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
US Agencies Issue Several Regulatory and Reporting Updates
The Board of Governors of the Federal Reserve System (FED) adopted the final rule on Adjustable Interest Rate (LIBOR) Act.
ECB Issues Multiple Reports and Regulatory Updates for Banks
The European Central Bank (ECB) published an updated list of supervised entities, a report on the supervision of less significant institutions (LSIs), a statement on macro-prudential policy.
HKMA Keeps List of D-SIBs Unchanged, Makes Other Announcements
The Hong Kong Monetary Authority (HKMA) published a circular on the prudential treatment of crypto-asset exposures, an update on the status of transition to new interest rate benchmarks.
EU Issues FAQs on Taxonomy Regulation, Rules Under CRD, FICOD and SFDR
The European Commission (EC) adopted the standards addressing supervisory reporting of risk concentrations and intra-group transactions, benchmarking of internal approaches, and authorization of credit institutions.
CBIRC Revises Measures on Corporate Governance Supervision
The China Banking and Insurance Regulatory Commission (CBIRC) issued rules to manage the risk of off-balance sheet business of commercial banks and rules on corporate governance of financial institutions.
HKMA Publications Address Sustainability Issues in Financial Sector
The Hong Kong Monetary Authority (HKMA) made announcements to address sustainability issues in the financial sector.
EBA Updates Address Basel and NPL Requirements for Banks
The European Banking Authority (EBA) published regulatory standards on identification of a group of connected clients (GCC) as well as updated the lists of identified financial conglomerates.
ESMA Publishes 2022 ESEF XBRL Taxonomy and Conformance Suite
The General Board of the European Systemic Risk Board (ESRB), at its December meeting, issued an updated risk assessment via the quarterly risk dashboard and held discussions on key policy priorities to address the systemic risks in the European Union.
FCA Sets up ESG Committee, Imposes Penalties, and Issues Other Updates
The Financial Conduct Authority (FCA) is seeking comments, until December 21, 2022, on the draft guidance for firms to support existing mortgage borrowers.
FSB Reports Assess NBFI Sector and Progress on LIBOR Transition
The Financial Stability Board (FSB) published a report that assesses progress on the transition from the Interbank Offered Rates, or IBORs, to overnight risk-free rates as well as a report that assesses global trends in the non-bank financial intermediation (NBFI) sector.
