From Fragmentation to Financial Integration in Europe

Chapter 16. European Union Banking Regulatory Framework and Authorities: An Overview

Charles Enoch, Luc Everaert, Thierry Tressel, and Jianping Zhou
Published Date:
December 2013
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Nadege Jassaud and Fabiana Melo 

This chapter provides an overview of the European Union (EU) banking regulatory framework and institutions. It reviews the European Banking Authority’s (EBA’s) performance against its mandates, given the economic conditions prevailing in the banking sector in the European Union. The review was carried out as part of the 2012 Financial Sector Assessment Program assessment of the European Union, and was based on the regulatory framework in place, the supervisory practices employed, and other conditions as they existed as of December 12, 2012.


Banks are a key contributor to the EU financial and professional services industry. EU credit institutions (including banks) account for 3.6 times the European Union’s GDP and €900 billion in revenues, that is, 7 percent of the European GDP.1 The sector employs more than three million people in Europe, 1.5 percent of the European Union’s workforce. At end-October 2012, there were 7,913 credit institutions licensed in the European Union, of which 75 percent were in the euro area2 (European Central Bank, ECB/FBE). European financial integration has also resulted in a sharp increase in cross-border banking groups, with 87 EU cross-border banking groups as of June 2012. As integration has progressed, crises involving a bank have increasingly had significant cross-border implications.

The recent financial crisis has demonstrated that both the quality and the size of the global banking system’s capital and liquidity base were insufficient to withstand severe economic shocks. Over the September 2008—December 2011 period, EU member states committed a total of nearly €4.5 trillion, that is, 37 percent of the European Union GDP, for backstopping their financial sector. The ECB also provided enhanced liquidity support by broadening the scope of eligible assets for central bank funding and extending the maturity of central bank funding through the Long-Term Refinancing Operations, up to €1.2 trillion in October 2012. The EU supervisory framework has been reshuffled as well, with the setup of European supervisory authorities (ESAs).

Three ESAs were created on January 1, 2011: the EBA, the European Securities and Markets Authority (ESMA), and the European Insurance and Occupational Pensions Authority (EIOPA). Their creation aims at enhancing the mechanisms to coordinate cross-border supervision, facilitate cooperation between supervisors, promote convergence of supervisory practices, and monitor implementation of the so-called single rulebook, a single set of rules across the European Union. The ESAs are regulatory agencies of the European Commission accountable to the European Parliament and the Council of the European Union. They have legal personality as well as administrative and financial autonomy.

A new European supervisory mechanism will complete the framework. In September 2012, the European Commission came with a proposal for the Single Supervisory Mechanism (SSM) that would assign broad supervisory tasks to the ECB, with defined objectives and powers to supervise all euro area banks. This legislative package followed the Euro area summit on June 29, 2012, which called on the commission to present proposals for setting up an SSM as a precondition for a possible direct recapitalization of banks by the European Stability Mechanism (ESM). Unanimous agreement on the commission’s proposal was reached in the Economic and Financial Affairs Council on December 13, 2012. The co-legislators (European Parliament and the European Council) reached agreement on the package in April 2013. The SSM is envisaged to be in place one year after the entering into force of the agreed texts.

The EU regulation has also been reviewed to implement new Basel III capital rules, through the Fourth Capital Requirements Directive and Capital Requirements Regulation. The text of this new regulation was published in the Official Journal on June 26, 2013, for an implementation scheduled on January 1, 2014.

Regulatory Framework for European Union Banking

The Basel Committee on Banking Supervision (BCBS) is the international standard setter for banking regulation. Originally composed of G-10 countries, after the 2008 financial crisis it was expanded and now has 27 members, of which nine are also European Union members.3 The European Commission, the ECB, and EBA are observers.

In September 2010, the BCBS published new international standards for the capital adequacy and liquidity framework for internationally active banks (know as the “Basel III package”). BCBS members agreed to implement Basel III gradually, starting from January 1, 2013, according to transitional and phase-in arrangements by which full implementation will be achieved by January 2019. Basel III complements and modifies the 2004 Basel II framework, introducing a new definition of regulatory capital (and higher requirements for better-quality capital), increased risk coverage, a leverage ratio as a backstop to the risk-based requirement, additional capital buffers that can be drawn down in periods of stress, and two liquidity standards.

BCBS standards need to be transposed into national regulations; in the case of the European Union, the Capital Requirements Directive (CRD) had introduced the regulatory framework. Member states transposed, and banks had to apply, the CRD implementing Basel II, from January 1, 2007. Since then, the CRD has been revised twice. On September 2009, the CRD II amended the regime for large exposures, supervisory colleges, hybrid capital, liquidity risk management, and securitization. Adopted on September 16, 2009 by the European Council and the European Parliament, the directive was transposed into national law by October 31, 2010. CRD III, agreed in the summer 2010, reformed the trading book, resecuritization, and remuneration, and entered into force in December 2011. In the European Union, CRD rules are applicable not only to internationally active banks but to all the European Union’s 8,300 credit institutions.

