6 Financial services: resilience of
credit institutions
| (a)
(35781)
6022/14
COM(14) 43
(b)
(35829)
6860/14
+ ADDs 1-3
SWD(14) 30
|
Draft Regulation on structural measures improving the resilience of EU credit institutions
Commission Staff Working Document: Impact Assessment accompanying the draft Regulation on structural measures improving the resilience of EU credit institutions and the draft Regulation on reporting and transparency of securities financing transactions
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| Legal base | (a) Article 114 TFEU; co-decision; QMV
(b) —
|
| Documents originated | 29 January 2014
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| Deposited in Parliament | (a) 5 February 2014
(b) 3 March 2014
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| Department | HM Treasury
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| Basis of consideration | EM of 26 February 2014
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| Previous Committee Report | None
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| Discussion in Council | Not known
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| Committee's assessment | Legally and politically important
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| Committee's decision | Not cleared; further information requested
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Background
6.1 The Liikanen Report or "Report of the European
Commission's High-level Expert Group on Bank Structural Reform"
(the Liikanen Group) is a set of recommendations published in
October 2012 by a group of experts led by Erkki Liikanen, governor
of the Bank of Finland and European Central Bank (ECB) council
member. The Group's mandate was to determine whether structural
reforms of EU banks would strengthen financial stability, improve
efficiency and consumer protection in addition to the regulatory
reform of the EU bank sector. The Group recommended actions in
five areas, including mandatory separation of proprietary trading
and other high-risk trading and strengthening bank governance
and control of banks.[17]
The documents
6.2 With the draft Regulation, document (a), the
Commission proposes, in response to the Liikanen Report, structural
measures to improve the resilience of EU credit institutions.
The proposal is complemented by another draft Regulation, on securities
financing transactions.[18]
6.3 There are two main elements to the present
draft Regulation:
· a ban on proprietary trading by certain
categories of credit institution; and
· a requirement for competent authorities
to review credit institutions falling into certain categories
and to determine whether to require them to separate their deposit
taking activities from their trading activities.
6.4 For the UK, the competent authority would be
the Prudential Regulation Authority. For the Banking Union Member
States, the regulatory role would be shared between the European
Central Bank for the largest firms and national competent authorities
for relatively small banks which conduct a large amount of trading.
6.5 The Regulation would apply to credit institutions
that are identified as being of global systemic importance under
Article 131 of Directive 2013/3/6/EC (on access to the activity
of credit institutions and the prudential supervision of credit
institutions and investment firms, 'CRDIV') and to credit institutions
that meet both of the following criteria:
· total assets amounting at least to €30
billion (£24.6 billion); and
· trading activities amounting at least
to €70 billion (£57.4 billion) or 10% of their total
assets.
Proprietary trading ban
6.6 Article 6 of the draft Regulation would introduce
a ban on proprietary trading, defined as taking positions in any
type of transaction for the sole purpose of making a profit for
one's own account, without any connection to client activity.
In order to allow risk management, cash management and transactions
related to client activity to continue, the ban would be limited
to the use of specifically dedicated desks, units, divisions or
individual traders. Credit institutions subject to the proprietary
trading ban would also be prohibited from investing in or holding
shares in alternative investment funds (as defined in the Alternative
Investment Fund Managers Directives), which would cover investing
or holding shares in hedge funds. The prohibition would not apply
to trading sovereign bonds issued by Member States.
Structural separation
6.7 Under the proposal, competent authorities would
have the power to decide that particular credit institutions must
separate certain trading activities from their 'retail' activities.
The competent authorities would be required to review certain
credit institutions' trading activities and determine for each
such institution whether certain trading activities should be
separated and, if so, which activities. If the competent authorities
determined that certain thresholds were exceeded, the bank would
qualify as a potential threat to financial stability and accordingly
the competent authority would have to impose separation. If the
competent authority determined those thresholds were not exceeded,
it could still impose separation if it concluded that the trading
activity posed a threat to the financial stability of the core
credit institution or the EU financial system as a whole. A competent
authority could decide not to impose separation of a core credit
institution (defined as a credit institution which takes deposits
that are eligible for deposit protection under Directive 94/19/EC
on deposit-guarantee schemes) even if the thresholds were met,
provided the credit institution could justify that its trading
activities do not endanger its stability or the stability of the
EU financial system as a whole.
