The European Banking Authority (EBA) published today its report in response to the European Commission’s call for advice on the suitability of certain aspects of the prudential regime for investment firms. This report, done in consultation with the European Securities Market Authority (ESMA), presents the EBA’s findings and lists a series of recommendations aiming to provide a more proportionate and less complex prudential regime for investment firms, based on appropriate risk sensitivity parameters.
In the Report published today, the EBA identifies the lack of risk sensitivity in the Capital Requirements Directive (CRD) and Regulation (CRR) regime for investment firms as a primary issue to be addressed, and proposes a series of recommendations to target specific risks posed by investment firms. The variations in nature, scale and complexity of investment firms’ activities are wide, but remain partially captured in the current CRD/CRR categorisation. This leads to a situation where firms that conduct similar activities and pose similar risks to market participants, might be subject to varying prudential requirements.
The first recommendation proposed by the EBA is a new categorisation of investment firms, which will distinguish between systemic and “bank-like” investment firms to which full CRD/CRR requirements should apply, and other investment firms, namely those that are considered “not systemic” or “not interconnected”, for which specific requirements should be defined.
These categorisations would lead to a more proportional framework, with the ultimate purpose of strengthening the soundness and stability of investment firms on going concern. The EBA believes that such prudential framework for investment firms should take into account the threefold objectives of preserving financial stability, protecting investors and ensuring the orderly failure of these firms when this may be needed.
The EBA also suggests extending the waiver for commodity trading firms, which are currently benefitting from the exemption under both the large exposures and capital adequacy provisions, until 31 December 2020. This extension would allow regulators to assess whether a more proportionated framework is suitable for these firms.