Path to Effective
Supervision –
Convergence of
Practices in Europe
José María Roldán | 14 Nov 2005
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
José María Roldán | 14 Nov 2005
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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)
IAS/IFRS
•
Post FSAP
risk-focused supervision
new standards, with impact on
supervisory tools
implementation and convergence of
practices
Response: the Lamfalussy process
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CEBS’ role and focus
Council
Commission
Parliament
L1
L2
Framework legislation
EBC¹
EIOPC¹
ESC¹
EFCC¹
Implementing details
L3
CEBS²
CEIOPS³
CESR³
Convergence
L4
Enforcement
Commission
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
José María Roldán | 14 Nov 2005
¹ Finance ministries
² Supervisors and Central
Banks
³ Supervisors
4
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).
Basel II – a global agreement
• 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
José María Roldán | 14 Nov 2005
The CRD – European legislation
6
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 => efficient
regulation from an economic
perspective
•
Flexible framework for small
and big banks
•
QIS 5
•
The CRD from January 2007
José María Roldán | 14 Nov 2005
3 pillars
Minimum
Capital
Requirements
Regulatory
view
Credit risk
Market risk
Operational
risk
Supervisory
review and
evaluation
(SREP)
+
Banks’ internal
view (ICAAP)
Market view
Supervisory
judgment
Disclosure
requirements
Market
discipline
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Implementation in the EU
•
•
•
Recognises and
encourages developments
in risk management and
supervisory practices
Capital adequacy
requirements
Incentives for all institutions
to adopt more sophisticated
approaches
A good business tool with
business value (not just
costs!)
José María Roldán | 14 Nov 2005
Risk management
The board
and senior
management
Internal
controls,
reporting, audit
and contingency
planning
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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 crossborder 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
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
Supervision of financial conglomerates
Off-shore financial centres
Outsourcing and internal governance
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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
1) Potential divergence in implementation
– National options and discretions
– Additional layers of national rules (“goldplating”)
– Different interpretations
2) 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)
3) Administrative burden
– Compliance costs, large vs. small banks
– Differences in supervisory reporting
– Duplication of contacts
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CEBS’ response
1) Potential divergence in implementation
supervisory disclosure
2) Complex and possibly fragmented supervisory
process
enhanced home-host co-operation, Pillar 2
3) 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
Basel II
Pillar 1
Pillar 2
Minimum
Capital
Requirements
Supervisory
review and
evaluation
(SREP)
+
Institutions’
internal view
(ICAAP)
Regulatory
view
Pillar 3
Market
discipline
Market view
• Foster an active dialogue
between institutions and
supervisors
• Covers the relationship between:
– Supervisor’s SREP (the Supervisory
Review and Evaluation Process); and
– Institution’ ICAAP (the Internal Capital
Adequacy Assessment Process)
José María Roldán | 14 Nov 2005
Credit risk
Market 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
XBRL
EU Group
Reporting
Supervisor 2
EU Group
Reporting
Supervisor 2
XBRL
Supervisor 3
Various data streams
Different reporting standards
Manual processes
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Supervisor 3
Common framework
Single format
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 Roldán
Email: josemaria.roldan@c-ebs.org
Tel: +44 20 7382 1770