The financial crisis has unveiled certain shortcomings within the capital requirements directive which are being addressed by proposed changes by the European Commission. Member states, including Malta, are expected to transpose the provisions of the Capital Requirements Directive (CRD) II by the end of October, and this will in turn be implemented by investment firms (where applicable) by the end of the year. The MFSA has issued a circular to the industry with information about the relevant developments.
The objective of the Capital Requirements Directive is to establish the capital adequacy requirements that apply to both credit institutions and investment firms to ensure the adequate solvency of financial institutions and to reduce the systemic risk of failure of financial institutions. This directive was adopted by the European Union in June 2006 but, as a response to the credit market turmoil that emerged in mid-2007, changes have been introduced relating to large exposures, hybrid capital instruments, supervisory arrangements and adjustments to certain technical provisions. The changes introduced to the CRD are referred to as CRD II.
Directive 2009/111/EC of CRD II addresses some of the shortcomings revealed by the financial crisis, such as the failure to focus on the macro-systemic risks of failure of financial institutions. The directive also establishes the criteria for hybrid capital instruments which could form part of the eligible capital of investment firms. This serves the purpose of enhancing the quality of the capital that is held by investment firms.
The directive establishes colleges of supervisors in order to increase cooperation between the competent authorities and to enhance the supervision of cross-border groups, particularly in emergency situations. It also introduces the notion of significant branches in order to reinforce the rights of host countries to information and improve the management of large exposures undertaken by investment firms.
During 2009 the Commission has proposed further changes to CRD with the aim of strengthening the prudential regulatory framework of the CRD with respect to certain areas which were relevant to the causes of the crisis. It was understood by supervisors and regulatory bodies that the failure of individual financial institutions during the recent crisis was caused by inappropriate remuneration structures which led financial institutions to take excessive and imprudent risks. CRD III has been proposed which covers changes relating to the trading book, re-securitisations and the disclosure of securitisation exposures.
The EU Commission is also currently discussing further improvements - CRD IV - relating to dynamic provisioning which is a counter-cyclical measure for capturing expected losses due to inherent credit risks that have not materialised as "incurred losses". The Commission is proposing to apply dynamic provisioning on balance sheet items (such as loans) and possibly off-balance sheet items (such as guarantees) and also the removal of national options and discretions which give rise to differences in national implementing legislation from the current directives. A public consultation document has been issued in this regard.
The Malta Financial Services Authority recommends that stakeholders familiarise themselves with the provisions of CRD II which may be accessed through the official journal of the European Union at the following link: http://eur-lex.europa.eu/en/index.htm . It is also important that stakeholders will familiarise themselves with the proposed CRD III directive http://ec.europa.eu/internal_market/bank/regcapital/index_en.htm and the public consultation document relating to CRD IV: http://ec.europa.eu/internal_market/consultations/docs/2009/capital_requirements_directive/CRD_consultation_document_en.pdf .
Regional seminar on insurance company directors' corporate responsibilities
The MFSA in collaboration with the Committee of European Insurance and Occupational Pensions Supervisors will be launching a training seminar aimed at providing participants with the opportunity to familiarise themselves with and discuss corporate responsibilities issues in relation to the insurance industry. The seminar will be held at the MFSA conference room on April 8 and 9. The seminar is aimed at insurance supervisors who are actively involved in the regulation and supervision of the insurance industry and to industry participants, namely directors, prospective directors and compliance officers involved in insurance/re-insurance companies.
Participants will be able to familiarise themselves with general governance requirements, risk management issues, internal control systems and general risk aspects related to governance within the insurance industry to further enhance preparation for Solvency II.
Further details, including programme details, are available on the MFSA website at www.mfsa.com.mt, under Training and Development. Persons intending to become directors of insurance companies are invited to attend the seminar.
MFSA website: http://www.mfsa.com.mt
Registry website: http://registry.mfsa.com.mt
Consumer website: http://mymoneybox.mfsa.com.mt