The CRD IV/Capital Requirements Regulation will implement Basel III in EU laws. The new EU legislation consists of two instruments: a regulation that applies directly in every member state and a directive that will have to be transposed into the national laws of each member state. The Capital Requirements Regulation lays down prudential requirements for capital, liquidity, and credit risk for all investment firms and credit institutions in EU member states. It will impose a single set of rules across the European Union—the single rulebook4—leaving no scope for arbitrary interpretation and ensuring certainty about the law for all EU single-market players. By contrast, the CRD will cover rules on bankers’ remuneration and bonuses, prudential supervision, corporate governance, and capital buffers. It will allow member states to require their home banks to hold more capital under certain conditions (as part of a supervisory process or as a macroprudential tool within the European Union harmonized framework5).

There are discrepancies with Basel standards, however. In 2012, the BCBS conducted a peer review exercise in the United States, the European Union, and Japan, with the objectives of identifying domestic regulations and provisions that were not consistent with the standards and assessing their impact on financial stability and the international level playing field. The BCBS reviewed the May 2012 draft version of the CRD IV, and the results of the assessment were published in October. Several discrepancies were detected, and some of them were considered material: “the proposed EU approach falls substantially short of the Basel framework in two areas: Definition of capital and the Internal Ratings-based (IRB) approach for credit risk.” Specifically, the BCBS pointed out that

  • the CRD definition of capital did not specify that common equity capital requirements should be met only with common shares,

  • the criteria for accepting other tier 1 capital instruments were not consistent with the Basel III criteria,

  • the treatment for recognition of minority interests was less stringent than the Basel III criteria, as was the derecognition from capital of unrealized gains and losses from changes in fair value liabilities, and

  • the Capital Requirements Regulation definition of “indirect holdings” to minimize double gearing and the consolidation of insurance investments (instead of deductions) were considered potentially material discrepancies.

The concern about the implementation of the internal-ratings-based approach mostly derived from the European Union’s application of partial exemptions for material exposure portfolios.

The BCBS Level 2 assessment will be updated based on the recently finalized rules, but it seems that at least some of the inconsistencies found may remain. The EU authorities have stated that the differences are derived from the wider scope of application of the CRD, which includes non-internationally active banks, and were also needed to accommodate certain legal constraints arising from local legislation. While the framework does build in some safeguards, including a role for EBA regarding supervisory enforcement practices and monitoring, the differences regarding the definition of capital (for example, not imposing common shares for listed banks) may give rise to financial engineering, impairing the quality of capital.

There are also some concerns about the timeliness of implementation. For instance, the BCBS has already introduced a gradual phase-in of the implementation of the liquidity coverage ratio,6 which establishes a minimum level of high-quality liquid assets to withstand an acute stress scenario lasting one month. However, according to the European Union text, the European Commission may be able to delay the introduction of the requirement, scheduled for 2018, if justified by international developments. Similarly, the leverage ratio will be introduced by way of an observation period, through standard reporting formats to be developed by the EBA. On the basis of these reports, the EBA will prepare reports for submission to the European Commission. The commission will have a delegated power to specify the detailed liquidity coverage requirement for implementation in 2015.

The European Banking Authority

Institutional Arrangements and Accountability

The EBA is governed by a Board of Supervisors (hereafter, the EBA Board). Like the other ESAs, the EBA Board is composed of the heads of the 27 national supervisory authorities (NSAs), with observers from the European Commission, European Systemic Risk Board (ESRB), ECB, ESMA, and EIOPA. Only the heads of the NSAs (or in their absence, their alternates) have the right to vote. The EBA chairman is responsible for preparing the work of the EBA Board and participates in its meetings but has no voting right. During 2012, the EBA Board met seven times and had four conference calls (in 2011, it met six times and had 10 calls). Only one EBA Board member attended only one physical meeting, infringing Article 40 of the EBA regulation that requests a minimum of two attendances.

The assignment of one vote per member and a decision-making process requiring a majority—either simple or qualified7—have facilitated decision making, but national interests may still influence decisions. The EBA Regulation explicitly cites (in Article 42) that the voting members of the EBA Board shall act independently and objectively in the sole interest of the European Union. However, some alliances or concerted decisions may take place. A voting member cannot vote on a matter where he or she has a material personal conflict, but that does not prevent him or her from voting on a matter concerning his or her own jurisdiction or country.

Within the banking union, new issues may arise. Countries that will not participate in the SSM may fear that the current decision-making process at the EBA Board will allow the SSM members’ position to always prevail. There will be safeguards for non-euro zone member states by means of double-majority voting requirements for EBA decisions on mediation and on technical standards. This should ensure that decisions are backed by a majority of both the SSM-participating and the nonparticipating member states, but it could also make the decision-making process more complex.

