ecb and ssm one year on srm taking...
TRANSCRIPT
ECB and SSM – one year onSRM – taking shape
Experiences so far and key priorities for 2016
www.pwc.com
March 2016
PwC
What is the Banking Union?
Banking Union
Single Resolution Mechanism (SRM)
Aim:
• Ensure an orderly resolution of failing banks with minimal costs for the real economy and taxpayers
• Key components: Single Resolution Board (SRB) and Single Resolution Fund (SRF) for medium-term funding
Single Supervisory Mechanism (SSM)
Aim:
• Ensure that banks comply with the EU banking rules
• Be in a position to tackle problems early on
• Direct supervision of ”significant“ banks by ECB; close cooperation of ECB and National Competent Authorities (NCAs) for ”less-significant“ institutions
Single Rulebook
Aim: To standardise rules within EU area
Eu
rozo
ne
on
lyE
U
CRD IV/CRRBank Recovery and Resolution
Directive (BRRD)Deposit Guarantee Schemes Directive
(DGSD)
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SSM – ECB list dated 30 December 2015
The list includes:
• Significant entities
• Less significant institutions
SRM – SRB list dated 1 March 2016
• All significant entities
• 16 other cross-border banking groups
SSM and SRM – Status of Luxembourg institutions
ECB
€
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Significant Supervised Entities in Luxembourg
1. Banque et Caisse d’Epargne de l’Etat, Luxembourg
2. J.P. Morgan Bank Luxembourg S.A.
3. Precision Capital S.A. including:- Banque Internationale à Luxembourg S.A.- KBL European Private Bankers S.A.- Banque Puilaetco Dewaay Luxembourg S.A.
4. RBC Investor Services Bank S.A.
5. State Street Bank Luxembourg S.A.
6. UBS (Luxembourg) S.A.
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Luxembourg Subsidiaries of Significant Supervised Entities
1 ABLV Bank Luxembourg S.A. 21 Europäische Genossenschaftsbank S.A.
2 ABN AMRO Bank (Luxembourg) S.A. 22 Fideuram Bank (Luxembourg) S.A.
3 Allfunds Bank International S.A. 23 HSH Nordbank Securities S.A.
4 Banca Popolare dell’Emilia Romagna (Europe) International S.A. 24 ING Luxembourg S.A.
5 Banco Popolare Luxembourg S.A. 25 La Française Bank
6 Bankinter Luxembourg S.A. 26 Mediobanca International (Luxembourg) S.A.
7 Banque BCP S.A. 27 Natixis Bank
8 Banque de Luxembourg S.A. 28 Nord/LB Luxembourg S.A. Covered Bond Bank
9 Banque Degroof Luxembourg S.A. 29 Sal. Oppenheim jr. & Cie Luxembourg S.A.
10 Banque Transatlantique Luxembourg S.A. 30 Société Européenne De Banque S.A.
11 BGL BNP-Paribas 31 Société Générale Bank & Trust
12 CACEIS Bank Luxembourg 32 Société Générale Capital Market Finance S.A.
13 Commerzbank International S.A. 33 Société Générale Financing and Distribution
14 Crédit Agricole Luxembourg 34 Société Générale LDG
15 Credem International (Lux) 35 State Street Europe Holdings Luxembourg S. à r.l.
16 DekaBank Deutsche Girozentrale Luxembourg S.A. 36 Ubi Banca International S.A.
17 Deutsche Bank Luxembourg S.A. 37 UniCredit International Bank (Luxembourg) S.A.
18 DZ Privatbank S.A. 38 UniCredit Luxembourg S.A.
19 Erste Europäische Pfandbrief- und Kommunalkreditbank AG in Luxemburg
20 Eurobank Private Bank Luxembourg S.A.
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Less Significant Institutions in Luxembourg (1/2)1 Advanzia Bank S.A. 21 China Construction Bank (Europe) S.A.
2 Agricultural Bank of China (Luxembourg) S.A. 22 Citibank International Plc, London (Royaume-Uni), succursale de Luxembourg
