Law Overview:

EBA Regulation: (European Banking Authority)

Regulation no 1093/2010
Art. 114 TFEU ● Legal basis for the adoption of EBA Regulation

Art. 1 (Establishment & (2)

scope of action) ● Scope of powers which the authority can act within that are
conferred in this regulation and a bunch of other
regulations and directives.
(3)
● What fields the authority overlooks including those who are
not directly covered in the acts referred to in paragraph 2.
(5)
● The objective is: stability and effectiveness of financial
system, for the Union economy, citizens and businesses.
(a)
● improving the functioning of the internal market, including,
in particular, a sound, effective and consistent level of
regu-lation and supervision;
(b)
● Ensuring integrity, transparency, efficiency + orderly
functioning of the financial markets.
(c)
● Strengthening international supervisory coordination
(d)
● Preventing regulatory arbitrage + promoting equal
conditions of competition
(e)
● Ensuring that risks are appropriately regulated and
supervised; and
(f)
● Enhancing customer protection

Art. 8 (Task and powers (1)

of the authority) ● Which tasks the EBA has:
(a)
● Contributes to high-quality common regulatory and
supervisory standards + providing opinions and developing
guidelines, recommendations and implementing technical
standards to the union institutions.

Art. 17 (Breach of Union Policing in breaches of eu law

law) (1)
● How the authority shall act in cases where there either is a
breach of the law, or where it appears to be a breach of
 the law. In accordance with (2), (3) & (6)
(2)
● After either request from one or more competent authority
(detailed in the article) or on its own initiative may
investigate an alleged breach or non-application of union
law.
● The competent authority shall provide the EBA the
information it considers necessary for the investigation
(3)
● The EBA has a maximum of 2 months from initiating
investigation, to addressing a recommendation to the
competent authority.
● The competent authority shall, within 10 working days of
receipt of the recommendations inform the EBA of the
steps it has taken, or intends to take to ensure compliance
with Union law.
(4)
● If the competent authority has not complied with union law
within 1 month of receipt of the EBA recommendation, the
Commission may by its own initiative or after them being
informed by EBA, issue a formal opinion.
● Commission shall issue formal opinion no later than 3
months after the adoption of the recommendation.
Commission may extend this by 1 month.
● EBA + competent authority shall provide necessary
information to the Commission.
(5)
● Competent authority shall within 10 working days of receipt
of formal opinion inform the Commission and the EBA of
the steps it has taken or intends to take in order to comply
with the formal opinion.
(6)
● In order to maintain or restore neutral conditions of
competition or ensure the orderly functioning and integrity
of the financial system, the EBA may where the relevant
requirements of the acts referred to in Art. 1(2) are directly
applicable to financial institutions, adopt an individual
decision addressed to a financial institution requiring the
necessary action to comply with its obligations under union
law.
(7)
● The decisions adopted under paragraph 6 shall prevail
over any previous decision adopted by the competent
authority on the same matter.

Art. 18 (Action in How to intervene in emergency situations

emergency situations) (1)
● The EBA shall actively facilitate and coordinate any
actions undertaken by the relevant national competent
supervisory authorities. In case of adverse developments
 which may jeopardise the functioning and integrity of the
financial markets.
● EBA shall be fully informed of any relevant developments,
and shall be invited to participate as an observer in any
relevant gathering by the national competent supervisory
authorities.
(2)
● Where the ESRB and EBA considers that an emergency
situation may arise, it shall issue a confidential
recommendation addressed to the Council along with an
assessment of the situation
(3)
● The EBA may adopt individual decisions requiring
competent authorities to take action, if adverse
developments which may jeopardise the orderly function
and integrity of the financial markets or the stability of the
financial system in the union.
(4)
● The EBA may, if a competent authority has not responded
to the legislative acts referred to in article 1(2), address
directly to a financial institution requiring the institution to
comply with its obligations.
(5)
● Decisions adopted under paragraph 4 shall prevail over
any previous decision adopted by the competent
authorities on the same matter.

Art. 19 (Settlement of Mediation and settle disputes between national authorities

disagreements between (1)
authorities in cross- ● If a competent authority disagrees of a procedure, action
border situations) or inaction from a competent authority in another member
state in cases specified in Article 1(2) the EBA at the
request may help reaching an agreement in accordance
with the procedure set out in paragraphs 2 to 4
● The EBA may on its own initiative assist the authorities to
reach an agreement.
(2)
● The EBA shall set a time limit for conciliation between the
authorities, taking into account the urgency, complexity
and relevant time periods specified in Article 1(2). At this
stage the EBA shall act as mediator.

(3)
● If the competent authorities fail to reach an agreement the
EBA may in accordance with subparagraph 3 and 4 of
Article 44(1) take a decision requiring them to take a
specific action or refrain from action in order to settle the
matter. With binding effects.
(4)
 ● The EBA may where a competent authority have failed to
comply, adopt an individual decision adresse to a financial
institution.
(5)
● Decision adopted under paragraph 4 shall prevail over any
previous decision adopted by the competent authority on
the same matter.

Art. 22 (General (1)

Provisions) (Systemic ● The EBA shall duly consider systemic risk as defined by
risk) Regulation 1092/2010. It shall address any risk of
disruption in financial services that is caused by an
impairment of all or parts of the financial system and has
the potential to have serious negative consequences for
the internal market and the real economy

● EBA shall consider the monitoring and assessment of

systemic risk as developed by the ESRB and the EBA and
respond to warnings and recommendations by the ESRB
in accordance with Article 17 of regulation 1092/2010
(2)
● The EBA and ESRB develop a common set of quantitative
and qualitative indicators to identify and measure systemic
risk.
● The EBA shall also develop an adequate stress-testing
regime to help identify situations that may pose systemic
risk
(3)
● The EBA shall draw up additional guidelines and
recommendations for financial institutions to take account
of the systemic risk posed by them.
● The EBA shall ensure that systemic risk posed by financial
institutions is taken into account when developing draft
regulatory and implementing technical standards.
(4)
● The EBA may on request from one or more competent
authorities, the european parliament, council or the
commission or by its own initiative, conduct an inquiry into
a particular type of financial institution, product or type of
conduct in order to assess potential threats to the stability
of the financial system and make recommendations for the
competent authorities.
(5)
● The Joint Committee shall ensure overall and cross-
sectoral coordination of the activities carried out in
accordance with this Article.

Art. 23 (Identification and (1)

measurement of ● The EBA shall in consultation with the ESRB, develop
 systemic risk) criteria for the identification and measurement of systemic
risk.
● Evaluation of the potential for systemic risk posed by
financial institution through an adequate stress-testing
regime.
● The financial institutions that may pose a systemic risk
shall be subject to strengthened supervision and where
necessary, the recovery and resolution procedures
referred to in article 25.
(2)
● The EBA shall take fully into account the relevant
international approaches when developing the criteria for
the identification and measurement of systemic risk posed
by financial institutions, including those established by the
FSB, IMF and BIS.

Art. 29 (Common (1)(a-e)

supervisory culture) ● Building a common union supervisory culture and
consistent supervisory practices, as well as in ensuring
uniform procedures and consistent approaches throughout
the union
(2)
● The EBA may develop new instruments to promote
common supervisory approaches and practices

SSM Regulation: (Single Supervisory Mechanism)

Regulation no. 1024/2013
Article 1 (Subject matter and scope)
● The SSMs objective to contribute to
the safety and soundness of the
financial system within the union and
each member state, with full regard
and duty care for the unity and
integrity of the internal market based
on equal treatment of credit
institutions.

Article 4 (Tasks conferred on the ECB) (1)

● The ECB shall be exclusively
competent to carry out, for prudential
supervisory purposes, the following
tasks in relation to all credit institutions
established in the participating
member states.
(a)

Article 6 (Cooperation with the SSM)
ESRB Regulation:
Regulation no. 1092/2010
Art. 3 (Scope of jurisdiction)
Art. 15 (Collection and
exchange of information)
● To authorise credit institutions and to
withdraw authorisations of credit
institutions subject to article 14
(e)
● makes clear that fit and proper
assessments should be part of the
ECB’s supervision of the overall
governance of credit institutions.
(1)
● The ECB shall carry out its tasks
within a single supervisory mechanism
composed of the ECB and national
competent authorities. ECB is
responsible for effective and
consistent functioning of the SSM
(4)
● Conditions when a bank is a big bank
or “not less significant”.
(5)
● With regard to the credit institutions
referred to in paragraph 4, and within
the framework defined in paragraph 7:
(a)
● The ECB shall issue regulations,
guidelines or general instructions to
NCAs to which the tasks are
performed and supervisory decisions
are adopted by NCAs
(1)
● Oversight of the Financial System.
● Avoid periods of widespread financial distress.
● Ensure sustainable contribution of the financial sector to
economic growth.
(2)
● (c) Issuing Warnings
● (d) Issuing recommendations
(1)
● ESRB shall provide the ESAs with the information on
risk necessary for the achievement of their tasks
(2)
● The ESAs, ESCB, Commission, national supervisory

Art. 16 (Warnings and
Recommendation)
Art. 17 (Follow-up of the
ESRB Recommendations)
Art. 18 (Public warnings
and recommendations)
BRRD: (Bank Recovery and Resolution Directive)
Directive 2014/59/EU
Art. 3 (Designation of
authorities responsible for
resolution)
Art. 5 + 6 (Recovery plans
and assessment of
recovery plans)
Art. 10 + 11 (Resolution
authorities and national statistics authorities shall
cooperate closely with the ESRB.
(3)
● The ESRB may request information from the ESAs, as a
rule in summary or aggregate form such that individual
institutions cannot be identified.
(1)
● When significant risks to the achievement of 3(1) are
Identified.
● The ESRB shall provide warnings and where
appropriate, issue recommendations.
(2)
● Warnings and recommendations may be either general
or specific. - and there must be a time-limit
(1)
● A national authorities...shall provide adequate
justification for any inaction.
○ To the council and the ESRB.
(2)
● If the ESRB decides that its recommendation has not
been followed, or have failed to provide adequate
justification for their inaction.
(1)
● The General Board shall decide on a case-by-case
basis, after having informed the Council sufficiently in
advance so that it is able to react, whether a warning or
a recommendation should be made public.
● (1) “Each Member State shall designate one or,
exceptionally, more resolution authorities that are
empowered to apply the resolution tools and exercise the
resolution powers.“
● The Banks draw up measures to be taken by the bank to
restore its financial position following a significant
deterioration of its financial position; NCAs(article 5 (1))
○ Planning must assume no public support .(article
5 (3))
○ Updated annually(article 5 (2))
● Assessed by supervisor (article 6 (1))
● The resolution authority draws an individual bank plan on
plans) what actions it will take, should the bank enter resolution
(article (10 (1))
○ Planning must assume no public or central bank
support (article 10 (3) (a-c))
○ Consider different scenarios(Article 10 (3))
○ Identifies potential obstacles to resolvability
(article 10 (2))

Art. 12 + 13 (Groups) ● Assessed at group level, by group level resolution

authority and all subsidiaries resolution authorities(Article
12 (1) (a-d))
○ If resolved as a group, allowed extra financial
support between the entities.(article 12 (3)(i))
○ What he group plan should hold (Article 13 (3)(a-
f))

Art. 27-30 (Early ● As a banks financial position begins to deteriorate, the

intervention measures) supervisor has a number of powers to try and rectify the
situation before it get to a resolution stage:

- Implement recovery plan(art. 27 (a))

- Change business strategy(art. 27 (f))
- Remove management(art. 28)
- Temporary administrator(art. 29)
- Coordination of early intervention and appointment of
temp. administrator(art. 30)

Art. 31 (Resolution ● When applying the resolution tools, the authorities shall
objectives) have regard to the objectives listed in article 31(2)

Art. 32 (Resolution ● Before resolution can be used, certain conditions have to

conditions) be met
○ The bank is in breach or will likely breach in the
near future.(art. 32 (1) (a))
○ There is no reasonable prospect (art.32 (1) (b))
○ In the interest of the public(art. 32 (5))
● Article 32 (4) lists the circumstances when an institution
is failing or likely to fail.

