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94-524: Under European Banking Supervision, the ECB directly supervises the larger banks that are designated as Significant Institutions. The other banks, known as Less Significant Institutions, are supervised by national banking supervisors ("national competent authorities") under supervisory oversight by the ECB. As of late 2022, the ECB directly supervised 113 Significant Institutions in the 21 countries within its geographical scope of authority, representing around 85% of

188-479: A fiscal quarter that has materially affected, or is reasonably likely to materially affect, the company's internal control over financial reporting. Banks may be required to obtain and maintain a current credit rating from an approved credit rating agency , and to disclose it to investors and prospective investors. Also, banks may be required to maintain a minimum credit rating. These ratings are designed to provide color for prospective clients or investors regarding

282-429: A "prudential backstop," or minimum common loss guarantee for the reserve funds that banks set up to deal with losses from future non-performing loans. If a bank fails to meet this agreed minimum level, deductions are made directly from its capital. In addition to the core SREP process, the ECB is also in charge of assessing banks’ acquisition of qualifying holdings, in accordance with Regulation 1024/2013, Art. 4. Before

376-521: A bailout, and then continue to take risks once again. The capital requirement sets a framework on how banks must handle their capital in relation to their assets . Internationally, the Bank for International Settlements ' Basel Committee on Banking Supervision influences each country's capital requirements. In 1988, the Committee decided to introduce a capital measurement system commonly referred to as

470-423: A bank is recognized as significant or when deemed necessary (i.e., in case of exceptional circumstances or when a non-Eurozone country joins the mechanism). Comprehensive assessments require too much resources for them to be conducted annually. Other supervision tools are therefore used on a more regular basis in order to assess how banks would cope with potential economic shocks. As required by EU law and as part of

564-507: A banking supervisor. In the banking union (which includes the euro area as well as countries that join on a voluntary basis, lately Bulgaria ), the European Central Bank , through its supervisory arm also known as ECB Banking Supervision, is the hub of banking supervision and works jointly with national bank supervisors, often referred to in that context as "national competent authorities" (NCAs). ECB Banking Supervision and

658-614: A certain bias of this institution towards the financial industry. This bias can be explained by different power mechanisms at stake: Bank supervision Banking regulation and supervision refers to a form of financial regulation which subjects banks to certain requirements, restrictions and guidelines, enforced by a financial regulatory authority generally referred to as banking supervisor , with semantic variations across jurisdictions. By and large, banking regulation and supervision aims at ensuring that banks are safe and sound and at fostering market transparency between banks and

752-515: A close advisor of BNP Paribas . This group led by de Larosière delivered a report highlighting the major failure of European banking supervision pre-2008. Based on this report, the European institutions have set up in 2011 “The European System of Financial Supervision” (ESFS). Its primary objective was: " to ensure that the rules applicable to the financial sector are adequately implemented, to preserve financial stability and ensure confidence in

846-513: A non-European, highly deregulated , private cartel . Banks may be restricted from having imprudently large exposures to individual counterparties or groups of connected counterparties. Such limitation may be expressed as a proportion of the bank's assets or equity, and different limits may apply based on the security held and/or the credit rating of the counterparty. Restricting disproportionate exposure to high-risk investment prevents financial institutions from placing equity holders' (as well as

940-432: A recapitalization plan for 2015. 0 0 0 0 0 ¹ These banks have a shortfall on a static balance sheet projection, but will have dynamic balance sheet projections taken into account in determining their final capital requirements. 0 0 0 0 0 0 Under the dynamic balance sheet assumption, these banks have no or practically no shortfall taking into account net capital already raised. 0 0 0 0 0 ² Taking into account

1034-421: A struggling bank or to let it fail. The issue, as many argue, is that providing aid to crippled banks creates a situation of moral hazard . The general premise is that while the government may have prevented a financial catastrophe for the time being, they have reinforced confidence for high risk taking and provided an invisible safety net. This can lead to a vicious cycle, wherein banks take risks, fail, receive

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1128-545: Is divided in two: Finally, Basel III provides additional capital buffers covering more specific risks. European Banking Supervision has been actively involved in the making of Non-Performing Loans action plans. In the ECB guidance recommendations, the SSM, along with the European Banking Authority (EBA), have introduced a new definition of Non-Performing Loans (NPLs) that relates to the optimisation of

