www.pwc.com ECB and SSM – one year on SRM – taking shape
Experiences so far and key priorities for 2016
March 2016 What is the Banking Union?
Banking Union
Single Supervisory Mechanism Single Resolution Mechanism (SSM)
nly (SRM) Aim: Aim: • Ensure that banks comply with the EU banking rules • Ensure an orderly resolution of failing banks with • Be in a position to tackle problems early on minimal costs for the real economy and taxpayers • Key components: Single Resolution Board (SRB) and
Eurozone o Eurozone • Direct supervision of ”significant“ banks by ECB; Single Resolution Fund (SRF) for medium-term close cooperation of ECB and National Competent funding Authorities (NCAs) for ”less-significant“ institutions
Single Rulebook Aim: To standardise rules within EU area
EU Bank Recovery and Resolution Deposit Guarantee Schemes Directive CRD IV/CRR Directive (BRRD) (DGSD)
March 2016 PwC 2 SSM and SRM – Status of Luxembourg institutions
SSM – ECB list dated 30 December 2015
The list includes: € • Significant entities ECB • Less significant institutions
SRM – SRB list dated 1 March 2016 • All significant entities • 16 other cross-border banking groups
March 2016 PwC 3 Significant Supervised Entities in Luxembourg
1. Banque et Caisse d’Epargne de l’Etat, Luxembourg
2. J.P. Morgan Bank Luxembourg S.A.
3. Precision Capital S.A. including: - Banque Internationale à Luxembourg S.A. - KBL European Private Bankers S.A. - Banque Puilaetco Dewaay Luxembourg S.A.
