01 November 2007

CEBS summary of discussions on prudential filters

CEBS published a summary of the discussions on the hearing on the implementation and the impact of prudential filter. Participants were in general rather supportive of the conclusions CEBS has drawn in the report. The question was raised whether the quantitative part of the study had also considered the effect of interest movements on the impact of the prudential filters. It was noted that since the introduction of the CEBS prudential filters movements in interest rates had not been material enough to allow for a thorough analysis of their impact.

CEBS concludes that prudential filters are appropriate and working satisfactorily. The observed differences, mainly relating to the treatment of unrealised gains in additional own funds, should be addressed even though the majority felt that any shortor mediumterm changes would cause more burden in terms of system changes than benefits from reduced competitive differences.

For future overhaul of the own funds definitions it is important to identify the right criteria for regulatory capital that, given the objectives of prudential supervision, could differ from the principles developed for financial reporting purposes, although supervisors should strive to keep a strong link between the accounting and regulatory capital and make adjustments only where they are justified for prudential reasons.

Some commentators also encouraged supervisors to consider possible alternatives for example through adjustments in Pillar 2. Moreover currently observed asymmetries regarding adjustments to denominator and to the numerator should be eliminated when they exist.

Summary

© Graham Bishop