Opinion

CEBS and CEIOPS advice on the recommendations in the definition of capital instruments for financial conglomerates

Date: 07/04/2008

The Committee of European Banking Supervisors (CEBS) together with the Committee of European Insurance and Occupational Pensions Supervisors (CEIOPS) are publishing today recommendations to address the consequences of the differences in sectoral rules on the calculation of own funds of financial conglomerates. These recommendations have been produced by the Interim Working Committee on Financial Conglomerates (IWCFC) at the request of the European Financial Conglomerates Committee. Today, this advice has been sent to the European Commission.

The recommendations are the third and last part of the advice on the cross-sectoral comparison of the sectoral rules for the eligibility of capital instruments in the regulatory capital. The other two parts were published in January 2007 and August 2007.

The recommendations in this advice focus on the four main differences that were gathered during the analysis: the treatment of hybrids, revaluation reserves/latent gains, deduction of holdings and the differences in consolidation approaches and methods foreseen by the Financial Conglomerates Directive.

On the treatment of hybrids the IWCFC proposes to harmonize sectoral rules and that hybrid instruments that meet certain requirements should be eligible for inclusion at the latest, with the implementation of Solvency II in the insurance sector, taking into account both current work of CEBS and CEIOPS.

On the treatment of revaluation reserves and latent gains the IWCFC recommends striving for consistency in the national transposition of the sectoral directives and the national application of prudential filters across the EU.
On the deduction of holdings in banks and insurers the IWCFC sets out the possible directions the alignment of the treatment of those holdings could take without recommending one single option as no regulatory arbitrage has yet been demonstrated.

As for the method to calculate the capital requirement for financial conglomerates the accounting consolidation method is being proposed as the default method. However the supervisory authorities should have the discretion to require companies to use the deduction and aggregation method or a combination of methods.

The IWCFC has extensively consulted with the industry on the need for and justification for potential amendments to the rules on the identification and use of own funds at conglomerate level and thanks all the stakeholders for their input.