Path to Effective Supervision – Convergence of Practices in Europe José María Roldán | 14 Nov 2005

2 Outline Drivers for change in banking supervision Basel II implementation in Europe CEBS' role and tasks Challenges for the supervision of cross-border groups CEBS response: examples –Supervisory disclosure –Enhanced co-operation between home and host supervisors –Supervisory Review Process (Pillar 2) –Common reporting Creating European supervisory culture

José María Roldán | 14 Nov Drivers for change in the EU banking supervision Banking market: Cross-border activity Consolidation Centralisation of business functions at group level Outsourcing of activities Diversity of banking structures Regulatory framework: Basel II (CRD) risk-focused supervision IAS/IFRS new standards, with impact on supervisory tools Post FSAP implementation and convergence of practices Response: the Lamfalussy process

José María Roldán | 14 Nov CEBS role and focus EBC¹ CommissionParliament EIOPC¹ESC¹EFCC¹ Enforcement Commission Council CEIOPS³CESR³ L1 L2 L3 L4 CEBS² 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 Framework legislation Implementing details Convergence

José María Roldán | 14 Nov Basel II implementation in Europe 5

José María Roldán | 14 Nov Implementation in the EU Legal instrument to transpose Basel II to European legislation: Capital Requirements Directive (CRD). Across all 25 EU countries (and 3 EEA countries); 8300 banks and more than 40 cross-border groups Importance of the scope: The directive will apply to all credit institutions and investment firms. CEBS guidelines for consistent implementation and convergence of supervisory practices Basel II – a global agreement The CRD – European legislation

José María Roldán | 14 Nov Implementation in the EU Basel II: three pillars with checks and balances Complex in detail but clear purpose and architecture Based on the best practices of the industry => efficient regulation from an economic perspective Flexible framework for small and big banks QIS 5 The CRD from January pillars Minimum Capital Requirements Regulatory view Supervisory review and evaluation (SREP) + Banks internal view (ICAAP) Market discipline Market view Credit risk Market risk Operational risk Supervisory judgment Disclosure requirements

José María Roldán | 14 Nov Implementation in the EU Recognises and encourages developments in risk management and supervisory practices Incentives for all institutions to adopt more sophisticated approaches A good business tool with business value (not just costs!) Capital adequacy requirements Internal controls, reporting, audit and contingency planning The board and senior management Risk management

José María Roldán | 14 Nov CEBS – role and tasks 9

José María Roldán | 14 Nov CEBS role and tasks Main tasks: –to give advice to the Commission –to promote consistent implementation of EU legislation –to enhance convergence of supervisory practices Objectives: Promoting 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

José María Roldán | 14 Nov CEBS role and tasks CEBS focus on: Consistent implementation and convergence of supervisory practices (Level 3) Prudential issues, in particular Capital Requirements Directive (CRD)

José María Roldán | 14 Nov Work Programme Priority areas of work Regulatory advice to the Commission Own funds, large exposures; possibly follow up on cross- border mergers and deposit guarantee schemes 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 Cross-sectoral issues Supervision of financial conglomerates Off-shore financial centres Outsourcing and internal governance 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 Delivered products Advice: national discretions (work continues), prudential filters, cross-border mergers, e-money, DGS Consultation papers: consultation practices, outsourcing, supervisory review process, common reporting, financial reporting, validation, ECAIs, CEBS role and tasks, home host Guidelines: Supervisory disclosure

José María Roldán | 14 Nov Work programme Main priority for CEBS in 2006 is implementation of the Capital Requirements Directive Final guidelines on: –Supervisory disclosure (tool to monitor implementation) –Supervision of cross-border groups –Validation of IRB and AMA systems –Supervisory Review Process (Pillar 2) –Common reporting frameworks (IFRS and solvency ratio) –Recognition of External Credit Assessment Institutions (ECAIs) Consistent implementation and application

José María Roldán | 14 Nov CEBS - toolbox Standards Guidelines Recommendations Public disclosure Training and staff exchange Voluntary co-operation, unanimity commitment from members to implement common decisions

José María Roldán | 14 Nov Challenges for the supervision of cross-border groups 15

