Introduction to the ECB/SSM supervisory framework · 1 Combined number of SIs included in EBA and...
Transcript of Introduction to the ECB/SSM supervisory framework · 1 Combined number of SIs included in EBA and...
Introduction to the ECB/SSM supervisory framework
Dr. Thomas GstädtnerHead of Division 9DG Micro-Prudential Supervision II
Finantsinspektsioon Estonian Financial Supervision Authority „Bank and supervision – together or separately”Tallinn on the 30th March 2017
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Agenda
2
1
2 Supervisory Activities
Structure of Single Supervisory Mechanism
Supervisory Priorities3
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SSM as Part of Regulatory Reform Package
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Structure of Single Supervisory Mechanism
SRM Single
Resolution Mechanism
SSM Single Supervisory mechanism
EDIS European
DepositInsurance
Scheme
Banks’ search for yield behaviour
Weaknesses in the regulatory framework
Weaknesses in supervision
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Got up and Running (1/2)
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• Size: SSM as (one of the) largest supervisory authorities
around the globe with more than 900 direct staff members
hired for SSM-related tasks
• Coverage: about 130 banking groups in 19 countries with
roughly 1,200 single entities covering roughly 80 % of overall
Eurozone banking under direct supervision of ECB; in addition
roughly 3,200 LSIs under indirect supervision of ECB
• Organisation of multicultural Joint Supervisory Teams,
working tools, methodology and - ad hoc as well as ongoing -
supervisory programme
Structure of Single Supervisory Mechanism
(as of end 2015)
(as of end 2015)
Large efforts in creating almost over night a single complex authority during
challenging micro and macro financial environment
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Growing Together
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Structure of Single Supervisory Mechanism
Got up and Running (2/2)
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Single Supervisory Mechanism (SSM) (1/7)
Structure- combined of ECB and NCAs of participating member states.- ECB as a core to the system is responsible for operation and functioning of SSM.- Within the SSM tasks are allocated between ECB and NCAs.- SSM carries responsibility for supervision of credit institutions in all participating member
states, with either direct or indirect involvement of ECB.
Key targets (Article 1 SSM Regulation)- contributing to the safety and soundness of credit institutions and the
stability of the financial system- unity and integrity of the internal market…- …based on equal treatment of credit institutions
Legal basis- SSM Regulation and SSM Framework regulation
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Structure of Single Supervisory Mechanism ECB-RESTRICTED
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Single Supervisory Mechanism (SSM) (2/7)Principles for SSM Supervision
Supervisory principles
Appropriate level of engagement with all
institutions
Effective und timely measures
Application of “Best Practices”
Compatibility with single European market
Homogeneity of supervisory approaches
and processes within SSM
Integrity and subsidiarity principle
Independence and accountability Risk based approach Proportionality
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Structure of Single Supervisory Mechanism ECB-RESTRICTED
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~ 129 significant institutions
(“SI’s”)
less significant institutions
(“LSI’s”)
Single Supervisory Mechanism (SSM) (3/7)
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Sharing of responsibilities within SSM
EZB
JST
Direct Supervision indirect Supervision
Support
Overall responsibility
NCA
Horizontal Functions
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Structure of Single Supervisory Mechanism ECB-RESTRICTED
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Single Supervisory Mechanism (SSM) (4/7)Allocation of Tasks between ECB and NCAs
• SSM is responsible for – direct and indirect – supervision of about 4,900 entities in all participating member states.
• Supervisory roles and responsibilities are allocated based on significance of supervised entities.
• To be treated as “significant” at least one of different criteria has to be fulfilled (e.g. relative national size, absolute size, cross boarder activity).
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Significant institutions
ECB supervises significant institutions directlywith support of NCA via JSTs
Less significant institutions
NCAs continue to exercise supervision, but with oversight function of ECB
Structure of Single Supervisory Mechanism ECB-RESTRICTED
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How to Determine Level of Significance of Institutions?
