UKnoteonproposalsfortheCapitalRequirementsRegulation/Directive

Keypoints TheUKwelcomestheworkoftheEuropeanCommissionindrawingupthe CRR/CRD4proposal.Itisanessentialstepintheregulatoryresponsetoasevere,far reachingandcostlyfinancialcrisisandrecession. Toprotectfinancialstability,reducecostsforEUcitizens,avoiddamaging internationalarbitrageandreinforceessentialmarketconfidenceinEUbanks,itis vitalthattheEUnowbuildsupontheCommissionproposalandtheG20agreement tofullyandfaithfullyimplementtheBasel3agreementthroughtheCapital RequirementsDirective(CRD)4. Therearetwocriticalworkstreamstoprioritise: o toachievethecorrectbalancebetweencompletingthesinglerulebookin banking,whichwilleaseburdensonbusinessandlowercostsforconsumers, andreinforcingtheabilityofMemberStatestoprotecttheireconomiesfrom thefiscalriskofbankfailure;and o toensurethattheregulatoryfailuresthatcontributedtothefinancialcrisis areproperlydealtwith.Inpractice,thismeansresistingthetemptationto departfromtheBasel3agreementbyallowinglessstringentprudential standards.ThiswouldcarryconsiderableriskfortheEU,toitsfinancial stabilitydirectly,andtothemarketcredibilityoftheEUbankingsector. Theremainderofthisnoteconsiderstheglobalcontextoffinancialregulatory reform;theimpactofthesereforms;andtheCRR/CRD4proposal. Theglobalcontextoffinancialregulatoryreform 1. Basel3wasarguablythemostimportantaspectoftheinternationallyagreed responsetothefinancialcrisis,addressingmanyofthedeficienciesintheprudential regimeexposedbythefinancialcrisis,whichledtotheneedforexceptionaland costlysupportfrompublicauthorities(governmentsandcentralbanks)tothe financialsystem,aswellasapermanentlossofwealthtoEUcitizensfromthe resultinglowornegativeeconomicgrowth.Togetherwithmorerobustsupervision, theimplementationofBasel3isakeystepinensuringstabilityandmarket confidenceintheEuropeanUnionsfinancialsystem. 2. TheBasel3agreementhasunprecedentedinternationallegitimacyandwasa deliberatelydetailedtechnicalagreement.ItwasendorsedbytheG20Leaders, includingtheleadersofFrance,Germany,Italy,theUnitedKingdomandthe PresidentoftheCommission.Thesedescribeditasalandmarkagreementandat theirSeoulSummitstatedthat:Wearecommittedtoadoptandimplementfullythese 1

standardswithintheagreedtimeframethatisconsistentwitheconomicrecoveryand financialstability.Thenewframeworkwillbetranslatedintoournationallawsand regulations,andwillbeimplementedstartingonJanuary1,2013 andfullyphasedinbyJanuary1,2019.ThiswasreinforcedbytheEuropeanCouncil attheirlastmeetingonJune24th,whichstatedthat:Allnecessarymeasures,fully consistentwithinternationalstandards,mustberapidlytakentoaddressanypossible bankingvulnerabilitiesbroughttolightbythesestresstests. 3. TheEUhasbeenheavilyrepresentedinthedevelopmentofinternationalbanking standards.SeniorEuropeanpolicymakerswerecentraltothedevelopmentofBasel 3,andthefinalagreementwastailoredtotakeintoaccountthespecificitiesof Europeanbankingmodels.DuringtheagreementofBasel3NoutWellinkwaschairof theBaselcommittee,JeanClaudeTrichetchairedtheGovernorsandHeadsof Supervisorscommittee(theexecutivebodyofBasel)andMarioDraghichairedthe FinancialStabilityBoard. ImpactofBasel3 4. Comprehensivestudies,includingtheBaselCommitteeslongtermeconomicimpact assessment,haveshownthattherearesignificantnetbenefitsfromtheenhanced financialstabilityassociatedwithafullimplementationofBasel3.TheBaselCommittees analysisfindslargenetbenefitsoftheagreedBaselIIIpackagethat remainpositiveforabroadrangeofcapitalratios.Forexample,withallbanks meetingacapitalratioof7%andtheliquidityrequirements,andassumingcrises havemoderatepermanenteffects,theexpectednetbenefitis0.76%ofthelevelof GDPperannum. 5. TheBaselCommitteehasalsoconductedanalysisoftheshortruneffectsthroughthe QuantitativeImpactStudyandtheMacroeconomicAssessmentGroupreportonthe transition.ThesestudiesfindthattheagreedcalibrationandsequencingoftheBasel 3agreementismanageablefortheeconomyandbanks,withtheshorttermimpact oneconomicrecoverymitigatedbythetransitionalarrangements. 6. Additionally,theOECD,intheirNovember2010EconomicOutlook,statedthatany negativeeffect[ofBasel3]islikelytobefarmorethanoffsetbythebenefitsof sounderbankingandthatthecurrentBCBSproposalsrepresentasubstantial improvementinthequality,quantity,andcomparabilityofbankcapital...Thiswould increasefurtherbankingsectorresiliencetoabsorbanyfutureshocksthatmaylie ahead,whilelimitingincentivestotakeexcessiverisksintheinterim. 7. TheECONcommitteeitselfhascommissionedanimpactassessmentofBasel3.The reportfindsenhancedcapitalandliquidityrequirementstobethemostefficientway toensurethestabilityofthefinancialsystem,thereportalsofindsthatthelongrun impactofincreasedcapitalandliquiditystandardsisclosetozero. 2