1222-409: Is in charge of checking the impacts such transactions will have on competition and, therefore, on consumers, the ECB is tasked to monitor the risks entailed by the suggested consolidations. If a transaction includes the acquisition of more than 10% of a bank’s shares or voting rights (i.e., a qualifying holding – Regulation 575/2013, Art. 4(1)36), it must be reported to the national competent authority of

1316-594: Is no minimum reserve ratio. The purpose of minimum reserve ratios is liquidity rather than safety. An example of a country with a contemporary minimum reserve ratio is Hong Kong , where banks are required to maintain 25% of their liabilities that are due on demand or within 1 month as qualifying liquefiable assets. Reserve requirements have also been used in the past to control the stock of banknotes and/or bank deposits. Required reserves have at times been gold, central bank banknotes or deposits, and foreign currency. Corporate governance requirements are intended to encourage

1410-503: Is organised by article 26 of the SSM regulation (Council regulation (EU) No 1024/2013). It is composed of all national participating supervisors, a chair, vice-chair and four ECB representatives. These members meet every three weeks in order to draft supervisory decisions then submitted to the Governing Council . The Supervisory Board is assisted in the preparation of its meetings by a Steering Committee. This committee gathers

1504-677: Is proportional to the risks they take. This is closely monitored by the supervisory authorities. Since 2016, if the results of the SREP for a bank do not reflect a proper coverage of the risks, the ECB may impose additional capital requirements to those required by the Basel agreement. This agreement provides a minimum capital requirement (called Pillar 1 requirement) of 8% of banks’ risk-weighted assets . Since Basel II , extra requirements (called Pillar 2 requirements) can be set in order to cover additional risks. This second category of requirements

1598-599: Is the meeting of the heads of state or government of the member states of the eurozone (those EU states which have adopted the euro ). It is distinct from the EU summit held regularly by the European Council , the meeting of all EU leaders. The Euro summit began as an offshoot of the Euro Group , which is the meeting of the eurozone member's finance ministers. French President Nicolas Sarkozy called for

1692-483: Is the premise for government bailouts , in which government financial assistance is provided to banks or other financial institutions who appear to be on the brink of collapse. The belief is that without this aid, the crippled banks would not only become bankrupt, but would create rippling effects throughout the economy leading to systemic failure . Compliance with bank regulations is verified by personnel known as bank examiners . The objectives of bank regulation, and

1786-535: The Basel Capital Accords . The latest capital adequacy framework is commonly known as Basel III . This updated framework is intended to be more risk sensitive than the original one, but is also a lot more complex. The reserve requirement sets the minimum reserves each bank must hold to demand deposits and banknotes . This type of regulation has lost the role it once had, as the emphasis has moved toward capital adequacy, and in many countries there

1880-487: The Basel Committee on Banking Supervision , makes a distinction between three "pillars", namely regulation (Pillar 1), supervisory discretion (Pillar 2), and market discipline enabled by appropriate disclosure requirements (Pillar 3). Bank licensing, which sets certain requirements for starting a new bank, is closely connected with supervision and usually performed by the same public authority. Licensing provides

1974-421: The European Central Bank itself, to rely more than ever on the standardized assessments of "credit risk" marketed aggressively by two US credit rating agencies – Moody's and S&P, thus using public policy and ultimately taxpayers' money to strengthen anti-competitive duopolistic practices akin to exclusive dealing . Ironically, European governments have abdicated most of their regulatory authority in favor of

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2068-476: The European Treaties , non-Eurozone countries do not have the right to vote in the ECB's Governing Council and, in return, are not bound by its decisions. As a result, non-Eurozone countries cannot become full members of the banking union (i.e., they cannot have the same rights and obligations as Eurozone members). However, non-Eurozone EU member states can enter into a "close cooperation agreement" with

2162-470: The Lehman Brothers ’ fall in 2008, public authorities seem committed to avoid the collapse of other systemic banks. One of the side effects of these public guarantees is to encourage moral hazard : protected by a public net, these financial institutions are incentivized to adopt riskier behaviors. As this opposition of opinions illustrates, if cross-border mergers might have the potential of reducing

