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Bancassurers may get EU capital adequacy break

EU banks may be allowed to count more of the capital in their insurance subsidiaries towards the new Basel III capital requirements than previously expected, according to the Financial Times.

Last year, the Basel Committee on Banking Supervision agreed to introduce a requirement for all banks to maintain core tier one capital equal to 7 per cent of their assets. It said insurance capital can only account for up to 10 per cent of each bank’s total capital stock.

But according to the FT, draft Basel III legislation, which has not yet been released, could allow EU banks to evade the 10 per cent cap.

It says this could “disproportionately” benefit EU banks with insurance arms, including Lloyds Banking Group, which owns a number of insurance divisions including Scottish Widows.

One source told the FT: “You could drive a horse and coach through that exception.”

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  1. George lekatis 27th May 2011 at 11:31 am

    This could be an interesting regulatory arbitrage opportunity for the European banks, but I do not expect anything like that to happen.

    There are also some unintended consequences for Europe: Escaping international principles and avoiding good risk management leads to the perception that European banks are not safe, and that the likelihood for problems is higher.

    I do not believe that the Capital Requirements Directive will give this impression.

    Also, when the G20 leaders endorsed the Basel III framework, they also endorsed a consistent implementation. Although we will always have differences, these differences are not going to be important.

    George Lekatis
    http://www.basel-iii-association.com

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