4. RBC Investor Services Bank S.A.
5. State Street Bank Luxembourg S.A.
6. UBS (Luxembourg) S.A.
March 2016 PwC 4 Luxembourg Subsidiaries of Significant Supervised Entities
1 ABLV Bank Luxembourg S.A. 21 Europäische Genossenschaftsbank S.A.
2 ABN AMRO Bank (Luxembourg) S.A. 22 Fideuram Bank (Luxembourg) S.A.
3 Allfunds Bank International S.A. 23 HSH Nordbank Securities S.A.
4 Banca Popolare dell’Emilia Romagna (Europe) International S.A. 24 ING Luxembourg S.A.
5 Banco Popolare Luxembourg S.A. 25 La Française Bank
6 Bankinter Luxembourg S.A. 26 Mediobanca International (Luxembourg) S.A.
7 Banque BCP S.A. 27 Natixis Bank
8 Banque de Luxembourg S.A. 28 Nord/LB Luxembourg S.A. Covered Bond Bank
9 Banque Degroof Luxembourg S.A. 29 Sal. Oppenheim jr. & Cie Luxembourg S.A.
10 Banque Transatlantique Luxembourg S.A. 30 Société Européenne De Banque S.A.
11 BGL BNP-Paribas 31 Société Générale Bank & Trust
12 CACEIS Bank Luxembourg 32 Société Générale Capital Market Finance S.A.
13 Commerzbank International S.A. 33 Société Générale Financing and Distribution
14 Crédit Agricole Luxembourg 34 Société Générale LDG
15 Credem International (Lux) 35 State Street Europe Holdings Luxembourg S. à r.l.
16 DekaBank Deutsche Girozentrale Luxembourg S.A. 36 Ubi Banca International S.A.
17 Deutsche Bank Luxembourg S.A. 37 UniCredit International Bank (Luxembourg) S.A.
18 DZ Privatbank S.A. 38 UniCredit Luxembourg S.A.
19 Erste Europäische Pfandbrief- und Kommunalkreditbank AG in Luxemburg 20 Eurobank Private Bank Luxembourg S.A.
March 2016 PwC 5 Less Significant Institutions in Luxembourg (1/2)
1 Advanzia Bank S.A. 21 China Construction Bank (Europe) S.A. 2 Agricultural Bank of China (Luxembourg) S.A. 22 Citibank International Plc, London (Royaume-Uni), succursale de Luxembourg 3 Andbank Luxembourg 23 Clearstream Banking S.A. 4 Banco Bradesco Europa S.A. 24 Compagnie de Banque Privée Quilvest S.A. 5 Banco BTG Pactual Luxembourg S.A. 25 Cornèr Banque (Luxembourg) S.A. 6 Bank Leumi (Luxembourg) S.A. 26 Credit Suisse (Luxembourg) S.A. 7 Bank of China (Luxembourg) S.A. 27 Danieli Banking Corporation S.A. 8 Bank of Communications (Luxembourg) S.A. 28 Danske Bank International S.A. 9 Banque Carnegie Luxembourg S.A. 29 Delen Private Bank Luxembourg S.A. 10 Banque de Patrimoines Privés 30 Depfa Pfandbrief Bank International S.A. 11 Banque Hapoalim (Luxembourg) S.A. 31 DNB Luxembourg S.A. 12 Banque Havilland S.A. 32 East West United Bank S.A. 13 Banque J. Safra Sarasin (Luxembourg) S.A. 33 Edmond de Rothschild (Europe) 14 Banque Öhman S.A. 34 EFG Bank (Luxembourg) S.A. 15 Banque Raiffeisen 35 EFG Investment (Luxembourg) S.A. 16 Bemo Europe - Banque Privee 36 FIL Holdings (Luxembourg) S.A. 17 BHF-BANK International 37 Fortuna Banque s.c. 18 Brown Brothers Harriman (Luxembourg) S.C.A. 38 Freie Internationale Sparkasse S.A. 19 BSI Europe S.A. 39 GPB International S.A. 20 Catella Bank S.A. 40 HSBC Bank Plc., Luxembourg branch
March 2016 PwC 6 Less Significant Institutions in Luxembourg (2/2)
41 HSBC Private Bank (Luxembourg) S.A. 58 Société Nationale de Crédit et d'Investissement 42 Industrial and Commercial Bank of China (Europe) S.A. 59 Standard Chartered Bank Luxembourg Branch 43 John Deere Bank S.A. 60 Sumitomo Mitsui Trust Bank (Luxembourg) S.A. 44 Keytrade Bank Luxembourg S.A. 61 Svenska Handelsbanken AB (Publ), Stockholm (Suède), succursale de Luxembourg 45 Lombard Odier (Europe) S.A. 62 Swedbank AB (publ) Luxembourg Branch 46 M.M. Warburg & CO Luxembourg S.A. 63 TD Bank International S.A. 47 Mirabaud & Cie (Europe) S.A. 64 The Bank of New York Mellon (International) Ltd., Luxembourg Branch 48 Mitsubishi UFJ Global Custody S.A. 65 The Bank of New York Mellon (Luxembourg) S.A. 49 Mizuho Trust & Banking (Luxembourg) SA 66 The Royal Bank of Scotland Plc, Luxembourg Branch 50 Nomura Bank (Luxembourg) S.A. 67 Union Bancaire Privée (Europe) S.A. 51 Nordea Bank S.A. 68 VP Bank (Luxembourg) S.A. 52 Northern Trust Global Services Ltd, London (Royaume- Uni), Luxembourg Branch 53 PayPal (Europe) S.à r.l. et Cie, S.C.A. 54 Pictet & Cie (Europe) S.A. 55 Quilvest Wealth Management S.A. 56 Skandinaviska Enskilda Banken S.A. 57 SMBC Nikko Bank (Luxembourg) S.A.
March 2016 PwC 7 Agenda
1. Organisation of the SSM 2. The experience so far 3. ECB priorities for 2016 4. The SRM
March 2016 PwC 8 Organisation of the SSM
March 2016 PwC 9 1. Organisation of the SSM PwC SSM Competence Centre Headquarters: Frankfurt am Main Consistent across Europe (Eurozone and non-Eurozone) ECB is accountable ECB Governing Council Consistent tools, methodologies and to both the approaches European SSM Supervisory Board Parliament & the EU Chair: Danièle Nouy Council Vice-Chair: Sabine Lautenschläger
Secretariat of the SSM
DG I. Microprudential DG II. Microprudential DG III. Microprudential DG IV. Microprudential Supervision Supervision Supervision Supervision Lead: Stefan Walter Lead: Ramón Quintana Lead: Jukka Vesala Lead: Korbinian Ibel Direct Supervision of significant Direct Supervision of significant - Indirect Supervision of all - Quality Assurance banking institutions banking institutions other banks in participating - Policies 30 banks 98 banks countries 30 banks (incl. subs.) >90 banks (incl. subs.) - Methodology & Standards - Oversight & NCA Relations - Authorisation 7 divisions 8 divisions + 18 sections - Institutional & Sectoral - SSM Risk Analysis Oversight - Enforcement & Sanctions Joint Supervisory Teams (JSTs) - Analysis & Methodological - Crisis Management - Comprising staff from ECB and NCA, and led by JST Coordinator Support - Planning & Coordination of - Responsible for day-to-day supervision of individual significant banks SREP and for implementing the annual supervisory programme - Centralised On-Site - Responsible for implementing decisions of Supervisory Board / Country desks Inspections Governing Council - Internal Models - Size and composition of JSTs vary between banks: - Biggest banks – 1 dedicated JST team - Otherwise 1 JST team responsible in average for up to 4 banks
The ECB has received approval to increase total SSM staff from 1,000 to 1,300 over the next 2 years
March 2016 PwC 10 The experience so far
March 2016 PwC 11 2. The experience so far One year of SSM: key lessons learned
Setting up the SSM has been a No single interpretation of CRD IV significant achievement and CRR regulations, given national options and discretions
More intrusive approach to Results of CA depend on regulation national regulation and stress testing methodology
More harmonisation is The first Ongoing work on business needed in many areas e.g. models and profitability SREP practices year of SSM drivers needed
Banks are genuinely trying to SSM touches on behaviour and adapt to the new regime culture through governance and risk appetite review
Regulation at a local level across the EU First round of annual supervisory remains diverse and fragmented assessments of the banks: Supervisory Review and Evaluation Process
March 2016 PwC 12 2. The experience so far 2015 Supervisory Review and Evaluation Process (SREP)
Internal Business model Assessment of capital adequacy Assessment of liquidity adequacy Governance Assessment of Stress Stress internal governance RAS ICAAP RAS ILAAP Business model, strategic testing testing and of the risk planning and viability management process Pillar 2 Requirements Pillar 2 Requirements
Global SREP assessment
Supervisory measures
Corrective intervention Capital enhancing Liquidity enhancing Qualitative measures measures
General findings ICAAP findings
• Banking business models are under significant pressure (low interest • Insufficient consideration of interest rate risk in the banking book rates, profitability, competitive pressure) • Insufficient consideration of concentration risks • Medium-term financial planning is not always consistent with capital • The need to take into account business model risk planning processes • Adequacy of the confidence level used in pillar II capital modelling • Stress testing results are not sufficiently taken into account in assessing a bank’s risk bearing capacity • Emphasis on the importance of the liquidation approach to calculate risk factors • Insufficient consideration of risk appetite and risk culture • Emphasis on the importance of liquidity ratios
March 2016 PwC 13 2. The experience so far 2015 SREP – Capital outcomes
Preliminary 2015 SREP capital ratios*
14%
13,5% • Average capital requirements across SSM
13% banks have risen compared to 2014 up to
12,5% 10.1% CET 1, within a range of 8-14% (Sabine Lautenschläger, 17.11.2015) 12,0%
11,5% • Buffers include capital conservation All ECB 11,0% supervised buffer, but not the countercyclical, systemic banks 10,5% 80% of banks risk and systemically important bank buffers
Quote 10,0% 50% of banks - • Oral information about classification of
9,5% CET1 banks (1 to 4)
9,0%
8,5%
8,0%
7,5%
* incl. Capital conservation buffer
March 2016 PwC 14 2. The experience so far Internal Governance under SSM
EBA Guidelines 44 • Corporate governance an important area of SSM supervision Definition of 30 principles to 6 key themes • A key priority in 2015 was a thematic review on risk governance and risk appetite focusing on:
Topics Key themes Topics • Board assessment
1 Organisational • Board information Framework
