Onscreen cover Banking union – the Single Supervisory Mechanism Dr Alexander Glos and Claire Harrop, 12 June 2014

Onscreen slide Agenda Overview of the Single Supervisory Mechanism Implications for banks in the euro area Implications for banks in non-participating Member States 1

Onscreen slide Divider Overview of the Single Supervisory Mechanism

Onscreen slide Overview of the Single Supervisory Mechanism “First step towards the creation of a European banking union” First of the three pillars of the European banking union A single supervisory mechanism (SSM) permitting the European Central Bank (ECB) to be the prudential supervisor of all significant banks within relevant Member States Pre-requisite for a direct bank recapitalisation through the European Stability Mechanism Underpinned by a single rulebook for financial services based on directly applicable EU Regulations (CRR, CRD IV) rather than Directives Next steps in banking union Single Resolution Mechanism (SRM) – Commission’s proposal adopted by European Parliament on 15 April 2014; 26 Member States signed the intergovernmental Agreement on the Single Resolution Fund (SRF) on 21 May 2014 Single Deposit Guarantee Scheme – project for the future Political implications 18 euro area states (including Latvia) currently propose to participate in the SSM No non-participating Member State has requested to join the SSM so far UK, Sweden and Czech Republic intend not to opt in 2

Onscreen slide Overview of the Single Supervisory Mechanism (cont.) Legislative basis SSM Regulation entered into force on 3 November 2013 −Centralises the supervision of significant credit institutions at the ECB SSM Framework Resolution of the ECB took effect on 15 May 2014 – complements the SSM Regulation and is the legal basis for the cooperation within the SSM between ECB and national competent authorities Timing: ECB to assume SSM tasks on 4 November 2014 Next steps for implementation of the SSM ECB Regulation on supervisory fees will enter into force in October 2014 −27 May ECB launched public consultation on draft ECB Regulation to set out how the ECB recovers its expenditures for supervising the euro area banking sector −Expenditure estimate for 2015 at around EUR 260m ECB to publish list of significant banks by 4 September 2014 ECB to draft and approve internal provisions regarding separation of functions and exchange of information in summer

Onscreen slide Divider Implication for banks in the euro area

Onscreen slide Implications for banks in the euro area: overview SSM will consist of ECB and national competent authorities (NCAs) ECB will be the prudential supervisor for ALL credit institutions under EU law based in: Member States where the euro is the currency (18 Member States) Other Member States which choose to participate in the SSM by way of “close cooperation” – opt-in procedure (currently no Member State) ECB has oversight for all banks, but will only actively fully supervise “significant credit institutions” National supervisors (i) to retain limited powers even for significant banks Anti-money laundering/counter-terrorist financing functions, payment services, MiFID functions, consumer protection – NCAs also to continue to apply autonomous supervisory law (e.g. approval of acquisition of non-EU credit institution) (ii) to supervise domestic banks (which are no credit institutions under EU law) and branches of non-EU banks 4

Onscreen slide Implications for banks in the euro area: close cooperation At request of a Member State whose currency is not the euro Notification by relevant Member State to the other Member States, the Commission, the ECB and the EBA containing undertakings: To ensure national competent authority will abide by ECB guidelines/requests Provision of all information required by ECB in respect of relevant banks Member State needs to adopt national legislation to ensure national competent authority will be obliged to adopt any measure requested by the ECB ECB will adopt a Decision in respect of the close cooperation Ended by Member State at any time 3 years after Decision publication ECB adopts a further Decision to terminate the close cooperation (to apply within a maximum of three months) Procedures where Member State disagrees with Supervisory Board decision May be requested again after 3 years from lapse of previous arrangement 5

Onscreen slide Implications for banks in the euro area: significant banks Some banks deemed to be more significant (Significant Supervised Entities) assessed on: Quantitative criteria: Total value of assets exceeds EUR 30bn, or Ratio of its total assets over the GDP of the participating Member State exceeds 20 per cent, unless total of assets is < EUR 5bn, or Top three banks in each participating Member State (in each case subject to “particular circumstances”) Qualitative criteria: Of significant relevance for domestic economy, upon notification by domestic regulator and confirmatory decision by ECB following a comprehensive assessment With banking subsidiaries in more than one participating Member State and significant cross-border assets or liabilities, upon ECB’s own initiative Those for which public financial assistance has been requested or received directly from the EFSF or the ESM 6

Onscreen slide Implications for banks in the euro area: supervision of significant banks ECB supervisory tasks relating to all significant credit institutions established in participating Member States Authorisation of banks: national competent authorities may reject the application for authorisation or may submit a draft decision to ECB to grant the authorisation ECB can withdraw the authorisation of banks on own initiative or adopt draft decision by national competent authority Assessment of applications for the acquisition and disposal of qualifying holdings in credit institutions – national competent authorities to submit draft decision to ECB for approval Ensure compliance with (quantitative) CRD requirements e.g. own funds, securitisation requirements, large exposure limits, liquidity, leverage and reporting/disclosure Imposition of bank specific additional own funds requirements Ensure compliance with (qualitative) CRD requirements, namely that the bank has robust governance arrangements including fitness and propriety of management, adequate risk management and internal controls, oversight of remuneration policies and of the internal capital adequacy assessment process 7

Onscreen slide Implications for banks in the euro area: supervision of significant banks (cont.) Carrying out of stress tests Consolidated supervision over parent companies in a participating Member State and participation in colleges of supervisors (national competent authorities to be “observers”) Supplementary supervision of a financial conglomerate in relation to the credit institutions included within it Carrying out of supervisory tasks in relation to recovery plans and early intervention measures (where explicitly stipulated by EU law and to exclude resolution powers) Branch/cross-border services notifications to other Member States for significant banks Oversight of significant bank branches from non-participating Member States in accordance with EU law 8

