What are options and discretions? What has the ECB published in relation to their exercise?
The banking law of the European Union (the Capital Requirements Regulation (CRR), Capital Requirements Directive (CRD) and delegated acts) grants supervisors the authority to exercise various options and discretions (O&Ds) when supervising banks. Some O&Ds are of a general nature, meaning that the supervisor sets a policy that applies to all banks under its supervision without an additional specific assessment for each bank. Conversely, other O&Ds apply on a case-by-case basis. This means the supervisor exercises the option or discretion only after a bank-specific assessment, usually following the submission of an application by the bank in question.
In 2016 and 2017 the ECB published a set of policy instruments harmonising how O&Ds are exercised in relation to significant institutions (SIs) and promoting the harmonised exercise of O&Ds by the national competent authorities (NCAs) in relation to less significant institutions (LSIs).
The ECB’s policies are set out in four O&D instruments:
- a Guide containing policy guidance for Joint Supervisory Teams to follow when assessing individual applications by SIs in relation to the exercise of O&Ds applicable on a case-by-case basis;
- an ECB Regulation in which the ECB exercises several O&Ds of a generally applicable nature in relation to SIs;
- an ECB Recommendation addressed to NCAs in respect of the exercise of O&Ds applicable on a case-by-case basis for LSIs or for which a common approach specific to LSIs is warranted;
- an ECB Guideline addressed to NCAs, concerning the exercise of O&Ds of a generally applicable nature in relation to LSIs.
The O&D instruments were reviewed and updated in 2022 to reflect changes introduced by Regulation (EU) 2019/876 (CRR II) and Directive (EU) 2019/878 (CRD V).
The documents subject to the current public consultation further update the policy instruments, mainly to reflect changes introduced by Regulation (EU) 2024/1623 (CRR III) and Directive (EU) 2024/1619 (CRD VI).
The purpose of publishing these documents is to ensure transparency in fostering the harmonisation of supervisory practices and the consistent application of standards of supervision for credit institutions subject to European banking supervision.
What is the ECB consulting on and why?
In this consultation, the ECB is proposing several updates and amendments to the four O&D instruments mentioned in the answer to the first question (above). Most of the changes that the ECB is proposing are needed because of changes to EU banking law introduced since these policy instruments were last updated in 2022. Most notably, CRR III and CRD VI introduced some new O&Ds into the EU legislative framework while amending or removing others. These legislative changes require certain consequential changes to be made to the O&D instruments. In addition, the ECB is proposing to introduce some clarifications and changes to the O&D instruments on the basis of supervisory developments since the instruments were last revised in 2021-22.
What are the new case-by-case O&Ds covered in the O&D Guide?
The proposed revisions to the O&D Guide set out how the ECB intends to assess applications from credit institutions for several types of permissions or derogations available under the revised CRR and CRD. The changes cover several prudential topics, including:
- In the area of prudential consolidation, the factors to be considered in assessing requests to exclude financial holding companies and mixed financial holding companies from the scope of consolidation, under Article 21a(4a) of the CRD.
- In the area of own funds, the calculation of minority interests in the case of subsidiaries in third countries as well as the factors to be considered when assessing if minority interests are available to absorb losses at consolidated level.
- Regarding capital requirements for credit risk, specifications relating to the permission available under Article 133(5) of the CRR to apply a risk weight of 100% to equity exposures subject to legislative provisions.
- In the area of securitisation, the ECB’s approach to significant risk transfer assessments.
- In the area of operational risk, specifications concerning Article 314(3) of the CRR, according to which competent authorities may grant permission to credit institutions to calculate a separate interest, leases and dividends component for specific subsidiaries where certain conditions are met.
- Regarding the revised market risk framework – also known as the Fundamental Review of the Trading Book (FRTB) – expectations in relation to the permission to use alternative definitions of delta and vega risk sensitivities, as well as the internal review of the use of the alternative standardised approach. In the light of the European Commission’s adoption of a delegated regulation deferring the date of application of certain provisions relating to the FRTB by one year to 1 January 2026, some of the proposed revisions to the Guide as regards market risk will only be relevant from that date.
Are you proposing any changes to the Guide in respect of existing case-by-case O&Ds?
The ECB is proposing some changes to its guidance on already existing O&Ds. These include introducing clarifications and modifications to the guidance on institutional protection schemes (IPSs), clarifying that IPS support measures can be part of the IPS member’s recovery options and that the IPS should have sufficient intervention rights if it is required to provide support to a bank, in order to secure its interests.
As regards Article 49(1) of the CRR concerning permission not to deduct holdings of insurance undertakings, given that the European Banking Authority stated in Q&A 2021_5805 that the question of whether the provision is applicable to holdings of all own funds instruments or only to holdings of CET1 instruments is already addressed in Article 49 of the CRR, the ECB proposes clarifying that all own funds-equivalent instruments should be covered by such permissions, not only CET1-equivalent instruments, in line with the text of Article 49(1).
To ensure equal treatment among financial conglomerates, for permissions for non-deduction granted on a national level before 4 November 2014, which limit the non-deduction to CET1-equivalent instruments only, the ECB will ask credit institutions to apply for a permission covering all own funds-equivalent instruments; otherwise, it will consider revoking the existing permissions. The ECB will provide for an appropriate transition period, during which the institutions may continue to apply the current approach.
What are the new general O&Ds covered in the ECB’s O&D Regulation?
It is proposed to amend to the ECB O&D Regulation to exercise in a general manner the option, provided in Article 495e of the CRR, to allow credit institutions to continue using credit assessments provided by external credit assessment institutions in relation to institutions which incorporate assumptions of implicit government support. The ECB proposes allowing the continued use of such credit assessments until 1 July 2026.
Taking this into account, credit institutions are expected to take all the measures and actions necessary to be able to meet the obligation not to use such credit assessments, as specified in Article 138, point (g) of the CRR, from 2 July 2026, in accordance with the ECB O&D Regulation.
Can you explain the use of different legal instruments to harmonise the exercise of options for the purposes of supervising SIs and LSIs, and the criteria considered by the ECB when deciding whether to apply the same SI policies to LSIs?
As regards LSI supervision, the ECB may, as part of its overarching role of oversight over the functioning of the system of European banking supervision (which comprises the ECB and the national banking supervisors of the participating countries), issue guidelines to NCAs on the performance of their supervisory tasks. The ECB made use of this power to harmonise the exercise of generally applicable O&Ds for the purpose of LSI supervision. By contrast, the ECB issued a (non-binding) recommendation to NCAs on the specifications to be applied in their case-by-case assessment of applications received from LSIs in relation to specific O&Ds.
When developing the ECB Recommendation and the ECB Guideline, the ECB was guided by the principle that the same prudential rules should apply for the same risk exposure. At the same time, the ECB paid particular attention to the principle of proportionality, i.e. to what extent a different policy for LSIs may be warranted for the exercise of specific options.
For all of the new O&Ds introduced by CRR III and CRD VI that are covered in this consultation, the ECB expects NCAs to adopt the same approach for LSIs as the ECB adopts for SIs. In addition, it is proposed to amend the ECB Recommendation to specify certain circumstances in which an NCA should re-assess whether an LSI should not be considered a small and non-complex institution in accordance with Article 4(1)(145)(i) of the CRR.