3 Andbank Luxembourg 23 Clearstream Banking S.A.
4 Banco Bradesco Europa S.A. 24 Compagnie de Banque Privée Quilvest S.A.
5 Banco BTG Pactual Luxembourg S.A. 25 Cornèr Banque (Luxembourg) S.A.
6 Bank Leumi (Luxembourg) S.A. 26 Credit Suisse (Luxembourg) S.A.
7 Bank of China (Luxembourg) S.A. 27 Danieli Banking Corporation S.A.
8 Bank of Communications (Luxembourg) S.A. 28 Danske Bank International S.A.
9 Banque Carnegie Luxembourg S.A. 29 Delen Private Bank Luxembourg S.A.
10 Banque de Patrimoines Privés 30 Depfa Pfandbrief Bank International S.A.
11 Banque Hapoalim (Luxembourg) S.A. 31 DNB Luxembourg S.A.
12 Banque Havilland S.A. 32 East West United Bank S.A.
13 Banque J. Safra Sarasin (Luxembourg) S.A. 33 Edmond de Rothschild (Europe)
14 Banque Öhman S.A. 34 EFG Bank (Luxembourg) S.A.
15 Banque Raiffeisen 35 EFG Investment (Luxembourg) S.A.
16 Bemo Europe - Banque Privee 36 FIL Holdings (Luxembourg) S.A.
17 BHF-BANK International 37 Fortuna Banque s.c.
18 Brown Brothers Harriman (Luxembourg) S.C.A. 38 Freie Internationale Sparkasse S.A.
19 BSI Europe S.A. 39 GPB International S.A.
20 Catella Bank S.A. 40 HSBC Bank Plc., Luxembourg branch
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Less Significant Institutions in Luxembourg (2/2)
41 HSBC Private Bank (Luxembourg) S.A. 58 Société Nationale de Crédit et d'Investissement
42 Industrial and Commercial Bank of China (Europe) S.A. 59 Standard Chartered Bank Luxembourg Branch
43 John Deere Bank S.A. 60 Sumitomo Mitsui Trust Bank (Luxembourg) S.A.
44 Keytrade Bank Luxembourg S.A. 61 Svenska Handelsbanken AB (Publ), Stockholm (Suède), succursale de Luxembourg
45 Lombard Odier (Europe) S.A. 62 Swedbank AB (publ) Luxembourg Branch
46 M.M. Warburg & CO Luxembourg S.A. 63 TD Bank International S.A.
47 Mirabaud & Cie (Europe) S.A. 64 The Bank of New York Mellon (International) Ltd., Luxembourg Branch
48 Mitsubishi UFJ Global Custody S.A. 65 The Bank of New York Mellon (Luxembourg) S.A.
49 Mizuho Trust & Banking (Luxembourg) SA 66 The Royal Bank of Scotland Plc, Luxembourg Branch
50 Nomura Bank (Luxembourg) S.A. 67 Union Bancaire Privée (Europe) S.A.
51 Nordea Bank S.A. 68 VP Bank (Luxembourg) S.A.
52 Northern Trust Global Services Ltd, London (Royaume-Uni), Luxembourg Branch
53 PayPal (Europe) S.à r.l. et Cie, S.C.A.
54 Pictet & Cie (Europe) S.A.
55 Quilvest Wealth Management S.A.
56 Skandinaviska Enskilda Banken S.A.
57 SMBC Nikko Bank (Luxembourg) S.A.
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1. Organisation of the SSM
2. The experience so far
3. ECB priorities for 2016
4. The SRM
Agenda
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Organisation of the SSM
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Secretariat of the SSM
SSM Supervisory Board
Chair: Danièle Nouy
Vice-Chair: Sabine Lautenschläger
ECB Governing Council
30 banks 98 banks
7 divisions
Joint Supervisory Teams (JSTs)
- Comprising staff from ECB and NCA, and led by JST Coordinator- Responsible for day-to-day supervision of individual significant banks
and for implementing the annual supervisory programme- Responsible for implementing decisions of Supervisory Board /
Governing Council- Size and composition of JSTs vary between banks:
- Biggest banks – 1 dedicated JST team - Otherwise 1 JST team responsible in average for up to 4 banks
8 divisions + 18 sections
DG IV. MicroprudentialSupervision
Lead: Korbinian Ibel
- Quality Assurance
- Policies
- Methodology & Standards
- Authorisation
- SSM Risk Analysis
- Enforcement & Sanctions
- Crisis Management
- Planning & Coordination of SREP
- Centralised On-Site Inspections
- Internal Models
DG III. MicroprudentialSupervision
Lead: Jukka Vesala
- Indirect Supervision of all other banks in participating countries
- Oversight & NCA Relations
- Institutional & SectoralOversight
- Analysis & Methodological Support
DG II. MicroprudentialSupervision
Lead: Ramón Quintana
Direct Supervision of significant banking institutions
DG I. MicroprudentialSupervision
Lead: Stefan Walter
Direct Supervision of significant banking institutions
30 banks (incl. subs.) >90 banks (incl. subs.)
