May 09, 2019

Pentti Hakkarainen of ECB spoke about the proportionate approach to banking supervision in EU, while speaking at the BIS-IMF policy implementation meeting on proportionality in banking regulation and supervision in Basel. He emphasized that proportionality is an inherently subjective concept and is a key obligation for all bank supervisors. During his speech, he described the concept of proportionality in bank supervision and explained the day-to-day reality of the way ECB implements proportionate supervision.

ECB directly supervises 117 significant banking groups, with these institutions accounting for over 80% of the banking assets across the euro area. All other euro area banks are supervised day-to-day by the national competent authorities, with the ECB providing an indirect oversight function for the national authorities’ supervision of these less significant institutions, or LSIs. "This split of roles and responsibilities between ECB and national competent authorities allows the same supervisory objectives to be pursued efficiently in both large and small banks. That efficiency is one of the key elements of proportionate supervision," said Mr. Hakkarainen. LSIs tend to focus on the domestic market of the country in which they are based. This makes the local expertise and geographical proximity of the national competent authority supervisors particularly useful in ensuring the efficient monitoring of prudential soundness.

In context of the ECB approach to proportionality, he explained that the first step in arranging the supervisory work is to set a minimum level of supervisory engagement that applies to all banks. This allows ECB to ensure that all banks are held to the same standards and that supervisory intensity is, in all cases, sufficient to demonstrate that these standards are met. From this minimum engagement level, extra layers of supervisory requirements are added in a proportionate way. These layers vary depending on the risk profile of the bank in question. The calibration of the additional layers of supervision is captured in a detailed annual supervisory examination plan. This plan sets out the supervisory activities to be undertaken for each of the significant institutions in the coming year, including risk-based decisions on what on-site inspections and internal model investigations to pursue. At the end of the supervisory analysis, proportionate supervisory measures must be applied. The key tool for applying proportionate supervisory measures is the Supervisory Review and Evaluation Process (SREP). These supervisory measures have become more proportionate over the five years since the Single Supervisory Mechanism was set up. One way of measuring this is to look at the correlation between the SREP scores of significant institutions and the Pillar 2 capital requirements that ECB imposes on them. Five years ago this correlation was below 30% and now it is steady at about 80%.

ECB is proportionate in its oversight function and in how it designs guidance for national competent authorities regarding their day-to-day supervisory activities. The main way in which ECB ensures that its oversight of the national competent authorities’ supervision is proportionate is by ranking the LSIs. The LSIs are categorized as high, medium, or low priority and this categorization is reviewed each year in cooperation with the national competent authorities. The LSIs are prioritized according to, first, the impact their failure would have on the domestic financial system and, second, their intrinsic riskiness. Greater riskiness and a larger potential impact on the financial system imply more intensive supervisory attention. The ECB uses this prioritization of LSIs to apply the principle of proportionality in a number of its oversight tasks. For instance, the Single Supervisory Mechanism (SSM) Framework Regulation provides that national competent authorities send certain ex ante notifications and fulfill certain ex post reporting requirements vis-à-vis the ECB to ensure that the ECB can adequately exercise its oversight of the functioning of the SSM. The principle of proportionality is also an important criterion for the ECB when assessing incoming ex ante notifications and determining the intensity of the review to be performed.

ECB assesses the impact of the planned measures from a supervisory and risk perspective and examines whether the measures are proportionate. Regarding regular ex post reporting requirements, ECB requires national competent authorities to submit institution-specific information and information related to their supervision of LSIs only if it is deemed material and proportionate. Hence, the depth and frequency of ex post reporting are adapted to the priority rank of the LSI. The ECB framework for the institution-specific oversight of LSIs is also based on the prioritization of institutions. A less granular and less frequent assessment is normally conducted for the banks that have been assigned a low or medium priority. However, this is not always the case. For example, if a thematic review were to indicate that a lower-priority institution was more risky and complex than expected, the principle of proportionality would require a stricter and more intrusive approach to be taken.


Related Link: Speech

 

Keywords: Europe, EU, Banking, Proportionality, SSM, SREP, Banking Supervision, Less Significant Institutions, Banking Union, ECB

Related Articles
News

IASB Issues Work Plan and Meeting Updates for May 2019

IASB published an updated work plan, along with the update of its meeting in May 2019.

May 17, 2019 WebPage Regulatory News
News

FCA Publishes Its Business Plan for the Coming Year

FCA published its Business Plan, which sets out the main areas of focus and priorities for 2019/20.

May 17, 2019 WebPage Regulatory News
News

CFTC Proposes to Amend Derivatives Clearing Organization Regulations

CFTC proposed amendments to certain regulations applicable to registered derivatives clearing organizations (DCOs) under Part 30 of the CFTC regulations.

May 16, 2019 WebPage Regulatory News
News

APRA Licenses Societe Generale As Foreign Deposit-Taking Institution

APRA granted Societe Generale a license to operate as a foreign authorized deposit-taking institution under the Banking Act of 1959.

May 16, 2019 WebPage Regulatory News
News

EBA Provides Updates on Its Work on Basel III Impact Assessment in EU

EBA is working to finalize the impact assessment on implementation of Basel III standards, in response to the EC call for advice, which was received on May 04, 2018.

May 16, 2019 WebPage Regulatory News
News

ISDA Publishes Two Consultations on Benchmark Fallbacks

ISDA published two consultations on benchmark fallbacks, the comment periods for which expire on July 12, 2019.

May 16, 2019 WebPage Regulatory News
News

Sam Woods of PRA Speaks About Style of Regulation in UK After Brexit

Sam Woods, Deputy Governor for Prudential Regulation and Chief Executive Officer of PRA, spoke at the UBS Financial Institutions Conference in Lausanne.

May 16, 2019 WebPage Regulatory News
News

FED Publishes Report Summarizing Regulatory and Supervisory Activities

FED published a report that summarizes banking conditions and the supervisory and regulatory activities of FED, in conjunction with semiannual testimony before Congress by the Vice Chairman for Supervision.

May 15, 2019 WebPage Regulatory News
News

US Agencies Propose to Amend Regulatory Framework for Foreign Banks

US Agencies (OCC, FED, and FDIC) proposed a regulatory framework for foreign banks operating in the U.S. that would more closely match the rules for foreign banks with the risks they pose to the U.S. financial system.

May 15, 2019 WebPage Regulatory News
News

ECB Consults on EONIA to €STR Legal Action Plan

ECB published a consultation, which was launched by the working group on euro risk-free rates, on recommendations to address the legal implications for new and legacy contracts referencing the euro overnight index average (EONIA), as a result of the proposed transition from EONIA to the euro short-term rate (€STR).

May 15, 2019 WebPage Regulatory News
RESULTS 1 - 10 OF 3089