ECB announced that it will take over the supervision of the largest and most systemic investment firms under the Investment Firms Directive and Regulation (IFD and IFR), which applies as of June 26, 2021. These investment firms must apply for a banking license and will thus be supervised by ECB going forward. The first set of investment firms newly authorized as banks are expected to be added to the list of supervised banks in the second half of 2021, thus becoming subject to the European Banking Supervision.
With the new regime just around the corner, large investment firms need to prepare. Firms that qualify as a credit institution should gather the detailed information required for license application. This includes information on the capital position, business plan, financial projections, operational structure, governance arrangements, internal controls, and risk management. There will also be important changes to supervision. If the new credit institution—that is, the investment firm with a new license—is considered significant under the applicable criteria, it will be directly supervised by ECB. If it is classified as less significant, the national competent authority will be responsible for its direct supervision. ECB encourages large investment firms to reach out to their national supervisors to start a dialog on the transition to the new regime.
ECB will assess applications using its established processes for the licensing of credit institutions. This means that the entry point for all applications is the national supervisor of the country where the credit institution will be located, irrespective of whether the significance criteria are met or not. The national supervisors and ECB cooperate closely throughout the licensing process. However, ECB is ultimately responsible for making licensing decisions on all applicant credit institutions. While waiting for the new license to be granted, an investment firm may continue to provide services under its current investment firm license, although this will ultimately depend on how a member state transposes the rules. While waiting for the new license to be granted, an investment firm may continue to provide services under its current investment firm license, although this will ultimately depend on how a member state transposes the rules.
The new rules are intended to better reflect the actual risks taken by the different types of investment firms and to make the supervision of such firms more effective. The new regime introduces various categories of investment firms. Large investment firms carry out bank-like activities, meaning that they take on credit and risks (the same types of risks that banks are exposed to). Under the new rules, an investment firm qualifies as a credit institution if it deals on its own account or underwrites or places financial instruments on a firm commitment basis and has total assets of more than EUR 30 billion. Classification as a credit institution is either on a stand-alone basis or on a combined basis. A firm qualifies as a credit institution on a combined basis if it belongs to a group of entities that individually have assets below EUR 30 billion but whose total assets when combined reach or exceed this figure. Smaller investment firms will be subject to a new regime that is more tailored to their activities, risk profile and size.
Keywords: Europe, EU, Banking, Securities, IFR/IFD, SSM, Systemic Risk, Investment Firms, Banking Supervision, ECB
Across 35 years in banking, Blake has gained deep insights into the inner working of this sector. Over the last two decades, Blake has been an Operating Committee member, leading teams and executing strategies in Credit and Enterprise Risk as well as Line of Business. His focus over this time has been primarily Commercial/Corporate with particular emphasis on CRE. Blake has spent most of his career with large and mid-size banks. Blake joined Moody’s Analytics in 2021 after leading the transformation of the credit approval and reporting process at a $25 billion bank.
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