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ERM Frameworks and Responses to risk [54]

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Bullet points include: Although regulatory capital requirements are only one among many determinants of business decisions and portfolio structures vary across sectors, substantial differences between sectors encourage firms to move risks solely to minimise the requirements. The table below shows an example based on Kuritzkes et al. (2003) setting out the extent of these differences in the total capital requirement for a simple £100 credit exposure to an ‘A’ rated counterparty* Banking regulation (current requirements) EU credit insurance regulation EU life insurance regulations Treat as commercial loan Capital requirement = 8% of outstandings Treat as credit insurance paying insurance premium of 1% pa Solvency capital = 16% of premiums or 0.16% of outstandings Treat as an investment Implicit asset risk charge is 3% of outstandings * Based on existing directives; in practice regulators may apply adjustments to reduce the extent of the differences.

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