What is CRD?
The Capital Requirements Directive, often abbreviated to CRD, was originally created in 2006. It was born from the Basel II rules on capital measurement and capital standards. Basel II is the second set of accords issued by the Basel Committee on Banking Supervision. This committee is made from the heads of the G10's central banks and meets four times a year in order to provide advice on the supervision of banks. The Capital Requirements Directive is, therefore, putting the Basel II rules into a legal framework enforceable in all EU member states.
You can read more on the Basel Committee on Banking Supervision at:
http://en.wikipedia.org/wiki/Basel_Committee_on_Banking_Supervision
At its simplest level, the Capital Requirements Directive legislates on the amount of capital which institutions in the financial services industry must hold in order to trade. Basically the Capital Requirements Directive stipulates that the bank must hold a certain percentage of the value of its trading book in real capital. The premise behind this is that, given the spreading and hedging of investments, it will be a very rare occasion when a bank will lose over the given threshold on its investments. If the bank loses anything up to the limit, it can cover losses with the capital held and it should not affect other services, such as the loaning of money.
In the years of growth which preceded the financial crisis, credit institutions took risks that turned out to be not adequately captured by capital requirements. In order to cover the losses made during the downturn, banks have had to seek fresh capital in a difficult economic environment that. This led to tightening of their lending standards, which exacerbated negative cyclical trends in the real economy.
The Capital Requirements Directive aims to try and prevent this from happening again.
Since the beginning of the financial crisis, the Capital Requirements Directive has been amended twice through the finalisation of CRD II and CRD III.
You can read the Commission's staff working document on CRD III at:
http://ec.europa.eu/internal_market/bank/docs/regcapital/com2009/summary_en.pdf
As these new amending versions of the Directive are published it takes on a little more jurisdiction, most of which are relevant to situations previously not thought on, but made apparent due to the financial crisis. For example, CRD III contains rules on how banks are to issue bonuses and pensions. More detail ofSharon's work on this can be found here. Plans are currently underway for the content of CRD IV.
You can read and respond to the European Commission's consultation on further possible changes to the Capital Requirements Directive (CRD IV) at:
http://ec.europa.eu/internal_market/consultations/2010/crd4_en.htm