It would be desirable to confirm in practice the EBA’s independence from the European Commission. The procedure for the adoption of technical standards gives room for objections by the commission on certain grounds (which have to be based on EU-wide interests and provided within three months). When the commission does not endorse a draft regulatory technical standard, it sends it back to the EBA, explaining why it does not endorse it and explaining the reasons for its amendments. The EBA has six weeks to amend the draft and resubmit it in the form of a formal opinion to the commission. If the new draft is not amended “in a way consistent with the Commission’s proposed amendments,” the commission can make its own amendments and adopt it. While the period under review remains too short to draw conclusions, there has been no example of undue interference on the substance of technical standards by the European Commission.

The EBA also has a management board that focuses on executive aspects such as the development of the annual work program, the budget, and resources. The management board is composed of six members selected from the EBA Board. It is chaired by the EBA’s chairman. Decisions of the management board are adopted on the basis of a majority of the members present, each having one vote. In the event of a tie, the EBA chairman has a casting vote. The quorum is reached once at least two-thirds of the members with the right to vote are present. The EBA executive director and a representative from the European Commission participate in the meetings of the management board, with no voting rights.

The EBA’s chairman and executive director are appointed by the EBA Board, following an open selection procedure. Both are appointed for five-year terms with the possibility of reappointment to a second five-year term. Before the EBA chairman takes up his or her duties, the European Parliament may object to the designation. The chairman may be removed from office only by the European Parliament following a decision by the EBA Board. The executive director is appointed by the EBA Board after confirmation by the parliament. The executive director may be removed only by decision of the EBA Board.

The EBA is accountable to the European Parliament and the European Council. In accordance with Article 43, the EBA Board reports its work program to the European Parliament, European Council, and European Commission each year as well as submitting an annual report on its activities and on the performance of the chairman’s duties. Article 50 of the EBA Regulation provides for EBA’s chairman to be invited to the European Parliament and Council to make a statement and to answer questions put by members. It also provides for the chairman to report in writing on EBA’s main activities when requested.

The Banking Stakeholder Group facilitates consultation with stakeholders in areas relevant to the EBA’s tasks. The Banking Stakeholder Group is composed of 30 members appointed to represent in balanced proportions the credit and investment institutions operating in the Union and their employees’ representatives as well as consumers and other users of financial services, such as small- and medium-sized enterprises. This group is consulted on actions concerning regulatory technical standards and implementing technical standards, guidelines and recommendations, to the extent that these do not concern individual financial institutions.

Governance arrangements should be reviewed with the aim of promoting a more supranational orientation in decision making. Providing voting rights to the chairs of the ESAs, moving fully to a full-time board, and delegating more decisions to the management board should be considered. In order to mitigate national interests, representatives of some other EU institutions (except the European Commission) and possibly the EBA chairman could have a vote on the EBA Board as well.

Data Issues

The regulation establishing the creation of the ESAs contains provisions indicating that the ESAs should be able to access, through European and national counterparties, all the information necessary to conduct their activities. Where information is not available or is not made available by the NSAs, the EBA can address a duly justified and reasoned request to other institutions or to the financial institutions themselves, but always through the respective NSAs. This provision has not been used in practice. In at least one case, seeking to assess the NSAs’ handling with regard to the financial conglomerate directive, the EBA has only received partial answers from NSAs and has not used its powers of data collection further.

This lack of direct, easy access to institution-specific data has in practice posed reputational risks. Since the EBA needs to go through NSAs to obtain detailed supervisory data, delays are incurred, and this negatively affects most EBA oversight activities (e.g., stress tests and risk assessments). In particular, requiring a vote from the EBA Board to provide data for particular studies that the EBA wants to implement might hinder its ability to be timely in its work. Furthermore, as the EBA does not have powers to collect data directly from the financial institutions, it has to rely on the NSAs, which perform the first-level data control and ensure the quality of the data transmitted. However, if NSAs’ data quality control is deficient, the EBA incurs considerable reputational risk while using and publishing the inaccurate information.

EBA Staff and Budget

The last two years were crucial in setting up and extending the EBA’s human resources team. EBA’s staff increased from 58 to 95 between May 2011 and December 2012, according to the initial plan presented during the previous IMF mission (Table 16.1). Currently the chairman and chief executive officer are supported by three directors and seven heads of units. EBA staff are composed of 15 contractual (permanent) staff, 68 temporary staff, and 12 secondees. Staff were trained during 2011, on average, for one day per staff member, and in 2012 for 1.5 days per staff member.

Table 16.1European Banking Authority Staffing Levels, 2011, 2012, and 2013
2011December 20122013 Planned
Staff temporary466893
Source: European Banking Authority.
Source: European Banking Authority.

Endowing the EBA with adequate resources, on a flexible basis, is crucial for it to achieve its ambitious objectives and meet its increasing responsibilities. Currently, the EBA’s budget is part of the European Commission’s overall budget. Forty percent of the EBA’s revenue comes from the European Commission Section of the General Budget of the European Union, and 60 percent comes from obligatory contributions from the NSAs.

