Sound prudential regime for investment firms
On 14 December 2015, the European Banking Authority (EBA) published a report setting out its recommendations for a “more proportionate and risk-based” prudential regime for investment firms. It identified a number of issues in the current application of the CRD/CRR regime for investment firms, including “inadequate” risk sensitivity and complexity of the framework stemming from the current categorisation of investment firms based on MiFID investment activities and services.
The EBA suggests a new categorisation of investment firms which would distinguish between systemic and "bank-like" investment firms to which full CRD/CRR requirements should apply, and other investment firms, namely those that are considered "not systemic" or "not interconnected". For the latter, specific requirements should be defined to capture investment business risks, such as credit, market, operational and liquidity risks taking particular account of the holding of client money and securities. The report did not set out any specific thresholds or other criteria for the proposed categorisation.
The EBA also recommended extending the waiver for commodity trading firms (that are currently exempt from the large exposures and capital adequacy provisions) until 31 December 2020.
Implications for investment firms
At this stage, the EBA has provided no specific thresholds or criteria for categorisation of firms and no calibrations for a new prudential framework; it is too early to say what implications this review will have for each category of investment firms. However, it raises a possibility that a simpler regime will be introduced for some firms.
As part of the review, the EBA is going to conduct a data collection exercise; firms should be ready to input into that.
Following the EBA’s report, the European Commission is now expected to report to the European Parliament and to the Council. The CRR specifies that the EBA’s report could be followed by a legislative proposal.
The EBA has already said that it would prepare a second, more detailed report with specific thresholds for categorisation and calibrations of a new prudential regime. To inform this follow-up report, the EBA is going to conduct the data collection exercise at a firm level.