2256-853: The National Administration of Financial Regulation in China , the Financial Services Agency in Japan , or the Prudential Regulation Authority in the United Kingdom . The European Union and United States have more complex setups in which multiple organizations have authority over bank supervision. The European Banking Authority plays a key role in EU banking regulation, but is not

2350-1039: The President of the European Commission and the European Central Bank President also attend. Presidents of the Euro Group and of the European Parliament may be invited and the President of the Euro Summit shall present a report to the European Parliament after each of the meetings of the Euro Summit. Heads of state or government of non- eurozone signatories to the European Fiscal Compact treaty participate, at least once

2444-661: The de facto summit President has been the European Council President , meaning that Herman Van Rompuy chaired all meetings since March 2010 to December 2014. The proposals for formalisation of the summit include electing a President along the same lines (and term) as the European Council President, and until then Van Rompuy continues to chair the summit. On 1 March 2012, according to the Treaty on Stability, Coordination and Governance in

2538-473: The financial crisis of 2008 , an increasing number of banks were merging across Europe. This trend stopped as a result of the crisis: between 2008 and 2017, while we saw a decline in the number of cross-border M&As , domestic consolidations (i.e., between two national institutions) rose. In 2016, there were about 6 000 banks in the Eurozone , most of which with a clear focus on their domestic market. Today,

2632-581: The risks taken by European banks . This process, undertaken annually by supervisors from the ECB and Joint Supervisory Teams, is an essential element of the implementation of the Single Supervisory Mechanism . The aim of the SREP is to make sure that banks remain safe and reliable; that any factors that could affect their capital and liquidity are under control. Today, the capital and liquidity levels of banks are then directly subject to an ECB monitoring system while beforehand it

2726-583: The 130 most significant credit institutions in the 19 Eurozone states representing assets worth €22 trillion (equal to 82% of total banking assets of the eurozone). The supervision report included: Based on these three criteria, the review found that a total of 105 out of the 130 assessed banks met all minimum capital requirements on 31 December 2013. A total of 25 banks were found to suffer from capital shortfalls on 31 December 2013, of which 12 managed to cover these capital shortfalls through raising extra capital in 2014. The remaining 13 banks were asked to submit

2820-588: The 19th century and especially the 20th century, even though embryonic forms can be traced back to earlier periods. Landmark developments include the inception of U.S. federal banking supervision with the establishment of the Office of the Comptroller of the Currency in 1862; the creation of the U.S. Federal Deposit Insurance Corporation as the first major deposit guarantee and bank resolution authority in 1934;

2914-727: The Chair and the Vice-Chair of the Supervisory Board, an ECB representative (Edouard Fernandez-Bollo since 2019) as well as five deputies of national supervisors. A division of labour has been established between the ECB and national supervisors. Banks deemed significant will be supervised directly by the ECB. Even though the ECB has the authority to take over the direct supervision of any bank, smaller banks will usually continue to be monitored directly by their national authorities. A total of 115 banks are currently being supervised by

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3008-528: The ECB is not new. In November 2016, the ECB wrote in its Financial Stability Review the following sentence with regards to the banking sector: “ Consolidation could bring some profitability benefits at the sector level by increasing cost and revenue synergies without worsening the so-called “too-big-to-fail” problem ” (ECB Financial Stability Review, Nov. 2016, p. 75) This positioning of the ECB, in favor of bigger and more competitive banks in Europe, translates

3102-421: The ECB's staff, national competent supervisors and experts in the banking field, make the link between the national and supranational levels. There is a JST for each significant banking institution. They act as supporting bodies, responsible mainly for the coordination, control and evaluation of supervisory missions. The Supervisory Review and Evaluation Process, also known as ‘SREP’, is a periodic assessment of

3196-402: The ECB. This procedure is organised by article 7 of the SSM regulation (Council regulation (EU) No 1024/2013) and the ECB decision 2014/510. In effect, these agreements imply the supervision of banks in these signatory countries by the ECB. A close cooperation agreement can be ended either by the ECB or by the participating non-Eurozone member state. Bulgaria , which is in the process of adopting

