Harmonising options and discretions within the euro area
One of the key projects since the establishment of European banking supervision has been the harmonisation of the rules on options and discretions (O&Ds) available in Union law. The current regulatory framework, comprising the Capital Requirements Directive (known as CRD IV), the Capital Requirements Regulation (CRR) and the Commission Delegated Regulation on the Liquidity Coverage Ratio, contains a number of O&Ds which give leeway to the supervisor in applying the rules. Some O&Ds have to be applied in a general manner while others are applied following a case-by-case assessment of the specific situation and characteristics of the bank concerned.
On top of creating an uneven playing field, the existence of a high number of such provisions adds a layer of regulatory complexity, further increases compliance costs and leaves ample room for regulatory arbitrage. Additionally, while some of these differences should gradually diminish over the coming years as transitional arrangements are phased out, a large number of O&Ds are of a permanent nature, leaving considerable divergences in place.
For these reasons, the ECB began work on harmonising the O&Ds as early as the preparatory stages for the creation of the Single Supervisory Mechanism (SSM). The relevance of this work was confirmed by the comprehensive assessment, as this showed very significant differences in the way O&Ds were exercised across the euro area, in particular regarding the use of the transitional CRR/CRD IV provisions for the computation of CET1 capital. These differences had a material impact on the level playing field.
For significant institutions (SIs) under direct ECB supervision the harmonisation of O&Ds was concluded in March 2016, when the regulation and guide on options and discretions were published.
To ensure a level playing field as well as the further and consistent application of high supervisory standards across the euro area, the ECB decided to also harmonise the exercise of O&Ds for the smaller banks that are supervised by national competent authorities (NCAs) under the ECB’s oversight. Given the diverse landscape of these less significant institutions (LSIs), the principle of proportionality has been key in assessing the best way to apply the O&D policy to this group of banks. In close cooperation with the national supervisors, the ECB has assessed whether identical policy recommendations should be applied to LSIs for consistency reasons, or whether a specific approach is warranted due to differences between significant and less significant banks.
In the majority of cases, the policy proposals for LSIs are the same as those adopted for SIs. This is the case, in particular, for O&Ds that constitute basic rules on capital instruments or the calculation of own funds and liquidity requirements. Nevertheless, for certain O&Ds the intention is to apply an approach for LSI supervision that deviates from the policy stance developed for SIs due to the application of the principle of proportionality. One example is the possibility of combining the risk and audit committee. In other cases, NCAs are able to take a flexible approach to the application of some O&Ds, where no harmonisation is required to ensure the robustness of supervision or to attain a level playing field.
Given the relevance and potential impact of the policy choices on O&Ds for LSIs, the ECB held a public consultation, similar to what had been done for the SIs, on a draft guideline and recommendation specifying how NCAs should exercise the O&Ds for these banks. The consultation gave LSIs and other stakeholders sufficient time to assess the policy proposal and provide their feedback. The final guideline and recommendation were published on 13 April 2017.
The NCAs should apply the recommendation from the date of its adoption and comply with the guideline as of 1 January 2018. In its oversight function, the ECB will follow the implementation of the agreed O&D policies by the NCAs.
The completion of this work is a major achievement towards consistent supervision and greater harmonisation and means that considerable divergences in the national application of options and discretions have been overcome.
However, O&Ds remain in the CRR/CRD IV which are exercised through national legislation as opposed to those which are in the hands of supervisors. Legislative action by policy makers is needed to reduce these remaining O&Ds.