CEBS published a quantitative analysis of the capital instruments that are eligible for prudential purposes in the application of the European Banking Directives. CEBS has analysed preliminary year end 2006 data from a representative sample of institutions in the European Economic Area (EEA) countries.
On an aggregate basis, original own funds represent 64% of regulatory capital of European credit institutions and investment firms. Additional own funds represents 34%. Ancillary own funds account for only 2% of total own funds and are present in a limited number of countries. The overall structure of own funds varies across Member States.
The elements deductible from total own funds represent 7,4% of total own funds after application of prudential filters.
In terms of quality, 'Core Tier 1' (i.e. original own funds minus hybrids) account for approximately 52,5% of total own funds. Hybrids account for 11,5%. Tier 2 amounts to 54 % of Tier 1; Lower Tier 2 represents 34% of Tier 1.
As a result of the application of prudential filters, eligible own funds slightly decrease mainly due to the shift of IFRS-related valuation differences from Tier 1 to Tier 2. The most important adjustment in absolute terms relates to the positive valuation differences related to available for sale equities. CEBS recommended filters are generally complied with, with a very limited number of exceptions.
CEBS has been asked by the Commission to check whether further convergence can be achieved on Hybrid capital elements eligible as original own funds and to report back to the Commission by end 2007.
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© Graham Bishop
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