Implementing CRD for investment firms: challenges for Malta
| Date | 09 November 2012 |
| Published date | 09 November 2012 |
| DOI | https://doi.org/10.1108/13581981211279363 |
| Pages | 417-432 |
| Author | Christopher P. Buttigieg |
| Subject Matter | Accounting & finance |
Implementing CRD for investment
firms: challenges for Malta
Christopher P. Buttigieg
Banking and Finance, University of Malta, Msida, Malta
Abstract
Purpose – The purpose of this paper is to review the development of the Capital Requirements
Directive (CRD) and examine the manner in which this has been implemented for investment firms in
Malta. The paper also assesses the challenges that small and medium-sized investment firms may face
as a consequence of the proposed CRD IV, which seeks to safeguard the stability of the European
banking sector.
Design/methodology/approach – A literature review of relevant EU and Malta legislation and
policy documents has been carried out. The arguments made in the paper are the result of the author’s
reflections on the subject and discussions held with other policy experts on capital adequacy in Malta
and the UK.
Findings – The paper considers the CRD from the perspective of small and medium-sized investment
firms and sheds light on the challenges faced by Malta with regards to the implementation of the CRD
for these type of firms. It also examines the approach taken by the Malta Financial Services Authority
in order to address these challenges.
Originality/value – Possiblefuture challenges thatmight arise in view of CRD IV arealso considered.
It is a central argument of this paper that capturing investment firms, particularly small and
medium-sized firms, within the scope of regulation, the main purpose of which is to address systemic
risk, may result in over-regulation.
Keywords Bank, CapitalRequirements Directive,Investment firm, MaltaFinancial Services Authority,
Prudential capitalregulation, Malta, Banking,Regulation
Paper type Research paper
Introduction
The Capital Requirements Directive 2006 (CRD 2006)[1] sets the prudential capital
requirements applicable to banks and investment firms. The requirements have the
purpose of enabling competent authorities to evaluate the adequacy of these financial
institutions’ capital, having due regard to the risks to which they are exposed. It replaced
the Capital Adequacy Directive[2], which was the first piece of European legislation to
set capital requirements applicable to investment firms established in the European
Union (EU). Originally adopted in 2006 with inter alia the aim of implementing the
Second Basel Capital Accord[3], the Capital Requirements Directive has been subject to
considerable changes.
Malta, which joined the EU in 2004, is the smallest Member State by population.
When compared to their peers in other Member States, investment firms established
in Malta are generally of a small or medium size and deal in non-complex type
instruments. Given the size and nature of the business of the investment firms
located in Malta, this country faced various challenges in the implementation of the
The current issue and full text archive of this journal is available at
www.emeraldinsight.com/1358-1988.htm
The author would like to thank Dr Miriam Goldby, Mr Edward Grech and Ms Mellyora Grech for
their comments on the content of the paper.
Implementing
CRD
417
Journal of Financial Regulation and
Compliance
Vol. 20 No. 4, 2012
pp. 417-432
qEmerald Group Publishing Limited
1358-1988
DOI 10.1108/13581981211279363
technically broad Capital Adequacy Di rective, the main challenge being the
simplification of a specialised and technical piece of EU law.
The updating of the European capital adequacy framework applicable to banks and
investment firms is on-going. Indeed, the European Parliament and the Council are
currently discussing another major revision to the Capital Requirements Directive,
known as the proposed Capital Requirements Directive IV (CRD IV)[4]. The CRD IV as
it is proposed will have an impact on investment firms in view of proportionality issues
that arise therefrom.
This paper briefly reviews the development of the Capital Requirements Directive and
examines the manner in which this has been implemented for investment firms in Malta.
It also assesses the challenges that small- and medium-sized firms may face as a
consequence of the proposed CRD IV, which seeks to safeguard the stability of the
European banking sector. It is a central argument of this paper that capturing investment
firms, particularly small- and medium-sized firms, within the scope of an EU Regulation,
the main purpose of which is to address systemic risk, may result in over-regulation.
The paper is divided into four additional sections as follows: Section 1 explains the
rationale for the prudential regulation of investment firms. Section 2 provides an
overview of Malta’s regime for the prudential regulation and supervision of the capital
adequacy of investment firms. It also provides a brief explanation on the characteristics
of Malta’s investment firm industry. Section 3 explains the CRD 2006 and the subsequent
two sets of amendments to this directive, the Capital Requirements Directive II (CRD II)[5]
and the Capital Requirements Directive III (CRD III)[6]. This section also reviews the
manner in which the Capital Requirements Directive has been implemented in Malta.
Section 4 examines the proposed CRD IV and the consequent potential challenges for
investment firms in Malta. Some concluding remarks are made at the end of the paper.
1. Rationale for the prudential regulation of investment firms
Capital adequacy standards foster confidence in the financial markets and should be
designed to achieve an environment in which a securities firm could wind down its business
without loss to its customers or the customers of other broker-dealers and without disrupting
the orderly functioning of the financial markets (IOSCO, 1989).
A stable financial system supplies a favourable business environment for the efficient
allocation of resources and by so doing, supports economic growth.An economy cannot
function without financial intermediation, as companies would not be able to obtain the
necessary liquidityto conduct their business. However, when left to themselves, financial
systems are prone to short periods of volatility and contagion (Davies and Green, 2008).
Financial systems suffer from what is generally defined as systemicrisk[7].
Applying capital adequacy requirements to financial institutions, such as banks
and investment firms, and monitoring compliance with these requirements, is considered
a regulatory and supervisory tool that is considered essential for the stability of the
financial system. Capital adequacy requirements seek to ensure the robustness of
individual institutions and in turn of the financial system at large. It would however be
incorrect to conclude that all investment firms form a threat to the financial system.
Experience suggests that the extent to which an investment firm is systemically
relevant, depends on the size of the particular firm, the nature of the business and
transactions it carries out and the nature, size and reach of its counterparties.
JFRC
20,4
418
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