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The package on capital requirements and liquidity management rules for banks — the so-called CRD IV, which transfers, via a regulation (10_{) and a directive (}11_{), the new} global standards on bank capital (commonly known as the Basel III agreement) into the EU legal framework — was published in the Official Journal of the European

Union on 27 June 2013.

The new rules, which apply from 1 January 2014, tackle some of the vulnerabilities faced by the financial institutions during the crisis, namely insufficient levels of capital, in terms of both quantity and quality, which resulted in the need for unprecedented support from national authorities. The timely implementation of the Basel III agreement is one of the commitments made by the EU in the G20.

CRD IV sets stronger prudential requirements for banks, requiring them to keep sufficient capital reserves and liquidity. This new framework will make EU banks more solid, and will strengthen their capacity to adequately manage the risks linked to their activities and absorb any losses they may incur in doing business.

Furthermore, these new rules will strengthen the requirements with regard to the corporate governance arrangements and processes of banks. For example, a number of requirements are introduced in relation to diversity within management, in particular as regards gender balance. In addition, in order to tackle excessive risk- taking, the framework imposes tough rules on variable remuneration.

Legislation for credit rating agencies now in force

Credit rating agencies (CRAs) are major players in today’s financial markets. Ratings have a direct impact on the actions of investors, borrowers, issuers and governments. For example, a corporate downgrade can have consequences on the capital a bank must hold and a downgrade of sovereign debt can make a country’s borrowing more expensive. Despite the adoption of European legislation

on credit rating agencies in 2009 (12_{) and 2011 (}13_{), the developments in the}

context of the euro debt crisis have shown the need for the regulatory framework to be strengthened. As a result, in November 2011 the Commission put forward proposals to reinforce the regulatory framework and deal with outstanding weak-

nesses. The new rules entered into force in June 2013 (14_).

G E N E R A l R E P O R T 2 0 1 3 — C h A P T E R 2

restoring benchmark confidence

The manipulation of the London interbank offered rate (LIBOR) and the Euro interbank offered rate (Euribor) resulted in multimillion euro fines for several banks in Europe and the United States. Allegations of the manipulation of com- modity (e.g. oil, gas and biofuel) and exchange rate benchmarks are also under investigation. The prices of financial instruments worth trillions of euros depend on benchmarks, and millions of residential mortgages are also linked to them. As a result, benchmark manipulation can cause significant losses to consumers and investors, distort the real economy and undermine market confidence.

That is why, in September 2013, the Commission proposed draft legislation to help restore confidence in the integrity of benchmarks. A benchmark is an index (statistical measure), calculated from a representative set of underlying data, which is used as a reference price for a financial instrument or financial contract, or to measure the performance of an investment fund. The new rules will enhance the robustness and reliability of benchmarks, facilitate the prevention and detection of their manipulation and clarify responsibility for and the supervision of benchmarks by the authorities. They complement the Commission’s proposals, agreed by the Parliament and the Council in June 2013, to make the manipulation of benchmarks a market-abuse offence subject to strict administrative fines. All the aforementioned proposals aim at adapting EU rules to the new market reality, notably by extending their scope to include all financial instruments that are traded on organised platforms and over the counter, and adapting the rules to new technology. Since the sanctions currently available to supervisors often lack a deterrent effect, sanctions will be tougher and more harmonised. Possible criminal sanctions were the subject of a separate but complementary proposal on which negotiations between the Parliament and the Council concluded at the end of 2013. This political agreement is due to be confirmed by the Parliament in plenary in 2014.

state aid

The restoration of a healthier financial sector capable of financing the real economy is indispensable for Europe’s recovery. In 2013, the Commission continued to use state aid control to help rebuild a sound financial sector. Even when banks have relied heavily on state aid, they can be allowed to remain in business when there is a realistic prospect that they can return to viability and function without public support in the future. This means these banks have to reduce their size considerably and change their business model substantially to become viable again. The Commission continued in 2013 to ensure that bank support through taxpayers’ money is kept to a minimum, that the banks’ owners bear a sufficient part of the burden of the restruc- turing and that distortions of competition created through state aid are minimised. 40

The special EU state aid crisis rules, in force since 2008, were materially revamped in August 2013 and have been applied since then. The new rules introduce three main changes: firstly, before resorting to taxpayers’ money, banks should tap internal resources and ask for contributions from shareholders, holders of hybrid securities (which combine characteristics of equity and debt) and junior debt holders; secondly, bank recapitalisations or asset relief measures will in general only be allowed after Commission approval of the bank’s restructuring plan; thirdly, a cap on executive pay for all banks in receipt of aid aims to provide the right incentives for management to implement the restructuring in good time and avoid the need for state support, and to implement agreed restructuring plans.

In 2013, the Commission adopted 50 decisions. For example, the Commission approved the restructuring plans of Caixa Geral de Depósitos, BPI and Millenium BCP (all Portugal) (15_{); the liquidation plans of Hypo Alpe Adria Group (Austria) (}16_{) and ATE} (Greece) (17_{); the restructuring plans of several Slovenian banks (}18_{); and the new} Portuguese scheme (19_{) providing state guarantees for banks that guarantee EIB} loans granted to companies in Portugal.