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CEBS Public Hearing on Prudential Filters (16 October 2007, London) Summary

Core Content

The CEBS public hearing on prudential filters, held on 16 October 2007 in London, aimed to discuss the implementation of CEBS guidelines on prudential filters for regulatory capital. The event followed CEBS's 2007 work programme and was intended to ensure alignment between the report's conclusions and the views of the banking community. It brought together a wide range of market participants, including investment banks, commercial banks, and trade associations, from various countries.

Main Viewpoints and Key Information

1. Discussion of the Findings of the Report

• Participants generally supported the conclusions of the CEBS report.
• The filters were found to work adequately, be material, and offer sufficient flexibility.
• There was agreement that unrealised gains and other available-for-sale assets (debt securities) require specific attention.
• It was noted that interest rate movements have not been significant enough to allow for a thorough quantitative analysis of the filters' impact.

2. Issues Regarding the Current Filters

• Unrealised Gains:

  • Differences in national tax regimes should not lead to competitive distortions.
  • Divergence in approaches (net vs. item-by-item) for determining unrealised gains included in additional own funds was identified.
  • It was suggested that deductions should be made net of foreseeable taxes, rather than on a gross basis.

• Intangible Assets:

  • Some countries do not deduct 'new intangibles', leading to inconsistencies.
  • A consistent approach across all asset categories is needed.

3. Reactions to the Proposed Way Forward

• While some participants preferred a uniform approach, others acknowledged that cost-benefit considerations suggest no immediate action is needed.
• CEBS and regulators were encouraged to focus on developing qualitative criteria for 'good' capital to avoid arbitrage.
• The importance of consistency in prudential treatment across asset categories was highlighted, especially with the potential increased use of the fair value option.
• Supervisors should consider prudential adjustments not only in regulatory capital but also in risk-weighted assets.
• CEBS guidelines already allow for balance sheet value adjustments for prudential purposes, but further alignment should be considered.

4. Suggestions for Future Developments

• Supervisors should review the criteria for regulatory capital, considering changes in accounting frameworks.
• IFRS is seen as a potential basis, with adjustments to address prudential differences.
• A different scope of consolidation for prudential purposes may be necessary.
• Prudential adjustments should remain independent of the accounting methods used by institutions.
• Consideration of alternative approaches, such as integrating prudential adjustments into economic capital models, was suggested.
• Supervisors were encouraged to explore options for capital adjustments within Pillar 2.
• Coordination with the Basel Committee is essential to eliminate differences in areas like securitisation.
• Harmonisation between banking and insurance sectors was also proposed.

5. Conclusions

• The current CEBS prudential filters are appropriate and functioning satisfactorily.
• While differences in the treatment of unrealised gains in additional own funds were noted, most participants believed that changes in the short or medium term would cause more system burden than benefits.
• Future redefinition of own funds should focus on identifying suitable prudential capital criteria, which may differ from financial reporting principles, but should maintain a strong link with accounting.
• Asymmetries in adjustments between the numerator and denominator should be eliminated where they exist.
• Supervisors are encouraged to consider alternative methods, such as Pillar 2 adjustments, and to work towards a more harmonised approach across financial sectors.