ECB Launches Bank Assessment Exercise

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”[1] 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.

[1] 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.

European Parliament Votes to Adopt SSM

On 12 September 2013, the European Parliament published a press release announcing the adoption of a package of legislative acts to set up a Single Supervisory Mechanism (SSM) for the Eurozone.  The SSM legislation was adopted with very large majorities and will bring the EU’s largest banks under the direct oversight of the European Central Bank (ECB) from September 2014.

The SSM legislation consists of a proposed regulation conferring specific tasks on the European Central Bank concerning policies relating to the prudential supervision of credit institutions and a proposed regulation amending Regulation 1093/2010 (see this blog post for more details).  The European Parliament has also published a document containing the provisional texts adopted which can be found on pages 105 and 50 respectively.

The Regulations will come into force following approval by the EU Council and publication in the Official Journal of the EU.  The ECB will assume its supervisory role 12 months later.

EU Council publishes final compromise SSM text

On 25 April 2013, the Council of the EU published the final compromise texts of a regulation conferring specific tasks on the European Central Bank concerning policies relating to the prudential supervision of credit institutions and the proposed regulation amending Regulation 1093/2010 (which established the European Banking Authority).  Together these texts establish the EU single supervisory mechanism (SSM).

Broadly, under the new regime, the European Central Bank (ECB) will assume responsibility for the supervision of “significant” credit institutions, with “less significant” credit institutions to remain subject to regulation by national supervisors.  “Significance” is to be based on the following criteria:

  • size;
  • importance for the economy of the EU or any participating Member State; and
  • significance of cross-border activities.

In addition, any credit institution will be regarded as “significant” if:

  • it has total assets of EUR 30 billion or more; or
  • the ratio of its total assets to the GDP of the participating Member State of establishment exceeds 20% (unless the total value of its assets is below EUR 5 billion); or
  • the ECB considers it to be of significant relevance; or
  • it has requested or received public assistance directly from the European Financial Stability Facility or the European Stability Mechanism;
  • it ranks amongst the three most significant credit institutions in a participating Member State.

The ECB will assume responsibility for, inter alia:

  • authorisations and withdrawal of authorisations;
  • the administration of certain activities currently carried out by home state regulators, such as the establishment of branches in non-participating Member States;
  • the assessment of applications for the acquisition and disposal of “qualifying holdings” (i.e. involving 10% or more of capital or voting rights);
  • the regulation of own funds requirements, securitisations, large exposure limits, liquidity, leverage, and reporting and public disclosure of information on those matters;
  • the enforcement of governance arrangements, risk management processes, internal control mechanisms, remuneration policies and internal capital adequacy assessment processes;
  • conducting supervisory reviews and stress testing;
  • consolidated supervision where parent companies are established in participating Member States; and
  • supervisory tasks in relation to recovery plans, early intervention and structural changes required to prevent financial stress or failure (but excluding any resolution powers).

ECB Opinion Reveals Approach to “Principle of Proportionality” under RRP – in a Manner of Speaking

On 19 April 2013, pursuant to a request from the Austrian Ministry of Finance, the European Central Bank (“ECB”) published an opinion (dated 11 April 2013) on certain draft Austrian recovery and resolution planning (“RRP”) legislation – the draft Banking Intervention and Restructuring Act and associated amendments to the Federal Banking Act and the Financial Market Authority Act (the “Draft Law”).

In general, the ECB welcomed the Draft Law, but commented, amongst other things that it:

  • does not contain the resolution tools required by Title IV of the EU Recovery and Resolution Directive (“RRD”); and
  • requires credit institutions (“CIs”) to prepare and submit resolution plans to the Austrian Financial Market Authority (“FMA”), rather than make this a responsibility of the FMA itself.

On the principle of Proportionality, the ECB noted that the Draft Law provides for a complete exemption from a CI’s obligations to submit an RRP if that CI’s insolvency can be presumed not to have any material adverse impact on the financial markets, on other CIs or on funding conditions.  The ECB considers that Article 4 of the RRD does not allow such a complete exclusion, providing only for simplified obligations for certain less systemically important CIs.  Furthermore, the ECB itself remains of the view that it is perfectly possible to make all CI’s subject to RRP legislation, whilst merely simplifying RRP requirements for smaller CIs.  Nonetheless, the ECB acknowledges the ongoing discussions within Europe on the subject of enabling Member States to waive the requirement to maintain and update RRPs in certain cases and understands the benefit in avoiding overburdening small CIs.  As such, it recommends that any such exemption is granted only under “very strict conditions in accordance with the proportionality principle of the RRD”.

