EU Capital Requirements and the Level Playing Field

This paper examines the likely impact of Capital Adequacy Directive (CAD) on European Securities markets, focusing in particular on the competitive consequences for institutions engaged in the trading of equity securities. The major conclusions are: first, the CAD cannot by itself ensure a level playing field given the importance of other sources of competitive distortions; second, perverse incentives exist for securities firms due to the failure of the CAD to take proper account of portfolio diversifications; third, major competitive distortions will arise due to differences in national implementation of the CAD; and finally, the EU securities industry will experience competitive distortions as a result of differences between the CAD and other regulatory regimes