European banks will needs to make major investments in information and management systems to comply with new capital requirements, a study has founds.
The new rules, scheduled to take effect throughout the European Community by the end of 1995, also apply to U.S. bank subsidiaries operating in Europe.
The study of European banks, investments houses, and regulators, which was conducted by Price Waterhouse, found that the institutions expect that new information systems to track capital will be needed to meet the new reporting requirements enacted by the European Community.
The rules are intended to ensure that financial institutions have enough capital to cover their risk and to provide a level playing field between securities dealers and bank's trading businesses.
"The new rules are likely to hit hard, especially banks and securities firms whose systems, and reporting structures are currently not up to scratch," said Peter Cooke, the former chairman of the Basel Committee on Banking Supervision who headed the study for Price Waterhouse.
Peter Dempsey, senior manager of financial services at Price Waterhouse in Brussels, added that "even when their systems are up to scratch, in many cases they will still have problems adopting or amending the systems."
He said one large institution in the study claimed it would need to invest tens of millions of dollars to comply. In most cases, the rules require management reporting, regulatory reporting, and capitalization calculation systems.
"The systems requirement goes far beyond the capital requirement," said Mr. Dempsey.
Need for Planning
The study cautions, "Management needs to obtain an early grasp of the systems implications so that they can begin planning what to do about them and discussing them with regulators" in their home states.
The study also notes that systems needed to fulfill reporting requirements would in many cases overlap with information technology already on-line. That fact may help limit the cost of compliance.
The regulations, called the capital adequacy directive, are the work of the European Commission, which, along with the Basel group and the International Organization of Securities Commissions, has been developing standards for banks and nonbanks competing across the world.
The binding directive, which is scheduled to be implemented across the EC by yearen 1995, requires financial institutions to report accurate, timely information about their exposure to market risk.
They also set capitalization ratios but, according to Mr. Dempsey, in most cases they will not result in appreciable increases in capital requirements.
|An Enormous Burden'
Among the risks covered by the directive are those associated with equities, debt securities, and derivatives.
It also covers large exposures risk. "When you consider this applies on a worldwide basis, it applies an enormous burden. You could argue that that plays into the hands of larger institutions," said Mr. Dempsey.
The rules are almost identical for investment firms and banks. EC member countries may also apply more stringent standards, according to the analysis. "This business of a level playing field has been much talked about," said Mr. Dempsey. "But it never set out to harmonize everything from one country to another."
As a result, by the end of the 1995, there will be 12 different systems in Europe; each must meet the minimum floor established in the directive.
The directive was passed in March, in conjunction with an investment services directive that created a "single passport," in which firms authorized to do business in one nation may set up branches in other member states and provide services across borders.
The Basel group is still developing proposals that would make for greater consistency and compatibility of regulations across the world. Mr. Dempsey said the proposals, when they are agreed upon by the group of 10 industrial nations, are expected to be quite similar to the directive.