● State Aid conditions (Art. 32(4)(d)(iii)

Art. 36 (valuation) (1)

● Before a sale is conducted an independent, fair and
realistic valuation must be conducted first.

Art. 38-39 (Sale of Article 38 (1)

business) ● Member States shall ensure that resolution authorities
have the power to transfer to a purchaser that is not a
bridge institution
(a)
● The entire business
 (b)
● All or any assets, rights or liabilities

Article 39
● Open sales process with marketing of sale, unless:
Article 39 (3)
● Sale undermines resolution objectives
Article 39 (3) (a)
● Threat to financial stability

The residual enters liquidation under national law.

NCWO principle (see article 74)

Art. 40-41 (Bridge Bank) Article 40 (1)

● Member states shall ensure that resolution authorities
have the power to transfer to a bridge institution:
(a)
● The entire business
(b)
● All or any assets, rights or liabilities

The bank must be publicly owned (Article 40 (2) (a))

Two year period (article 41 (5)) can be extended with one year if
the requirements in article 41 (6) (a) or (b) is met.

The residual enters liquidation under national law.

NCWO principle (see article 74)

Art. 42 (Asset separation) Before an institution is transferred to an asset management

vehicle, an article 36 (1) valuation must be conducted first.
(1)
● Member States shall ensure that resolution authorities
have the power to transfer assets, rights or liabilities of an
institution under resolution or a bridge institution to one or
more asset management vehicles
(2)(a)
● The bank must be publicly owned

Allows the transfer of assets whose liquidation which could have

adverse effects on the financial markets (article 42 (5) (a))
Restores confidence in the market

NCWO principle (see article 74)

Art. 43-55 (Bail in) Article 43 (2)

● Purpose: loss-absorption and recapitalization.
 Article 44 (1)
● Scope:
● Some liabilities are exempted i.e. covered deposits
(Article 44 (2))
● Others are chosen discretionary under exceptional
circumstances. I.e. destruction of value (Article 44 (3) (a-
d) (in this case the SRF comes into play)

Application of the minimum requirement (Article 45 (1))

Article 46 (1) (a-b)

● Member States shall ensure that, when applying the bail-
in tool, resolution authorities assess on the basis of a
valuation that complies with Article 36

Treatment of shareholders in bail-in or write down or conversion

of capital instruments (Article 47 (1) (a-b))

Sequence of write down and conversion(Article 48 (1) (a-b)

Derivatives(article 49 (1))

Rate of conversion of debt to equity(article 50 (1))

Recovery and reorganisation measures to accompany bail-in

(Article 51 (1))

Business reorganisation plan(Article 52 (1))

Effect of bail-in(Article 53 (1))

Removal of procedural impediments to bail-in(Article 54 (1))

Contractual recognition of bail-in(Article 55 (1) (a-d))

NCWO principle (see article 74)

Article 73 (Treatment of (1)

shareholders and creditors
in the case of partial
transfer and application of
the bail-in tool)
(a)
● Member States shall ensure that, where one or more
resolution tools have been applied and, in particular for
the purposes of Article 75:
● Except where point (b) applies; The shareholders and
creditors whose claims have not been transferred,
receive in satisfaction of their claims at least as much as
under normal insolvency at the time when the decision

Article 74 (Valuation of
difference in treatment)
Article 75 (Safeguard for
shareholders and
creditors)
SRM Regulation
Article 4 (participating
member states)
Article 8 ( resolution plans
drawn up by the board)
CRD IV
Directive 2013/36/EU
Article 88 (Governance
arrangements)
Article 91 (Management
body)
was taken
(b)
● The shareholders and creditors whose claims have been
written down or converted, do not incur greater losses
than they would have under normal insolvency at the time
when the decision was taken
(1)
● The application of NCWO (Article 74 (2) (a-c))
● No creditor or shareholder shall incur greater losses than
they would have incurred if the institution had been
wound up under normal insolvency proceedings
● If valuation is carried out under Article 74 and it is
determined that any shareholder or creditor referred to in
Article 73 has incurred greater losses than they would
under normal insolvency, they are entitled to a payment
of the difference.
Article 4(3)
● provides that for the purposes of carrying out its
supervisory tasks the ECB will apply all relevant Union
law and, where this law is composed of Directives, the
national law implementing those directives.
(1)
● The board shall draw up and adopt resolution plans
referred to in article 7(2) and 7 (4)(b) and (5) where the
conditions are met.
Article 88 (1)(a)
● Emphasizes the obligations of the board to monitor the
performance, risk controls, compensation strategy and
integrity disclosure of the firm
Fit and proper test
Article 91 (1)
● Members shall have at all times be of sufficiently good
 repute and possess sufficient knowledge, skills and
experience.
Article 91 (2)
● Members shall commit sufficient time to perform their
functions.
Article 91 (7-8)
● Imposes ad hoc regulatory duties of care and loyalty on
board members
Article 91 (7)
● The management body shall possess adequate collective
knowledge, skills and experience to be able to understand
the institutions activities and risks.
Article 91 (8)
● Each member of the management body shall act with
honesty, integrity and independence of mind to effectively
assess and challenge the decision of the senior
management to effectively oversee and monitor
management decision-making.

Article 74 (Internal Article 74 (2)

governance and ● Aims to ensure that the internal governance arrangements
recovery and resolution are consistent with the individual risk profile and business
plans) model of the institution(proportionality)

Article 92 Article 92 (1)

(Remuneration policies) ● The application of paragraph 2 of this Article and of Articles
93, 94 and 95 shall be ensured by the competent
authorities for institutions at group, parent company and
subsidiary levels, including those established in offshore
financial centres.
Article 92 (2)(a-g)
● What competent authorities shall ensure, when establishing
and applying the remuneration policies.
● And which employees: Material risk-takers

Article 93 (Institutions Article 93 (1)(a-c)

that benefit from ● In the case of institutions that benefit from exceptional
government government intervention,the following principles shall apply
intervention) in addition to those set out in Article 92 (2):

Article 94 (Variable Article 94 (1)(a-q)

elements of
remuneration)
Organizational Bodies:

Legislators/Regulators:

National:

NCA: National Danish national competent authority: Finanstilsynet

competent authority
Conduct supervision has not been centralized and is not under the
principle of the home country control. Conduct supervision is subject
to the host country control - meaning that the responsible authority
for your activities in terms of contract will be the host country.

Supranational:

International Financial Institution:

(entities that are an institution in international terms, that can help out countries that are about to
fail because of banks)
IMF: International
Monetary Fund: Who: 189 countries

What: Financial assistance and stability, transparency and

development

- Promote global economic cooperation

- Facilitate balanced international trade
- Promote stability of exchange
- Contribute in the establishing of a multilateral payment-system
- Assist members with difficulties on balance of payments

Legal foundations: articles of agreement

Output: Surveillance, lending, capacity development

 World Bank:

International Agenda Setters:

(bodies that are supposed to set very high agendas)
G20:
- Who: Finance ministers and central bank governors from 19 countries
and the European Union (represented by the President of the
European Council and the Head of the European Central Bank).
- Meeting between the more powerful governments and
institutions of Europe
- Goal: Enhancing financial stability, funding development and
combating terrorism
- Global agenda setting for economic stability and sustainable
growth
- Issuance of guidelines preventing from economic crises and
financial risk
- Strengthening global financial architecture
- Legal foundations: Informal forum and not an organisation
- Output: Decisions without direct legal impact
- They only set principles - nothing legally binding

FSB: Financial
Stability Board Who: States, international financial institutions and standard-setters
(collective of central bankers)

What: International financial stability through coordination

Monitoring and recommendations on the global financial system

- Coordinate the work of national financial authorities and international

standard setting bodies
- Implementation of regulatory, supervisory and financial sector policies

Legal foundations: FSB charter and articles of association

Output: Advice, monitor and set guidelines - it’s documents are not binding

International financial standard setters:

(bodies that take into account what have been set as a principle by the agenda setter, and
creates soft law)
BIS: Bank of
International Who: International financial organisation owned by 60 member central
Settlements: banks, representing countries from around the world that together make
up about 95% of world GDP. Its head office is in Basel, Switzerland. It is
the oldest international institution (established after world war II). The
ideas with it was to finance the banks.

What: Global standard setter for the prudential regulation of banks

The BIS is a bank with a big body – it functions as the central bank of
central banks.

- Place for discussion and collaboration among central banks

- Support dialogue between authorities responsible for promoting
financial stability
- Research on policy issues for central banks and financial
supervisory authorities
- Counterparty for central banks’ financial transactions
- Agent or trustee for international financial operations

Legal foundation: established by means of a Convention and Charter

Output: Develop and review the implementation of its standards. BIS

has no legislative power

Membership in the BIS is according to its Charter restricted to central

banks and banking supervisors. Other international institutions such
as the European Commission, the European Banking Authority, the
International Monetary Fund, can only be given an observer status.

Decision making: Seats are in principle granted with respect to the

importance of the national banking sectors to international financial
stability.

Art 44, statute: Voting rights shall be in proportion to the number of

shares subscribed in the country of each institution represented at the
meeting.

When the BIS develops its standards, it typically initiates a public

consultation, seeking input from all relevant stakeholders on policy
proposals. Unless respondents request confidential treatment, their
comments are published on the BIS website

The input is partially documented, but the decision making process is

not directly observable: the BIS and its working groups are not open to
the public and there is no public record of their meetings.
 - The BIS have developed a lot of guidelines/soft law in relation
to corporate governance, and a lot of their principles have been
endorsed into the CRD IV (74-91)

BCBS: The Basel

Committee for A committee, that is particularly relevant in producing the soft law
Banking Supervision standards that are taken and transformed into binding law by different
legislators.

- Is technically separate from the BIS, but is closely associated

international forum for financial regulation that is housed in the
BIS’ offices in Basel
- Membership in the BCBS is restricted to a number of central
banks and banking supervisors from currently 28 jurisdictions
- The BCBS is no formal supranational authority, and the
prudential rules it proposes are per se not legally binding but
have a de facto strong impact on subsequent legislative process.
- Whatever comes out of the Basel Committee will properly
be law.

Though the Basel standards are not legally binding, the BCBS still
monitors both the timeliness and the substance of the subsequent
legislative process, seeking to ensure that the standards are
implemented with no or little deviation

1. It checks whether Basel standards are timely adopted

2. It assesses the consistency and completeness of the domestic
regulations, also judging the significance of any deviations

The whole process is set out in the Regulatory Consistency Assessment

Program (RCAP) – Formally adopted in 2012

The RCAP’s grading system uses four categories: the regulatory

framework can be judged to be compliant, largely compliant, materially
non-compliant, or non-compliant.

