How to Spot a G-SII

Introduction

On 12 December 2013, the European Banking Authority (EBA) published a consultation paper on draft regulatory technical standards (RTS) on the methodology for the identification of global systemically important institutions (G-SIIs)[1] and draft implementing technical standards (ITS) on uniform formats and dates for the disclose of the values of the indicators used for determining the score of G-SIIS[2]. Continue reading

EBA Consults on Asset Encumbrance Reporting

For those involved in the preparation of RRPs, here is a link to an article on our sister site regarding an EBA consultation paper on asset encumbrance.  Given the potential effect asset encumbrance arrangements can have on a firm’s resolvability, this is the type of thing that may well come across your desk in the future.

EBA Template Highlights the Data Challenge of RRP

Introduction

On 23 January 2013, the European Banking Authority (EBA) published its recommendation on the development of recovery plans.

The recommendation is a follow-up to the EBA’s Discussion Paper on recovery plans published on 15 May 2012 and is primarily for the benefit of national competent authorities pending the finalisation of the EU directive establishing a framework for the recovery and resolution of credit institutions and investment firms (the “RRD”).  It aims to ensure consistency and convergence on highest standards across the EU.

The requirement to complete the template recovery plan outlined in the recommendation applies to a list of 39 banks, as detailed in Schedule 1 to this article.  The template itself must be completed no later than 31 December 2013.

Summary of Recovery Plan Template

The template recovery plan itself is divided into three sections:

  • General overview – providing background information on the structure of the group and the governance processes supporting the recovery plan;
  • Core of recovery plan – dealing with the design and implementation of credible recovery options; and
  • Follow-up – addressing the measures that can be taken to optimise successful resolution strategies.

A more detailed summary of the requirements is provided in Schedule 2 to this article.

The Data Challenge

Whilst much inevitably depends on the specific drafting of an individual group’s recovery plan, the EBA template does raise the prospect that a number of EU banks will be required to effectively produce two recovery plans.  Taking the UK as an example, broadly speaking, banks preparing recovery plans pursuant to FS12/1 will find that they have already undertaken most of the analysis necessary in order to produce an EBA compliant recovery plan.  Thankfully, much of the required data will have been generated as part of their Module 2 (Recovery Plans) submissions.  However, firms may need to look further afield into Modules 3, 4 and 5 in order to meet certain other requirements of the EBA template, such as those regarding:

  • group legal structure diagrams;
  • functional mappings;
  • intra-group dependencies; and
  • information management processes.

In addition, certain other aspects of the EBA template are not specifically addressed under FS12/1.  This includes the requirement to produce an “Operational Contingency Plan” explaining in detail how internal operations and access to market infrastructure will be maintained during the implementation of a recovery option.

The practical difficulties presented by the EBA template recovery plan are symptomatic of a wider issue hampering the ability of firms to meet the RRP needs of regulators.  This stems from the absence of any kind of real agreement amongst national regulators as to the set of information to be generated by firms in support of their RRPs.  Unfortunately, current indications are that any chance of uniformity with respect to RRP data requirements is actually receding yet further, with authorities in jurisdictions such as Canada and Hong Kong largely declining to follow earlier precedents set by regulators such as the FSA.  Given the administrative and financial burden associated with RRP production, the challenge to firms in the future will be to find a way to create a flexible enough view of underlying data so as to avoid having to completely reinvent the wheel for each regulator.  A technology led solution would seem to be the answer and is long overdue.

