Beyond the horizon of the Slovak Presidency: A central banker’s perspective

Jozef Makúch Governor

Národná banka Slovenska

Visit of Mr Jozef Makúch, Governor of Národná banka Slovenska to Warsaw on 26–27 October 2016 on the occasion of the NBP Biannual EU Presidency Lecture

A. Banking Union

B. Capital Markets Union

C. Anti-money laundering / combating terrorist financing (AML/CTF)

D. Basel III revisions (Basel IV) and CRR/CRD IV review

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Banking Union pillars

A. Banking Union

Single Rulebook

Single Supervisory Mechanism

(SSM)

Single Resolution Mechanism

(SRM)

European Deposit

Insurance Scheme

(EDIS)

Pillar I Pillar II Pillar III

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Pillar I - Single Supervisory Mechanism (SSM)

4 November 2014 – ECB took over supervisory competences

SSM Regulation:

Council Regulation (EU) No 1024/2013 of 15 October 2013 conferring specific tasks on the European Central Bank concerning policies relating to the prudential supervision of credit institutions.

ECB exercises direct supervision over what are known as significant credit institutions (on a consolidated and sub-consolidated basis).

Criteria for significance: Size (total value of assets exceeding EUR 30 billion),

Importance for the economy of the Union or any participating Member State (total assets above 20% of GDP and at least EUR 5 billion; being one of three largest banks established in a Member State),

Recipient of assistance from the European Stability Mechanism

Significance of cross-border activities.

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Distribution of SSM banks

Significant banks

Supervision is conducted by Joint Supervisory Teams, each consisting of the JST coordinator (a staff member of the ECB) and members of the JST (staff members of NCAs and ECB).

Less significant banks

Supervision is conducted by the National Competent Authorities (NBS in Slovakia) and is governed by the ECB’s joint supervisory standards for less significant banks. The ECB monitors the whole process and is empowered to decide on direct supervision.

ECB with NBS NBS

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Pillar I - Single Supervisory Mechanism (SSM)

Belonging to a group designated as significant

Three largest banks in the country

Single Supervisory Mechanism Direct supervision by the ECB

Direct supervision by the ECB – significant banks

• Slovenská sporiteľňa, a.s.

• Všeobecná úverová banka, a.s.

• Tatra banka, a.s.

• Československá obchodná banka, a.s.

• ČSOB stavebná sporiteľňa, a.s.

• Sberbank Slovensko, a.s.

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ECB direct Supervision is conducted by Joint Supervisory Teams

Joint Supervisory Team

Single Supervisory Mechanism Direct supervision by the ECB

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Single Supervisory Mechanism Indirect supervision

Indirect supervision by the ECB – less significant banks Less significant banks in Slovakia – 7 banks and 13 foreign bank branches. Gradual harmonisation and standardisation of banks’ processes and reporting, as well as harmonisation of legal rules (options and national discretions under the CRR, CRD IV) applicable to less significant institutions. ECB - DG III is the directorate general responsible for supervision of less significant banks. “High priority institutions” – list of institutions supervised in greater depth. High priority institutions in Slovakia:

• Poštová banka, a.s. • Prima banka Slovensko, a.s. • OTP banka Slovensko, a.s.

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Single Supervisory Mechanism

Benefits

• Establishment of Joint Supervisory Teams. • Better knowledge of the situation in the whole banking group. • Coordination and harmonisation of the supervision of activities and plans

within the consolidated group. • Harmonisation of joint decisions on capital and liquidity. • Uniform risk assessment methodologies help to increase understanding of

each bank’s overall risk profile. • Significant harmonisation of supervisory procedures and assessments. Challenges • Need for harmonisation of national laws (options and national discretions in

CRR and CRD IV). • Different national laws and supervisory practices in each of the 19 SSM

countries. • Language – working language English, but documents of supervised banks

mostly in local language. • Complex decision-making procedure (proposal by an NCA, decision by the ECB

Supervisory Board, non-objection procedure in the Governing Council).