Indicator Description Thresholds
SI size Size, according to Articles 50 to 55 of the SSM Framework regulation. > 30 bn EUR of total assets
SI national economic importance
Importance for the economy of the Union or any participating MS, according to Articles 56 to 58 of the SSM Framework regulation.
GDP ≥ 20%andtotal assets ≥ 5 bn EUR
SI cross-border activities
Cross-border activities, according to Articles 59 and 60 of the SSM Framework regulation.
Group has subsidiaries which are themselves credit institutions, in more than one other participating Member State
Total assets > 5 bn EUR anda) cross-border assets > 20% of
total assets orb) cross-border liabilities > 20% of
total liabilities
Determination of direct supervision competence/ responsibility based on two set of criteria: a) quantitative (see below)b) qualitative
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Process is performed either via… Annual assessment Ad hoc assessment (e.g. because of exceedance
of quantitative thresholds)…lead by NCA (LSIs) or ECB (JSTs)
Single Supervisory Mechanism (SSM) (5/7)Determination of Significance
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Structure of Single Supervisory Mechanism ECB-RESTRICTED
ECB REGULATION ECB GUIDE Legally binding act, generally and directly applicable to all credit institutions directly supervised by the ECB
Non-binding legal instrument providing guidance to JSTs on how to treat individual banks’ applications
Art. 10 SSMR Request for informationAsk legal and natural persons to provide all information that is necessary in order to carry out the tasks conferred on it by this Regulation
Art. 12 SSMR On-site inspections
conduct all necessary on-site inspections at the business premises
Art. 16 SSMR Supervisory powers
e.g. require…:- …capital add-ons- …reinforcement of
arrangements, processes, mechanisms and strategies
- …application of specific provisioning policy
- …limitation of business and disinvestments
- …limitation of variable remuneration
- …limitation of distribution to shareholders
- …additional reporting- …
Art. 18 SSMR Sanctioning
Impose sanctions up to relevant gains/avoided losses or up to 10% of total annual turnover
Art. 11 SSMR General investigationsmay conduct all necessary investigations of any [legal or natural] person
Single Supervisory Mechanism (SSM) (6/7)Legal Powers
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Single Supervisory Mechanism (SSM) (7/7)Decision making process
The Decision making process within SSM is based on a novel approach for ECB, known as “non-objection”-procedure
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Structure of Single Supervisory Mechanism
The Supervisory Board takes draft decisions which are submitted to the
Governing Council
Within a defined period of time (10 working days) the decison is adopted if non-objection by the Governing
Council
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Jointsupervisory
teams per bank
≈ 3.200 banking groupsSSM countries: 19staff : ≈ 90
staff : ≈ 320
Secretariat of
Supervisory BoardMicro prudential
Supervision I DG
Micro prudential Supervision II
DG
Direct supervision
≈ 40 banking groups- “Home”: 26- “Host”: 6
SSM countries: 12staff: ≈ 260
≈ 90 banking groups- “Home”: 70- “Host”: 17
SSM countries: 19staff : ≈ 280
Micro prudential Supervision IV DG
Horizontal functions
authorisation
Crisis Management
On-site
Enforcement & sanctions
internal models
Planning and Coordination
Methodology and standards
Risk analysis
Quality assurance
Supervisory strategy
Micro prudential Supervision III DG
Indirect supervision
supervisory oversight & NCA relation
Institutional & sectorial supervision
Analytics & Methodology
Cluster1 and 2
Cluster3 to 5
staff: ≈ 50
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Structure of Single Supervisory Mechanism
ECB Supervisory ArmInternal Organisation
ECB
SSM Other functions(*)
(*) Admin, Economics/mon.policy, Fin. stability, Market operations, Internat. relations, ,…
“Chi
nese
Wal
l”
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Significant InstitutionsJoint Supervisory Teams
• Established per Significant Institution
• Responsible for carrying out day to day supervision and implementation of annual supervisory program
• Responsible for implementation of decisions of Supervisory Board/ Governing Counsel
• Size and composition depends on characteristics of supervised entity
• Composed by ECB members and members from NCA
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Structure of Single Supervisory Mechanism
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Less-Significant InstitutionsOversight Function of ECB (1/2)
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Structure of Single Supervisory Mechanism
Regulatory reporting
ECB / DG-MS3Oversight
Banking Supervision
Regulations, guidelines or general instructions
Regular delivery of quantitative andqualitative information
NCAsBanking Supervision
LSIsIf necessary, the ECB can also: perform on-site inspections take over the direct supervision of an LSI
ECB with direct responsibility (e.g. for authorisations)
Information request
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Less-Significant InstitutionsOversight Function of ECB (2/2)
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Proportionality is a key element and is applied to all supervisory processes to determine the engagement level.
