Commission Working Document on Capital Adequacy

18 November 2002



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The European Commission published a Working Document on the new capital requirements framework for banks and investment firms. The objective of the review of capital requirements is to modernise the existing framework to make it more comprehensive and risk-sensitive and to foster enhanced risk management amongst financial institutions.

The recommendations in the Working Document say credit and investment firms should have enough funds to match their overall risk profile. Furthermore, they should have in place an appropriate system of risk management and process of capital adequacy assessment, and they should be required to disclose more information relating to their risk exposure and the level of funds that they have.

According to officials, the Commission is quite content with the results reached within the Basel II agreement so far although it has to be amended to fit for EU legislation. Some minor questions exist with:

  • the incorporation of investment firms.
  • Calibration details (QIS3-study). Incentives to move to other approaches should be modest.
  • partial use of the standard approach.
  • with regard to operational risk the question of insurance coverage has to be considered closely.
  • the aspect of supervision with regard to cross border issues and the treatment of subsidiaries.
  • creating a level playing field between the EU and the US. An accord implementing group is seeking consensus.
  • financing long term credits through loans on the capital market.
  • EU accession countries and their position after 2004 enlargement.

    The new EU framework should come into effect at the same time as the new Basel Capital Accord at the end of the year 2006.

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