Supervision of credit institutions Flashcards
Corporate governance problems during GFC
Assumption: attention only on SHs interests could encourage excessive risk-taiking, damaging other stakeholders such as creditors, depositors, employees.
Inefficient and ineffective CopGov arrangements, managers take to much risk
New corporate governance rules
New “management body” that oversees executives and assist authorities in monitoring. MB appointed in accordance with national law. MB should be diverse, no single authoritative member (not too many directorships though)
Risk management function
bank unit that ensures ideni´tificatino, measurement and reporting of all risks. Autonomous from other ops functions.
Committees within mgmt body of large institutions
Only comprised of people without executive function
1) Risk committee: advise and assist MB with risk strategy implementation
2) Nomination commitee: regularly assesses skills of MB people, review and recommend choices of senior management
3) Remuneration committee: draft, consult and supervise implementation of remuneration policies. Important: don’t encourage excessive risk taking (such as in GFC)
De Larosiere mandate
EU answer to GFC, focused on stregnthening EU supervisory 1) prudential soundness of insti 2) functioning of markets 3) protection of depositors, policy holders, investors.
Strenghten EU cooperation on 1) financial stability oversight 2) early warning mechanism 3) crsis management.
One point: before GFC too much micro-prudential, not enough macro
EU system of financial supervision (ESFS) organs
1) EU supervisory authorities (ESAs): work with national authorities at individual financial firm level. develop rules, standards, guidelines,. monitoring, ban stuff, mediate disputes, ensure application of EU law
2) EU systemic risk board (ESRB): monitor threahts to stability on macro-eonomic level/ whole financial system. Provide early warning of system-wide risks
3) National competent authorities (NCAs): authorize CIs, investigate. can impose administrative penalties/measures
Supervisory review and evaluation process (SREP)
assessment of risks that CIs are exposed to, prepared at least annually. Here it is also determined whether CI might pose systemic risk. Also: stress tests.
Reactive measures
excess funds, reinfocement, apply particular provisioning policy or treatment of assets, restrict business, reduce isk, more reporting, force CI to use net profits to strenghthen funds, restrict payment of interest to SHs, members/holders of additional tier 1 instruments, liquidity requirements
Trilemma of financial supervision
1) Stable financial system
2) Integrated financial market
3) National financial supervision
3 components of Euro area banking union
1) Single supervisory mechanism (all banks by ECB, less-significant banks by NCAs)
2) single resolution mechanism (SRB, NRAs for lesser banks)
3) deposit insurance scheme (EDIS). weak point. not mutualised at euro-area level yet. Common deposits guarantee scheme (CDGS)
Main reasons for banking union
1) relevant amount of cross-border activities within both euro-area and non euro-area
2) Integriyt of the Euro and internal market threatened by fragmentation of financial sector
3) need for supervisors able to overse highly compley and interconected instit
4) home country control no longer enough
5) need to cut link between sovereign debts and domestic banking systems
6) coordination by ESSFS not enough
3 Objectives of SSM
1) ensure safety and soundness of Euro-area banking system
2) enhance financial integration and stability
3) ensure consistent application of bank supervision standards
Tasks and powers of ECB in SSM framework
1) Micro-prud tasks: grant/withdraw bank licences, authorise acquisitions, monitoring of compliance, investigations, set prudential requirements, supervisory reviews (stress tests), impose corrective measures/ recovery plans and early intevention
2) macro: define higher requrements for capital buffers than applied by NCAs
Governance issues: ECB governing council vs. SSM supervisory board
governing council has upper hand ag. supervisory board and can reject decision by SB (if not rejected after some time, decision is deemed adopted).
Decision-making structures of ECB primarily for monetary polica (vs. supervisory function of SSM)
Governing council: separation principle
GC cannot modify decisions proposed by SB. GC stuff on supervisory matters strictly apart from other ECB functions. Separation also ensured on staff level.