- Corporate governance has been developed at the level of the

Basel Committee (standards that have affected the way the law
has been drafted afterwards)
- Much have been implemented into CRD IV
 The capital requirements of banks have been developed internationally
in the Basel Committee, by means of standards

- Basel 2: the three pillars framework

- Minimum capital requirements
- Supervisory review
- Market discipline
- Basel 3 introduced
- Increased quantity/quality of capital
- Countercyclical capital buffer
- Conservation capital buffer
- Additional requirements for global and domestic systemic
banks
- Global liquidity standards
- Leverage ratio

IOSCO:

International policy-making bodies:

FATF: Financial action task force The FATF is an inter-governmental body established in
1989 by the Ministers of its Member jurisdiction

Objective: to set standards and promote effective

implementation of legal, regulatory and operational
measures for combating money laundering, terrorist
financing and other related threats to the integrity of the
international financial system.
- It works to generate the necessary political will
to bring about national legislative and regulatory
reforms in these areas
- Hence: this body produces soft law by means of
recommendations

The FATF has developed a series of recommendations

that are recognised as the international standard for
combating of money laundering.
- They form the basis for a co-ordinated response
to these threats to the integrity of the financial
system and help ensure a level playing field
- The recommendations are regularly revised and
updated so that they remain up to date and
relevant, and they are intended to be of
 universal application

The FATF:
1. Monitors the progress of its members in
implementing necessary measures,
1. Reviews money laundering techniques and
counter-measures.
2. Promotes the adoption and implementation of
appropriate measures globally.
a. They promote the adoption of new
measures at a global level, working in
close cooperation with the national
competent authorities

In collaboration with other international stakeholders,

the FATF works to identify national-level vulnerabilities
with the aim of protecting the international financial
system from misuse.

EU:

Co-Legislator:

European Commision: Legislation level 1 (?)

European Parliament: Legislation level 1 (?)

EBA regulation article 10:” where the European Parliament delegate
power…, the authority may develop draft regulatory technical
standards…”

Council of the EU: Legal basis for the council, TFEU art. 127.6:
The Council, acting by means of regulations in accordance with a
special legislative procedure, may unanimously, and after consulting
the European Parliament and the European Central Bank, confer
specific tasks upon the European Central Bank concerning
policies relating to the prudential supervision of credit
institutions and other financial institutions with the exception of
insurance undertakings
- The highlighted part represents the making of the SSM
- Credit institutions is the European wording for banks

Regulators:

ESAs: European Consisting of EBA, ESMA and EIOPA.

Supervisory
Authorities Together they constitute Legislation level 2
- Together, they are empowered to add technicalities that can’t be
done at legislation level 1.
- The ESA fills in the gaps and blank spots
- It is an easier process to change something at legislation level 2,
than it is at level 1
- The European commission endorses and publishes what ESA
drafts – hence they are not a real legislation authority/body.
- They are mandated to create Binding technical standards (BTS),
which are either Regulatory technical standards (RTS) or
Implementing technical standards (ITS)
- The Binding technical standards are binding and must be
complied with, but the level 2 legislation should always be
based on something from legislation level 1

The ESA also function on legislation level 3, where they release

recommendations and guidelines, which are subject to the ‘comply or
explain rule’, meaning that Governments must comply, and if not, explain
why they don’t.

The joint committee is the meeting where EIOPA, EBA and ESMA meets
and exchange practices to make sure that they are on the same page at
all times.

EBA: European EBA is responsible for the supervision of banking

Banking Authority:
- EBA is required, in cooperation with the ESRB, initiate and
coordinate EU-wide stress tests to assess the resilience of
financial institutions to adverse market developments
- EBA regulation art. 22-23
- The objective of the EU-wide stress test is to provide
supervisors, banks and other market participants with a
common analytical framework to consistently compare
and assess the resilience of EU banks and the EU
banking system to shocks, and to challenge the capital
position of EU banks.
- The stress-test is relating to the systemic risk and
intended for big banks only

The European Banking Authority (EBA) was established in 2010 to

promote enhanced harmonization of supervisory practices across the EU
Member States.(art. 8 EBA regulation)

- the EBA is involved with drafting the law

- but the EBA is a supervisory authority in a traditional sense
 (checking the behavior of others – EBA is also part of the
legislation level 2)
- we will see that the EBA does much more than just creating this
drafts for legislation.
- The EBA is the supervisor of the supervisors

To ensure that the Member State supervisory authorities apply the sound
and prudent management principle similarly across EU/EEA states, the
European Banking Authority (EBA) adopts regulatory technical
standards that are binding and supervisory guidelines that are non-
binding to promote enhanced harmonization of supervisory practices
across EU/EEA Member States.

- To further harmonise institutions’ internal governance

arrangements, processes and mechanisms within the EU, the
EBA is mandated by Article 75 of Directive 2013/36/EU to
develop guidelines in Corporate governance
- The guidelines by the EBA are directed to the public
authority and not to the bank directly.
- It is comply or explain kind of guidelines

- EBA is according to art. 17 of the EBA regulation, also

responsible for the interpretation of the EU law - if there is a
wrong application of the law, you go to EBA.

Main objectives:

- Establishing EU single rulebook

- Promoting and enhancing the quality and consistency of
supervision
- Reinforcing oversight of cross-border groups
- Early warning of upcoming vulnerabilities
- Effective early intervention and bank resolution

Main tasks:

- Develop binding technical standards, guidelines,

recommendations
- Promoting common supervisory culture/supervisory practices
- Peer group analyses and peer reviews
- Monitoring effectiveness colleges
- EU-wide risk assessments and stress tests
- Risk dashboards
- Reacting on risk warnings
- Handling of emergency situations
 (The above is basically art. 8 of the EBA Regulation - 17-19 and 29 is
also relevant)

- Single rule book is a word that refers to all the body of law that is
applicable to banks
- The last three objectives, are objectives with more relation to the
control of the EBA over the national supervisors
- The tasks must be done in order to reach the objectives.

- Everything the EBA does, they do reaching out to all the Member
states.

ESMA: European ESMA is responsible for securities/financial markets

Securities and
Market Authority
- Once the prospectus has been approved by the competent
authority of the EU country of origin, it must be published and a
copy must be sent to the ESMA

Regulation: In 2017 the prospectus ruleset have been transposed into a

regulation (before, it was a directive), which makes the regulation more
harmonized.

- The ESMA provides free of charge and searchable online access

to all prospectuses approved in the European Economic Area

- MiFID II unsuitability; art. 25(1) and (5)

- ESMA came out with guidelines for suitability and certain
aspects about this.

The rules of conduct is split into different areas:

- Duties of information
- Suitability test. How do investment firms assess the
suitability? What kind of questions and aspects do they
have to shed the light on, to know a customer?
- Clients knowledge and experience
- Clients financial situation
- Clients investment objectives
- Appropriateness test
- Reporting duty
- The firm must write a suitability report, that contain the
advice given and why it is suitable and so on.
- Duty to ensure best Execution
 - The obligation of the firm to find the best result possible
for the client, when executing orders.

EIOPA: European EIOPA is responsible for insurance/pensions.

Insurance and
Occupational They are a part of ESA which is legislation level 2.
Pensions Authority
They are empowered to add technicalities that can’t be done at
legislation level 1.

ECB: European Legal basis: TFEU art. 127.6

Central Bank Objective: to maintain price stability (through primarily Monetary Policy)

Independence:
- “Neither the ECB nor the national central banks (NCBs), nor any
member of their decision-making bodies, are allowed to seek or
take instructions from EU institutions or bodies, from any
government of an EU Member State or from any other body.”
- EU institutions and bodies and the governments of the Member
States must respect this principle and not seek to influence the
members of the decision-making bodies of the ECB” (Article 130
of the Treaty)

- Liquidity assistance can come as Market liquidity assistance

typically in the form of Open Market Operations, which is the
competence of the ECB (thus centralized) and forms part of its
monetary policy responsibilities in accordance with art. 18 of the
ESCB Statute and Article 127 TFEU.
- Art. 14.4 of the Statute of the European System of Central Banks
and of the European Central Bank (Statute of the ESCB) assigns
the Governing Council of the ECB responsibility for restricting
ELA operations if it considers that these operations interfere with
the objectives and tasks of the Eurosystem (price stability and
inflation)

- Emergency Liquidity Assistance (ELA) operations allow the

national central bank to act, on a discretionary basis, as a lender
of last resort, providing temporary loans against adequate
collateral. Responsibility for the provision of ELA lies with the
NCB(s) concerned. This means that any costs of, and the risks
arising form, the provision of ELA are incurred by the relevant
NCB.
- Central banks can, however, not do whatever they want: art. 14.4
of the Statute of the European System of Central Banks (statute
of the ESCB) assigns the Governing Council of the ECB
 responsibility for restricting ELA operations if it considers that
these operations interfere with the objectives and tasks of the
Eurosystem
- It states that the governing council of the ECB can say
that the central bank is not compliant with the objective of
the eurosystem
- The ELA program is in the hands of the central banks, but
the ECB has always the last to say in regards to whether
their actions are in compliance with the objectives of the
eurosystem (price stability and inflation)
- The ECB must be informed by the NCBs of any ELA
operation within two business days after the operation
was carried out.

ESCB: European The European System of Central Banks comprises the European
System of Central Central Bank and the national central banks of all the 28 EU Member
Banks States.
The Eurosystem comprises the ECB and the national central banks of
the 19 EU Member States that have adopted the euro.
- The Eurosystem is the monetary authority of the eurozone

ESCB is hence a collection of all the banks in Europe – not just in the
eurozone.

- The primary objective of the ESCB is to maintain price stability.

- The ESCB's objective is price stability throughout the European
Union.
- Secondarily, the ESCB's goal is to improve monetary and
financial cooperation between the Eurosystem and member
states outside the eurozone

The basic tasks to be carried out through the ESCB shall be:

- to define and implement the monetary policy of the Union,

- to conduct foreign-exchange operations consistent with the
provisions of Article 219,
- to hold and manage the official foreign reserves of the Member
States,
- to promote the smooth operation of payment systems.
Supervisors:

EU:

ESA: European
Supervisory Authority: - ESA was created in 2010 with a subgoal of the supervisory
fragmentation problem
- They should make sure that the law is created in a
certain way
- They should harmonize the practices, and tackle the
problem of cross-border regulation and cross-border
fragmentation of the institution

It is supposed to close possible blind spots of the home country

control principle, and help crate som harmonized supervision

- Art. 17: To play a role in policing breaches of EU law

- Art. 18: To intervene in emergency situations
- Art. 19: To Mediate and settle disputes between national
authorities

ECB: European Objective: to maintain price stability in the euro-area

Central Bank
- The day-to-day supervision of banks is handled by the ECB
- Checking on whether banks comply with capital
requirements, liquidity ratios, corporate governance
rules and so on
- The banks must be Globally systemically important banks (G-
SIB): a player that has an enormous impact
- The ECB is responsible in terms of supervisory for
these banks, that are also stated as “significant
institutions”
- For the less significant institutions, the national
competent authority is responsible in terms of
supervisory
- The significance criteria/thresholds is/are listed in art.
6 of the SSM Regulation
- Article 4 of the SSM regulation also states that the
ECB is always responsible for certain areas, no matter
if you are big or small - one of them is the
authorization to give and withdraw licenses to operate
- The ECB is only responsible for the banks established in the
eurozone countries, because of its legal basis in art. 127 of
TFEU
 - Why 127? It was a rushed decision taking in 2010
during the crisis. The problem about it is, that the
origin of 127 was conceived for the monetary policy for
the ECB, which is only for the 19 countries of the
eurozone. If we use the same article to expand the
powers of supervision, means that the ECB can have
a say for the banks established in the 19 countries of
the eurozone, and not the rest.
- The ECB, because of the legal basis, is limited to
act in the eurozone.
- The single rule book is valid for all 28 member states

Article 4 of the SSM regulation conferred on the ECB:

- To authorise credit institutions and to withdraw authorisations
of credit institutions
- Hence, ECB is the competent authority go give out
and withdraw licenses for banks to operate and enter
markets. In practise, the NCAs will channel everything
from the credit institution to the ECB - but the ECB is
the only one with authorization to say yes or no
- The ECB shall be exclusively competent to carry out, for
prudential supervisory purposes, the following tasks in
relation to all credit institutions established in the
participating Member States

