1. Supervisory Colleges Ian Tower Workshop on Cross-Border Supervision and Consolidated Supervision June 2-4, 2015 Beirut, Lebanon

2. What is a supervisory college? “Working groups of supervisors of the parent company and key branches or subsidiaries of an international banking group”, Basel Committee, Good Practice Principles Long-established in many countries, but revived by the financial crisis Most effective to date in integrated regional markets (Nordics) Now also for insurance & IOSCO, including credit rating agencies Colleges are one important aspect of effective cross-border supervision 2

3. What is a supervisory college? (2) Supplements rather than replaces bilateral supervisory cooperation 3 Bilateral (home/host exchanges) New licenses for cross-border banks Changes of control New branch offices Major supervisory concerns and enforcement Major events, e.g. capital-raising Joint supervisory work Multilateral (college) Group risk assessment Group supervisory programme Model approval Major supervisory concerns and enforcement Major events, e.g. capital-raising Joint supervisory work Crisis preparedness/recovery and resolution Colleges act as efficient mechanism of cooperation

4. Key drivers of supervisory colleges Requirements for enhanced colleges of supervisors International standards on consolidated and cross-border supervision Global financial crisis highlighted a need for better supervisory cooperation in practice New prudential standards (capital models, new liquidity requirements) Crisis management & Recovery and resolution planning (FSB) 4 Colleges should now be in place, but for many supervisors are new and developing

5. International standards Financial Stability Board: 2008 Report on crisis – enhanced cooperation required Mandates colleges and Crisis Management Groups (CMGs) for G-SIBs Basel Committee: Core Principle 13: Good Practice Principles for Supervisory Colleges, 2014 Also extensive EU material (European Banking Authority) 5

6. Financial crisis issues and colleges Information-sharing gives complete picture College coordinates group risk assessment Joint work and sh ared supervisory programme Limited information on group wide risks Network of contacts/coordination of work Single view of group risks and remedial action Crisis preparedness, including simulations Inadequate communication and coordination Discussion of e.g., group capital distribution Prior notice of e.g., ring-fencing measures CMGs: group recovery planning and resolution Risk of national measures at expense of effective group supervision 6

7. Basel Committee Principles on Colleges 7 Issued 2010 in response to FSB recommendation Principles-based approach to ensure wide application Revised in June 2014 Results of survey of colleges practices available from Basel Consultative Group

8. Basel Committee Principles 1Objective: enhance information exchange to support effective supervision 2Structure: take account of scale, structure and complexity of the banking group 3Info-sharing: of principal risks, vulnerabilities etc and develop mutual trust 4Communication channels: for efficient sharing of confidential information 5Collaborative work: promote joint working for effective supervision of groups 6Interaction with the institution: to complement individual supervisors’ interactions 7Crisis preparedness: roles of college and CMG Should reflect macroprudential objectives of supervision also 8

9. Principle 1: College objectives 9 “Supervisory colleges should enhance, on an ongoing and confidential basis, information exchange and cooperation between supervisors to support the effective supervision of international banking groups. Colleges should enhance the mutual trust and appreciation of needs and responsibilities on which supervisory relationships are built.”

10. College objectives Information- sharing Coordination of supervisory work Decision-taking 10 Objectives vary – at minimum should be exchange of information Colleges are not usually decision-taking Whatever the objectives, they should be clear and agreed by members Colleges should be continuous – not just meetings

11. College objectives: Issues Building mutual trust takes time Interests of home and host supervisors can differ, sometimes considerably There are often barriers to effective information sharing 11

12. Principle 2: College structures “Supervisory colleges should be structured in a way that enhances effective oversight of international banking groups, taking into account: the scale, structure and complexity of the banking group its significance in host jurisdictions, and the corresponding needs of its supervisors. While a college is a single forum, multiple or variable substructures may be used, as no single college structure is likely to be suitable for all banks.” 12

13. College structures: Options Single structure Core and universal Variable 13 One college – all supervisors Universal Core Group Regional Core Should take account of home and host needs, e.g. where bank is an SIB in host country

