Are there commonalities and differences between Basel III and Solvency II regulations

Abstract

In the wake of two financial crises, the regulatory framework for the financial services industry has undergone significant change. The regulatory system for banks was revised in response to the financial crisis and, following adjustments based on Basel I/II, has been in force since 2013 with the Basel III version, although some regulatory points did not have to be implemented until later. For the insurance industry, the Solvency II regulatory framework came into force in the EU in 2016. The aim of the paper is to present a comparison between the regulatory frameworks and the specifications for the two sets of rules. In both frameworks, commonalities can be identified in the 3-pillar approach. The supervisory models are structured in the same way and stand side by side on an equal footing, i.e. they are intended to complement or mesh with each other. Internal procedures for calculating capital requirements may only be used after regular supervisory review and disclosure to the market. The regulatory focus is on a qualitative view. The risk profiles differ; in particular, credit and market risks must be taken into account in the case of financial institutions, while insurance companies focus on underwriting risk. Furthermore, in the case of banks as opposed to insurance companies, additional capital buffers are required due to the economic situation, for example, and leverage and liquidity ratios are also prescribed. There is no regulation for insurance companies in comparison. The Basel III regulations have higher capital requirements. Also the eligibility of the positions of the different capital levels have lower capital quality standards for insurance companies compared to banks.