Article 6, par. 5, reg. 1024/2013 (the SSM regulation)

- “The ECB shall issue regulations, guidelines or general

instructions to national competent authorities, according to
which the tasks … are performed and supervisory decisions
are adopted by national competent authorities…”
- There’s a potential risk that the NCAs will supervise at
their own standards - this has been solved by art. 6,
which gives the ECB the obligation to issue regulations
and guidelines to how the NCAs should supervise
- This is done in the single supervisory handbook
- A set of practices that should be used by the
NCAs
- An insurance that all the supervisors in Europe
operate in the same way - it harmonizes the
process

Resolution
- The ECB decides whether a resolution should be taken into
action, when they decide whether or not a bank is failing (the
 first criteria for resolution)

- Per se, the ECB is responsible for the micro prudential,

however they also have some non-defined responsible for the
macro prudential (Article 1 SSM regulation)
- The SSM is guided and led by the ECB

Art. 4(1)(e) of the SSM Regulation makes clear that fit and proper
assessments should be part of the ECB’s supervision of the overall
governance of credit institutions. Regulation 1024/2013

- The SSM Framework Regulation elaborates on the fit and

proper field of competences in art. 93 and 04
- Art. 93 refers to changes in the management bodies
- Art. 94 covers new facts or any other issues which
may impact upon the ongoing obligation to have
suitable members in the management bodies of credit
institutions
- The fit and proper testing is the supervisory activity done by
the NCAs to check if the people are good enough to do their
job
- The ECB is responsible for the fit and proper assessment
- However, given that the CRD IV is a directive, there
are differences among jurisdictions in the way the
rules have been designed/implemented
- The ECB is only responsible for the fit and proper test for the
banks that is inside the eurozone and that is big enough; for
all the other banks, it is the national competent authority.
- Art. 4(3) of the SSM Regulation provides that for the
purpose of carrying out its supervisory tasks the ECB
will apply all relevant Union law and, where this
law is composed of Directives, the national law
implementing those Directives.

ESRB: European ● Tasks: ESRB has the tasks of monitoring risks to EU financial
Systemic Risk Board: stability and issuing risk warnings and policy
recommendations
● The ESRB is not an entity and is without legal personality; it is
a board
○ It is a collection/meeting of different entities that
already exist, put together in a room, and representing
the interest of systemic risk
○ ESRB includes voting (ECB General Council, the
Chairs of the ESAs, European Commission) and non-
 voting members (one national supervisory authority for
each Member State)
○ The board functions as a consultant to the ECB, to
take care of the macro-prudential supervision
(systemic risk)
● Governed by its board members who are the Governors of the
Central Banks of EU Member States
● Lacks meaningful power: it can only issue recommendations
and warnings, and has no binding legal authority. It can
release recommendations that can cover the EU as a whole
or a set of or individual countries
○ It cannot coordinate the macro-prudential policies of
EU Member States

The ESRB is responsible for the macro-prudential supervision,

with the objective to enhance oversight of systemic risk, for ALL
FINANCIAL SECTORS (there is no division between banks,
insurance or markets).

Art. 3 of the ESRB regulation:

- The ESRB shall be responsible for the macro-prudential
oversight of the financial system within the Union in order
to contribute to the prevention or mitigation of systemic
risks to financial stability in the Union that arise from
developments within the financial system and taking into
account macroeconomic developments, so as to avoid
periods of widespread financial distress. It shall contribute to
the smooth functioning of the internal market and thereby
ensure a sustainable contribution of the financial sector
to economic growth.
- The ESRB are hence contributing to the tasks that are really
performed by someone else (the ECB and the NCAs), yet
they are still responsible
- The ECB is expected to provide the analytical,
statistical, administrative and logistic support to the
ESRB
- Art. 3 also makes sure that the ESRB overcomes the lack of
integrated financial stability assessment at EU level covering
the whole financial sector (first highlighted part of the article)

The ESRB is accountable to European Institutions (EC, Council, EP)

The office of the ESRB is inside the ECB

Art. 15 of the ESRB regulation: Collecting and exchange of

information
- 1. The ESRB shall provide the ESAs with the information on
risks necessary for the achievement of their tasks
- 2. The ESAs, the European System of Central Banks (ESCB),
 the Commission, the national supervisory authorities and
national statistics authorities shall cooperate closely with the
ESRB and shall provide it with all the information necessary
for the fulfilment of its tasks in accordance with Union
legislation.
- 3. The ESRB may request information from the ESAs, as a
rule in summary or aggregate form such that individual
financial institutions cannot be identified.

The ESRB ‘may request’ information from the ESAs, but not about
the specific institution – only the aggregate information from a
country. May request is meaning that the EAS can decline.

The ESRB ‘shall provide’ information to the ESAs

ESA is obviously the one leading the supervision according to this

Art. 16 of the ESRB regulation: Warnings and

recommendations:

- 1. When significant risks to the achievement of the objective in

article 3(1) are identified, the ESRB shall provide warnings
and, where appropriate, issue recommendations for remedial
action, including, where appropriate, for legislative initiatives.
- 2. Warnings or recommendations issued by the ESRB may be
of either a general or a specific nature and shall be addressed
in particular to the Union as a whole or to one or more
Member States, or to one or more of the ESAs, or to one or
more of the national supervisory authorities. If a warning or a
recommendation is addressed to one or more of the national
supervisory authorities, the Member State(s) concerned shall
also be informed thereof. Recommendations shall include a
specified timeline for the policy response. Recommendations
may also be addressed to the Commission in respect of the
relevant Union legislation

The scope of recommendations is vague: they should not address

monetary policy and individual financial institutions; they are likely to
cover mainly financial regulation/supervision and can target individual
countries

Recommendations are not binding; however, they are subject to

comply or explain mechanisms and possibility of publishing them as a
 last resort.

- The effectiveness of the ESRB are hence based on

reputation, if a country does not comply, all they can do is to
publish the recommendation to the world

ESFS: European The ESFS is responsible for micro-prudential supervision, with

System of Financial the objective to enhance supervisory convergence and coordination,
Supervision for specific sectors, divided into banks, insurance and markets.

The ESFS was introduced in 2010, and consists of

- The European Systemic Risk Board (ESRB)
- Three European supervisory authorities (ESAs), namely
- The European Banking Authority (EBA)
- The European Securities and Markets Authority
(ESMA)
- The European Insurance and Occupational Pensions
Authority (EIOPA)

SSM: Single First pillar of the BU

Supervisory
Mechanism: The SSM is guided and led by the ECB

- The ECB shall carry out its tasks within a single supervisory
mechanism composed of the ECB and national competent
authorities. The ECB shall be responsible for the effective and
consistent functioning of the SSM.

- The SSM is a centralised system of supervision, but it is not

composed of a “single” supervisor

Objective: Joint supervision of significant banks

Objectives according to Art. 1 of the SSM regulation:

- Resilient banking system
- Identification of relevant risks
- Fair and consistent assessment of risks
- Timely and tough intervention in case of identified risks
and deficiencies
- → tough and forward-looking supervision of credit
institution
- Financial integration
- Development of harmonised supervisory
 methodologies and approaches
- Consistent application of the regulatory and
supervisory frameworks across the euro area
- → creation of a supervisory level playing field

Only regulates the eurozone

- The SSM system is evolving the ECB and the NCAs, article 4
of the SSM regulation

Corporate governance:

- The SSM is responsible for the supervision of the board of

directors / the management body, when determining if they
comply with the CRD IV

SRM: Single SECOND PILLAR of the BU.

Resolution
Mechanism Objective: joint rules for the recovery and resolution of banks - hence
crisis management

Only regulates the eurozone

Managed by the single resolution Board (SRB)

Rules: SRMR+BRRD

National Resolution Authorities (NRAs) are;

- Involved in the resolution process
- Assists the SRB
- In charge of implementing the resolution decisions in line with
national company and insolvency law

Two main, but very different, goals:

- Emphasis on Market discipline
- Less generous safety net. Authorities are more likely
to let inefficient banks fail. Risk of instability and bank
runs.
- Emphasis on Financial stability
- Authorities less inclined to let banks fail. Inefficient
institutions may be kept in the market, also via bail-
outs, and this may foster moral hazard and Too Big
Too Fail issues and hamper market discipline
We balance these two goals by creating a credible resolution
framework.
 - The two approaches meet in the middle when we have a
credible bank resolution framework
- Opens up for the possibility for banks to fail, but trying to keep
alive what is still functioning – a separation of what is good
and what is bad.

Legislation: BRRD - Bank Recovery and Resolution Directive (+

SRMR)
- The BRRD determines
- Rules for how EU banks in difficulties are restructured
- How vital functions for the real economy are
maintained
- How losses and costs are allocated to the bank’s
shareholders and creditors
- The BRRD “establishes minimum harmonization rules
and does not lead to the centralisation of decision
making in the field of resolution and leaves discretion
to national authorities in the application of the tools” -
Recital 10 of the SRM regulation
- The BRRD is applicable to all EU member states

Corporate governance:
- The SRM is responsible for the supervision of the board of
directors / management body, when determining if they
comply with the BRRD in case of crisis

DGS: Deposit Not an institution (?)

Guarantee Scheme:
Objective: equal protection of depositors’ savings

In Europe we have a harmonized system by means of a directive,

Directive 2014/49/EU
- This system already ensures that all deposits up to 100.000
euro are protected through national DGS all over the EU
- DGS are entirely funded by the banks
- DGSs shall ensure that the repayable amount is available
within seven working days

We are moving away from these national DGS, and towards the EDIS
which is in the making

EDIS: European In the making.

deposit insurance Only regulates the eurozone
scheme
- EDIS is Governed by the single resolution board (SRB)
- EDIS will be built on the existing system, composed of
national deposit guarantee schemes; individual depositors will
continue to enjoy the same level of protection (100.000 euro)
 - EDIS will fully insure national DGS as of 2024
- The European Deposit Insurance Fund would be
created. It will be financed directly by bank
contributions, adjusted for risk. Management of the
European Deposit Insurance Fund would be entrusted
to the existing Single Resolution Board.

EBU: European
Banking Union The European banking union is composed by three pillars

- Single Supervisory Mechanism (SSM)

- Objective: Uniform approach to banking supervision
- ”The first doctor” – checks your blood pressure and so
on
- The daily check
- If something is off, then you are investigated by the
SRM
- Applies only to the eurozone
- The law applied everywhere, but the institution
that applies the law only apply in some
countries
- Single Resolution Mechanism (SRM)
- Objective: Uniform rules for banking resolution
- ”the second doctor” – must check your health more
intensely
- Insolvent, bankruptcy, in-liquidity, the people on the
board are not fit and proper
- This pillar is known as crisis management
- The single resolution board is governing the single
resolution mechanism
- The principle is resolution: orderly failure. Trying to
minimize the negative externalities that a bank failure
can impose on the economy.
- Deposit Guarantee Scheme (DGS)
- Objective: Uniform insurance cover for retail
depositors
- The protection of depositors
- A class of stakeholders that needs to be protected –
the depositors
- We don’t have a single deposit guarantee scheme (yet
– it is in the making); we have one directive

Some pillars apply to the European union whereas some other

activities are applicable only to the eurozone.

The idea with the different pillars is to have a centralized

supervisor/powerful institution who is capable of checking all the big
 players in the market, without having to worry about the borders

These three pillars are based on the ideas of the single rulebook and
the single supervisory handbook

- Single rulebook (a constellation of pieces of law)

- This is the law that has to be supervised and
enforced by the three pillars
- The set of law that has to be supervised
- This set of law has a European scope
- Applicable to all 28 member states.
- Single supervisory handbook

The single rule book and single supervisory handbook apply to all the
member states

The SSM and SRM are two faces of the same coin. They talk
together all the time and the gap between them is minimal.