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Single Supervisory Mechanism

Current situation: 2015 was the SSM’s first full year of operation. Main activities consisted of: • Annual Supervisory Review and Evaluation Process (harmonized decisions

on capital add-ons and liquidity requirements). • Setting-up and adjustments of applicable procedures and Joint Supervisory

Teams. • Further harmonization of legal rules (ECB Regulation 2016/445 on the

exercise of options and discretions available in Union law). • Development of policy methodologies, etc. Further information about the SSM is provided in the 2015 Annual Report: https://www.bankingsupervision.europa.eu/ecb/pub/pdf/ssmar2015.sk.pdf?8a862dc72451bb308afb7b01b43ae97f Main priorities for 2016: • business model and profitability risk, credit risk, capital adequacy, risk

governance and data quality, and liquidity.

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Pillar II - Single Resolution Mechanism (SRM)

The SRM’s legal and institutional background

• 31 December 2014 – the European Parliament approves the Bank

Recovery and Resolution Directive (BRRD) as the legal framework for the EU’s bank resolution regime.

• 15 July 2014 – the European Parliament approves the Single Resolution Mechanism Regulation (SRMR) as the SRM’s institutional framework.

1 January 2015 – Single Resolution Board (SRB) takes over resolution planning

powers from national resolution authorities in the euro area.

1 January 2016 – SRB takes over responsibility for crisis management from

national resolution authorities in the euro area.

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SRM Architecture and phasing in 01/01/2015

• SRB perimeter – Significant Institutions (same as ECB) and cross-border banks

• Board perimeter – Less Significant Institutions (same as NBS), mo coss border banks

• Board cooperates with SRB in the area of resolution planning

• National Resolution Fund in place

01/01/2016

• SRB takes over crisis management from Board

• Board acts as extension of SRB and remains fully responsible for LSIs

• Single Resolution Fund replaces to large extent National Resolution Fund

Pillar I - SSM

Pillar- SRM

European

Central Bank

National Bank

of Slovakia

Single Resolution

Board

(SRB)

Resolution

Board

(Board)

04/11/2014 01/01/2015

01/01/2016

SSM Regulation

CRD IV, CRR

SRM Regulation

BRRD

Symmetrical structure of pillar I and II

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Single Resolution Mechanism

1. Address the “too big to fail” problem

Set minimum requirement for own funds and eligible liabilities (MREL) at reasonable levels – a case in point being deposit-funded systemically important institutions that have a conservative business/funding model and limited access to long-term funding sources.

Access to resolution fund(s) – BRRD condition of 8% of total liabilities and own funds (TLOF) seems overly stringent.

Credible common public backstop to the Single Resolution Fund (SRF) – still pending.

2. Uniform application of the common resolution regime in the banking union

Since different national insolvency regimes could give rise to different resolution outcomes, bank insolvency regimes should be harmonized.

3. Synergy with the SSM

Good cooperation in resolution planning between the SRB and ECB.

Cooperation in Crisis Management remains untested.

4. Ensuring a level playing field and better functioning of internal market

The recently created “patchwork” of national approaches to the subordination of loss absorbing instruments is clearly against this objective.

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SRM objectives and associated challenges

Single Resolution Mechanism

• Scope of application of TLAC.

Should it apply beyond EU globally systematically important banks (G-SIBs)?

• Differences between TLAC and the MREL

eligibility of instruments,

deduction of TLAC holdings,

link with capital buffers.

• Some features of TLAC could make the EU resolution regime more operational and address some of the challenges identified on the previous slide:

concepts of resolution entity, resolution group and internal TLAC,

subordination requirement at least for internal MREL instruments.

