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Basel Accord’s Pillar 2 – is there a level playing field for European banks?

Despite the EU’s ongoing efforts to establish more uniform financial regulation across Europe, a report published by KPMG finds there is still significant divergence among European regulators in their approaches to implementing the Pillar 2 guidance on capital adequacy.

The research shows the capital requirements vary considerably between major banks in different European countries, as the application of the process used to assess and arrive at those requirements is variable.

The main difference between countries such as Germany, Austria and Belgium, and others including France, Spain and the UK, boils down to the extent economic capital models are expected to inform the outcome of the regulatory assessment of required capital levels. The other key disparity relates to the approach of the regulators; namely between those that seek adjustments to economic models to meet their expectation for coverage of risks and those that set guidance based on regulatory capital and/or require adjustments to regulatory capital bases.

Daniel Sommer, European head of financial risk management at KPMG said:  “From its inception, Pillar 2 has incorporated a degree of flexibility given the one size fits all model was considered neither practical nor necessary at the time. The issue that has since emerged is because Pillar 2 leaves more room for interpretation than originally envisaged, there is little transparency which makes it difficult to compare banks. This is clearly undesirable and subject to much criticism by the banks in question.  As participants in the single market they expect to be treated consistently with their European peers and compete on a level playing field.  To make such an approach work, European regulators should be applying common processes and consistent standards which is currently not the case.

“As far as Pillar 2 is concerned, European banks and regulators still appear to be in a process of experimentation. The guidance for Pillar 2 in Europe was first issued by the Committee of European Banking Supervisors (CEBS) in 2006, which in itself was a challenging task due to the need to achieve convergence across 27 EU members, each with significantly different legal systems and practices.”

“Given the framework has now been applied for more than three years, ideally these divergent practices should have been ironed out by now. However, what we see in the market is that every single national regulator is applying, and further developing, their favourite approach with little incentive so far to develop a common view on overall approach, methodology and resulting minimum capital levels.

“The transformation of CEBS into the European Banking Authority, the obligatory use of regulatory colleges for multi-national banking groups and the associated requirement for joint decisions on Pillar 2, should reverse this process. This, in turn, should lead toward greater transparency and a comparable view on how European banks should be capitalised and managed.”

Notes to editor

About this report

ICAAP in Europe – Moving in Different Directions is based on a study undertaken by KPMG in Germany leading up to February 2011. The views and insights in this report are based on interviews with risk and capital managers in various large European banks, and KPMG’s professionals’ assessment of the regulatory practices existing in each of the countries included in this study.

Click on this link to view the report

For further information please contact

Monica Fiumara, Senior PR Manager, KPMG

Tel: +44 (0)20 7694 5674

Mobile: +44 (0)7901 105180


About KPMG

KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and operates from 22 offices across the UK with nearly 11,000 partners and staff.  The UK firm recorded a turnover of £1.6 billion in the year ended September 2010. KPMG is a global network of professional firms providing Audit, Tax, and Advisory services. We operate in 150 countries and have more than 138,000 professionals working in member firms around the world. The independent member firms of the KPMG network are affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity.  KPMG International provides no client services.

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