CEBS Update: Challenges in Implementing the CRD and the CEBS Guidelines Risk Capital 2006, Paris Danièle Nouy | 4 July 2006

CEBS Update: Challenges in Implementing the CRD and the CEBS’ Guidelines

Risk Capital 2006, Paris

Danièle Nouy | 4 July 2006

Danièle Nouy | 4 July 2006 2

Outline

• CEBS – role and structure

• Work programme – from design to practice

• Challenges in EU banking supervision

• CEBS’ responses:

– guidelines/operational networking

• Additional tools

• Conclusions


CEBS’ role

Main tasks:

• Give advice to the Commission

• Promote consistent implementation and application of EU legislation

• Exchange information and enhance convergence of supervisory practices

Objectives:

Promote 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


CEBS’ operational structure

CEBS 2006Chair

Danièle NouyCommission

Bancaire

Vice ChairHelmut Bauer

BaFin

Bureau

Andreas IttnerOesterreichische

Nationalbank

Kerstin af Jochnick

Finansinspektion

Andrzej ReichNarodowy

Bank Polski Secretariat

Secretary General

Andrea EnriaBanca d’Italia

Groupe de Contact

Chair Fernand NaertCBFA (Belgium)

Capital Requirements

Chair Clive Briault

FSA (UK)

Financial Information

Chair Arnoud Vossen

De Nederlandsche Bank


Work Programme

Priority areas of work

• Regulatory advice – Own funds, large exposures,

commodity firms

• Convergence of supervisory practices

– Supervisory Review Process (Pillar 2)– Validation of IRB and AMA systems– External Credit Assessment

Institutions (ECAIs)– Reporting frameworks– Supervisory disclosure

• Co-operation and information exchange

– Supervision of cross-border groups (operational networking)

– Crisis management (with the BSC)

– Information exchange

• Cross-sectoral issues– Supervision of financial conglomerates

(with CEIOPS)– Off-shore financial centres – Anti money laundering and terrorist

financing– Outsourcing – Internal governance

Other areas of work

• Monitoring and self-assessment

• Risks to banking stability

• The role of the audit function for prudential supervision

• Impact of IFRS on prudential requirements

• Ongoing monitoring of IASB work


Challenges in supervision

1) Divergences in implementation

• Options and national discretions

• Additional layers of national rules (“goldplating”)

• Different interpretations and practices (e.g. in models’ approval)

2) Cost-efficiency of the EU-system

• E.g. reporting requirements

3) Supervision of cross-border groups

• Misalignment between legal and operational structures in banking groups


Challenges in supervision

1) Divergences in implementation

• Options and national discretions

• Additional layers of national rules (“goldplating”)

• Different interpretations and practices (e.g. in models’ approval)

2) Cost-efficiency of the EU-system

• E.g. reporting requirements

3) Supervision of cross-border groups

• Misalignment between legal and operational structures in banking groups


CEBS’ responses 1

1) Divergences in implementation:

• CEBS’ guidelines covering the CRD (Basel II):

– Structured use of supervisory judgment: Supervisory Review Process (Pillar 2)

– Validation of advanced approaches for credit and operational risk (high level principles not enough to achieve convergence)

• CEBS’ and Commission’s initiative on CRD Transposition and CEBS query systems http://www.c-ebs.org/crdtg.htm

• Supervisory disclosure: transparency of possible inconsistencies and tool for peer and market pressure http://www.c-ebs.org/SD/SDTF.htm


Supervisory Review Process

Objectives:

• 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

Minimum Capital

Requirements

Regulatory view

Supervisory review and evaluation

(SREP)+

Institutions’ internal view

(ICAAP)

Market discipline

Market view

Credit riskMarket riskOperational

risk

Supervisory judgment

Disclosure requirements

Banks and investment firms

Pillar 1 Pillar 2 Pillar 3


Supervisory review process

• Foster active dialogue between institutions and supervisors

-Supervisory Review and Evaluation Process (SREP)

-Internal Capital Adequacy Assessment Process (ICAAP)

• Proportionality:

-For large and complex institutions in-depth and tailor-made

-For smaller institutions likely to be quite standardised

• CEBS seminars and training to foster convergence


Guidelines on validation

• A common understanding of the supervisory authorities on how to deal with IRB or AMA applications

• Tight calendar: need for common approaches allowing both institutions and their supervisors to make appropriate preparations

• Extensive involvement of supervisors from all Member States, with different technical subgroups

• Two rounds of consultations, coupled with informal dialogue with industry experts

