EUROPEAN UNION: EBA Seeks Views on New Prudential Regime for Investment Firms

Monday November 7 2016

On 4th November 2016, the European Banking Authority (EBA) launched a consultation in response to the European Commission`s call for technical advice on the design of a new prudential regime for investment firms, which is specifically tailored to the needs of investment firms` different business models and inherent risks. The aim of this work is to develop a single, harmonised set of requirements that are reasonably simple, proportionate, and more relevant to the nature of investment business. The consultation runs until 2 February 2017.

The Commission`s call for advice of 13 June 2016 follows up on the first two recommendations included in the EBA`s Report on investment firms published on 15 December 2015 and is addressed to all investment firms that are not systemic and bank-like. In particular, the EBA recommends a framework focused on the risks that investment firms pose to customers and to market integrity and liquidity.

Therefore, the EBA is proposing that the ongoing capital requirements shall be calculated based on capital factors (K-factors) that are attributed to one of these two broad types of risks. As a result, firms that pose more risk to customers and markets should get higher capital requirements than those who pose less risk, and firms that pose similar risk to customers and markets but with more own risk should hold more capital than those with less own risk.

The Discussion Paper covers the most important aspects related to the new prudential requirements for investment firms, including three possible alternatives to set minimum liquidity requirements. All three alternatives aim at addressing the liquidity profile of investment firms in a more appropriate way than the liquidity coverage ratio (LCR) and the net stable funding ratio (NSFR).

Click on the link above for further details.