1. Banking supervision Financial regulation and supervision
European System of Financial Supervision
Banking Union
Banking supervision
Basel Committee on Banking Supervision
Banking supervision in Romania

2. Financial market regulation and supervision
The financial market includes:
banking system;
capital markets;
insurance sectors.
Financial markets can be seen as an economic space within diverse operators as banks, financial intermediaries, mutual funds, insurance firms, pension funds, provide financial instruments and services.
Financial market regulation aims three major objectives:
the pursuit of macroeconomic and microeconomic stability;
the transparency in the market and the protection of intermediaries and investor;
the safeguarding and promotion of competition in the financial intermediation sector.

3. Models for financial market regulation and supervision
Institutional supervision - follows the traditional segmentation of the financial market into three markets: banking, securities and insurance; the oversight is realized through three different supervisory authorities.
Supervision by objectives - all intermediaries and markets are subject to the supervision of more than one authority; there should operate three authorities,, each of them being responsible of one of the three objectives of regulation.
Functional supervision (supervision “by activity”) – each type of financial services should be regulated by a given authority independently of the operators who offer it.
Single regulator-supervision (integrated/consolidated supervision) – there should be a single supervisory authority, responsible for all markets and intermediaries operating in banking, financial or insurance system.
The dominant model applied at the international level was institutional supervision, but recently the integrated financial supervision has gain an important role.

4. Consolidated supervision of financial system
Towards the end of the 20th century, the traditional barriers that separated financial activities weakened due to the accelerated pace in the integration and globalization of the financial markets.
This led to the appearance of financial holdings that operate both in the banking sector and on the stock and insurance markets and, thus, provide the whole range of financial services.
The recent developments in the financial sector indicate a tendency towards consolidated supervision.
Consolidated supervision is applied under the influence of several factors:
the globalization of the financial markets and a greater degree of integration of the companies providing financial services;
the frailty of the financial sector that caused the collapse of some financial institutions and serious crises of the financial markets;
changes in the responsibilities of CBs.

5. European System of Financial Supervision (I)
It is an institutional architecture of the EU's framework of financial supervision created in 2010 in response to the financial crisis, based on two pilons:
I. Micro-prudential supervision:
Three new authorities, called European Supervisory Authorities (ESAs):
European Banking Authority (EBA)– a EU financial regulatory institution for banking system; its activities include conducting stress tests on European banks to increase transparency in the European financial system and identifying weaknesses in banks' capital structures.
European Insurance and Occupational Pensions Authority (EIOPA) – a EU financial regulatory and supervisory institution for insurance occupational pensions market.
European Securities and Markets Authority (ESMA) – a EU financial regulatory and supervisory institution for capital market.
Joint Committee of the European Supervisory Authorities.
National Supervisory Authority

6. European System of Financial Supervision (II)
II. Macro-prudential supervision:
European Systemic Risk Board (ESRB), under the responsibility of the ECB:
It is tasked with the macro-prudential oversight of the financial system within the EU in order to prevent or mitigate systemic risk and, thus, to contribute to financial stability in the EU.
It shall contribute to the smooth functioning of the financial market and thereby ensure a sustainable contribution of the financial sector to economic growth.
It is an independent body of the EU and is hosted and supported by the European Central Bank.
European Systemic Risk Board is made of the officials of:
European Central Bank
National Central Banks
European Supervisory Authorities
National Supervisory Authority

7. Banking Union
In response to the financial crisis that emerged in 2007, the European Commission pursued a number of initiatives to create a safer and sounder financial sector for the single market.
These initiatives, which include stronger prudential requirements for banks, improved depositor protection and rules for managing failing banks, form a single rulebook for all financial actors in the 28 Member States of the European Union.
The single rule book is the foundation on which the Banking Union sits.
Banking Union applies to countries in the euro-area.
Non-euro-area countries can also join.
Banking Union consists of:
Single Supervisory Mechanism
Single Resolution Mechanism
Single Deposit Guarantee Scheme

8. Single rulebook
The single rulebook is the foundation of the banking union.
It consists of a set of legislative texts that all financial institutions (including approximately 8300 banks) in the EU must comply with.
These rules, among other things:
lay down capital requirements for banks;
ensure better protection for depositors;
regulate the prevention and management of bank failures.
These new harmonised rules seek to:
increase the EU banks’ strength and resilience through enhanced prudential requirements and supervision;
reduce the costs of bank failures by providing an effective resolution framework that seeks both to avoid bank bail-outs and to improve deposit protection;
manage systemic risk through a more explicit and active macro-prudential policy framework.

