CEBS's advice on prudential filters for regulatory capital

Date: 21/12/2004

From January 1st, 2005 European listed companies, at the minimum, will have to publish consolidated financial statements based on the new International Financial Reporting Standards (IFRS) rules. The IFRS accounting developments may affect the magnitude, the quality and volatility of banks' available regulatory capital. As accounting numbers remain the basis for the computation of prudential ratios, this change will have a significant impact on the solvency ratios and, primarily, on the content of own funds.

In response to a request from the Banking Advisory Committee, CEBS has proposed to the European Commission on 19 October 2004 a first set of technical advice on the use of prudential filters in the context of the new IFRS and the proposed Capital Requirements Directive. In addition to the prudential filters proposed to the European Commission, CEBS has developed supplementary prudential filters. CEBS suggests member states to apply the guidelines to institutions applying IFRS for prudential purposes in order to avoid any unwanted change likely to be introduced by the new accounting rules; and that CEBS monitors the application thereof. For consistency purposes, CEBS also encourages member states to consider the need to apply the guidelines to institutions following national GAAP to the extent that they are similar to IFRS.

As the Recasting Directive 2000/12/EC will only be applicable 1st January 2007 onwards, in the meantime, it is the intention of CEBS members to apply CEBS guidelines on prudential filters on a best effort basis for their IFRS based prudential returns on a voluntary and national basis, implemented in accordance with national procedures.

Accounting changes that will have an impact on Own funds have been prioritised. In this regard, the objective of the prudential filters should be to maintain the current definition - and quality - of regulatory capital for those institutions applying IFRS, or institutions following national GAAP to the extent that they are similar to IFRS, for prudential purposes.

In order to reach a common level playing field across Europe and G10 countries CEBS proposals on prudential filters are in line with the Basel Committee's work on the same subject.