The EBF understands the need to ensure the harmonization of supervisory practices and achieve consistency by specifying how the consolidating supervisor, the home and the host competent authorities should cooperate to carry out prudential supervisory tasks with regards to those branches that are considered to be systemically important in the country where they operate.
The majority of EBF members recommend that the guidelines must ensure the leading role of the home supervisor since branches are an integral part of parent companies. In any cases, the home supervisor must always have the final say. It has to be noted that some members do not share the opinion of the majority and would support that the home and the host authorities lead the process together and take joint decisions.
The EBF recommends ensuring that the scope of the guidelines is extended to the EEA in order to fit with the scope of the CRD IV.
The guidelines need more clarity and precision: the criterion used to determinate if a significant branch has to be deemed as significant-plus must be clarified and precise thresholds must be established.
The EBF is opposed to the proposed approach to introducing a branch risk assessment as part of the SREP since the risks posed by branches cannot be assessed from an isolate perspective but must be identified and controlled from an institution or group perspective. If EBA finally adopts the proposed approach, it is important to ensure that the risks of the branch are included and assessed as a part of the institution or group risk assessment.
The EBF understands the need to ensure the harmonization of supervisory practices and achieve consistency by specifying how the consolidating supervisor, the home and the host competent authorities should, within the framework of supervisory colleges established either under Article 116 or under Article 51(3) of Directive 2013/36/EU, cooperate to carry out prudential supervisory tasks.
It is worth noting that those branches that are considered to be systemically important or significant-plus in the market where they operate, are already likely to be subject to scrutiny by the host authority. Since Directive 2013/36/EU does not establish a precise framework for host supervision of those branches, the EBF welcomes the EBA initiative that aims at increasing coordination between authorities and avoiding to impose an excessive burden on banks.
However, EBA must clarify and adequately define the scope of its guidelines in order to ensure that they make sense.
In the context of the Single Supervisory Mechanism (SSM), if the guidelines are only applied to those significant branches of European banks that operate in a Member State different than the one where their parent company operate, they would not be relevant. Indeed, under the SSM both home and host supervision is supposed to be harmonised and remain under the ultimate responsibility of the same supervisor, the European Central Bank (ECB). The concepts of home and host supervision do not make a lot of sense from a SSM perspective. Therefore, in order to avoid creating confusion, it is important that EBA recognizes that the SSM supervisory framework will not be altered by the adoption of those guidelines and that supervisory actions will continue being organised according to the SSM regulation and other already adopted legislations.
The proposed guidelines could in contrast be considered as relevant and necessary if their scope is extended to a larger perimeter than the Banking Union (for branches of SSM institutions located outside the SSM, or for branches of outside SSM institutions located within the SSM). Ideally their scope should be extended to the EEA to fit with the CRD IV scope. The EEA includes markets where the supervisory authority is not caught in the SSM and thus where coordination between supervisors and harmonisation of supervisory practices are not ensured. This may become a problem when the host supervisory authority decides to enforce some supervisory scrutiny at the level of specified branches, which often occurs for those branches that are considered to be systemically important or significant-plus for the host market by the host supervisor. In this context, the EBF welcomes any initiative that would improve the convergence of supervisory practices between home and host supervisors and minimize the burden that host authorities may impose on these branches.
Having said that, it is noteworthy that the guidelines should not interfere with the division of competences between home and host authorities as established by the applicable legal frameworks, in particular the CRD IV, according to which branches form an integral part of the respective financial institution and thus remain under the responsibility of the home supervisor. EBA itself recognizes that the proposed guidelines must not interfere with the tasks and responsibilities conferred on the consolidating supervisor and the home and host competent authorities by the relevant legislation.
In the case of significant-plus branches, the home authority must remain the leading supervisory authority and must define, coordinate and supervise supervisory actions. The division of actions established by law must be respected, i.e. it must take the actions provided by the law. In this sense, it is important to recognize that assessing a branch on a stand-alone perspective could result in a risk assessment that is not fully reflective of the true risk picture. Branches must be assessed as a part of the whole entity in order to avoid imposing additional burdens upon the Group score which should be captured in the SREP, infringe on the operation of a branch network and restrict the free movement of funds within banking groups. In addition, in recovery or resolution, branches can’t be dealt with in isolation from their mother company.
It is essential to clearly delimitate the role and responsibilities of host supervisors and clearly specify that their actions remain limited and supervised by home authorities. In any cases, the home supervisor must have the final say. Otherwise, the framework would create a risk that host supervisors interfere with the internal organisation and governance decisions of banks. Supervisors may artificially isolate significant branches from their mother company and seek to enforce supervision actions at individual branch level which, is clearly not aligned with the purposes of the current EU regulatory framework and institutional architecture. Concerns arise from the risk that host supervisors would try to increase supervisory requirement at branch level for ICAAP, ILAAP, recovery plan, or even SREP purposes. Ultimately, by giving an extended role to Host authorities, we see a risk that these guidelines as currently written may undermine one of the corner stone of the EU approach to banking regulation, namely the articulation of the right of establishment of Credit Institutions under the so-called “European passport”.
