Public hearing on "Updating CRR, CRD, BRRD and SRMR: the new banking legislation package" in the ECON Committee of the European Parliament
Introductory statement by Danièle Nouy, Chair of the Supervisory Board of the ECB, Brussels, 25 April 2017
It is a pleasure to participate in this hearing on the “banking legislation package”.
At the ECB, we consider the proposal to amend the CRD, CRR, BRRD and SRM Regulation timely and necessary.
It is extremely important that we continue on our path of having a strong EU regulation which responds to international regulatory developments, but also takes into account recent progress made in EU financial integration.
Key issues of the banking legislation package from the supervisory perspective
From our supervisory perspective, we welcome, first, the timely proposal to implement a series of international supervisory standards, which will increase the resilience of EU institutions. These standards include the net stable funding ratio, the Fundamental review of the trading book and the leverage ratio.
Second, we also broadly welcome the changes introduced in the resolution framework. The implementation in EU law of the Financial Stability Board standard for total loss-absorbing capacity (TLAC) and the revision of the MREL framework is one important further step in minimising the need for public financial support in the event of an institution experiencing financial problems. In principle, we deem it appropriate to limit the scope of TLAC to global systemically important institutions (G-SIIs), for which the standard was designed and calibrated.
Third, we also welcome the introduction of a harmonised category of non-preferred senior debt, which provides an additional means for institutions to comply with the forthcoming TLAC and MREL requirements. We are of the view that this reform should be adopted as soon as possible to give clarity to credit institutions as they prepare for the new requirements.
Furthermore, we think that, in addition to the current proposal, a general depositor preference based on a tiered approach should be introduced. This would enhance the implementation of the bail-in tool in resolution because the resolution authority will be able to bail in other senior debt instruments prior to deposits, while minimising the risk of compensation claims under the “no creditor worse off” principle. Such depositor preference would then foster more effective resolution action.
We also appreciate the provisions which will facilitate a closer prudential supervision of financial holding companies and of significant third country banking groups located in the EU. For the latter, the requirement to establish an EU parent company will ensure an appropriate supervisory overview and also lead to smoother resolution processes. There are however a few modifications needed to minimise the potential for supervisory arbitrage and fragmentation. This includes the need for the EU parent company only to be set up as a (mixed) financial holding company or a credit institution, as well as to include large third country branches.
Finally we support the proposal to grant capital waivers within a banking group on an EU cross-border basis, and not only locally, as is the case now. This will allow a more efficient management of capital across the EU. We are convinced that the banking union and progress made in financial integration allow the granting of these waivers inside the SSM without creating additional risk to financial stability.
Having said that, we also consider there are still seven areas where there is room for substantial improvement in the proposal.
First, it is important to ensure that supervisors have the necessary tools and reporting powers to perform their tasks and address idiosyncratic risks of institutions. Not all situations can be foreseen in legislation and not all risks can be measured in Pillar 1. Therefore, supervisors need to keep an adequate degree of supervisory judgement to preserve risk-based and institution-specific supervision through Pillar 2, and their ability to act swiftly when needed to ensure the soundness of the EU banking sector.
- Against this background, the proposed legislation on Pillar 2, while rightly seeking to further supervisory convergence, seeks to put a frame around supervisory actions that is much too tight in essential aspects.
- By framing supervisors’ assessment of Pillar 2 risks through regulatory technical standards and restricting their ability to collect ad hoc reporting, the proposals risk creating a one-size-fits-all approach where supervisors can no longer adequately differentiate evolving risks, thereby harming the strongest, safest banks more than the riskiest ones.
- It would also be necessary to ensure that the supervisors can set Pillar 2 capital add-on fully in CET1 as this form of capital has proven to be the most loss-absorbent in going concern. Moreover, we have experienced significant supervisory issues with Additional Tier 1 instruments, more fit for gone concern purposes.
Second, the proposal does not provide an adequate harmonisation of certain key supervisory tools at the EU level. These are mainly those powers needed to make certain deductions in capital in order to prudently address risks which are not fully covered by the accounting rules. This is, for example, the case for non-performing loans (NPLs) where our current tools will not prevent the development of new NPLs.
Third, some of the proposed deviations from internationally agreed standards, such as the net stable funding ratio, the leverage ratio or the Fundamental review of the trading book, deserve further analysis:
- Insofar as these deviations just respond to the need to adapt global rules to EU specificities and do not compromise the objective of prudent rules, there could be room for them. This is the case, for example, for many of the provisions aiming at providing a simpler framework for small EU credit institutions.
- However, some of the deviations from global standards should be more thoroughly assessed to ensure that they do not leave institutions more exposed to risks or compromise banks’ comparability.
Fourth, even though further steps towards more proportionality are welcome for smaller, simpler and less risky banks, we are not in favour of the proposed reduction of the frequency of regulatory reporting by small institutions.
- The regulatory reports are very relevant, as they are among the most important sources of information for the ongoing supervision of smaller institutions. Instead of reducing the frequency of regulatory reporting, an amendment of the level of granularity of reporting for smaller institutions could be considered.
Fifth, the proposal in our view is insufficiently ambitious in respect of further harmonising the EU prudential framework. We think that much more progress could have been achieved in harmonising national options and discretions, but there is still a chance to do so during the negotiations. Furthermore there are a number of national supervisory powers which we need access to in all participating Member States to ensure a level playing field.
- It is indeed crucial to attain a level playing field in the EU banking sector. Supervising banks subject to 19 different legal frameworks makes our job more difficult, increases the cost of supervision and constrains further European financial integration.
- A solution could be for the legislator to put the remaining ONDs in the hands of the national competent authorities, hence the SSM for the euro area. This should be done in the regulation part of the CRR/CRD4 to make it directly applicable by the SSM. Otherwise, the 19 different frameworks would prevail, with the result the SSM could not move towards the single rule book.
Sixth, it is important that the legislators agree fairly soon on the transitional measures for the capital impact relating to IFRS 9. The accounting rules enter into force on 1 January 2018 and we as supervisors are powerless to act if there is no legislation ready. However, it is important that the mechanism should be simple in nature, also for the market to understand. The phasing-in should only be for the initial CET1 capital reduction, i.e. for this static amount only.
Finally, we would favour a clarification of the early intervention measures available to the supervisors under the BRRD as well as their introduction in a directly applicable regulation in order to ensure that the toolkit available to supervisors is effective and fully usable in practice.
Let me conclude: I welcome the Commission’s initiative to revisit the prudential framework via its proposal for the review of CRD, CRR and the BRRD/SRMR.
The proposals contain many positive elements that could further enhance financial sector resilience and promote financial integration within the EU.
However, there still remains some room for further improvement. Our revised regulatory framework should aim to fully implement international standards and best practices, as well as further harmonise prudential rules at the EU level to create a completely level playing field.
To this effect, it is also necessary to ensure that supervisors have all the necessary tools and powers as well as the right degree of flexibility to be able to perform their tasks and act swiftly when needed.