ECB is accountable to both the European
Parliament & the EU Council
Country desks
1. Organisation of the SSM
The ECB has received approval to increase total SSM staff from 1,000 to 1,300 over the next 2 years
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Headquarters: Frankfurt am Main
Consistent across Europe (Eurozone and non-Eurozone)
Consistent tools, methodologies and approaches
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The experience so far
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Regulation at a local level across the EU remains diverse and fragmented
Banks are genuinely trying to adapt to the new regime
More harmonisation isneeded in many areas e.g. SREP practices
More intrusive approach to regulation
Setting up the SSM has been a significant achievement
First round of annual supervisory assessments of the banks: Supervisory Review and Evaluation Process
SSM touches on behaviour and culture through governance and risk appetite review
Results of CA depend on national regulation and stress testing methodology
No single interpretation of CRD IV and CRR regulations, given national options and discretions
The first year of SSM
Ongoing work on business models and profitability drivers needed
2. The experience so farOne year of SSM: key lessons learned
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Stress testing
ILAAPRASStress testing
ICAAPRAS
Pillar 2 Requirements Pillar 2 Requirements
Assessment of capital adequacy Assessment of liquidity adequacy
Assessment of internal governance
and of the risk management
process
Business model, strategic planning and viability
Internal Governance
Business model
Global SREP assessment
Supervisory measures
Capital enhancing Qualitative measuresLiquidity enhancingCorrective intervention
measures
General findings
• Banking business models are under significant pressure (low interest rates, profitability, competitive pressure)
• Medium-term financial planning is not always consistent with capital planning processes
• Stress testing results are not sufficiently taken into account in assessing a bank’s risk bearing capacity
• Insufficient consideration of risk appetite and risk culture
• Emphasis on the importance of liquidity ratios
ICAAP findings
• Insufficient consideration of interest rate risk in the banking book
• Insufficient consideration of concentration risks
• The need to take into account business model risk
• Adequacy of the confidence level used in pillar II capital modelling
• Emphasis on the importance of the liquidation approach to calculate risk factors
2. The experience so far2015 Supervisory Review and Evaluation Process (SREP)
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Preliminary 2015 SREP capital ratios*
7,5%
8,0%
8,5%
9,0%
9,5%
10,0%
10,5%
11,0%
11,5%
12,0%
12,5%
50% of banks
80% of banks
All ECB supervised
banks
CE
T1-
Qu
ote
13%
13,5%
14%
* incl. Capital conservation buffer
• Average capital requirements across SSM banks have risen compared to 2014 up to 10.1% CET 1, within a range of 8-14% (Sabine Lautenschläger, 17.11.2015)
• Buffers include capital conservation buffer, but not the countercyclical, systemic risk and systemically important bank buffers
• Oral information about classification of banks (1 to 4)
2. The experience so far2015 SREP – Capital outcomes
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EBA Guidelines 44
Definition of 30 principles to 6 key themes
Organisational
Framework
Transparency 6
Risk management
Internal Control
Information systems/
business continuity
3
4
5
Corporate structure /
Organisation
Management body
1
2
Checks and balances
Know- your- structure
Non-standard/non
transparent activities
Duties and
responsibilities
Composition and
functioning
Framework for business
conduct
Outsourcing and
remuneration
Risk culture
Alignment remuneration
with risk profile
1
1
1
1
2
2
2
2
3
3
Internal framework
Risk Control function
Risk Control Function’s
role
Chief Risk Officer
Compliance function
Internal Audit function
Information
system/communication
Business continuity
management
Risk management
Framework
Empowerment
Internal governance
transparency
3
4
4
4
4
4
4
5
5
6
6
Key themes Topics Topics
New products 3
2. The experience so farInternal Governance under SSM
• Corporate governance an important area of SSM supervision
• A key priority in 2015 was a thematic review on risk governance and risk appetite focusing on:
• Board assessment
• Board information
• Quality of debate
• Risk appetite framework
• Sabine Lautenschläger (Vice-Chair of the Supervisory Board of the SSM) on governance and risk appetite framework: “A number of banks, while meeting national requirements, do not comply with international best practices with regard to governance”
• Julie Dickson (Member of the Supervisory Board of the ECB) on behaviour and culture: “Some banks are not accustomed to answering questions on their risk appetite framework and the appropriateness of information they are getting from management”
• Issues related to internal governance and risk appetite will continue to be an important subject of ECB supervision going forward
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2. The experience so farLiquidity and funding challenges
Key observations
• Group 1 banks are banks with Tier 1 capital in excess of EUR 3 billion and which are internationally active. All other banks are categorised as Group 2 banks.
