Prudential Framework for Investment Firms

The prudential framework for investment firms has not undergone any fundamental reform in the last 20 years. It originally aimed at an orderly wind-down of investment firms in case of failure. Following the introduction of the EU revised capital and liquidity standards (comprising Basel 3) in 2014, European policy makers initiated a thorough review of the suitability of the current prudential framework for investment firms. In 2015, policy makers concluded that the current framework is insufficiently risk sensitive and found the administrative burden to be often disproportional. The European Commission issued a call for advice to the European Banking Authority (EBA) that issued a discussion paper in November 2016 proposing new standards to calculate capital and liquidity requirements. Following the advice of EBA, the European Commission has published a proposal for a regulation (IFR) and a directive (IFD) on the prudential requirements for investment firms in December 2017.

Implementation / enforcement 12/2014 - 12/2017
Discussion / consultation 12/2017 - 01/2020

New proposals on prudential standards for investment firms are being discussed at European level.

The prudential regime for investment firms has grown into a complex framework. The proposals present a new prudential regime for investment firms, which distinguishes 3 classes of investment firms as opposed to more than 10 current classes in the current framework. The 3 classes represent 'systemic & bank-like' firms (class 1) and (small) non-systemic firms (classes 2 and 3). Class 1 firms will continue to be subject to the current CRR/CRD IV regime. The classes 2 and 3 investment firms will be subject to the new IFD and IFR.  The proposals contain, amongst other rules, a new appropriate, intuitive and proportionate method to determine capital requirements, which is referred to as the k-factor model. The impact on capital requirements for class 2 and 3 can be positive or negative under the current proposals.

Further information:
EBA Discussion paper: designing a new prudential regime for investment firms
EBA Report: review of the prudential framework for investment firms
EU Commission: Review of the prudential framework for investment firms

Jeroen Heijneman Senior Manager
Categories: Liquidity Capital and Risk