Path to Effective Supervision

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Path to Effective Supervision Convergence of
Practices in Europe

• José María Roldán 14 Nov 2005

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Outline

• Drivers for change in banking supervision
• Basel II implementation in Europe
• CEBS' role and tasks
• Challenges for the supervision of cross-border
  groups
• CEBS response examples
• Supervisory disclosure
• Enhanced co-operation between home and host
  supervisors
• Supervisory Review Process (Pillar 2)
• Common reporting
• Creating European supervisory culture

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Drivers for change in the EU banking supervision

• Banking market
• Cross-border activity
• Consolidation
• Centralisation of business functions at group
  level
• Outsourcing of activities
• Diversity of banking structures
• Regulatory framework
• Basel II (CRD) risk-focused supervision
• IAS/IFRS new standards, with impact on
  supervisory tools
• Post FSAP implementation and convergence of
  practices
• Response the Lamfalussy process

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CEBS role and focus

Framework legislation
Implementing details
Convergence
EBC European Banking Committee EIOPC European
Insurance and Occupational Pensions Committee
ESC European Securities Committee FCC
Financial Conglomerates Committee CEIOPS
Committee of European Insurance and Occupational
Pensions Supervisors CESR Committee of European
Securities Regulators
¹ Finance ministries ² Supervisors and Central
Banks³ Supervisors
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Basel II implementation in Europe
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Implementation in the EU

• Legal instrument to transpose Basel II to
  European legislation Capital Requirements
  Directive (CRD).
• Across all 25 EU countries (and 3 EEA countries)
  8300 banks and more than 40 cross-border groups
• Importance of the scope The directive will apply
  to all credit institutions and investment firms.
• CEBS guidelines for consistent implementation and
  convergence of supervisory practices

Basel II a global agreement
The CRD European legislation
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Implementation in the EU

• Basel II three pillars with checks and balances
• Complex in detail but clear purpose and
  architecture
• Based on the best practices of the industry gt
  efficient regulation from an economic perspective
• Flexible framework for small and big banks
• QIS 5
• The CRD from January 2007

3 pillars
Minimum Capital Requirements Regulatory view
Supervisory review and evaluation (SREP) Banks
internal view (ICAAP)
Market discipline Market view
Credit riskMarket risk Operational risk
Supervisory judgment
Disclosure requirements
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Implementation in the EU

• Recognises and encourages developments in risk
  management and supervisory practices
• Incentives for all institutions to adopt more
  sophisticated approaches
• A good business tool with business value (not
  just costs!)

Risk management
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CEBS role and tasks
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CEBS role and tasks

• Main tasks
• to give advice to the Commission
• to promote consistent implementation of EU
  legislation
• to enhance convergence of supervisory practices

• Objectives
• Promoting cross-border supervisory co-operation
  and the safety and soundness of the EU financial
  system through
• good supervisory practices
• efficient and cost-effective approaches to
  supervision of cross-border groups
• effective regulation
• level playing field and proportionality

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CEBS role and tasks

• CEBS focus on
• Consistent implementation and convergence of
  supervisory practices (Level 3)
• Prudential issues, in particular Capital
  Requirements Directive (CRD)

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Work Programme

• Priority areas of work
• Regulatory advice to the Commission
• Own funds, large exposures possibly follow up on
  cross-border mergers and deposit guarantee
  schemes
• Convergence of supervisory practice
• Supervisory Review Process (Pillar 2)
• Validation of IRB and AMA systems
• External Credit Assessment Institutions (ECAIs)
• Harmonisation of reporting requirements
• Supervisory disclosure
• Co-operation and information exchange
• Supervision of cross-border groups (home-host)
• Crisis management (joint with the BSC)
• Information exchange
• Cross-sectoral issues
• Supervision of financial conglomerates
• Off-shore financial centres
• Outsourcing and internal governance

• Other areas of work
• Risks to banking stability
• Outsourcing
• Internal governance
• Impact of IFRS on prudential requirements
• The role of the audit function for prudential
  supervision
• Delivered products
• Advice national discretions (work continues),
  prudential filters, cross-border mergers,
  e-money, DGS
• Consultation papers consultation practices,
  outsourcing, supervisory review process, common
  reporting, financial reporting, validation,
  ECAIs, CEBS role and tasks, home host
• Guidelines Supervisory disclosure

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Work programme

• Main priority for CEBS in 2006 is implementation
  of the Capital Requirements Directive
• Final guidelines on
• Supervisory disclosure (tool to monitor
  implementation)
• Supervision of cross-border groups
• Validation of IRB and AMA systems
• Supervisory Review Process (Pillar 2)
• Common reporting frameworks (IFRS and solvency
  ratio)
• Recognition of External Credit Assessment
  Institutions (ECAIs)
• Consistent implementation and application

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CEBS - toolbox

• Standards
• Guidelines
• Recommendations
• Public disclosure
• Training and staff exchange

Voluntary co-operation, unanimity commitment
from members to implement common decisions
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Challenges for the supervision of cross-border
groups
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Challenges for the supervision of cross-border
groups