3290-572: The ECB; all other banks are supervised by their national supervisor. A bank is considered significant when it meets any of the following criteria: This significance status is subject to change due to, for example, mergers and acquisitions. In 2020, two additional banks (LP Group B.V. in the Netherlands and Agri Europe Cyprus in Slovenia ) have joined the list of banks supervised by the ECB. Joint Supervisory Teams (JST), composed of members of

3384-477: The Economic and Monetary Union (TSCG), he was formally elected as President of the Euro Summit for the term 1 June 2012 to 30 November 2014. New president for the term 1 December 2014 until 31 May 2017, is the former Polish Prime Minister Donald Tusk . Belgian Prime Minister Charles Michel was elected new president on 2 July 2019, taking office on 1 December 2019. Presidents of other EU institutions, such as

3478-539: The Euro summit to replace the Euro Group as a "clearly identified economic government" for the eurozone, stating it was not possible for the eurozone to continue without it. The eurozone economic government would discuss issues with the European Central Bank, which would remain independent. Sarkozy stated that "only heads of state and government have the necessary democratic legitimacy" for the role. This idea

3572-524: The European banking landscape is composed of banks with a smaller market share at the EU level than what can be observed in the United States. As a result, the European market is said to be more fragmented and therefore less competitive than in the US or Asia. Cross-border mergers in banking would help banks to diversify their portfolio and, therefore, better recover from localized shocks in the economy. On

3666-411: The European banking system arose long before the financial crisis of 2007-2008 . Shortly after the creation of the monetary union in 1999, a number of observers and policy-makers warned that the new monetary architecture would be incomplete, and therefore fragile, without at least some coordination of supervisory policies among euro members. The first supervisory measure put in place at the EU level

3760-477: The Member State in which the bank is established. This national authority must then conduct an assessment of the deal and forward its conclusions to the ECB, which is the final decision-maker, validating (with or without conditions) or refusing the transaction (Council Regulation No 1024/2013, Art. 15). In 2020, the ECB published a document aiming to clarify the way they were assessing such transactions, with

3854-611: The NCAs together form European Banking Supervision , also known as the Single Supervisory Mechanism. Countries outside the banking union rely on their respective national banking supervisors. The United States relies on state-level bank supervisors (or "state regulators", e.g. the New York State Department of Financial Services ), and at the federal level on a number of agencies involved in

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3948-402: The SREP, the ECB carries out annual stress tests on supervised banks. In 2016, a stress test was performed on 51 banks, covering 70% of EU banking assets. These banks entered the process with an average Common Equity Tier 1 (CET1, i.e., percentage of Tier 1 capital held by banks) ratio of 13%, higher than the 11.2% of 2014. The test showed that, with one exception, all the assessed banks exceeded

4042-488: The West African Monetary Union in 1990 and then, at a much larger scale, with the start of European Banking Supervision in 2014. Given the interconnectedness of the banking industry and the reliance that the national (and global) economy hold on banks, it is important for regulatory agencies to maintain control over the standardized practices of these institutions. Another relevant example for

4136-679: The agency providing its service: the company or the market? European financial economics experts – notably the World Pensions Council (WPC) have argued that European powers such as France and Germany pushed dogmatically and naively for the adoption of the " Basel II recommendations", adopted in 2005, transposed in European Union law through the Capital Requirements Directive (CRD). In essence, they forced European banks, and, more importantly,

4230-485: The annual report has issued an attestation report on management's assessment of the company's internal control over financial reporting. Under the new rules, a company is required to file the registered public accounting firm's attestation report as part of the annual report. Furthermore, the SEC added a requirement that management evaluate any change in the company's internal control over financial reporting that occurred during

4324-449: The applicable AML/CFT framework. Deposit insurance and resolution authority are also parts of the banking regulatory and supervisory framework. Bank (prudential) supervision is a form of "microprudential" policy to the extent it applies to individual credit institutions, as opposed to macroprudential regulation whose intent is to consider the financial system as a whole. Banking supervision and regulation are closely intertwined, to

4418-420: The bank must further protect itself by increasing its equity reserve in the event the loan is not paid. The purpose of this procedure is to increase the bank's resilience to shocks by sharing the risk with the private sector. In other words, addressing the problems associated with PNPs in the future is paramount to consolidating the banking union, while developing lending activity. The new provisions put in place

