ECB Publishes Guide for Determining Penalties for Regulatory Breaches
ECB published a guide that outlines the principles and methods for calculating the penalties for regulatory breaches of prudential requirements by banks. The guide clarifies that ECB sets the level of a penalty in relation to the severity of the breach and, to ensure proportionality, to the size of the supervised entity. The severity of a breach is classified in one of five categories: minor, moderately severe, severe, very severe, and extremely severe. Which category a breach falls into depends on a combination of two factors: the impact of the breach and the degree of misconduct.
For breaches classified as very severe or below, ECB sets the base amount for the penalty either with reference to a predefined “penalty grid” according to the severity of the breach and the size of the institution, or by multiplying the total profits gained or losses avoided, if they can be determined, by an amount corresponding to the severity of the breach. Where breaches are classified as extremely severe, ECB sets the base amount as a percentage of the supervised entity’s total annual turnover. In a final step, ECB may increase or reduce the base amount to account for all mitigating and aggravating circumstances and ensure that the penalty is proportionate, effective and dissuasive.
As an overarching consideration, ECB will, as part of its assessment of proportionality, look at the appropriateness of the penalty in the light of the financial situation of the supervised entity and the potential impact on that financial situation. ECB will look at the appropriateness of the penalty to ensure that the penalty does not cause the supervised entity to become insolvent, does not cause it serious financial distress or represent a disproportionate percentage of its total annual turnover. In addition, ECB may, in certain cases, impose a symbolic administrative pecuniary penalty. The justification for imposing such a penalty will be indicated in its decision. Finally, the particularities of a given case or the need to impose an effective, proportionate, and dissuasive penalty in a particular instance may justify a departure from the standard method of setting administrative pecuniary penalties that is detailed in this guide.
Banks supervised by the ECB are required to comply with certain prudential requirements. To foster such compliance, the Single Supervisory Mechanism Regulation (SSM Regulation or 1024/2013) granted ECB the power to impose administrative pecuniary penalties. While ECB enjoys a wide margin of discretion in determining the amount of the penalty appropriate in each case, the penalties must be effective, proportionate, and dissuasive and must not exceed the limits specified in the SSM Regulation.
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Keywords: Europe, EU, Banking, Penalty, Regulatory Breach, SSM Regulation, Administrative Penalty, Prudential Requirements, ECB
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