Schedule 1

List of Banks Subject to the EBA Recommendation on Recovery Plans

 

 

  • ABN AMRO Group NV
  • Allied Irish Banks, Plc
  • Alpha Bank AE
  • Banco Bilbao Vizcaya Argentaria, SA
  • Banco Comercial Portugues SA
  • Banco Santander SA
  • Bank of Cyprus Public Company Limited
  • Bank of Ireland
  • Barclays PLC
  • Bayerische Landesbank
  • BNP Paribas SA
  • Commerzbank AG
  • Credit Agricole Group
  • Cyprus Popular Bank Public Co Ltd
  • Danske Bank A/S
  •  Deutsche Bank AG
  • Deutsche Zentral-Genossenschaftsbank AG
  • Dexia
  • DNB Bank AB
  •  Erste Group Bank AG
  • Eurobank Ergasias
  • Group BPCE
  •  HSBC Holdings PLC
  • ING Bank N.V.
  • Intesa Sanpaolo SpA
  •  KBC Group NV
  • Lloyds Banking Group Plc
  • National Bank of Greece
  •  Nordea Bank AB
  • OTP Bank Nyrt
  • Piraeus Bank
  • Rabobank Group
  • Raiffeisen Zentralbank AG
  • Royal Bank of Scotland Group Plc
  • Skandinaviska Enskilda Banken AB
  • Societe Generale SA
  • Svenska Handelsbanken AB
  • Swedbank AB
  • UniCredit SpA

 

Schedule 2

Summary of EBA Template Recovery Plan

 

The EBA template is divided into three main sections, as detailed below.

1. General Overview

1.1 Summary

This should include at least:

  • the key elements presented in each section of the plan;
  • the main changes since the last update, if applicable;
  • an overview of the steps to be taken before finalisation/update of the plan.

1.2 Description of the group

This section should provide a:

  • general overview of the institution’s:
    • legal structure (including significant branches);
    • business model;
    • activities and jurisdictions in which it is active;
    • main core business lines; and
    • interdependencies;
  • mapping of:
    • legal and operational structures i.e.:
      • significant legal entities and branches;
      • activities conducted;
      • business units; and
      • employees by business unit;
    • legal and financial structures i.e.:
      • significant legal entities and branches;
      • turnover;
      • cash flows;
      • liquid assets;
      • funding needs;
      • large exposures;
      • P&L;
      • Tier 1 capital;
  • description of:
    • intra-group financial links, including:
      • material intra-group exposures;
      • material intra-group funding relationships;
      • capital mobility; and
      • intra-group guarantees;
    • critical or systemically relevant group functions, including:
      • external functions:
        • payment systems;
        • services provided to other institutions;
      • centralised functions
        • treasury;
        • collateral management;
        • IT;
        • access to market infrastructures;
        • administrative;
        • operational;
        • outsourcing.

1.3   Discussion of internal governance

This section addresses internal governance issues regarding the design of the recovery plan, providing a summary of:

  • how the plan was developed, including:
    • identification of persons responsible for the different sections; and
    • discussion of how the plan is integrated into corporate governance and risk management frameworks;
  • by whom the plan was approved, including:
    • involvement of senior management;
    • whether the plan was presented to internal/external auditors;
    • whether the plan was presented to the risk committee; and
    • confirmation of approval by Board of Directors and/or Supervisory Board;
  • the governance of recovery options during a crisis, including:
    • a description of escalation processes; and
    • the decision making process surrounding plan activation;
  • how the plan is to be updated, including:
    • responsible individuals;
    • frequency of updating; and
    • a description of the updating process in response to material changes affecting the institution or its environment.

2. Core of recovery plan

This section requires firms to provide a “menu of recovery options” enabling an institution to respond to financial stress, whether idiosyncratic or systemic, and to assess the feasibility and impact of each option.  At a minimum, the information detailed below is to be provided.

2.1 General overview of recovery options

Firms are required to provide a general description of:

  • all available recovery options; and
  • the actions that would be taken to enable timely execution of each option.

2.2 Recovery indicators

Recovery indicators determine the point at which, in a given situation, an institution starts to consider appropriate recovery options. They are both quantitative and qualitative in nature and tend to relate to the solvency and liquidity of the institution in question under stressed scenarios.  However, they do not automatically activate a specific recovery option, instead acting as an early identification of the best way forward.  This part of the recovery plan should detail how recovery indicators:

  • are incorporated into an institution’s risk management framework;
  • align with liquidity or capital contingency plan triggers;
  • align with the institution’s risk appetite framework.

