BOE reveals tough stance on CRD IV rules for holdings in banks and insurers

This week the BOE published a consultation paper on changes to its rules regarding EU’s CRD IV. In it the BOE fills in any blanks left by the CRD IV. Clearly noticeable is BOE’s stance on a bank’s holdings in other banks and insurers. It’s tough!

Where some continental supervisors support the arcane bank-assurance model, BOE is upfront in its chapter on the Definition of capital (p23). The BOE requires deduction of holdings of regulatory capital issued by banks that the mother bank consolidates.  From 1 January 2014, firms must deduct 50% of these holdings. Each next year an additional 10% shall be deducted.

Also regarding insurers, a bank will have to deduct significant holdings of regulatory capital issued by  insurers. BOE’s Prudential Regulation Authority (PRA) motivates this: “The PRA considers deduction necessary to prevent the multiple use of the same capital resources in different parts of the financial system.”

These rules mitigate the transfer of risks and capital to subsidiaries. Capital will now more often be upstreamed to the (mother) holding bank, keeping daughters slimly capitalized. The rules also mitigate the incestuous piggy-backing of banks on insurance capital.