Annexes to COM(2015)388 - Rules governing the levels of application of banking prudential requirement - Main contents
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This page contains a limited version of this dossier in the EU Monitor.
| dossier | COM(2015)388 - Rules governing the levels of application of banking prudential requirement. |
|---|---|
| document | COM(2015)388  |
| date | August 5, 2015 |
3.3.Existence of derogations with inappropriate scope of application
Competent authorities may exempt institutions from the prudential requirements set out in Articles 74 to 96 of CRD on an individual basis in accordance with Article 109(1) of CRD. However, Articles 74 to 96 cover fundamental prudential requirements, for example, the implementation of robust governance arrangements, effective risk management processes and robust internal control mechanisms. Competent authorities are therefore reluctant to grant this exemption because these requirements are considered essential for effective prudential supervision. It is therefore more prudent to limit the scope of this exemption where the application of these requirements on an individual basis is not essential and can be adequately replaced with an application on consolidated basis.
In addition, Article 9 of CRR does not allow for exempting institutions from leverage requirements, which is permitted under Article 7 of CRR. It might be worth considering the possibility of better aligning these two articles.
3.4.Incomplete conditions for the application of waivers
Parent institutions and their subsidiaries may be exempted from prudential requirements on an individual basis under Article 7 of CRR, provided that certain conditions specified in that Article are met. However, there might be some merit to supplement the current conditions with further specifications as follows:
– Control relationships between the parent undertaking and the subsidiaries should be assumed where the parent undertaking has the power to issue binding instructions to its subsidiaries; such a condition already exists under Article 10 of CRR;
– The implementation of the risk management framework of the parent undertaking in the subsidiaries could be assumed where a uniform and integrated risk management framework is established in both the parent undertaking and subsidiaries.
3.5.Misalignment of exemption rules between CRD and CRR
The supervisory review and evaluation process (SREP) applies at the same level as the level of application of prudential requirements set out in CRR. As the ICAAP under Article 73 of CRD is the starting point of the SREP and the latter covers the obligations set out in Articles 74 to 96 of CRD, the levels of application of the prudential requirements specified in Articles 108 and 109 of CRD may lead to the following inconsistencies:
– The ICAAP and prudential requirements set out in Articles 74 to 96 of CRD may not apply at the same level where institutions are exempted under Article 108(1) or 109(1) of CRD;
– Institutions benefitting from the derogations provided for in Article 8 or 9 of CRR may be required to apply the prudential rules set out in Articles 73 to 96 on an individual basis;
– The granting of the exemption under Article 108(1) of CRD is not determined by the granting of the exemption under Article 10 of CRR, meaning that credit institutions permanently affiliated to a central body may be exempted from capital requirements on an individual basis while being subject to internal capital requirements;
– Institutions belonging to banking groups are not required to implement the ICAAP on an individual basis whereas they are subject to solvency requirements at this level.
The levels of application of the ICAAP and the prudential rules on governance arrangements, risk management and remuneration policies as set out in Articles 108 and 109 of CRD could therefore be made consistent with the levels of application of the other prudential requirements set out in CRR and CRD. Requiring an ICAAP for every institution in a large banking group might, however, be considered excessively burdensome, particularly for those institutions which are not significant in relation to the rest of the group. Jointly with ICAAP requirements on a consolidated basis, where applicable, the ICAAP could therefore apply on an individual basis to any institution, including those belonging to banking groups, except where competent authorities make use of the derogations under Article 7, 9 or 10 of CRR, taking account of the significance of the institution in relation to the rest of the group.
3.6.Insufficient monitoring of the entities excluded from the scope of prudential requirements
Banking groups are allowed to exclude group entities from the scope of prudential consolidation pursuant to Article 19(1) of CRR without referring to their competent authorities. However, it could be worth assessing the costs and benefits of requiring banking groups to notify the use of the waiver under that Article to their competent authorities so that the latter could grant permission to banks before undertaking exclusions and monitor the number of entities and volume of assets covered by the waiver.
3.7.Interpretation issues identified
3.7.1.Risk of divergent interpretation on how to apply remuneration rules on a consolidated basis
Article 92 (1) of CRD requires competent authorities to ensure that the principles and rules on remuneration laid down in Articles 92 to 95 of CRD apply to institutions at group, parent company and subsidiary levels, including those established in offshore financial centres. Recital 67 of CRD clarifies that this is to protect and foster financial stability within the Union and to address any possible avoidance of the requirements laid down in CRD.
A number of the remuneration requirements in Article 92 of CRD apply only to staff whose activities have a material impact on an institution's risk profile. The Commission Delegated Regulation (EU) No 604/2014 8 set out criteria to identify such staff at group, parent company and subsidiary levels.