• DG-MS3’s key task is to ensure the consistent application of high supervisory standards and supervision of the highest quality, hence creating a level playing field across the SSM. – DG-MS3 follows a risk-based approach and works in close cooperation with NCAs.
• Collaboration with NCAs takes place in various ways:– to discuss general topics and proposals to the Supervisory Boards– to share best practices and foster high quality supervision (via Working Groups and drafting
teams);– and to exchange information on specific issues (at staff level).
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Sign
ifica
nt B
ranc
h /
Subs
idia
ry (S
I)Cooperation with Non-SSM Countries
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ECB JST
SSM-NCA
Foreign Parent
College
Non-SSM NCA
Bra
nch/
Su
bsid
. (LS
I)
Non-SSM NCA
SSM-NCA Foreign ParentEZB
College
SI Supervision
A)
B)
• Existence of college depends on complexity of cross-border banking group and relevance of single entities for overall group risk (only relevant entities in scope of college [case B])
• Depending on significance of entity in SSM context either ECB or NCA member of college
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Agenda
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1
2 Supervisory Activities
Structure of Single Supervisory Mechanism
Supervisory Priorities3
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Consistency and Integrity of Supervisory Approach
Supervisory Activities
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For more or less the first time use of a harmonised analytical approach for banks across the Eurozone promoting consistency and integrity with regard to supervisory treatment, processes, applicable rules and risk analysis
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Some relevant key activities
Supervisory Activities
External Guidance, e.g.:
Harmonisation of National Options and Discretions (“OND project”)
ECB guidance on leveraged transactions (Consultation period: 23 Nov 2016 - 27 Jan 2017)
Guide to fit and proper assessments (Consultation period: 14 Nov 2016 to 20 Jan 2017)
ECB Guide on the approach for the recognition of institutional protection schemes for
prudential purposes (Finalised: 12 Jul 2016)
ECB Recommendation on dividend distribution policies (Finalised: 28 Jan 2015)
ICAAP/ILAAP guidance
Internal supervisory activity , e.g.:
Comprehensive Stress Test exercise
SSM supervisory statement on governance and risk appetite
• in-depth assessment of the institutions’ management bodies and RAFs conducted in 2015
• Ongoing follow-up
Cyber risk horizontal review
• in-depth assessment of the institutions’ management around cyber risk20
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EBA/ECB Stress Test 2016
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Supervisory Activities
The Stress Test is not a
pass fail exercise…
…but results feed into the SSM SREP
capital decision
Assess the resilience of financial institutions to adverse market developments Contribute to the overall SREP to ensure institutions’ capital and liquidity adequacy, as well as sound
risk coverage and internal processes. Ensure a consistent treatment of all SIs supervised by the SSM
Objectives
1 Combined number of SIs included in EBA and SSM SREP stress test samples does not equal total number of SIs under SSM supervision, as some exceptions apply (e.g. banks that were subject to a comprehensive assessment in 2015 or will be in 2016, or SIs that are subsidiaries of other SSM SIs, already covered at the highest level of consolidation).
