The Capital Requirements Directives (CRD) for the financial services industry have introduced a supervisory framework in the European Union which reflects the Basel II and Basel III rules on capital measurement and capital standards. Member States have progressively transposed, and firms of the financial service industry have applied the CRD from 1 January 2007.
The capital framework consists of three Pillars:
- Pillar 1 determines the minimum capital requirements of firms to cover credit, market, and operational risk;
- Pillar 2 requires firms to assess whether they should hold additional capital in respect of any risks not covered by Pillar 1; and
- Pillar 3 requires firms to publicly disclose information relating to their risks, capital adequacy, and policies for managing risk with the aim of promoting market discipline.