CommissionproposalsforCRR/CRD4 8. TheUKwelcomestheCommissionsCRR/CRD4proposals,whichareanimportant firststeptowardsaprudentialsounderfinancialsystemintheEU.However,as indicatedabove,thereareanumberofareaswheretheUKwouldliketosee amendmentstotheproposalstobringtheminlinewithinternationallyagreed standards. 9. FailingtofullyimplementinternationallyagreedstandardsintheEUbrings considerableriskfortheEU,toitsfinancialstabilitydirectly,andtothemarket credibilityoftheEUbankingsector.Thefollowingsectionsetsoutthepriorityareas wheretheUKfeelsamendmentswouldstrengthenthelegislativeproposals. Thesinglerulebook/maximumharmonisation 10. Asoutlinedabove,itwillbecriticaltoachievethecorrectbalancebetween completingthesinglerulebookinbanking,whichwilleaseburdensonbusinessand lowercostsforconsumers,andreinforcingtheabilityofMemberStatestoprotect theireconomiesfromthefiscalriskofbankfailure. 11. TheUKstronglysupportsthecompletionofthesinglerulebookinbankingand believesthatthisisbestdonebyremovingthemajorityofoptionsanddiscretions foundintheCRD,byensuringconsistencyinthedefinitionsusedthroughouttheEU, suchasincapitalinstrumentsandliquidassets,andbypromotingsupervisorybest practice,whileensuringthatMemberStateshavenecessaryflexibilityinthewayin whichsupervisoryreviewisundertaken. 12. However,nationalgovernmentshavetheultimateresponsibilitytoensurefinancial stabilityintheirjurisdictionsandtoprotecttheirtaxpayersagainstthepotentialfiscal riskassociatedfromfinancialturmoil.ItisimportantthatMemberStatesretain discretiontoreacttosystemicrisksemergingthroughnationalspecificstructural characteristicsorcreditcycles. 13. TheCommissionisproposingthatthatPillar1(minimumrequirements)andPillar3 (disclosurerequirements)shouldberecastasbeingmaximumharmonised, preventingMemberStatesfromrequiringhigherprudentialstandardseitherto requirebankstoholdadditionalcapitalinexcessoftheminimumorformacro prudentialpolicyreasons.Nocompellingevidenceisprovidedforthisapproachinthe proposalsimpactassessment.

