Europe allows wider role for op risk insurance in Cad 3

European banks and investment firms should be able to use operational risk insurance to reduce capital charges in all approaches to measuring op risk under new European Union (EU) capital adequacy rules.

This is likely to be proposed by the European Commission in a paper on progress with the European Union’s third capital adequacy directive, or Cad 3, which is expected in mid-November, banking industry and regulatory sources said.

It would be good news for European investment firms and asset managers and their supervisors, who feared the firms would be required to set aside penal amounts of protective capital to guard against operational hazards such as fraud, technology failure, legal risk and settlement errors.

But it would open up an unwelcome gap for some national regulators between the European Commission’s third capital adequacy directive, or Cad 3, and the Basel II bank capital adequacy accord. The present Basel II proposals on op risk insurance are restricted to advanced approaches and exclude simpler approaches.

Cad 3 will, in effect, be the way that the Basel II accord will be applied in EU nations when both sets of rules are introduced in late 2006.

A fuller version of this story will appear in the forthcoming edition of Operational Risk.