Alexander Radwan, rapporteur on the forthcoming Directive on Capital Adequacy, issued his second working paper presented during last AMAC meeting. Regarding the scope of application, the European regulation regarding minimum capital requirements will differ considerably from the Basle Accord and intends to cover a rather broad range of banks and investment firms. “The recent discussion in the US”, Mr. Radwan states, “highlighted the question whether we would need a broad application in Europe.”
However, the document also states that the achievements in favour of SMEs were hampered by the introduction of the so-called 'granularity criterion' which relates the exposure to each debtor to the total size of the retail portfolio. It would further limit the ability of smaller banks to achieve preferential treatment for their SME loans, as their retail portfolio is simply not large enough to fully exploit the 1 Mio. € threshold.
Although representatives of the Basle Committee have stated publicly on several occasions that this criterion will be abolished, it is still part of the new document.
About two weeks ago, the European Shadow Financial Regulatory Committee (ESFRC) recommended that a Capital Adequacy Directive should be adopted in a way that would make Basel II mandatory only for the large internationally active banks and investment firms. Smaller institutions should have the option of adopting either a simplified version of the “standardised approach”. Furthermore, distortions in the credit markets for SMEs should be remedied through fundamental reform accompanied by transitional measures and not by ad- hoc approaches favouring SMEs.
Mr. Radwan is currently drafting his report on the Capital Adequacy Directive which will probably be published in June.
CAD working paper
ESFRC comment
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