14. TheCommissionsproposalconstrainstheabilityofMemberStatestorespond flexiblyandinatimelymannertosystemicrisksintheirjurisdictionortomitigate fiscalrisk.MemberStatesshouldretaintheindependencetodetermineoverall calibrationofregulatorystandards.Importantly,thisextendsbeyondlevelsofcapital. Itisincreasinglyrecognisedthatnationalauthoritiesneedtobeabletopursuea macroprudentialeconomicpolicytobestaddresstheriskspresentedbythefinancial sector. 15. AkeyEUreportthatexaminedthecausesofthefinancialcrisisandproposeda regulatoryresponsealsoconcludedthatmaximumharmonisationisnottheanswer. TheDeLarosierereportconcludes:Furthermore,allowingacountry,under appropriatecircumstances,toadoptsafeguardsorregulatorymeasuresstricterthan thecommonframeworkshouldnotberejected.Aslongasagreedminimumcore standardsareharmonizedandenforced,acountrycouldtakemorerestrictive measuresifitconsiderstheyaredomesticallyappropriatetosafeguardfinancial stability.Thisshouldofcoursebedonewhilerespectingtheprinciplesoftheinternal market. TheCommissionsapproachtoflexibleregulation 16. TheCommissionproposaldoeshoweverseektoallowsomeflexibility,anddoesthis throughamendmentstoPillar2,thecountercyclicalcapitalbufferandtheaddition ofadelegatedactgrantingthempowertovarycapitallevelsthroughouttheEU. Theseamendmentsareinappropriateforconductingmacroprudentialpolicyfora numberofreasons. 17. First,Pillar2isdesignedtobeusedonafirmbyfirmbasisandtocoveridiosyncratic risk.Itisnotdesignedtobeappliedtoallfirmsatasystemiclevelandifusedinthat waymaybesubjecttolegalchallenge.Pillar2isalsonotdisclosed,whichwould meanthatmacroprudentialauthoritieswouldbeunabletosignaltheirdecisionsto themarketunderminingtheimpactoftheirdecision.Oneofthekeytoolsamacro prudentialauthorityhasistheabilitytosignaltothemarketthattheyconsider conditionsaredeteriorating. 18. Second,aCommissiondelegatedactisnotanappropriatevehicletoconductmacro prudentialpolicyattheMemberStatelevel.Tobemosteffectivemacroprudential policyshouldbesetbynationalauthoritieswithakeyrolefortheESRB. 19. Third,toolssuchasthecountercyclicalcapitalbufferare,bydefinition,intendedto betimevarying(countercyclical)andnotpermanent.InsomecircumstancesMember Statesmaychoosetoimplementpermanentlyhigherstandardsiftheyjudgethis necessarytoprotectagainstthesizeoftheirfinancialsector.

20. Thefollowingsectionsetsouttheareasinrelationtocapital,leverageandliquidity wheretheUKwouldliketoseetheCRD4proposalsbroughtinlinewiththeBasel3 agreement. Treatmentofsignificantinvestmentsininsurers 21. Basel3allowsupto10%ofabankscommonequitytier(CET)1capitaltobemade upofsignificantinvestments1ininsurers.TheBaselCommitteeagreedthatany investmentabovethe10%mustbesubjecttothecorrespondingdeduction approach.Thatisaninvestmentmustbedeductedfromtheequivalentpartofa bankscapitalstructure,e.g.aninvestmentinaninsurersordinarysharesmustbe deductedfromCET1. 22. TheBaselCommitteeagreedthecorrespondingdeductionapproachtoensurethat bankcapitalisfullylossabsorbentandtopreventthedangerousdoublecountingof capitalbetweenbanksandinsurancesubsidiaries. 23. Thecorrespondingdeductionapproachwasoneofthecentralcomponentsofthe Basel3agreementandisdesignedtopreventbanksbeingabletocountinsurance capitalandartificiallyinflatetheirowncapitalratio. 24. DespitethistheCommissionsproposalsdeviatefromthisimportantaspectofthe Basel3agreementbyallowingMemberStatestheabilitytocontinueusing alternative,lessprudentapproachestothetreatmentofsignificantinvestmentasset outintheFinancialConglomeratesDirective(FCD). 25. Thispermissiontodeviatefromtheglobalagreementprovidesasignificant commercialbenefittolargeglobalbankinggroupsiftheyarestructuredinthe bancassurancemodel,withdiscountsfromwhatwouldproperlybetheminimum Basel3requirementsofperhapsaround30%andpotentiallyhigherinparticular cases(thiscouldamounttoadiscountedcapitalrequirementrelativetoproper implementationofBasel3ofinexcessof10bnforcertainglobalbanks2). 26. AllowingMemberStatestocontinueusingdivergentapproachesisalsoinconsistent withthesinglerulebookinbanking,asitwillmeandifferentbanksthroughoutthe EUusingdifferingapproachesforacentralpartoftheprudentialframework.
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1 2

Asignificantinvestmentisdefinedasowning10%ormoreofthatentitiesequity. Autonomous,Europeanbanks:firstthoughtsonCRD4

