European Central Bank

ECB Reports on Supervision of Less Significant Institutions in SSM

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On November 8, 2017, the European Central Bank (“ECB“) published a report on the supervision of less significant institutions (“LSIs“) in the single supervisory mechanism (“SSM“).

In its role as lead supervisor in the SSM, the ECB directly supervises all credit institutions in the Eurozone that are classified as significant, while national competent authorities (“NCAs“) directly supervise other credit institutions, referred to by the ECB as LSIs.

In the report, the ECB sets out an overview of:

  • A description of the organization of banking supervision in the SSM, focusing on the supervision of LSIs.
  • A description of the LSI sector and the implications for supervision of current challenges for LSIs.
  • The main supervisory activities conducted of LSIs by NCAs. The ECB summarizes the NCAs’ work relating to off-site and on-site supervisory activities, thematic reviews and the application of supervisory powers under Article 104 of the CRD IV Directive (2013/36/EU).
  • The ECB’s work to promote the convergence of LSI supervision across the SSM. The ECB states that it and the NCAs have made substantial progress in promoting a common supervisory approach, methodologies and toolkit for LSIs. The ECB notes that further work is needed to address challenges arising from differences in practice relating to accounting systems.

ECB Opinion on Implementation of TLAC

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On November 10, 2017, the European Central Bank (“ECB“) published an opinion (dated November 8, 2017) on the European Commission’s legislative proposals to implement the Financial Stability Board’s (FSB) total loss absorbing capacity (“TLAC“) standard.

The opinion relates to the Commission’s legislative proposals to amend the following Regulations and Directive in order to implement TLAC in the EU: Bank Recovery and Resolution Directive (2014/59/EU) (“BRRD“), Regulation for Single Resolution Mechanism (Regulation 806/2014) (“SRM Regulation“), CRD IV Directive (2013/36/EU) and Capital Requirements Regulation (Regulation 575/2013) (“CRR“). The Commission published its legislative proposals in November 2016.

The ECB welcomes these proposals but highlights some areas for consideration, including issues relating to:

Implementation of the TLAC standard in the EU;

  • Amendments to the minimum requirement for own funds and eligible liabilities (“MREL“);
  • Transitional arrangements for MREL;
  • Early intervention measures; and
  • Pre-resolution moratorium tool.

Specific proposals to amend the drafting of the proposed Regulations and Directive, together with some additional proposals to amend the current texts of the BRRD, SMR Regulation, CRR and CRD IV Directive are set out in a technical working document, which is attached to the opinion.

Econ Vote on Resolution on Basel III Revisions

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On November 10, 2016, the European Parliament published a press release on a vote taken by its Committee on Economic and Monetary Affairs (“ECON“) in relation to revisions to Basel III, which are currently under consideration by the Basel Committee on Banking Supervision (“BCBS“).

The text of the resolution has not been published, yet the release states that it calls on the European Central Bank (“ECB”), the European Commission (“EC”) and the EBA to engage in the BCBS’s work and report to the ECON on their progress. Furthermore, the press release states that the revisions should:

  • strengthen the overall financial provision of European banks but should not significantly increase overall capital requirements;
  • respect the principle of proportionality and the important role played by banks in financing the European economy; and
  • consider and mitigate the differences between jurisdictions and, at the same time, avoid penalizing the EU banking model.

The resolution will be considered by the European Parliament in its plenary session between November 21, 2016 and November 24, 2016.

The package of reforms to Basel III is expected by the end of 2016 and will cover issues such as internal ratings-based (“IRB“) approaches and operational risk as well as the standardized approach for credit risk.

ECB Amends Eligibility Criteria for Unsecured Bank Bonds

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On October 5, 2016, the European Central Bank (“ECB”) stated that it will be making changes to its collateral framework by revising the collateral eligibility criteria and risk control measures in relation to senior unsecured debt instruments issued by credit institutions or investment firms (unsecured bank bonds or UBBs).

Under the current rules, UBBs will, except for these new changes, become ineligible on January 1, 2017. The ECB’s revisions to its collateral framework are aimed at temporarily maintaining the eligibility of UBBs (including the eligibility of statutorily subordinated UBBs that are not also contractually subordinated), beyond January 1, 2017.

Furthermore, UBBs will also be subject to additional risk control measures to remain eligible. The ECB has decided to reduce, as of January 1, 2017, the usage limit for uncovered bank bonds from 5% to 2.5%. The reduction will not apply where:

  • the value of such assets is equal to or less than €50 million (net of any applicable haircut); or
  • such assets are guaranteed (by a public sector entity that has the right to levy taxes) by way of a guarantee that complies with the provisions of Article 114 of the ECB Guideline on the implementation of the Eurosystem monetary policy framework.

The changes are expected to come into effect from January 1, 2017.

Addendum to ECB Guide on Harmonizing Options and Discretions Available in Union Law

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On August 10, 2016, the European Central Bank (ECB) published an addendum to its guide on options and discretions (O&Ds) available in Union law.

