Download - Relevance of IWCFCs Capital Advice for the Financial Conglomerates Directive Roundtable on the Review of the Financial Conglomerates Directive 8 September

Relevance of IWCFC’s Capital Advice for the Financial Conglomerates Directive

Roundtable on the Review of the Financial Conglomerates Directive

8 September 2008 Brussels

8 September 2008 EFCC Roundtable on FCD2

European Commission’s Call for Technical Advice (No.1) to IWCFC of 12 June 2007: Part A - Comparison of the sectoral rules

(banking/securities versus insurance) for eligibility of capital instruments – published in January 2007

Part B - Impact of the sectoral differences for the supervision of financial conglomerates – published in August 2007

Part C - Recommendations on how to address the sectoral differences – published in April 2008

IWCFC Mandate


Conclusions from Parts A and B

• A lot of commonalities…

• Four main areas of differences:

– Eligibility of hybrid capital instruments– Revaluation reserves/unrealised gains– Deduction of participations/holdings– Consolidation approaches and methods

Part A and B (1)


Conclusions from Parts A and B (continued)

• FCD does not affect the differences in capital that are created by the sectoral differences.

• Sectoral differences can have an impact on the composition and amount of regulatory capital of a conglomerate. In theory, this may create distortions and influence the placing of certain assets or transactions within a conglomerate. However, market participants do not consider this a strong driver for management decisions.

Part A and B (2)


Conclusions from Parts A and B (continued)

• Whether the parent of a conglomerate is a bank or an insurance undertaking only matters under the third FCD method (book value/requirement deduction) which requires that regulatory capital is calculated on the basis of the rules applicable to the parent. This method proved not to be a useful basis for analysis as it does not recognise surpluses in subsidiaries.

• Market participants flagged concerns about the differences in the national implementation of the sectoral directives.

Part A and B (3)


• Enhancement of the level playing field within financial conglomerates and between financial conglomerates and “pure” banking or insurance groups.

• Avoidance of undue burdens for financial conglomerates stemming from the application of different provisions on the banking and the insurance parts of the financial conglomerate.

• Ensuring that the risks stemming from the activities of the conglomerate as a group are adequately covered by regulatory capital.

Part C (Objectives of the Recommendations)


• Inconsistent application of the sectoral rules across the EU seems to create greater problems for financial conglomerates than differing cross-sectoral rules and at the same time complicate further convergence of the cross-sectoral rules.

• Amendments to sectoral provisions that are also relevant from a cross-sectoral perspective should be closely aligned and not conducted in isolation.

Part C (General Conclusions of the Recommendations)


Part C (Recommendations) - Details (1)

• Hybrids– Common principles and requirements for eligibility of

hybrid capital instruments recommended at the sectoral level.

– Harmonisation to be attempted by CRD amendment and Solvency II.

• Revaluation reserves and unrealised gains– Different sectoral valuation methods might justify

different treatment. – No concrete action recommended for the time being. – Follow up with current debate on valuation rules.– Enhance consistency in national application of the

sectoral directives and prudential filters across the EU.


Part C (Recommendations)- Details (2)

• Deduction of holdings/participations– Difference in quantitative thresholds gives

opportunities for theoretical regulatory arbitrage, but there is no clear evidence for such practice.

– Concern raised with regard to different application of qualitative criteria (e.g. durable link).

– Enhance consistency in national transposition of the sectoral directives.


Part C (Recommendations)- Details (3)

• Consolidation approaches and methods– Method 1 (accounting consolidation) as the default

method.– Supervisory authorities should have discretion to

choose adequate method on a case-by-case basis. – Method 3 (book value/requirement deduction) is too

simplistic and leads to distorted calculation results.


Objectives of the FCD

Recitals (1) to (3) of the FCD• Introduction of supplementary supervision of financial

conglomerates on a group-wide basis to address– loopholes in sectoral legislation – additional prudential risks, stemming from the

combination of different licenses in on group• Supplementary Supervision focuses on solvency position,

risk concentration, intra-group transactions, internal risk management processes and fit and proper character of the management.

• Ultimate goal is to ensure financial stability in the EU.


IWCFC Recommendations in the light of the FCD Objectives

• Loopholes/Level Playing Field– Harmonisation of thresholds for deduction of participations /

holdings to avoid possibilities of regulatory arbitrage

– Ensure consistent application of the durable link criteria

– Delete Calculation method 3 as it creates distortions depending on whether the parent of a conglomerate is a bank or an insurance

• Financial Stability– Not affected


Thank you for your attention.

Any questions?

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