09 January 2007
The Committee of European Banking Supervisors (CEBS) and the Committee of European Insurance and Occupational Pensions Supervisors (CEIOPS) are publishing today a comparison of the capital instruments that are eligible for prudential purposes in the application of the European banking, insurance and securities regulation. This crosssectoral comparison has been produced by the Interim Working Committee on Financial Conglomerates (IWCFC) at the request of the European Financial Conglomerates Committee. This report was sent to the Commission on 3 January 2007.
In 2006 CEBS and CEIOPS jointly established an Interim Working Committee on Financial Conglomerates, under the chairmanship of Prof. Arnold Schilder of De Nederlandsche Bank, to carry out work on issues related to financial conglomerates and the implementation of the Financial Conglomerates Directive (FCD, 2002/87/EC). The membership of the IWCFC is composed of experts from the national supervisory authorities responsible for the supervision of financial conglomerates.
The objective of regulatory capital is to be available to absorb losses and to ensure the continuity of the business entity and the protection of depositors and policy-holders. On an on-going basis and along with debt, they also fund the entity?s assets. They are an important yardstick for supervisors and market participants to assess the financial and prudential soundness of financial entities.
On the basis of current sectoral Directives, the IWCFC has analysed the main similarities and differences of the characteristics of regulatory capital for a credit institution, an investment firm and an insurance entity. The methods of calculating capital for regulatory purposes are also addressed, with a special focus on the impact of the new International Accounting Standards IAS/IFRS and on the prudential filters.
This factual comparison takes place before the implementation of the Capital Requirements Directive ("Basel II") in Europe and during the process of preparing the new Solvency II regime. In addition, given the increasing importance of new capital instruments combining features of both debt and equity ? commonly referred to as hybrids - the similarities and differences in the nature of these instruments and their regulatory treatments are identified.
Most eligible capital instruments - although ?labelled? differently -are common in the two sectors and share the same core characteristics. The differences that emerged from the analysis can be explained by the differences in the nature of business of each sector, or by differences in the calculation of eligible capital elements and the way they are taken into account at group level. In the next few months, the IWCFC will analyse the impact that differences in the sectoral rules might have for the supervision of financial conglomerates.
To complement this analysis with surveys of national implementations of the sectoral Directives, please refer to CEBS survey available here and to the current CEIOPS work.
The report is published on www.ceiops.org under Publications/Submissions to the EC and on www.c-ebs.org
Franca Rosa Congiu