2.3 Assumptions and scenarios

The objective of this section is to define a set of stress scenarios (idiosyncratic, systemic and a combination of the two) under which the efficiency of the different recovery options can be assessed by reference to their impact on such factors as:

  • solvency;
  • liquidity;
  • funding;
  • profitability; and
  • operations.

2.4 Recovery options

Recovery options are extraordinary in nature and can include:

  • external recapitalisation;
  • divestment of assets, subsidiaries or business units (or the whole institution);
  • voluntary restructuring of liabilities;
  • reduction of balance sheet;
  • strengthening of liquidity position.

With respect to each recovery option, a firm is required to perform:

  • an impact assessment, addressing:
    • financial and operational impact; and
    • external impact;
  • a risk assessment, addressing:
    • feasibility i.e. the risk that an option cannot be implemented; and
    • systemic consequences i.e. the risks resulting from implementation; and
  • a decision making process regarding implementation of recovery options.

2.5 Operational contingency plan

For each recovery option an institution is expected to provide an operational contingency plan detailing the way in which its operations can be maintained following implementation of a recovery option.  This includes at least an analysis of:

  • internal operations. e.g.:
    • IT systems;
    • Suppliers; and
    • HR operations; and
  • access to market infrastructure, e.g.:
    • clearing and settlement facilities;
    • payment systems; and
    • additional requirements in terms of collateral.

2.6 Communication plan

Firms are expected to provide a detailed communication plan regarding both internal and external stakeholders, addressing:

  • implementation of the communication plan under each recovery option; and
  • the potential impact on the business and on general financial stability.

2.7 Information management

Firms are required to describe general policy with respect to information management together with an analysis of specific information needs in relation to each recovery option.  Furthermore, each institution must be able to demonstrate an ability to satisfy not only its own information needs under each recovery option, but also the needs of its regulators.  Information required by a regulator would include:

  • intra-group exposures;
  • trades booked on a back-to-back basis;
  • amounts of liquid assets in parent banks and subsidiaries;
  • off balance sheet activities; and
  • large exposures.

3. Follow-Up

Follow-up measures focus primarily on:

  • preparations that can be taken in advance of the implementation of a recovery option; and
  • areas for improvement.

EBA Responds to EU Commission’s Consultation on RRP for Non-Banks

On 21 December 2012, the European Banking Authority (EBA) published its response to the EU Commission’s “Consultation on a Possible Recovery and Resolution Framework for Financial Institutions Other Than Banks”.

In general, the EBA believes it important that RRP regimes should be harmonised so as to avoid regulatory arbitrage across borders and between industries such as banking and insurance.  Clear guidance should also be provided on the circumstances and extent to which FMIs which also hold banking licences will be subject to bank or non-bank resolution proposals.  Ultimately, it may be necessary to extend the non-bank RRP proposals to include ‘shadow banking’ entities such as money market funds and hedge funds.

The EBA agrees that the objectives of a resolution regime for FMIs should be aligned with those of banks, namely the continuation of critical functions and the maintenance of financial stability.  Cross-border co-ordination in the form of supervisory Resolution Colleges should also be encouraged.

With respect to resolution tools, the EBA supports the proposal concerning the transfer of critical functions of a failing FMI to a surviving FMI.  In order to facilitate such a transfer, the EBA suggests that ex-ante operational arrangements between FMIs should be established and specifically endorses the actions referred to in the FSB “Key Attributes” paper, namely:

  • A centralised repository for all FMI membership agreements;
  • Standardised documentation for payment services;
  • Draft transition services agreement; and
  • A ‘purchasers’ pack’ including key information on payment operations and credit exposures, and lists of key staff.