Resolution Authorities:

EU:

SRB: The Single Resolution

Resolution Board - The SRB is responsible for deciding what kind of resolution tools
that should be applied (The ECB decides if resolution should be
applied at all)
- If we are outside of the eurozone area, the national
competent authority is responsible for both. (national
resolution authorities (NRAs)

- Single resolution board is entitled with the specific power to

manage the crisis of banks
- The SRB are somehow like the ECB in terms of
supervision’
- SRB is not an EU institution legally speaking – it is a
 European agency, established by means of art. 114 TFEU
(legal basis), but the subjective scope has been limited to
the banks covered by the SSM
- SRB can act in the eurozone for the big banks
- The SRB is responsible for the banks that are big enough
and that operate in the eurozone
- Denmark is still subject to the same law – the
difference is who is responsible for checking and
enforcing the law. In DK the national competent
authority enforces the law.

- Recovery plans (art. 5+6 BRRD): the banks draw-up measures to

be taken by the bank to restore its financial position following a
significant deterioration of its financial position; assessed by
supervisor
- Resolution plans (Art. 10+11 BRRD): the resolution authority
draws up an individual bank plan on what actions it will take
should the bank enter resolution
- Updated annually
- Consider different scenarios
- Identifies potential obstacles to resolvability
- Groups (art. 12+13 BRRD): Assessed at group level by group
level resolution authority and all subsidiaries’ resolution authorities
- If resolved as a group, can allow extra financial support
between the entities.

Planning must assume 1) no public support, and 2) no central bank

support

- Art 27-30 BRRD

- More public oriented perspective; supervisor has powers
when a banks financial position weakens
- The supervisor in this case can
- implement recovery plans
- Power of removal: remove management.
- Very excessive power
- Art. 32 BRRD / 18 SRMR)
- Conditions for recovery
- Failing or likely to fail (ECB/SRB)
- No other way (SRB)
- Public interest (SRB)
- “No creditor worse off” principle
- Art. 73, 74 and 75 BRRD

SRF: The Single - The single resolution fund is an essential element of the Single
 Resolution Fund Resolution Mechanism (SRM) which manages resolution of credit
institutions and certain investment firms within the 19 participating
Member States.
- The Fund helps to establish a uniform administrative practice in
the financing of resolution within the SRM and ensures that
resolution decisions are taken effectively and quickly enhancing
the financial stability in the Banking Union
- The Fund will be built up during the first eight years (2016-2023)
and shall reach at least 1 % of covered deposits

- The single resolution fund:

- Part of the second pillar, that is managed by the single
resolution board
- The fund is collecting money from all the industries (all the
banks), and the way it is collected reflects the size and the
riskiness of the bank, meaning they give an X amount of
money depending on how big they are
- The fund is not used to rescue banks, but they are used to
support the procedure.
- If you use the bail-in, they can recapitalize the bank for at
least 8 percent
- The money could be used for integrating the resolution, but
only partially.
- If we have a bank that is failing, all the money that is in the
fund, funded by all other member countries, can be used in
the procedure to help the bank in crisis

Terminology:

Coase Theorem:
Coase Theorem: in the absence of transaction costs, if property rights are well-defined and
tradable, then voluntary negotiations will lead to efficiency. It doesn’t matter how rights are
allocated initially… because if they’re allocated inefficiently, they can be sold/Traded until
they’re allocated efficiently.

● If you let the free market work, it will settle in the most efficient way
● If there is no transaction costs, we don’t really care how things are distributed in the
world, because humans will find a way to be better without.
● We find a way to be happy without using the law. It depends on what we value, and
finding a compromise.
● There are no transaction costs and there are full information.

The conditions for the Coase Theorem to hold

● Property rights have to be well-defined

○ We need to be clear on who has what rights, so we know the starting point for
negotiations
● And tradable
○ We need to be allowed to sell/transfer/reallocate rights if we want
● And there can’t be transaction costs
○ It can’t be difficult or costly for us to buy/sell the right

Definition:

Transaction costs all the difficulties and expenses that you are
going to incur when you want to make a deal
with another party without an intermediary.

Information asymmetries it is very difficult to fill in the informational

gap: someone always knows more than the
other

Normative Theory and the Law:

Definition: ● The Nature of law points to intrinsic

● Normative means relation to an ideal
standard or model, based on what is
considered to be the normal or correct
way of doing something.
● In Law, as an academic discipline, the
term “normative” is used to describe
the way a legal rule ought to be
designed or applied according to a
values and morals, which the law
should prove.
○ This would require everyone to
share the same morals and
values however.
● Rule of law, translated into potential
substantive and individual rights and
constraints and prescriptions
 value position.
Market Failure:
Types of market failures:
Externalities and Public Goods:
Public goods:
● Non-rival: Consumption by
one person does not reduce
availability for others.
● Non-excludable: It is
impossible to exclude others
from using the good (Free
riding)
○ Producers cannot
appropriate benefits,
which reduces
incentives to invest
in production
facilities.
Increasing Returns:
Market Imperfections: (Things that
can go wrong)
regarding the role of the government.
○ Gaining authority through the
concept of the social contract.
Externalities:
● Externalities occur when economic activities
create spillovers (benefits or cost) that cannot
be appropriated by, or collected from, the
producer.
● A producer who creates and external cost, will
produce too much.
○ Likewise, a producer who creates and
external benefit will produce too little.
● A consumer who cannot appropriate an external
benefit will consume too little.
● With Increasing returns to scale, marginal costs
are never increasing for an individual firm. The
effect is to encourage the emergence of a single
firm taking the entire market and having pricing
power.
● This natural monopoly will lead to that firm
seeing that it’s marginal revenue is below its
price and when it maximises profits by setting
prices at the point where it’s marginal revenue is
equal to its marginal cost, that price will be
higher than its marginal costs, and so become
economically inefficient from the perspective of
the consumer.
● Distorted prices, that do not reflect the
underlying scarcities and costs.
○ An example of this is when consumers
incur costs of switching to different
suppliers, which allow said suppliers to
set a higher price.
● Producers have limited information about
opportunities or production technology.
○ Perfect/imperfect information.
 ● Consumers have limited information about
available offerings and product quality levels.
● Entry barriers that give incumbents to market
power.
○ Since new players will have great
difficulty of entering the market, thereby
decreasing competition.

Distributional Inequity: ● Society’s preferences regarding the distribution

of wealth may deviate from the outcome of a
well-functioning market.
● Welfare economics typically distinguishes
between efficiency and equity, arguing that there
is a tradeoff.
○ It deals with this tradeoff by comparing
redistributive measures in terms of
efficiency.
○ The concept of market failure excludes
departures from distributional equity.

Macroprudential:

Definition: ● A form of supervision, which addresses

the risk of a system failing. Prudential
policy with a system-wide perspective.

Macro-prudential supervision
● Looking at the banking system – not the
single bank - but looking at the market.
● How are the single banks interacting
with each other?
● And the possible spread of risk of one
bank to another bank, building up to a
collapse
● Ex-ante oriented; it’s intend is to prevent
something from happening
Macroprudential Perspectives:
Macroprudential Tools:
Cross sectional measures:
● Shadow banking - Systemically
important institutions beyond banks.
Such as investment banks, hedge
funds, insurers and other non-bank
financial institutions that replicate
some of the activities of regulated
banks, but do not operate in the
same regulatory environment.
● OTC derivative market through the
central clearing counterparties
(CCP’s) “Financial market utilities”.
● Structural reforms, which could be
done by separation between retail
and investment banking.
Time-varying measures:
● Monetary policies to control assets
booms, which can be done by
controlling the money supply and
thus the cost of credit.
● Specific buffers, like conservation
buffers, countercyclical and G-SIB
buffers could also be used.
● Time-varying risk weights, loan-to-
value ratios as to restrict bank
lending into particular types of
assets
○ E.g., there is a limit on the
amount house-buyers can
borrow compared with the
cost of a house or their
income
Cross-sectional:
● Concerned with ensuring the resilience
of the financial system should a risk
materialise at any point. The policies are
in place to prevent risks from affecting
the financial system more broadly, or
becoming systemic.
Time Series:
● Concerned with the build-up of risk in
the financial system over time. The
policies are in place to prevent risks
from becoming systeminc.
The tools will vary from country to country,
depending on the ‘country’s exposure to shocks
and risks, and its structural, institutional and
financial market characteristics that affect the
amplification of financial and real-sector cycles
and the effectiveness of specific policies’.
- page 402-403
Counter-cyclical capital requirements
- You use counter-cyclical buffers
to dampen credit booms in a
specific market (e.g. housing
market) by imposing higher
capital requirements on home
mortgage loans as opposed to
other types of loans
- Loan-to-income ratios
- You Exercise a loan-to-income
ratio cap for e.g. bank mortgage
lending
- Liquidity tools
- Require financial institutions to
hold a certain ratio of liquid
assets
- Leverage ratios
- Could be used to limit the
amount of leverage relative to
the value of the bank’s assets
Microprudential:

Definition: ● A form of supervision, which

addresses the risk an individual bank
has in order to fail.

Micro-prudential supervision
● The check of the bank on the
individual level.
● Looking at how the bank is governed
in terms of local governance, and if it
has enough liquidity and so forth
● Ex-post oriented according to the
book. However, according to our
professor, the micro is also supposed
to prevent something bad. It is then
not only ex-post, ex-ante oriented..

Types of Regulatory Instruments:

Command and Control ● State centered: State

promulgation(offentliggørelse/bekendtgørelse) of legal rules
prohibiting specified conduct underpinned by coercive
sanctions.

Competition Based ● Competition based regulatory tools, aim to enrol the

competitive force of the markets to elicit behavioural change.
○ Examples include: Taxes, Charges, subsidies, liability
rules, trade-able permits.

Consensus Based: ● Co-operative partnership, between the state and non-state

actors, encouraging self-regulation.
● Pros:
○ Greater degree of expertise and technical knowledge,
○ Reduced monitoring and enforcement costs,
○ Less formal than public regulation,
○ Administrative costs are internalized in the trade or
activity.
● Cons:
 ○ Private interests may gain considerable benefits.
○ Absence of accountability and external constraints.

Communication Based: ● These regulatory instruments attempt to persuade and

educate to facilitate the achievement of regulatory goals
(disclosure regimes - certification/labelling -, public
information campaigns, naming and shaming.)
● A similarity with command and control, wherein sanctions are
applied in order to ensure obedience.
● Market based: Creating a scheme of incentives that may be
expected to influence the behavior of suppliers and
purchasers.
● Assumes consumers are rational decision-makers and able
to understand and evaluate the information.

Types of Supervision:
Supervisory models and approaches;
Tripartite Model: ● It is the traditional three-pillar system, with:
○ The central bank usually overseeing the banks,
○ A securities regulator usually a separate
commission, handling securities markets.
○ An insurance regulator which may or may not still be
part of a government ministry.

Dual Model: ● There is a variety of two-pillar systems each with its own
characteristics:
○ Some group together securities and insurance
supervision,
○ Others link banking and securities.

Twin Peaks: It is a system with:

● One prudential regulator responsible for monitoring capital
reserves in all financial institutions.
● A second conduct of business regulator with responsibility
for transparency and other market or customer transaction-
related aspects of regulation.