Internal framework 1 Checks and balances 4 • Quality of debate
4 Risk Control function • Risk appetite framework 1 Know- your- structure
Risk Control Function’s 4 1 Non-standard/non 1 Corporate structure / role • Sabine Lautenschläger (Vice-Chair of the Supervisory Board transparent activities Organisation 4 Chief Risk Officer of the SSM) on governance and risk appetite framework: “A 2 Duties and responsibilities 2 Management body number of banks, while meeting national requirements, do 4 Compliance function 2 Composition and not comply with international best practices with functioning 3 Risk management 4 Internal Audit function regard to governance” 2 Framework for business conduct 4 Internal Control Information 5 system/communication 2 Outsourcing and • Julie Dickson (Member of the Supervisory Board of the ECB) remuneration Information systems/ 5 5 Business continuity on behaviour and culture: “Some banks are not business continuity management 3 Risk culture accustomed to answering questions on their risk 6 Transparency 6 Empowerment appetite framework and the appropriateness of 3 Alignment remuneration with risk profile Internal governance information they are getting from management” 6 transparency 3 Risk management Framework • Issues related to internal governance and risk appetite will 3 New products continue to be an important subject of ECB supervision going forward
March 2016 PwC 15 2. The experience so far Liquidity and funding challenges Evolution of LCRs Key observations
Banks quantitative liquidity positions (LCR) are fairly robust
First year of (draft) ILAAPs shows very divergent maturity; not harmonised
There are several challenges ahead in the area of liquidity and funding
Risk management framework
Funding strategy
Cost benefit allocation mechanism
Liquidity buffers & collateral management
Source: CRD IV–CRR/Basel III monitoring exercise report, 15 September 2015 Funds transfer pricing
• Group 1 banks are banks with Tier 1 capital in excess of EUR 3 billion Intra-day liquidity risk management and which are internationally active. All other banks are categorised as Group 2 banks. Liquidity stress testing • The minimum LCR requirement has been set at 60% from 1 October 2015 and will gradually increase to 100%. Contingency funding plan
March 2016 PwC 16 ECB priorities for 2016
March 2016 PwC 17 3. ECB’s priorities for 2016 ECB’s areas of focus for 2016 and beyond
Business model EBA EU-wide stress IFRS 9 / accounting ILAAP analysis / review test issues
Targeted Review of IT resilience and Non performing Less significant Internal Models cyber security loans institutions (TRIM)
ICAAP and internal Data quality & Asset quality reviews BCBS 239 stress testing Reporting
Conduct and National discretions Internal governance AnaCredit operational risk and options and risk appetite
March 2016 PwC 18 3. ECB’s areas of focus for 2016 and beyond Business model analysis / review
Background The experience so far
Analysis being completed by the ECB through two means: • Comprehensive Assessment addressed issues of bank 1. SREP solvability in the Eurozone, Collection and analysis of data related to forecast profitability the issue of the viability of 2. Specific on-site missions European banks remains Very granular analysis of the banks’ historical performance and forward • ECB business model analysis looking strategic and business plan, with data requests including: focussed on the following: Margin contributions / profitability calculations at the lowest level of detail • Viability and sustainability 5-year historic profitability, split into ECB defined segments • Profitability drivers and ability to generate acceptable Overview of profitability by product and by customer returns over a forward- looking period 5-year historic cost of funding broken down by funding sources 5-year historic new business analysis, including planned vs realised results, broken • Extent of interest rate risk down by new business from existing vs new customers inherent in the business model Full customer lists Business suggested by supervisory and management board members
Overview of business and distribution channels
March 2016 PwC 19 3. ECB’s areas of focus for 2016 and beyond EBA EU-wide stress test– overview
2016 EU-wide stress test draft methodology launched at the end of February 2016 including final methodology, templates and scenarios 53 EU banks will participate in the exercise, including 39 SSM banks Outcomes expected to be published at the beginning of Q3 2016 For significant institutions not covered, the ECB will conduct in parallel its own stress test, consistent 27 calculation support and validation (CSV) templates with the EBA methodology Credit risk 8 Results will be used to assess Pillar 2 capital Market risk, CCR losses and CVA 8 Net Interest Income 2 needs of individual banks in the context of the Conduct risk and other operational risk 2 Supervisory Review and Evaluation Process (SREP) RWA 5
Non-interest income and expenses 1
Capital 1 9 transparency templates
March 2016 PwC 20 3. ECB’s areas of focus for 2016 and beyond EBA EU-wide stress test – key changes from 2014 exercise
Stress test 2014 Stress test 2016
• Pass / fail approach . No hurdle rates Hurdle rates • Hurdle in baseline scenario: 8% . Results to be used in deriving pillar - • Hurdle in adverse scenario: 5,5% capital requirements through SREP
• Static balance sheet as at 31.12.2013 . Static balance sheet as at 31.12.2015 Static balance • Recognition of official restructuring . No recognition of official restructuring sheet plans plans
. Increased focus Documentation • Documentation requested . Increased demands for documentation -
• Concurrent implementation of AQR Interplay with and stress test . No separate full-scale AQR AQR - • Results joined up
. Distinction made between OpRisk and • To be considered within operational Conduct Risk Conduct Risk risk . Complex stress testing methodology for conduct risk to be applied
March 2016 PwC 21 3. ECB’s areas of focus for 2016 and beyond ILAAP – key aspects
Background and objectives
• All significant banks to produce an ILAAP from 2016 • ILAAP and data collected through the Short Term Exercise used to calibrate SREP requirements on liquid asset buffer • Three main objectives: 1. Board awareness of liquidity management framework and adequacy of liquidity resources 2. Liquidity resources adequacy assessment under business as usual and stress 3. Documentation of the overall liquidity framework (identification, management, measurement, mitigation and reporting)
ILAAP requirements (as defined in EBA guidance Dec 2015)
• How liquidity risk is identified, measured, monitored, planned and mitigated Overview of • Proportionate to the size and complexity of the entity and its business model ILAAP process • Supported by documentation and records in relation to the various components of the framework • Integrated with the risk appetite framework and linked to business strategy, risk strategy and ICAAP • Measurement and management of liquidity risk, liquidity buffers and counterbalancing capacity ILAAP main • Presentation of funding plans with quantitative past and forward looking information components • Integration of liquidity transfer pricing into the measurement of profitability of new asset and liabilities • Intraday liquidity risk management including a quantitative overview past year of intraday liquidity risk • Organizational structure and internal control ILAAP • Scope of ILAAP and interaction with the credit institution’s decision making governance • Evidence of use tests of ILAAP as the support of existence of internal validation • Management approval for ILAAP • Description of the scenarios Liquidity stress • Information on methodology and parameters testing • Scenario results • Analysis of the relevance of the outcomes on internal limits, risk appetite, buffers and feasibility of funding plans March 2016 PwC 22 3. ECB’s areas of focus for 2016 and beyond IFRS 9 – EBA questionnaire
Background
The EBA has launched an impact assessment of IFRS 9 covering approximately 50 institutions, weighted towards larger banks The aim of the exercise is threefold: 1. Help the EBA understand the impact of IFRS 9 on regulatory capital 2. Assess the interaction between IFRS 9 and other prudential requirements 3. Assess the way institutions are preparing for the application of IFRS 9
Questionnaire content
1. Qualitative – how are banks preparing? Governance (board involvement), judgmental aspects, lending practices, impact expected by institutions, implementation stage 2. Quantitative - by big themes: impairment, etc. Impact on CET1, total impact to see impact on reg cap (provisions, etc)
Timing
Questionnaire requested for end of April. Analysis should be ready for Q3. Not sure if report will be published, depending on data quality. The EBA will probably do another one next year as this year, data was requested best effort basis.
ECB / SSM involvement
The ECB is very interested to see the results of the analysis, as there is a view that IFRS 9 could have a significant impact on banks’ regulatory capital ECB may also add some banks into the scope of the questionnaire
March 2016 PwC 23 3. ECB’s areas of focus for 2016 and beyond IT resilience and cyber security