Moreover, pursuant to Article 92 (2) of CRD the remuneration requirements are to be applied in a manner and to an extent that is appropriate to the institutions' size, internal organization and the nature, scope and complexity of their activities. The updated EBA guidelines on the application of the remuneration rules will contain further guidance on the scope of the concept of ‘group’ and the application of the proportionality principle, which will help address risks of divergent interpretation and application of the remuneration rules.
It should also be noted that Article 161(2) of CRD provides for the Commission, in close cooperation with EBA, to review the provisions on remuneration by 30 June 2016. This review will, amongst other elements, assess efficiency, implementation and enforcement of remuneration provisions, including the identification of any lacunae arising from the application of the principle of proportionality.
3.7.2.Risk of diverging interpretation of the conditions to the application of waivers
Institutions may be exempted from solvency or liquidity requirements in accordance with Articles 7, 8 or 9 of CRR, provided that there is no impediment to funds movements. However, supervisors may face difficulties in identifying impediments. Clarifying this could help enhance the convergence of supervisory practices on the application of the waivers. More broadly, the conditions set out in those three Articles, especially in Article 8 of CRR, might benefit from further specifying how to reduce risk of diverging interpretation from authority to authority.
3.7.3.Unclear treatment of institutions holding participations in financial entities established in third countries
Article 22 of CRR and Article 108(4) of CRD stipulate that a subsidiary institution which holds participations in a financial entity established in a third country shall apply on a sub-consolidated basis the capital and large exposure requirements as well as the rules related to qualifying holdings and those related to ICAAP. However, the purpose of these two Articles is open to several possible interpretations. Consequently, the treatment applicable to institutions holding participations in financial entities established in third countries could be clarified.
4. Conclusion
It does not appear suitable to propose amendments to the existing rules in the wake of the report as the Commission needs to continue to reflect further on whether and how these exceptions and conditions for their application should be maintained. Some of these considerations will be particularly apposite in the context of SSM. Moreover, since some rules are new or have not been used extensively yet, experience in their application must still be gained so that the Commission could carefully assess the feasibility of amending the existing rules.
It also appears particularly important to take account of the conclusions of the report on the prudential regime for European investment firms that the Commission shall issue in accordance with Article 508(2) and (3) of CRR before considering the possibility of changing the rules applicable to investment firms.
Finally, the experience gained by competent authorities in the implementation of the liquidity coverage requirement and the application of the provisions laid down in the BRRD will contribute to the reflection of the Commission on whether amendments to the application regime for banking prudential requirements would be appropriate.
(1) Directive 2013/36/EU of the European Parliament and of the Council of 26 June 2013 on access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms, amending Directive 2002/87/EC and repealing Directives 2006/48/EC and 2006/49/EC (OJ L 176, 27.06.2013, p. 338).
(2) Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms and amending Regulation (EU) No 648/2012 (OJ L 176, 27.6.2013, p. 1).
(3) Seventh Council Directive 83/349/EEC of 13 June 1983 based on the Article 54 (3) (g) of the Treaty on consolidated accounts (OJ L 193, 18.07.1983, p.1).
(4) Opinion of the EBA on the application of Articles 108 and 109 of Directive 2013/36/EU and of Part One, Title II and Article 113(6) and (7) of Regulation (EU) No 575/2013, 29 October 2013.
(5) June 2006 BCBS framework - Basel II: International Convergence of Capital Measurement and Capital Standards: A Revised Framework - Comprehensive Version.
(6) Where the institutions are authorised in several Member States, the competent authorities of the various Member States need to reach a common agreement pursuant to Articles 8(3) and 21 of CRR.
(7) Directive 2014/59/EU of the European Parliament and of the Council of 15 May 2014 establishing a framework for the recovery and resolution of credit institutions and investment firms and amending Council Directive 82/891/EEC, and Directives 2001/24/EC, 2002/47/EC, 2004/25/EC, 2005/56/EC, 2007/36/EC, 2011/35/EU, 2012/30/EU and 2013/36/EU, and Regulations (EU) No 1093/2010 and (EU) No 648/2012, of the European Parliament and of the Council (OJ L 173, 12.6.2014, p. 190).
(8) See Article 1 of Commission Delegated Regulation (EU) No 604/2014 of 4 March 2014 supplementing Directive 2013/36/EU of the European Parliament and of the Council with regard to regulatory technical standards with respect to qualitative and appropriate quantitative criteria to identify categories of staff whose professional activities have a material impact on an institution's risk profile (OJ L 167, 6.6.2014, p. 30).