José María Roldán | 14 Nov Challenges for the supervision of cross-border groups 1)Potential divergence in implementation –National options and discretions –Additional layers of national rules (goldplating) –Different interpretations 2)Complex and possibly fragmented supervisory process –Misalignment of legal and operational structures in banking groups –Risk of overlapping or conflicting supervisory assessments –Validation of models and Art. 129 –Supervisory Review Process (Pillar 2) 3)Administrative burden –Compliance costs, large vs. small banks –Differences in supervisory reporting –Duplication of contacts

José María Roldán | 14 Nov CEBS response 1)Potential divergence in implementation supervisory disclosure 2)Complex and possibly fragmented supervisory process enhanced home-host co-operation, Pillar 2 3)Administrative burden common reporting requirements

José María Roldán | 14 Nov Supervisory disclosure 18

José María Roldán | 14 Nov CEBS response: 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 key implementation issues Easy access and meaningful comparison peer group pressure –Internet access via CEBS website –Links to national websites –Comparable information –Common language - English

José María Roldán | 14 Nov CEBS response: supervisory disclosure

José María Roldán | 14 Nov Home-host co-operation 21

José María Roldán | 14 Nov CEBS response: enhanced home-host co-operation CRD Art. 129 to 132, enhanced co-operation and role of the consolidating supervisor CEBS draft Guidelines, a practical framework for: –Co-ordinated planning –Structured exchange of information –Avoidance of redundancies –Optimal use of supervisory resources Concrete examples: risk assessment and validation

José María Roldán | 14 Nov CEBS response: enhanced home-host co-operation 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

José María Roldán | 14 Nov Supervisory Review Process (Pillar 2) 24

José María Roldán | 14 Nov 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 and hold capital above Pillar 1 minimum requirements Foster an active dialogue between institutions and supervisors Covers the relationship between: –Supervisors SREP (the Supervisory Review and Evaluation Process); and –Institution ICAAP (the Internal Capital Adequacy Assessment Process) 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

José María Roldán | 14 Nov Supervisory Review Process Proportionality is the key: - For large complex institutions in-depth and tailor-made - For smaller institutions likely to be quite standardised -CEBS considering possible guidance for smaller institutions Second consultation finished in October CEBS guidelines in January 2006 –Mixed response: high level principles or detailed guidance? –Small banks ask for detailed guidelines

José María Roldán | 14 Nov Common reporting 27

José María Roldán | 14 Nov CEBS response: common reporting The challenge: HOW TO limit the costs of pan-European institutions WHILE respecting the diversity of the Single Market (large/small firms) and limit the impact on small local institutions

José María Roldán | 14 Nov CEBS response: common reporting Common frameworks for: –Financial data for prudential purposes –Reporting of the solvency ratio CRD and IFRS window of opportunity for change: less administrative burden for cross-border groups; limited impact on small, local banks Common templates and possibilities presented by new technologies (XBRL) Consultation: criticisms on size and national flexibility But new rules are complex and supervisors move from quite different starting points

José María Roldán | 14 Nov CEBS response: common reporting Layer approach: harmonization & flexibility –Core: key information which more or less can be expected throughout the EU –Detailed: comprehensive information which a majority of supervisors may require Reduction after consultation: –COREP: ± 75% (level of detail between US and Canada) –FINREP: ± 40% Finalization in December 2005 due to pressure from the industry, no second round of consultation

José María Roldán | 14 Nov CEBS response: common reporting Reporting now… and later… EU Group Reporting Supervisor 1 Supervisor 3 Supervisor 2 Various data streamsCommon framework Different reporting standardsSingle format Manual processesAutomated data collection EU Group Reporting Supervisor 1 Supervisor 2 Supervisor 3 XBRL

José María Roldán | 14 Nov Creating a European supervisory culture 32

José María Roldán | 14 Nov Creating a European supervisory culture Compendium of CEBS standards, guidelines and recommendations –for supervisors and market participants –flexible, internet-based structure, easy to update –consistent terminology, definitions Inventory of implementation issues Training programmes and staff exchange

José María Roldán | 14 Nov Conclusions Differences across countries not wiped out, but visible, so that priorities for further work can be identified Not a single supervisory interface, but a more coordinated and streamlined process Not a single compliance process, but greater commonality of approaches and a process for further convergence where needed a structured process for convergence, whose pace and end result are not predetermined

José María Roldán | 14 Nov Questions? Thank you! 35

Contact details: Chairman José María Roldán Tel: