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EU to label asset managers systemic and regulate them like banks

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EU to label asset managers systemic and regulate them like banks

Europe's largest investment firms are to be declared systemic and regulated in line with banks, the European Commission has proposed.

The new rules are intended to simplify the treatment of smaller firms in order to remove some regulatory burden, while ensuring unchecked risks are not building outside the more tightly regulated banking sector, said EC Vice President Valdis Dombrovskis in a statement.

"Today's proposal aims to make sure that capital requirements for investment firms are more proportionate and in line with the risk they face," he said.

The plan is also designed to head off concerns about large investment firms enjoying lighter regulation as they move operations from the U.K., where the vast majority of Europe's money managers are based, to the European Union after Brexit.

Regulators ramped up capital requirements for banks in the wake of the 2008 credit crisis, culminating in the completion of the Basel III framework earlier this month.

But the spotlight has since fallen on the world's biggest asset managers, which have increasingly been performing bank-like services such as underwriting and trading.

Since December 2016, the Bank of England's Prudential Regulation Authority has supervised large investment firms, and broker/dealers which trade securities on their own account or for other firms are treated just like banks.

Firms in the EU with assets of over €30 billion carrying out such activities will now be regulated as banks "in all respects," according to the EC proposal.

"Smaller investment firms will benefit from simpler requirements which are more in line with their risk profile," said Dombrovskis. "At the same time, larger firms posing similar risks as banks should be regulated and supervised like banks."

The larger firms will mostly be the asset management arms of major investment banks.

Non-systemic investment firms, meanwhile, will be split into two groups.

Small and non-interconnected 'Class 3' firms' minimum capital would be either the level of initial capital required for their authorization or a quarter of their fixed costs for the previous year, whichever is higher.

Slightly larger 'Class 2' firms, those with under €30 billion but carrying out certain bank-like activities, will qualify for a new 'K-factor' approach that "specifically targets business practices that are most likely to generate risks to the firm, to its customers and to counterparties."

The EC proposal document says that while some firms will have to raise more capital, the European Banking Authority estimates that total aggregate capital requirements for all EU investment firms will not change significantly.

"The new capital requirements are expected to be 16% lower than today's total level of harmonised requirements and capital add-ons imposed by supervisors," it said. "This more than offsets the 10% increase in the harmonized requirements applicable to all EU firms."