Through 2015, the ECB required supervised banks to complete a questionnaire, IT resilience and cyber assessing how banks protect themselves from cyber fraud security remain a major concern for the The basis of the questionnaire was the Cybersecurity Framework of the National ECB in 2016 Institute of Standards and Technology (NIST), as non-regulatory agency of the US Government
The submissions are currently being processed and results are expected to be published in 2016
The ECB remains concerned about the risks faced by banks in relation to cybercrime, rating it as one of their key risks for 2016
Supervisory concerns about risks of The supervisor will continue to assess the risk of IT and cybercrime through the cybercrime are still individual review of banks’ cyber risk profile and mitigation capabilities and through cross-sectional review and benchmarking growing
March 2016 PwC 24 3. ECB’s areas of focus for 2016 and beyond Targeted Review of Internal Models (TRIM)
Objectives Scope & timelines 2016
• Answers to data requests • Restore credibility, adequacy • Focus on credit, market and • Preparation of supervisory and appropriateness of counterparty credit risk visits approved Pillar 1 internal models models • Anticipation of model • Ensure compliance with • 2016: emphasis on approval requests for 2017 regulatory requirements and methodological • Well-defined internal harmonise supervisory practices harmonisation, model organisation and resource governance framework review • Integrate international availability (including model validation policy, regulatory developments model use and data quality (EBA/ BCBS) to accommodate processes) and model map & 2017 / 2018 upcoming changes prioritisation (including • Take a targeted approach to benchmarking) • On-site IT data quality specific topics and models based on review on approved models • 2017/8: IT and data quality material issues requiring review; model-specific on-site • Large number of supervisory harmonisation reviews on-site investigations over • Integrate TRIM-related 2017 and 2018 (targeted model activities in regular model specific reviews) validation (infrastructure, tools, • Appropriate resources to deal processes & methodologies with on-site teams • Logistics for the on-site teams
March 2016 PwC 25 3. ECB’s areas of focus for 2016 and beyond
Non-performing Less significant ICAAP & Internal Asset quality BCBS 239 loans institutions stress testing reviews
• Taskforce formed led • Guidelines to be • For banks not • Process already • Increased importance by the former head of published on included in the EBA under way to conduct of risk data banking supervision supervision of less exercise, ECB will AQRs on all new aggregation and risk in Ireland significant conduct its own significant banks reporting (e.g. AQR, institutions stress test consistent EBA stress testing, • Focus will be on with the EBA • AQRs also to be regulatory data countries and • List of 91 “high methodology conducted on specific requests) individual banks priority” less portfolios (e.g. where NPL ratios are significant • To be used to assess shipping) and less • ECB expects banks to deemed too high institutions to be Pillar 2 capital significant improve their risk released (so far) through the 2016 institutions on a case data aggregation SREP by case basis capabilities • SREP process for LSIs to be similar to • Focus also on the current preparedness for significant institution gone-concern process scenarios (MREL / TLAC)
March 2016 PwC 26 3. ECB’s areas of focus for 2016 and beyond
National Internal Data quality and Conduct and AnaCredit discretions and reporting operational risk governance and options risk appetite
• Continued requests • Reviews to be done • AnaCredit • Consultation • Underlying for ever more mainly through the requirements to be launched in sentiment that granular data in the SREP process finalised through November on governance within context of stress 2016 harmonising the certain banks is testing, on-site • Focus will be on risk exercise of options insufficient, e.g. missions, AnaCredit culture and the and discretions in etc. effectiveness of the union law − Quality of the Board supervisory board • Poor data quality and • To be finalised and − Independence from processes could lead implemented in the management to capital buffers first half of 2016 − Use of risk appetite in decision making
March 2016 PwC 27 3. ECB’s areas of focus for 2016 and beyond Summary of current SSM/ECB tenders
The ECB has launched a number of tender processes for framework contracts with external contractors for assistance across a number of different areas. The table below summarises these.
