ECB Finalizes Guide on Supervisory Approach to Bank Consolidation
ECB published a guide that sets out the supervisory approach to consolidation in the banking sector. The guide was finalized post a consultation process, which ended on October 01, 2020. ECB also published a feedback statement for the comments received on this guide. As part of the supervisory approach, ECB will use certain tools to facilitate sustainable consolidation projects. Such 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 addresses key issues such as Pillar 2 capital requirements of the combined entity, treatment of badwill (the difference between the re-evaluated book value of a bank and the price the acquirer pays), and permission for temporary use of the already approved internal models.
The guide covers the overall approach to the supervisory assessment of consolidation projects, the supervisory expectations regarding consolidation projects, the supervisory approach to key prudential aspects of the consolidation transaction, the ongoing supervision of the newly combined entity, and the application of this framework to consolidation transactions involving less significant institutions. Banks under resolution do not fall within the scope of the guide. The guide clarifies the following:
- ECB will not penalize credible integration plans by setting higher Pillar 2 capital requirements. Furthermore, during the application process, it will communicate to banks an indication of the capital levels the combined bank will need to maintain.
- Supervisors expect the profits stemming from badwill to play their role as capital of the combined bank. This means that banks are expected not to pay out, in dividends, profits stemming from badwill until the sustainability of the business model has been firmly established. ECB expects the acquirer to take advantage of a relatively low acquisition price to increase sustainability.
- ECB will accept temporary use of the existing internal models, subject to a strong roll-out plan.
The approach taken is founded on the baseline case whereby a bank subject to the Single Supervisory Mechanism (SSM) intends to acquire the control of another bank subject to the SSM. These principles remain valid with the necessary adaptations in all other cases, even when a non-bank or non-SSM bank is involved. All cases involving the proposed acquisition of a bank subject to the SSM fall under the common procedures of ECB and the relevant national competent authorities. 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 these principles should be expected. ECB encourages parties considering consolidation to engage with supervisors early on. This will allow ECB to give preliminary feedback on such projects.
Related Links
Keywords: Europe, EU, Banking, Basel, Proportionality, SSM, Regulatory Capital, Internal Model, Pillar 2, Dividend Distribution, 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
Related Articles
BIS Paper Studies Impact of Fintech Lending on Small Businesses in US
The Bank for International Settlements (BIS) published a paper that studies impact of fintech lending on credit access for small businesses in U.S.
UK Regulators Issue CRR Changes and Stress Test Scenarios for Banks
The Prudential Regulation Authority (PRA) issued the policy statement PS8/22 to amend the Own Funds and Eligible Liabilities (CRR) Part of the PRA Rulebook and update the supervisory statement SS7/13 titled "Definition of capital (CRR firms).
EBA Launches EU-Wide Transparency Exercise in 2022
The European Banking Authority (EBA) launched the EU-wide transparency exercise for 2022, with results of the exercise expected to be published at the beginning of December, along with the annual Risk Assessment Report.
SRB on CRR Quick-Fix to Policy for Multiple Point of Entry Banks
The Single Resolution Board (SRB) welcomed the adoption of the review of the Capital Requirements Regulation, or CRR, also known as the "CRR quick-fix."
EC Rule Lists Advanced Economies for Market Risk Capital Calculations
The European Commission (EC) recently adopted the Delegated Regulation 2022/1622, which sets out the regulatory technical standards to specify the countries that constitute advanced economies for the purpose of specifying risk-weights for the sensitivities to equity.
EBA Publishes Final Regulatory Standards on STS Securitizations
The European Banking Authority (EBA) published the final draft regulatory technical standards specifying and, where relevant, calibrating the minimum performance-related triggers for simple.
ECB Further Reviews Costs and Benefits Associated with IReF
The European Central Bank (ECB) is undertaking the integrated reporting framework (IReF) project to integrate statistical requirements for banks into a standardized reporting framework that would be applicable across the euro area and adopted by authorities in other EU member states.
EBA Publishes Funding Plans Report, Receives EMAS Certification
The European Banking Authority (EBA) has been awarded the top European Standard for its environmental performance under the European Eco-Management and Audit Scheme (EMAS).
MAS Launches SaaS Solution to Simplify Listed Entity ESG Disclosures
The Monetary Authority of Singapore (MAS) set out the Financial Services Industry Transformation Map 2025 and, in collaboration with the SGX Group, launched ESGenome.
BCBS to Finalize Crypto Rules by End-2022; US to Propose Basel 3 Rules
The Basel Committee on Banking Supervision met, shortly after a gathering of the Group of Central Bank Governors and Heads of Supervision (GHOS), the oversight body of BCBS.