27. Itisimportant,bothfromasinglemarketandfinancialstabilityperspectivethatall banksthroughouttheEUarerequiredtoapplythecorrespondingdeduction approachtosignificantinvestmentsininsurers. Formofcommonequitytier1capital 28. TheBaselCommitteeandG20haveagreedthatinstrumentsthatcountascommon equitytier1(CET1)capitalforjointstockcompaniesmustmeetthelegalformof ordinarysharesthatmeet14substantivecriteria,i.e.theBaselCommitteeagreed thatbothsubstanceandformwereimportant.Thelegalformofordinaryshareswas chosenbecausetheyweretheinstrumentsthatwereproventobethemostloss absorbentandtransparentduringthefinancialcrisis. 29. TheBaselCommitteeagreedthatinstrumentsthatqualifyasCET1shouldbelimited toordinarysharesthatmeet14lossabsorbencycriteriabutimportantly,onlywhere afirmdoesissueordinaryshares.DespitethistheCommissionsproposalsmove awayfromtheBaselagreementinthiskeyarea. 30. TheCommissionisproposingthatratherthanfollowtheinternationaldefinitionof CET1asordinarysharestheproposalswouldallowanyinstrumentsthatarecounted asequityundernationallawandmeetthe14criteriatobeaccepted.Thisproposal invitesfinancialengineeringasitwouldallowanynewinnovativecapitalinstruments thatseemtofulfilthe14criteriaandareacceptedundernationallawtobeequityto countasCET1.Theexperienceofthefinancialcrisishasshownthatinnovativecapital instrumentsfailtobearlossestothesamedegreeasordinaryshares. 31. AllowinganationaldefinitionofequitytobethelegalformthatCET1instruments mustmeetisalsocontrarytothesinglerulebookinbanking.UnderTheCommissions proposalsitwillbepossibletohave27differentinstrumentseligibleas CET1.ThecurrentfragmenteddefinitionofCET1throughouttheEUwasoneofthe keydeficienciesidentifiedwiththeprudentialregimeintheEUbythedeLarosiere report.TheCommissionsproposalsforCRD4wouldfurtherexacerbatethisfracture attheheartoftheprudentialframeworkintheEU. 32. Additionally,marketsareexpectingthatCET1willbemadeupofordinaryshares(a termthathasbeenusedpreviouslyinEUlegislation,forexampleinCRD2), instrumentswhichtheytrust.Thisisaveryrealrisk,asmarketcommentatorshave alreadybeguntocommentontherisksposedbytheCommissionsweakened proposals.AresearchnotefromDeutscheBankrecentlynotedthatwe seethesechangesasafurtherlargedilutionoftheoriginalvisionoftheBaselCommittee, andintheshortrun,abenefittobankprofitability.Inthelongerrun,weareinclined

toseethemasadetrimenttobankstability,andwedonotseetheEUCommissionas hittingtherightnoteinbalancingthesetwooutcomes.3 33. InordertoensurethattheCET1capitalthatbanksholdisfullylossabsorbentand toretainmarketconfidenceinEUbanksitisvitalthatinstrumentsthatqualifyas CET1mustbeordinaryshareswhichmeetthe14criteria. Mutualsandcooperatives 34. Mutualsandcooperativebanksdonotissueordinaryshares.Thespecificitiesofnon jointstockcompaniesareaddressedbyBasel3.Theimportantrolethatmutualsand cooperativebanksplayintheEUeconomydoesnotinanywaypreventtheEUfrom fullyimplementingBasel3.Mutualsandcooperativesareexemptfromthe requirementthattheirCET1mustmeetthelegalformofordinarysharesbutthatthe instrumentstheyissuemustmeetthemajorityof14criteriaassetoutbytheBasel agreement. Basel1capitalfloor 35. Basel2movedtoariskbasedsystemforassessingcapitalrequirements.However,to avoidthisleadingtocapitalrequirementsbeingreducedinappropriately(below80% heldunderBaselI),itwasagreedthattherewouldbeafloorintermsofthecapital requirementforcertainassets.InJuly2009,theBaselCommitteeagreedtokeepin placetheBaselIcapitalfloorsbeyondtheendof2009. Sincethentherehasbeenno commitmenttoremovethecapitalfloors,ortoallowawaiverfromtheirapplication. 36. DespitethistheCommissionisproposingthatsupervisoryauthoritiesshouldhavethe abilitytograntawaiverfromthefloorifcertainconditionsaremetwithrespectto internalmodels.Inordertoprovideabackstoptoriskbasedcalculationsofcapital, thefloorshouldremainforallbanks. Grandfatheringtreatmentofcapitalinstruments 37. DuetotheimportanceofCET1capitalinensuringfinancialstability,theBasel Committeeagreedthatforjointstockcompanies,CET1instrumentsthatareno longereligiblewouldnotbesubjecttoagrandfatheringperiodandwouldbe ineligiblefrom1stJanuary2013.Itwasalsoagreedinternationallythatonlythose instrumentsissuedbefore12thSeptember2010wouldbeaffordedagrandfathering period. 38. TheCRD4proposalswouldallowCET1instrumentsineligibleunderthenew proposalsandissuedbyjointstockcompaniesatenyeargrandfatheringperiod.This willmeanthatthecapitalbaseforEUbankswillbesignificantlyweakenedovera prolongedperiodoftime.Thisisaverysignificantconcessionandwasstrongly rejectedbyBasel.Theproposalsalsobringforwardthegrandfatheringcutoffdate from12thSeptember2010toJuly2011,meaningthatalllesslossabsorbent
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3