9. Single Supervision Mechanism (I)
The Single Supervisory Mechanism (SSM) places the ECB as the central prudential supervisor of financial institutions in the euro area (approximately 6000 banks) and in those non-euro EU countries that choose to join the SSM.
As from November 2014, the ECB directly supervises the “significant” banks (around 130 entities representing about 85% of the European banking assets).
A significant bank is a bank that fulfill at least one of the following conditions:
having total assets over 30bn euro;
having total assets representing over 20% of domestic GDP, unless total assets are below 5bn euro;
having significant cross-border activity;
are considered as systemic by national supervisor.

10. Single Supervision Mechanism (II)
Apart from these thresholds, at least the most significant three banks in each country had to fall under the oversight of the ECB.
The status of “significant bank” are periodically reviewed.
The national supervisory authorities will continue to monitor the remaining banks.
The main task of the ECB and the national supervisors, working closely together within an integrated system, will be to check that banks comply with the EU banking rules and to tackle problems early on.

11. Single Resolution Mechanism (SRM)
SRM is applied to banks covered by the SSM.
In the cases when banks fail despite stronger supervision, the mechanism will allow bank resolution to be managed effectively through a Single Resolution Board and a Single Resolution Fund, financed by the banking sector.
Its mission is to ensure that credit institutions, which face serious difficulties, are resolved effectively with minimal costs to taxpayers and the real economy, by recapitalization or liquidation and closing them.
Its purpose is to ensure an orderly resolution of failing banks with minimal costs for taxpayers and to the real economy.
The resolution fund will ultimately provide a degree of stability in times of financial stress.
The Board is also responsible for managing the Single Resolution Fund which is established by the SRM.
SRM is fully operational, with a complete set of resolution powers, from January 2016.

12. Single Deposit Guarantee Scheme
The European Deposit Insurance Scheme (EDIS) would apply to deposits below euros of all banks in the euro area.
When a bank is placed into insolvency or in resolution and it is necessary to pay out deposits or to finance their transfer to another bank, the national deposit guarantee schemes and EDIS will intervene.
At the final stage of the EDIS set up, the protection of those deposits will be fully financed by EDIS, supported by a close cooperation between EDIS and national DGS.
Given that national DGS may remain vulnerable to large local shocks, the purpose of EDIS is to ensure equal protection of deposits through the Banking Union regardless of the Member State where the deposit is located.
From a financial stability perspective, this promise prevents depositors from making panic withdrawals from their bank, thereby preventing severe economic consequences.

13. Banking supervision
Banking supervision basically involves the rules that have to be complied with when setting up banks and carrying out banking business.
The health of the economy and the effectiveness of monetary policy depend on a sound financial system:
Through supervising and regulating financial institutions, the CB is better able to make policy decisions.
The key aims of banking regulation and oversight is the existence of a stable financial system, which can optimally fulfill its macroeconomic function of efficient and low-cost transformation and provision of financial resources.
To enable banking supervisors to prevent bank insolvencies, new risks require new methods of banking supervision.
Liberalization of the financial markets during the last decades:
has created new business opportunities for banks which can significantly increase their risk;
has led to a tighter regime of prudential supervision.

14. Authority of banking supervision (I)
3 approaches regarding the authority responsible for banking supervision:
1. Responsibility for banking supervision should be assigned to an agency formally separated by the CB:
There is some empirical evidence that the inflation rate is considerably higher and more volatile in countries where the CB acts as a monopolist in banking supervision. The data are not definitively in favor of functional separation.
Moreover, although banks seem to be more profitable when CBs supervise them, they incur into higher costs and rely more on deposits with respect to more sophisticated liabilities as a funding source.
The evolution of financial intermediaries, moral hazard problems and especially cost accountability seem to suggest that separation would be a better solution for industrialized countries.
Example: in UK between 1997 and 2013, financial system supervision, including banks, was carried out by Financial Stability Authority (after the financial crisis Bank of England is responsible for banking supervision).

