Capital adequacy regulation of financial conglomerates in the European Union

Over the past few decades, changes in market conditions such as globalisation and deregulation of financial markets as well as product innovation and technical advancements have induced financial institutions to expand their business activities beyond their traditional boundaries and to engage in cross-sectoral operations. As combining different sectoral businesses offers opportunities for operational synergies and diversification benefits, financial groups comprising banks, insurance undertakings and/or investment firms, usually referred to as financial conglomerates, have rapidly emerged, providing a wide range of services and products in distinct financial sectors and oftentimes in different geographic locations. In the European Union (EU), financial conglomerates have become part of the biggest and most active financial market participants in recent years. Financial conglomerates generally pose new problems for financial authorities as they can raise new risks and exacerbate existing ones. In particular, their cross-sectoral business activities can involve prudentially substantial risks such as the risk of regulatory arbitrage and contagion risk arising from intra-group transactions. Moreover, the generally large size of financial conglomerates as well as the high complexity and interconnectedness of their corporate structures and risk exposures can entail substantial systemic risk and can therefore threaten the stability of the financial system as a whole. Until a few years ago, there was no supervisory framework in place which addressed a financial conglomerate in its entirety as a group. Instead, each group entity within a financial conglomerate was subject to the supervisory rules of its pertinent sector only. Such silo supervisory approach had the drawback of not taking account of risks which arise or aggravate at the group level. It also failed to consider how the risks from different business lines within the group interrelate with each other and affect the group as a whole. In order to address this lack of group-wide prudential supervision of financial conglomerates, the European legislator adopted the Financial Conglomerates Directive 2002/87/EC8 (‘FCD’) on 16 December 2002. The FCD was transposed into national law in the member states of the EU (‘Member States’) by 11 August 2004 for application to financial years beginning on 1 January 2005 and after. The FCD primarily aims at supplementing the existing sectoral directives to address the additional risks of concentration, contagion and complexity presented by financial conglomerates. It therefore provides for a supervisory framework which is applicable in addition to the sectoral supervision. Most importantly, the FCD has introduced additional capital requirements at the conglomerate level so as to prevent the multiple use of the same capital by different group entities. This paper seeks to examine to what extent the FCD provides for an adequate capital regulation of financial conglomerates in the EU while taking into account the underlying sectoral capital requirements and the inherent risks associated with financial conglomerates. In Part 1, the definition and the basic corporate models of financial conglomerates will be presented (I), followed by an illustration of the core motives behind the phenomenon of financial conglomeration (II) and an overview of the development of the supervision over financial conglomerates in the EU (III). Part 2 begins with a brief elaboration on the role of regulatory capital (I) and gives a general overview of the EU capital requirements applicable to banks and insurance undertakings respectively. A delineation of the commonalities and differences of the banking and the insurance capital requirements will be provided (II). It continues to further examine the need for a group-wide capital regulation of financial conglomerates and analyses the adequacy of the FCD capital requirements. In this context, the technical advice rendered by the Joint Committee on Financial Conglomerates (JCFC) as well as the currently ongoing legislative reforms at the EU level will be discussed (III). The paper finally closes with a conclusion and an outlook on remaining open issues (IV)

The New Basel Capital Accord: A Primer with an Indian Focus

The article examines the pros and cons of the implementation of Basel II in India and contextually, conducts an empirical exercise to examine the impact of capital requirements on the Indian banking systemBasel accord; banknig; India

BASEL II: THE REVISED FRAMEWORK OF JUNE 2004

A major aim of Basel II has been to revise the rules of the 1988 Basel Capital Accord in such a way as to align banks´ regulatory capital more closely with their risks, taking account of progress in the measurement and management of risk and of the opportunities which these provide for strengthened supervision. Achievement of this aim has involved the incorporation in Basel II of methods for quantifying banking risks introduced since the late 1980s. The task of the designers of Basel II has been complicated by the way in which the BCBS´s rules for banks´ capital, originally intended for the internationally active banks of its member countries, have become a global standard widely applied in developing as well as developed countries. Acceptance of this role by the BCBS has entailed a global consultation process, whose results have been reflected in three consultative papers and the RF, and the different approaches and options for setting numerical capital requirements which are intended to accommodate banks and supervisors of different levels of sophistication. As well as providing a commentary on the main features of the RF this paper documents the response of the BCBS to some of the more important points which were raised during this consultation process, including the outcome of decisions taken at a meeting in Madrid in October 2003 following comments on the consultative paper of April 2003, and summarises the results of the most recent of the BCBS´s initiatives to estimate the quantitative impact of the Basel II rules on banks´ capital. This discussion includes a review of papers issued by the BCBS as part of the last stage of its work preceding the RF.

Pro-cyclicality of capital regulation: is it a problem? How to fix it?