4512-433: The bank to be well managed, and is an indirect way of achieving other objectives. As many banks are relatively large, and with many divisions, it is important for management to maintain a close watch on all operations. Investors and clients will often hold higher management accountable for missteps, as these individuals are expected to be aware of all activities of the institution. Some of these requirements may include: Among

4606-570: The banking system's total assets (excluding financial infrastructures that are designated as LSIs such as Euroclear in Belgium, Banque Centrale de Compensation in France, or Clearstream in Germany and Luxembourg). European Banking Supervision represents the initial and so far most complete component of the broader banking union , a project initiated in 2012 to integrate banking sector policy in

4700-527: The benchmark used in 2014 in terms of CET1 capital level (5.5%). The results of this stress test show that, in 2016, EU banks had a better potential of resilience and shock absorption than in 2014. In 2018, two types of stress tests were performed: an EBA stress test for 33 banks and a SSM SREP stress test for 54 banks. The aggregate results of those tests show that, in 2018, both sets of banks had again strengthened their capital base compared to 2016, increasing their potential of resistance to financial shocks. Due to

4794-417: The capacity of the ECB to monitor 6,000 banks ". The Vice-President of the European Commission at the time, Olli Rehn , responded to that concern that the majority of European banks would still be monitored by national supervisory bodies, while the ECB " would assume ultimate responsibility for the supervision, in order to prevent banking crises from escalating ". The European Parliament voted in favour of

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4888-438: The company; management's assessment of the effectiveness of the company's internal control over financial reporting as of the end of the company's most recent fiscal year; a statement identifying the framework used by management to evaluate the effectiveness of the company's internal control over financial reporting; and a statement that the registered public accounting firm that audited the company's financial statements included in

4982-543: The coronavirus pandemic, the 2020 stress test has been postponed to 2021. The results of this test should be published by the end of June 2021. All 20 eurozone member states automatically participate in European Banking Supervision. Croatia , being the latest country to join the Eurozone on 1 January 2023, was accordingly added to the scope of application of European Banking Supervision. Under

5076-647: The creation of the Belgian Banking Commission , Europe's first modern banking supervisor in 1935; the start of formal banking supervision by the Bank of England in 1974, marking the eventual generalization of the practice among jurisdictions with large financial sectors; and the emergence of supranational banking supervision, first by the Eastern Caribbean Central Bank in 1983 and the Banking Commission of

5170-477: The date and summary reports of all previous Euro Summits. New procedure rules for Euro summits were adopted on 14 March 2013, regulating the Euro Summit shall meet at least twice a year, convened by its president on preferably one of the same dates as the EU summits . However, for unknown reasons, only one Euro Summit meeting per year took place in 2013 and 2014, and none took place in 2016. In its informal capacity,

5264-549: The disposal of the NPLs by the banks. The main purpose is to integrate the multidimensional framework that the banks use in their evaluation process in the comprehensive assessment by the Supervisory Authority. A bank loan is non-performing when the 90-day period is exceeded without the borrower paying the due amount or the agreed interest. If customers do not follow the agreed upon repayment terms for 90 days or more,

5358-432: The emphasis, vary between jurisdictions. The most common objectives are: Among the reasons for maintaining close regulation of banking institutions is the aforementioned concern over the global repercussions that could result from a bank's failure; the idea that these bulge bracket banks are " too big to fail ". The objective of federal agencies is to avoid situations in which the government must decide whether to support

5452-467: The euro area. The unfinished piece of the banking union agenda is about crisis management and resolution, for which the so-called Single Resolution Mechanism coexists with national arrangements for deposit insurance and other aspects of the bank crisis management framework. The policy agenda on the completion of the banking union, stalled since June 2022, also includes options for the regulatory treatment of sovereign exposures. The question of supervising

5546-419: The euro currency, signed a close cooperation agreement with the ECB in 2020. Croatia likewise had a close cooperation agreement with the ECB prior to joining the eurozone. The European Central Bank (ECB) has the leadership in European banking supervision. A strict administrative separation is foreseen between the ECB's monetary and supervisory tasks. However, final decision-making on both matters takes place in

