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Thursday, 25th April 2024 |
| The obstacles standing in the Capital Adequacy Directive’s way |
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| Several key issues relating to the new Capital Adequacy Directive, some as basic as translation of the directive into the myriad of new EU languages, have still to be addressed, writes Paul O’Connor, adding that the Irish Bankers Federation would like to see improved coordination and cooperation amongst national supervisory authorities in the EU before the Directive is finalised. |
IIt is now five years since the Basel Committee on Banking Supervision announced that it was beginning to work on reviewing the original Basel framework. This summer the Basel Committee completed its work with the publication of the new framework in June. But a number of issues remain to be addressed.
The new accord expands the rules for banking into three Pillars addressing Capital Adequacy, Supervisory Review and Market Discipline. The objective is to deliver a set of rules for credit institutions and investment firms which are risk sensitive and take account of the sophistication of the modern industry. Since the summer, the Directive has made its way rapidly through the EU Council part of the co-decision process. This is the process which sees a Directive pass through the dual channels of Council and Parliament.
The Dutch Presidency of the Council set the ambitious target of reaching a ‘political orientation’ on the proposal in December. A political orientation is effectively a political agreement, but a final agreement cannot be reached until the Commission and Council have received and considered the European Parliament’s first reading opinion.
International
It is expected that over 100 countries will implement the revised framework. The United States will apply the new rules on a compulsory basis to ten internationally active banks – a second group will opt to apply the new rules. All other banks will move to a slightly revised version of Basel l. There are concerns amongst this latter group that they will not benefit from the capital reductions afforded by the revised framework leading to unfair competitive distortions in the domestic industry. The US has a different process to the EU with the responsibility for agreeing the new rules left with the US banking agencies and not with Congress.
Implementation of the Directive is scheduled for 1 January 2008 for the advanced approach and from 1 January 2007 for the basic approaches. It is worth noting that the change to 1 January for implementation dates from the previous day of 31 December is one of the amendments which will be passed shortly. This change is to facilitate improved accounting treatment of implementation costs.
Progress of the Directive
The initial expectation was for the Directive to be passed at a single reading in May 2005. A list of amendments has been prepared by the Council Working Group involving ministry and regulator representatives from all member States. However, as the Dutch Presidency has a qualified majority, these amendments are all likely to be passed before the end of the year. The Presidency is also asking Parliament to complete its work on the Directive in time for a May reading. For a number of reasons, this date now looks optimistic. If this date is passed, the Directive will go to a second reading in the late Autumn during the UK Council Presidency.
The major obstacles to progress are as follows:
European Parliament: Following the European Parliament’s show of strength over the appointment of the new Barroso Commission, it is quite likely that it will continue in the same assertive vein. EMAC (European Monetary Affairs) is the Parliamentary Committee responsible for progressing the Directive – Ireland has two MEPs as members of EMAC, Eoin Ryan and Gay Mitchell.
Scope of review: The Rapporteur for the Directive, the German MEP Mr Radwan, who is responsible for progressing the Directive through EMAC, has said that he will be considering all aspects of the Directive, both technical and political. The Council had asked that Parliament focus primarily on the political aspects of the Directive. The rapid pace through Council has not provided time for adequate consultation with industry on key amendments. Some contentious areas may be revisited by the Parliament.
Translations: The delay in making translations of the Directive available is impeding progress. French and German translations are not expected until early 2005 with others to follow. The Chairwoman of EMAC has made it clear that translations in all languages are required in order to be able to proceed satisfactorily. Only recently, discussions at Parliament were suspended due to the non availability of a translator for a Lithuanian MEP.
New EU states: Some of the newer EU States are keen to develop their banking systems further before being exposed to a single market and may adopt a more protectionist stance. Most newer States have a large number of smaller savings and co-operative banks. These compete at a domestic level and are less keen on opening the doors to competition at a European or International level.
Articles v. annexes: Parliament may also seek to challenge the balance between the articles and annexes of the Directive proposal. A shift of requirements from the annexes to the articles would reduce flexibility – maintaining flexibility is a key industry objective.
There is also a risk that the Parliament will concentrate first on other issues that it might regard as less challenging than the new capital requirements framework. With the first Reading scheduled for May, the pace is likely to increase significantly during the first quarter of 2005.
The industry position: The European Bankers Federation (FBE) welcomed the adoption of the Directive proposal. Many improvements and concessions in the Directive have been secured through the industry’s Capital Adequacy Working Group. It is clear that the Directive has benefited from the unprecedented level of consultation by the Commission and the amount of technical work done at both Basel and European levels.
This Working Group was chaired by the Irish Bankers Federation for an eighteen month period up to earlier this year.
Nevertheless, a number of key issues remain where we would like to see further progress:
Improved co-ordination: The Commission’s recognition of the need for improved coordination and cooperation amongst national supervisory authorities in the EU is welcome. The developed role of the consolidating supervisor has already been challenged by Parliament, particularly by the new Member States whose banking industry is largely foreign owned. The role of the consolidating supervisor would be a significant step towards delivering consistency and convergence as it
Respects the role of national supervisory authorities whilst providing a single point of application (e.g. for approval to adopt the Internal Ratings Approach for credit risk) for institutions;
Encourages cooperation by creating incentive for competent authorities to work in full consultation when determining application. Requiring competent authorities to reach an agreed view within 6 months – after which the consolidating supervisor can take its own view on the application – is crucial to effective implementation.
There are, however, some areas where amendment to the Directive proposal is necessary if the objectives of consistency and convergence are to be delivered. These include reducing the number of national discretions and applying the Supervisory Review Process at consolidated group level in the EU.
National discretions: Some of the national discretions in the Directive proposal significantly distort the Single Market without any improvement in the quality of prudential supervision These have the effect of locking in the existing unlevel playing field between Member States, with some applying the rules on a consolidated basis and others on an individual entity basis.
Own funds – Article 69(1): Member States have discretion to decide the level at which the supervision of the adequacy of own funds applies. There is no prudential justification for this approach given the stringent conditions a credit institution must meet to demonstrate that own funds are distributed within the Group. Supervision should be applied at a consolidated level within the EU. Member States were split on this issue and opted for a national discretion following pressure from national supervisors.
Intra-group exposures – Article 80(7): A discretionary approach has been allowed with regard to rules for holding capital against intra-group exposures. This may lead to credit institutions being required to hold capital against certain transactions – without a prudential justification for doing so. Some exemptions apply to this rule, but only where the counterparties reside within the same State. This discretion will produce competitive distortions in the Single Market and lead to higher costs for depositors and borrowers.
Consolidated supervision: The Basel Committee favours supervision at a consolidated (ie: group) level. The industry has argued for supervision at the consolidated level as a rule in the EU, subject to conditions to ensure that own funds are distributed adequately among the parent undertaking and the subsidiaries. The Industry will also argue for the role of the consolidating supervisor to be extended to applying the Supervisory Review Process. If this approach is not adopted, subsidiaries of a group would be subject to inconsistent treatment across the EU.
These areas are likely to feature in the European Parliament review of the Directive and will also be prominent issues when it comes to implementation at a national level. |
Paul O’Connor is head of prudential supervision with the Irish Bankers Federation.
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| Article appeared in the December 2004 issue.
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