Freshfields Bruckhaus Deringer LLP Banking union – what will it mean for Europe? Presentation by Michael Raffan, Alexander Glos and Philippe Goutay 5 February 2013

1 Agenda Overview of the proposals Implications for banks in the Eurozone Implications for banks in non-participating Member States Interaction with the EBA

2 Overview of the proposals “First step towards the creation of a European banking union” A single supervisory mechanism (SSM) permitting the European Central Bank (ECB) to be the prudential supervisor of all banks within relevant Member States Pre-requisite for a direct bank recapitalisation through the European Stability Mechanism (ESM) Underpinned by a single rulebook for financial services based on directly applicable EU Regulations (CRR, EMIR, MiFIR, MAR, SSR) rather than Directives Timing: ECB to assume tasks “on 1 March 2014 or 12 months after the entry into force of this Regulation” Best estimate: Summer 2014 Next steps in banking union Following on from the Recovery and Resolution Directive for banks (plenary date June 2013) – a common resolution authority and resolution fund (Regulation planned for final quarter of 2013) Common deposit guarantee scheme – more problematic

3 Overview of the proposals Legislative basis Regulation conferring specific tasks on the ECB –unanimous agreement by Council and technically not subject to usual trilogue process but Parliament may create difficulties if it does not have an opportunity to give its views Regulation amending the Regulation creating the European Banking Authority (EBA) – currently subject to trilogue process, agreement due March 2013 once voting modalities in the EBA are agreed Political implications 17 Euro area states plus 7 additional states currently propose to join the SSM UK, Sweden and Czech Republic have stated intention to remain outside the SSM Influence of the City – EBA voting modalities will be key Two tier banking union within the EU Benefit of Eurozone stability

4 Implications for banks in the Eurozone: overview ECB will be the prudential regulator for ALL banks based in: Member States where the euro is the currency (17 Member States) Other Member States which choose to participate in the SSM via “close cooperation” (currently 7 Member States) ECB has oversight for all banks, but will only actively fully supervise “significant banks” SSM will consist of ECB and national competent authorities National regulators to retain limited powers even for significant banks Anti money laundering/counter terrorist financing functions, payment services, MiFID functions, day-to-day verification services, consumer protection Supervision of domestic banks (which are not credit institutions under EU law) and branches of non-EU banks

5 Implications for banks in the Eurozone: 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 BUT no provision for the supervision of national competent authorities to be revoked ECB will adopt a Decision in the OJ in respect of the close cooperation and Decision applies 14 days after publication Ended by Member State at any time 3 years after Decision publication ECB adopts a further Decision immediately (published in the OJ) 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

6 Implications for banks in the Eurozone: significant banks Some banks deemed more significant assessed on: Quantitative criteria: Total value of assets exceeds euro 30 billion, or Ratio of its total assets over the GDP of the participating Member State exceeds 20%, unless total of assets is < euro 5 billion, 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

7 Implications for banks in the Eurozone: supervision of significant banks ECB supervisory tasks relation to all significant credit institutions established in participating Member States Authorisation/withdrawal of authorisation of banks – national competent authorities to submit decisions to ECB for approval Assessment of applications for the acquisition and disposal of qualifying holdings in credit institutions – national competent authorities to submit decisions 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

8 Implications for banks in the Eurozone: supervision of significant banks (cond.) Carrying out of stress tests Consolidated supervision over parents 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 Oversight of bank branches from non-participating Member States in accordance with EU law

9 Implications for banks in the Eurozone: 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 for: - authorisations/withdrawal of authorisations -assessment of applications for qualifying holdings Unclear: - supplementary supervision of financial conglomerates (most likely drafting error)

10 Implications for banks in the Eurozone: supervision of less significant banks (cond.) 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 authorities to report to ECB on a regular basis on their supervision of less significant banks

11 Implications for banks in the Eurozone: legal framework EU law EU Regulations – directly applicable EU Directives – ECB to apply the national law transposing those Directives – so ECB has to apply 24 different national interpretations of the same Directive in the relevant national languages Competence of national courts over ECB actions when applying national law? ECB may issue guidelines, recommendations and decisions 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 (if a substantial impact)

12 Implications for banks in the Eurozone: 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 with third country supervisors and international organisations without duplicating the international role of the EBA

13 Implications for banks in the Eurozone: 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% 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 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)

14 Implications for banks in the Eurozone: ECB organisation ECB will be accountable to European Parliament and the Council Yearly reports to European Parliament, Council, Commission, the Eurogroup and national parliaments of participating Member States National parliaments may: -address reasoned observations on the reports and request the ECB to reply in writing to any observations or questions submitted -invite the ECB chair or a Supervisory Board member to participate in an exchange of views in relation to the supervision of a bank in that Member State Supervisory board consisting of: ECB Chair and Vice Chair Four representatives of the ECB (not involved with monetary policy functions) One representative of national competent authority for each participating Member State Separate monetary policy function – separate meetings/agenda of the Governing Council and the Supervisory Board. staff organisationally separate and subject to separate reporting lines

15 Implications for banks in the Eurozone: ECB funding No impact on the EU budget, since the ECB budget is not part of this Financing of ECB supervision by means of annual supervisory fees charged to the relevant credit institutions Fees must be based on objective criteria and be in proportion to the importance and risk profile of the bank, including its risk-weighted assets Set at the highest level of consolidation within participating Member States Open public consultation before criteria defined ECB to communicate with national competent authorities to ensure cost- effectiveness and reasonableness of fees National authorities can continue to charge fees in addition to ECB For non-ECB supervisory activities and for costs of “cooperating with and assisting the ECB and acting on its instructions” Will this dual fee regime cost more?

16 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 European Parliament Committee’s view (3/12/12) “..the ECB should be required to ensure that it performs its supervisory tasks in a manner that is non-discriminatory and is consistent with the proper functioning of the internal market.” Banks established in non-participating Member States with branches in participating Member States Annual supervisory fee payable to cover expenditure by the ECB

17 Interaction with the EBA ECB will participate in the Board of Supervisors on behalf of the participating Member States Voting within the EBA is the key political issue Current position: a double majority system for adoption of decisions proposed by the independent panel (breaches of Union law/settlement of disagreements) and for decisions adopted by qualified majority voting (technical standards) Double majority: a simple majority of members from participating Member States AND a simple majority of members from non-participating Member States Voting deal may be reviewed if fewer than 4 Member States stay outside banking union European Parliament Committee report (3/12/12): “concerns such as governance and voting arrangements in the EBA should be considered carefully and equal treatment of Member States participating in the SSM and other Member States must be guaranteed.”

18 [Document number] This material is for general information only and is not intended to provide legal advice. © Freshfields Bruckhaus Deringer LLP 2012