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EU-wide exercise under EBA coordination in cooperation with EU-COM, ESRB, ECB & NCAs
94 SIs1
Results not public
51 banks Publication of
final results
(there of 38 SSM SIs participating in EBA stress test, but results used for
SSM assessment)
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Thematic review ”Governance und risk appetite”
Supervisory Activities
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Results:
• Workstream has identified best practices
in adoption of international standards
• SIs were far away from international best
practice
• Key aspects:
- Ability of management bodies for
counter steer
- Integration of risk perspective in
discussions amongst board
members
- Interaction of risk appetite
framework and risk strategy
Assessment by JST Bank specific findings
Horizontal benchmarking
Supervisory dialog with bank
Follow-up letter and measures
In-depth assessment of 113 SIs applying consistent assessment approach
2 elements…
- Composition and effectiveness of management body
- Risk appetite framework
…based on consistent supervisory approach feed into SREP process based on legal framework:
- CRR/CRD IV
- National law
- Internal best practices
- SSM guidance
StatusOngoing JST follow-up / monitoring(for cluster 1&2 even enhanced follow-up including horizontal analysis)
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Options and national discretions (“ONDs”)
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Supervisory Activities
• OND project aimed at harmonizing application of national discretions
• In first step applicable to SIs only
• Publications in March and August 2016 after including process of public consultation
• Be treated partly as guidance (ECB guide) and party as strictly legally binding (ECB regulation)
Partial adoption to LSIs
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ICAAP / ILAAP Documentation
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Supervisory Activities
• Internal capital adequacy assessment processes (ICAAP) and
Internal liquidity adequacy assessment processes (ILAAP) very diverse across Europe
• In order to increase harmonisation ECB at the beginning of 2016 was asking banks to deliver
documentation that meets minimum requirements of ECB in this regard
Annex A – Supervisory expectations on ICAAP:
• Governance: involvement of management body
• Capital adequacy statement
• design of the ICAAP: quantify all risks that may
materially impact over a short, medium and long-term
perspective
• Minima consideration of: Credit-, Market-, Operational-
Risk, IRRBB, Participation risk, Sovereign risk, Pension
risk, Funding cost risk, Risk concentrations, Business and
strategic risk
• Other: Stress-Testing, diversification, capital definition,…
Annex B – Supervisory expectations on ILAAP
• Liquidity risk strategy
• Buffers and collateral management
• Internal monitoring
• Stress testing
• Fund-Transfer Pricing
• Intraday liquidity management
• Contingency funding
• Other: disclosure, market access
Incl. qualitative and quantitative Data collection
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Agenda
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1
2 Supervisory Activities
Structure of Single Supervisory Mechanism
Supervisory Priorities 3
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Supervisory Priorities 2017 (1/2)
Supervisory Priorities
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• Key risks being identified in thorough bottom-up process involving several stakeholders
and views
• Supervisory activity and programme underpinned by key supervisory priorities…
Two risk categories most
impacted by these risk
drivers:
business model and
profitability
credit risk
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Supervisory Priorities 2017 (2/2)
Supervisory Priorities
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Assess banks’ business models and profitability drivers
Brexit preparations – Dialogue with banks
Non-bank competition / FinTech
Consistent approach to NPLs/ forborne exp.
Evaluate banks’ preparedness for IFRS 9
Business models &profitability drivers
Credit risk with focus on NPLsand concentrations
Risk management
Track exposure concentrations (e.g. shipping/ real estate)
Area Key actions
Assess compliance with BCBS 239
TRIM
ICAAP and ILAAP
Outsourcing
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Business Models &Profitability Drivers
Supervisory Priorities
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Thematic review of business models & profitability
(cont’d 2016)• impact of the interest rate
environment• levers banks use to steer
their profitability• JSTs will perform in-depth
examinations in 2017
Non-bank competition / FinTech(comprises FinTech, insurance companies, shadow banking, etc.)• participation in international
discussions• defining assessment approach
for risk emanating from FinTechand non-bank competition
• Working on licensing criteria for FinTech banks
• Business models and profitability drivers continue as priority area in 2017
• Special in view of protracted ultra-low/negative interest rates.