This budget process raises some concerns. Indeed, the salaries and levels of seniority are dictated by European Commission rules and the budget is determined by the European Commission to a great level of granularity. New tasks are not automatically covered by immediate additional staff resources. While tasks added from new regulations should in theory come with immediate additional budget, the European Commission budget rules allocate new staff only when a new regulation is published in the official journal. For instance, the new tasks addressing resolution powers (recovery plans) will require 16 new staff, according to the EBA. However, the resourcing will need to await the final publication of the directive, although in theory the technical standards should be mostly ready for consultation and validation by that time. Staff and other expenses are not fungible, making budget planning very rigid. EBA cannot use free budgetary resources from other projects to meet these immediate needs.

The participation of NSA staff in technical working groups is helpful and desirable in the current decentralized setting, but the EBA should not rely too much on such resources. Standing and technical committees—staffed by NSAs—are significant and desirable complementary resources. There are currently four standing committees (Standing Committee on Regulation and Policy; Standing Committee on Oversight and Practices; Standing Committee on Accounting and Auditing; Standing Committee on Financial Innovation) and 16 subcommittees. NSAs are also seconding staff for defined periods of time, sometimes for very short thematic projects. Since the NSAs have more abundant resources than the EBA, the resulting work may potentially reflect this national-based membership. In addition, work continuity may become overly dependent on the availability of NSAs.

Like the other ESAs, the EBA advocates for more flexibility in staffing. Given the current stage of the process of implementing Basel III, a critical mass of staff is necessary to ensure proper drafting and implementation of the technical standards across the European Union. To help this process, more flexibility in the budget should be considered. One option could be a separate and specific budget line in the overall EU budget, outside the European Commission’s funding. The EU agency in charge of data protection (the European Data Protection Supervisor) is funded on the general budget of the European Union. An alternative that might be envisaged is to explore additional sources of funding, such as fees on financial institutions. The planning for staff also needs to take a medium-term view, particularly considering the establishment of the SSM. Since the ECB will be given a supervisory role for euro area member states, the EBA mandate should provide for the necessary adjustments to the range of its activities and may have to refocus on specific core tasks.

Regulatory and Supervisory Actions

Developing a European Regulatory Framework

The EBA is a regulatory agency of the European Commission, but it has no direct Level 1 regulatory powers. The directives and regulations for the banking sector are adopted by EU legislators based on the proposals of the European Commission. The EBA has been empowered to draft technical standards (Level 2), although these only have binding effect once endorsed by the commission, and to draft guidelines (Level 3). The EBA participates in the Level 1 process, giving opinions on the European Commission’s rule-making proposals, but such opinions are not binding nor do they require a response.

EBA will develop the single rulebook, by imposing uniform regulatory technical standards (RTS) that will be binding, once approved by the European Commission. The draft RTS developed so far are mostly focused on CRDIV, on own funds, credit risk; and market risk but will eventually cover all the Level 1 regulation of the Capital Requirements Regulation.

Enhancing Supervisory Convergence

As part of its mandate, the EBA should promote the convergence of supervisory practices to a high standard across member states, so that regulatory and supervisory rules are implemented equally on the ground. This mandate serves both financial stability and the single market. There is a range of tools available to strengthen supervisory convergence, including training programs, harmonizing reporting, data sharing and disclosure, participation in colleges, and conducting peer reviews.

Several EBA subgroups are in charge of enhancing convergence, but besides issuing guidelines little has been accomplished so far. Member countries exchange practices through the ongoing work of the EBA Standing Committee on Oversight and Practices. Its subgroup on Home-host and Colleges is directly involved in the work on the colleges, in particular in their operational functioning (see Box 16.1), joint decision making on approval of advanced models, and joint decision making on institution-specific prudential requirements. Another relatively new standing subcommittee is focused on supervisory practices, in which convergence and harmonization of practices should be a core objective.

Guidelines for supervisory and reporting convergence issues include both recommendations on the implementation of EU regulations and best practices on issues covered exclusively by national legislation. Regarding the first, there are guidelines to harmonize processes concerning supervisory approval of changes in advanced measurement approach models for operational risk; guidelines on stressed value-at-risk (stressed VaR) and on the incremental default and migration risk charge modeling approaches employed by credit institutions using the internal model approach; and guidelines on the data collection exercise on high earners and remuneration benchmarking. On the other hand, the guidelines on “assessment of the suitability of members of the management body and key function holders” enter the realm of national legislation, since no harmonized EU legislation exists. The guidelines include criteria and minimum requirements for fit and proper assessments, and are aimed to be used by both banks and by local supervisors in assessing banks’ practices.

Box 16.1The European Banking Authority and Its Role in Supervisory Colleges

The EU banking regulation requires colleges of supervisors to be established for all cross-border banking groups in Europe. Capital Requirements Directive 2 (applicable from December 31, 2010) requires the establishment of colleges of supervisors to improve the supervision of cross-border banking groups and facilitate home-host dialogue, particularly in the context of the joint decision on capital (Pillar 2 capital add-on). The colleges should also help prepare and handle emergency situations. The Financial Stability Board has also promoted the establishment of supervisory colleges for all major financial institutions at the global level, as an immediate response to the financial crisis. European Banking Authority (EBA) colleges were set up for 87 cross-border banks in 2012 (of which 40 were in full-fledged colleges*). Core colleges need to be set up where a full college would be unwieldy for decision making; not all of the 40 full-fledged colleges have set up core colleges.

