FSA urges UK banks to look hard at EU capital proposals

UK banks should look hard at a draft text of European Union (EU) capital rules that the European Commission plans to issue around the end of October, the UK’s senior financial regulator said today.

Bankers should comment on the draft sooner rather than later, Financial Services Authority (FSA) chairman Howard Davies said. The FSA is the UK’s chief financial market watchdog.

The Commission plans to publish a paper on progress with its third capital adequacy directive (Cad 3) about a month after the Basel Committee on Banking Supervision issues key documents relating to the complex Basel II capital accord.

Cad 3 is closely modelled on the Basel II proposals, and the draft text will be included in the commission’s paper, Davies told the annual supervision conference of the British Bankers’ Association, the trade body for UK and foreign banks based in Britain. The draft will give an idea of what an EU directive might look like if the Basel II proposals were finalised in their current form, he said.

“That will, I hope, be welcome to you, because it is the precise wording of the EU directive that we in the UK will have to implement, and you will have to follow,” Davies told bankers attending the conference.

The Basel Committee, the architect of the Basel II accord, plans to issue its third Basel II quantitative impact study, or QIS 3, on October 1. QIS 3 will seek information on how the risk-based Basel II accord on bank protective capital will affect banks when it is introduced in late 2006.

The European Commission wants to apply Cad 3 to all banks and investment firms in the EU, of which the UK is one of 15 member states.

Davies noted that in the EU, Basel II will take effect through Cad 3.