Integrated and Unified This is the one pillar system, with:

Model: ● A single prudential and conduct of business regulator, that
covers all or most of the financial sectors.
Bank Definition:

EU: «is an undertaking the business of which is to take deposits or other

repayable funds from the public and to grant credits for its own
account» (Regulation 575/2013, art. 4.1)

US: «An institution which both accepts demand deposits or deposits that
the depositor may withdraw by check or similar means for payment to
third parties or others; and is engaged in the business of making
commercial loans» (Banking Holding Company Act, par. 2c)

Theory of 1. Liquidity Transformation: A primary function is to provide

Banking: liquidity which allows its customers to access money of known
value for consumption purposes. - It does so in two ways, by
providing access to notes and coins. As well as by allowing it’s
liabilities to be used as a means of payment.
a. Assets
i. What the bank owns, and that which people owe to
the bank.
b. Liabilities:
i. Everything the bank owes to other people and
whatever’s left for the shareholders.
2. Maturity transformation: Not only are the assets of banks illiquid,
but they are also long term in nature. Where as the interest rate is
dependent on risk and time.
● Maturity intermediation is when a bank attempts to
generate returns through maturity mismatches between
assets and liabilities. This may be fragile as it is based on
the confidence the depositors have in the bank and that
the bank may safely return the yield they promised.
3. Credit transformation: Banks transform low-risk liabilities into
riske investments, banks do this by monitoring and screening the
quality of the individuals and companies to which they lend,
checking their creditworthiness.
● This can however be risky if creditworthiness of borrowers
is misjudged or if the bank suffers unexpected withdrawal
of funds by short-term lenders.

Business Model: ● OTH: (Originate to hold)

○ Banks provide loans to firms and individuals, the bank
holds these loans in their balance sheet until their maturity.
○ The risks involved in this is, that the bank bears the credit
risk as the assets stay in their balance sheet.
■ If a client does not repay the loan to the bank, the
 bank will incur a loss.
● OTD: (Originate to distribute)
○ Banks provide loans to firms and individuals, however, the
bank does not themselves hold these loans in their
balance sheet until their maturity. They distribute these
loans to other market participants through the
securitization process.
○ The risks involved in this is that the bank do not bear the
credit risk on loans anymore, since the credit risk is not
born by the market participants.

Too big/important to fail Principle:

Why save collapsing banks?
● When normal companies collapse,
they are put into insolvency.
● Banks however, are special
companies and having them fail may
cause a systemic collapse with wide
implications.
● Traditionally, public money has been
used to rescue banks in crises, public
intervention has involved the state
purchasing equity, or providing
guarantees for the bank, evt.
Bailouts: State aid to the financial sector:
● Virtually no case-law on state aid to
the financial sector before 2007, when
existing banks are treated like other
enterprises.
● This all changed during the crises with
the 2008 ireland case, since then,
over 400 cases of state aid to the
financial sector has happened.

Financial stability vs. market discipline: Emphasis on market discipline:

● Can combined and balanced create a
credible bank resolution framework.
Emphasis on financial stability:
● Less generous safety net. Authorities
are more likely to let inefficient banks
fail. Risk of instability and bank runs.
● Authorities are less inclined to let
banks fail. Inefficient institutions may
be kept in the market, also via bail-
outs, this may foster moral hazard and
TBTF issues and hamper market
discipline.
What is resolution?
Definition: Resolution, is
the restructuring of a
bank, through the use of
resolution tools, to ensure,
inter alia, the continuity of
it’s critical functions and
preservation of financial
stability.
CONDITIONS (art. 32
BRRD/18 SRMR)
Insolvency vs.
resolution:
Objectives of resolution:
● To ensure continuity of critical functions.
● To maintain financial stability,
● Protecting public funds as well as those of depositors,
investors and the funds belonging to the clients as well as
their assets.
It is important to note, that each objective is of equal significance.
1. Failing or likely to fail: (ECB/SRB)
a. The bank is in breach (or is likely to come in
breach) within the near future, of the requirements
for continuing authorisation in a way that would
justify it’s withdrawal.
i. Negative equity. (more liabilities than
assets)
ii. Liquidity Crisis.
iii. Public support is needed.
2. No other way: (SRB)
a. No reasonable prospect that any alternative
measure, including private or supervisory, would
prevent the failure in a reasonable timeframe.
3. Public interest: (SRB)
a. Resolution is necessary in the public interest, i.e.
the resolution objectives would not be met to the
same extent if the bank were wound up under
normal insolvency proceedings.
1. Resolution is an alternative to insolvency.
2. If national insolvency proceedings (NIP’s) are feasible
and credible, and there is no public interest for resolution,
they apply.
3. If NIPs cannot achieve resolution objectives to the same
extent, and the other conditions for resolution are met,
resolution applies.
4. What objectives inform the SRB’s PIA?
 a. Continuity of critical functions,
b. Financial Stability,
c. Protection of public funds, depitors, investors and
funds and assets of the client.

NCWO - No creditor ● Tension between property rights and public interests,

worse off Principle:
such as financial stability.
“See recital 62 <<Interference with property rights should
not be disproportionate...affected shareholders and
creditors should not incur greater losses than those which
they would have incurred had the entity been wound up at
the time that the resolution decision is taken.>>

Resolution tools: - The NCWO principle applies to all the resolution tools.
- An independent, fair and realistic valuation must first be
SRF: conducted according to art. 36 of the BRRD regulation,
● Financed by the no matter which resolution tool is chosen.
industry.
● Liquidity or capital Sale of Business: (Art. 38-39 BRRD)
measures. ● Parts/all shares or assets/rights/liabilities are transferred
● For capital to a private purchaser. (Usually another bank or financial
measures, at least institution)
8% of the losses ● Open sale process unless detrimental to financial stability
must have been and resolution objectives.
absorbed first. ● Carve out essential financial services and ensure their
continuity.
● The residual entity is wound-up under national rules.
Bridge Bank: (Art. 40-41 BRRD)
● Parts/all shares or assets/rights/liabilities transferred to a
temporary institution.
● The bank must be publicly controlled and sold after a
maximum of two years (extendable by 1 year).
● Carve out essential financial services and ensure their
continuity.
● The residual entity is wound-up under national rules.
Asset Separation: (Art. 42 BRRD)
● Assets/Rights/Liabilities is transferred to an AMV, totally
or partially publicly owned.
● Carve out all bad assets to clean-up the bank.
● It allows the transfer of assets where liquidation could
cause market disruption.
● Restore confidence in the original bank
● To be used in combination with one of the other tools.
Bail-In: (Art. 43-55 BRRD)
● Equity and debt written down and converted.
● Burden on shareholders and creditors rather than on the
public.
● Loss-absorption and recapitalization.
 ● Some liabilities are exempted mandatorily (covered
deposits, secured liabilities, etc.)

Basel accords:

Basel 3: Pillar 1:
The Three pillars ● Minimum capital requirements: requirements based on market,
framework: credit and operational risk to:
a) Reduce risk of failure by cushioning against losses, and
b) Provide continuing access to financial markets to meet
liquidity needs, and
c) Provide incentives for prudent risk management.
Pillar 2:
● Supervisory review: qualitative supervision by regulators of
internal bank risk control and capital assessment process,
including the ability to require banks to hold more capital than
required under Pillar 1.
Pillar 3:
● Market discipline: Public disclosure and transparency
requirements.

Basel 3: ● Increased quantity/quality of capital.

The key building ● Countercyclical capital buffer.
blocks: ● Conservation capital buffer.
● Additional requirements for global and domestic systemic banks.
● Global liquidity standards.
● Leverage Ratio.

Basel 3: ● The Core idea: shareholders equity should fund a certain

Capital rules: proportion of the current value of the banks assets in order to
increase the chances that a bank will be able to absorb losses on
the asset side of its balance sheet, without becoming insolvent
and without triggering a run on its deposits.
● The requirement is imposed at formation and is assessed on a
continuing basis.
● It is adjusted as the amount and quality of the banks assets vary.
● It amounts to a restriction on banks leverage.
○ That is, it constrains the extent to which the finance itself
through debt.

Basel 3: ● Credit risk: the risk that borrowers will repay. Initially banks were
Risk vs. capital: required to hold capital only against credit risk.
● Trading risk was implemented into the basel framework under
Basel 2. Trading/market risk is the risk that securities which banks
hold for proprietary-trading purposes suffer a decline in market
value.
● Additionally, operational risk has been identified as third capital
triggering category. Operational risk embraces a number of
internal risks, including employee fraud, breakdown of computer
systems, failure/malfunction of different parts of complex
organisation to coordinate their activities effectively.
● The capital requirement is set as a percentage (8%) of the bank’s
assets. It is a ratio and therefore it can be adjusted by changing
either of it’s two elements
○ The numerator(the bank’s capital)
○ The denominator(assets)
IRB: Intellectual Justification and regulatory techniques:

Definition: ● In regulatory terms, this is quite a fascinating technique “since by

The IRB (Internal incorporating regulated institutions’ internal capital models in the
rating-based capital adequacy regime, it seeks to bridge the informational
approach) allows chasm between the actual risk profile of regulated firms and the
the bank to regulators charged with minimizing the social costs incurred if
benefit from using those risks materialize.''
its internal data ● “Put another way, financial institutions have become too
and experience to complicated for non-insiders to acquire the information necessary
compute the risk for effective regulation, and regulators have turned to insiders to
weighting. mine data”.

IRB in EU Law: Art. 143 Permission to use the IRB approach:

Art. 143 ff. CRR: 1. Where the conditions set out in this chapter are met, the
competent authority shall permit institutions to calculate their risk
weighted exposure amounts using the internal ratings based
approach.
○ Art. 144 sets the requirements to be satisfied by the bank.
Art. 147 Methodology to assign exposure to exposures classes:
1. The methodology used by the institution for assigning exposures
to different exposure classes shall be appropriate and consistent
over time.
2. Each exposure shall be assigned to one of the following exposure
classes: a) exposures to central governments and central banks;
b) exposures to institutions; c) exposures to corporates; d) retail
exposures; f) items representing securitisation positions; g) other
non credit-obligations assets.

Critiques to the 3 main arguments against IRB:

IRB approach: ● Banks’ risk assessment under IRB vary significantly from bank to
bank.
● Quality of the internal data available to the banks. Data did not go
back very far and thus they relate to unusually benign economic
period. They failed to capture “tail risks”
○ Tail risks are risks that are unlikely to eventuate, but which
will have a major impact on the bank if they do.
● The models were focused on the probability distribution of risky
events.
○ Risk can be modelled, priced and traded, neglecting the
probability of an uncertain event - such as a major
financial crisis to occur.
Composition regulatory capital ≠ accounting capital:
Definition: For the
purposes of capital
requirements for banks,
capital is not obtained
simply by deducting the
value of an institution
liability, from its assets.
The regulatory capital is
more conservative than
accounting capital.
The accounting definition
of capital is not the same
as the definition used for
regulatory capital
purposes.
Difference between tier
1 and tier 2 capital?
Capital Buffers:
The persistence of the
basal “8 percent”
requirement is
misleading, because it
● Only capital that is at all times freely available to absorb
losses qualifies as regulatory capital. Additional
conservatism is added by adjusting this measure of capital
further by e.g. deducting assets that may not have a stable
value in stressed market circumstances, such as goodwill
and not recognize gains that have not yet been realized.
Composition - AT1:
● Additional tier 1 or AT1 consists of capital instruments that
are continuous, in that there is no fixed maturity including.
○ Preferred shares high contingent convertible
securities.
● Contingent convertible securities are a major component
of AT1 and their structure is shaped by their primary
purpose as a readily available source of capital for a firm in
times of crisis.
● As such, they characteristically absorbs losses prior to, or
at, the point of insolvency and the activation of this
absorption must be a function of the capitalization levels of
the issuing firm.
○ Losses can be absorbed by either:
■ Converting into common equity; or
■ Suffering a principal write-down.
Composition - T2:
● Tier 2 capital includes, revaluation reserves, general loan-
loss reserves, and undisclosed reserves. Hybrid capital
instruments subordinated term debt,
● Tier 2 capital is supplementary capital because it is less
reliable than tier 1 capital.
● Going concern capital: This allows an institution to
continue its activities and helps to prevent insolvency. Tier
1 capital is considered to be a going concern capital. The
purest form is common equity Tier 1 capital.
● Gone concern capital: This helps ensuring that depositors
and senior creditors can be repaid if the institution fails.
This category of capital includes hybrid capital and
subordinated debt. Gone concern capital is named Tier 2
capital.
● Basel 3 introduced a number of additional capital buffers,
which - when applicable - require banks to increase CET1
capital.
The difference between buffers and minimum capital
relates only to the requirements:
minimum capital
requirements for banks.
Capital conservation
buffer: (CCB)
Tackles the problem of
“procyclicality”.
Counter-cyclical capital
buffer: (CCCB)
It tackles the problem of
“procyclicality”, as CCB
does, but in an economic
upswing.
Systemically important
bank (G-SIB) buffer:
Corporate Governance in Banking:
Banking Four important aspects:
business 1. Banks are highly leveraged. As a result, shareholders may stand
● The capital requirement is a condition for running the
business.
○ A bank which falls below its minimum capital
requirement is likely to be closed down.
● The sanction for falling below a buffer requirement is that
distributions to shareholders and managers are
constrained.
● In the downswing of the economic cycle, banks maintain
their capital ratios despite poorer borrower performance
and more volatile markets, not by adjusting the capital side
of the ration, but by adjusting the asset side of the ratio.
○ Reducing their assets, especially by making fewer
loans.
○ This buffer is 2,5% CET1 capital and it applies to
all banks all of the time.
● The CCB is “designed to ensure banks build up capital
buffers outside periods of stress which can be drawn down
as losses are incurred”.
● In the upswing of the economic cycle, existing capital will
support a higher level of bank activity because of the
better borrower performance and more benign markets.
● The CCCB is designed to constrain lending by banks
during economic boom and to prepare banks for the
coming bust.
● This buffer operates depending on national situations and
must be set between 0% and 2.5% CET1, calibrated in
steps of(or multiple of) 0.25%. However, a designated
authority may set countercyclical buffer rate higher than
2.5% where it considers the conditions in the member
state justify this.
● This buffer is an additional CET1 requirement that applies
to only some banks, but all of the time.
● It addresses the argument that the Basel rules are focused
on the safety and soundness of individual banks rather
than on the banking system as a whole.
● The buffer varies from 1 to 3,5% CET1, though no bank
has received so far the maximum top-up of 3,5 and only
six banks have top-ups of 2%.
reflected in to benefit at creditors expense from changes in the bank’s
corporate investment projects that increase risk and associated returns.
governance: 2. Banks failure to impose greater cost on society. This gives banks
a perverse incentive to structure their operations such that they
are systemically important.
3. Financial assets are hard to observe and measure. The value of
their loan portfolio is not readily subject to external scrutiny by
shareholders/creditors.
4. The risk the banking business is exposed to are of a technical
nature and very difficult to manage.

Concept of ● Corporate governance determines the allocation of authority and

Corporate responsibilities by which the business and affairs of a bank are
Governance: carried out by its board and senior management,
● The primary objective of corporate governance should be
safeguarding stakeholders’ interest in conformity with public
interest on a sustainable basis.
● Among stakeholders, particularly with respect to retail banks,
shareholders’ interest would be secondary to depositors interest.

Board’s overall ● The board has overall responsibility for the bank, including
responsibilities: approving and overseeing management’s implementation of the
bank’s strategic objectives, governance framework and corporate
culture.
● The board should define appropriate governance structures and
practices for its own work, and put in place the means for such
practices to be followed and periodically reviewed for ongoing
effectiveness.

Senior ● Under the direction and oversight of the board, senior

management: management should carry out and manage the bank’s activities in
a manner consistent with the business strategy, risk appetite,
remuneration and other policies approved by the board.

Bank board structure and risk management:

CRD IV: Does not impose any minimum requirement for the
proportion of independent directors, save for:
● Separation of char and chief executive; and,

CRD IV (Dir. 2013/36, Art. 88):
Emphasizes the obligations of
the board to monitor the
performance, risk controls,
compensation strategy, and
integrity disclosure of the firm
CRD IV (Dir. 2013/36, art. 91):
Imposes ad hoc regulatory
duties of care and loyalty on
board members.
The EBA:
According to Art. 16(3) of
Reg.(EU) Nr. 1093/2010:
Competent authority (national
supervisors) must notify the
EBA as to whether they comply
or intend to comply with these
guidelines, or otherwise with
reasons for non-compliance.
Risk Identification,
monitoring and controlling:
● The composition of the nomination, remuneration
and risk committees.
CRD IV, does however require:
● Board members “shall commit sufficiently good
repute and possess sufficient knowledge, skills”
● and experience to perform their duties. The overall
composition of the management body shall reflect
an adequately broad range of experiences.
“The management body defines oversees and is
accountable for the implementation of the governance
arrangements that ensure effective and prudent
management of an institution, including the segregation of
duties in the organisation and the prevention of conflicts of
interest.”
7. The management body shall possess adequate
collective knowledge, skills and experience to be able to
understand the institution’s activities, including the main
risks.
8. Each member of the management body shall act with
honesty, integrity and independence of mind to effectively
assess and challenge the decisions of the senior
management where necessary and to effectively oversee
and monitor management decision-making.
The EBA shall publish the fact that a competent authority
does not comply or does not intend to comply with that
guideline or recommendation. The EBA may also decide,
on a case-by-case basis, to publish the reasons provided
by the competent authority for not complying with that
guideline or recommendation.
Risks should be identified, monitored and controlled on an
ongoing bank-wide and individual entity basis. The
sophistication of the bank’s risk management and internal
control infrastructure should keep pace with changes to the
banks risk profile, to the external risk landscape and in
industry practice.
The banks risk governance framework should include
policies, supported by appropriate control procedures and
processes, designed to ensure that the bank’s risk

Internal control framework
and mechanisms:
The internal control framework
is a set of functions, processes
and internal procedures. The
institution must ensure:
Risk management function:
The RMF should ensure that all
risks are identified, assessed,
measures, monitores, managed
and properly reported on by
relevant units in the institution.
Compliance function:
Institutions shall establish a
permanent and effective
compliance function to manage
compliance risk.
Internal audit function (IAF):
Independence:
In order for the internal control
functions to be regarded as
independent, the following
identification, aggregation, mitigation and monitoring
capabilities are commensurate with the banks size,
complexity and risk profile.
a. Effective and efficient operations;
b. Prudent conduct of business;
c. Adequate identification, measurement and
mitigation of risks;
d. The reliability of financial and non-financial
information reported both internally and externally;
e. Sound administrative and accounting procedures;
f. Compliance with laws and regulations, supervisory
requirements and the institution’s internal policies,
processes, rules and decisions.
The RMF should be actively involved at an early stage in
elaborating an institutions risk strategy and in ensuring that
the institution has effective risk management processes in
place. The RMF should provide the management body with
all relevant risk-related information to enable it to set the
institutions risk appetite level.
The RMF should assess the robustness and sustainability
of the risk strategy and appetite. It should ensure that the
risk appetite is appropriately translated into specific risk
limits. The RMF should also assess the risk strategies of
business units, including targets proposed by the business
units, and should be involved before a decision is made by
the management body concerning the risk strategies.
The compliance function should advise the management
body on measures to be taken to ensure compliance with
applicable laws, rules, regulations and standards, and
should assess the possible impact of any changes in the
legal or regulatory environment on the institutions activities
and compliance framework.
The IAF should not be involved in designing, selecting,
establishing and implementing specific internal control
policies, mechanisms and procedures, and risk limits.
The IAF should independently review and provide objective
assurance of the compliance of all activities and units of an
institution, and of the effectiveness of the internal control
framework.
a. Their staff do not perform any operational tasks that
fall within the scope of the activities the internal
control functions are intended to monitor and
control;
conditions should be met:
Proportionality:
Art. 74(2) Dir. 2013/36/EU aims
to ensure that internal
governance arrangements are
consistent with the individual
risk profile and business model
of the institution.
Internal control as a
regulatory strategy:
b. They are organisationally separate from the
activities they are assigned to monitor and control;
c. Notwithstanding the overall responsibility for
managing the activities the internal control function
monitors and controls; and
d. The remuneration of the internal control functions’
staff should not be linked to the performance of the
activities the internal control functions monitors and
controls, and not otherwise likely to compromise
their objectivity.
a. The size in terms of the balance-sheet total;
b. The geographical presence of the institution and the
size of its operations in each jurisdiction;
c. The legal form of the institution, including whether
the institution is part of a group and, if so, the
proportionality assessment for the group;
d. Whether the institution is listed or not; whether the
institution is authorised to use internal models for
measurement of capital requirements.
i. The internal ratings based approach.
e. The type of authorised activities and services
performed by the institution.
f. The underlying business model and strategy; the
nature and complexity of the business activities, and
the institution’s organisational structure;
g. The risk strategy, risk appetite and actual risk
profile of the institution.
● Supervisors and regulators are increasingly
“delegating” enforcement activities traditionally
performed by the state to “internal gatekeepers”.
● Internal Controls and compliance function amount to
a form of internalised law enforcement, consisting of
efforts banks undertake to ensure that the firm, and
it’s employees do not violate applicable rules,
regulations or norms.
● Traditionally, the board retains primary authority
over the firm.
● But authority means the power to decide. As a
result, the question of the authority of compliance
vis-á-vis the board ultimately resolves into the
question of whether the board has the authority to
decide not to implement a compliance function. If
so, then boards retain full primacy over compliance,