15. Authority of banking supervision (II)
2. The banking supervision can be carrying out by a governmental institution (Ministry of Finance, for example):
Advantage: banks will support through their activity the government’s programme for economic development.
Disadvantage: banks can be subordinated to some political interests, with negative effects on their autonomy.
Example: in Japan, many years banking supervision was carried out by Financial Supervisory Agency, subordinated to Ministry of Finance; today it is carry out by the Financial Service Authority and Bank of Japan.
3. The banking supervision can be carry out by the CB:
Although the CB’s objectives and tasks are not identical to those of banking supervisors, monetary policy and prudential supervisory aims and activities often overlap or complement one another in the financial sector.
Today, in many countries CB is considered the appropriate institution for carrying out the banking supervision.

16. Modalities of banking supervision
Banking supervision is carry on two levels:
at the bank’s level
at the banking supervision authority level
Those two levels correspond two different modality of banking supervision:
1. On-site supervision:
It is realized through examinations of banks’ credit documentations, financial statements and other financial situations through inspections at their head offices and their branches.
2. Off-site supervision:
It is realized through submitted regulator reports and financial statements, and periodic trend analysis of selected ratios by the banks to supervisory authority.
Its object is to quickly identify trends and emerging problems and to resolve the issues before they come so serious that they could negatively affect the bank’s financial conditions.

17. Basel Committee on Banking Supervision
The Basel Committee on Banking Supervision (BCBS) was established by the central-bank Governors of the Group of Ten countries at the end of 1974.
The member countries are represented by their CBs and also by the authority with responsibility for the prudential banking supervision where this is not the CB.
The Committee does not possess any formal supranational supervisory authority, and its conclusions do not have legal force.
It formulates broad supervisory standards and guidelines and recommends statements of best practices.
One important objective has been to close gaps in international supervisory coverage in pursuit of two basic principles:
that no foreign banking establishment should escape supervision;
that supervision should be adequate.
The Committee’s Secretariat is located at the Bank for International Settlements in Basel, Switzerland.

18. Core Principles for Effective Banking Supervision (Basel Core Principles)
The Principles represent the basic elements of an effective supervisory system, addressing:
preconditions for effective banking supervision,
licensing and structure,
prudential regulations and requirements,
methods of ongoing banking supervision,
information requirements,
formal powers of supervisors
cross-border banking.
These principles are intended to serve as a basic reference for supervisory and other public authorities worldwide to apply in the supervision of all the banks within their jurisdictions.

19. Basel Accords. Basel I versus Basel II
In 1988 Basel Committee on Banking Supervision introduced a capital measurement (Basel Accord I), which required to banks to carry a capital of at least 8% of its total risk-weighted assets (Cooke ratio), as a buffer to absorb unexpected losses.
In 2006, Basel II replaced the Basel I, which consists of three pillars:
minimum capital requirements for covering not only the credit risk, but also the market and operational risks:
supervisory review of capital adequacy;
effective use of disclosure to strengthen market discipline.
Both Cooke and McDonough ratios are solvency or capital adequacy ratios.

20. Regulatory capital elements
Tier 1 capital:
permanent shareholders’ equity:
issued and fully-paid ordinary shares/common stock and perpetual non-cumulative preference shares;
reserves:
general reserves
legal reserves
Retained profit
Tier 2 capital:
hybrid (debt/equity) instruments (bonds that can be converted into shares)
subordinated term debt (subordinated debt capital instruments with a minimum original fixed term to maturity of over five years).

21. Basel III (I)
It was developed in 2010 in response to the deficiencies in financial regulation revealed by the late-2000s financial crisis, scheduled to be introduced until 2019.
Basel III was supposed to strengthen bank capital requirements by increasing bank liquidity and decreasing bank leverage.
Basel III introduced “additional capital buffers“:
a “mandatory capital conservation buffer” equivalent to 2.5% of risk weighted assets (RWA); this buffer is established above the regulatory minimum capital requirement;
a “discretionary counter-cyclical buffer”, of up to 2.5% of capital during periods of high credit growth; the level of this buffer ranges between 0% and 2.5% of RWA.