The EBA staff has participated in the colleges, yet with mixed success. According to EBA regulation (Article 21), in its ‘facilitator’ role the EBA will contribute to promoting and monitoring the efficient, effective and consistent functioning of the colleges of supervisors and foster the coherence of the application of EU law among the colleges of supervisors. Staff should encourage supervisory best practices to converge, and the EBA may develop technical standards with regard to the operational functioning of colleges. The EBA may collect and share all relevant information in cooperation with the national supervisory authorities while establishing a central system to make such information accessible to all college members. It may evaluate the risks to which financial institutions are or might be exposed under the supervisory review process or in stress situations. There seems to be considerable variety as to how this ‘facilitator’ role is performed in practice, depending on the group’s structure, type of college, and EBA representative.

At the level of the colleges, joint assessment and decisions remain heterogeneous. The colleges, under the coordination of the consolidating supervisor, should lead to a joint risk assessment and reach joint decisions on the adequacy of capital at the group and entity level. According to an EBA staff note, most colleges have developed uniform approaches but with different levels of granularity and consistency. Joint decisions sometimes are only one page long, simply listing the individual capital requirements and without adequate evidence and analysis. In some cases, the EBA said it was not convinced that a joint decision had been reached, particularly where domestic authorities imposed higher capital requirements on entities that were the most profitable of the entire group. Use could have been made of formal mediation, where no joint decisions had been reached.

Cooperation from third-country supervisors is work in progress. EBA staff have been invited to participate in a few colleges that are set up for the European Economic Area parts of a banking group with a parent undertaking in a third country. For the time being, however, these appear to remain exceptional cases, and some third- country authorities have not granted full access to the EBA representative. Some authorities still object to granular data sharing, particularly at the level of the general colleges. Some third-country supervisors are reluctant to attend crisis management colleges.

The EBA should strengthen its leading role in cross-border supervisory colleges, but the arrival of the SSM will raise new challenges. The EBA should ensure that its guidelines are observed and implemented in practice. It should use its soft powers (“name and shame”) to foster effective and regular multilateral exchanges of information, ensure genuine joint decisions, push for mediation when no joint decision can be reached, and seek to ensure that colleges reach action-oriented, forward-looking conclusions. Under the Single Supervisory Mechanism, the design of colleges will change. The European Central Bank will become the home supervisor, and in some cases the euro area home and host countries will participate in colleges as observers only.

* Committee of European Banking Supervisors/EBA released (nonbinding) guidelines for operational functioning of colleges distinguish between ‘fully fledged’ colleges for banks with presence through significant branch or subsidiary in two or more host countries, and ‘non-fully fledged’ colleges with smaller cross-border presence.

Regarding peer reviews, the EBA adopted in May 2011 the decision to establish a review panel, but conducting peer reviews has been given relatively low priority. The decision establishes that peer reviews would assess the degree of convergence reached by members in the implementation of supervisory provisions set in legislation or by the EBA, and that they would monitor convergence in supervisory practices. It is interesting to note that reviews are also to cover the adequacy of supervisory resources and the governance arrangements of supervisory authorities.

The establishment of the ECB as a single supervisory authority for the euro area countries has triggered a renewed discussion on EBA’s mandate on supervisory convergence. It is clear that the ECB will need to implement supervisory manuals and procedures that are consistent across participating countries and with their NSAs exercising delegated powers, and that might front-run or overlap with the EBA’s mandate. In response, EBA’s management has expressed the intention of producing a supervisory handbook. According to EBA’s work plan for 2013, such a handbook would seek to unify supervisory methodologies and would be composed of papers summarizing best practices and guidelines. The focus of such a handbook should not be on detailed procedures, but rather on the interpretation of existing standards and regulations, and with an orientation to how supervisors can substantiate their assessments of banks risks.

The ECB and EBA will need to cooperate strongly so that the ECB, as a new supervisor, can build its procedures based on best practices. The ECB should align its procedures with the proposed supervisory handbook to be drafted by the EBA. Like any other supervisor in the European Union, the ECB will need to adjust its practices as guidelines and standards are updated.

Assessing Systemic Risk

EU-Wide Stress Tests and the Risk Dashboard8

The EBA has been strengthening bank stress-testing procedures and their application. Following the poor reception of the 2010 exercise, the 2011 solvency stress testing and recapitalization exercises were marked by extensive consistency checks and more transparency about methodology and data. The EBA 2011 stress and recapitalization exercises helped identify weak banks and increase capital buffers. The recapitalization exercises recommended the achievement of 9 percent core Tier 1 capital by end-June 2012, after establishing a sovereign buffer against banks’ holdings of government securities based on a market-implied valuation of those holdings. The exercise led to an additional €200 billion in capital generation or release by June 2012, and government backstops were provided to the weakest banks. A few banks under restructuring and recapitalization programs did not achieve the target on time.

