1. CEBS Update: Challenges in Implementing the CRD and the CEBS Guidelines Risk Capital 2006, Paris Danièle Nouy | 4 July 2006

2. 2 Outline CEBS – role and structure Work programme – from design to practice Challenges in EU banking supervision CEBS responses: –guidelines/operational networking Additional tools Conclusions

3. Danièle Nouy | 4 July 2006 3 CEBS role Main tasks: Give advice to the Commission Promote consistent implementation and application of EU legislation Exchange information and enhance convergence of supervisory practices Objectives: Promote cross-border supervisory co-operation and the safety and soundness of the EU financial system through: good supervisory practices efficient and cost-effective approaches to supervision of cross-border groups effective regulation level playing field and proportionality

4. Danièle Nouy | 4 July 2006 4 CEBS operational structure CEBS 2006 Chair Danièle Nouy Commission Bancaire Vice Chair Helmut Bauer BaFin Bureau Andreas Ittner Oesterreichische Nationalbank Kerstin af Jochnick Finansinspektion Andrzej Reich Narodowy Bank Polski Secretariat Secretary General Andrea Enria Banca dItalia Groupe de Contact Chair Fernand Naert CBFA (Belgium) Capital Requirements Chair Clive Briault FSA (UK) Financial Information Chair Arnoud Vossen De Nederlandsche Bank

5. Danièle Nouy | 4 July 2006 5 Work Programme Priority areas of work Regulatory advice –Own funds, large exposures, commodity firms Convergence of supervisory practices –Supervisory Review Process (Pillar 2) –Validation of IRB and AMA systems –External Credit Assessment Institutions (ECAIs) –Reporting frameworks –Supervisory disclosure Co-operation and information exchange –Supervision of cross-border groups (operational networking) –Crisis management (with the BSC) –Information exchange Cross-sectoral issues –Supervision of financial conglomerates (with CEIOPS) –Off-shore financial centres –Anti money laundering and terrorist financing –Outsourcing –Internal governance Other areas of work Monitoring and self-assessment Risks to banking stability The role of the audit function for prudential supervision Impact of IFRS on prudential requirements Ongoing monitoring of IASB work

6. Danièle Nouy | 4 July 2006 6 Challenges in supervision 1) Divergences in implementation Options and national discretions Additional layers of national rules (goldplating) Different interpretations and practices (e.g. in models approval) 2) Cost-efficiency of the EU-system E.g. reporting requirements 3) Supervision of cross-border groups Misalignment between legal and operational structures in banking groups

7. Danièle Nouy | 4 July 2006 7 Challenges in supervision 1) Divergences in implementation Options and national discretions Additional layers of national rules (goldplating) Different interpretations and practices (e.g. in models approval) 2) Cost-efficiency of the EU-system E.g. reporting requirements 3) Supervision of cross-border groups Misalignment between legal and operational structures in banking groups

8. Danièle Nouy | 4 July 2006 8 CEBS responses1 1)Divergences in implementation: CEBS guidelines covering the CRD (Basel II): –Structured use of supervisory judgment: Supervisory Review Process (Pillar 2) –Validation of advanced approaches for credit and operational risk (high level principles not enough to achieve convergence) CEBS and Commissions initiative on CRD Transposition and CEBS query systems http://www.c-ebs.org/crdtg.htm Supervisory disclosure: transparency of possible inconsistencies and tool for peer and market pressure http://www.c-ebs.org/SD/SDTF.htm

9. Danièle Nouy | 4 July 2006 9 Supervisory Review Process Objectives: Ensure institutions have adequate capital to support all risks in their business Encourage institutions to manage risk and hold capital above Pillar 1 minimum requirements Basel II Minimum Capital Requirements Regulatory view Supervisory review and evaluation (SREP) + Institutions internal view (ICAAP) Market discipline Market view Credit risk Market risk Operational risk Supervisory judgment Disclosure requirements Banks and investment firms Pillar 1 Pillar 2 Pillar 3

10. Danièle Nouy | 4 July 2006 10 Supervisory review process Foster active dialogue between institutions and supervisors -Supervisory Review and Evaluation Process (SREP) -Internal Capital Adequacy Assessment Process (ICAAP) Proportionality: -For large and complex institutions in-depth and tailor- made -For smaller institutions likely to be quite standardised CEBS seminars and training to foster convergence

11. Danièle Nouy | 4 July 2006 11 Guidelines on validation A common understanding of the supervisory authorities on how to deal with IRB or AMA applications Tight calendar: need for common approaches allowing both institutions and their supervisors to make appropriate preparations Extensive involvement of supervisors from all Member States, with different technical subgroups Two rounds of consultations, coupled with informal dialogue with industry experts –Main criticism: too detailed (rules-based vs. principles-based approach), superequivalence, risk of backtracking (vs. level playing field concerns) –Criticism taken seriously and guidelines redrafted

