The UK’s Financial Services Authority has released its complex proposals for implementing the EU’s Capital Requirements Directive. The 1300-page document is so heavy that bankers are complaining of stretched arms and grazed knuckles, writes Michael Imeson.
What is it?
It is called Strengthening Capital Standards 2 (Consultation Paper 06/3). It was published on February 28, and comes with a full set of draft rules and guidance for the relevant modules of the FSA Handbook. It is a must-read for all banks, building societies and investment firms.
Who dreamed it up?
Blame these bodies: the FSA’s wholesale and prudential policy department for the consultation paper; the European Commission for the Capital Requirements Directive (CRD); and the Bank for International Settlements for the Basel II accord, which the CRD implements into EU law.
What are its main provisions?
First, the paper concentrates on the main policy areas not discussed in the FSA’s initial consultation, Strengthening capital standards (CP05/3), published in January 2005. It also looks at policy issues that have arisen in the intervening period. For example, it proposes how the FSA will assess applications to use the internal ratings-based (IRB) approach and advanced measurement approach (AMA) to risk management. It also explains how the supervisory regime will work and how the FSA will monitor individual capital adequacy standards. Second, the paper addresses concerns raised by banks and other financial institutions during consultation on CP05/3. The FSA has, for example, done a U-turn in several areas where it had previously decided that the UK rules would be “super-equivalent” to (ie, go beyond) the CRD text.
What’s in the small print?
It is all small print. It goes into the tiniest details, and runs to 1302 pages. The Basel II accord is ‘only’ 284 pages.
What does the industry say?
There are only two months to comment, instead of the usual three for this sort of consultation. “It’s going to be a major project management exercise to respond on this one,” says Katherine Seal, a London Investment Banking Association director. “People are staggering around with vast reams of paper under their arms.” It’s too early to say what parts of the paper the industry does not like, but “we are not expecting any surprises”, says Ms Seal. “The final rules were always going to be necessary, big and uncomfortable. But the FSA is in an invidious position because it can’t use the final CRD text from Brussels yet. That won’t be ready until May at the earliest, which is only seven months from the implementation deadline.”
How much will it cost?
The paper contains a comprehensive cost-benefit analysis for the “roughly 1500 firms that the CRD will affect in around 20 markets” in the UK. It put the implementation costs collectively incurred by all financial services sector firms between 2001 and 2008 at £1.1bn ($1.9bn); about 80% is expected to be incurred by banks and building societies. The ongoing annual costs for the financial services sector will be £133m a year. Additionally, over the period 2001–2008, the FSA estimates it will have incurred its own costs of about £16m. In 2009, the first full year of operation, it expects to incur extra costs of about £2m falling to about £1.5m in subsequent years.
What do the regulators say?
Sorry, there is no other option, says the FSA. CP06/3 is necessary to implement the CRD, and the CRD is necessary “to introduce a modern, risk-sensitive prudential framework for credit institutions and investment firms across the EU”. The FSA says it has reigned back in some areas where it was proposing to gold-plate the CRD, but the paper still gold-plates in 28 areas.
The law of unintended consequences
Befuddled brains, stretched arms and scraped knuckles.
Could we live without it?
No. Once the international banking industry committed to Basel II some years ago, this paper was inevitable.
Rating: 5
Rating scale: 5 = Essential 4 = Useful 3 = Neutral 2 = Unnecessary 1 = Waste of time
