Twenty years of (bumpy) progress: harmonising supervisory reporting in the EU
Keynote speech by Andrea Enria, Chair of the Supervisory Board of the ECB, at the ECB Supervisory Reporting Conference 2023
Frankfurt am Main, 26 April 2023
Good morning and welcome to the ECB Supervisory Reporting Conference 2023.
I am particularly happy to introduce this conference because supervisory reporting is a topic that I have a strong personal investment in. I’ve been involved in efforts to harmonise supervisory reporting in the EU for a large part of my professional career.
Today I want to tell you the story of these harmonisation attempts. In one sense it’s a classic EU integration story. A story of friction between national priorities and perspectives on the one hand, and of realising collective gains from pooling sovereignty on the other hand. But it’s also a personal story about my own career and the vision I have been working to achieve, rooted in my belief in EU integration.
The early years: CEBS
It started nearly 20 years ago. When I became Secretary General of the Committee of European Banking Supervisors, CEBS, in 2004, one of the first major tasks on my agenda was an attempt for the EU to produce harmonised reporting for banks, based on the Basel standards.
The vision was bold. As we were moving to implement Basel 2 in Europe through the Capital Requirements Directive, we saw a unique window of opportunity to move to a supervisory reporting setup similar to what they had in the United States. The uniformity and transparency of supervisory reporting support smooth market functioning by promoting investor confidence in the ability to make differentiated investment decisions. In the US system, the Federal Financial Institutions Examination Council (FFIEC) set uniform principles, standards, and report forms used by all financial supervisory authorities. This enabled standardised disclosure of balance sheet and P&L data directly on the authorities’ websites, thus ensuring proper working of market discipline. It also enabled integrated supervision of all entities belonging to the same banking group, even if they were supervised by different authorities within the United States.
We saw the US system as a model that could help us address three issues that we saw as contributing to a fragmented supervisory reporting landscape in the European Union. First, we wanted to tackle the excessive compliance burden for banks operating through different establishments within the Single Market. Cross-border banks had to show compliance with the same requirements across the Union using different reporting templates and IT platforms in different Member States. Second, we wanted to enable a system-wide picture of risks, by allowing supervisors to pool information and compare risks at competing entities supervised by different authorities, also to avoid competition in laxity. And third, we wanted to provide a backbone for a better functioning of the newly established Pillar 3, with disclosures of standardised, comparable information to markets.
We were motivated by the belief that a common financial reporting framework would reduce the reporting burden for credit institutions that operated across borders and would help to promote a level playing field in Europe while lowering barriers to an efficient internal market in financial services.
What did we achieve? CEBS issued guidelines establishing a standardised consolidated financial reporting framework, FINREP, in December 2005, and a common reporting framework for the new solvency ratio for credit institutions and investment firms, COREP, in January 2006.
FINREP was intended to replace existing consolidated financial reporting frameworks when supervisory authorities chose to change the accounting basis for prudential reporting from national generally accepted accounting principles to International Accounting Standards/International Financial Reporting Standards. COREP represented a significant step towards convergence. For the first time, key prudential information was reported in the same manner, using formats and variables with clear common definitions linked directly to the relevant solvency directives.
But the actual outcome remained very far from what we had hoped to achieve.
There was no maximum harmonisation, which would have prevented Member States from imposing additional requirements beyond those defined by the EU legislator.
There was a reluctance on the part of national competent authorities (NCAs) to really move to a common framework. As these guidelines were not legally binding, the use of the framework was not mandatory. Each national supervisor remained free to decide whether and how to apply the framework to the credit institutions under its supervision.
And efforts to adopt a common IT infrastructure based on the XBRL format were not supported by all authorities.
A particularly egregious example of the inadequate progress was the lack of harmonised definition and disclosure of non-performing loans. The consequences of this inability to progress on harmonisation were grave, greatly damaging European banks during the great financial crisis, as investors were unable to distinguish banks that had major asset quality issues from those that did not. So they penalised the whole sector as a result. This continues to be a lesson for us – the ramifications of lack of harmonisation are not theoretical ones.
But the fact was, we did not have a legal basis to implement harmonisation. CEBS was just an international committee and not an authority. We soon understood that without a stronger legal basis it was impossible to make real progress. We needed EU legislation to define maximum harmonisation reporting standards so as to exclude national implementation mechanisms and achieve a truly unified set of legally binding requirements.
Maximum harmonisation: the EBA and CRD IV
The next major development in harmonised reporting mirrored the next step in my professional journey.
The European Banking Authority was established in 2011 to contribute, through the adoption of binding technical standards and guidelines, to the creation of the European Single Rulebook in banking. The EBA is also there to promote the convergence and harmonisation of supervisory practices across the EU.
