Banking Proposals Need To Be Amended For Investment Firms Says FSA Chairman

by Carla Johnson, Investors Offshore.com

05 July 2001

Speaking at the 11th Annual Fund Forum International Conference at the Grimaldi Forum in Monte Carlo yesterday (Wednesday), Howard Davies, the chairman of the UK's Financial Services Authority, argued that the EU should avoid a simple extrapolation of the proposed Basel capital rules for banks to investment firms. It is important to recognise that, especially in the case of operational risk, one size does not fit all firms in the financial services industry, he said.

Mr Davies stated that he was in favour of 'the aim of creating a European wide level playing field where risks are subject to capital requirements that fully reflect them, and where similar risks are treated in similar ways, no matter what type of institution carries them.'

According to Mr Davis a core factor of the new Basel recommendations is the inclusion of a separate capital charge for operational risk. 'We are clear that this must be part of the equation in the long run,' he stressed, 'but it is unfortunately true that the initial Basle calibration generated operational risk charges which, for investment firms and fund managers in particular, seem to be well above what might reasonably be required (though it is fair to say that some firms now hold appreciably more capital than regulators require, for commercial reasons).'

He added: 'A simple extrapolation of the Basle model to investment firms produced percentage increases for fund managers which, in some cases, were quite outlandish – this is clearly not what was intended. …What we are doing now at a European level is carrying out an impact study to assess the effect of the proposals in detail, particularly on investment firms.' As it considers the responses from banks over the next year the Basle Committee will certainly make changes which will be helpful to non-banks, too. But there is more work to do to produce a rational approach to capital for investment firms in the EU.

Mr Davies emphasised that the overall approach should be based on proportionality. He said: 'We must recognise that not all firms are alike. Investment firms are not banks, and within the investment firms community there is great diversity, ranging from the large institutions able to conduct the full range of ISD activities, to firms with limited scope and which do not hold client money. The foundation for a more proportionate approach to the prudential regime for investment firms is already present in European legislation, in that it already imposes different levels of initial capital requirements commensurate with the scope of a firm’s business activities.'

'But,' he concluded, 'we need to build on that framework. It may be necessary to consider a further breakdown into business lines which would allow for a more risk-sensitive operational risk charge based on different scaling factors for different categories of business.'

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