5640-516: The exact structure of the reports that the SEC requires. In addition to preparing these statements, the SEC also stipulates that directors of the bank must attest to the accuracy of such financial disclosures. Thus, included in their annual reports must be a report of management on the company's internal control over financial reporting. The internal control report must include: a statement of management's responsibility for establishing and maintaining adequate internal control over financial reporting for

5734-607: The exposure of individual firms to localized shocks, studies show that they also increase systemic risks on financial markets. In the attempt to mitigate those risks, the ECB is, since 2013, responsible (as part of the Single Monitoring Mechanism), with the European Commission , for assessing the soundness of banking mergers (Council Regulation No 1024/2013, Art. 4). While the European Commission

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5828-558: The extent that in some jurisdictions (particularly the United States) the words "regulator" and "supervisor" are often used interchangeably in its context. Policy practice, however, makes a distinction between the setting of rules that apply to banks (regulation) and the oversight of their safety and soundness (prudential supervision), since the latter often entails a discretionary component or "supervisory judgment". The global framework for banking regulation and supervision, prepared by

5922-753: The fact that the European treaties did not allow the EU, at the time, to have real decision-making power on these matters. The idea of having to modify the treaties and of engaging in a vast debate on the Member States’ loss of sovereignty cooled down the ambitions of the Lamfalussy process. The financial and economic crisis of 2008 and its consequences in the European Union  incentivized European leaders to adopt a supranational mechanism of banking supervision. The main objective of

6016-452: The financial system as a whole ”. The ESFS brought together, in an unconventional manner, the European and the national supervisory authorities. Despite the creation of this new mechanism, the European Commission considered that, having a single currency, the EU needed to go further in the integration of its banking supervision practices. The idea was that the mere collaboration of national and European supervisory authorities

6110-1246: The firm's) capital at an unnecessary risk. In the US in response to the Great Depression of the 1930s, President Franklin D. Roosevelt 's under the New Deal enacted the Securities Act of 1933 and the Glass–Steagall Act (GSA), setting up a pervasive regulatory scheme for the public offering of securities and generally prohibiting commercial banks from underwriting and dealing in those securities. GSA prohibited affiliations between banks (which means bank-chartered depository institutions, that is, financial institutions that hold federally insured consumer deposits) and securities firms (which are commonly referred to as "investment banks" even though they are not technically banks and do not hold federally insured consumer deposits); further restrictions on bank affiliations with non-banking firms were enacted in Bank Holding Company Act of 1956 (BHCA) and its subsequent amendments, eliminating

6204-464: The governance mechanism at stake (e.g. what the skills and experiences of the leadership are). With this communication, the ECB also took the initiative to clarify how it was computing the capital requirements of the new entity and how it would assess the quality of this new body's assets . According to two PwC analysts, the publication of this document by the ECB seems to indicate that it wishes to encourage banking consolidation. This position from

6298-429: The imposition of concentration risk (or large exposures) limits, and related reporting and public disclosure requirements and supervisory controls and processes. Other components include supervision aimed at enforcing consumer protection , sometimes also referred to as conduct-of-business (or simply "conduct") regulation and supervision of banks, and anti-money laundering supervision that aims to ensure banks implement

6392-461: The individuals and corporations with whom they conduct business. Its main component is prudential regulation and supervision whose aim is to ensure that banks are viable and resilient ("safe and sound") so as to reduce the likelihood and impact of bank failures that may trigger systemic risk . Prudential regulation and supervision requires banks to control risks and hold adequate capital as defined by capital requirements , liquidity requirements,

6486-425: The interconnectedness is that the law of financial industries or financial law focuses on the financial (banking), capital, and insurance markets. Supporters of such regulation often base their arguments on the " too big to fail " notion. This holds that many financial institutions (particularly investment banks with a commercial arm) hold too much control over the economy to fail without enormous consequences. This

6580-581: The legislative proposal on the 12th of September 2013. The Council of the European Union gave its own approval on the 15th of October 2013. The SSM Regulation entered into force on the 4th of November 2014. The fact that European Banking Supervision is formulated as a regulation and not a directive is important. Indeed, a regulation is legally binding and Member States do not have the choice, unlike for directives, of how to transpose it under national law. The ECB published its first comprehensive assessment on 26 October 2014. This financial health check covered

