European Union Takes Additional Steps Toward New Capital Adequacy Framework

Washington, DC, July 7, 2003 - The Commission of the European Union has issued a third consultation paper on a new capital adequacy framework for credit institutions and investment firms, including asset managers, in the European Union. The Commission continues to take the general view that the new capital adequacy framework should apply to all types of financial institutions to ensure a level playing field within Europe.

Background

Since February 2001, the EC, in cooperation with the Basel Committee on Banking Supervision, has evaluated the EU's capital adequacy framework for banks and investment firms. An EC Capital Adequacy Directive proposal would subject investment firms, UCITS funds, and credit institutions to explicit capital requirements in order to manage operational risk—similar to requirements imposed on banking institutions.

In its latest report, the Commission identifies three elements to the prudential framework. First, every institution would be required to comply with basic risk management standards. Second, every institution would be subject to a minimum capital requirement for operational risk. Third, institutions would be required to disclose information on operational risk exposure and management.

ICI Position
The Institute supports the Commission’s recognition and acceptance of the view expressed by the Institute and others that the Commission’s previous proposals and the Basel proposals do not appropriately take into account the lower risk profile of the asset management sector. The Institute has consistently stated that it would be inappropriate to apply bank-style regulations to the asset management industry. In its latest report, the Commission acknowledges that in the case of asset management firms, their limited activities and risk profile indicate the need for a modified approach.

The Institute continues to urge the Commission not to impose capital requirements on the asset management industry, stating that they are unnecessary to protect investors and that high capital requirements in asset management have anticompetitive effects. The Commission expects to revisit this issue after further consideration.

Related Links
This website includes a section devoted to the Institute’s work with representatives of foreign nations and U.S. government officials to seek legislative and regulatory improvements that enhance both the competitiveness of U.S. money management firms abroad and the level of service to investors in foreign markets.