ECB / SSM Tender name
SSM Support on the performance on on-site supervisory activities
SSM Provision of support on the development and review of internal models
Provision of support for project management, quality assurance on asset quality reviews, stress testing and the provision of non-statutory audit services Lot 1 – PMO SSM Lot 2 – Quality Assurance Lot 3 - Stress testing Lot 4 - AQR
ECB Provision of consultancy and agency services on market infrastructure and payments
ECB Provision of consultancy services for risk management
ECB Information security - conceptual consultancy framework
ECB Management assessment & management development programme
March 2016 PwC 28 3. ECB’s areas of focus for 2016 and beyond Approach to supervision of LSIs - overview
Ad-hoc information requests National ECB DG III Common standards, recommendations, guidelines supervisors Supervision overview and general instructions Direct supervision Quantitative and qualitative information
Cooperation with banking associations 91 LSIs classified as “high-priority” so far
Less Significant Institutions
Tiered approach - Supervision to be in accordance with the principle of proportionality - Intensity of supervision and information requests are based on the priority level of a bank - Risk-based and consistent approach
March 2016 PwC 29 3. ECB’s areas of focus for 2016 and beyond Approach to supervision of LSIs – supervisory tools
National authorities obliged to inform and seek approval from the ECB of any decisions or actions with regards to supervised banks
Regular reporting of national supervisory authorities to the ECB
Sharing of ECB guidelines and general work instructions with the national supervisory authorities
Thematic examinations: Detailed examination of specific risks
Retrieving information and conducting site inspections
Opportunity for the ECB to take over direct supervision of a less significant institution
Staff exchanges
March 2016 PwC 30 3. ECB’s areas of focus for 2016 and beyond Approach to supervision of LSIs – key focus areas
1 Development of common standards e.g. capital planning and business model analysis 2 Exchanging information with national supervisory authorities and continuous monitoring of LSIs by means of "country desks" 3 Finalizing the procedure for crisis management 4 Thematic audits, e.g. of the Institutional Protection Scheme (IPS) and accounting standards 5 Development of a risk assessment / SREP methodology for LSIs Data and data analysis: collection and reporting of data, assessment of risks 6 and vulnerability, list of less significant institutions
March 2016 PwC 31 3. ECB’s areas of focus for 2016 and beyond Approach to supervision of LSIs – SREP for LSIs
Key objectives Key principles
Ensuring a "level playing field" between significant SREP for LSIs to be derived from the SREP for institutions and LSIs and between LSIs significant institutions Ensuring uniformity in the implementation of the SREP Application of SREP for LSIs is proportional and aligned by ECB and national supervisory authorities to the availability of comparable data
1 Frequency of Analysis • Proportionality based on the priority level of the institution 2 Scope of the assessment • There are predefined three levels: "High-Medium-Low" 3 Granularity of analysis
March 2016 PwC 32 The Single Resolution Mechanism
March 2016 PwC 33 European and Luxembourg regulatory framework…
Single Resolution Fund Luxembourg Resolution Luxembourg Deposit Luxembourg Investors (SRF) Fund Guarantee Schemes Compensation Schemes (LRF) (LDGS) (LICS)
Regulation 806/2014 Directive 2014/59 Directive 2014/49 (DGSD) Directive 97/9 Implementing Regulation (BRRD) 2015/81 Delegated Regulation
2015/63 European
Circular CSSF 15/626 Law 18 December 2015 Law 18 December 2015 Law 18 December 2015 (the Law) (the Law) (the Law) Circular CSSF 15/628 Circular CSSF 15/617 Circular CSSF 15/610 Luxembourg (obsolete)
March 2016 PwC 34 … implementing 3 different mechanisms through 4 structures
Resolution Investor Compensation scheme
Single • Ensuring continuation of Compensation scheme up to EUR 20,000 Resolution systemically important Fund (SRF) for certain types of investors in case their functions funds linked to their investment Luxembourg• Executing orderly wind down transactions or securities are not available Resolution of other parts of business (ex-post contributions) Fund (LRF)
Stability of market Investor protection
Deposit Guarantee Scheme
Covering certain types of depositors up to EUR 100,000 in case their deposits are not available (FGDL)
Depositor protection
Minimal costs to taxpayers and minimal impact to the real economy
March 2016 PwC 35 Timeline No Information Jul 2015 on DGS Data collection from CSSF contribution to calculate 2015 ex ante Sept 2015 (yet) contribution to the LRF Deadline for institutions to (Circular CSSF 15/617) submit data for the 2015 ex Dec 2015 ante contribution to the LRF Dec 2015 Data collection from CSSF to calculate 2016 ex ante Institutions received from CSSF the contribution to the SRF Feb 2016 2015 Ex ante Contribution to be paid (Circular CSSF 15/626) Deadline for institutions to the LRF before end of December to submit data for the 2015 (Circular CSSF 15/628) SRF ex ante contribution Transposition of the BRRD and the for 2016 May 2016 DGSD through Law of 18 December Notification of the 2016 2015 ex ante contribution to be paid to the SRF Jun 2016
Deadline for institutions to pay the 2016 ex ante contribution to the SRF
Jan 2019
Start of extra 0.8% contribution to LDGS
Dec 2023
End of Initial period of the SRF
Dec 2024 March 2016 PwC End of initial period of the LRF 36 Financing arrangements of the Resolution Fund
Calculated by the Ex-ante Resolution Authority, contributions Paid annually at individual level by institutions
Calculated by the Resolution Authority where ex-ante contributions are insufficient to cover the losses or costs incurred by the use of the LRF/SRF Financing Shall not exceed three times the annual ex ante arrangements contribution Ex-post contributions Alternative funding Borrowing or other forms of support from institutions on scope, financial institutions or other third parties
March 2016 PwC 37 Criteria for institution to be failing or likely to fail
01 02 Regulatory issues Solvency issues The institution infringes the The assets of the institution are less than requirements for continuing its liabilities authorisation in a way that would justify the withdrawal of the authorisation by the competent authority
Institution to be failing or likely to fail (art 33 of the Law) 03 04 Financing issues Liquidity issues Extraordinary public financial support is The institution is unable to pay its debts required or other liabilities as they fall due
March 2016 PwC 38 4 resolution tools
Sale of Bridge Whole/partial acquisition of the Sale of the institution or parts of its business institution institution by one or more public business to one or more purchasers authorities or control by the without the consent of shareholders resolution authority
Intervention of the Resolution Fund under conditions: • Loss absorption and recapitalisation ≥ 8 % of the total liabilities including own funds has been made by the shareholders and the holders of other instruments of ownership, the holders of relevant capital instruments and other eligible liabilities through write down, conversion or otherwise. AND • Limited to the lower of 5 % of total liabilities including own funds or the means available to the Resolution Fund and the amount that can be raised through ex-post contributions within three years.
! Asset Losses and appropriate part of the Transfer assets, rights or liabilities @ separation Bail-in costs arising from the failure of the of an institution under resolution to institution supported by a separate vehicle shareholders and specific creditors
! Should be used only in conjunction with other tools to prevent an undue competitive advantage for the failing institution @Stronger incentive to monitor the health of an institution during normal circumstances
March 2016 PwC 39 Resolution planning
The EBA specifies the content of resolution plans (submitted to the EC)
Summary
Arrangements for Arrangements for Resolution strategy information operational continuity
Conclusions of the Financing Communication assessment of resolvability
Responses from the institution or group
March 2016 PwC 40 Minimum Requirement for own funds and Eligible Liabilities (MREL)
• Based on size, business model, funding profile, Case-by-Case risk profile, possible DGS using EBA Eligible liabilities and own funds criteria > X% contribution… = Total liabilities and own funds • 8% Floor • Min. Own Funds + Buffer • Sub-floor for contractual bail-in instruments?
