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CEBS Public Consultation on IwCFC Recommendations on Capital for Financial Conglomerates - Summary

Core Content

The Austrian Federal Economic Chamber (WKO), through its Division of Banking and Insurance, has submitted comments on the CEBS public consultation regarding the IwCFC recommendations on capital for financial conglomerates. The comments focus on the harmonization of capital requirements between the banking and insurance sectors and emphasize the need for flexibility and alignment with international standards.

Main Views and Key Points

Item 1: Hybrid Capital

• Support for Level Playing Field: The Chamber supports the idea of establishing a level playing field for hybrid capital to ensure comparability between the banking and insurance sectors and to avoid unequal treatment.
• Need for Uniform Framework: A uniform approach is necessary but should not override the specific needs of each sector. The current EU directives should be used to define capital types, as they already accommodate industry-specific requirements.
• Caution Against Overreach: There is a risk that current banking capital proposals exceed international standards (e.g., Sydney Press Release), which could negatively impact the European banking industry.
• Recommendation: The current proposals are not yet suitable as guidelines and require further refinement, especially in the context of harmonization across Member States and sectors.

Item 2: Treatment of Participations

• Low Impact of Thresholds: The Chamber believes that differences in participation deduction thresholds have a minimal impact, as they only affect holdings between 10% and 20%.
• Preference for Current Rules: It is recommended to retain the current rule and allow supervisory discretion to intervene if necessary.
• Regulatory Arbitrage Concerns: The fear of regulatory arbitrage is unfounded, as the management of minority stakes does not depend on mandatory deductions. The shift from bank to insurance participation would already raise supervisory concerns.

Item 3: Revaluation Reserves and Unrealised Gains

• No Change Needed: The Chamber does not see a need for changes to the current rules regarding revaluation reserves and unrealised gains.
• Sector-Specific Valuation Methods: It advocates for the retention of different valuation methods used in the banking and insurance sectors, even at the level of financial conglomerates.

Item 4: Calculation Methods

• Default Consolidation Method: The Chamber agrees that the consolidation method should be the default approach for calculating capital adequacy.
• Flexibility in Methods: It supports the use of deduction and aggregation methods in certain cases, such as when companies within a conglomerate are not fully integrated.
• Equivalence of Methods: Calculation methods 1 and 2 are equally suitable and should be accepted side by side. The third method is considered irrelevant.
• Supervisory Discretion: The supervisory authority should have the flexibility to choose between the two methods or a combination thereof, depending on the situation.

Additional Notes

• Contradictory Statements: The Chamber notes that statements in item 17 contradict those in item 69ff, as they refer to different treatment of bank and insurance participations.
• Clarification on "Financial Institutions": The statement in footnote 5 is incorrect; insurance companies are not defined as "financial institutions" under Directive 2006/48/EC.
• Need for Definition of Cross-Sectoral Capital: A clear definition of "cross-sectoral capital" is missing, which is crucial for crisis management. Only capital components recognized by both sectoral rules should qualify as cross-sectoral.
• Questions Raised: The Chamber raises questions about which capital components qualify in both sectors, whether it depends on detailed characteristics or just on general classification, and whether it applies to inclusion limits and deduction requirements.

Conclusion

The Austrian Federal Economic Chamber emphasizes the importance of harmonizing capital requirements across the banking and insurance sectors while preserving flexibility and aligning with international standards. It calls for a coordinated approach to convergence efforts and stresses the need for clarity in defining cross-sectoral capital for effective crisis management.