30 August 2007
The Committee of European Banking Supervisors (CEBS) and the Committee of European Insurance and Occupational Pensions Supervisors (CEIOPS) are publishing today a report on the possible impact of the differences in the definition of capital instruments provided for by the European banking, insurance and securities regulation, for the supervision of a conglomerate. This assessment has been produced by the Interim Working Committee on Financial Conglomerates (IWCFC) in response to the Commission's call for advice on sectoral rules on eligible capital and analysis of the consequences for supervision of financial conglomerates.
This report follows the first report on the cross-sectoral comparison of the sectoral rules for the eligibility of capital instruments in the regulatory capital published in January 2007.
The impact analysis has been constructed around building blocks necessarily simplifying the complex reality of financial conglomerates and based on fictitious numerical examples.
Like for its first report, the IWCFC has benefited in the course of the exercise from the input and the practical experience provided on an informal basis by experts from conglomerates.
This report focuses on the impact of the key differences flagged by the industry in the January report: the treatment of hybrids (including the limits), the different approaches to deductions, the treatment of unrealised profits and revaluation reserves. The differences in consolidation approaches and methods in each sector were not tested. Instead, the exercise used the three methods of calculation as laid down in the Financial Conglomerates Directive. Like for its first report, the analysis did not consider national implementation of the Directive.
The impact analysis confirms that the key differences identified in the January report can have an impact in the composition and amount of regulatory capital of a financial conglomerate. The Financial Conglomerates Directive (FCD) does not increase, nor alleviate, nor eliminate the differences in capital that are driven by the sectoral differences. This is valid across the three methods of consolidation allowed by the FCD.
The differences in the type of capital elements eligible in each sector and the differences in the limits to the inclusion of eligible items might create distortions and influence the localisation of certain assets or transactions within a conglomerate. Some market participants however pointed out that management decisions are not only driven by the prudential regulation and that there is no strong evidence that financial conglomerates take advantage of these differences.
In the next few months, together with market participants, the IWCFC will reflect on the rationale behind the sectoral differences and how to address these differences in sectoral rules from a financial conglomerates perspective.