Implementation of Total Loss-Absorbing Capacity (TLAC) in the EU – challenges and opportunities

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Single Resolution Mechanism

Pillar III - European Deposit Insurance Scheme (EDIS)

• 24 November 2015 – European Commission (EC) publishes its proposal for the EDIS Regulation • based on The Five Presidents’ Report of 22 June 2015 on Completing

Europe’s Economic and Monetary Union. • 13 January 2016 – the Ad Hoc Working Party on the Strengthening of the

Banking Union is established by the EU Council; it is composed of representatives of all Member States, regardless of whether the Member State intends to participate in EDIS. • The main goal: to prepare the EU Council’s position on the EC proposal

(for the EDIS Regulation). • EC is under pressure from Member States to submit a full impact

assessment of EDIS. • The views of Member States are split: DE, SK + northern Member

States are calling for prioritization of risk reduction measures (e.g. deleveraging of banking sector, common backstop for Single Resolution Fund) before progress on risk sharing (EDIS); southern MSs want faster progress on EDIS.

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European Deposit Insurance Scheme

European Deposit Insurance Fund (DIF)

• administered by the Single Resolution Board (SRB)

• financing of DIF – primarily from ex ante contributions from banks affiliated to a participating deposit guarantee scheme (DGS) + other sources.

Phasing-in of EDIS

- 1. reinsurance phase – three year period; limited coverage, with DIF covering up to 20% of the liquidity shortfall and 20% of the excess loss of the national DGS.

- 2. co-insurance phase – four year period; DIF funding of national DGS liquidity needs and losses to increase each year by 20% until it reaches 80%.

- 3. full insurance phase - 100% coverage of DGS liquidity needs and losses.

• national DGSs remain in force - mutual cooperation with EDIS.

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European Deposit Insurance Scheme

Other controversial issues in the EDIS proposal

• DIF financing to be provided only with SRB approval. If the SRB does not approve financing, the DGS may ask for a review of the decision, and that review would be carried out by the SRB.

• The EDIS Regulation should enter into force in 2017; this seems premature, coming before Member States’ transposition of the Deposit Guarantee Scheme Directive (DGSD) and the DGSD’s application in practice have been evaluated (the EC is due to report to the European Parliament in 2019 on the functioning of national DGSs).

• The absence of a detailed process of mutual cooperation between the SRB and national DGSs (as regards, for example, the part not to be covered by EDIS).

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Key activities in Q2/2016:

Prospectus Regulation (concerning prospectuses that are to be published when securities are offered to the public or admitted to trading).

Reason – to update the current Prospectus Directive, with corporate capital-raising to be simplified by reducing issuance costs while maintaining investor protection.

• European Commission’s Proposal published in November 2015.

• EU Council’s General Approach agreed in June 2016.

• European Parliament’s Proposal approved in September 2016.

The trialogues are scheduled from the second half of October 2016.

The aim of the Slovak Presidency is to broker a political agreement before the end of the year.

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B. Capital Markets Union (CMU)

European Social Entrepreneurship Funds (EuSEFs)

European Venture Capital Funds (EuVECAs)

European Commission’s proposal published in July 2016.

Regulations amended in 3 main ways:

- extending the range of managers eligible to market and manage EuVECAs/EuSEFs.

- increasing the range of companies that can be invested in by these type of funds.

- simplifying the registration and cross-border marketing of these funds.

Running discussions on the compromise text in the European Council.

Main open issues:

- definition of own funds of EuVECAs/EuSEFs.

- definition of companies in which EuVECAs/EuSEFs may invest.

- cross-border distribution regimes and fees.

The aim of the Slovak Presidency is to broker a compromise in the EU Council.

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Capital Markets Union – key activities in Q2/2016

Cross-border distribution of investment funds

In order to increase the proportion of investment funds marketed and sold across the EU, the European Commission has launched a public consultation on the main barriers to the cross-border distribution of funds (UCITS - Undertakings for the Collective Investment of Transferable Securities, AIFs - Alternative Investment Funds, ELTIFs - European Long Term Investment Funds, EuSEFs - European Social Entrepreneurship Funds, EuVECAs - European Venture Capital Funds).

