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European Commission Responds to Comments on Capital Adequacy Directive
Washington, DC, March 22, 2004 - The European Commission (EC) will propose that capital requirements be tailored specifically for investment firms, including asset management firms, when it drafts the EU’s Capital Adequacy Directive.
Since February 2001, the EC, in cooperation with the Basel Committee on Banking Supervision, has evaluated the EU's capital adequacy framework for banks and investment firms. An EC Capital Adequacy Directive proposal would subject investment firms, UCITS funds, and credit institutions to explicit capital requirements in order to manage operational risk-similar to requirements imposed on banking institutions.
In October 2003, the Institute submitted comments on the EC’s Third Consultation Paper on Capital Requirements for Credit Institutions and Investment Firms, in which the Institute expressed two particular concerns:
- Bank-styled capital requirements are not appropriate for the asset management industry, and
- Use of insurance should be permitted to offset minimum capital requirements.
The EC’s recent announcement that it would tailor the capital requirements for investment firms appeared in a document published by the European Commission that summarizes a range of issues raised by the comments received on its third consultation paper. Specifically, the Commission plans to include a proposal in the directive to permit asset management companies to continue to calculate their minimum capital requirements under the current rules (13 weeks of expenditure) rather than calculate capital for operational risk. As recommended by the Institute, the Commission intends to permit firms that do not qualify for this exception and must use one of the three Basel-based operational risk approaches to not also have to comply with the expenditure-based approach.
On the use of insurance to offset capital, the Commission states that respondents argued for the recognition of insurance under all approaches but that no practical proposal has been made for the recognition of insurance under the two simpler Basel-based approaches. Therefore, the Commission does not intend to alter its approach from the third consultation paper.
The Commission also states that it is continuing to consider an Institute comment that the specific conditions under which Member States may grant waivers to investment firm groups from the requirements to consolidate capital be revised.
- European Parliament Report Recognizes Need to Tailor Capital Adequacy Rules for Asset Management Industry, September 2003
- European Union Takes Additional Steps Toward New Capital Adequacy Framework, July 2003
- Institute Comments on Proposed EU Capital Requirements, January 2003
- European Committee Extends Review of New Basel Accord, January 2002
- European Committee Delays Capital Adequacy Proposals, July 2001
- Institute Comments on EU Proposed Capital Adequacy Standards, May 2001
- Europe Considers Capital Adequacy Framework for Securities Firms, February 2001