With respect to loss-allocation tools, specifically the haircutting of margin held on behalf of clearing members of a failing FMI, the EBA believes that more consideration should be given to the specific circumstances of the clearing member and their ability to actually absorb losses so as to avoid the possibility of financial contagion.  Moreover, any loss-allocation mechanism which goes beyond normal pre-funded loss mutualisation measures (i.e. the guarantee fund) should be closely coordinated with authorities responsible for the supervision and oversight of the clearing members.

On the subject of group resolution of FMIs, the EBA is of the opinion that any recovery and resolution framework should aim to maintain the ‘healthy’ parts of the FMI in question.  In order to protect these ‘healthy’ parts, it may be necessary to wind up or even ‘tear up clearing’ of specific instruments.  In addition, it may be prudent to allow for one part of an FMI group to provide temporary financial support to an FMI in difficulty, provided that this does not risk contagion or involve lending to an insolvent entity.

EBA Provides Opinion on Liikanen

Introduction

On 14 December 2012, the European Banking Authority (“EBA”) published its opinion on the recommendations of the High-level Expert Liikanen Group on reforming the structure of the EU banking sector.

The final report of the Liikanen Group was published on 2 October 2012 and made the following recommendations:

  •  mandatory separation of proprietary trading and other high-risk trading activities to the extent exceeding a threshold;
  • possible additional separation of activities conditional on an institution’s resolvability;
  • possible amendments to the use of bail-in as a resolution tool;
  • review of the capital requirements on trading assets and real estate loans; and
  • strengthening banks’ governance and controls.

General Comments

In general, the EBA considers that the Liikanen proposals strike an appropriate balance between protecting the core features of the universal banking model and strengthening the resilience of the financial sector.  However, it believes that an impact assessment is required in order to properly be able to evaluate the potential benefits and cost of the proposals.

Aware that several Member States are considering structural change to national banking industries, the EBA emphasises the need to ensure consistency across the EU so as to protect the operation of the Single Market.  To this end, it states that clear criteria must be established in relation to such issues as:

  • the situations where separation is mandatory;
  • parameters that apply to exceptions such as the provision of “hedging services to non-banking clients”; and
  • the provision of financial support between deposit banks and trading entities pursuant to the proposed bank recovery and resolution directive (the “RRD”).

Banks’ compliance with the proposals should also be subject to periodic review and macro-prudential monitoring to avoid structural arbitrage.  In addition, any structural changes must be consistent with existing legislation, such as the RRD and the large exposures regulation, but should not be viewed as a substitute for adequate supervision.

Bail-in

The EBA considers that there is a need to further develop the bail-in framework in the RRD in order to improve its legal and operational certainty and so avoid possible destabilising effects.  The EBA repeats its preference for a two-tier bail-in regime.  Under such a regime, bail-in would initially be applied to a targeted category of debt instruments.  This targeted approach would, it is hoped, avoid the risk that a wide ex ante bail-in regime turns out to be of limited value once resolution actually occurs.  Only if the targeted approach proved insufficient, would remaining creditors be bailed-in within a proper administrative resolution procedure.

In addition, banks would be required to issue and hold a minimum percentage of their liabilities as “bail-inable” debt.  It is anticipated that this would create a market in bail-in debt, encourage the standardisation of contracts and incentivise rating agencies to focus on the rating of bail-in instruments.  However, the EBA supports the proposal that such debt should be held outside of the banking system, suggesting that penal risk-weightings could be introduced in order to discourage acquisition of such securities by the banking sector.  It also welcomes the suggestion to use bail-in instruments in remuneration schemes for top management and as part of bonus schemes.

First Steps Towards Banking Union Agreed…

…with respect to 200 banks.

As the FT reported today, eurozone finance ministers agreed a plan for a common bank supervisor in the early hours of this morning.  Beginning in early 2013, the ECB will take responsibility for the supervision of banks – but only those having assets of more than €30bn, or representing more than a fifth of a state’s national output.  In addition, there are no explicit provisions governing timeframes in which the ECB is to assume responsibility for the EU’s biggest banks.

