CP13/6 - CRD IV for Investment Firms - Financial Conduct Authority

CRD IV for Investment Firms
CP13/6
41. Whenever possible, firms may have the incentive to fill any remaining total capital requirement
by issuing qualifying debt, as this is the cheapest capital raising option in terms of cost. In the
scenario where firms hold the minimum required levels of capital, most firms would substitute
debt for equity, therefore we calculate the overall cost for the total investment firms affected by
CRD IV by estimating the additional RWAs that will need to be financed by equity and apply to
that our estimated range of incremental cost of equity. We estimate the overall capital compliance
cost for the CRD IV firm population to be between £64 to £215 million (see Table 19).
Table 19: Estimated overall capital compliance cost for the CRD IV firm population
£ Millions
Total risk weighted assets (RWA) 86,028
Incremental equity to be raised: 2.5% of RWA 2,150
Overall capital compliance cost:
[3-10%] x incremental equity to be raised
[64 - 215]
Indirect costs
42. Together capital and non-capital compliance costs will increase the cost structures of the
investment firms considered as part of this CBA. These increased costs will have indirect effects
since they may alter the structure of some of the markets we are considering in this CBA. For
example, the increased costs of financial intermediation may be passed on to clients, possibly
resulting in a reduction in client return and that, in turn, could lead to a reduction in demand for
such services. Furthermore, such effects could potentially affect consumer behaviour, driving
investors to look for higher returns by, warily or unwarily, taking more risk.
43. Additionally, there could be implications for competition in the market as explained in the
competition assessment section at the end of this Annex.
Wider macroeconomic impacts
44. We do not expect significant wider macroeconomic costs arising from the impacts of the
policies on investment firms. The firms we consider in this CBA do not generally provide credit
to SMEs or households in the real economy, so the main indirect economic impacts will be
felt only within the markets in which they operate. As noted previously, we expect the major
macroeconomic impacts will come from systemically important firms. The PRA has estimated
the macroeconomic costs and benefits of the policy package by considering the impact on
PRA-regulated firms.
Financial Conduct Authority July 2013
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