OREANDA-NEWS. Comparability of eurozone bank capital ratios remains limited by major issues such as tricky national discretions, for example the inclusion of certain deferred tax assets (DTAs) in core capital, and the treatment of insurance subsidiaries permitted under the "Danish Compromise", says Fitch Ratings.

Harmonisation of the regulatory framework across eurozone countries is a primary objective of Daniele Nouy, chair of the Single Supervisory Mechanism's (SSM) Supervisory Board. She has commented that the ECB has made significant progress on harmonisation since it took responsibility for supervising the area's leading banks in November 2014. But in her speech on 11 September this year Ms Nouy highlighted that a few key discretions remain unresolved, citing DTAs and insurance subsidiaries.

Harmonisation of banks' regulatory capital calculations and associated disclosures is vital to investors' ability to compare banks' key metrics and make appropriate investment decisions. The SSM initially identified over 150 instances where regulators had applied discretion when they transposed the Basel III framework into national legislation. Most of these exceptions have now apparently been ironed out, but details are not yet public, and the changes are likely only to come into effect in 2016 following a consultation.

DTAs are important in capital calculations because Basel III deducts them from regulatory capital. Divergent tax regimes cause material discrepancies in the amount and timing of real tax obligations due, which feeds through to DTAs in the financial reports. Southern European banks generally build up more DTAs than their northern European counterparts, primarily because of differing corporate tax regimes, although changes to Italian tax laws in June 2015 brought these more into line with the northern banks. In addition, the Spanish government yesterday communicated upcoming amendments to the treatment of DTAs.

The Capital Requirements Regulation (CRR), the EU's implementation of Basel III, introduced additional flexibility for DTA recognition. Without this flexibility and changes to some national tax laws, some southern European banks would have failed to comply with prudential solvency ratios.

The "Danish Compromise", dating from 2012 when Denmark held the presidency of the EU, gave local supervisors discretion to permit capital allocated to insurance activities to count towards regulatory capital for banks subject to conglomerate supervision (CRR Article 49). This allows some banks with substantial insurance subsidiaries in countries including France, Belgium and Finland to report higher capital ratios.

Our calculation of Fitch Core Capital, our primary measure of bank capitalisation, deducts investments in insurance companies because, in our opinion, this capital is held in a regulated company with its own capitalisation needs and would not necessarily freely flow through to support risks in the banking business. We also deduct DTAs related to losses carried forward, which rely on future profitability to be realised. This is particularly relevant for the Greek banking system and several Spanish and Portuguese banks that hold substantial amounts of DTAs.