New QIS for Europe to explore economic impact of CRD IV

A new quantitative impact study for Europe will be launched to analyse the impact of Capital Requirements Directive IV

Patricia Jackson, Ernst & Young

The European Union is to undertake a new quantitative impact study (QIS) to help it get to grips with the overall picture created by the implementation of the fourth Capital Requirements Directive (CRD IV).

The new QIS, has been rumoured in the market-place for some weeks, was confirmed in a European Banking Commission newsletter.

In a newsletter sent to financial firms in December, the European Commission's Internal Markets Directorate wrote: "The final proposal will be accompanied by a robust and in-depth impact assessment of micro- and macro-economic effects. This will allow for ensuring the appropriate calibration of the proposal. In the coming months, the Commission will continue to work with Member States, the [European Parliament] EP, and all relevant stakeholders to finalise the details of the upcoming legislative proposal."

"This impact assessment is important because there have been various changes made to the [Basel] Accord since the first full QIS," says David Murphy, head of risk and reporting at the International Swaps and Derivatives Association in London. "It is pretty difficult to figure out what the impact might be without doing a full QIS, so that's an important element in the process. Certainly I think that would be a welcome development."

The final form of the EU's QIS is still under discussion, however. Important changes were made to Basel III before it was finalised in mid-December 2010 - including a new calculation methodology for the credit value adjustment (CVA) and changes to capital charges for central counterparty default funds - making the QIS results that were published at the same time already out of date.

However, firms are currently completing updates to show the effects of the CVA changes made at the end of last year in the final Basel III rules. An assessment is also being made of the effects of the proposed CCP rules. As a result, Patricia Jackson, risk partner at Ernst & Young in London, says it is not clear how much of the EU study will be a standalone QIS and how much will be using results from the Basel Committee QIS - at least in terms of the impact on individual firms.

However, other issues will be looked at in any EU QIS. The European Parliament, in its Karas report published in September 2010, requested an impact study because MEPs are concerned about the economic implications of the new capital requirements on bank lending to small businesses and individuals. "The key question is how much strain all these new capital requirements will put on the financial services industry, and therefore the economy," says Jackson.

MEPs also expressed worry about how the new rules would interact with other regulatory changes that are hitting the financial services sector - this may include the US Dodd-Frank Act. This is also a concern, says Jackson, "as banks are facing a substantial amount of change across a range of areas. Indeed, they will also face the effects of the central banks exiting from provision of emergency funding over the same period."

The banks themselves will be keen to see the results of this new QIS, as they have their own worries about the new rules - for example, how much more capital the whole industry will need. Given that they are not convinced it will be possible to wait until the end of the Basel implementation timelines to achieve the higher standards, pressures to raise capital are likely to intensify, says Jackson.

At the moment, the EBA is saying it is anticipating publishing its new CRD IV text "before the summer" of 2011 - a delay of four-to-six weeks from the original timetable that is a direct result of a similar gap in the publication of Basel III.

Jackson says a QIS study would probably be launched soon, with a two-month period for banks to respond, then a two- to three-month period of analysis. But this would depend on whether a full separate exercise is needed or if the Basel QIS figures can be utilised for some part of the exercise.