Fit and proper test - Legal framework:
SSM Regulation and SSM
Framework Regulation:
Art. 4(1)(e) of the SSM regulation
makes clear that fit and proper
assessments should be part of the
ECB’s supervision of the overall
governance of credit institutions.
Regulation 1024/2013:
CRD IV and National Law:
Art, 4(3) of the SSM Regulation
provides that for the purposes of
carrying out it’s supervisory tasks
the ECB will apply all relevant union
law and, where this law is
composed of directives, the national
and compliance can be viewed as a simple
delegation of board authority.
● The SSM Framework regulation elaborates on
the fit and proper field of competence in art. 93
and 94.
● Art. 93, refers to change in the management
bodies,
● Art. 94 covers new facts or any other issues
which may impact upon the oncloing obligation
to have suitable members in the management
bodies of credit institutions.
● Suitability requirements are covered by Art. 91
of the CRD IV. The Directive covers the fit and
proper standards in substance, without,
however, providing any details on the different
criteria, and remains silent on the type of
supervisory procedure to be followed.
○ e.g. the choice between ex ante
law implementing those directives.
Fit and proper test:
Fit and proper assessments of
members of the management body.
Consumer protection + Financial consumer protection:
Unfair terms directive
93/13/EEC:
The relevance of bargaining
power imbalance between two
contracting parties, and the
need to lay down harmonising
rules in Europe.
Unfair Terms Art. 3:
Duty of “good faith” entails an
obligation to ensure from a
supervisory approval of an appointment
or ex post notification of an appointment
to the supervisor.
● Consequently, when taking fit and proper
decisions within the SSM, the ECB will apply
the substantive fit and proper requirements laid
down in the binding national law, which
implements art. 91 of the CRD IV. Given that
art. 91 of the CRD IV is clearly a minimum
harmonisation provision, this transposition has
been dealt with in different ways in the nineteen
Euro area countries.
Five criteria for fit and proper assessment:
1. Experience:
a. Does the candidate have the theoretical
and practical capabilities to assume a
specific role in the bank.
2. Reputation:
a. Criminal record, fiscal irregularities.
3. Conflicts of interest:
4. Time commitment:
5. Collective suitability:
a. Looking for added value given to the
whole board.
Art. 1:
● <<The purpose of this directive is to approximate
the laws, regulation and administrative provisions of
the member states, relating to unfair terms in
contracts concluded between a seller or supplier
and a consumer.>>
● Contracts: all contracts, including financial
contracts.
● Consumer: The natural person, acting for purposes
that are outside his trade, business of profession.
1. A contractual term which has not been individually
negotiated shall be regarded as unfair if, contrary to
the requirement of good faith, it causes a significant
imbalance in the parties rights and obligations
substantial point of view, the
supplier, which is the bank,
should not take advantage of
the state of necessity or lack of
experience of the consumer,
while from a formal point of
view, terms should be written in
a legible and clear way and
without traps.
Legal consequence and
impact of the unfair term:
Any unilateral modification of
the contractual conditions must
be communicated expressly to
the customer, in a manner that
highlights the formula:
“Proposal for a unilateral
modification of the contract”
with a minimum of 2 month
notification, in writing.
If the banks do not follow the rules stated above:
arising under the contract, to the detriment of the
consumer.
2. A term shall always be regarded as not individually
negotiated where it has been drafted in advance
and the consumer has therefore not been able to
influence the substance of the term, particularly in
the context of a pre-formulated standards contract.
The fact that certain aspects of a term or one
specific term has been individually negotiated shall
not exclude the application of this article to the rest
of a contract if an overall assessment of the contract
indicates that it is nevertheless a pre-formulated
standard contract. Where any seller or supplier
claims that a standards term has been individually
negotiated, the burden of proof in this respect shall
be incumbent on him.
3. The annex shall contain an indicative and non-
exhaustive list of the terms which may be regarded
as unfair.
● In contracts of indeterminate duration, the right to
unilaterally change the rates, prices and other
conditions can be provided by the contract if a
justified reason exists, with a clause approved
specifically by the customer. In other contracts of
duration, the right to unilateral modification can be
agreed exclusively for the clauses that do not have
as their object the interest rates, provided that there
is a justified reason.
● The change is considered approved if the customer
does not withdraw, without charge, from the contract
by the date set for it’s application. In this case,
during the liquidation of the relationship, the
customer has the right to the application of the
previously practiced conditions.
● The contractual variations for which the
prescriptions of this article have not been observed
are ineffective, if unfavorable for the customer.
Prospectus:
A prospectus is a legal document
that describes:
● A company’s main line of
business, it’s finances and
shareholding structure,
● The securities that are being
issued and/or admitted to
trading.
The EU introduced rules on the
prospectus in 2003, with directive
2003/71/EC:
The rules underwent a major revision in
2010, with the adoption of amending
Directive 2010/73/EU:
Prospectus directive Art. 5:
● Most companies that want to raise capital
through public offers or have securities
admitted to be traded on regulated markets
need to provide investors with a prospectus.
● It contains the information an investor
needs before making a decision whether to
invest in the companies securities (such as
shares, bonds, derivatives).
● EU prospectus rules ensure that adequate
and equivalent disclosure standards are in
place in all EU countries, so that investors
can benefit from the same level of
information.
● Under these rules, once a prospectus has
been approved in one EU country, it is valid
throughout the EU.
● The rules also ensure that minimum
protection for investors is of the same
standard across the EU.
<<The prospectus shall contain all information
which, according to the particular nature of the
It is formed of different sections, the
summary is therefore very important.
It is “in a brief manner and in
nontechnical language, conveys the
essential characteristics and risks
associated with the issuer, any
guarantor and the securities, in the
language in which the prospectus was
originally drawn up.”
issuer and of the securities offered to the public or
admitted to trading on a regulated market, is
necessary to enable investors to make an informed
assessment of the assets and liabilities, financial
position, profit and losses and prospects of the
issuer and of any guarantor, and of the rights
attaching to such securities. This information shall
be presented in an easily analysable and
comprehensible form.>>

Information, approval and ● The essential characteristics of the issuer of

publication:
The prospectus must contain a
summary document, produced in a
standard format, providing key
information on:
Once it has been approved by the
competent authority, it must be
published and a copy must be sent to
the ESMA.
the securities (The issuing company, this
usually is the banks itself), of any
guarantors (the bank itself or others) and of
the securities offered or admitted to trading
on a regulated market, as well as the main
risks associated with them;
● The general terms of the offer, notably an
estimate of the expenses invoiced by the
issuer to the investor.

Prospectus: The regulation:

In june 2017, the EU adopted The regulation aims to:

the regulation (EU)
20017/1129 to improve the
prospectus regime.
● Make it easier and cheaper for smaller companies to
access capital,
● To introduce simplification and flexibility for all types
of issuers, in particular for secondary issuances and
frequent issuers which are already known to
markets,
● And to improve prospectuses by introducing a retail
investor-friendly summary of key information,
catering for the specific information and protection
needs of investors.

Key aspects of the regulation: Exemption of the smallest raising:

● The new rules do not apply to issues of securities
with a value below €1 million. In addition, member
states can exempt issuers they consider small - up to
8 million, for their domestic markets.
Shorter prospectuses and better investor information:
● The regulation specifies, with greater clarity, the
amount of information needed in order to make
prospectuses shorter and clearer.
Simplifying secondary issuance for listed firms:
● Companies already listed on a public market that
wish to issue additional shares or raise
debt(corporate bonds), can benefit from a simplified
 prospectus.
Fast-tract and simplified frequent issuer regime:
● Companies that frequently issue can use the
universal registration document (URD). Issuers that
maintain an updated URD can benefit from fast-track
approval.
Single access point for all EU prospectuses:
● The ESMA will provide free of charge and
searchable online access to all prospectuses
approved in the European Economic Area.

Money Laundering:

International Action:

FATF (financial action task 2. Monitors the progress of its members in

force): In collaboration with other
international stakeholders, the
FATF works to identify national-
level vulnerabilities with the aim of
protecting the international financial
system from misuse.
implementing necessary measures,
3. Reviews money laundering techniques and
counter-measures.
4. Promotes the adoption and implementation of
appropriate measures globally.

Directive 91/308/EEC:
<<On prevention of the use of the
financial system for the purpose of
money laundering>>
The initial concern of the council directive was that
credit and financial institutions could be used to launder
the proceeds of criminal activities, jeopardising the
whole financial system.
It established key preventative measures. In particular
three pillars:
1. Customer/client identification,
2. Record-keeping,
3. Methods of reporting suspicious transactions.
a. To the competent authorities.

Client Identification: ● The identification requirement shall also apply

Credit and financial institutions for any transaction involving a sum amounting
require identification of their to €15.000 or more, whether the transaction is
customers by means of supporting carried out in a single operation or in several
evidence when entering into
business relations, particularly when
opening an account or savings
accounts, or when offering safe
custody facilities.
● Credit and financial institutions shall carry out
operations which seem to be linked. Where the
sum is not known at the time when the
transaction is undertaken, the institution
concerned shall proceed with identification as
soon as it is apprised of the sum and
establishes that the threshold has been
reached.
such identification, even where the amount of
the transaction is lower than the threshold laid
down, wherever there is suspicion of money
laundering.

Reporting obligations:

The institutions and a) By promptly informing the FIU, on their own initiative, where
persons covered by the institution or person covered by this directive knows,
Directive 2006/70/EC, suspects or has reasonable grounds to suspect that money
and where applicable laundering or terrorist financing is being or has been
their directors and committed or attempted;
employees shall b) By promptly furnishing the FIU, at its request, with all
cooperate fully. necessary information, in accordance with the procedures
established by the applicable legislation.

Suspicion of money ● The suspicion may arise from the characteristics, size, or
laundering activity: nature of the transaction or from any other circumstances
that come to the reporting institution’s attention by reason of
its functions, and taking account of the economic capacity or
business activity of the persons carrying out the transaction.
● The suspicion must be grounded in a comprehensive
assessment of all elements, both objective and subjective, of
the transactions that are known to the reporting institution,
acquired in the course of the customers activity or as the
result of conferral of an assignment.
● To facilitate the detection of suspicious transactions,
anomaly indicators issued by the FIU and models, patterns
representing anomalous conduct, devised and issued by the
FIU.

Reports must be ● Reports must be made without delay, where possible before
made without delay! the transaction is effected. The reporting procedures differ
according to the category of reporting institution.
● Reports are transmitted to the FIU electronically via the
INFOSTAT-UIF portal, after the reporting institution has been
registered and authorized to use the systems by the
procedures described in a special set of instructions.
Exemption from the
obligations:
Directive 2006/70/EC (Due diligence)
Identification to Due
diligence:
● Additional obligations
of the bank, to keep
an eye on their
customers and report
suspicious
transactions to the
relevant authorities.
−Enhanced customer due
diligence measures for
politically exposed persons
(persons holding a public
office such as judges) and
their immediate families or
close associates;
● Reporting obligations do not apply to notaries, other
independent legal professionals, auditors, external
accountants and tax advisors, only to the strict extent that
such exemption relates to information that they receive from,
or obtain on, one of their clients, in the course of ascertaining
the legal position of their client, or performing their task of
defending or representing that client in, or concerning,
judicial proceedings, including providing advice on instituting
or avoiding such proceedings, whether such information is
received or obtained before, during or after such
proceedings.
Customer due diligence measures shall comprise:
a) identifying the customer and verifying the customer's
identity on the basis of documents, data or information
obtained from a reliable and independent source;
b) identifying, where applicable, the beneficial owner and
taking risk-based and adequate measures to verify his
identity so that the institution or person covered by this
Directive is satisfied that it knows who the beneficial
owner is, including, as regards legal persons, trusts
and similar legal arrangements, taking risk-based and
adequate measures to understand the ownership and
control structure of the customer;
c) obtaining information on the purpose and intended
nature of the business relationship;
d) conduct ongoing monitoring of the business
relationship including scrutiny of transactions
undertaken throughout the course of that relationship to
ensure that the transactions being conducted are
consistent with the institution's or person's knowledge
of the customer, the business and risk profile
The institutions and persons covered by this Directive shall
apply customer due diligence measures in the following cases:
a) when establishing a business relationship;
b) when carrying out occasional transactions amounting to
EUR 15 000 or more, whether the transaction is carried
out in a single operation or in several operations which
appear to be linked;
c) when there is a suspicion of money laundering or
terrorist financing, regardless of any derogation,
exemption or threshold;
d) when there are doubts about the veracity or adequacy
of previously obtained customer identification data.
−Simplified customer due
diligence procedures for low-
risk transactions (Member
State assessed) involving
public authorities or public
bodies if their identity and
activities are publicly
available, transparent and
certain and on-going
monitoring of such
transactions.
Directive (EU) 2015/849 - IV Directive:
Risk-based
approach/proportionality:
Personal Scope:
Providers of gambling
services:
● Obliged entities take appropriate steps to identify and
assess the risks of money laundering and terrorist
financing, taking into account risk factors including those
relating to their customers, countries or geographic
areas, products, services, transactions or delivery
channels. Those steps shall be proportionate to the
nature and size of the obliged entities.
● With the exception of casinos, and following an
appropriate risk assessment, member states may decide
to exempt, in full or in part, providers of certain gambling
services from national provisions transposing this
directive on the basis of the proven low risk posed by
nature and, where appropriate, the scale of operations of
such services.
● Among the factors considered in their risk assessment,
member states shall assess the degree of vulnerability of
the applicable transactions, including with respect to the
payment methods used.