– Main criticism: too detailed (rules-based vs. principles-based approach), superequivalence, risk of “backtracking” (vs. level playing field concerns)

– Criticism taken seriously and guidelines redrafted


Guidelines on validation

Structure – a typical approval process

Preliminarycontacts

Supervisorycooperation

Application

Supervisor’sassessment

Dialogue andjudgement

Decision and permission

Monitoring of implementation

Ongoingreview


Supervisory disclosure

• Article 144 of the CRD requires supervisors to disclose a set of information related to the directive implementation

• Disclosure framework must provide a comprehensive overview of supervisory rules and guidance and permit meaningful comparisons of the national approaches

• CEBS believes that a move towards larger transparency will contribute very significantly to consistent implementation and convergence in supervisory practices across the EU

• Two-tier website solution in English by end 2006


Supervisory disclosure

Links to national websitesfor more detailed information


CEBS’ responses 2

2) Cost-efficiency of the EU-system:

• Common reporting frameworks for capital requirements and for consolidated financial data:

– Common framework and format a significant step towards harmonisation

– Still extensive, but benefits for institutions and supervisors

– Exploiting the opportunities offered by new technologies: XBRL taxonomies

• Common recognition process for External Credit Assessment Institutions (ECAI)

– Streamlines the process significantly


Standardised reporting frameworks

Reporting now… and later…

Supervisor 1

Supervisor 3

Supervisor 2

Different templates and definitions Common templates and definitionsSeveral formats Single formatDifferent technologies XML/XBRL recommended

Supervisor 1

Supervisor 2

Supervisor 3

XBRL

Group A

Group B

Group C

Group A, B, CCommon

framework

XBRL


CEBS’ responses 3

3) Supervision of cross-border groups:

• CEBS guidelines on home-host cooperation:

– Coordinated planning, exchange of information, optimal use of resources (delegation of tasks)

– Cooperation in supervisory risk assessment and review

• Operational networking

– A specific substructure to intensify the dialogue between the consolidating and host authorities in the supervision of cross-border groups and to highlight relevant issues to CEBS.


Guidelines on supervisory cooperation

• 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

• Proportionality


Guidelines on supervisory cooperation

Group

Subsidiary

Risk identification > Risk assessment > Planning > Supervisory action > Evaluation

Consolidating supervisor – supervision of the group

Consolidating supervisor coordinates preparation of risk assessment with input from host supervisors

GroupSREP

Agree plan and coordination of supervisory activities

Risk identification > Risk assessment > Planning > Supervisory action > Evaluation

Host supervisor – supervision of a subsidiary

SubsidiarySREP

Identify the approach for jointly performing or allocating tasks

Agree outcomes from supervisory tasks, data received etc

Exchange of information

Exchange of information

Ongoing dialogue

Ongoing dialogue


Operational networking

• Enhancing day-to-day consistent supervision and cooperation between consolidating and host supervisors of cross-border banking groups

– Definition of standards for written arrangements

– Ensuring consistency of approaches for different cross-border groups

– Conducting bottom-up surveys of market and supervisory practices

• Focus first on 10-15 largest EU banking groups– Monitoring the implementation of CEBS guidelines

– Identifying implementation issues: case studies and surveys

– Testing ways of delegating supervisory tasks


Additional tools

• Training and exchanges of staff– Creating a common supervisory culture and approach

• Joint inspections– Positive experiences from e.g. Nordic countries

• Delegation of responsibilities and tasks– Included in the home-host guidelines

– Within the EU legal framework

• Mediation – Open attitude to develop new tools

– But specific concerns of banking supervisors (e.g. the role of CEBS vis-à-vis members, crisis situations)

– How would it work in banking supervision? Do we need tailor-made arrangements?


Conclusion

• Current “European supervisory system”:– No single supervisory interface. But a more coordinated and

streamlined supervisory process, and a structured process for convergence through time

– Differences across countries not wiped out, but visible so that priorities can be identified and market pressure can work

– Nature of Level 3 guidance yet to be fully settled and tested

– “Consensus” vs. “best practices” dilemma

– Effectiveness of the current system will be assessed


Conclusion

• Banking supervision issues link with broader institutional issues:

• Cross-sectoral consistency and cooperation

• Deposit insurance

• Financial stability tasks and crisis management at the national and EU levels

• Tax and company laws

Contacts:

CEBS - http://www.c-ebs.org Danièle NouyCEBS Chair [email protected]

Documents

CEBS Update: Challenges in Implementing the CRD and the CEBS Guidelines Risk Capital 2006, Paris Danièle Nouy | 4 July 2006