6674-413: The licence holders the right to own and to operate a bank. The licensing process is specific to the regulatory environment of the jurisdiction where the bank is located. Licensing involves an evaluation of the entity's intent and the ability to meet the regulatory guidelines governing the bank's operations, financial soundness, and managerial actions. The supervisor monitors licensed banks for compliance with

6768-502: The management structure or the need of holding more capital especially in times of financial crisis ). These actions shall normally be fulfilled by the following year. In case of non-compliance with these requirements, the ECB can charge a fine up to the double of the profits (or losses) which have been generated (or caused) by the breach and that can amount up to 10% of these banks’ annual turnover . The ECB can also request national authorities to open proceedings against these banks. In

6862-650: The most important regulations that are placed on banking institutions is the requirement for disclosure of the bank's finances. Particularly for banks that trade on the public market, in the US for example the Securities and Exchange Commission (SEC) requires management to prepare annual financial statements according to a financial reporting standard , have them audited, and to register or publish them. Often, these banks are even required to prepare more frequent financial disclosures, such as Quarterly Disclosure Statements . The Sarbanes–Oxley Act of 2002 outlines in detail

6956-445: The most important requirement in bank regulation that supervisors must enforce is maintaining capital requirements . As banking regulation focusing on key factors in the financial markets, it forms one of the three components of financial law , the other two being case law and self-regulating market practices. Compliance with bank regulation is ensured by bank supervision . Banking regulation and supervision has emerged mostly in

7050-400: The most influence over how banks (and all public companies) are viewed by those engaged in the public market. Following the 2007–2008 financial crisis , many economists have argued that these agencies face a serious conflict of interest in their core business model. Clients pay these agencies to rate their company based on their relative riskiness in the market. The question then is, to whom is

7144-427: The new supervisory mechanism was to restore confidence in financial markets. The idea was also to avoid having to bail out banks with public money in case of future economic crises. To implement this new system of supervision, the President of the European Commission in 2008, José Manuel Barroso , asked a group of experts to look at how the EU could best regulate the European banking market. This group

7238-408: The objective of being more transparent and predictable. Even though transactions are assessed on a case-to-case basis, the supervision process of these deals follow the same three stages: In phase two, the ECB pays particular attention to the sustainability of the suggested business model (e.g., under which assumptions it has been built, what has been planned in terms of IT integration, etc.) and to

7332-493: The orderly resolution plan of this institution, which benefits from a State guarantee, there is no need to proceed with additional capital raising. This is the only time where a comprehensive assessment has been done for the 130 banks supervised by the ECB. Since 2014, only a few numbers of banks have been comprehensively assessed by the ECB: 13 in 2015, 4 in 2016 and 7 in 2019. These comprehensive assessments are conducted either when

7426-423: The other hand, spreading risks across different geographies could also be a threat to the stability of financial markets: one might, indeed, worry of a potential effect of contagion between regions. Such transactions could also lead to the creation of groups regarded as “ Too big to fail ”, which, in case of systemic crises, would require significant support from the public purse. Following the terrible consequences of

7520-482: The possibility that companies owning banks would be permitted to take ownership or controlling interest in insurance companies, manufacturing companies, real estate companies, securities firms, or any other non-banking company. As a result, distinct regulatory systems developed in the United States for regulating banks, on the one hand, and securities firms on the other. Most jurisdictions designate one public authority as their national prudential supervisor of banks: e.g.

7614-581: The president of the Central Bank and of the Eurogroup on a preliminary report used as a basis for discussions at the summit. In compliance with the decisions made then, the European Commission published a proposal for a council regulation establishing European banking supervision in September 2012. The European Central Bank welcomed the proposal. Chancellor of Germany Angela Merkel questioned "

7708-408: The previous year and  after each cycle, there is an individual evaluation. Based on these assessments and simulations, supervisors write a report on the vulnerability of European banks, with a score ranging from 1 (low risk) to 4 (high risks), and list concrete measures for these banks to take. These measures can be quantitative - related to capital or liquidity, or qualitative (e.g., a change in