We use a macroeconomic euro area model with a bank sector to study the pro-cyclical effect of the capital regulation, focusing on the extra pro-cyclicality induced by Basel II over Basel I. Our results suggest that this incremental effect is modest. We also find that regulators could offset the extra pro-cyclicality by a countercyclical capital-requirements policy. Our results also suggest that banks may have incentives to accumulate countercyclical capital buffers, making this policy less relevant, but this finding is depends on the type of economic shock posited. We also survey different policy options for dealing with procyclicality and discuss the pros and cons of the measures available.Basel accord, pro-cyclicality

Instruments for assessing the risk of falls in acute hospitalized patients: a systematic review and meta-analysis

Background Falls are a serious problem for hospitalized patients, reducing the duration and quality of life. It is estimated that over 84% of all adverse events in hospitalized patients are related to falls. Some fall risk assessment tools have been developed and tested in environments other than those for which they were developed with serious validity discrepancies. The aim of this review is to determine the accuracy of instruments for detecting fall risk and predicting falls in acute hospitalized patients. Methods Systematic review and meta-analysis. Main databases, related websites and grey literature were searched. Two blinded reviewers evaluated title and abstracts of the selected articles and, if they met inclusion criteria, methodological quality was assessed in a new blinded process. Meta-analyses of diagnostic ORs (DOR) and likelihood (LH) coefficients were performed with the random effects method. Forest plots were calculated for sensitivity and specificity, DOR and LH. Additionally, summary ROC (SROC) curves were calculated for every analysis. Results Fourteen studies were selected for the review. The meta-analysis was performed with the Morse (MFS), STRATIFY and Hendrich II Fall Risk Model scales. The STRATIFY tool provided greater diagnostic validity, with a DOR value of 7.64 (4.86 - 12.00). A meta-regression was performed to assess the effect of average patient age over 65 years and the performance or otherwise of risk reassessments during the patient’s stay. The reassessment showed a significant reduction in the DOR on the MFS (rDOR 0.75, 95% CI: 0.64 - 0.89, p = 0.017). Conclusions The STRATIFY scale was found to be the best tool for assessing the risk of falls by hospitalized acutely-ill adults. However, the behaviour of these instruments varies considerably depending on the population and the environment, and so their operation should be tested prior to implementation. Further studies are needed to investigate the effect of the reassessment of these instruments with respect to hospitalized adult patients, and to consider the real compliance by healthcare personnel with procedures related to patient safety, and in particular concerning the prevention of falls

Methodological Guide to Co-design Climate-smart Options with Family Farmers

Climate-smart agriculture (CSA) seeks to improve productivity for the achievement of food security (pillar 1: Productivity), to develop a better ability to adapt (pillar 2: Adaptation), and to limit greenhouse gas emissions (pillar 3: Mitigation). Technical and organizational innovations are needed to find synergies among those three pillars. Innovation (its creation and its operation) is a social phenomenon. Many studies worldwide have shown that promoting a sustainable change and innovation within organizations has to be analyzed and implemented with stakeholders. Thus, the ability of local actors to tackle climate change and mitigate its effects will depend on their ability to innovate and mobilize material and non-material resources, to articulate links among national policies, not only between themselves, but also undertaking actions at the local level. To support stakeholders in the development of responses to this challenge, we propose the development of open innovation platforms, in which all local actors may participate. These platforms are virtual, physical, or physico-virtual spaces to learn, jointly conceive, and transform different situations; they are generated by individuals with different origins, different backgrounds and interests (Pali and Swaans, 2013).The purpose of this manual is to provide a seven-step methodology to allow family farmers to co-build and adopt CSA options to tackle climate change in an open innovation platfor

Expected-loss-based accounting for the impairment of financial instruments:: the FASB and IASB IFRS 9 Approaches

This paper outlines the work of the FASB and the IASB on the development of expected-loss methods for measuring the impairment of financial instruments arising from credit losses, and describes and compares key features of the different approaches developed by the two standard setters. It also provides information indicative of the possible effect of differences between the two approaches and summarises arguments for and against the main elements of the approaches proposed by the two standard setters

History of Value-at-Risk: 1922-1998

value-at-risk history

Monitoring, reporting and vrification for national REDD+programmes: two proposals

Different options have been suggested by Parties to the UNFCCC (United Framework Convention on Climate Change) for inclusion in national approaches to REDD and REDD + (reduced deforestation, reduced degradation, enhancement of forest carbon stocks, sustainable management of forest, and conservation of forest carbon stocks). This paper proposes that from the practical and technical points of view of designing action for REDD and REDD + at local and sub-national level, as well as from the point of view of the necessary MRV (monitoring, reporting and verification), these should be grouped into three categories: conservation, which is rewarded on the basis of no changes in forest stock, reduced deforestation, in which lowered rates of forest area loss are rewarded, and positive impacts on carbon stock changes in forests remaining forest, which includes reduced degradation, sustainable management of forest of various kinds, and forest enhancement. Thus we have moved degradation, which conventionally is grouped with deforestation, into the forest management group reported as areas remaining forest land, with which it has, in reality, and particularly as regards MRV, much more in common. Secondly, in the context of the fact that REDD/REDD + is to take the form of a national or near-national approach, we argue that while systematic national monitoring is important, it may not be necessary for REDD/REDD + activities, or for national MRV, to be started at equal levels of intensity all over the country. Rather, areas where interventions seem easiest to start may be targeted, and here data measurements may be more rigorous (Tier 3), for example based on stakeholder self-monitoring with independent verification, while in other, untreated areas, a lower level of monitoring may be pursued, at least in the first instance. Treated areas may be targeted for any of the three groups of activities (conservation, reduced deforestation, and positive impact on carbon stock increases in forest remaining forest)