05 December 2014

BCBS: Assessment of Basel capital regulations in the European Union

The Basel Committee on Banking Supervision has published a report assessing the implementation of the Basel capital framework in the nine EU Member States that are members of the Basel Committee.

A key component of this programme is to assess the consistency and completeness of a jurisdiction's adopted standards and the significance of any deviations in the regulatory framework. The Regulatory Consistency Assessment Programme (RCAP) framework promotes full and consistent adoption of the Basel framework by identifying domestic regulations for internationally active banks that are not in line with the letter and spirit of the relevant Basel standards. The RCAP assessments do not take account of a jurisdiction's bank supervisory practices nor do they evaluate the adequacy of regulatory capital for individual banks or a banking system as a whole.

The assessment is based on the EU's Capital Requirements Regulation and Fourth Capital Requirements Directive and took account of relevant rules in place at the Member State level. It concluded that eight of the 14 components meet all minimum provisions of the relevant Basel standards and these were therefore graded as "compliant". Four of the components were assessed as "largely compliant", reflecting the fact that most but not all provisions of the global standard were satisfied. One component - the Internal Ratings-based (IRB) approach for credit risk - was assessed "materially non-compliant" and pertained primarily to the treatment of exposures to SMEs, corporates and sovereigns. Another component was found to be "non-compliant". This relates to the EU's counterparty credit risk framework, which provides an exemption from the Basel framework's credit valuation adjustment (CVA) capital charge for certain derivatives exposures.

RCAP assessments are summarised using a four-grade scale: compliant, largely compliant, materially non-compliant and non-compliant. A grade is assigned to each of the 14 key components of a jurisdiction's risk-based capital framework and an overall grade is then determined. According to the Committee's RCAP methodology, a grade of "materially non-compliant" is applied, for example, if key provisions of relevant Basel standards have not been satisfied. The overall grade for the EU was therefore assessed this rating. At the same time, the Committee recognises and welcomes the commitment of the European authorities to converge toward the Basel standards, such as the provisions the EU has already made to limit over time the application of standardised risk weights to central government exposures.

In carrying out this review, the Committee's assessment team held discussions with senior officials and technical staff of the European Commission, the European Banking Authority, Basel Committee member institutions from the nine EU Member States and the European Central Bank. The team also met with a selection of banks headquartered in the EU.

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