The single supervisor is seen as the first, and easiest, step in the three-stage process which will lead towards EU banking union, the other stages being the creation of a EU-wide common deposit guarantee scheme and a single European recovery and resolution framework.  An inability to confidently take this first step does not bode well for the future.  If banking union is to mean anything is must surely create a level playing field, not the two-tier regime threatened by the current political fudge.

ECB Publishes Opinion on RRD

Introduction

On 5 December 2012, the European Central Bank (ECB) published its opinion on the EU’s draft directive establishing a framework for recovery and resolution of credit institutions and investment firms (the “Recovery and Resolution Directive” or “RRD”).

In general, the ECB fully supports the RRD, welcomes the fact that it is in line with the FSB’s “Key Attributes” document and believes that it should be adopted rapidly.  It also encourages the EU to take further steps to implement an independent European resolution mechanism, which it views as one of the three banking union pillars.  Beyond clarifying its general position, the ECB also made a number of more specific observations, a summary of which are provided below.

Definition of resolution

The ECB notes that “resolution” under the RRD involves, inter alia, restoring the viability of all or part of a failing institution.  However, it is of the opinion that, if there is no public interest element to a proposed resolution action, the institution in question should not be resolved as a going concern and instead should be liquidated under normal national insolvency law.  As such, the ECB is of the view that the RRD should be amended to clarify that the aim of resolution is not to preserve a failing institution, but to ensure the continuity of its essential functions.

Resolution conditions and the need for extraordinary financial public support

In the interests of “prompt and efficient resolution action”, the ECB believes that the relevant competent authority should have responsibility for determining whether an institution is failing or likely to fail (and thus has triggered the conditions for resolution).  Moreover, this determination should be based solely on an assessment of the situation of the institution in question.  It should not be based on an institution’s particular need for State aid, although the circumstances surrounding any grant of State aid would be relevant in assessing the institution’s general situation.

Involvement of central banks in recovery and resolution

In recognition of the role of central banks in promoting macro-prudential and financial stability, the ECB recommends that, where a central bank is not itself the resolution authority, the relevant competent authority and resolution authority engage in an “adequate exchange of information” with the central bank.

With respect to the use of the bridge institution and asset separation tools, the ECB believes that the RRD should clarify the fact that, where a central bank acts as a resolution authority, it will not assume any financing obligations with respect to either the bridge institution or the asset management vehicle created pursuant to the asset separation tool.

Involvement of national designated authorities in assessment of recovery plans

The ECB recommends that, when assessing recovery plans, competent authorities consult with competent national designated authorities (to the extent that they are separate entities).

Intra group financial support

The ECB considers that further investigation may be required into whether additional provisions are necessary in order to ensure the legal certainty and enforceability of voluntary intra-group financial support arrangements.

The bail-in tool and write down powers

The ECB believes that bail-in should be used predominantly for the resolution of institutions that have reached a point of non-viability.  Any use of the tool to restore a failing institution to the position of a going concern should only be considered in “exceptional and justified” circumstances.

The ECB also notes that the RRD requires the European Banking Authority (EBA) to report to the EU Commission on the implementation of the requirement for institutions to maintain an aggregate amount of own funds and eligible liabilities expressed as a percentage of total liabilities.  The ECB believes that further investigation, together with an impact assessment, should be conducted as to whether the minimum requirement should be expressed as a percentage of total liabilities or as a percentage of risk weighted assets – it being thought that the latter may represent a better measure of the riskiness of the assets of the institution in question.

The ECB further recommends that the EBA conduct an assessment of whether it would be beneficial to introduce a prohibition or limitation on the banking sector’s ability to hold instruments which are eligible for bail-in.  It also suggests amending Article 38(2) of the RRD to make clear that all liabilities to members of the European System of Central Banks (ESCB) are explicitly excluded from the application of the bail in tool, on the basis that EXCB members are public bodies whose basic tasks require them to have exposures to institutions.

