ERM frameworks [38]

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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, Treat as credit insurance paying insurance premium of 1% pa, Treat as an investment. Capital requirement = 8% of outstandings, Solvency capital = 16% of premiums or 0.16% of outstandings, 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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