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CEBS Consultation Paper on Options and National Discretions in CRD

Core Content

This consultation paper outlines CEBS's preliminary proposals on the reduction and harmonization of options and national discretions in the Capital Requirements Directive (CRD). CEBS has analyzed 152 provisions, including 101 from its supervisory disclosure framework, and has proposed a balanced approach that considers prudential concerns, supervisory flexibility, and the interests of both domestic and cross-border institutions.

Main Views and Key Information

1. Scope of the Work

• CEBS's analysis includes 101 options and national discretions identified in its supervisory disclosure framework, as well as mutual recognition clauses and their corresponding national discretions.
• Additional provisions were identified by the industry in their responses to CEBS's 2007 questionnaire, which were also included in the analysis.
• CEBS has adopted a broad pragmatic approach to the interpretation of "options and national discretions," considering provisions that may be interpreted as such by Member States.

2. Proposed Solutions

• CEBS proposes to keep as a national discretion approximately one fifth (30) of the 152 provisions, where possible with accompanying proposals to mitigate negative effects.
• Over one third (51) of the national discretions will expire within a short period and can be deleted.
• For the remaining majority (121), CEBS suggests solutions to harmonize supervisory practices and level the playing field among institutions.

3. Types of Proposals

• Keep as national discretion: 30 provisions (e.g., those related to local market specifics, lack of experience, or future overhaul).
• Subject to mutual recognition: 24 provisions (e.g., binding and non-binding mutual recognition for cross-border operations).
• Keep as or transform into a supervisory decision: 37 provisions (applied on a case-by-case basis).
• Delete or remove: 35 provisions (either by transforming into a rule or by complete deletion).
• Keep or transform into an option for credit institutions/investment firms: 22 provisions (e.g., risk weighting, capital calculation methods).
• EU joint assessment process: 9 provisions (e.g., equivalence of third-country arrangements, mutual recognition).
• Out of scope: 12 provisions (e.g., those not relevant to supervisory practices or not yet analyzed).

4. Methodology

• CEBS conducted a public questionnaire in July 2007, which received responses from all supervisors in CEBS and 16 market participants.
• A complementary working group of industry experts was formed to assist in the analysis.
• CEBS performed a qualitative cost-benefit analysis (CBA) to evaluate the impact of each discretion and guide its proposals.

5. High-Level Considerations

• Convergence of supervisory practices is important but not the sole factor in decision-making.
• Cross-border and domestic interests should be balanced in the decision-making process.
• Impact assessments should include legal continuity, transitional provisions, or grandfathering clauses where necessary.
• Discretionary decisions should be made based on clear criteria and, where possible, on a case-by-case basis.
• Mutual recognition is encouraged to reduce discrepancies and promote uniformity.
• Options for credit institutions should be retained if they allow for proportionate and risk-sensitive treatment.
• Joint assessment processes should be used where consensus is difficult to achieve.

6. Public Consultation

• The consultation period runs from 22 May 2008 to 15 August 2008.
• CEBS invites feedback on the preliminary proposals in the Annex.
• Specific provisions (3, 31, 33, 38, 41, 43, 44, 45, 59, 61, 63, 81, 82, 86, 87, 89, 90, 93, 95, 96, 100, 112, 113, 116, 117, 118, 119) require detailed feedback.
• A public hearing is scheduled for 17 June 2008 in London.

7. Impact Assessment

• CEBS followed a qualitative impact assessment (IA) approach, as per the better regulation agenda.
• The IA was informed by feedback from industry experts and CEBS members.
• The IA focuses on economic relevance, distribution of costs and benefits, and interdependencies among provisions.
• Only a small number of discretions were found to address relevant market failures, and these were evaluated for net benefits.

8. Summary of Findings

• CEBS proposes to delete or remove provisions that do not address material market failures.
• For most remaining discretions, harmonization is possible through mutual recognition, supervisory decisions, or transformation into general rules.
• CEBS emphasizes that flexibility is necessary for supervisors, but also that consistency across institutions is essential.
• A case-by-case approach is advocated for many provisions, especially those involving internal models or risk assessments.

Conclusion

CEBS aims to reduce national discretions while ensuring prudential soundness and supervisory flexibility. Its proposals seek to harmonize practices, level the playing field, and reduce regulatory fragmentation. The final advice is expected to be delivered by October 2008, and the public consultation is a key step in this process.