12. Danièle Nouy | 4 July 2006 12 Guidelines on validation Structure – a typical approval process Preliminary contacts Supervisory cooperation Application Supervisors assessment Dialogue and judgement Decision and permission Monitoring of implementation Ongoing review

13. Danièle Nouy | 4 July 2006 13 Supervisory disclosure Article 144 of the CRD requires supervisors to disclose a set of information related to the directive implementation Disclosure framework must provide a comprehensive overview of supervisory rules and guidance and permit meaningful comparisons of the national approaches CEBS believes that a move towards larger transparency will contribute very significantly to consistent implementation and convergence in supervisory practices across the EU Two-tier website solution in English by end 2006

14. Danièle Nouy | 4 July 2006 14 Supervisory disclosure Links to national websites for more detailed information

15. Danièle Nouy | 4 July 2006 15 CEBS responses2 2)Cost-efficiency of the EU-system: Common reporting frameworks for capital requirements and for consolidated financial data: –Common framework and format a significant step towards harmonisation –Still extensive, but benefits for institutions and supervisors –Exploiting the opportunities offered by new technologies: XBRL taxonomies Common recognition process for External Credit Assessment Institutions (ECAI) –Streamlines the process significantly

16. Danièle Nouy | 4 July 2006 16 Standardised reporting frameworks Reporting now… and later… Supervisor 1 Supervisor 3 Supervisor 2 Different templates and definitions Common templates and definitions Several formatsSingle format Different technologiesXML/XBRL recommended Supervisor 1 Supervisor 2 Supervisor 3 XBRL Group A Group B Group C Group A, B, C Common framework XBRL

17. Danièle Nouy | 4 July 2006 17 CEBS responses3 3)Supervision of cross-border groups: CEBS guidelines on home-host cooperation: –Coordinated planning, exchange of information, optimal use of resources (delegation of tasks) –Cooperation in supervisory risk assessment and review Operational networking –A specific substructure to intensify the dialogue between the consolidating and host authorities in the supervision of cross- border groups and to highlight relevant issues to CEBS.

18. Danièle Nouy | 4 July 2006 18 Guidelines on supervisory cooperation The notion of significance and systemic relevance The process of information exchange The respect of the legal allocation of responsibilities Operational networks and delegation of tasks Transparency of the arrangements Proportionality

19. Danièle Nouy | 4 July 2006 19 Guidelines on supervisory cooperation Group Subsidiary Risk identification > Risk assessment > Planning > Supervisory action > Evaluation Consolidating supervisor – supervision of the group Consolidating supervisor coordinates preparation of risk assessment with input from host supervisors Group SREP Agree plan and coordination of supervisory activities Risk identification > Risk assessment > Planning > Supervisory action > Evaluation Host supervisor – supervision of a subsidiary Subsidiary SREP Identify the approach for jointly performing or allocating tasks Agree outcomes from supervisory tasks, data received etc Exchange of information Ongoingdialogue Ongoing dialogue

20. Danièle Nouy | 4 July 2006 20 Operational networking Enhancing day-to-day consistent supervision and cooperation between consolidating and host supervisors of cross-border banking groups –Definition of standards for written arrangements –Ensuring consistency of approaches for different cross-border groups –Conducting bottom-up surveys of market and supervisory practices Focus first on 10-15 largest EU banking groups –Monitoring the implementation of CEBS guidelines –Identifying implementation issues: case studies and surveys –Testing ways of delegating supervisory tasks

21. Danièle Nouy | 4 July 2006 21 Additional tools Training and exchanges of staff –Creating a common supervisory culture and approach Joint inspections – Positive experiences from e.g. Nordic countries Delegation of responsibilities and tasks –Included in the home-host guidelines –Within the EU legal framework Mediation –Open attitude to develop new tools –But specific concerns of banking supervisors (e.g. the role of CEBS vis-à-vis members, crisis situations) –How would it work in banking supervision? Do we need tailor-made arrangements?

22. Danièle Nouy | 4 July 2006 22 Conclusion Current European supervisory system: –No single supervisory interface. But a more coordinated and streamlined supervisory process, and a structured process for convergence through time –Differences across countries not wiped out, but visible so that priorities can be identified and market pressure can work –Nature of Level 3 guidance yet to be fully settled and tested –Consensus vs. best practices dilemma –Effectiveness of the current system will be assessed

23. Danièle Nouy | 4 July 2006 23 Conclusion Banking supervision issues link with broader institutional issues: Cross-sectoral consistency and cooperation Deposit insurance Financial stability tasks and crisis management at the national and EU levels Tax and company laws

24. Contacts: CEBS - http://www.c-ebs.org Danièle Nouy CEBS Chair daniele.nouy @banque-france.frhttp://www.c-ebs.org daniele.nouy @banque-france.fr