• The minimum LCR requirement has been set at 60% from 1 October 2015 and will gradually increase to 100%.
Evolution of LCRs
Banks quantitative liquidity positions (LCR) are fairly robust
First year of (draft) ILAAPs shows very divergent maturity; not harmonised
There are several challenges ahead in the area of liquidity and funding
Liquidity stress testing
Funds transfer pricing
Contingency funding plan
Intra-day liquidity risk management
Source: CRD IV–CRR/Basel III monitoring exercise report, 15 September 2015
Risk management framework
Funding strategy
Liquidity buffers & collateral management
Cost benefit allocation mechanism
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ECB priorities for 2016
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3. ECB’s priorities for 2016ECB’s areas of focus for 2016 and beyond
Non performing loans
IT resilience and cyber security
Less significant institutions
Targeted Review of Internal Models
(TRIM)
Conduct and operational risk
AnaCreditNational discretions
and optionsInternal governance
and risk appetite
Asset quality reviewsICAAP and internal
stress testingBCBS 239
Data quality & Reporting
Business model analysis / review
EBA EU-wide stress test
ILAAPIFRS 9 / accounting
issues
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3. ECB’s areas of focus for 2016 and beyondBusiness model analysis / review
• Comprehensive Assessment addressed issues of bank solvability in the Eurozone, the issue of the viability of European banks remains
• ECB business model analysis focussed on the following:
• Viability and sustainability
• Profitability drivers and ability to generate acceptable returns over a forward-looking period
• Extent of interest rate risk inherent in the business model
Background
Analysis being completed by the ECB through two means:
1. SREP
Collection and analysis of data related to forecast profitability
2. Specific on-site missions
Very granular analysis of the banks’ historical performance and forward looking strategic and business plan, with data requests including:
Margin contributions / profitability calculations at the lowest level of detail
5-year historic profitability, split into ECB defined segments
Overview of profitability by product and by customer
5-year historic cost of funding broken down by funding sources
5-year historic new business analysis, including planned vs realised results, broken down by new business from existing vs new customers
Full customer lists
Business suggested by supervisory and management board members
Overview of business and distribution channels
The experience so far
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3. ECB’s areas of focus for 2016 and beyondEBA EU-wide stress test– overview
2016 EU-wide stress test draft methodology launched at the end of February 2016 including final methodology, templates and scenarios
53 EU banks will participate in the exercise, including 39 SSM banks
Outcomes expected to be published at the beginning of Q3 2016
For significant institutions not covered, the ECB will conduct in parallel its own stress test, consistent with the EBA methodology
Results will be used to assess Pillar 2 capital needs of individual banks in the context of the Supervisory Review and Evaluation Process (SREP)
27 calculation support and validation (CSV) templates
Credit risk 8
Market risk, CCR losses and CVA 8
Net Interest Income 2
Conduct risk and other operational risk 2
RWA 5
Non-interest income and expenses 1
Capital 1
9 transparency templates
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3. ECB’s areas of focus for 2016 and beyondEBA EU-wide stress test – key changes from 2014 exercise
No hurdle rates Results to be used in deriving pillar
capital requirements through SREP
• Pass / fail approach• Hurdle in baseline scenario: 8%• Hurdle in adverse scenario: 5,5%
Hurdle rates -
Static balance sheet as at 31.12.2015 No recognition of official restructuring
plans
• Static balance sheet as at 31.12.2013• Recognition of official restructuring
plans
Static balance sheet
Increased focus Increased demands for documentation
• Documentation requestedDocumentation -
Stress test 2014 Stress test 2016
No separate full-scale AQR• Concurrent implementation of AQR
and stress test• Results joined up
Interplay with AQR -
Distinction made between OpRisk and Conduct Risk
Complex stress testing methodology for conduct risk to be applied
• To be considered within operational risk
Conduct Risk
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3. ECB’s areas of focus for 2016 and beyondILAAP – key aspects
Background and objectives
Overview of ILAAP process
ILAAP governance
• Organizational structure and internal control• Scope of ILAAP and interaction with the credit institution’s decision making• Evidence of use tests of ILAAP as the support of existence of internal validation • Management approval for ILAAP
Liquidity stress testing
• Description of the scenarios• Information on methodology and parameters• Scenario results• Analysis of the relevance of the outcomes on internal limits, risk appetite, buffers and feasibility of funding plans
• Measurement and management of liquidity risk, liquidity buffers and counterbalancing capacity• Presentation of funding plans with quantitative past and forward looking information• Integration of liquidity transfer pricing into the measurement of profitability of new asset and liabilities • Intraday liquidity risk management including a quantitative overview past year of intraday liquidity risk
ILAAP main components
ILAAP requirements (as defined in EBA guidance Dec 2015)
• How liquidity risk is identified, measured, monitored, planned and mitigated • Proportionate to the size and complexity of the entity and its business model• Supported by documentation and records in relation to the various components of the framework• Integrated with the risk appetite framework and linked to business strategy, risk strategy and ICAAP