22. Basel III (II) Basel III introduced two required liquidity ratios:
Liquidity Coverage Ratio – a bank should hold sufficient high-quality liquid assets to cover its total net cash outflows over 30 days;
Net Stable Funding Ratio - the available amount of stable funding should exceed the required amount of stable funding over a one-year period of extended stress:
Basel III introduced a minimum “leverage ratio“, calculated by dividing capital to the bank's average total consolidated assets, that should be higher than 3%:

23. Financial regulation and supervision in Romania
The authorities for the regulation and supervision of the financial system are:
1) NBR for the banking sector;
2) Financial Supervisory Authority (FSA) created in 2013; it has assumed all functions (including supervisory and regulatory) from the previous respective securities, insurance, and private pensions regulators in Romania, i.e. the National Securities Commission (“NSC”), the Insurance Supervisory Commission (“ISC”) and the National Private Pensions System Supervisory Commission (“PPSSC”), all of which ceasing to exist.
National Committee for Financial Stability:
It was established in 2007 in order to comply with the EU requirements on financial crisis management that ask for an agreement of co-operation between all national financial supervisors, central bank and finance ministry.
The Committee consists of the following members: the Minister of Public Finance, the Governor of the National Bank of Romania, the President of the Financial Supervisory Authority .

24. Banking supervision in Romania
NBR realized consolidated supervision of credit institutions.
NBR is the authority responsible for the authorization, regulation and prudential supervision of credit institutions.
Banking supervision is based on the next steps:
Authorization of the credit institutions – in order to carry on activity in Romania, every credit institution shall be authorized by the NBR.
Regulation of credit institutions’ activity – NBR is authorized to elaborate and apply prudential requirements which aim the well and safe functioning of credit institutions, which have to be fulfilled by all credit institutions.
Effective prudential supervision – is based on both modalities of supervision (on-site and off-site), on the basis of reports transmitted by credit institutions and on-site inspections at the head offices of credit institutions and of their branches in Romania and abroad.
Credit institutions from other member states EU which have established a branch on Romania’s territory shall report periodically to the NBR data and information regarding their activities carried on in Romania.

25. Prudential requirements (I)
With a view to ensuring the stability and reliability of the activity carried out and/or the fulfillment of the assumed obligations, each credit institution shall maintain a proper level of its regulatory capital.
Solvency indicator:
Solvency indicator: the bank’s capital must represent at least 8% of the risk-weighted assets.
Liquidity:
It is calculated as a ratio between effective liquidity and the necessary liquidity, and its minimum limit is 1.
Effective liquidity is calculated by adding on the each maturity band the assets in the balance sheet and the other items of the same kind recorded outside the balance sheet.
Necessary liquidity is determined by adding on each maturity band the liabilities in the balance sheet and other items of the same nature recorded outside the balance sheet.

26. Prudential requirements (II)
Large exposures:
Exposures that exceed 10% of a bank’s own funds are considered high exposures and require the approval of the bank’s board of directors.
A credit institution cannot register an exposure to a single debtor, which is higher than 25% of its own funds.
The cumulated value of a credit institution’s high exposures cannot exceed 800% of its own funds
No credit institution may have a qualifying holding the amount of which exceeds 15% of its own funds in an undertaking, other than a credit institution, a financial institution, an insurance/reinsurance undertaking or an undertaking carrying on activities which are a direct extension of banking or concern services ancillary to banking, such as leasing, factoring, management of investment funds or any other similar activity.
The total amount of a credit institution’s qualifying holdings in the undertakings may not exceed 60% of its own funds.

27. Prudential requirements (III)
Credit classification: credits granted to the costumers are classified depending on 3 criteria (financial performance, service of payment and judiciaries procedures) in 5 categories: standard, in observation, sub-standard, doubtful, and loss and the bank should allocate capital provisions in order to cover them.
Minimum reserve requirements: banks must held in accounts with CB minimum reserve in amounts of the 8% of the deposits in domestic currency and 8% of the deposits in foreign currency collected from the costumers.
Banks must to participate with funds to the Bank Deposit Guarantee Fund, which covers euro per deposit.
CAMPL system:
It evaluates the banks’ financial performance taking into account 5 essential indicators: C (capital adequacy), A (assets’ quality), M (management), P (profitability), and L (liquidity)..
A rating of 1 indicates the highest level of bank’s performance.
A rating of 5 indicates the weakest level of bank’s performance.