“Brexit”• possible repercussions
of the UK’s referendum on EU membership for supervised banks and their business models.
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Key Challenge Profitability (1/2)
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•Supervisory Priorities
• RoE remains low on average across SSM;
profitability seems to be weaker Y-t-Y bot
improving during 2016
• Smaller countries slightly stronger
• Fee income significantly below 2015 levels
across most business models, although this is
key dimension for stabilizing NII-reliant income
• Overall profitability in most cases well below
forecasts
• Funding costs keep decreasing which helps to
slow down decline in net margin; but zero
interest rate border challenges further decline in
funding costs
• Deposits are increasing faster than loans
hinting to lack of loan business and investment
activity
PT GR IT DE LU CY SSM ES FR BE NL AT FI SI LT IE EE MT LV
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Supervisory Priorities
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ES
• NII clearly dominates total operating income of European SIs
• Large differences across countries, party driven by large banks or significant outliers
• Underlines once more potential threats ahead given continued low interest rates
ES
Key Challenge Profitability (2/2)
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Non-performing Loans (NPL)
Supervisory Priorities
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Status
• Guidance is addressed to all Sis, considering for proportionality and materiality
(e.g. parts of chapters 2 + 3 more relevant for banks with high NPL-levels)
• Exemplary extracts from NPL guidance:
assumptions and self assessment
- assess and regularly review operating environment
development and implementation
- analyse all available strategic
- targets by portfolio
Steering and decision-making - role of management body
NPL operating model
- establish separate and dedicated NPL workout units (WUs)
- implement clear hand-over triggers between WUs
- sophisticated portfolio segmentation
Control framework and early warning process
- Develop key performance indicators (KPIs)
- suitable early warning system and automated workflows
Cha
pter
3:
NPL
gov
erna
nce
and
oper
atio
ns
Cha
pter
2:
NPL
st
rate
gy
Cha
pter
4:
Forb
eara
nce
Forb. options and their viability
Processes, afford-ability assessm.
- distinguish between short-term and long-term options
- Borrower affordability assessment
- clear decision tress and monitoring
Disclosure- Public disclose items
- supervisory reporting
Ch.
5: N
PL
reco
gniti
on definition and link to forbearance
- Use of regulatory definitions
- Alignment with accounting view
Disclosure - Deviation of accounting/regulatory view
Ch. 6: write-off / impair.
estimation of provisions
- define identification criteria / triggers
- follow conservative / timely approach
Ch.
7:c
olla
t. va
luat
ion
Governance, procedures, controls
- independent control process
- Annual val. update, use of triggers
foreclosed assets
- active sales policy (IFRS 5)
- appropriate liquidity discounts
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TRIM: Targeted Review of Internal Models
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Supervisory Priorities
• ~ 70 SIs with in total around 2,400 models• TRIM integrated in the onsite SEP for 2017• Focus:
– Credit R. (CR), – Market R. (MR), – Counterparty Credit R. (CCR)
• Goals: – Ensure compliance with regulatory standards– Harmonise supervisory practices in the SSM– Reduce non-risk-based (unwarranted) RWA
variability– Confirm adequate capital requirements
• Assessment Method: strong on-site / mostly / off-side / pure off-side
Scoping completed
missions in executionStatus
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Looking ahead
Summary
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• A lot has changed during the first 2 years of European banking supervision
• Nevertheless, there is still a lot to do…
forge a common European
supervisory culture
Refine our processes and
methodologies
further harmonise banking
supervision
Finalise adoption to Basel III rules (incl. remaining areas of supervisory
adjustments as FRTB, SA for OpRisk, new
SA for CR, constraints for CR IRB…)
Adjust business models with regard
to consumer needs and digitalisation
…for us as supervisors …for financial institutions