7802-566: The prudential supervision of credit institutions: for banks, the Federal Reserve , Office of the Comptroller of the Currency , and Federal Deposit Insurance Corporation ; and for other credit institutions, the National Credit Union Administration and Federal Housing Finance Agency . Euro summit The Euro summit (also referred to as the eurozone summit or euro area summit )

7896-462: The relative risk that one assumes when engaging in business with the bank. The ratings reflect the tendencies of the bank to take on high risk endeavors, in addition to the likelihood of succeeding in such deals or initiatives. The rating agencies that banks are most strictly governed by, referred to as the "Big Three" are the Fitch Group , Standard and Poor's and Moody's . These agencies hold

7990-412: The requirements and responds to breaches of the requirements by obtaining undertakings, giving directions, imposing penalties or (ultimately) revoking the bank's license. Bank supervision may be viewed as an extension of the licence-granting process. Supervisory activities involve on-site inspection of the bank's records, operations and processes or evaluation of the reports submitted by the bank. Arguably

8084-587: The same body: the Governing Council. The Governing Council is the main decision-making entity of the ECB. It comprises the members of the Executive Board of the European Central Bank and the governors of all national central banks of the Eurozone 's member states. The Governing council is in charge, based on the opinion drafted by the Supervisory Board, of taking formal decisions with regards to its supervisory mandate. The Supervisory board

8178-469: The same rules. Until such an election takes place, the European Council President fulfils that role. In October 2011, the Eurozone head of states agreed to meet at least twice per year, as part of measures to improve governance of the Eurozone. Meetings were chaired by president Herman Van Rompuy from March 2010 to November 2014. Donald Tusk has been the Euro Summit president since 1 December 2014, and ends his term on 31 May 2017. The table below lists

8272-677: The worst case scenario, when a bank is likely to fail, the second pillar of the European Banking Union , the Single Resolution Mechanism , enters into play. Eventually, even though the methodology and the timeframe are identical for banks, the actions to take can significantly differ among them as well as the sanctions. As banks can take considerable risks , holding capital is essential to absorb potential losses, avoid bankruptcies and secure people’s deposits . The amount of capital banks should hold

8366-538: Was based on the meeting of eurozone leaders in 2008 who met to agree a co-ordinated eurozone response to the banking crisis. They first met in the summit format in October 2008, in response to the debt crisis . Subsequent meetings took place in March 2010, May 2010, March 2011, July 2011 and October 2011. In the October 2011 meeting, it was agreed to formalise the Euro summit, as at least twice yearly meeting. This change

8460-548: Was formalised in the 2012 Treaty on Stability, Coordination and Governance in the Economic and Monetary Union . Since this formalisation, Heads of State or Government have failed to meet this target of twice yearly meetings in 2013, 2014, 2016 and 2017. A Euro summit President, separate from the Euro Group President, would be elected at the same time as the President of the European Council and under

8554-504: Was heterogeneously done at a national level. This evaluation is based on the monitoring of four different areas: In addition, each year, the European Central Bank is, under European Union law , obliged to perform at least one stress test on all supervised banks. This test will be part of the annual SREP cycle. Stress tests are computer-simulated techniques which evaluate the capacity of banks to cope with potential financial and economic shocks . Annual SREP cycles are based on data from

8648-636: Was led by Jacques de Larosière , a French senior officer who held, until 1978, the position of Director General of the Treasury ;in France. He was also President of the International Monetary Fund from 1978 to 1987, President of the “ Banque de France ” from 1987 to 1993 and President of the European Bank for Reconstruction and Development from 1993. On a more controversial stance, Jacques de Larosière has also been

8742-414: Was not enough and that the EU needed a single supervisory authority. The European Commission therefore suggested the creation of the Single Supervisory Mechanism. This proposal was debated at the Eurozone summit that took place in  Brussels on 28 and 29 June 2012. Herman Van Rompuy , who was president of the European Council at the time, had worked upstream with the president of the commission,

8836-506: Was the creation of the Lamfalussy Process in March 2001. It involved the creation of a number of committees in charge of overseeing regulations in the financial sector. The primary goal of these committees was to accelerate the integration of the EU securities market. This approach was not binding for the European banking sector and had therefore little influence on the supervision of European banks. This can be explained by

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