Commenting on the European Commission’s review of capital requirements for banks and investment firms today, Patrick Fell, director in the financial services regulatory practice at PricewaterhouseCoopers, said:
The new regime is a vital development for all financial services firms – banks and investment firms – and requires their urgent attention.
The new EU capital framework is inspired by the new Basel Capital Accord and should come into effect at the same time at the end of 2006, but it is the EU’s framework that will have the force of law. Firms in the EU and the Accession countries ignore EU developments at their peril.
International banks already know about Basel and many have started implementation work. But these proposals will also affect thousands of domestic banks and investment firms. Many of these have so far done very little to prepare for the new world that they will face in 2006.
The principal divergence from Basel relates to this broader constituency. The Commission has recognised that it could not simply apply Basel’s proposals without increasing capital requirements unjustifiably. Basel’s approach is aimed at large, diversified institutions. It does not work so well for some investment firms and for asset managers. The Commission’s proposals to apply lower operational risk requirements to such firms better recognises their risk profile and should result in more appropriate capital charges. It will be important for affected firms to give the Commission high quality feedback during its consultation on these proposals.
The Commission’s document will form the basis of a period of what the Commission is calling a “Structured Dialogue” with the industry that will run until the end of January 2003. It is vital firms participate in this dialogue, and that they get to grips with the implementation and other issues that they will face. 2006 seems a long way off; but time presses. For example, in order to qualify for the intermediate approach to credit risk (the Foundation Internal Ratings based Approach), firms need to be collecting data from the end of 2003. There is little time to lose.