Introduction to the ECB/SSM supervisory framework · PDF fileIntroduction to the ECB/SSM...

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

3


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)

4

• 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


(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

5


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

6

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

7


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~ 129 significant institutions

(“SI’s”)

less significant institutions

(“LSI’s”)

Single Supervisory Mechanism (SSM) (3/7)

8

Sharing of responsibilities within SSM

EZB

JST

Direct Supervision indirect Supervision

Support

Overall responsibility

NCA

Horizontal Functions

8


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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).

9

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


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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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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

12


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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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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Less-Significant InstitutionsOversight Function of ECB (1/2)

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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



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


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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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”


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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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• 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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• 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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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)


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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


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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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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)


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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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• ~ 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

Introduction to the ECB/SSM supervisory framework · PDF fileIntroduction to the ECB/SSM...

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