Radwan report highlights potential problems for investment firms

BRUSSELS

-- Member of the European Parliament Alexander Radwan released another working draft of his report to the EU Parliament in late May, and presented the report to the Committee on Economic and Monetary affairs. In the report, Radwan draws the committee’s attention to some key op risk issues.

Increases in capital

For example, in the EU, the Basel II proposals are going to be effectively applied to the asset management community as well as banks through the third capital adequacy directive (Cad3). The Basel Committee on Banking Supervision’s third quantitative impact study (QIS3) showed large increases in regulatory capital due to the size of the op risk charge for investment firms.

"There are cases where the requirement to cover risks by own capital is neither reasonable nor helpful, but would just lead to further consolidation in the financial services industry. In some member states there are thousands of small investment firms, which do not come into possession of money or instruments of clients (eg, investment advisers, certain portfolio managers). Their risks are best covered by insurance," says Radwan in his paper.

"One big group who have a lot of concerns is the investment banks. They have started lobbying. The main point is that they say how they will have to calculate operational risk, the charge is too high for them," he says. "We’ve noted this, and we need to look for the reasons. If there is no reason for it that is sensible, then we will say to the commission that it is too high and should be reduced."

Smaller banking institutions

"Obviously this [charge] is going to be a big pill to swallow for the European asset managers," says Christian Pedersen, a consultant at Oliver Wyman in London "They’ve lobbied a lot but seemingly it has not been completely heard, so they are going to have to brace themselves for improving risk management, an area that they probably haven’t focused that much upon."

Radwan says he will also be looking at the impact of the operational risk capital charge on smaller banking institutions, and more specialised banks, through a more detailed study of the QIS 3 results.

Other areas of concern, according to Radwan, include the differences in scope of implementation between the EU and the US, and the introduction of the Lamfalussy process for legislation (Cad3 is the first piece of financial legislation to be structured into a main body of fixed principles, and a series of more flexible annexes packed with technical detail).

Radwan says he awaits the release of the next draft of the Cad3 in early June, and he will be presenting his final report for adoption of the committee before the EU parliament’s summer break. "We have to see if they move or not in the Commission on the points that are important to us," he says. OpRisk

Ellen Leander/Joseph Radford