The Committee of European Banking Supervisors (CEBS) released its second report in a week when it published a report on the effects of the Capital Requirements Directive (CRD, the EU's variant of Basel II) on the amount of regulatory minimal capital required in Europe. This study was carried out by the CEBS in parallel with the QIS 5 study carried out by the Basel Committee on G10 and non-G10 countries. 262 banks participated in this study (49 being large, internationally active and diverse banks with own funds greater that 3 billion euros).
The results showed that for the larger banks, based on the current favourable macroeconomic environment, the reduction for those adopting the Internal Ratings Based (IRB) Approach was between 3.2% and 8.3% with the reduction, taking the most likely approach, being 7.7%. Reductions for the smaller banks were higher, being as high as 16.6% for those adopting the Foundation IRB Approach. Even higher figures were achieved by smaller banks adopting Advanced IRB but, with only 14 specialist banks falling into this category, these results were not seen as representative. The falls in capital do not take into account the thresholds that will apply until the end of 2009.
These results show that the largest decreases were in the residential mortgage area followed by other retail exposures, but there was general acceptance across the board that there was an incentive for European banks to move to more sophisticated risk measurement and management techniques. Banks supplied results for a number of different approaches to the calculation of regulatory capital but when asked which they would most likely adopt, responses showed that, for credit risk, all but two of the banks were likely to adopt one of the IRB Approaches. For smaller banks, however, 54% would adopt the Standardised Approach. For operational risk based capital calculations, the differences were even more marked; none of the larger banks were planning to adopt the Basic Indicator Approach (BIA) with 19 of the 49 adopting the Advanced Measurement Approach (AMA), but, for the smaller banks, two-thirds of banks were planning to adopt the BIA with only two banks taking on the challenge of AMA.
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