Give me strength

It has been a few weeks now since we last had a paper on prudential matters from the FSA so it was good to see that three new papers have just been released.

“Strengthening Capital Standards 3” (CP09/29) sets out proposals for implementing changes to the Capital Requirements Directive (if you can’t immediately recall papers 1 & 2 that is because they were released in 2005 and 2006 respectively). The paper combines “CRD2”, which Europe requires to be applied from 31 December 2010, and “CRD3”, the final text of which has yet to be agreed by Europe.

As a result the paper is consulting on some issues which may be subject to change, so there may be a need for a later follow up consultation. Of perhaps most interest to the majority of firms is the (previously flagged) proposal to exempt ‘limited licence’ and ‘limited activity’ firms from the large exposures regime set out in BIPRU 10.5. This proposal will not be implemented until 1 January 2011 and until that time all firms subject to BIPRU must continue to monitor their large exposures.

Interestingly, the FSA estimate that the average administrative cost for each of these firms in complying with the large exposures regime is around £5,000 p.a. Elsewhere there will be no changes to the Pillar 2 regime with some changes to Pillar 3 disclosure with the intention of increasing the amount of useful information available to market participants.

Other areas discussed include hybrid capital, securitisation and the need to strengthen capital requirements for firms with a trading book – the latter is estimated to increase capital requirements of such firms in the order of £29bn. Sections 1.7 to 1.12 of the CP contain a useful summary of the proposals.

Draft text of proposed changes in BIPRU etc. is contained in the Appendices of CP09/29.

The consultation closes on 10 March 2010.