It was an exciting time of possibility. Coming out of the financial crisis, we were a new authority with new powers, and a new legal framework in the pipeline – the fourth Capital Requirements Directive (CRD IV) and the first Capital Requirements Regulation (CRR) – to enshrine the concept of maximum harmonisation at the core of our regulatory framework. I remember the feeling of optimism I had, as Chairperson of the EBA, when discussing with colleagues the first plans to harmonise supervisory reporting. We carried forward the same bold vision that had been frustrated in the earlier years, with a newfound optimism that it could be achieved.
The CRD IV package was adopted in 2013 and introduced a mandate for the EBA to develop a common reporting framework for all banks in the EU, through implementing technical standards directly binding across all Member States. In 2014, the EBA finalised and rolled out a single set of reporting standards in the form of COREP and FINREP requirements.
This was a major step forward in harmonisation. The EU reporting standards provided fully harmonised information on banks’ own funds and balance sheet data. In practice, this made all banks subject to the same standards for supervisory reporting, to ensure adequate information and coverage for both micro- and macroprudential purposes.
This went hand-in-hand with establishing common definitions, bringing together supervisory, accounting and prudential aspects.
Importantly, the EBA introduced standards on the definitions of non-performing exposures and asset encumbrance. Before the crisis, the lack of a single rulebook made it very difficult to organise supervision of cross-border institutions in a truly coordinated manner and achieve a truly comparable European picture of the health of the banking sector.
This was particularly true for the assessment of credit risk, where the identification of non-performing and forborne loans followed very country-specific and barely comparable definitions. The EBA’s technical standards on non-performing exposures and debt forbearance, finalised in 2014, ensured uniformity across the Single Market for supervisory reporting.
They were also a precondition for carrying out the Single Supervisory Mechanism (SSM) asset quality review on a consistent basis in 2014.
However, despite this real progress, it yet again fell significantly short of our bold vision. True harmonisation was jeopardised by two safety valves for national discretions. This effectively meant national authorities could maintain their own separate reporting frameworks that they found useful, but that had not been included in the harmonised EU framework via COREP and FINREP.
One was the national discretion for Pillar 2 reporting, which made it possible to add reports that were not included in COREP and FINREP. This was due to the fact that the supervisory convergence on Pillar 2 practices was left to guidelines, which allowed room for discretion to NCAs, and was strongly justified on the grounds that to be effective, supervisors had to be able to ask for additional information. Still, this was a carve-out from the maximum harmonisation principle that was supposed to ensure NCAs could only rely on the European reporting templates for regular requests for data.
The second issue was central banking statistics. Maximum harmonisation is valid for banking supervision, but it is of course not meant to constrain data requests necessary for central banking statistics. This provided NCAs with a channel to continue using additional reporting templates to ask banks for information they found useful for supervisory purposes, by relabelling their data requests as driven by monetary policy or macroprudential purposes.
Further harmonisation: the SSM
The banking union gave new impetus to harmonising reporting requirements. When the SSM was set up in 2014, the ECB for the first time started gathering EU-level data from significant institutions established in all Member States participating in the banking union. It became immediately apparent realised that the way data was collected, managed and controlled was totally different in different Member States, creating an unlevel playing field.
That’s why the so-called Task Force on the Harmonisation of the Sequential Approach was initiated – a centrally managed effort to harmonise practices and controls applied to banks’ reports.
This is the backbone of what the sessions of today’s conference are devoted to. So, I won’t go into too much detail on this, as I don’t want to anticipate too much of what my colleagues will tell you later on.
But suffice it to say that this harmonisation has gone some way towards achieving the vision I mentioned earlier, inspired by the FFIEC in the United States. Single supervision, by construction, removed the differences in Pillar 2 processes as a justification for maintaining differences in the reporting templates used by competent authorities.
Today, by harmonising the different practices of the NCAs of Member States participating in the banking union, within the SSM we have effectively created something akin to a central collection point for supervisory data. While the banks still send reports to the NCAs, these are immediately forwarded to us centrally at the ECB. The fact that this is harmonised across NCAs means that, from the banks’ perspective, it should make no difference whether they are sending the reports to the ACPR, Banco de Portugal or the Central Bank of Cyprus.
Limitations to what harmonisation can achieve
It should be clear by now that I am a strong supporter of harmonisation in supervisory reporting.
But before I give the impression that I think harmonisation itself is the be-all and end-all of supervisory reporting, I want to make two points.
The first is the importance of data quality. Even if we were to achieve perfect harmonisation of reporting, it would be meaningless if the quality of inputs remained poor. That’s why we have been asking banks for some years now to focus on improving their risk data aggregation and reporting capabilities, pursuant to the international standards enshrined in BCBS 239 already a decade ago. Today’s conference will feature several presentations on data quality assessment and aggregation. And my colleague Mario Quagliariello will discuss the SSM supervisory priorities, which include risk data aggregation as a key area where we will see to it that banks make concrete progress over the next period.
My second point is that the supervisor needs to maintain the right to collect ad hoc information from banks depending on the urgency of the situation. Recent events underline this point. Following the pandemic, we asked banks to fill in specific templates on loan guarantees, loan moratoria, staff teleworking patterns and other ad hoc variables. These were temporary and are no longer used. Following the recent banking turbulence surrounding Silicon Valley Bank and Signature Bank in the United States, and increased focus on interest rate risk in the banking book, the EBA and the ECB are using the ongoing stress test exercise to collect ad hoc data on unrealised losses on securities held to maturity, including the mitigating impact that hedges have on these.
I would argue that ad hoc data collections need to be possible and should not be seen as breaches of the maximum harmonisation requirements. Supervisors need to focus on specific risks and be able to drill deeper if required. But this ad hoc reporting should remain strictly temporary. To ensure discipline, supervisors should also regularly assess their own usage of data, and if some reporting items or templates are not used that much, they should be removed.
That being said, I left the harmonisation story unfinished. Where do we stand now?
The next frontier: feasibility of an integrated reporting system
I believe we are now in a position to finally achieve a genuine integrated reporting framework. The latest revisions to the Capital Requirements Regulation, CRR2, provided an important legal basis for tackling the shortcoming I explained: that bank reporting is not harmonised between banking supervision and central banking functions. Article 430c of the CRR2 provided a mandate for the EBA to assess the feasibility of developing a consistent and integrated system for collecting statistical, resolution and prudential data, as well as involving the relevant authorities in the preparation of the feasibility study, which was published in 2021. Since then, European authorities have been working together to take forward the report’s roadmap.
All authorities agree on the need to define a common data dictionary for prudential, statistical and resolution data as a key building block for an integrated reporting system. The common data dictionary would be a set of common and standard definitions of reporting requirements that would be used in all data exchanges between all authorities and institutions.
As part of this joint effort to pursue semantic integration within a common data dictionary, authorities are investigating possibilities to increase the granularity of reported data. Semantic integration implies breaking down the data definitions into their granular constituents. This would allow statistical and supervisory concepts to be reconciled and potentially harmonised. Once concepts are defined in a decomposed manner, more granular data on key areas such as credit risk could be reported to contribute to the objective of having banks “report only once”, while allowing supervisors to tailor the metrics they need.
And it has also been agreed to establish the Joint Bank Reporting Committee (JBRC). This is an important governance arrangement that will strengthen cooperation and coordination among authorities to define a common vision. The JBRC will be able to identify opportunities for semantic integration of data from different frameworks, and for the development of the common data dictionary.
But I must say that I also perceive it as a challenge that the integrated reporting framework would operate on two legs. One leg is with the EBA reporting framework, dealing with supervisory and resolution reporting, while the other leg is on the central banking side, seeking full integration of the central banking data. The JBRC would bring both sides together. I believe this project should not lose sight of the goal of having a single data dictionary with a single set of definitions, which is granular enough to cater to both central banking and supervisory needs. Granular reporting could enable easier reconciliation of the main aggregates reported by supervised institutions.
Now, I won’t be involved to see the completion of the integrated reporting framework. My term of office as Chair of the ECB Supervisory Board comes to an end at the end of this year. To some extent, I feel a degree of unfinished business about this. I would have liked it if the bold vision for integrated reporting that we first articulated 20 years ago would have already been achieved by now. And I certainly hope that it will be soon.
But I do see some of the same dynamics at play in the present workstream that I have pointed to throughout the different episodes in the story, which have frustrated efforts to achieve genuine integration. There is reluctance in some quarters to set the level of ambition high enough. And I still perceive resistance from authorities that perhaps remain attached to their ability to request idiosyncratic reports from banks on an ongoing basis, and do not want to give this up. I understand that. But I don’t think it’s the way to go. I believe we are again at a unique moment of opportunity to achieve genuine integration, and we should set the level of ambition as high as possible. And so I encourage you, the ECB and NCA colleagues in this room who are working on this, the bankers present who deal with reporting issues, to keep up the pressure, keep up the momentum, so that this time, truly, we can achieve the vision for integrated reporting that will ultimately benefit the efficiency and stability of the EU financial system.