The authors discuss the role and significance of Union regulations concerning equity and capital requirements with respect to credit institutions; the origin of those regulations, their evolution and the future direction of changes.

The relevant EU directives adopted in the late 80s and early 90s, emphasised equity as the most important factor in reducing the risk of insolvency of credit institutions. During the last decade, banking activities have undergone major changes; the same is true of the practice of risk management and the methodology of supervision. Therefore the original regulations have become obsolete and outdated, contributing little to either risk reduction or effective supervision.

The paper presents the proposals included in the consultative document issued by the European Commission in November 1999 and entitled "A Review of Regulatory Capital Requirements for EU Credit Institutions and Investment Firms". This document followed a review of capital adequacy methodology carried out by the Basle Committee for Banking Supervision.

The authors discuss the proposals by the European Commission relating to credit and operational risk, the role of market discipline and the supervisory review process. They present their opinion and assess the potential impact of the changes the Polish banking sector.

The authors also present their views on the proposed way implementation strategy designed to attain the overall purpose stated by the Commission, which is to improve the match between the modified capital requirements and the risks related to them.

Particular attention was given to the Commission's new understanding of the significance and objectives of the supervisory review process. This process, besides its role in ensuring that banks own enough equity to restrict risk is now seen as an incentive for the institutions to develop new and better risk monitoring and management techniques.

The next issue covered by the paper is conglomerate supervision. Since conglomerate supervision solutions were enforced in all EU member states, the authorities have been able to force the credit institutions organised into financial groups to observe the prudential regulations relating to equity, solvency ratio, standards for loan or more broadly, receivables concentration and finally, the provisions of the directive on capital adequacy.

In the authors' opinion, also voiced increasingly often in the European Union, supervision should rather focus on ensuring equal opportunity for banking activities and eliminating anti-competitive activities. At the moment the overly restrictive requirements by the supervising bodies practically paralyse the activities of smaller institutions. Therefore many experts recommend a diversified approach towards credit institutions, allowing a minor increase in the risk of their activities, which might help improve their efficiency. This does not necessarily mean abolishing any current supervisory regulations: the supervisors should simply concentrate on laying down the general framework for the institutions' activities, without interfering with their day-to-day activities. External standards cannot constitute the sole guarantee of security, and responsibility for the financial position of a credit institution should primarily rest with its management.