DeutscheBank,EuropeanBanksStrategy:Anupdateonsomepositivetrends:fundingandregulation

instrumentsissuedbetweenthesedateswillcontinuetocountasfullylossabsorbing capitalforaprolongedperiodoftime. Leverageratio 39. Akeyadvantageoftheleverageratioisthatitpreventsbanksfrombuyingexcessive amountsofriskyassetswhichtheregulatoryframeworkhasincorrectlydeemedless riskyorevenriskfree. 40. Oneofthekeycharacteristicsofthebuildupofthefinancialcrisiswasthe unsustainablebuildupofleverageinthefinancialsystem,includingintheEUwhere onaveragebanksweremorehighlyleveragedthantheircounterpartsintheUSand Asia. 41. Thecurrentregulatoryframeworkresultedinpoorlycapitalisedbanksseemingwell capitalisedundertheriskbasedregime.Whenthefinancialcrisishit,banksquickly incurredlosseswhicherodedtheircapitalbase,forcingthemintotheeconomically damagingprocessofdeleveraging. 42. BecauseofthisattheG20leaderssummitinPittsburghtheleadersstatedthatWe supporttheintroductionofaleverageratioasasupplementarymeasuretotheBasel IIriskbasedframeworkwithaviewtomigratingtoaPillar1treatmentbasedon appropriatereviewandcalibration.MrOthmarKarassReportonBaselIIand revisionoftheCapitalRequirementsDirectivesFavoursaleverageratiotobe anchoredinPillar1oftheBaselCommitteeframework. 43. TheBaselagreementreflectedthissentimentbyagreeingthatin2018theleverage ratioshouldbemigratedtoPillar1followingareviewofwhetheranychangestothe calibrationoftheratiowasneeded.TheCommissionsproposalsonCRD4donot makeadefinitivecommitmenttomigratetheleverageratiotoPillar1in2018as agreed.ToensureaconsistentapplicationoftheleverageratiothroughouttheEU, andtoallowtheleverageratiotofulfilitsroleasabackstopitisimportantthata commitmentismadetomigratetheratiotoPillar1in2018asagreed. Liquiditymeasures 44. Thefinancialcrisisrevealedthatbankswereholdinginsufficientamountsofliquid assetsontheirbalancesheetandwereoverlyreliantonshorttermfundingsources. Itwastheinabilityofbankstoaccessstablefundingsourcesthatpreventedthem fromsupplyingcredittotherealeconomy. 45. Inresponsetotheliquidityproblemsexperiencedbybanksduringthefinancialcrisis theBaselCommitteehasagreedtwomeasures;theLiquidityCoverageRatio(LCR) andNetStableFundingRatio(NSFR).TheLCRwillrequirebankstoholdenoughtruly liquidassetstofundthemselvesfor30daysofmarketstress.TheNSFRwillrequire bankstofundthemselvesfromstableandlongtermsourcesoffunding,ratherthan relyonunstableshorttermwholesalefundingsources. 8

