CEBS – Role, Programme and Challenges José María Roldán | 23 May 2005

Outline Introduction What is CEBS? Work Programme Consultation process Basel II and CEBS Four challenges What is CEBS? Role and tasks Lamfalussy framework Work Programme Supervisory Disclosure Supervisory Review Process (Pillar II) Reporting requirements Supervision of cross-border groups Consultation process Future work CEBS | May 2005

Introduction Basel II and CEBS The new paradigm: risk-focused supervision A window of opportunity for convergence in supervisory practices in the EU: the role of CEBS Implementation of Basel and the Capital Requirements Directive Four main challenges in EU implementation Consistency Convergence in supervisory practices Streamlining the supervisory process for cross-border groups Effective consultations CEBS | May 2005

CEBS - Role and tasks Established in Nov 2003, the first meeting Jan 2004 High level representatives from the banking supervisory authorities and central banks of the European Union, including the European Central Bank 25 countries and 46 member organisations, observers from EEA* countries, the European Commission and the Banking Supervision Committee of ESCB (European System for Central Banks) Chairman Vice Chair Secretary General José María Roldán Danièle Nouy Andrea Enria Banco de España Commission de Bancaire Banca d’Italia * Iceland, Liechtenstein and Norway CEBS | May 2005

CEBS - Role and tasks to advise the European Commission on banking policy issues, in particular for the preparation of draft measures for the implementation of European legislation to foster a common day to day implementation and application of Community legislation by issuing guidelines, recommendations and standards to promote supervisory co-operation and provide for the exchange of supervisory information CEBS | May 2005

Enforcement Commission Lamfalussy framework EBC¹ Commission Parliament EIOPC¹ ESC¹ FCC¹ Enforcement Commission Council CEIOPS³ CESR³ L1 L2 L3 L4 CEBS² Legislation Implementing details Convergence EBC = European Banking Committee EIOPC = European Insurance and Occupational Pensions Committee ESC = European Securities Committee FCC = Financial Conglomerates Committee CEIOPS = Committee of European Insurance and Occupational Pensions Supervisors CESR = Committee of European Securities Regulators ¹ Finance ministries ² Supervisors and Central Banks ³ Supervisors CEBS | May 2005

Accountability CEBS² CEIOPS3 CESR3 ECOFIN Council European Commission EBC¹ CEBS² CEIOPS3 CESR3 ¹Finance ministries ²Supervisors and Central Banks ³Supervisors ECOFIN Council EBC European Banking Committee EFC Economic and Financial Committee FSC Financial Services Committee FST Financial Stability Table CEIOPS Committee of European Insurance and Occupational Pensions Supervisors CESR Committee of European Securities Regulators European Commission Parliament FSC¹ European Central Bank (ECB) EFC-FST¹ Economic and Monetary Affairs Committee (ECON) Banking Supervision Committee (BSC) Level-3 coordination Advice/ accountability Cooperation CEBS | May 2005

Work Programme Priority areas of work Other areas of work Regulatory advice to the Commission Cross-border mergers in banking Deposit guarantee schemes Own funds E-money Convergence of supervisory practice Supervisory Review Process (Pillar 2) Validation of IRB and AMA systems External Credit Assessment Institutions (ECAIs) Harmonisation of reporting requirements Supervisory disclosure Co-operation and information exchange Supervision of cross-border groups (home-host) Crisis management (joint with the BSC) Information exchange Other areas of work Risks to banking stability Outsourcing Internal governance Impact of IFRS on prudential requirements The role of the audit function for prudential supervision Cross-sectoral issues: Supervision of financial conglomerates Off-shore financial centres Delivered products Advice: national discretions (work continues), prudential filters Consultation papers: consultation practices, outsourcing, supervisory review process, common reporting, supervisory disclosure, financial reporting. CEBS | May 2005

Expert groups CEBS | May 2005

The first challenge Consistent implementation The issue CEBS response: Complex framework: risk of differences in national implementation Additional layers of regulation at the national level (“gold-plating”) National discretions Lack of visibility for the common EU rules and practices CEBS response: Allowing for meaningful comparisons of national implementation: the draft guidelines on supervisory disclosure Reducing the scope for national discretions, also in relation to their expected impact CEBS | May 2005