14. College structures: Issues Difficult to balance effectiveness of college and host involvement The size of college membership can be inversely proportionate to the effective sharing of information Home sets membership criteria – difficult decisions about materiality When to compromise? Position of “significant” subsidiaries or branches What should be done for supervisors not included? 14

15. Principle 3: Exchange of information “College members should do their best to promptly share appropriate information with respect to a banking group’s principal risks, vulnerabilities and risk management practices. Mutual trust and willingness to cooperate are key for effective two-way information-sharing. To facilitate this process, supervisory colleges should strive towards confidentiality agreements among college members, such as those contained in memoranda of understanding (MoUs)” 15

16. Exchange of Information: Issues All college members must be able to share and protect confidential information as condition of participation What information should be shared? What is essential and what is optional? Are MOUs necessary or valuable? They should not be too prescriptive so that they can be flexible in a crisis Essential not to forget the needs of supervisors who are not invited to the college as they will also be affected by the decisions made 16 Examples: Home: organisation charts, capital plans, crisis plans Hosts: audit reports, performance updates

17. Principle 4: Exchange of information “Communication channels within a college should ensure the efficiency, ease of use, integrity and confidentiality of information exchange. The home supervisor should make sound communication channels available to the college and host supervisors should use them appropriately and regularly.” 17

18. Principle 5: Collaborative/Joint work “Supervisory colleges should promote collaborative work between members, as appropriate, to improve the effectiveness of the oversight of international banking groups. Collaborative work should be based on agreement between supervisors and should recognise national legal constraints.” 18

19. Collaborative/Joint work: Issues Scope for joint working on particular issues, such as: group governance, risk management model approval under Basel II and stress-testing Also scope for friction and misunderstanding of roles Cooperation to deliver specific outputs, such as: a group risk assessment a pillar II/ICAAP evaluation and group capital assessment Process should respect national supervisors’ continuing responsibilities 19

20. Principle 6: Interaction with the bank “Interaction between the college members and the banking group should complement the interaction that individual supervisors (both home and host) have with the specific entity they supervise.” 20

21. Interaction with the bank: Issues College meetings benefit from presentations from bank management  Management can explain strategy, governance etc.  All supervisors can ask questions of group management  Supervisors can deliver consistent collective messages (at meeting and afterwards) Most of the meeting should be private (supervisors only) NB: Banks will expect senior (and continuous) supervisory representation at colleges and feedback from meetings 21

22. Principle 7: Crisis preparedness/management “Supervisory colleges are distinct from but complementary to crisis management and resolution structures. The work of a banking group’s supervisory college should contribute to effective crisis management planning.” 22

23. Crisis preparedness/management Crisis preparedness plan (college):  List of contacts with telephone numbers etc  Information requirements – general and in case of crisis  A plan (e.g., home supervisor to contact which hosts) Recovery and resolution planning (college or CMG):  reviews of banking group recovery plans and impact on each entity  resolution strategies (with resolution authorities etc) 23

24. College practical issues Burden of organization should not be underestimated When to hold a college? Home supervisor needs to provide agenda, papers, presentations, minutes, updated decisions log and work plans. 6-8 weeks or more? Seniority of representatives important Important to integrate college work and other supervision Supervisors must monitor, implement outcomes 24

25. A (typical) college meeting agenda Overview from home supervisor:  key developments and issues  preparation for meeting with bank management Questions and updates from host supervisors Presentation and discussion with bank management  followed by supervisors’ discussion of key points Update to risk assessment (led by home supervisor) Specific issues, e.g., group remuneration practices, adequacy of audit ….and lunch or dinner – to facilitate building of trust 25

26. Conclusions: some lessons so far Colleges not new but developing rapidly, where information can be shared (not always easy) Using colleges for information exchange is good, but practical outputs (e.g. risk assessment, model approval) are better Good to involve bank management but manage their expectations of the likely output Be realistic – colleges supplement and do not replace national supervision and bilateral exchanges 26