The purpose of the draft law 7638, submitted to the Luxembourg Parliament (Chambre des Députés) on 27 July 2020 (the “Draft Law”) is to transpose into Luxembourg law
- Directive (EU) 2019/878 of 20 May 2019 amending Directive 2013/36/EU as regards exempted entities, financial holding companies, mixed financial holding companies, remuneration, supervisory measures and powers and capital conservation measures (“CRD V”); and
- Directive (EU) 2019/879 of 20 May 2019 amending Directive 2014/59/EU as regards the loss-absorbing and recapitalisation capacity of credit institutions and investment firms and Directive 98/26/EC (“BRRD II”).
A brief overview of CRD V and BBRD II
CRD V, the so called capital requirements directive, in particular amends the provisions relating to the measurement of interest rate risk inherent to non-trading book positions, strengthens the supervisory framework for holding companies and creates an obligation for certain third-country banking groups to set up a single intermediary parent company in the European Union.
Additionally, CRD V further integrates the principle of proportionality into banking regulations, notably in the area of requirements applicable to remuneration policies, and reinforces the obligations of cooperation and information exchange between prudential authorities and authorities in charge of the fight against money laundering and terrorist financing.
BRRD II, the bank recovery and resolution directive, for its part, pursues the objective of strengthening the effectiveness of bank resolution in a crisis. To this end, it strengthens the rules on loss-absorbing capacity in order to allow for a restructuring of defaulting institutions that is less onerous for the resolution fund and to better protect depositors and other non-subordinated creditors of banks.
Highlights of the resulting Draft Law
The Draft Law, which mainly amends the Luxembourg law of 5 April 1993 on the financial sector, inter alia strengthens one of the pillars of banking supervision,
i.e. additional capital requirements, by introducing the possibility for the CSSF to impose capital recommendations in addition to capital requirements.
The tools of macro-prudential supervision are reviewed in order to delineate them more clearly those of micro-prudential supervision and to make them more coherent by aligning and simplifying certain decision-making procedures and clarifying the articulation of the different capital cushions.
The Draft Law further aims to adapt the modalities related to the determination of minimum capital requirements and eligible instruments specific to each institution in order to ensure an efficient application of the bail-in tool.
Beyond the transposition of CRD V and BRRD II, the Draft Law includes, inter alia, propositions:
- to strengthen depositor protection by setting up an additional safety net for the benefit of the deposit guarantee fund; and
- to make targeted amendments to other laws, including but not limited to the Luxembourg law of 23 December 1998 establishing a financial sector supervisory commission (“Commission de surveillance du secteur financier”), as amended, with a view to facilitating, where appropriate, the implementation of crisis management mechanisms.