In addition, the EBF notes a number of points that would require additional clarification in order to ensure that the EBA’s stated objective is met.
It is important to note that some banks do not share the opinion of the majority and would support that the home and the host authorities lead the process together and take joint decisions.
The proposed guidelines do not provide any further clarity and certainty to Article 51 of Directive EU n°2013/36/EU. On the contrary, the proposal adds more complexity and uncertainty to the framework.
According to article 51, host authorities may make a request to the consolidating authority to deem a specific branch as being significant when:
a. the market share of the branch in terms of deposits exceeds 2 % in the host Member State;
b. the likely impact of a suspension or closure of the operations of the institution on systemic liquidity and the payment, clearing and settlement systems in the host Member State
c. the size and the importance of the branch in terms of number of clients within the context of the banking or financial system of the host Member State
Although the first criterion is objective, both other criteria remain subjective. The EBA guidelines do not specify more clearly this vagueness, which implies divergences. Table 1 of the EBA consultation shows that the criteria to consider a branch as significant are already very heterogeneous across Member States.
On the contrary, the proposal adds more complexity to the framework and provides too much discretion to supervisory authority. Indeed, significant plus branches are identified according to an intensification test based on subjective criterion:
a. the importance of the branch for the group or the institution
b. its importance for the financial stability of the host Member State where it operates
c. whether the branch performs in the host jurisdiction critical functions
Furthermore, with regard to the assessment of critical functions, it is unclear how this should be undertaken when a number of branches are involved. For example, a banking group could have an activity out of one branch but the booking in another. In that scenario would the critical function be located in the branch performing the activity or in the booking location?
The EBF recommends EBA to define more precisely the criterion of the intensification test (how does EBA define the importance of a branch for a banking group, for the financial stability of the host Member State? And how does EBA define critical functions?) and establish precise thresholds in order to ensure a level playing field and the harmonisation of supervisory practices.
In general, priority should be given to objective and measurable criteria against qualitative considerations. The consultation does not allow to understand clearly which criteria could be used by the significant branch Host competent authority. This inaccuracy is very concerning and could foster Host authorities to abusively consider some branches as significant plus branches.
Another point that would require further clarification consists in the source of information for requirements stated in the consultation paper which does not specifically mention if the host competent authority would expect the information to come from the bank, or if they would do an independent assessment.
In addition, it is very important to ensure the transparency of the process: branches must be informed about the reasons why they have been designated as significant or significant plus. The guidelines do not establish clearly the designation process and do not ensure that the branch remains informed about its situation. The EBF strongly recommends introducing the possibility for branches and parent companies to enter in a contradictory dialogue with home and host authorities with regard to their potential designation as significant or significant plus.
The methodology for the identification of O-SIIs can be used for the determination of significance plus of branches if it is adjusted to the specificities of branches and provided the approach is used for the sole purpose of determination of the significance plus category. Individual branches should of course not be subject to national O-SII framework and not be dealt with as O-SIIs institutions (e.g. O-SII buffer is entirely not relevant for branches).
The EBF is opposed to the proposed approach that would consist in performing a risk assessment at branch level as part of the SREP. As explained before, branches are an integral part of parent companies and have no separate legal status. Their risks cannot be assessed from an isolate perspective but must be identified and controlled from a group perspective.
The scope of the SREP is clearly defined in the legislation and should not be redefined. Introducing a SREP approach at branch level would purely override the level 1 text. As a matter of fact, the SREP is defined under Chapter II section III of CRD IV and applies to “institutions”. Article 110 mentions that “Competent authorities shall apply the review and evaluation process referred to in Section III of this chapter and the Supervisory measures referred to in Section IV of this Chapter in accordance with the level of application of the requirements of regulations (EU) N° 575/2013 set out in Part one, Title II of that regulation.” Applying a risk assessment at the branch level is not considered in the relevant CRR articles.
The small potential benefit of performing a full SREP-type process on significant-plus branches seems greatly outweighed by the magnitude of the undertaking. Institutional-wide SREP follow up actions shall be consistently implemented throughout the organisation including the respective branch levels.
If EBA finally adopts the proposed approach to introducing a branch risk assessment and while the EBF strongly opposes this possibility, the following recommendations must be taken into account.
• It is important that EBA ensures that the branch risk assessment does not interfere with the principle of free location of capital and liquidity between the parent company and branches.
• It worth mentioning that paragraph 37 refers to an institution’s ICAAP and ILAAP in order to provide the required information to perform the risk assessment and would include information such as business model and strategy, governance, risk control and material risks to capital, liquidity and funding the branch may be exposed to. It is important to note that as this information would only be specifically required from the moment when a branch has been identified as significant-plus, this information will probably not have been included until this determination date.
• Assessments would be performed by home and host supervisors. Therefore there could be multiple models/methodologies employed within a single banking group. A harmonised approach would be necessary in order to consistently assess branches.
