A bank (or a “credit institution” in the terminology of the Capital Requirements Regulation – CRR) is a business which takes deposits or other repayable funds from the public and grants credits for its own account. These activities are regulated in order to protect the public and promote public confidence in the financial system. Licensing of banks prevents institutions that could threaten the stability of the financial system from entering the market and ensures that those that do enter the market comply with minimum safety standards and are thus considered sufficiently robust. Licensing also ensures that institutions comply with all applicable national and European legal requirements.
The European Central Bank (ECB) is the sole authority able to grant a banking licence in the euro area. All entities that wish to become banks must be licensed by the ECB, whether they will be significant institutions (directly supervised by the ECB) or less significant institutions (directly supervised by the national competent authorities – NCAs), and the ECB and NCAs cooperate closely in the licensing process. The entry point for applications is always the NCA of the country where the entity is to be located, and all applications are subsequently assessed by the ECB.
Licensing procedures for credit institutions established in the euro area are carried out jointly by the ECB and the NCA of the Member State where the applicant is located. Technically, this “common procedure” starts with an institution approaching its NCA, which is the entry point for any authorisation procedure, and ends with the ECB taking the decision. However, the ECB and the NCA work closely together from the beginning to ensure a consistent, efficient and thorough approach.
Entities that wish to become a bank must demonstrate that they are able to comply with the requirements of EU and national law (Articles 8 to 14 of the Capital Requirements Directive – CRD IV). The licensing requirements span a wide range of areas, including the amount of capital to be held, the suitability of shareholders and board members, and the adequacy of the entity’s business operations, as reflected in its business plan, governance framework, internal controls and risk management, etc. Applications for a licence are assessed on the basis of the applicable requirements, as well as the overall prudential framework for the supervision of credit institutions. This framework covers, for example, an assessment as to whether the intended activities and business model of the applicant include the core banking activities of taking deposits and granting credit and whether the overall prudential framework for credit institutions is the most correct and appropriate framework for the intended activities. The European Banking Authority (EBA) has published draft Regulatory Technical Standards with a comprehensive list of information to be provided by applicants. Each licence application is assessed on a case-by-case basis and the assessment is proportional to the envisaged systemic importance of the entity and its forecast risk profile.
The number of licensing procedures in which an ECB decision has been taken since the start of the Single Supervisory Mechanism (SSM) in November 2014 is 51, including both new licences and extensions of existing licences.
So far, no negative decisions have been taken by the ECB. This can be attributed to the fact that early supervisory signals to the applicant that it is running the risk of a negative decision normally lead to a withdrawal of the application.
The ECB published its Guide to assessments of licence applications (“Licensing Guide”) in March 2018. The Guide expresses general licensing principles on the scope of the licensing requirement and the assessment of licence applications. These general licencing principles are also applied throughout Part 2. Part 2 contains specific guidance regarding the ECB’s supervisory expectations on the capital required for a newly licensed bank and the programme of operations.
As with the previously published Licensing Guide, the purpose of Part 2 is to enhance transparency for potential applicants and increase their understanding of the procedure and criteria applied by the ECB in its assessment of licence applications. This transparency is also intended to facilitate the application process. However, the Licensing Guide is not legally binding in nature; it is a practical tool to support applicants and all entities involved in the process of authorisation, with a view to ensuring a smooth and effective procedure and assessment.
As part of licence applications, supervisors evaluate the amount, quality, origin and composition of the applicant credit institution’s capital. The assessment of capital needs takes into account the situation at the time the authorisation is granted, as well as the projected capital needs over a specified future period.
The ECB assesses capital needs regardless of whether the application is for an initial authorisation, an authorisation in the context of a merger or acquisition, a bridge bank application, or an application from an existing institution to extend the scope of its authorisation.
Since the start of the SSM, the ECB and NCAs have been working closely together on joint practices and policies. This cooperation aims to ensure that all licence applications are treated in the same manner across the entire euro area, right from the very beginning of the process of interaction with each applicant.
When authorising bank licences, the ECB applies all relevant EU law and the national laws implementing the CRD IV that contain the licensing requirements. Nevertheless, national laws may have transposed the minimum EU legal requirements differently, which may lead to some differences across the euro area countries – most notably regarding the minimum amount of initial capital required. To achieve a harmonised SSM approach, the ECB uses the leeway of the national discretions as provided by the laws of the participating Member States, which, as a consequence, diminishes the differences.
Main topics include the business model and associated risk profile, the situation of the credit institution within the economic context and the business environment, its financial projections, the clarity and effectiveness of its organisational structure, its governance arrangements, the internal control and risk management framework and its IT infrastructure. In order to test the assumptions that form the basis of the business plan, supervisors can challenge the information provided.
No. The guidance provided in the Licensing Guide and also in Part 2 addresses applications for new authorisations or extensions. Thus, it will not lead to the reassessment of authorisations already granted. The compliance of authorised banks with the requirements detailed in the guides is monitored on an ongoing basis by supervisors.
Banks relocating to the euro area will be required to show that they comply with relevant EU and national laws, as well as with all supervisory standards. In the context of Brexit, the general requirements and the well-established common procedures process remain unaltered. In many cases, the relocation will require a licence to be granted and/or another type of supervisory decision. Banks that relocate are expected, among other things, to conduct real operational activity, have sufficient staff, be operationally independent and implement adequate local risk management. Of course, special attention will also be paid to how banks plan to transfer their activities to the euro area and how they ensure that their progress in building up local capabilities keeps pace with the transfer process. Again, each application will be processed in accordance with the existing authorisation procedure. No specific procedure has been established for banks relocating as a result of Brexit. For Brexit-related questions, please also consult the dedicated pages on the ECB’s Banking Supervision website.