Relevance of IWCFC

1

• Relevance of IWCFCs Capital Advice
• for the Financial Conglomerates Directive
• Roundtable on the Review of the Financial
  Conglomerates Directive
• 8 September 2008
• Brussels

2
IWCFC Mandate

• European Commissions Call for Technical Advice
  (No.1) to IWCFC of 12 June 2007
• Part A - Comparison of the sectoral rules
  (banking/securities versus insurance) for
  eligibility of capital instruments published
  in January 2007
• Part B - Impact of the sectoral differences for
  the supervision of financial conglomerates
  published in August 2007
• Part C - Recommendations on how to address the
  sectoral differences published in April 2008

3
Part A and B (1)

• Conclusions from Parts A and B
• A lot of commonalities
• Four main areas of differences
• Eligibility of hybrid capital instruments
• Revaluation reserves/unrealised gains
• Deduction of participations/holdings
• Consolidation approaches and methods

4
Part A and B (2)

• Conclusions from Parts A and B (continued)
• FCD does not affect the differences in capital
  that are created by the sectoral differences.
• Sectoral differences can have an impact on the
  composition and amount of regulatory capital of a
  conglomerate. In theory, this may create
  distortions and influence the placing of certain
  assets or transactions within a conglomerate.
  However, market participants do not consider this
  a strong driver for management decisions.

5
Part A and B (3)

• Conclusions from Parts A and B (continued)
• Whether the parent of a conglomerate is a bank or
  an insurance undertaking only matters under the
  third FCD method (book value/requirement
  deduction) which requires that regulatory capital
  is calculated on the basis of the rules
  applicable to the parent. This method proved not
  to be a useful basis for analysis as it does not
  recognise surpluses in subsidiaries.
• Market participants flagged concerns about the
  differences in the national implementation of the
  sectoral directives.

6
Part C (Objectives of the Recommendations)

• Enhancement of the level playing field within
  financial conglomerates and between financial
  conglomerates and pure banking or insurance
  groups.
• Avoidance of undue burdens for financial
  conglomerates stemming from the application of
  different provisions on the banking and the
  insurance parts of the financial conglomerate.
• Ensuring that the risks stemming from the
  activities of the conglomerate as a group are
  adequately covered by regulatory capital.

7
Part C (General Conclusions of the
Recommendations)

• Inconsistent application of the sectoral rules
  across the EU seems to create greater problems
  for financial conglomerates than differing
  cross-sectoral rules and at the same time
  complicate further convergence of the
  cross-sectoral rules.
• Amendments to sectoral provisions that are also
  relevant from a cross-sectoral perspective should
  be closely aligned and not conducted in
  isolation.

8
Part C (Recommendations) - Details (1)

• Hybrids
• Common principles and requirements for
  eligibility of hybrid capital instruments
  recommended at the sectoral level.
• Harmonisation to be attempted by CRD amendment
  and Solvency II.
• Revaluation reserves and unrealised gains
• Different sectoral valuation methods might
  justify different treatment.
• No concrete action recommended for the time
  being.
• Follow up with current debate on valuation rules.
• Enhance consistency in national application of
  the sectoral directives and prudential filters
  across the EU.

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Part C (Recommendations)- Details (2)

• Deduction of holdings/participations
• Difference in quantitative thresholds gives
  opportunities for theoretical regulatory
  arbitrage, but there is no clear evidence for
  such practice.
• Concern raised with regard to different
  application of qualitative criteria (e.g. durable
  link).
• Enhance consistency in national transposition of
  the sectoral directives.

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Part C (Recommendations)- Details (3)

• Consolidation approaches and methods
• Method 1 (accounting consolidation) as the
  default method.
• Supervisory authorities should have discretion to
  choose adequate method on a case-by-case basis.
• Method 3 (book value/requirement deduction) is
  too simplistic and leads to distorted calculation
  results.

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Objectives of the FCD

• Recitals (1) to (3) of the FCD
• Introduction of supplementary supervision of
  financial conglomerates on a group-wide basis to
  address
• loopholes in sectoral legislation
• additional prudential risks, stemming from the
  combination of different licenses in on group
• Supplementary Supervision focuses on solvency
  position, risk concentration, intra-group
  transactions, internal risk management processes
  and fit and proper character of the management.
• Ultimate goal is to ensure financial stability in
  the EU.

12
IWCFC Recommendations in the light of the FCD
Objectives

• Loopholes/Level Playing Field
• Harmonisation of thresholds for deduction of
  participations / holdings to avoid possibilities
  of regulatory arbitrage
• Ensure consistent application of the durable link
  criteria
• Delete Calculation method 3 as it creates
  distortions depending on whether the parent of a
  conglomerate is a bank or an insurance
• Financial Stability
• Not affected

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• Thank you for your attention.
• Any questions?