The addendum complements the guide and ECB Regulation that were published in March 2016. It lays down the ECB’s approach to the exercise of eight O&Ds provided for in the Capital Requirements Regulation (Regulation 575/2013) (CRR) and the CRD IV Directive (2013/36/EU). The objective is to provide coherence, effectiveness and transparency regarding the supervisory policy that will be applied in the supervisory assessment of applications from significant supervised entities within the scope of the single supervisory mechanism (SSM).

A press release also published on August 10, highlights that the publication of the addendum signals the end of the consultation process. A consolidated version of the guide, including the addendum and the approach for the recognition of institutional protection schemes, is to be published on the ECB’s website later in 2016.

ECB Guide on Approach for the Recognition of Institutions Protection Schemes

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On July 12, 2016 the European Central Bank published a guide on the approach for the recognition of institutional protection schemes for prudential purposes. The report aims to ensure coherence, effectiveness and transparency in the processes of assessing IPSs in accordance with Regulation 575/2013 of the European Parliament and of the Council (the Capital Requirements Regulation).

An IPS is a contractual or statutory liability arrangement which protects its member institutions and ensures that they have the liquidity and solvency needed to avoid bankruptcy where necessary.

The guide sets out how the ECB will assess the compliance of IPSs and their member institutions with the conditions laid down in the CRR.

ECB Publishes Public Consultation

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The European Central Bank (“ECB”) has published a Public Consultation on a draft Addendum to the ECB Guide on options and discretions available in Union law.

The consultation document sets out the ECB’s approach to the exercise of options and discretions provided for in Regulation 575/2013 (on prudential requirements for credit institutions and investment firms) and Directive 2013/36/EU (on access to the activity of credit institutions and the prudential supervision of credit institutions and investments firms).

This publication is the second phase of the ECB’s project on options and discretions.

ECB Offers Opinion on Proposed Regulation to Establish a European Deposit Insurance Scheme

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On April 20, 2016, the European Central Bank (ECB) published an opinion on a proposal for a regulation amending Regulation (EU) No. 8.6/2014 in order to establish a European Deposit Insurance Scheme (EDIS).

The ECB notes that an EDIS is a necessary third pillar to complete the Banking Union, having established a Single Supervisory Mechanism and the Single Resolution Mechanism and overall welcomes the system proposed. However, the opinion notes risks in terms of scope and governance of the scheme.

The opinion appends a technical working document containing drafting proposals as proposed amendments to the text released by the European Commission.

ECB Publishes Opinion on Proposed Regulation Extending Exemptions for Commodity Dealers under CRR

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On March 4, the European Central Bank (“ECB”) published an opinion on the European Commission’s legislative proposal for a Regulation amending the Capital Requirements Regulation (CRR) to extend certain exemptions for commodity dealers. The opinion is a response to a request made by the Council of the European Union on January 12, 2016.

The ECB stated that it had not identified any concrete indications of systemic risk created by commodity dealers that would make it strictly necessary to remove the exemption for requirements concerning large exposures and own funds that apply at present. The EBA explained that given commodity dealers active in Europe are generally less leveraged and have more resilient capital structures than banks. However, the ECB regards a detailed impact analysis as a necessary step in terms of taking the most appropriate decision regarding the removal or the temporary extension of the exemption. In particular, consideration should be given to level playing-field issues relative to credit institutions which trade in commodities.

The ECB believes that the exemption should be of a temporary nature given the European Commission is expected to present a proposal for a comprehensive review of the prudential regulation of investment firms.  Opinion.

ECB Publishes the Response of the Eurosystem to the European Commission’s Call for Evidence on the EU Regulatory Framework for Financial Services

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On February 4, the European Central Bank (“ECB“) published a response of the ECB and the national central banks of member states of the eurozone (Eurosystem) to the European Commission’s call for evidence on the EU regulatory framework for financial services.

The Eurosystem’s response makes the following remarks:

  • the financial crisis led to much-needed and far-reaching reform of the European regulatory framework and a redesign of its supervisory architecture;
  • the regulatory framework for banks is largely in place, but a few important initiatives on the regulatory agenda for banks and the non-bank sector still need to be finished;
  • initiatives to support the financing of the economy should maintain the robustness of the regulatory framework which resulted from the post-crisis reforms;
  • reaping long-term benefits implies both assuming temporary costs that emerge in the transitional period and complementing regulation with measures to correct any unintended long-term impacts that are identified;
  • it is important to ensure that regulations are able to preserve financial stability, while leaving sufficient room for markets to develop and fully play their role in the economy; and
  • the European exercise should take into account ongoing initiatives at the international level.

The Eurosystem’s response aims to provide evidence from recent impact studies of the effects of the new regulatory framework and to highlight areas where possible improvements could be made, including: (i) rules affecting the ability of the economy to finance itself and to grow; (ii) unnecessary regulatory burdens; (iii) interactions of individual rules, as well as inconsistencies and gaps in the existing regulations; and (iv) rules giving rise to unintended consequences.  Response.