Guidelines for co-operation between consolidating supervisors and host supervisors (CP09)

Start Date: 08/07/2005 l Deadline: 08/11/2005

Executive Summary

1. This paper sets out CEBS guidelines for establishing an enhanced framework for co-operation between consolidating supervisor and host supervisors (Guidelines). They contain sections on general cooperation, distinguishing between subsidiaries and branches, and guidance more specifically related to the approval process of model validation.

2. The Guidelines are primarily directed towards supervisory authorities but credit institutions and investment firms will be affected by the operational aspects of supervisory co-operation. These Guidelines are the starting point for substantial developments in the supervision of cross-border groups, through the creation of operational network mechanisms. The exchange of relevant and essential information, consultation and proportionality are key to the supervisory challenges in the future.

3. This is an endeavour to respond to recent market developments. It also reflects the requirements of the proposed Capital Requirements Directive (CRD) . As banking groups are centralising their risk management activity there is a need to develop further an integrated, risk-based and coordinated approach to supervision. These Guidelines should therefore be of key interest to groups operating on a cross-border basis in the EU.

4. The starting point for these Guidelines is the legal text, predominantly Article 129, 131 and 132 of the CRD, which set the statutory framework for a much enhanced collaborative approach to the supervision of cross-border banking groups. In line with the requirements of the Directive this approach will be based on information sharing including, where necessary, consultation on supervisory action (Article 132), on joint model validation under the lead of the consolidating supervisor (Article 129) and more generally on written arrangements for coordination and co-operation between home and host supervisors (Article 131). These and other CRD requirements have been fleshed out for practical application by the supervisory authorities being the prime addressees of these Guidelines. The proposed guidelines are intended to further CEBS' main objectives, which are to promote effective supervision of EU banking groups, to streamline the supervisory process by enhancing convergence of practice and standards and to develop operational network mechanisms underpinning supervisory coordination and co-operation. It is expected that theses efforts will help avoid an excessive burden of supervision on EU banking groups.

5. Related issues such as the possible need to upgrade the EU framework for deposit insurance schemes, the lender of last resort function or crisis management provisions will not be addressed in this paper as they go beyond the scope of mere supervisory coordination and co-operation discussed here.

6. CEBS has elaborated on a practical framework for the Supervisory Review Process (SRP), comprising the Internal Capital Adequacy Assessment Process (ICAAP) and the Supervisory Review and Evaluation Process (SREP) and will publish shortly guidance for the model validation process.

7. For cross-border groups, all supervisors could be required - depending on the scope of application as defined by the CRD - to undertake the SREP within the respective Member States. For supervisory co-operation to be effective, the SREP should therefore be based on the same principles, applying similar procedures. This should result in:

  • convergence of supervisory practice among EU supervisors, thus offering scope for coordinating supervisory actions and eliminate duplicate tasks; and
  • a proportionate and risk-based approach to supervisory co-operation, thereby avoiding unnecessary communication and redundant tasks, thus preventing the arrangements between home and host supervisors becoming administratively burdensome.

8. Within the framework set by Article 129, 131, and 132 of the CRD, the extent of coordination, co-operation and information sharing will be influenced by the significance or systemic relevance of the entities, both within the group and in their local market(s). The consolidating supervisor and the host supervisor may have different views on the degree of significance or systemic relevance of the various entities and on the risks stemming from these entities for the group. Significance and systemic relevance remain relative concepts, to be assessed by the consolidating and host supervisors on a case-by-case basis, and determined by the consolidating supervisor for the purposes of the supervision on a consolidated basis. In making their assessment, supervisors should consider, at a minimum, the complexity, potential impact, and size of the entity.

9. This interaction gives shape to an integrated supervisory framework and relies materially on the exchange of information within the operational networks set up between the relevant consolidating supervisors and host supervisors. For certain matters, such as those related to local market characteristics, the host subsidiary supervisor will be best placed to collect and assess information that could be of interest to the consolidating supervisor. Likewise, there are matters for which the host supervisor may find it necessary to obtain information which is best made available by the consolidating supervisor. The information exchange process shall be proportionate and risk-focused to avoid unnecessary information exchanges. Drawing on communication within existing and further enhanced operational networks it shall also be as spontaneous as possible, allowing any supervisor to take the initiative to submit an issue deemed necessary to be raised. The information shall be communicated on a timely basis.

10. Moreover, the co-operative framework should be neutral in the sense that it does not provide an incentive for groups to restructure. It should strive to eliminate duplication of work, which should reduce the burden on the industry.

11. The outcome will be a practical framework for the Supervisory Review Process, comprising the Internal Capital Adequacy Assessment Process, the Supervisory Review Evaluations Process and the Approval Process for Model Validation. The Guidelines will be further complemented with a practical transposition for specific cases; a section on model validation is therefore part of this paper. One for situations of crisis management is under elaboration.

12. In drafting these Guidelines, CEBS has tested their application through a number of case studies, and will continue to explore the practicalities and efficacy of these proposals. The findings from these case studies, which will involve the banking groups, will also influence the final paper, as will any lessons from the Basel AIG process and the colleges being undertaken under the auspices of that body.

13. CEBS believes that a formal consultation of the Guidelines framework at this stage will benefit to both the market participants and the supervisors.

14. CEBS will also hold a public hearing on these proposals in October 2005 at its offices in London. More information on this and a registration form will be published on the CEBS website.

15. CEBS invites comments on this consultation paper by 8 November 2005 ( Comments should be made in English. The received comments (unless the respondent requests otherwise) will be published on the CEBS website.