EU risk dashboard and assessment. The EBA is producing a risk dashboard (which is not public) to identify and measure systemic risk, and it also publishes a regular risk assessment. The dashboard is based on key risk indicators, which are a set of 53 ratios reported on a quarterly basis by EU national authorities and covering 57 EU banks from 20 European Economic Area countries. The definition of those variables is homogeneous and consistent with the supervisory and financial common EU reporting forms, known as the Common Reporting (COREP) and the Financial Reporting (FINREP). In terms of coverage, the banks in the sample cover at least 50 percent of each national banking sector. However, the time series are not complete, since they have been collected on a best-effort basis, and their quality still depends on national authorities, even though the EBA carries out automatic consistency checks to clean the data. The EBA provides the European Parliament, the European Council, the European Commission, and the ESRB with regular risk assessments of trends and potential risks and vulnerabilities in the EU banking sector.

Contribution to the Work of the European Systemic Risk Board

The EBA is a member of the ESRB. It participates in all decision-making bodies and in expert groups under the ESRB’s Advisory Technical Committee, and in two permanent working groups: the Working Group on Analysis Tools and the Working Group on Instruments. The objective is that its input on microprudential issues is reflected in the ESRB’s systemic risk measures. In expert groups under the ESRB’s Advisory Technical Committee, the EBA has assumed the role of collecting bank-specific information, such as data on asset encumbrance and innovative funding and on interbank lending in the European Union. The EBA also provides the ESRB with its own bottom-up assessments of risks and vulnerabilities affecting the EU banking system.

The EBA is following up on ESRB recommendations. With regard to the recommendation on lending in foreign currency, by end-2013 the EBA must adopt guidelines to NSAs on capital measures relating to foreign exchange lending supervisory practices (those guidelines have been drafted and were open for public consultation in May 2013). The ESRB recommendation on dollar-denominated funding includes regular data collection on funding positions, which the ESRB collects from NSAs in its follow-up. The recommendation states that NSAs may report in aggregate through the EBA, which already has received such a notification and wants to establish its own account in this data collection. It is engaging with the ESRB Secretariat and NSAs to receive further notifications of the data collections.

Role in Fostering Transparency

The EBA has been acting to promote the harmonization of financial and supervisory reporting. It is currently finalizing a draft technical standard on supervisory reporting, which will cover all EU credit institutions and investment firms. The technical standard will harmonize the reporting framework in the European Union and will include reporting of own funds and own-funds requirements in COREP and FINREP, large exposures, liquidity, and leverage ratios. Banks will report the data to their national supervisory authorities, which will then forward data on an individual basis to the EBA. The EBA plans in the near future to collect comprehensive sets of regulatory and accounting data from the banks and hopes to be a hub of bank-specific data. Regarding COREP, FINREP, and large exposures, the EBA reporting will cover 100 to 200 banks in the first phase, but leverage and liquidity ratio reporting will cover all banks. This effort will not only facilitate stability analysis, but will also reduce the regulatory burden by harmonizing reporting requirements. The EBA is in the process of preparing a Regulatory Technical Standards specifying the new requirements contained in Basel III on own-funds disclosures, including a template for own-funds. It has not yet made a decision on public dissemination of the bank-specific data that will be collected through the new reporting framework.

The 2011 stress test exercise showed the value brought by disclosure of detailed information. The EBA has published the results of the EU-wide stress tests in 2010 and 2011 on its website. In 2011, a user-friendly tool was provided to access the disclosure of more than 3,000 data points for each bank disclosed.

However, quality assurance is key, more so even than the stress tests themselves. The EBA should strive to (1) enhance the quality assurance process; (2) promote the disclosure of granular asset quality information (including collateral and risk-weighted assets calculations); and (3) expand the depth and coverage of data audits. In addition, the EBA should raise supervisors’ awareness of issues related to asset quality and the need for accurate and timely reporting, in particular by issuing guidelines for supervisors on best practices for conducting asset quality reviews. It should work with national authorities and coordinate the provision of technical expertise where needed.

The EBA should push for enhancing the comparability and granularity of Pillar 3 reports. While it has been working on assessing Pillar 3 reports for some time, this has not always been followed up with strong actions. The EBA (and Committee of European Banking Supervisors) assessments have led to the publication of yearly reports, containing findings and suggested best practices. Linked to the work on asset quality, Pillar 3 reports should also be adapted to provide the markets with more granular and comparable information.

Binding Powers

In very few cases, the EBA can issue recommendations or binding decisions directly to national authorities. This applies to cases where a national authority is incorrectly applying EU law (breach of EU law, Article 17); where there is a disagreement between national authorities (mediation, at the initiative of the NSAs, Articles 19 and 20); and in emergency situations declared by the Council (Article 18). In those cases, the EBA can take decisions directly applicable to financial institutions as a last resort only if the national supervisor has failed to comply and only when EU law applies directly to a financial institution (as a regulation and not a directive).