Financing of resolution

The ECB is concerned that the proposal to set up a European system of resolution financing arrangements will not solve all cross-border resolution issues.  In particular, the current proposal for 27 national arrangements which can borrow from, and lend to, each other suffers from a lack on clarity with respect to details such as the rights and obligations of lenders and borrowers.

Deposit guarantee schemes (DGS)

The ECB supports the proposal that any available resources of a DGS should be available to finance resolution, but warns that this should not be allowed to compromise the core DGS function i.e. the protection of insured deposits.

In contrast to the proposed RRD, which requires Member States to ensure that DGS rank pari passu with unsecured non-preferred claims under national insolvency law, the ECB recommends that Member States should be allowed to establish preferential ranking of claims that the DGS has acquired by subrogation (i.e. after having paid out the amount corresponding to covered deposits).  This, it believes, would help ensure that sufficient funding is always available to the DGS.

Disclosure of marketing materials

The RRD currently allows for a delay in publication of any public disclosure regard the sale of any part of an institution under resolution.  The ECB recommends extending this power to facilitate a delay in the publication of any price sensitive information relating to publicly traded financial instruments of the institution under resolution.

Further harmonisation of recovery and resolution rules

The ECB supports the development of a recovery and resolution framework for systemically important non-bank financial institutions e.g. insurance companies and market infrastructures.

 

UK Continues to Fret Over Banking Union

On 4 December 2012, the House of Lords Sub-Committee on Economic and Financial Affairs wrote a letter to Greg Clark MP, Financial Secretary to HM Treasury, regarding the EU Commission’s proposal for a Single Supervisory Mechanism (SSM).

The Committee believes that EU banking union is “urgently required” but recognises that it has potentially significant risks for the UK, particularly regarding the:

  • risk of marginalisation and isolation on financial sector matters and the damage that this could do the position of London as a financial centre;
  • threat to the integrity of the single market arising from amended voting structures within the EBA;
  • possibility that the authority of the EBA (to which all 27 Member States are a part) could come under the influence of the ECB (which would supervise the operation of the SSM); and
  • possible conflict of interest between the SSM supervisory role of the ECB and its responsibilities with respect to EU monetary policy.

The Committee is concerned with the proposed timetable for agreement of the SSM, which it regards as rushed and “wholly unrealistic” (although if this FT article is anything to go by we may not see banking union as soon as was first thought).  It also regards attempts to implement banking union without a common deposit scheme, as required by Germany, as being “unsustainable”.

EU Parliament adopts Resolution Approving Single EU Banking Supervisor

Introduction

On 13 September 2012, the EU Parliament published a press release announcing that it has adopted a resolution relating to the establishment of a single EU banking supervisor.  The resolution was adopted the day following the publication by the EU Commission of two legislative proposals on EU banking union.

In passing the resolution, the EU Parliament warned that EU banking supervision rules must be of “good quality”, transparent and accountable, noting that the current preferences of certain Member States “risk sending the wrong message, as well as perpetuating inefficiencies”.  Presumably, this is a reference to German objections to the establishment of a single deposit guarantee scheme, seen as one of the next necessary steps on the road to full banking union, which led to this aspect of the project being shelved, as reported in the Financial Times.  The EU Parliament also seem aware of the need to protect the functioning of the EU single market, an issue preying on the minds of non-eurozone EU countries, as highlighted in this FT article.

EU Council Proposal regarding a Single Supervisory Mechanism (SSM) for credit institutions

ECB Powers

After a transitional period (see below for more details), the European Central Bank’s (ECB) powers will apply to all credit institutions, regardless of their business model or size.  Member States that have not adopted the Euro will be able to participate in the SSM provided that they abide by and implement relevant ECB decisions.   The EU Commission proposals give responsibility to the ECB in a number of areas regarding the supervision of Eurozone EU credit institutions, including:

  • authorisation and withdrawal of authorisation;
  • the assessment of acquisitions and disposals of holdings in credit institutions;
  • the removal of a member of a credit institution’s management board;
  • capital requirements as well as exposure, leverage and liquidity limits;
  • the conducting of stress-tests;
  • the initiation of early intervention measures to restore institutions which are in danger of breaching regulatory capital requirements (this is to be done in co-ordination with national resolution authorities pending the conferral of resolution powers on a European body);
  • assumption of the role of host supervisor for credit institutions established in non-participating Member States which establish a branch or provide cross-border services in a participating Member State;
  • assumption of the role of both home and host supervisor for credit institutions exercising the right of establishment in other participating Member States;
  • assumption of the roles currently held by all participating Member States within colleges of supervisors set up to consider cross-border banking groups;
  • the ability to require information from, and conduct investigations (including on-site inspections) of, credit institutions, their group companies, persons involved in or otherwise connected to their activities and national competent authorities; and
  • the imposition of sanctions for breach of regulations in an amount of up to twice the profit gained or loss avoided because of the breach (where this can be determined), or up to 10% of the total annual turnover of the relevant institution in the preceding business year.

Role of National Supervisors

All tasks not specifically conferred on the ECB will remain with national supervisors.  This will include responsibility for consumer protection, anti-money laundering, and the supervision of third country credit institutions establishing branches or providing cross-border services within a Member State.  In addition, the day-to-day activities necessary to implement ECB decisions appear likely to be performed by national supervisors.  Applications for authorisation as a credit institution within a participating Member State will also initially be administered by national competent authorities, which shall propose to the ECB whether the conditions of authorisation have been met and therefore whether the ECB should grant the authorisation.

Role of the EBA

The ECB would not take over any tasks of the European Banking Authority (EBA).  Specifically, the EBA would retain responsibility for the development of a single rulebook and ensure convergence and consistency of supervisory practice.

Independence and Accountability

The ECB must maintain independence when carrying out its banking supervision role and will be accountable to the European Parliament and to the EU Council.  Monetary policy tasks will be strictly separated from supervisory tasks to eliminate potential conflicts of interest between the objectives of monetary policy and prudential supervision.

Entry into force and Transition Period

The regulation creating the SSM will enter into force on 1 January 2013 (although this FT article would suggest that this deadline may be missed), and will adopt a phased approach.  Although, by way of notification to an institution and its national regulator, the ECB could choose to apply its powers to any bank from the outset, it is envisaged that it will initially apply to those banks which have received or requested public financial assistance, following which it will be extend to the most systemically important banks.  The ECB shall make public a list of those institutions over which it has a supervisory role before 1 March 2013.  Remaining banks will fall under the ECB remit by 1 January 2014 at the latest.

Supervisory fees

The ECB shall levy fees directly on credit institutions in order to cover the costs of the SSM.  The level of fees will be proportionate to the  importance and risk profile of the credit institution concerned.

First Steps Towards EU Banking Union to be Finalised by End of 2012

The EU Commission has published a speech given on 3 September 2012 by Olli Rehn, Vice-President of the European Commission and member responsible for Economic and Monetary Affairs and the Euro on EU banking union entitled “Towards a Genuine Economic and Monetary Union”.

The EU Commission sees banking union as a top priority and proposes a two-stage process.  The first stage involves the establishment of a Single Supervisory Mechanism (“SSM”) for Eurozone banks under the authority of the European Central Bank (“ECB”).  Note, however, that this press release from the European Parliament would suggest that the authority to supervise non-Eurozone banks would remain with the European Banking Authority.

 The legislative proposal for the SSM will be presented by the EU Commission within two weeks, with a view to it being finalised by the end of 2012.  The SSM will apply to all Euro area Member States, but other Member States will be free to participate if they so choose.  As even small banks can represent a source of systemic risk, the SSM will apply to all Eurozone banks.  Whilst the ECB will have prime responsibility for the administration of the SSM, national supervisors will continue to play an important role.

The second stage of banking union will involve the creation of a common deposit guarantee scheme as well as for a single European recovery and resolution framework.