March 18, 2010, 14:07 CET
Solvency
Own funds and Regulation governing the capital adequacy of institutions, groups of institutions and financial holding groups (Solvency Regulation)
The Regulation governing the capital adequacy of institutions, groups of institutions and financial holding groups (Solvency Regulation) of 14 December 2006 was published in the Federal Law Gazette (Bundesgesetzblatt) 2006, part I, No 61, p 2926 ff on 20 December 2006 and came into force on 1 January 2007. It transposes the European minimum capital standards prescribed in the Banking Directive (2006/48/EC) and the Capital Adequacy Directive (2006/49/EC) and the corresponding equivalent requirements of the new Basel Capital Accord (“Basel II”) into national law. It replaces the previous Principle I and spells out the details of the adequacy of institutions’ own funds demanded by section 10 of the Banking Act. For a transitional period ending on 31 December 2007, institutions will be able to continue calculating their capital requirements completely on the basis of Principle I. The Solvency Regulation applies both to single entities and to groups of institutions and financial holding groups on a consolidated basis.
The Solvency Regulation has geared the rules governing capital charges to more modern standards to make supervision more risk-oriented. New methods now enable risk exposures to be calculated more precisely than under the previous Principle I regime and will lead to a more risk-appropriate regulatory capital backing.
Pursuant to the provisions of the Solvency Regulation, institutions must quantify their counterparty risks, which are made up of default risk and settlement risk, their operational risk and their market price risk and back them with own funds. Market price risk is composed of interest rate risk and equity price risk in the trading book, foreign exchange risk, commodity risk and other market risk positions. Only tier 1 (core) and tier 2 (additional) capital can be used to back counterparty risk and operational risk; tier 3 capital may be used to back market price risk. The required minimum overall capital ratio of 8% must be maintained.
Institutions must be in compliance with the minimum capital requirements at the close of business on each business day. Institutions have to calculate these requirements and submit reports to supervisors on a quarterly basis. Such reports are to be submitted electronically only.
Besides rules about minimum capital requirements, disclosure provisions have been incorporated into the Solvency Regulation. The aim of these rules is to utilise market mechanisms for prudential supervisory purposes and to ensure transparency as well as the possibility of public accountability, especially regarding the prudential recognition of internal methods.
