Capital Requirements Directive (CRD)

The Capital Requirements Directive, or CRD, is the EU directive that sets out the financial arrangements credit institutions (banks) and investment firms must have in place to ensure they're in a position to weather losses and other problems without risking bankruptcy.

Put more simply, it's the instruction manual that banks and investment firms must follow when setting up their rainy-day funds. Except that, alongside how much and what kinds of financial reserves they must have in place, the directive also lays down rules on governance and obliges firms to submit reports to regulators on an ongoing basis.

The first CRD, known as CRD I, entered into force on 20 July 2006 and was based on standards set out by the Basel Committee on Banking Supervision. It was subsequently revised in 2009, 2010, 2013, 2019, and 2024. Member states' deadline for transposing the latter, called CRD VI, is January 2026.

The most significant revision is the one that took place in 2013. Known as CRD IV, this version implemented Basel III requirements — the standards the Basel Committee on Banking Supervision set out following the 2008 financial crisis. It also replaced the previous regulatory framework with a new one based on three pillars:

• Pillar 1: Minimum capital requirements

  This sets out the minimum amount and quality of capital banks and investment firms must hold to cover credit, market, and operational risk. The general rule is that the minimum must equal at least 8% of their risk-weighted assets. 4.5% — just over half — must be Common Equity Tier 1 capital, which includes:

  • Common shares (ordinary equity issued by the bank)
  • Stock surplus (share premium from issuing common shares)
  • Retained earnings
  • Qualifying minority interests (certain equity held in subsidiaries)
  • Other comprehensive income and reserves

• Pillar 2: Additional capital requirements

  If the minimum isn't enough to cover all the risks a firm is exposed to, the firm may have to hold extra capital. This is an ongoing requirement, meaning firms must carry out regular reviews to make sure their rainy day fund is sufficient.

• Pillar 3: Transparency

  Firms must publish detailed information about the risks they're exposed to, how they manage them, and what capital they have in place which they can draw on should these risks materialize.

The 2019 and 2024 directives, CRD V and CRD VI, are updates, rather than full-blown replacements like CRD IV was.

CRD V introduced stricter conditions for what counts as minimum capital, new rules on management oversight, and a requirement for banks to measure, monitor, and control interest rate risks.

CRD VI deals with ESG risks. It also requires non-EU banks and investment firms to set up local branches or subsidiaries, introduces minimum standards, and gives regulators more supervisory powers.

Interesting facts

• You won't be surprised to hear that many banks weren't happy with CRD and, more specifically, with CRD IV.

  In particular, many argued that a cap on bonuses — 100% of their salary, or 200% subject to shareholder approval — would make it harder for EU-based banks to attract top talent. Banks also argued that fixed salaries would have to increase to compensate for the cap, leading to less financial flexibility: the opposite of CRD IV's gains.

• You also won't be surprised to hear that these fears turned out to be overstated.

  According to a European Commission report published in 2016 — three years after CRD IV came into force — while the new rules did reduce banks' flexibility in the short term, they made up for this through greater stability and resilience.

• CRD has had a significant impact outside the EU.

  Non-EU banks serving EU customers have had to adjust their processes, procedures, and, in many cases, their business models. This has leveled the playing field between EU and non-EU banks.

  Singapore, Switzerland, and other non-EU countries with large banking industries have also taken their cue from the CRD's detailed approach, mirroring in their regulatory frameworks.

Further reading

• The EU Commission's CRD portal is regularly updated with the latest news, including updated technical guidance and links to key documents.

• The 2008 banking crisis has been a key reason for increased banking regulation. This 2023 report takes a comprehensive look at the impacts — positive and negative — of stricter rules on the EU banking sector.