Not very helpful advice, given the admission that the proportionality principle of the RRD does not permit a full exemption.  The net result is that there is still no answer to the question as to whether a non-systemically important bank will be able to benefit from a complete exemption from RRP legislation.

EU Council and Parliament Reach Agreement Over SSM

On 18 April 2013, the EU Council published a press release confirming that agreement had been reached with the EU Parliament on the establishment of the single supervisory mechanism (SSM) with respect to EU credit institutions.

The European Central Bank (ECB) will be responsible for administration of the SSM, but national supervisors will retain responsibility for takes not conferred on the ECB, such as consumer protection, money laundering, payment services and branches of third country banks.  The ECB will assume its supervisory role with respect to the SSM either on 1 March 2013 or 12 months after entry into force of the legislation, whichever is later to occur.

ECB Publishes Letter on Scope of SSM

On 4 April the European Central Bank (ECB) published a letter from Mario Draghi, President of the ECB, to Nuno Melo, MEP regarding the scope of supervisory responsibilities under the Single Supervisory Mechanism (SSM).

In the letter, the ECB makes clear that the scope of the SSM is designed to include all credit institutions in the euro area and in non-euro area Member States wishing to participate within the SSM.  Furthermore, the current draft legislation regarding the SSM distinguishes between “significant” and “less significant” banks according to:

  • size;
  • importance to the economy;
  • cross-border activity; and
  • whether or not they benefit from direct EU financial assistance.

The ECB will have full supervisory powers over significant banks, with the assistance of national supervisory authorities.  However, in order to ensure that it can effectively supervise all credit institutions within participating Member States, the ECB will also have certain powers with respect to less significant banks, namely:

  • national supervisory authorities will need to abide by ECB regulations, guidelines and instructions; and
  • the ECB may, at any time, decide to exercise direct supervision over less significant banks, based on the supervisory data on such institutions to which it will have access.

ECB Questions the Point of Non-Viability Under the RRD

The opinion of the European Central Bank (“ECB”) (dated 29 November 2012) on the proposed directive establishing a framework for recovery and resolution of credit institutions and investment firms (the “RRD”) was recently published in the Official Journal of the EU.  The opinion addressed a number of issues under the RRD and suggested various amendments to the text of the directive.  The extent to which the ECB’s suggestions will ultimately be adopted is as yet unknown.  However, a number of elements are worthy of note.

The ECB proposals included amending the resolution objectives so as to require the protection of all deposits and not only those which benefit from the statutory EUR 100,000 protection limit.  CCPs in particular will also welcome the ECB’s suggested amendments to Articles 32 and 34 of the RRD such that any bridge institution or purchaser of a failed firm must continue to meet regulatory membership criteria of relevant payment, clearing and settlement systems – an amendment which the ECB specifically notes is designed to enable the operators of such systems to assess whether the bridge institution/purchaser continues to meet relevant membership criteria.  However, of most interest, were the ECB’s comments regarding the point of non-viability under the RRD.

At a principal level, the ECB believes that institutions that are failing or likely to fail should be liquidated under national insolvency proceedings if there is no public interest concern in their resolution.  Bail-in powers should only be used to maintain an institution that has reached the point of non-viability as a “last resort”.  Accordingly, the ECB proposes to amend the definition of “resolution” under the RRD so as only to allow restructuring of an entire institution in ‘exceptional and justified’ circumstances.

At a more practical level, the RRD currently entitles resolution authorities to take a resolution action if either the resolution authority or the competent authority determines that an institution is failing or likely to fail.  However, in the opinion of the ECB, the role of the competent authority as prudential supervisor and regulator makes it best placed to determine, for example, whether an institution is in breach of its capital requirements for continuing authorisation.  As such, the ECB considers that the “competent authority” alone should make the determination as to whether an institution has reached the point of non-viability and suggests amending Article 27(1)(a) of the RRD accordingly.  Moreover, the decision of any competent authority as to whether an institution is actually failing or likely to fail, should be based solely on an assessment of the prudential situation of the institution in question.  As such, a need for state aid should not, in itself, represent conclusive evidence that an institution is failing or likely to fail, although it would be taken into account in assessing the institution’s prudential situation.