6.8 Where the competent authority required separation,
it would have to address a decision to the affected credit institution
specifying those trading activities to be separated. 'Trading
activities' is defined in Article 8 and would include any activities
other than taking deposits which were eligible for deposit protection,
lending, retail payment services and certain other activities.
Consequently, although the competent authorities could specify
a wide range of trading activities to be separated, a deposit
taking bank would be able to continue taking eligible deposits,
lending, and providing retail payment services (and certain other
activities). A deposit taking bank would also be permitted to
manage its own capital, liquidity and funding and to provide risk
management services to clients (for example, through derivatives).
The products it could sell to its clients are listed at Article
12.
6.9 The trading activities to be separated would
have to be transferred to a separate legal entity, which would
not be permitted to take deposits eligible for deposit protection
under the deposit guarantee scheme or to provide retail payment
services. Articles 14 to 17 set out limits to large exposures
for deposit taking banks, both within a group and externally.
Derogation
6.10 Article 21 provides a derogation from the provisions
about separation of trading activities, from which individual
credit institutions could benefit provided they were subject to
'national primary legislation adopted before 29 January 2014'
which imposed structural separation on certain types of credit
institutions and complied with specific criteria set out in paragraph
1 of Article 21. The criteria are designed to ensure that the
national regime is at least equivalent to the scheme envisaged
by the proposal.
6.11 Although the derogation would apply to specific
credit institutions, it would have to be applied for by a Member
State on behalf of that credit institution. Application would
be to the Commission and would have to include a positive opinion
from the competent authority, together with information allowing
the Commission to appraise the national legislation. This process
would have to be completed on a firm by firm basis.
6.12 The criteria with which national legislation
would have to comply are:
· having the aim of preventing financial
stress, failure or systemic risk;
· preventing credit institutions that take
deposits from individuals and SMEs from dealing in investments
as principal and engaging in trading activities; and
· ensuring that if such a credit institution
is within a group, it can make decisions independently of other
group entities, has a management body independent of other group
entities, and of the credit institution itself, is subject to
separate capital requirements to other group entities and will
not enter into contracts with other group entities other than
on terms as favourable as it would enjoy if contracting with entities
outside the same sub-group or outside the group at all.
Third-country equivalence
6.13 Article 4 provides that the Regulation would
not apply to EU branches of credit institutions established in
a third country or to subsidiaries established in third countries
of EU parents, provided the third countries had a legal framework
deemed by the Commission to be equivalent to the Regulation. To
enable this exclusion to operate, under Article 27, Member States
or a third country could apply to the Commission, or the Commission
could choose, to issue an implementing act determining that 'the
legal, supervisory and enforcement arrangements of a third country
ensures that credit institutions and parent companies in that
third country comply with binding requirements which are equivalent
to the requirements laid down in Article 6, 10 to 16 and 20'.
These articles concern the main prohibitions and prescriptions
of the Regulation, including the prohibition on proprietary trading
and other activities and exposures, the separation powers of the
competent authority and technical exemptions for the purpose of
risk management.
Remuneration
6.14 Under Article 7, the remuneration policy of
firms within the scope of the Regulation could not be designed
and implemented in a way that directly or indirectly incentivised
individuals to carry out the activities prohibited by the Regulation.
Provisions on the role of Competent Authorities
6.15 Articles 10, 18, 19, 26 and 28-32 make provision
about the role of the competent authority, including, the duty
to exercise supervisory powers and its obligation to exchange
information with the European Banking Authority (EBA) about its
application of administrative sanctions and other measures responding
to certain breaches of the Regulation.
Negative Scope
6.16 The proposed Regulation would not apply to:
· EU branches of third country credit institutions
and third country subsidiaries of EU banks subject to equivalent
third country regimes;
· central banks and some public entities
(for example, in the UK the Commonwealth Development Finance Company
Ltd, the Agricultural Mortgage Corporation Ltd, and the Scottish
Agricultural Securities Corporation Ltd); and
· in relation only to Chapter III (separation
of trading activities) of the proposal and at the discretion of
the competent authorities, subsidiaries of EU parents established
in third countries, provided the competent authority was satisfied
there was a resolution strategy agreed between the group level
resolution authority in the EU and the third country host authority
and the resolution strategy for the subsidiary would have no adverse
effect on the financial stability of the Member State or States
where the EU Parent or any other group entities were established
(the so-called multiple-point of entry resolutions).
