EBA欧洲银行-IWCFC-DOC-07-01-final-_Comparisonofsectoralrulescapitalinstruments_88页_491kb

Summary of the Interim Working Committee on Financial Conglomerates Report: Comparison of Sectoral Rules for Eligible Capital Instruments

I. Introduction

The Interim Working Committee on Financial Conglomerates (IWCFC) was established by the European Financial Conglomerates Committee (EFCC) to compare the capital instruments eligible for regulatory capital in the European banking, insurance, and securities sectors. This report contributes to part (a) of the EFCC's Call for Technical Advice and aims to identify similarities and differences in the eligibility criteria of capital instruments between the two sectors.

The comparison is based on current sectoral Directives, including the Financial Conglomerates Directive 2002/87/EC, and the Banking Directives 2006/48/EC and 2006/49/EC. It also takes into account the upcoming Solvency II framework, which introduces new capital requirements and regulatory approaches.

The report does not provide recommendations but instead offers a factual comparison of eligible capital elements and highlights the impact of IAS/IFRS on regulatory capital calculations. It acknowledges the increasing importance of hybrid capital instruments and the need to assess their eligibility and treatment in both sectors.

II. Core Content

1. Eligible Capital Elements: Common to Both Sectors

• Paid-up Capital:

  • Both sectors consider paid-up capital as eligible without limits.
  • In the banking sector, it is defined under Article 57 of Directive 2006/48/EC and includes capital under Article 22 of Directive 86/635/EEC and share premium accounts, excluding cumulative preference shares.
  • In the insurance sector, paid-up capital includes initial or foundation funds and is subject to specific supervisory definitions.

• (Statutory) Reserves:

  • Reserves are considered eligible without limits in both sectors.
  • The banking sector includes reserves from the Capital Requirements Directive, while the insurance sector includes statutory reserves under the Recast Life Directive and First Council Directive.
  • Differences arise due to national company laws.

• Profit and Loss:

  • Profits and losses brought forward are eligible in both sectors.
  • These items are treated similarly in terms of eligibility, though the exact implementation may vary.

• Reserves for Unrealised Profits and Hidden Reserves:

  • Both sectors include unrealised gains and losses in eligible capital.
  • The extent of inclusion differs between the two sectors, with the insurance sector typically including more unrealised profits and hidden reserves.

2. Eligible Capital Elements with Limits

• Hybrid Instruments:

  • Hybrid instruments combine features of debt and equity and are not consistently treated across the two sectors.
  • In the banking sector, they are generally classified under "additional own funds" and are subject to limits.
  • In the insurance sector, they are considered "capital elements eligible with limits" and are also subject to restrictions.

• Instruments Eligible with Conditions:

  • Both sectors require capital instruments to meet certain eligibility criteria.
  • Securities of indeterminate duration (perpetuals) and non-fixed term cumulative preference shares are treated similarly.
  • Subordinated loan capital and fixed-term cumulative preference shares are also subject to similar conditions.

3. Elements Specific to Each Sector

• Insurance Sector:

  • Profit reserves, zillmerising amounts, and future profits are specific to life insurers.
  • Members' calls are specific to non-life insurers and are included under Article 16(4)(b) of Directive 73/239/EEC.

• Banking Sector:

  • Elements specific to credit institutions and investment firms include general provisions, ancillary own funds, and deductions related to securitisation transactions.
  • The banking sector also has rules for internal ratings-based (IRB) institutions under the Capital Requirements Directive.

III. Limits on Capital Instruments

• Banking Sector:

  • Hybrid instruments are included in original own funds but subject to national supervisory limits.
  • Additional own funds are subject to two limits under Article 66 of Directive 2006/48/EC.
  • Ancillary own funds are subject to complex limitations under Directive 2006/49/EC.

• Insurance Sector:

  • Capital eligible without prior supervisory approval includes paid-up capital and reserves free of foreseeable liabilities.
  • Capital eligible with prior supervisory approval includes instruments like deeply subordinated debt and unpaid elements.

• Common Purpose of Limits:

  • The purpose of limits in both sectors is to maintain a minimum level of quality in regulatory capital.
  • The levels and calculations of limits may differ, but the objective is consistent.

IV. Deductions from Regulatory Capital

• Common Deductions:

  • Both sectors deduct own shares and intangible assets from eligible capital.
  • Deductions are made from different reference points: original own funds (Tier 1) and additional own funds (Tier 2) in the banking sector, versus total own funds in the insurance sector.

• Sector-Specific Deductions:

  • In the banking sector, holdings in other entities are subject to stricter thresholds (e.g., 10% or more).
  • In the insurance sector, participations are deducted based on materiality and other factors.

• Cross-Sector Deductions:

  • Holdings/participations across sectors are governed by the Financial Conglomerates Directive.
  • This directive aims to prevent double counting and intra-group capital creation.
  • Differences in deduction thresholds may lead to regulatory arbitrage.

V. Prudential Consolidation and Capital Elements

• Group Definitions:

  • The definition of a "group" for regulatory purposes differs between the banking and insurance sectors.
  • Banking groups are typically defined through consolidated statutory accounts, while insurance groups may use three different methodologies.

• Consolidation Methods:

  • Banking groups use consolidated financial statements, whereas insurance groups can use three methods, with one being similar to the banking approach.
  • Both sectors have rules for intra-group capital allocation.

• Impact of Prudential Consolidation:

  • Consolidation procedures affect the calculation of eligible capital items.
  • The treatment of hybrids and minorities is influenced by consolidation methods.
  • In the banking sector, minorities are strictly defined, while in the insurance sector, there is more flexibility.

VI. IAS/IFRS Implications and Prudential Filters

• Prudential Filters:

  • Both sectors apply prudential filters to ensure the quality of regulatory capital under IAS/IFRS.
  • Filters are applied to elements eligible without limits, such as equity, reserves, and profit and loss items.
  • Filters specific to insurance groups have been developed to address sectoral differences.

• No Specific Filters for Hybrid Instruments:

  • There are no specific prudential filters for capital instruments eligible with limits.
  • Filters on intangible assets are also in place in both sectors.

• Impact of IAS/IFRS:

  • The IFRS accounting regime has affected the quality, magnitude, and volatility of regulatory capital.
  • Prudential filters have been developed to counteract these effects.

VII. Conclusion

• The report highlights the similarities and differences in eligible capital instruments between the banking and insurance sectors.
• Hybrid and innovative instruments are not adequately captured by current Directives and require further regulatory attention.
• The Solvency II framework introduces new capital requirements (SCR and MCR) and may lead to different treatment of capital elements compared to current regimes.
• National implementations and supervisory approaches vary, leading to potential regulatory arbitrage.
• The IWCFC report serves as a factual reference for future regulatory harmonisation efforts and is not intended to provide a model answer for capital eligibility.