Tight new rules for conglomerate solvency calculations are out.

The Council of the European Union adopted regulation regarding regulatory technical standards on the consistent application of calculation methods of solvency for financial conglomerates. This is a complicated piece of regulation that should stop financial conglomerates turning themselves into a risk for financial stability. This should be Europe’s answer to the somewhat weakened implementation of Basel III. Note, I referred to this Standard in an earlier post.

The principles underlying the standards are clear:

  • Elimination of multiple gearing; 
  • elimination of intra-group creation of own funds; 
  • transferability and availability of own funds; and
  • coverage of a deficit at financial conglomerate level regarding cross-sector capital.

Note also Article 9, which requires a solvency requirement (when bank rules apply) that includes:

  1. the requirements of CRR  and CRD to hold capital in excess of those requirements (the normal capital requirements),
  2. including a requirement arising from the (ICAAP, following Article 73 of the Directive),
  3. any requirement imposed by a competent authority pursuant to Article 104(1)(a) of that Directive (Second Pillar),
  4. the combined buffer requirement as defined in Article 128(6) of that Directive (Conservation, Cyclical, and SIB buffers),
  5. and measures adopted according to Articles 458 (macroprudentially inspired) or 459 (prudential requirements) of Regulation (EU) No 575/2013.

The Regulation shall enter into force on the twentieth day following that of its publication in the Official Journal of the European Union.

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