Supervisory Disclosure Supervisors are required to publish (CRD Art. 144): Rules and guidance How options and national discretions are exercised Supervisory review and evaluation Statistical data on national banking sectors Easy access and meaningful comparison  peer group pressure Internet access via CEBS website www.c-ebs.org Links to national websites Comparable information Common language - English CEBS | May 2005

Supervisory Disclosure CEBS | May 2005

Supervisory Disclosure CEBS | May 2005

National Discretions Open question: The advice to the Commission: cutting down on numbers The dialogue with the industry: identifying high impact discretions and options The work on supervisory convergence Discipline via supervisory disclosure Open question: Effectiveness of market pressure and soft tools CEBS | May 2005

The second challenge Convergence in practices The issue CEBS response: Potentially different approaches to the supervisory review process (Pillar 2) Very technical aspects of the new framework: possibility of different criteria being used in supervisory assessment of internal measures of risk Compliance burden for cross-border groups, especially in relation to supervisory reporting CEBS response: Guidelines for the supervisory review process Common quantitative and qualitative criteria for the validation of internal approaches for credit and operational risk Common reporting requirements CEBS | May 2005

Supervisory Review Process Objectives of Pillar 2 are to: Ensure institutions have adequate capital to support all risks in their business Encourage institutions to manage risk Foster an active dialogue between institutions and supervisors Covers the relationship between: Supervisor’s SREP (the Supervisory Review and Evaluation Process); and Institution’ ICAAP (the Internal Capital Adequacy Assessment Process). CEBS | May 2005

Supervisory Review Process First consultation paper: ICAAP the responsibility of the institution Dialogue between the institution and the supervisory authority in the ICAAP/SREP process Proportionality Second consultation paper Interaction between ICAAP and SREP Internal governance Guidance for small institutions Further work on specific issues (concentration risk, stress testing, interest rate risk in the banking book) CEBS | May 2005

Supervisory Review Process CEBS | May 2005

Validation Validation Development of quantitative and qualitative requirements for discrimination and calibration of rating systems, estimates of PDs, LGDs, EADs and AMA parameters. Minimum standards for the review of the methodologies applied by credit institutions and investment firms. CEBS | May 2005

Reporting requirements Common reporting of the solvency ratio and financial data Common templates and technology platform, to achieve: Level playing field Less administrative burden for cross-border groups (while limiting the burden for small, local banks) Easier exchanges of information between supervisors Open questions: Degree of detail in CEBS’ guidelines: how to strike the right balance? Overall reporting burden CEBS | May 2005

The third challenge Streamlining the supervisory process The issue Misalignment between legal and operational structure of cross-border groups Possible impact on compliance costs, if supervisory controls are duplicated or even conflicting Role of the consolidating supervisor in the proposed CRD CEBS response: Enhanced co-operation and exchange of information between home and host authorities Clear ex ante agreements on the division of labour and interaction between the authorities involved in the supervision of a group (notion of significance) Guidance on the approval process for validation of IRB and AMA Road testing CEBS | May 2005

Streamlining the supervisory process Open questions: Delegation of tasks/responsibilities Conflicting views (e.g., significance, distribution of capital) Crisis management CEBS | May 2005

The fourth challenge: effective consultation Consultation with the industry, market participants and end-users Objectives: transparency, benefit from expertise of market participants and end-users, dialogue and interaction Tools: public consultation on CEBS products, Consultative panel Consultative Panel composed of 19 members with main task of acting as a sounding board in strategic issues The industry, market participants and end-users CEBS Standards, guidelines and recommendations CEBS | May 2005

Consultative Panel • Expresses views on CEBS’ work programme; • Comments on the way in which CEBS is exercising its role and, in particular, on the adequacy of consultation with market actors, consumers and end-users; • Assists CEBS in setting priorities; • Alerts CEBS to regulatory inconsistencies in the Single Market and suggests areas for Level-3 work; • Informs CEBS on major financial market developments. CEBS | May 2005

Next steps on consistent implementation and convergence of practices: Future Work Next steps on consistent implementation and convergence of practices: Compendium or guidebook of standards, guidelines, advice and other work of CEBS For supervisors and market participants Flexible, internet based structure, easy to update Consistent terminology, definitions Common European approach and “supervisory culture” CEBS | May 2005

Question time Any questions? Thank you! CEBS | May 2005

Contact details: José María Roldán : josemaria.roldan@c-ebs.org