• According to paragraphs 35 to 37, the draft Guidelines require that a branch risk assessment is performed for significant-plus branches and that the risk assessment is always included as an annex to the group risk assessment or to the SREP report. It is important to ensure that the risks of the branch are included and assessed in the group risk assessment, while the branch risk assessment should operationally be a subsequent assessment reflecting specific and residual risk not already captured in the Group assessment. Thereby all risks would be captured, while operationally not penalizing the institution unnecessarily.
• From a practicality perspective, paragraph 37 task the consolidating supervisor with obtaining certain information, while paragraph 39 ambiguously implies that the host authority should obtain the same information directly from the significant-plus branches. This potentially contradicts the intention of the authorities as described under with Paragraph 44, where stated that duplication of information requests to the supervised institution should be avoided. This should be remedied by clarifying that consolidating supervisor manage bank information gathering, while the host supervisor base its analysis on information received from the consolidating supervisor.
With regard to paragraph 54, it is noteworthy that:
a. For many branches, there is no internal/external audit and internal risk reports focusing on the branch. EBA should define what would happen under this scenario.
b. From a liquidity perspective, it is not relevant to require additional reports at the branch level. As per article 415 of Regulation (EU) No 575/2013, there are no obligations to perform stand-alone branch liquidity reporting, significant or otherwise, but only to produce a separate reporting at the institution level in a currency different from the reporting currency when the institution has a significant branch in a host MS using this currency. Under paragraph 56 home authorities would share with host authorities the impact of the stress on the liquidity in the currency in which the branch operates. However, as stated in article 415, this would not be calculated at the individual branch level and therefore we would request clarification on which information would be shared and how this would be determined.
c. EBA must clarify whether these regulatory reports would be shared with firms.
Since the executive summary notes that these guidelines should not introduce additional burden on significant-plus branches, paragraph 49 drafting should be amended to clarify that.
” …the frequency of the number of the on-the-spot, checks, and inspections for significant-plus branches on a yearly basis shall not be by principle higher than for other branches. The need for such type of investigations shall be decided in accordance with the Supervisory Examination Program depending on the nature of the activities and the risks associated to the branch.”
The guidelines suggest that supervision of a significant-plus branch cover several areas, where i) either the home supervisor has agreed upon some of the supervision activities to be carried out together with the host supervisors; ii) the activity is carried out by the host supervisor based on the agreement with the home supervisor; or iii) the supervision is mandated to the host supervisors in the legal framework stipulating the supervision of the respective significant-plus branch.
All requests regarding risk controls, risk management practices and governance frameworks related information, in the course of on-going supervision of branches, should be channeled through the home authority, where the home authority shall hold the responsibilities of facilitating aligning with host authorities, and manage the assessment of objectives of those requests before executing them. To the extend any of the requests are not coordinated through the home authority, it is important, that the supervised entity is always fully informed by the consolidating supervisor about any relevant agreements on cooperation and coordination between supervisors, to enable the supervised entity to understand the mandate used by the host supervisor for the individual supervisory activities (including ad hoc requests) related to the branch.
The EBA guideline introduces a new risk reporting level- “risks borne by the branch” - under paragraph 54(a). In no circumstances, the banks should be led to change the articulation of their existing internal risk reports to accommodate specific branch level requests.
The EBA approach is insufficient regarding the communication with the institutions.
In paragraph 59 EBA proposes in the consultation to ensure that macroprudential measures and information influencing significant-plus branches should be forwarded between regulators. Similarly, this requirement should be extended to cover also significant branches and their mother company
It is important that the current framework for home-host authorities’ co-ordination for the assessment of Recovery Plans for cross-border groups be respected. This framework, established by art.6 and 8 of the BRRD, requires that any decision concerning the assessment of Recovery Plans and the identification of material deficiencies be duly reflected in a joint decision.
In addition, it should be clearly specified that, whenever the home and host authorities convene that new arrangements are required to ensure coordination of measures at the level of the home institution and at branch level, in no case Recovery Plans can be claimed by host authorities at the level of local branches, because the latter have no separate legal status.
It is worth noting that article 98 of Directive 2014/59/EU already sets the framework for confidential information sharing. This article establishes that the consolidating supervisor shall, together with the competent authorities of subsidiaries, after consulting the competent authorities referred to in Article 116 of Directive 2013/36/EU and with the competent authorities of significant branches insofar as is relevant to the significant branch, review the group recovery plan and assess the extent to which it satisfies the requirements and criteria laid down in Articles 6 and 7. " This article must be strictly respected.
Current drafting refer to the host authority inputting to recovery planning. As recovery planning is the responsibility of the bank, this must either refer to the host supervisor inputting to the home supervisors assessment of the recovery plan.
A concept of “home competent authority of branch” is introduced under paragraph 16 and paragraph 70 in relation to recovery planning. The EBF believes that this concept should not be retained. The responsibility of the overall assessment of the group recovery plan or institution’s recovery plan should be maintained under the responsibility of the consolidating/home authorities, while the host authorities should be consulted and their input taken into account and if agreement is achieved in the recovery college, they must be reflected in the joint decision.
In addition, transparency on the division of tasks between supervisors must be ensured in order to ensure efficiency in the communication and interactions between authorities, parent company and branches."