Relevance of IWCFCs Capital Advice for the Financial Conglomerates Directive Roundtable on the Review of the Financial Conglomerates Directive 8 September 2008 Brussels

8 September 2008EFCC Roundtable on FCD 2 European Commissions Call for Technical Advice (No.1) to IWCFC of 12 June 2007: Part A - Comparison of the sectoral rules (banking/securities versus insurance) for eligibility of capital instruments – published in January 2007 Part B - Impact of the sectoral differences for the supervision of financial conglomerates – published in August 2007 Part C - Recommendations on how to address the sectoral differences – published in April 2008 IWCFC Mandate

8 September 2008EFCC Roundtable on FCD 3 Conclusions from Parts A and B A lot of commonalities… Four main areas of differences: –Eligibility of hybrid capital instruments –Revaluation reserves/unrealised gains –Deduction of participations/holdings –Consolidation approaches and methods Part A and B (1)

8 September 2008EFCC Roundtable on FCD 4 Conclusions from Parts A and B (continued) FCD does not affect the differences in capital that are created by the sectoral differences. Sectoral differences can have an impact on the composition and amount of regulatory capital of a conglomerate. In theory, this may create distortions and influence the placing of certain assets or transactions within a conglomerate. However, market participants do not consider this a strong driver for management decisions. Part A and B (2)

8 September 2008EFCC Roundtable on FCD 5 Conclusions from Parts A and B (continued) Whether the parent of a conglomerate is a bank or an insurance undertaking only matters under the third FCD method (book value/requirement deduction) which requires that regulatory capital is calculated on the basis of the rules applicable to the parent. This method proved not to be a useful basis for analysis as it does not recognise surpluses in subsidiaries. Market participants flagged concerns about the differences in the national implementation of the sectoral directives. Part A and B (3)

8 September 2008EFCC Roundtable on FCD 6 Enhancement of the level playing field within financial conglomerates and between financial conglomerates and pure banking or insurance groups. Avoidance of undue burdens for financial conglomerates stemming from the application of different provisions on the banking and the insurance parts of the financial conglomerate. Ensuring that the risks stemming from the activities of the conglomerate as a group are adequately covered by regulatory capital. Part C (Objectives of the Recommendations)

8 September 2008EFCC Roundtable on FCD 7 Inconsistent application of the sectoral rules across the EU seems to create greater problems for financial conglomerates than differing cross-sectoral rules and at the same time complicate further convergence of the cross-sectoral rules. Amendments to sectoral provisions that are also relevant from a cross-sectoral perspective should be closely aligned and not conducted in isolation. Part C (General Conclusions of the Recommendations)

8 September 2008EFCC Roundtable on FCD 8 Part C (Recommendations) - Details (1) Hybrids –Common principles and requirements for eligibility of hybrid capital instruments recommended at the sectoral level. –Harmonisation to be attempted by CRD amendment and Solvency II. Revaluation reserves and unrealised gains –Different sectoral valuation methods might justify different treatment. –No concrete action recommended for the time being. –Follow up with current debate on valuation rules. –Enhance consistency in national application of the sectoral directives and prudential filters across the EU.

8 September 2008EFCC Roundtable on FCD 9 Part C (Recommendations) - Details (2) Deduction of holdings/participations –Difference in quantitative thresholds gives opportunities for theoretical regulatory arbitrage, but there is no clear evidence for such practice. –Concern raised with regard to different application of qualitative criteria (e.g. durable link). –Enhance consistency in national transposition of the sectoral directives.

8 September 2008EFCC Roundtable on FCD 10 Part C (Recommendations) - Details (3) Consolidation approaches and methods –Method 1 (accounting consolidation) as the default method. –Supervisory authorities should have discretion to choose adequate method on a case-by-case basis. –Method 3 (book value/requirement deduction) is too simplistic and leads to distorted calculation results.

8 September 2008EFCC Roundtable on FCD 11 Objectives of the FCD Recitals (1) to (3) of the FCD Introduction of supplementary supervision of financial conglomerates on a group-wide basis to address –loopholes in sectoral legislation –additional prudential risks, stemming from the combination of different licenses in on group Supplementary Supervision focuses on solvency position, risk concentration, intra-group transactions, internal risk management processes and fit and proper character of the management. Ultimate goal is to ensure financial stability in the EU.

8 September 2008EFCC Roundtable on FCD 12 IWCFC Recommendations in the light of the FCD Objectives Loopholes/Level Playing Field –Harmonisation of thresholds for deduction of participations / holdings to avoid possibilities of regulatory arbitrage –Ensure consistent application of the durable link criteria –Delete Calculation method 3 as it creates distortions depending on whether the parent of a conglomerate is a bank or an insurance Financial Stability –Not affected

8 September 2008EFCC Roundtable on FCD 13 Thank you for your attention. Any questions?