I thank the Chairman and the committee for inviting us to discuss this proposal. The proposal was published earlier this year and is currently subject to negotiation. There has already been considerable negotiation of this instrument, both in preparatory working groups and in Council working groups, where consideration is ongoing. It was considered in great detail at G20 and in Basel III through the Basel committee and at each stage we have been conscious of working with and trying to influence the process so that our interests are represented.
Regarding the CRD legislative framework, there has been a capital requirements directive in place for some time. It was updated in the mid-2000s and further updated as developments in the financial services area occurred, of which there have been many in recent years. This is the third iteration of Basel and the directive is referred to as CRD IV. It is structured slightly differently from other CRD directives in that there is a regulation and a directive. The regulation means that it will have direct effect across the European Union and will become European Union law. The requirements to be met by financial institutions will be equivalent across the European Union. The regulation side is more flexible and focuses on areas of governance and supervision and administrative sanction, where there must be recognition of the wider varying circumstances and environments in member states. In that context, it is structured as part directive and part regulation.
The main objectives of the directive are to implement Basel III, to effect consolidation of previous capital requirement directives and to address some additional supervision and governance arrangements. The main aspects of Basel III, which is being transposed here, are capital requirements. Across the EU, the directive raises the capital requirements to be held by banks against expected losses. This is being raised to a common level across Europe, which is seen as more consistent with requirements based on the experience of the financial crises of recent years. In addition, a capital buffer is provided for. The capital is calculated against risk-rated assets and our Central Bank colleagues can provide more detail on the breakdown of the calculations. On top of the basic capital requirements, there is provision for a capital buffer, which gives room for corrective action to be taken by an institution before it gets down to the bone of breaching its capital requirements, where there are particular difficulties. That buffer is 2.5%.
A second buffer is provided for in CRD, which is a new concept of a countercyclical buffer. The concept is that in times of bubble type growth, a financial institution can be required to increase the buffer in particular areas to try to slow to the expansionary impact of what is going on. That can be further corrected when times are tight by reducing the buffer to allow the banks more flexibility to operate in difficult environments. Within the CRD, they have introduced a liquidity coverage ratio and this recognises a shortfall that was recognised through the financial crisis, that there was no control across Europe on liquidity requirements. We can provide more detail on this. There are also capital requirements for counterparty credit exposures which needed to be addressed. There is also the new concept of leverage ratio. Our experience of the Basel examination has shown us that some banks were over-leveraged. When that was corrected, it had an impact on the ability of these banks to provide credit. It was considered that it was important to try to protect against this happening in the future. The structure of the liquidity requirements and the leverage ratio which are relatively new concepts in bank supervision will necessitate a number of years of observation. After certain requirements are met, there will be a number of years of observation before the final requirement is imposed. We will monitor that observation process and make sure it recognises our needs.
I would like to speak about the supervision regime. Additional provisions are being made in relation to corporate governance. They are focused on the composition of the banks' boards of directors and the range of directorships that can be held by any one person. They also focus on risk management to try to ensure the directors and boards of banks recognise and manage their risks properly. The directive introduces administrative sanctions across the European Union. A significant regime of administrative sanctions has been put in place by the Central Bank. What is being proposed is largely consistent with the regime in place in this country. We are working to deal with any issues that are not consistent. I highlight the additional supervisory powers being provided for. Powers relating to the supervision of the new liquidity regime, in particular, have to be provided for.
There is necessarily a great deal of detail to these changes, over which I have scanned. I have not provided all of the details for the committee. I have highlighted what I see as the innovations and the main matters that arise in the package. I emphasise that, overall, we are reasonably satisfied with the proposal presented by the Commission. It reflects the fact that it has already been the subject of significant analysis and input among member states and industry stakeholders. It has been considered in the European Union and at a wider international level through the Basel and G20 processes. These proposals will require significant changes to the capital positions of European banks. It is important to note that our banks are reasonably well positioned in this respect as a result of the significant capital injections made through the Central Bank's prudential capital assessment review and the liquidity arrangements that resulted from the prudential liquidity assessment review.
The proposed new liquidity requirements will have significant implications for the funding profiles of many European banks. Obviously, they will have a further impact on Irish banks, to some extent. The Central Bank's requirement for significant deleveraging by the Irish banks has gone some way towards meeting the deleveraging and CRD requirements. We are continuing to work with the working committees and groups. As the process proceeds, we will work at a political level. We will work with the European Parliament to ensure the existing proposal can be further refined, where necessary, to enable the Central Bank to fulfil its regulatory functions. We will ensure the impact of the directive will be to provide for the balance and flexibility we consider necessary.
We expect that the Council deliberations will conclude by mid-2012. The target of the European Commission is that the CRD 4 process will be in place by the start of 2013, which is probably a little ambitious. We are working towards achieving that target. After the Council has completed its work, the process will move towards the trialogue stage, when the Council, the Parliament and the Presidency will work together to finalise a directive. The Parliament is working in parallel with the Council. Various contacts with the Council are under way, or will be soon, at rapporteur level.
I have given a broad overview. We will respond to any questions asked and deal with any issues raised.
