ECB Consults on Supervisory Approach to Consolidation in Banking
ECB launched a consultation on the guide that sets out supervisory approach to consolidation projects in the banking sector. As per the guide, the consolidation projects must be based on a credible business and integration plan, improve the sustainability of the business model, and respect high standards of governance and risk management. The guide also addresses the key issues such as Pillar 2 capital requirements of the combined entity, treatment of bad will, and permission for temporary use of the already approved internal models. The consultation on this guide ends on October 01, 2020.
The proposed guide should enhance the transparency and predictability of supervisory actions and help credit institutions design prudentially sustainable projects. The guide covers the:
- Overall approach to the supervisory assessment of consolidation projects
- Supervisory expectations regarding consolidation projects
- Supervisory approach to key prudential aspects of the consolidation transaction
- Ongoing supervision of the newly combined entity
- Application of this framework to consolidation transactions involving less significant institutions
With regard to the supervisory approach to key prudential aspects of the consolidation transaction, the guide highlights that, base on past experience, three supervisory factors can play a key role in determining the feasibility of a business combination: post-merger Pillar 2 capital requirements and Pillar 2 Guidance, the prudential treatment of badwill, and the transitional arrangements for the use of internal models. ECB will not penalize credible integration plans with higher capital requirements. The starting point for capital will be the weighted average of the two banks’ Pillar 2 capital requirements and Pillar 2 guidance prior to consolidation. ECB will look to the use of badwill by banks for risk-reduction and value-added investments and accept the temporary use of existing internal models, subject to a strong roll-out plan. Past experience shows that there is no “one size fits all” approach when it comes to banking sector consolidation. Consequently, a case-by-case approach based on proportionality in the application of the principles set out in the guide should be expected.
ECB encourages parties envisaging consolidation to engage with it early on in the process. This will allow ECB to give preliminary feedback on such projects. ECB Banking Supervision examines, from a prudential perspective, the consolidation projects brought to its attention. This assessment is aimed at ascertaining that the entity resulting from the business combination will meet all prudential requirements when the transaction is implemented. The assessment will also ensure that the business combination resulting from the transaction is sustainable and is likely to allow for permanent compliance with the prudential requirements in the future too. The profitability and sustainability of banks’ business models are among the supervisory priorities for 2020 and are important for increasing the resilience of banks and their capacity to service the economy, including in the context of COVID-19 pandemic.
Related Links
Comment Due Date: October 01, 2020
Keywords: Europe, EU, Banking, SSM, Pillar 2, Basel, Proportionality, Regulatory Capital, Internal Models, Banking Supervision, Consolidation of Banks, ECB
Featured Experts
María Cañamero
Skilled market researcher; growth strategist; successful go-to-market campaign developer
Nicolas Degruson
Works with financial institutions, regulatory experts, business analysts, product managers, and software engineers to drive regulatory solutions across the globe.
Patrycja Oleksza
Applies proficiency and knowledge to regulatory capital and reporting analysis and coordinates business and product strategies in the banking technology area
Previous Article
CFRF Publishes Guide for Addressing Climate-Related Financial RisksRelated Articles
BIS and Central Banks Experiment with GenAI to Assess Climate Risks
A recent report from the Bank for International Settlements (BIS) Innovation Hub details Project Gaia, a collaboration between the BIS Innovation Hub Eurosystem Center and certain central banks in Europe
Nearly 25% G-SIBs Commit to Adopting TNFD Nature-Related Disclosures
Nature-related risks are increasing in severity and frequency, affecting businesses, capital providers, financial systems, and economies.
Singapore to Mandate Climate Disclosures from FY2025
Singapore recently took a significant step toward turning climate ambition into action, with the introduction of mandatory climate-related disclosures for listed and large non-listed companies
SEC Finalizes Climate-Related Disclosures Rule
The U.S. Securities and Exchange Commission (SEC) has finalized the long-awaited rule that mandates climate-related disclosures for domestic and foreign publicly listed companies in the U.S.
EBA Proposes Standards Related to Standardized Credit Risk Approach
The European Banking Authority (EBA) has been taking significant steps toward implementing the Basel III framework and strengthening the regulatory framework for credit institutions in the EU
US Regulators Release Stress Test Scenarios for Banks
The U.S. regulators recently released baseline and severely adverse scenarios, along with other details, for stress testing the banks in 2024. The relevant U.S. banking regulators are the Federal Reserve Bank (FED), the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC).
Asian Governments Aim for Interoperability in AI Governance Frameworks
The regulatory landscape for artificial intelligence (AI), including the generative kind, is evolving rapidly, with governments and regulators aiming to address the challenges and opportunities presented by this transformative technology.
EBA Proposes Operational Risk Standards Under Final Basel III Package
The European Union (EU) has been working on the final elements of Basel III standards, with endorsement of the Banking Package and the publication of the European Banking Authority (EBA) roadmap on Basel III implementation in December 2023.
EFRAG Proposes XBRL Taxonomy and Standard for Listed SMEs Under ESRS
The European Financial Reporting Advisory Group (EFRAG), which plays a crucial role in shaping corporate reporting standards in European Union (EU), is seeking comments, until May 21, 2024, on the Exposure Draft ESRS for listed SMEs.
ECB to Expand Climate Change Work in 2024-2025
Banking regulators worldwide are increasingly focusing on addressing, monitoring, and supervising the institutions' exposure to climate and environmental risks.