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CEBS and CEIOPS published a report on the possible impact of the differences in the definition of capital instruments provided for by the European banking, insurance and securities regulation, for the supervision of a conglomerate.
The report focuses on the impact of the key differences flagged by the industry in the January report: the treatment of hybrids (including the limits), the different approaches to deductions, the treatment of unrealised profits and revaluation reserves. The differences in consolidation approaches and methods in each sector were not tested. Instead, the exercise used the three methods of calculation as laid down in the Financial Conglomerates Directive. Like for its first report, the analysis did not consider national implementation of the Directive.
The impact analysis confirms that the key differences identified in the January report can have an impact in the composition and amount of regulatory capital of a financial conglomerate. The Financial Conglomerates Directive (FCD) does not increase, nor alleviate, nor eliminate the differences in capital that are driven by the sectoral differences. This is valid across the three methods of consolidation allowed by the FCD.
The differences in the type of capital elements eligible in each sector and the differences in the limits to the inclusion of eligible items might create distortions and influence the localisation of certain assets or transactions within a conglomerate. Some market participants however pointed out that management decisions are not only driven by the prudential regulation and that there is no strong evidence that financial conglomerates take advantage of these differences.