03 December 2002

Working Document on Capital Adequacy

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Mr Radwan presented his Working Document on the forthcoming Capital Adequacy Directive, questioning the democratic legitimacy of Basel II with regards to the role of the European Parliament towards ‘soft law’ agreements. He also stated that the Lamfalussy procedure and especially article 202 will become a crucial point which has to be clarified beforehand.

He noted that US investment companies are not included in the agreement which might be problematic with regard to the level playing field. Small local banks should also be covered by the application of Basle II to EU-legislation to ensure a level playing field as foreseen in the Commission's Working Document.

The situation of SME has to be analysed carefully and to put into consideration. With regard to the 0.2% 'granularity criterion' there is the danger that some of the achievements in favour of SMEs are offset for the retail portfolios of smaller banks are not large enough to fully exploit the 1 Mio. € threshold for a single retail loan. Mr Radwan welcomed the possibility that under certain conditions the preferential risk weights for loans secured by commercial real estate can be applied by national authorities. Especially for small banks, life will be much easier under the new regime, if they have the opportunity to cover against or by using insurance.

He also noted that macroeconomic might well arise. Procyclicality might be a direct consequence of improved risk assessment and lead to a credit crunch during a downturn. Other issues that have to be considered carefully are related to the supervisory authority he said.

In the following discussion Mr Andria supported Mr Radwans view to give special attention to the role of SMEs and smaller banks. The problem of a possible credit crunch has to be considered carefully, he said. On the Lamfalussy procedure Mrs Villies questioned whether one should not leave the door open for a ‘Lamfalussy-like’ approach postponing a final decision on article 202. She also stated the need of national flexibility due to national differences. Banks and investment companies should also be allowed to insurances for considering their capital basis. Mrs Kauppi noted that the US Congress has not made any commitment to accept the Basel agreement due to the fact that they do not have the legitimacy to do so.

The Commission representative also underlined the important aspect of SMEs and noted that the Commission is continuously working on this aspect within the Basel discussions. He also stated that the 0.2% granularity criterion is a problem which has to be resolved.

Responding to the discussion Mr Radwan opposed to Mrs Villiers intention on the Lamfalussy procedure and stated that this problem has to be resolved first.

A hearing on the Capital Adequacy Directive will be held in February. The report is expected for March.

Working Document

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