No formal case of this type has materialized so far. The EBA has been involved in a number of soft reconciliation measures, consisting of differences between home and several host supervisors and differences between home and individual supervisors. However, it has recently brought to its EBA Board two requests for investigation of breaches of EU law that could lead to a formal mediation process.

In 2012, several actions were taken on crisis management preparations. The EBA issued a crisis management manual outlining the role of colleges of supervisors in emergency situations, as well as an EBA internal crisis management procedure guide. It also began to attend the crisis management groups of a number of the major cross-border banking groups. In May 2012, it also published a discussion document containing a template for a standard recovery plan.

The EBA’s coordination role in this area of activity will significantly expand when the Bank Resolution and Recovery Directive is adopted. In the forthcoming resolution directive, the EBA will have a strong role in coordinating and designing resolution plans for cross-border group entities in procedures for emergency situations.9

Consumer Protection and Financial Innovation

Consumer protection is one of the core functions laid down in the EBA regulation, which states that

EBA shall take a leading role in promoting transparency, simplicity and fairness in the market for consumer financial products or services across the internal market, including by: (i) collecting, analyzing and reporting on consumer trends; (ii) reviewing and coordinating financial literacy and education initiatives by the competent authorities; (iii) developing training standards for the industry; and (iv) contributing to the development of common disclosure rules.

The EBA also has a monitoring role on new and existing financial activities.

Only in February 2012 was a unit established to deal with consumer protection issues, and the EBA has so far mostly relied on work done by its standing committees. The Standing Committee on Financial Innovation, mentioned earlier, was established in May 2011 together with its two subgroups: the Subgroup on Consumer Protection and the Subgroup on Innovative Products.10

Focus has been on risk management and financial stability. Under the Standing Committee on Investor Protection, workstreams are focusing on different topics, such as exchange traded funds (ETFs). This workstream performed an in-depth analysis of risks from ETFs for banks, interviewing several smaller ETFs providers. The EBA Board has tasked this workstream with producing a note on good risk management practices related to ETFs directed toward banks; it has also tasked it with producing a paper on the key risks posed by ETFs as well as good risk management practices, directed toward national supervisory authorities. Another work-stream conducted an in-depth analysis and held conference calls with the three largest providers of European Contracts for Differences (CfDs) providers (IG Markets; Saxo Bank; and the Royal Bank of Scotland, RBS) to discuss the nature of CfD structures, key risks associated with providers of CfDs, and CfD risk management. Finally, regarding structured products, a workstream is interviewing banks to receive a mostly qualitative overview on the European structured product market. Guidelines on handling borrowers in payment difficulties and on responsible lending in the area of mortgages were published as EBA Opinions in June 2013.

In the area of consumer protection, more staff and knowledge building are needed. The consumer protection unit seems to be too lightly staffed: it is composed of only one person and reports directly to the EBA’s executive director. Support from the other ESAs may be sought, since some have been more proactive, issuing guidelines, reports on good practices, and consumer trends in this area. Work on financial innovation should be given a focus on consumer protection and not just on financial stability, and care needs to be taken to avoid duplication of the work conducted in the securities arena (e.g., work on ETF carried out by ESMA or by the Financial Stability Board).

Cross-Sectoral Issues

Cross-sectoral work is carried out by the Joint Committee of ESAs. The Joint Committee is a forum of cooperation on cross-sectoral issues for three ESAs. Established on January 1, 2011 (Article 54 to 57 of the ESAs), it succeeded the former Joint Committee on Financial Conglomerates (Article 54 to 57 of the ESAs). The Joint Committee of ESAs should ensure cross-sectoral consistency of work and should reach joint positions “where appropriate,” in particular regarding the areas of (1) supervision of financial conglomerates (e.g., guidelines for colleges of financial conglomerates, which will be drafted by end-2014); (2) accounting and auditing (e.g., assessing and providing consistent cross-sector inputs and exchanges of views in order to ensure cross-sector consistency in their application); (3) microprudential analyses of cross-sectoral developments; (4) risks and vulnerabilities for financial stability; (5) retail investment products; (6) measures combating money laundering; and (7) information exchange with the ESRB and development of the relationship between the ESRB and the ESAs.

Its chairmanship of the Joint Committee of ESAs rotates between the three authorities. The chairman is the second vice-chairman of the ESRB. The members are the chairmen of the EBA, EIOPA, and ESMA, and the chairmen of each subcommittee of the Joint Committee; additionally, functioning as observers are the executive directors of EBA, EIOPA and ESMA, a representative of the European Commission, and a representative of the ESRB. The Joint Committee has a dedicated staff provided by the ESAs (one full-time employee in 2011 and two full-time employees in 2012). It meets at least every two months at the premises of the ESA that is chairing. The chairman may also convene a meeting when he or she deems it necessary, including in the case of adverse developments that may seriously jeopardize the functioning and integrity of financial markets or financial stability.