• All significant banks to produce an ILAAP from 2016
• ILAAP and data collected through the Short Term Exercise used to calibrate SREP requirements on liquid asset buffer
• Three main objectives:
1. Board awareness of liquidity management framework and adequacy of liquidity resources
2. Liquidity resources adequacy assessment under business as usual and stress
3. Documentation of the overall liquidity framework (identification, management, measurement, mitigation and reporting)
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3. ECB’s areas of focus for 2016 and beyondIFRS 9 – EBA questionnaire
Background
The EBA has launched an impact assessment of IFRS 9 covering approximately 50 institutions, weighted towards larger banks
The aim of the exercise is threefold:
1. Help the EBA understand the impact of IFRS 9 on regulatory capital
2. Assess the interaction between IFRS 9 and other prudential requirements
3. Assess the way institutions are preparing for the application of IFRS 9
Questionnaire content
1. Qualitative – how are banks preparing? Governance (board involvement), judgmental aspects, lending practices, impact expected by institutions, implementation stage
2. Quantitative - by big themes: impairment, etc. Impact on CET1, total impact to see impact on reg cap (provisions, etc)
Timing
Questionnaire requested for end of April. Analysis should be ready for Q3. Not sure if report will be published, depending ondata quality. The EBA will probably do another one next year as this year, data was requested best effort basis.
ECB / SSM involvement
The ECB is very interested to see the results of the analysis, as there is a view that IFRS 9 could have a significant impact onbanks’ regulatory capital
ECB may also add some banks into the scope of the questionnaire
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3. ECB’s areas of focus for 2016 and beyondIT resilience and cyber security
Through 2015, the ECB required supervised banks to complete a questionnaire, assessing how banks protect themselves from cyber fraud
The submissions are currently being processed and results are expected to be published in 2016
The ECB remains concerned about the risks faced by banks in relation to cybercrime, rating it as one of their key risks for 2016
IT resilience and cyber security remain a major concern for the ECB in 2016
Supervisory concerns about risks of cybercrime are still growing
The supervisor will continue to assess the risk of IT and cybercrime through the individual review of banks’ cyber risk profile and mitigation capabilities and through cross-sectional review and benchmarking
The basis of the questionnaire was the Cybersecurity Framework of the National Institute of Standards and Technology (NIST), as non-regulatory agency of the US Government
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3. ECB’s areas of focus for 2016 and beyondTargeted Review of Internal Models (TRIM)
• Answers to data requests
• Preparation of supervisory visits
• Anticipation of model approval requests for 2017
• Well-defined internal organisation and resource availability
• On-site IT data quality review on approved models
• Large number of supervisory on-site investigations over 2017 and 2018 (targeted model specific reviews)
• Appropriate resources to deal with on-site teams
• Logistics for the on-site teams
2016
2017 / 2018
Scope & timelines
• Focus on credit, market and counterparty credit risk models
• 2016: emphasis on methodological harmonisation, model governance framework review (including model validation policy, model use and data quality processes) and model map & prioritisation (including benchmarking)
• 2017/8: IT and data quality review; model-specific on-site reviews
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Objectives
• Restore credibility, adequacy and appropriateness of approved Pillar 1 internal models
• Ensure compliance with regulatory requirements and harmonise supervisory practices
• Integrate international regulatory developments (EBA/ BCBS) to accommodate upcoming changes
• Take a targeted approach to specific topics and models based on material issues requiring harmonisation
• Integrate TRIM-related activities in regular model validation (infrastructure, tools, processes & methodologies
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3. ECB’s areas of focus for 2016 and beyond
Non-performing loans
• Taskforce formed led by the former head of banking supervision in Ireland
• Focus will be on countries and individual banks where NPL ratios are deemed too high
Less significant institutions
• Guidelines to be published on supervision of less significant institutions
• List of 91 “high priority” less significant institutions to be released (so far)
• SREP process for LSIs to be similar to the current significant institution process
Asset quality reviews
• Process already under way to conduct AQRs on all new significant banks
• AQRs also to be conducted on specific portfolios (e.g. shipping) and less significant institutions on a case by case basis
BCBS 239
• Increased importance of risk data aggregation and risk reporting (e.g. AQR, EBA stress testing, regulatory data requests)
• ECB expects banks to improve their risk data aggregation capabilities
ICAAP & Internal stress testing
• For banks not included in the EBA exercise, ECB will conduct its own stress test consistent with the EBA methodology
• To be used to assess Pillar 2 capital through the 2016 SREP
• Focus also on preparedness for gone-concern scenarios (MREL / TLAC)
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3. ECB’s areas of focus for 2016 and beyond
Data quality and reporting
• Continued requests for ever more granular data in the context of stress testing, on-site missions, AnaCreditetc.
