Radwan working paper released

Alexander Radwan, a member of the European parliament (MEP) for Germany, released another draft of his working paper on the European Commission's capital adequacy directive (CAD) on May 20.

He presented the paper at a meeting of the parliament’s committee on economic and monetary affairs. Radwan had been expected to publish a complete report this month, but he has decided to postpone publication of this until next month, after the EU Commission issues the next draft of the CAD.

The next draft of the CAD is due in early June, and the document is expected to be finalised by February 2003. Radwan’s final report is expected to be adopted by the committee before the parliament breaks for the summer holidays in June.

In an interview with BaselAlert.com, Radwan says that two general points that will be debated most hotly when the CAD comes to the European parliament include the actual form the legislation will take, and the differences between the adoption of Basel II in the US and in the EU.

At present, the CAD document is drafted according to the Lamfalussy process – that is, the main body of the document includes the core principles of the legislation, while the annexes include all the technical detail. In theory, MEPs will pass the main body into law, while the technical detail will be subject to change over time. Some MEPs are sceptical of this process, which was created specifically to provide more flexibility in financial legislation and regulation, because they fear that bureaucrats will be able to alter the technical details to suit their needs, which could run counter to the intentions of the parliament as codified in the main body. The CAD is the first document that is being passed under the Lamfalussy process, and so the actual procedure under which the legislation will be constructed will be open to considerable debate, Radwan says.

The fact that the US has chosen to place it’s 10 largest institutions on Basel II’s most advanced approaches for credit and operational risk, while leaving the remainder of its institutions on Basel I, has also caused concern in Europe. Indeed, in Europe the Basel II framework is being applied not only to banks, but also to investment firms and insurers. MEPs fear that European institutions that are forced to hold capital will be at a competitive disadvantage against their US counterparts, who do not have specific capital requirements.

Radwan’s report also highlighted concerns about the granularity criterion in the standardised approach, which relates the exposure to each debtor to the total size of the retail portfolio for small and-medium-size enterprise lending. Under the Basel and CAD documents, SME lending is subject to special provisions that allow banks with exposures to one client of less than E1 million to treat the exposure as a retail exposure for regulatory capital purposes. Radwan’s report suggests that the granularity criteria might be too restricting.

Radwan also notes some of the changes that were made to the third consultative paper (CP3) of the Basel Committee on Banking Supervision, released at the end of April, in light of the QIS3 results. He says: “We have to see if they move or not in the Commission on the points that are important to us.”

Click here to view the working paper.BaselAlert.com