The Joint Committee of ESAs conducts risk assessment on cross-sectoral issues that also deserve close coordination with ESRB. It monitors and assesses the systemic risk work performed by the ESAs. It also assists in the development of cooperation between the ESAs and the ESRB. It produces policy-focused risk reports for the European Financial Committee-Financial Stability Table meetings in March and September each calendar year. These reports include preliminary policy conclusions and provide a cross-sectoral assessment that is to be fed into each of the ESA’s sectoral systemic-risk assessment work.

Summary of Recommendations


  • Representatives of some other EU institutions (except the European Commission), and possibly the respective EBA chairmen, could have a vote on the EBA Supervisory Board.

  • The powers of the EBA Management Board could be further strengthened with more delegated powers from the Board; or a permanent Executive Board composed of independent representative could be formed.

  • Members who do not comply with article 40 of the EBA regulation should see their votes suspended. To incentivize the right representation, a mechanism of written procedure should be introduced.

  • More resources need to be allocated to the EBA, and more flexibility in the budget should be considered.

Regulatory and Supervisory Actions

  • Supervisors’ awareness of asset quality issues should be raised, in particular by issuing guidelines (nonbinding) for supervisors on best practices for conducting asset quality reviews, perhaps addressing some specific sectors and urgently pushing for the enhancement of comparability and completeness in Pillar 3 reports.

  • Convergence on Pillar 2 practices (common methodologies for risk assessment) should be accelerated. A good example of activity that should receive priority is the current work on the consistency of treatment of risk weighted assets. This work should be harmonized with BCBS Level 3 exercises and followed up with the issuance of guidelines (and perhaps RTS) to ensure consistency.

  • Cooperation should be fostered by encouraging joint on-site supervision by member countries, and resuming the performance of thematic peer reviews.

  • Peer reviews should be implemented covering the adequacy of supervisory resources and the governance arrangements of supervisory authorities.

  • The EBA should play more of a leading role in cross-border supervisory colleges and should be able to participate in the core colleges of EU banking groups that have activities abroad.

  • The EBA should ensure that its guidelines are observed and implemented in practice. It should use its soft powers (“name and shame”) to foster effective and regular multilateral exchanges of information, to ensure genuine joint decisions, and to push for mediation when no joint decision can be reached.

  • The EBA should work closely with the ECB as a new supervisor, so that the SSM can build its procedures based on the best available guidelines from the EBA and its handbook.


  • Strengthening the transparency and reliability of data should be given priority. EBA should strive to (1) enhance the quality assurance process; (2) promote the disclosure of granular asset quality information; and (3) expand the depth and coverage of the 2012 audits.

  • Pillar 3 reports should be enhanced and harmonized.

Consumer Protection and Cross-Sectoral Issues

  • In the area of consumer protection, EBA should be organized to fulfill its mandate. More staff and knowledge building are needed. Support from the other ESAs may be sought, as some have already been more proactive in this area (issuing guidelines, reports on good practices, and reports on consumer trends).

  • Work on financial innovation should be given a focus on consumer protection, and overlaps with work conducted in the securities arena (for instance, work on ETF by ESMA or by the Financial Stability Board) should be avoided.

European Banking Federation, 2010.

European Central Bank, ECB/FBE.

The BCBS members are: Argentina, Australia, Belgium, Brazil, Canada, China, France, Germany, Hong Kong SAR, India, Indonesia, Italy, Japan, Korea, Luxembourg, Mexico, the Netherlands, Russia, Saudi Arabia, Singapore, South Africa, Spain, Sweden, Switzerland, Turkey, the United Kingdom, and the United States.

The single rulebook derives from the idea that technical rules should be defined at the European Union level and adopted through EU regulations. That would ensure their direct applicability to all banks, eliminating the additional layer of local rules. Such measures would reduce costs of compliance, limit the scope for regulatory arbitrage, and prevent loss of competitiveness of EU-wide groups.

National options and discretion would be the exception, although flexibility is envisaged for financial stability risks that differ across jurisdictions and institutions. National authorities may impose systemic risk buffers, without the European Commission’s preapproval, up to a limit, and with preapproval above the limit. They may temporarily impose stricter requirements, e.g., in relation to risk weights for certain sectors, large exposure limits, and liquidity requirements. They also retain the flexibility to impose stricter requirements on individual institutions through Pillar 2 reviews.

Because of concerns that too-rapid implementation of the original liquidity coverage ratio could have a detrimental impact on the real economy, the text published by the BCBS on January 7, 2013 proposed a phasing-in of the liquidity coverage ratio similar to the capital requirements, starting with 60 percent of the ratio in 2015, rising progressively to reach 100 percent in 2019.

Adoption of technical standards requires a qualified majority.

A separate report on stress tests was produced by the IMF during the Financial Sector Assessment Program, so this chapter will not detail the issue.

Article 25 of the EBA regulation.

The Standing Committee on Financial Innovation was recently renamed the Standing Committee on Consumer Protection and Financial Innovation.

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