6.17 In addition chapter III would not apply to those
EU firms who gain a derogation under Article 21.
Reports and Review
6.18 Article 33 details the reports the EBA would
be required to publish and submit to the Commission following
implementation of the Regulation. These concern technical details,
including whether other types of derivative instrument and financial
instrument should be available to a core credit institution to
manage its own risk and whether core credit institutions should
be permitted to sell other types of financial instruments to customers
for their risk-management. Article 34 would require the Commission
to review the effects of the rules laid down in the Regulation.
By 1 January 2020 the Commission would have to report to the European
Parliament and to the Council and continue to report on a regular
basis.
Final Provisions
6.19 Article 35 would confer powers on the Commission
to adopt delegated acts in relation to the Regulation. The proposal
foresees the use of delegated acts for the adoption of technical
standards, adjusting thresholds and to supplement or adjust some
of the provisions of the proposal. Article 36 provides that the
Regulation would enter into force on the twentieth day following
its publication in the Official Journal. The Regulation would
apply from that date, except that:
· Article 6 (which imposes the ban on proprietary
trading) would apply from 18 months after publication; and
· Articles 13-18 and 20, which govern the
degree and manner of separation between core credit institutions
and trading entities, where the competent authority has imposed
a requirement to separate certain trading activities, would apply
from 36 months after publication.
Impact assessment
6.20 The Staff Working Document, document (b), is
the Commission's impact assessment together with 14 annexes and
an executive summary, for this draft Regulation and that on securities
financing transactions.[19]
The Government's view
6.21 The Financial Secretary to the Treasury (Sajid
Javid) introduces his comments by saying that:
· the Government is implementing ambitious
bank structural reforms through Part 1 of the Banking Reform Act
2013 and the secondary legislation to be made under it;
· these reforms, first recommended by the
Independent Commission on Banking, chaired by Sir John Vickers,
will safeguard the continuity of core banking services such as
deposit taking and the provision of overdrafts and ensure that
such services can be separated from investment activities and
protected if a banking group encounters financial difficulty;
· overall, the Government is in favour of
this draft Regulation as a means to reduce the implicit taxpayer
guarantee which distorts the single market;
· it strongly supports the derogation provision
within the proposal which would allow Member States which had
already imposed a stronger framework before the 29 January 2014
to continue to implement it alongside this Regulation —
this provision should allow the UK to continue to implement the
reforms embodied in Part 1 of the Act;
· the proposal would provide for structural
reform of credit institutions throughout the EU in a slightly
different way to the Act 2013 and will impose a prohibition on
proprietary trading, which the UK has not introduced; and
· the Government will be closely scrutinising
these areas of difference.
6.22 The Minister then expands on these points as
follows.
Prohibition on Proprietary Trading
6.23 The Minister says that:
· in its report on proprietary trading the
Parliamentary Commission on Banking Standards found that there
was little to indicate that the large banks were engaged in the
practice;
· the regulatory and political pressures
being placed on banks are reported to be impairing any appetite
banks may have to pursue the activity;
· the Government will be scrutinizing this
area of the proposed legislation to ensure that the ban is effective,
while avoiding unintended consequences, such as preventing helpful
market making activity; and
· additionally, the Banking Reform Act provides
for an independent review of the case for a prohibition of proprietary
trading in UK law to be undertaken in 2021; and — this will
produce an updated evidence base on the extent of proprietary
trading and the potential need and scope for a ban.
Scope
6.24 The Minister comments that:
· the derogation provisions should ensure
that the draft Regulation would not disrupt the implementation
of the ring-fencing reforms for firms that fall within the scope
of the ring-fencing provisions contained in the Banking Reform
Act;
· the Government will be seeking to ensure
that Member States being able to request a derogation from the
Commission in relation to firms that are covered by national legislation
having an equivalent effect remains the case during the negotiation
and that firms that are subject to ring-fencing under the Banking
Reform Act would be exempted from the provisions of chapter III
of the Regulation;
· the scope of this proposal is, however,
wider than the measures in the Banking Reform Act;
· consequently certain credit institutions
that would not be subject to ring-fencing and therefore would
not fall within the derogation from chapter III would find themselves
subject to the entirety of the Regulation; and
· the Government will be scrutinising where
this would be the case and will work to ensure any additional
requirements are proportionate and effective.