• Poor data quality and processes could lead to capital buffers
Conduct and operational risk
• Reviews to be done mainly through the SREP process
• Focus will be on risk culture and the effectiveness of the supervisory board
National discretions and
options
• Consultation launched in November on harmonising the exercise of options and discretions in union law
• To be finalised and implemented in the first half of 2016
Internal governance and
risk appetite
• Underlying sentiment that governance within certain banks is insufficient, e.g.
− Quality of the Board
− Independence from management
− Use of risk appetite in decision making
AnaCredit
• AnaCreditrequirements to be finalised through 2016
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3. ECB’s areas of focus for 2016 and beyondSummary of current SSM/ECB tenders
The ECB has launched a number of tender processes for framework contracts with external contractors for assistance across a number of different areas. The table below summarises these.
ECB / SSM Tender name
SSM Support on the performance on on-site supervisory activities
SSM Provision of support on the development and review of internal models
SSM
Provision of support for project management, quality assurance on asset quality reviews, stress testing and the provision of non-statutory audit services
Lot 1 – PMOLot 2 – Quality AssuranceLot 3 - Stress testingLot 4 - AQR
ECB Provision of consultancy and agency services on market infrastructure and payments
ECB Provision of consultancy services for risk management
ECB Information security - conceptual consultancy framework
ECB Management assessment & management development programme
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3. ECB’s areas of focus for 2016 and beyondApproach to supervision of LSIs - overview
ECB DG IIISupervision overview
National supervisors
Direct supervision
Quantitative and qualitative information
Common standards, recommendations, guidelines and general instructions
Ad-hoc information requests
Less Significant Institutions
91 LSIs classified as “high-priority”
so far
Cooperation with banking associations
Tiered approach- Supervision to be in accordance with the principle of proportionality- Intensity of supervision and information requests are based on the priority level of a bank- Risk-based and consistent approach
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3. ECB’s areas of focus for 2016 and beyondApproach to supervision of LSIs – supervisory tools
National authorities obliged to inform and seek approval from the ECB of any decisions or actions with regards to supervised banks
Regular reporting of national supervisory authorities to the ECB
Sharing of ECB guidelines and general work instructions with the national supervisory authorities
Thematic examinations: Detailed examination of specific risks
Retrieving information and conducting site inspections
Opportunity for the ECB to take over direct supervision of a less significant institution
Staff exchanges
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3. ECB’s areas of focus for 2016 and beyondApproach to supervision of LSIs – key focus areas
Development of common standards e.g. capital planning and business model analysis
Exchanging information with national supervisory authorities and continuous monitoring of LSIs by means of "country desks"
Finalizing the procedure for crisis management
Thematic audits, e.g. of the Institutional Protection Scheme (IPS) and accounting standards
Development of a risk assessment / SREP methodology for LSIs
Data and data analysis: collection and reporting of data, assessment of risks and vulnerability, list of less significant institutions6
2
3
4
1
5
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3. ECB’s areas of focus for 2016 and beyondApproach to supervision of LSIs – SREP for LSIs
Key objectives
Ensuring a "level playing field" between significant institutions and LSIs and between LSIs
Ensuring uniformity in the implementation of the SREP by ECB and national supervisory authorities
Key principles
SREP for LSIs to be derived from the SREP for significant institutions
Application of SREP for LSIs is proportional and aligned to the availability of comparable data
Frequency of Analysis1
Scope of the assessment2
Granularity of analysis3
• Proportionality based on the priority level of the institution
• There are predefined three levels: "High-Medium-Low"
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The Single Resolution Mechanism
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European and Luxembourg regulatory framework…
Single Resolution Fund(SRF)
Luxembourg Resolution Fund (LRF)
Luxembourg Deposit Guarantee Schemes
(LDGS)
Luxembourg Investors Compensation Schemes
(LICS)
Eu
ro
pe
an
Lu
xe
mb
ou
rg
Regulation 806/2014 Implementing Regulation
2015/81
Directive 2014/59 (BRRD)
Delegated Regulation 2015/63
Directive 2014/49 (DGSD) Directive 97/9
Circular CSSF 15/626 Law 18 December 2015 (the Law)
Circular CSSF 15/628 Circular CSSF 15/617 Circular CSSF 15/610
(obsolete)
Law 18 December 2015 (the Law)
