On 29 October 2013, the following were published in the Official Journal of the EU (OJ):
The SSM Regulation bestows supervisory powers over “significant” Eurozone banks on the European Central Bank (ECB). The assessment of whether or not a bank is “significant” will be based on:
- Size – the presumption being that any bank which fulfils any of the following criteria will be regarded as significant:
- the total value of its assets exceeds EUR 30 billion; or
- its total assets represent over 20% of the GDP of the relevant participating Member State (unless the value of those assets is below EUR 5 billion); or
- both the bank’s national competent authority (NCA) and the ECB confirm that the bank is to be regarded as “significant”;
- Importance for the economy of the EU or any Member State participating in the SSM; and
- Significance of cross-border activities.
Any bank which has received public financial assistance shall be regarded as “significant” as are the three most significant banks in each of the participating Member States. The assessment as to whether or not a bank is “significant” should not be conducted more often than annually.
Pursuant to the SSM Regulation, the ECB will have power over the authorisation (and withdrawal of authorisation) of banks, as well as authority in relation to early intervention and recovery planning (but not resolution). In addition, it can, inter alia:
- require banks to hold own funds in excess of capital requirements;
- restrict, limit or require the divestment of activities of a bank;
- impose limits on variable remuneration;
- prohibit distributions;
- impose additional reporting and liquidity requirements; or
- remove members of the management body.
The ECB is due to publish a framework for the SSM by 4 May 2014, prior to assuming its supervisory role on 4 November 2014. In advance of this, it is empowered to require NCAs to provide it with relevant information from 3 November 2013, the same day on which the SSM Regulation enters into force.
On 25 October 2013, the Financial Markets Law Committee (FMLC) published a second discussion document on the EU Commission’s General Approach to the proposed Recovery and Resolution Directive (RRD).
The document is generally supportive of the changes made within the General Approach, but highlights a few remaining areas of concern with respect to legal uncertainty, including those set out below:
- Bail-in: The RRD does not provide a set of principles to guide a resolution authority’s choice as to whether to convert debt to equity or whether to write-down debt. In addition, contractual bail-in provisions may not operate in the same way as statutory bail-in provisions;
- Valuation: It is unclear on what basis the valuation (which must be independent) is to be carried out, notwithstanding that Article 30 of the RRD provides that the valuation should be fair and realistic. This drafting ambiguity gives rise to legal uncertainty as to the status of a resolution action which is taken when a valuation at the proscribed standard has not been carried out, owing to practical difficulty or impossibility; and
- General Resolution Powers: Articles 56(1)(h) and 56(1)(l) of the RRD give a resolution authority the power to cancel or amend the terms of “debt instruments”. However, this definition is wider than that of “capital instruments” – the term used to describe the instruments that are eligible to be ‘bailed-in’.
On 25 October 2013, the Financial Stability Board (FSB) published a list of:
On 23 October 2013, the Financial Services (Banking Reform) Bill 2013-14 (the “BRB”) completed its committee stage in the House of Lords.
A revised version of the BRB has been made available on the UK Parliament website.
On 23 October 2013, the European Central Bank (ECB) published a note, accompanying press release and transcript of a question and answer session regarding the comprehensive assessment of banks’ balance sheets and risk profiles it will carry out in advance of assuming full responsibility for supervision as part of the single supervisory mechanism (SSM) in November 2014.
The exercise will commence in November 2013 and take approximately 12 months to complete. It will involve approximately 130 “significant” credit institutions established in 18 EU Member States (listed in the annex to the note), covering approximately 85% of euro area bank assets which will be directly supervised by the ECB. It has three main goals:
Transparency – enhancing the quality of information available concerning the condition of banks;
Repair – identifying and implementing necessary corrective actions; and
Confidence building – assuring all stakeholders that banks are fundamentally sound and trustworthy.
The assessment will be carried out in collaboration with national competent authorities and will consist of:
A supervisory risk assessment – addressing key risks in banks’ balance sheets, including liquidity, leverage and funding;
An asset quality review – examining the asset side of bank balance sheets as at 31 December 2013; and
A stress test, building on and complementing the asset quality review by providing a forward-looking view of banks’ shock-absorption capacity under stress.
The outcome of the assessment may lead to a range of remedial action, including changes in a bank’s provisions and capital.
 A bank is “significant if:
- the total value of their assets exceeds €30 billion;
- the ratio of total assets to GDP of the participating Member State of establishment exceeds 20 per cent, unless the total value of their assets is below EUR 5 billion;
- the institution is among the three largest credit institutions in a participating Member State.
On 22 October 2013, the EU Parliament updated it procedural file on the recovery and resolution framework for non-bank institutions. The indicative first or single reading plenary session scheduled for 13 January 2014 has been moved forward to 9 December 2013.
Risk Magazine has published an article in which Deutsche Bank highlights the issues it has experienced in complying with global recovery and resolution plan (RRP) requirements.
This is an all too common story. The lack of guidance from regulators, absence of globally coordinated regulatory requirements and the move towards subsidiarisation combine to pose a significant challenge to firms which are subject to RRP rules. From experience, the only real solution lies in the creation of a robust yet flexible data architecture, capable of serving up only that view of information which is necessary for the particular audience and with the capacity to adapt to meet future regulatory developments.
On 14 October 2013, the European Central Bank (ECB) published a speech given by its President, Mario Draghi, on 12 October 2013 regarding the Euro area economic outlook, ECB monetary policy and current policy challenges.
The speech was wide-ranging, but touched upon progress made to date in establishing European banking union. Mr Draghi welcomed the approval of the single supervisory mechanism (SSM) by the European Parliament on 12 September and looked forward to its “urgent adoption” by the EU Council later this month, with a view to the ECB adopting its new supervisory role by November 2014. In addition, Mr Draghi supported the establishment of the single resolution mechanism (SRM), “a necessary complement to the SSM”, by the end of 2014.