Onscreen slide Implications for banks in the euro area: supervision of less significant banks ECB has overall oversight National competent authorities supervise in respect of: Branch establishment/cross-border services Prudential requirements Robust governance arrangements Stress tests Consolidated supervision Supervisory tasks in relation to recovery plans/early intervention ECB to have responsibility in respect of all credit institutions for: Authorisations/withdrawal of authorisations Assessment of applications for the acquisition and disposal of qualifying holdings in credit institutions 9

Onscreen slide Implications for banks in the euro area: supervision of less significant banks (cont.) ECB shall issue regulations, guidelines or general instructions to the national competent authorities regarding the performance of their supervisory tasks ECB may decide to step in and supervise less significant banks directly “where necessary to ensure consistent application of high supervisory standards” ECB can request ad hoc or continuous information from national competent authorities National competent authorities to report to ECB on a regular basis on their supervision of less significant banks 10

Onscreen slide Implications for banks in the euro area: legal framework EU law EU Regulations – directly applicable (incl. national options) EU Directives – ECB to apply the national law transposing those Directives – ECB has to apply 18 different national interpretations of the same Directive Legal Remedies ECB supervisory decision addressed to supervised entity can be challenged before the General Court/CJEU (action for annulment) – CJEU may also assess such decision under national law as far as ECB has applied national law transposing Directives NCA supervisory decision based on an ECB instruction: supervised entity should consider challenging the national act before national courts and the ECB instruction before the General Court −Very likely no competence of national courts over ECB actions when applying national law SSM Regulation accords legislative competences to the ECB – ECB may issue guidelines, recommendations and decisions ECB can only adopt Regulations to the extent necessary to organise or specify the modalities for the carrying out of those tasks and must carry out public consultation and analyse costs/benefits 11

Onscreen slide Implications for banks in the euro area: legal framework (cont.) Most important ECB Regulation: SSM Framework Regulation More detailed legal basis for operation of the SSM than provided for by the SSM Regulation: Rights and obligations of supervised entities and third parties In addition: Organisational and administrative procedure Sanctioning ECB to conduct supervision on a consolidated basis in respect of credit institutions, financial holding companies or mixed financial holding companies that are significant on a consolidated basis Joint Supervisory Teams (JSTs) made up of ECB and NCA members in charge of the supervision of a credit institution JSTs will be the operational core units within the SSM (day-to-day supervision) ECB is in general the main contact point for all requests, notifications or applications relating to ECB tasks Important exception: NCA remains main contact point for information reported by credit institution on a regular basis 12

Onscreen slide Implications for banks in the euro area: ECB powers Power to require all necessary information, conduct investigations and carry out on-site inspections Power to request exchange/secondment of staff from national competent authorities Power to request national authorities to exercise their powers Power to develop contacts and enter into arrangements with third country supervisors, administrations and international organisations Plus all the supervisory powers of national authorities will have under EU law in respect of prudential supervision and imposition of capital buffers 13

Onscreen slide Implications for banks in the euro area: ECB sanctions Power to impose administrative sanctions Intentional or negligent breach of directly applicable EU law (Regulations) in relation to which administrative pecuniary sanctions are available Up to twice the amount of the profits gained/losses avoided due to the breach (if determinable) or up to 10 per cent of the total previous year’s annual turnover (consolidated turnover for groups) Applies to banks, financial holding companies and mixed financial holding companies Does NOT apply to natural persons Sanctions to be published unless this would affect stability of the financial markets Power to require national competent authorities to take action for breach of relevant national legislation (implementing EU Directives) and in other cases not covered by Article 18 (1) SSM Regulation 14

Onscreen slide Implications for banks in the euro area: ECB funding Principles for fees in the SSM Regulation The costs of supervision should be borne by the entities subject to ECB supervision. Note: Branches established in participating Member States by banks established in non- participating Member State Subsidiaries established in non-participating Member States Draft fees regulation Public consultation in process (deadline 11 July 2014) In particular, the regulation will establish the methodology for: Determining the total amount of the annual supervisory fee Calculating the individual amount to be paid per supervised entity or group 15

Onscreen slide Divider Implications for banks in non-participating Member States

Onscreen slide Implications for banks in non-participating Member States Non-participating Member States (e.g. the UK) will need to sign an MoU with the ECB To cover: Branches established in the UK of participating Member State banks Branches of UK banks established in participating Member States Cooperation in emergency situations Recital (30) to the SSM Regulation “The ECB should carry out the tasks conferred on it with a view to ensuring the safety and soundness of credit institutions and the stability of the financial system of the Union as well as of individual participating Member States and the unity and integrity of the internal market, thereby ensuring also the protection of depositors and improving the functioning of the internal market, in accordance with the single rulebook for financial services in the Union. In particular the ECB should duly take into account the principles of equality and non- discrimination.” [emphasis added] 16

Onscreen slide Implications for banks in non-participating Member States: cross-border application Branches (e.g. from London-based bank) In a participating Member State by a bank established in a non-participating Member State (e.g. the UK into SSM country) In a non-participating Member State by a bank established in a participating Member State (e.g. by a euro area bank outwards) Provision of cross-border services Into a participating Member State from a bank established in a non-participating Member State From a bank established in a participating Member State into a non-participating Member State Authorisation – bank in a participating Member State Assessment of acquisitions of qualifying holdings of banks in participating Member States (change in control) 17

Onscreen slide Freshfields Bruckhaus Deringer LLP is a limited liability partnership registered in England and Wales with registered number OC It is authorised and regulated by the Solicitors Regulation Authority. For regulatory information please refer to This material is for general information only and is not intended to provide legal advice. © Freshfields Bruckhaus Deringer LLP 2014 Thank you