Supervision of credit institutions

Question 1

Corporate governance problems during GFC

Answer 1

Assumption: attention only on SHs interests could encourage excessive risk-taiking, damaging other stakeholders such as creditors, depositors, employees.

Inefficient and ineffective CopGov arrangements, managers take to much risk

Question 2

New corporate governance rules

Answer 2

New “management body” that oversees executives and assist authorities in monitoring. MB appointed in accordance with national law. MB should be diverse, no single authoritative member (not too many directorships though)

Question 3

Risk management function

Answer 3

bank unit that ensures ideni´tificatino, measurement and reporting of all risks. Autonomous from other ops functions.

Question 4

Committees within mgmt body of large institutions

Answer 4

Only comprised of people without executive function

1) Risk committee: advise and assist MB with risk strategy implementation
2) Nomination commitee: regularly assesses skills of MB people, review and recommend choices of senior management
3) Remuneration committee: draft, consult and supervise implementation of remuneration policies. Important: don’t encourage excessive risk taking (such as in GFC)

Question 5

De Larosiere mandate

Answer 5

EU answer to GFC, focused on stregnthening EU supervisory 1) prudential soundness of insti 2) functioning of markets 3) protection of depositors, policy holders, investors.

Strenghten EU cooperation on 1) financial stability oversight 2) early warning mechanism 3) crsis management.

One point: before GFC too much micro-prudential, not enough macro

Question 6

EU system of financial supervision (ESFS) organs

Answer 6

1) EU supervisory authorities (ESAs): work with national authorities at individual financial firm level. develop rules, standards, guidelines,. monitoring, ban stuff, mediate disputes, ensure application of EU law
2) EU systemic risk board (ESRB): monitor threahts to stability on macro-eonomic level/ whole financial system. Provide early warning of system-wide risks
3) National competent authorities (NCAs): authorize CIs, investigate. can impose administrative penalties/measures

Question 7

Supervisory review and evaluation process (SREP)

Answer 7

assessment of risks that CIs are exposed to, prepared at least annually. Here it is also determined whether CI might pose systemic risk. Also: stress tests.

Question 8

Reactive measures

Answer 8

excess funds, reinfocement, apply particular provisioning policy or treatment of assets, restrict business, reduce isk, more reporting, force CI to use net profits to strenghthen funds, restrict payment of interest to SHs, members/holders of additional tier 1 instruments, liquidity requirements

Question 9

Trilemma of financial supervision

Answer 9

1) Stable financial system
2) Integrated financial market
3) National financial supervision

Question 10

3 components of Euro area banking union

Answer 10

1) Single supervisory mechanism (all banks by ECB, less-significant banks by NCAs)
2) single resolution mechanism (SRB, NRAs for lesser banks)
3) deposit insurance scheme (EDIS). weak point. not mutualised at euro-area level yet. Common deposits guarantee scheme (CDGS)

Question 11

Main reasons for banking union

Answer 11

1) relevant amount of cross-border activities within both euro-area and non euro-area
2) Integriyt of the Euro and internal market threatened by fragmentation of financial sector
3) need for supervisors able to overse highly compley and interconected instit
4) home country control no longer enough
5) need to cut link between sovereign debts and domestic banking systems
6) coordination by ESSFS not enough

Question 12

3 Objectives of SSM

Answer 12

1) ensure safety and soundness of Euro-area banking system
2) enhance financial integration and stability
3) ensure consistent application of bank supervision standards

Question 13

Tasks and powers of ECB in SSM framework

Answer 13

1) Micro-prud tasks: grant/withdraw bank licences, authorise acquisitions, monitoring of compliance, investigations, set prudential requirements, supervisory reviews (stress tests), impose corrective measures/ recovery plans and early intevention
2) macro: define higher requrements for capital buffers than applied by NCAs

Question 14

Governance issues: ECB governing council vs. SSM supervisory board

Answer 14

governing council has upper hand ag. supervisory board and can reject decision by SB (if not rejected after some time, decision is deemed adopted).

Decision-making structures of ECB primarily for monetary polica (vs. supervisory function of SSM)

Question 15

Governing council: separation principle

Answer 15

GC cannot modify decisions proposed by SB. GC stuff on supervisory matters strictly apart from other ECB functions. Separation also ensured on staff level.

Question 16

Criteria for “significant” CI

Answer 16

1) Assets > 30bn
2) Total assets / GDP_home country > 20% (unless < 5bn)
3) NCA or ECB define bank as significant on the basis of cross-border assets and liabilities or because of ESM assistance or bcamong 3 biggest banks of country

less significant banks under direct supervision of NCAs, only indirect from ECB

Question 17

Joint supervisory teams (JST)

Answer 17

one of the main forms of cooperation between ECB and national supervisors for supervising significant banks.