due d iligence standards for in vestments in certain 
types - as identified in advance by the Committ ee of European Banking Supervisors (CEBS) - 
of highly complex re-secu ritizations have been adequately met. For these instruments, a 
general deduction from capital requirement would apply unless bank s demonstrate that 
necessary due diligence standards have been  met. In instances, where compliance with 
required due diligence is found to be inade quate, institutions would be debarred from 
investing in such instruments in the future.  
5.3. Disclosure of Securitization Risks 
Disclosure requirements would be enhanced in several areas such as securitization exposures 
in the trading book and sponsorship of off-balance sheet vehicles. 
These changes will improve inve stor understanding of bank risk profile and, by allowing 
market participants to exert discipline, would also reinforce bank risk management incentives. 
The incremental administrative burden for the EU banking industry is estimated at €1.3 million per year and is expected to fall mostly  on larger institutions with more advanced 
approaches to risk management. 
5.4. Supervisory Review of Remuneration Policies 
The proposed amendments will impose a bi nding obligation on credit institutions and 
investment firms to have remuneration policie s that are consistent with effective risk 
management. The relevant principles will be se t out in the CRD, but will be closely aligned 
with those set out in the Recommendation on re muneration policies in the financial services 
 
EN 6   EN sector. For the practical appl ication of this binding oblig ation, the guidelines on sound 
remuneration polices developed by CEBS w ill be also highly relevant. All national 
supervisors will be able to apply both financia l and non-financial sanctions against firms that 
fail to satisfy supervisors that they comply w ith the relevant principles in a way that is 
appropriate to their internal structure and business model.  
Making the relevant principles of the Reco mmendation binding will enhance compliance with 
them at a company level; therefore, there might be an impact on attracti ng or retaining talent 
at the overall sector level which might have  negative short-term implications for the 
international competitiveness position of EU firms. It is essential to underline, however, that a more effective implementation of the relevant  principles of the Recommendation certainly 
implies a trade-off that includes long-term be nefits for the industry stemming from improved 
risk management outcomes and, more importantly, broader benefits in te rms of a more stable 
and less procyclical financial system.
 
5.5. Cumulative Impact of Proposed Amendments 
An estimated $1.4 trillion could be lost in asse t writedowns by European banks as a result of 
the current crisis. These losses together with  ensuing negative consequences for the real 
economy will be shouldered – to a varying degree – by different stakeholder groups, ranging 
from shareholders of financial institutions to taxpayers. In light of th e lessons learned, it is 
crucial to review certain aspect s of bank regulation so  that the risk of losses of this scale 
occurring in the future is contained. Such containment constitutes the overarching and the most material expected benefit (or cost sa ving) of the proposed amendments and by far 
outweighs the costs that accompany them.  
The improvements that are being proposed ai m to render the CRD framework more robust, 
leading to more effective risk management ince ntives and practices, more adequate and less 
volatile bank capital requirements and enhanced  disclosure of bank risk positions to the 
market participants. At the level of individua l stakeholder groups and systemic concerns, the 
expected benefits of th e proposals are as follows: 
– Enhancements to the regulatory capital framewor k - in terms of more  adequate and less 
cyclical capital requirements t ogether with strengthened pub lic disclosure requirements - 
should provide the EU banking industry
 with appropriate incen tives for improving their 
risk management as well as their internal governance and control systems and procedures. 
As a result, not only the long-term viability of  EU banks but also their competitive position 
vis-à-vis their interna tional peers in the long run would be enhanced. 
– The proposed revisions will enhance the effectiveness of supervisors ' monitoring of the 
risks that financial instituti ons are exposed to by providing  more legal clarity on banks' 
obligations with respect to  managing risks stemming from  inappropriate remuneration 
policies; by eliminating regulatory arbitrage opp ortunities allowing banks to apply lower of 
the banking or the trading book cap ital charges and streamlini ng the regulatory treatment 
of securitization positions in banks' trading book. 
– Protection of banks' creditors , including depositors, will be enhanced as improved 
effectiveness of the framework and its supervision wi ll lead to a reduc tion of bank default 
risk. 
– Borrowers , including SMEs , will benefit from a less cyclical nature of bank financing 
allowing them to engage in projects that ar e profitable and vital for the economic growth 
and prosperity. 
 
EN 7   EN – Importantly, by improving the adequacy and curt ailing the cyclicality of regulatory capital 
requirements as well as enhancing risk management incentives for the EU banking institutions, the proposed amendments  will strengthen financial stability
 and mitigate any 
excessive pro-cyclical effects  of bank regulation, indirectly yielding substantial benefits to 
the wide range of social stakeholders , including bank employees (via improved financial 
soundness of their employers), households (e.g., vi a less cyclical availability of credit and 
restored trust in their banks) and taxpayers (via reduced likelihood of bank bailouts in the 
future).  
The overall cumulative impact on co mpliance costs for the industry is expected to be chiefly 
driven by the cost of capital which would have to  be raised in order to comply with revised 
rules. To the extent that, as a result of thei r internal capital planning or credit rating agencies' 
requirements, banks hold capital levels exceedin g regulatory requirements, the impact might 
be partially mitigated by the resultant capital buffers.  
Introduction of proposals that have a direct be aring on the amount of capital that banks are 
required to hold will have to be carefully timed so that any unintended pro-cyclical impacts on the credit supply and, hence, the real economy are avoided or cu shioned in the short-term.  
6. M
ONITORING AND EVALUATION  
It is expected that the proposed amendments will enter into force in 2011. The amendments 
are tightly inter-linked with other provisions of  the CRD, that are in effect already since 2007-
2008, and that will come into effect following CR D revisions that have already been adopted 
by the Council and the European Parliament in 2009 or are foreseen for adoption by the 
Commission later in 2009.  
Measuring the progress of reaching specifi c policy objectives will be aided by the 
Commission's participation in the working grou p of the Basel Committee and the joint task 
force on the impact of the new capital framewor k, established by the ECB and CEBS, that are 
monitoring the dynamics of bank capital positions under the Base l II framework globally and 
in the EU, respectively.