The aim is to adopt measures that increase competition and consumer choice.

The public consultation closed on 9 October 2016.

In July 2016 the EC also organised a technical workshop on barriers to cross-border distribution of investment funds.

The aim of the Slovak Presidency is to broker a compromise in the EU Council.

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Capital Markets Union – key activities in Q2/2016

Maintaining momentum

Is the CMU project still on course?

Is it right to prioritize quality?

Should greater consideration be given to legislation changes?

Brexit

What kind of impact may Brexit have on existing or proposed solutions?

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Capital Markets Union – key questions

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Implementation of the EU Directive on the prevention of money laundering and terrorist financing (4 AMLD) and its revision. Current status – an amendment to Slovakia’s Act No 297/2008 Coll. is now being drafted in

order to transpose 4 AMLD. The draft law is due to be published in the second half of this year (provisionally, by the end of October).

Member States are required to enact laws, regulations and administrative provisions

necessary to comply with this Directive by 26 June 2017. However, the draft amending Directive (EU) 2015/849 brings the transposition deadline iforward to 1 January 2017.

What awaits us? On 5 July 2016 the EC published a proposal for a Directive of the European Parliament and of the Council amending Directive (EU) 2015/849 on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing and amending Directive 2009/101/EC.

C. Anti-money Laundering (AML), Combat Terrorist financing (CTF)

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Key objectives of the draft amending directive - to designate virtual currency exchange platforms as obliged entities, - to set lower maximum transaction limits for certain pre-paid instruments, - to enable Financial intelligence Units (FIUs) to request information on money laundering

and terrorist financing from any obliged entity, - to harmonise the EU approach towards high-risk third countries, - to improve access to beneficial ownership information, - to clarify a number of existing provisions. Member States are required to enact laws, regulations and administrative provisions

necessary to comply with this Directive by 1 January 2017. In our view, this represents a very ambitious target for all Members States.

During the Slovak Presidency three business meetings dealing with the feasibility report on the 4 AMLD amendment were held at the expert and attaché levels. The Slovak Presidency is now working to broker a compromise, still with the aim of achieving a “general approach” in this area.

C. Anti-money Laundering (AML), Combat Terrorist financing (CTF)

Purpose of the revisions to reduce variability in risk weighted assets, to avoid a significant increase in overall capital requirements.

Elements of the reforms under discussion

Credit risk: • Internal ratings-based (IRB) approach: calibration of parameter

input floors for IRB exposures; removal of advanced IRB approaches for certain portfolios.

• Standardized approach (STA): design revisions; lower risk weights for some exposure classes.

Operational risk: removal of the advanced measurement approach (AMA); introduction of a single standardized approach for all banks.

Output floor: replacement of the Basel I floor with a new standardized approach output floor at the aggregate level.

Leverage ratio: additional Leverage ratio requirements for global systemically important banks.

By the end of 2016 – finalization of outstanding Basel III reforms by the Basel Committee on Banking Supervision (BCBS).

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D. Basel III revisions (Basel IV)

Review of the Capital Requirements Regulation and Directive CRR/CRD IV

European Commission to review selected parts of the CRR/CRD IV.

Intention of ECB/SSM

To ensure that the CRR/CRD IV review takes into account experience gained and lessons learnt during the SSM’s first two years.

Elements of the reforms under discussion

Liquidity reporting requirements

Cross-border application within the SSM

Minority interests and treatment of deductions related to subsidiaries

Treatment of share premium accounts

Revision of enforcement framework.

By the end of 2016 – EC intends to publish a consultative document.

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Beyond the horizon of the Slovak Presidency: A central banker’s perspective

Jozef Makúch Governor

Národná banka Slovenska

Visit of Mr Jozef Makúch, Governor of Národná banka Slovenska to Warsaw on 26–27 October 2016 on the occasion of the NBP Biannual EU Presidency Lecture

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