46. Ensuringbanksmovetomovesustainablesourcesoffundingisakeystepinensuring financialstability,thisisparticularlythecaseintheEUwheretheIMFnotesthat bankshavemadelessprogressinlengtheningthematurityoftheirfunding,and remainhighlydependentonwholesalefunding,withsecondtierbanksincreasinglyrelian toncoveredbondmarketsandtheEuropeanCentralBank(ECB)forfunding.4 47. InasimilarwaytotheCommissionsproposalsontheleverageratioitsproposals ontheNSFRmakenofirmcommitmenttoimplementthemeasureaswasagreed internationally. 48. TherehasbeensomeconcernexpressedwiththedesignoftheLCR.Inparticular,that itwouldrequirebankstoholdtoogreatanamountofsovereigndebt.TheLCRissplit intotwoparts:Level1andLevel2.TheminimumamountofLevel1holdingsis60%. Outrightholdingsofsovereigndebtonlycomprisesoneoffouroptionsforholding Level1assets. 49. Level1comprises:(i)cashdeposits(i.e.reserves)atcentralbanks;(ii)debtsecurities issuedbysupranationals(e.g.EBRD,EIB,EC,IMF,WorldBank,etc);(iii)sovereign debtofthehighestqualityplusthedomesticsovereignofthebankinquestion;and (iv)cashdepositssecuredonanyof(ii)or(iii),i.e.reverserepotransactions.Level2 compriseslessliquiddebtsuchashighqualitycoveredbonds,lowerquality sovereignsandhighlyratedcorporates. 50. Additionally,werethereisnotsufficientsovereigndebtavailablenow,orinthe future,theBaselCommitteehasspecificallyoutlinedoptionsthatjurisdictionscould take.Theseoptionsare:(i)committedlineswithcentralbanks;(ii)alleviatingthe minimum60%requirementforlevel1assets;and/or(iii)holdingliquidassetsinother currencies. 51. TheCommissionsproposalsalsodonotdefinewhatassetsshouldbemonitored duringtheobservationperiod.Insteadbanksaregivendiscretiontoidentifywhich assetsshouldbereportedon.Allowingbanksdiscretiononwhichassetstoreporton intheobservationperiodisincompatiblewiththesinglerulebook. 52. Theexperienceofthefinancialcrisishasshowntheimportanceofrigorousliquidity standards,itisnowmoreimportantthaneverthattheEUimplements internationallyconsistentliquiditystandards. Treatmentofcoveredbonds 53. TheCRDalreadyoffersauniformlyfavourablecapitaltreatmentforcoveredbonds basedsimplyoncreditratings,andnotransparencyrequirements.Incontrast, securitisationsarerightlysubjecttoextensiveduediligenceandtransparencyrules. CRD4wouldincreasethedisparitybetweensecuritisationsandcoveredbondsby
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4

IMFGlobalFinancialStabilityReport,April2011

requiringmoredisclosureofhowratingagenciesratesecuritisations,butno equivalentforcoveredbonds. 54. CoveredbondsplayanextremelyimportantroleintheEUeconomy,andthe systemicimportanceofcoveredbondsislikelytoincreaseinthecomingyearsnot leastbecausetheywillbeacceptedaslevel2assetsintheLiquidityCoverageRatio.It isthereforevitalthatthereisarigorousprudentialregimetosupportcoveredbonds. Itisimportant;inordertoprotecttheintegrityofthecoveredbondmarketthat coveredbondsshouldbesubjecttodetailedtransparencyrequirementsinthesame wayassecuritisations.Thiswouldrecognisethefactthathighqualitysecuritisations andcoveredbondshavesimilarunderlyingassets.Indeed,somecoveredbondshave securitisationsastheirunderlyingassets. 55. Furthermore,inCRD3,atthelastminuteanextensiontoanexemptionfromcapital requirementsforcoveredbondsincertainMemberStateswasrushedthrough.It originatedfromCRD2whenatransitionalexemptionwasagreedyetnowthe Commissionhastakenapowertoprovidesuchanexemptionpermanentlyandto widenthistoallMemberStates,thiswasnotwithstandingthestrongobjectionsof theECB.Thereshouldbenoquestionofsuchapermanentexemptionexistingwhich willdistortthesinglemarket,bygivingsignificantconcessionsforaparticularfunding source. TreatmentofLimitedLicenceInvestmentFirms(LLIFs) 56. Limitedlicenceinvestmentfirms(LLIFs)areadiversegroupoffirmsincluding investmentmanagers,stockbrokers,corporatefinancefirms,venturecapitalfirms andwholesalemarketbrokers.LLIFsareusuallysmallbutdovaryinsize,mostare requiredtohaveminimuminitialcapitalofEuro50kor125k,dependingupontheir preciseactivitiesaccordingtotheMarketsinFinancialInstrumentsDirective(MiFID). 57. DespitethenonsystemicnatureofLLIFstheCommissionisproposingthatLLIFs shouldbesubjecttoalmostasrigorousaregulatoryregimeasinternationallyactive banks. 58. Theseproposalsaredisproportionateandwerenotsubjecttoanimpactassessment. ItisimportantthatthetreatmentofLLIFsissubjecttoafullimpactassessmentand thattheirtreatmentdoesnotdisproportionatelyimpactonagroupoffirmsthat providemuchneededservicesanddiversitytotheEUsfinancialsystem.

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