• Potential divergence in implementation
• National options and discretions
• Additional layers of national rules
  (goldplating)
• Different interpretations
• Complex and possibly fragmented supervisory
  process
• Misalignment of legal and operational structures
  in banking groups
• Risk of overlapping or conflicting supervisory
  assessments
• Validation of models and Art. 129
• Supervisory Review Process (Pillar 2)
• Administrative burden
• Compliance costs, large vs. small banks
• Differences in supervisory reporting
• Duplication of contacts

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CEBS response

• Potential divergence in implementation
• supervisory disclosure
• Complex and possibly fragmented supervisory
  process
• enhanced home-host co-operation, Pillar 2
• Administrative burden
• common reporting requirements

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Supervisory disclosure
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CEBS response supervisory disclosure

• Supervisors are required to publish (CRD Art.
  144)
• Rules and guidance
• How options and national discretions are
  exercised
• Supervisory review and evaluation
• Statistical data on key implementation issues
• Easy access and meaningful comparison ? peer
  group pressure
• Internet access via CEBS website www.c-ebs.org
• Links to national websites
• Comparable information
• Common language - English

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CEBS response supervisory disclosure
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Home-host co-operation
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CEBS response enhanced home-host co-operation

• CRD Art. 129 to 132, enhanced co-operation and
  role of the consolidating supervisor
• CEBS draft Guidelines, a practical framework for
• Co-ordinated planning
• Structured exchange of information
• Avoidance of redundancies
• Optimal use of supervisory resources
• Concrete examples risk assessment and validation

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CEBS response enhanced home-host co-operation

• The notion of significance and systemic
  relevance
• The process of information exchange
• The respect of the legal allocation of
  responsibilities
• Operational networks and delegation of tasks
• Transparency of the arrangements

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Supervisory Review Process (Pillar 2)
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Supervisory Review Process

• Objectives of Pillar 2 are to
• Ensure institutions have adequate capital to
  support all risks in their business
• Encourage institutions to manage risk and hold
  capital above Pillar 1 minimum requirements
• Foster an active dialogue between institutions
  and supervisors
• Covers the relationship between
• Supervisors SREP (the Supervisory Review and
  Evaluation Process) and
• Institution ICAAP (the Internal Capital Adequacy
  Assessment Process)

Basel II
Pillar 1
Pillar 2
Pillar 3
Minimum Capital Requirements Regulatory view
Supervisory review and evaluation
(SREP) Institutions internal view (ICAAP)
Market discipline Market view
Credit riskMarket risk Operational risk
Supervisory judgment
Disclosure requirements
Banks and investment firms
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Supervisory Review Process

• Proportionality is the key
• - For large complex institutions ? in-depth and
  tailor-made
• - For smaller institutions ? likely to be quite
  standardised
• CEBS considering possible guidance for smaller
  institutions
• Second consultation finished in October
• CEBS guidelines in January 2006
• Mixed response high level principles or detailed
  guidance?
• Small banks ask for detailed guidelines

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Common reporting
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CEBS response common reporting

• The challenge
• HOW TO
• limit the costs of pan-European institutions
• WHILE
• respecting the diversity of the Single Market
  (large/small firms) and limit the impact on small
  local institutions

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CEBS response common reporting

• Common frameworks for
• Financial data for prudential purposes
• Reporting of the solvency ratio
• CRD and IFRS ? window of opportunity for change
  less administrative burden for cross-border
  groups limited impact on small, local banks
• Common templates and possibilities presented by
  new technologies (XBRL)
• Consultation criticisms on size and national
  flexibility
• But new rules are complex and supervisors move
  from quite different starting points

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CEBS response common reporting

• Layer approach harmonization flexibility
• Core key information which more or less can be
  expected throughout the EU
• Detailed comprehensive information which a
  majority of supervisors may require
• Reduction after consultation
• COREP 75 (level of detail between US and
  Canada)
• FINREP 40
• Finalization in December 2005 due to pressure
  from the industry, no second round of
  consultation

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CEBS response common reporting

• Reporting now and later

Supervisor 1
Supervisor 1
EU GroupReporting
EU GroupReporting
XBRL
Supervisor 2
Supervisor 2
XBRL
Supervisor 3
Supervisor 3
Various data streams Common frameworkDifferent
reporting standards Single format Manual
processes Automated data collection
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Creating a European supervisory culture
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Creating a European supervisory culture

• Compendium of CEBS standards, guidelines and
  recommendations
• for supervisors and market participants
• flexible, internet-based structure, easy to
  update
• consistent terminology, definitions
• Inventory of implementation issues
• Training programmes and staff exchange

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Conclusions

• Differences across countries not wiped out, but
  visible, so that priorities for further work can
  be identified
• Not a single supervisory interface, but a more
  coordinated and streamlined process
• Not a single compliance process, but greater
  commonality of approaches and a process for
  further convergence where needed
• a structured process for convergence, whose
  pace and end result are not predetermined

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Questions? Thank you!
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Contact details Chairman José María
RoldánEmail josemaria.roldan_at_c-ebs.org Tel 44
20 7382 1770