Assets Liabilities Liabilities owed, secured, guaranteed or funded by the institution Liabilities with a remaining maturity < 1 year Derivative liabilities Total Secured deposits or with preference in national insolvency hierarchy liabilities and … own funds Own funds Eligible liabilities and Eligible Subordinated debts own funds for Eligible Senior debts MREL Regulatory adjustments to accounting equity Increased funding cost? March 2016 PwC 41 MREL and the link to Deposit Guarantee Schemes
• Significant industry discussion regarding whether deposit insurance or deposit guarantee schemes overlap with or remove the need for MREL requirements • Key aspects of both tools are summarised in the table below:
MREL Deposit guarantee schemes
• Subordinated debt that can be “bailed-in” to • Guarantees customer deposit amounts up to a Description protect a bank from significant losses during a certain amount in the case of bank failure crisis • Sits just above equity in terms of seniority • No loss absorbing capacity - protects depositors • Can be used to absorb losses and protect more only in the case of a bank having already failed Loss absorbing senior debt-holders (including depositors) • Used in cases over and above BRRD, i.e. if bail- capacity • Used for “bail-in” in the case of a resolution in under MREL yields enough funds, guarantee under BRRD schemes would not need to be invoked • Applied within individual countries up to a limit • Determined by the SRB in co-operation with of €100k per depositor National Resolution Authorities Application • European Commission attempts to move towards • Set on an entity level, case by case basis but likely a harmonised European Deposit Insurance to not be less than 8% of total assets Scheme (EDIS)
• The regulatory view is clear: the existence of deposit insurance schemes do not replace the need for MREL to be applied • The SRB sees the application of MREL as a way of replacing deposit guarantee schemes as a key bank resolution tool
March 2016 PwC 42 Resolution process
• The SRB is working with the National Resolution Authorities (NRAs), SSM and European Commission on the procedures for resolving a bank. In a resolution the responsibility will wholly shift from the NRAs to the SRB • A first basis for any resolution will be the resolution plan but the SRB will need to adapt to the circumstances on the ground, including whether to bail in all the allocated assets or not • Before the resolution process is triggered there will be an informal stage of cooperation between the SRB, the NRAs, SSM and Commission BAIL-INABLE In a normal scenario the waterfall would be:
1 MREL eligible own funds and liabilities MREL-eligible Own funds and liabilities except: Own funds and liabilities • Secured, collateralised or 2 Other bail-inable own funds and liabilities (including subordinated debts): guaranteed • Issued & fully paid-up • Covered deposits • Not owed to, secured, • Liabilities necessary for 3 Deposit Guarantee Schemes guaranteed, or funded by the daily functioning institution • Liabilities to entities • Remaining maturity > 1 year (excluding group • 4 Single Resolution Fund Not a derivative entities) with original • Not a deposit with preference maturity < 7 days • Liabilities to employees, tax authorities, DGS…
March 2016 PwC 43 Single Resolution Mechanism Timeline for engaging with banks through 2016
Q1 Q2 Q3 Q4
• Information request to • Start resolution • Bilateral engagement • Bilateral engagement all banking groups planning for a third with second and third with third wave wave of banking groups wave banking groups • Bilateral engagement • Obtain feedback and with first wave of • Obtain feedback and • Executive Sessions and MREL implementation groups MREL implementation second set of plans from second and plans from first wave of Resolution Colleges third wave • Start resolution banks planning for a second • First set of MREL • Executive Sessions for wave of banking groups • Executive Sessions and decisions remaining groups first set of Resolution Colleges • Second set of MREL decisions
March 2016 PwC 44 Key messages
1• The existence of deposit insurance schemes does not replace the need for MREL
2• SRB to finalise MREL decisions for the major banking groups within the Banking Union during 2016
3• MREL targets expected to be set not less than eight percent of total assets – but on a case-by-case basis possibly above
4• Individual implementation plans to reach the MREL target to be put in place as soon as possible
5• MREL decisions require the approval of resolution plans by the Executive Session of the SRB and a final joint decision by a Resolution College
March 2016 PwC 45 Thank you
Burkhard Eckes Emmanuelle Henniaux Partner, Banking & Capital Markets Leader, Germany Partner, Banking Regulatory & Risk Leader, REcCE Banking & Regulatory Leader Luxembourg
direct: +49 30 26 36 2222 direct: + 352 49 48 48 2111 [email protected] [email protected]
Jean-Philippe Maes Director, FS Consulting, Luxembourg
direct: +352 49 48 48 2874 [email protected]