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Views sought on new capital miles Back  
The EU has entered the campaign to push for changes to the capital adequacy arrangements for banks and investment firms. At the end of November, the European Commission launched consultations on a new capital adequacy framework. Member states have been invited to make comments on the proposals by the end of March 2000. It is proposed that these consultations will generally take place ëat the national level via the appropriate competent authorities - the Central Bank of Ireland - but the Commission will also be willing to receive comments directly from European level federations and consumer or industry associations.

This consultation exercise complements the consultation undertaken by the Basel Committee on Banking Supervision which was launched in June 1999. Both projects are, according to the Commission, based on the concept of minimum capital requirements, supervisory review and the potential of market discipline as an aid in strengthening and encouraging safe and sound banking practices.

The consultation paper addresses several risk-related issues, including risk weighting as it relates to credit risk. Two possible strategies are outlined to ensure that the economic risk of financial transactions is better captured by capital charges: an approach based on institutionsí internal credit assessment systems, and a revision of the standardised credit risk weighting scheme.

A new approach to risk mitigation is also suggested whereby common underlying risks or economic effects would be treated in a consistent manner. On other risks, the paper recognises that the current framework is based largely on credit risks and market risks and suggests that this should be extended to include, for example, operational, legal and reputational risk. It is also suggested that a specific charge for interest rate risk could be considered.

While various options for these areas and others are all outlined in the paper, responses to the consultative procedure are expected to colour the final framework when it eventually appears.

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