Law 18 December 2015 (the Law)
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… implementing 3 different mechanisms through 4 structures
Resolution
• Ensuring continuation of
systemically important
functions
• Executing orderly wind down
of other parts of business
Investor Compensation scheme
Minimal costs to taxpayers and minimal impact to the real economy
Single Resolution Fund (SRF)
LuxembourgResolutionFund (LRF)
Deposit Guarantee Scheme
Covering certain types of depositors up to EUR 100,000 in case their deposits are not available
(FGDL)
Compensation scheme up to EUR 20,000 for certain types of investors in case their funds linked to their investment transactions or securities are not available (ex-post contributions)
Stability of market
Depositor protection
Investor protection
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Timeline
Data collection from CSSF to calculate 2015 ex ante contribution to the LRF (Circular CSSF 15/617)
Jul 2015
Institutions received from CSSF the 2015 Ex ante Contribution to be paid to the LRF before end of December 2015 (Circular CSSF 15/628)
Transposition of the BRRD and the DGSD through Law of 18 December 2015
Dec 2015 Data collection from CSSF to calculate 2016 ex ante contribution to the SRF(Circular CSSF 15/626)
Dec 2015
Deadline for institutions to submit data for the 2015 ex ante contribution to the LRF
Sept 2015
Deadline for institutions to submit data for the SRF ex ante contribution for 2016
Feb 2016
Notification of the 2016 ex ante contribution to be paid to the SRF
May 2016
Deadline for institutions to pay the 2016 ex ante contribution to the SRF
Jun 2016
Start of extra 0.8% contribution to LDGS
Jan 2019
End of Initial period of the SRF
Dec 2023
End of initial period of the LRF
Dec 2024
No Information
on DGS contribution
(yet)
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Financing arrangements of the Resolution Fund
Financing arrangements
Ex-ante contributions
Ex-post contributions
Alternative funding
Calculated by the Resolution Authority,
Paid annually at individual level by institutions
Borrowingor other forms of support
from institutions on scope, financial institutions or
other third parties
Calculated by the Resolution Authority where ex-ante contributions are insufficient to cover the losses or costs incurred by the use of the LRF/SRF Shall not exceed three times the annual ex ante contribution
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Criteria for institution to be failing or likely to fail
02Solvency issues
The assets of the institution are less than its liabilities
04Liquidity issues
The institution is unable to pay its debts or other liabilities as they fall due
Institution to be failing or likely to fail
(art 33 of the Law)
Regulatory issues
The institution infringes the requirements for continuing authorisation in a way that would justify the withdrawal of the authorisation by the competent authority
03Financing issues
Extraordinary public financial support is required
01
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4 resolution tools
Bridge institution
Sale of business
Asset separation
Sale of the institution or parts of its business to one or more purchasers without the consent of shareholders
Whole/partial acquisition of the institution by one or more public authorities or control by the resolution authority
Losses and appropriate part of the costs arising from the failure of the institution supported by shareholders and specific creditors
Transfer assets, rights or liabilities of an institution under resolution to a separate vehicle
!
!
Should be used only in conjunction with other tools to prevent an undue competitive advantage for the failing institution
Intervention of the Resolution Fund under conditions:
• Loss absorption and recapitalisation ≥ 8 % of the total liabilities including own funds has been made by the shareholders and the holders of other instruments of ownership, the holders of relevant capital instruments and other eligible liabilities through write down, conversion or otherwise.
AND
• Limited to the lower of 5 % of total liabilities including own funds or the means available to the Resolution Fund and the amount that can be raised through ex-post contributions within three years.
@
@
Stronger incentive to monitor the health of an institution during normal circumstances
Bail-in
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Resolution planning
The EBA specifies the content of resolution plans (submitted to the EC)
Arrangements for information
Resolution strategy
Conclusions of the assessment of resolvability
Arrangements for operational continuity
Communication
Summary
Financing
Responses from the institution or group
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Minimum Requirement for own funds and Eligible Liabilities (MREL)
> X%=
Eligible liabilities and own funds
Total liabilities and own funds
•Based on size, business model, funding profile, risk profile, possible DGS contribution…
•8% Floor•Min. Own Funds + Buffer
•Sub-floor for contractual bail-in instruments?