6.25 The Minister continues that:
· the third country impact of these proposals
is different from the Banking Reform Act — Part 1 applies
only to UK institutions and not to their subsidiaries in other
EEA countries;
· secondary legislation to be made under
the Act will prevent ring-fenced bodies from establishing a branch
in a non-EEA country;
· further, the Act applies only to UK subsidiaries
of credit institutions established in EEA or third countries;
· by contrast, the proposed Regulation would
include within its scope all branches and subsidiaries of EU credit
institutions, wherever those branches or subsidiaries are located;
· it would apply in principle also to EU
branches of credit institutions established in third countries,
not merely to their EU subsidiaries; and
· the Government will work to ensure that
this area of the legislation does not place undue costs on non-EEA
firms establishing branches within the EU, neither on third-country
branches nor subsidiaries of EU banks.
Institutions
6.26 Noting that to gain derogations for credit institutions
subject to Part 1 of the Banking Reform Act 2013, the UK would
have to apply to the Commission, the Minister says that:
· the Government is committed to ensuring
the draft Regulation maintains an appropriate balance between
the role of the Member State and the role of the Commission; and
· it will also work to ensure that the process
is transparent and timely enough to prevent uncertainty in the
market and that provision is made for Member States to challenge
an adverse decision by the Commission.
Legal issues
6.27 The Minister says that:
· it is important the legal basis for the
proposed Regulation is sound — if not, it risks creating
uncertainty for public authorities, institutions within its scope
and creditors and investors;
· the Government continues to scrutinise
whether Article 114 TFEU is an appropriate legal basis for the
Regulation, in the light of the provisions made in relation to
remuneration policies;
· these arguably contravene Article 114,
paragraph 2, which provides that paragraph 1 does not apply in
relation to provisions relating to the rights and interests of
employed persons — the same point applies to certain provisions
of Regulation (EU) No 575/2013 (on capital requirements) which
are concerned with remuneration and on which the UK is challenging
the legal basis;
· the Government will also scrutinise the
role of the ECB under the proposal in supervising banking groups
established both in the UK and in Member States in the Banking
Union and will work to ensure any powers are consistent with the
Treaties;
· in considering the role of the ECB the
Government is conscious that the role proposed represents a departure
from the "conventional" allocation of supervisory tasks
to consolidating supervisors and competent authorities in relation
to banking groups and group entities;
· under the CRDIV/Capital Requirements Regulation
package the consolidating supervisor has, in general terms, one
task — to apply group capital requirements at the level
of the EU parent undertaking;
· the consolidating supervisor does not
have any direct supervisory powers at the level of regulated subsidiaries
in jurisdictions other than the Member State in which the parent
undertaking is established;
· the result is that, in general terms,
the Bank of England and the Financial Conduct Authority regulate
financial services firms established in the UK — the Government
will work to ensure that the role of the ECB under the Regulation
would not undermine that independence; and
· there is extensive use of delegated acts
in the proposal, which would give the EBA an important role and
leaves much of the detail uncertain — the Government will
scrutinise the role of the EBA in this process to drive certainty
and ensure supervisors would be given sufficient flexibility to
react to developments as rules made under delegated and implementing
acts were to come into effect.
Financial implications
6.28 The Minister says that:
· this proposal would require the EBA to
fund two temporary posts to develop four delegated acts and six
technical standards over three years starting in 2016 and continuing
until 2018; and
· the cost of this would be met jointly
by Member States, with a contribution of 60% or €690,000
(£566,766), and the EU, with a contribution of the remaining
40%, or €460,000 (£377,844).
Impact assessments
6.29 The Minister draws our attention to the Commission's
impact assessment. He also attaches to his Explanatory Memorandum
the Government's own impact assessment. Amongst the points it
makes are that:
"Overall this proposal should provide the
UK with a moderate economic benefit. This is primarily because
of its impact in the wider EU, where it will improve financial
stability and competition by extending the benefits of bank structural
reform."
Conclusion
6.30 Whilst this proposed Regulation, if adopted,
might have some moderate benefit for the UK, we note the various
issues for the UK, including some legal ones, which the Minister
highlights. So before considering the proposal further we wish
to hear about the Government's progress in addressing these issues
in Council working group discussions. Meanwhile the documents
remain under scrutiny.
17 See http://ec.europa.eu/internal_market/bank/docs/high-level_expert_group/report_en.pdf. Back
18
(35780) 6020/14 + ADD 1: see chapter 4 of this Report. Back
19
Ibid. Back
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