Case-by-Case using EBA
criteria
Assets Liabilities
Regulatory adjustments to accounting equity
Liabilities owed, secured, guaranteed or funded by the institutionLiabilities with a remaining maturity < 1 year
Derivative liabilitiesSecured deposits or with preference in national insolvency hierarchy
…
Eligible liabilities and own funds for
MREL
Total liabilities and
own fundsOwn funds
Eligible Subordinated debts
Eligible Senior debts
Increased funding cost?
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MREL and the link to Deposit Guarantee Schemes
• Significant industry discussion regarding whether deposit insurance or deposit guarantee schemes overlap with or remove the need for MREL requirements
• Key aspects of both tools are summarised in the table below:
MREL Deposit guarantee schemes
Description• Subordinated debt that can be “bailed-in” to
protect a bank from significant losses during a crisis
• Guarantees customer deposit amounts up to a certain amount in the case of bank failure
Loss absorbingcapacity
• Sits just above equity in terms of seniority• Can be used to absorb losses and protect more
senior debt-holders (including depositors)• Used for “bail-in” in the case of a resolution
under BRRD
• No loss absorbing capacity - protects depositors only in the case of a bank having already failed
• Used in cases over and above BRRD, i.e. if bail-in under MREL yields enough funds, guarantee schemes would not need to be invoked
Application
• Determined by the SRB in co-operation with National Resolution Authorities
• Set on an entity level, case by case basis but likely to not be less than 8% of total assets
• Applied within individual countries up to a limit of €100k per depositor
• European Commission attempts to move towards a harmonised European Deposit Insurance Scheme (EDIS)
• The regulatory view is clear: the existence of deposit insurance schemes do not replace the need for MREL to be applied
• The SRB sees the application of MREL as a way of replacing deposit guarantee schemes as a key bank resolution tool
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In a normal scenario the waterfall would be:
Resolution process
• The SRB is working with the National Resolution Authorities (NRAs), SSM and European Commission on the procedures for resolving a bank. In a resolution the responsibility will wholly shift from the NRAs to the SRB
• A first basis for any resolution will be the resolution plan but the SRB will need to adapt to the circumstances on the ground, including whether to bail in all the allocated assets or not
• Before the resolution process is triggered there will be an informal stage of cooperation between the SRB, the NRAs, SSM and Commission
Own funds and liabilities except:• Secured, collateralised or
guaranteed • Covered deposits• Liabilities necessary for
daily functioning• Liabilities to entities
(excluding group entities) with original maturity < 7 days
• Liabilities to employees, tax authorities, DGS…
Own funds and liabilities (including subordinated debts):• Issued & fully paid-up• Not owed to, secured,
guaranteed, or funded by the institution
• Remaining maturity > 1 year • Not a derivative• Not a deposit with preference
BAIL-INABLE
MREL-eligible
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March 2016
MREL eligible own funds and liabilities1
Other bail-inable own funds and liabilities2
Deposit Guarantee Schemes3
Single Resolution Fund 4
PwC
Single Resolution MechanismTimeline for engaging with banks through 2016
Q1 Q2 Q3 Q4
• Information request to all banking groups
• Bilateral engagement with first wave of groups
• Start resolution planning for a second wave of banking groups
• Start resolution planning for a third wave of banking groups
• Obtain feedback and MREL implementation plans from first wave of banks
• Executive Sessions and first set of Resolution Colleges
• Bilateral engagement with second and third wave banking groups
• Executive Sessions and second set of Resolution Colleges
• First set of MREL decisions
• Bilateral engagement with third wave
• Obtain feedback and MREL implementation plans from second and third wave
• Executive Sessions for remaining groups
• Second set of MREL decisions
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Key messages
• The existence of deposit insurance schemes does not replace the need for MREL
• SRB to finalise MREL decisions for the major banking groups within the Banking Union during 2016
• MREL targets expected to be set not less than eight percent of total assets – but on a case-by-case basis possibly above
• Individual implementation plans to reach the MREL target to be put in place as soon as possible
• MREL decisions require the approval of resolution plans by the Executive Session of the SRB and a final joint decision by a Resolution College
2
3
4
1
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March 2016
5
Thank you
direct: +49 30 26 36 [email protected]
Burkhard Eckes
Partner, Banking & Capital Markets Leader, Germany
REcCE Banking & Regulatory Leader
direct: + 352 49 48 48 2111
Emmanuelle HenniauxPartner, Banking Regulatory & Risk Leader, Luxembourg
direct: +352 49 48 48 [email protected]
Jean-Philippe MaesDirector, FS Consulting, Luxembourg