Credit institutions Flashcards
(30 cards)
How are banks categorized?
general public banks: retail, investment and universal banks
Higher-level institutions: central banks
what are activities performed by banks?
taking deposits, lending and payment services.
Additionally investment banks might also perform investment, insurance and property management services.
what is the definition of a credit institution?
‘a credit institution ‘is an undertaking the business of which is to take deposits or other repayable funds from the public and to grant credit for its own account’ NB this business is exclusively reserved to Credit institutions. Additionally in order to qualify as a credit institution you must strictly adhere to all the activities listed before EG. a company providing credit for its own account might not be included if it takes no deposits.
what are the characteristics that define a deposit?
- Object of the deposit is only money
- The deposited amount should be related to a banking transaction between the depositor (creditor) and the bank (debtor)
- The depositor and the depositary may agree that the funds are repayable to the former either upon request (demand deposit) or at a fixed term (term deposit)
- The principal amount of the deposit must always be paid back at its face value (i.e., at par)
- It does not matter whether the sum is to be repaid with or without interests and whether the deposit is transferable to third parties.
6 it is not a financial instrument excluding certificates of deposit.
what are other repayable funds
“other repayable funds” are funds that the credit institution has received under a contract other than a deposit agreement and that it is required to pay back at par, or in such a sum that is increased based on the agreed interest (not financial instruments!!)
why can non financial institutions offer securities to the public without violating credit institution requirements of the CRD?
Ban on undertakings that are not banks from taking deposits or other repayable funds from the public does not apply to cases expressly covered by national law, provided that those activities are subject to regulations and controls intended to protect depositors and investors. (CRD subordinated to national law)
what does “from the general public” imply?
- in general fundraising activities directed towards restricted groups do not count towards qualification as a credit institution, however national law can set anti avoidance rules to prevent this from being exploited. whenever the fundraising activity is regularly carried out with no restriction or
limitation, it will be potentially addressed to the general public
what does granting of credit for its own account mean?
-granting of credit implies any type of financing given or promised to give.
-for its own account: when the credit institution provides financing, it bears the credit risk and possible default weight on them, not on the client that provided the deposit.
why do we need to regulate banks?
they are inherently risky as their whole business consists in transforming short-term liquid liabilities into long term illiquid assets.
what is fractional reserve banking?
only a small part of liquidity needs to be kept at all times to meet withdrawal requests by depositors, this allows to invest the remaining funds into long term assets. However this concept may lead to financial disaster once withdrawals start being correlated (eg bank runs)
which are the 2 main risks to which banks are exposed?
- Banks may misjudge the creditworthiness of borrowers: losses may bring the value of assets (loans) below the value of liabilities
- Liquidity issues (withdrawals) can turn rapidly into balance sheet
insolvency
what were the weaknesses of the EU regime on banking regulation?
- inadequate cross border supervision
-no common European legal tools to allow for recovery and resolution of bank crisis
-vicious circle between sovereign debt and state of the banking system.
what did the new banking regulation framework introduce?
-The transposition of Basel III Accord into the so-called “CRD Package” and CRR
-Deposit guarantee schemes
-A set of harmonized rules concerning the recovery and the resolution of failing credit institutions and investment firms
-European Systemic Risk Board (ESRB) and three European Supervisory Authorities (ESAs)
-Single Supervisory Mechanism (SSM)– the first pillar of the
Banking Union– and the Single Resolution Mechanism (SRM)– the second pillar of the Banking Union
what is the CRD?
minimum harmonization measure concerning the largest credit institutions and investment firms. sets rules on
- access to business activity
-supervisory powers and tools for the prudential supervision of credit institutions by competent authorities
-disclosure duties towards competent authorities
what is the CRR?
uniform rules regarding the general prudential requirements that institutions shall comply with in relation to:
- regulatory capital
- large exposures to single counterparts or closely tied counterparts
- liquidity requirements
- reporting requirements related to own capital and large exposure
- public disclosure requirements
why was the banking union introduced?
-large amount of intra state transactions
-fragmentation of banking system threatened euro stability
-unified supervision
-need to replace home country control principle
-Need to cut the link between sovereign debts and domestic banking systems
what is the SSM?
Single Supervisory mechanism: (composed of theECB + Euro-AreaNCAs). ECB is the direct supervisor of significant banks, NCAs are
supervisors of less-significant banks (still under the
coordination of the ECB.
- all euro area countries automatically participate
-countries that are not part of the Euro can decide to enter by joining a “close cooperation” with ECB
-countries that did not join coordinate supervision through a memorandum of understanding
what is SRM?
Single Resolution mechanism: (composed of SRB+ Euro-Area NRAs). The SRB has the task of planning, preparing and resolving significant
banks (final decision to be approved by Commission and
Council of Ministers), NRAs have the same power in
relation to less-significant banks.
what is EDIS?
European deposit insurance Scheme: is meant to protect the depositors up to a pre
determined amount. The weak point is that so far the
scheme has not been mutualised at Euro-Arealevel.
What are the tasks of the ECB under the SSM? how are they categorised?
micro prudential tasks:
-grant bank licenses
-authorise acquisition of qualified holdings
-monitor compliance with requirements
-conduct investigations
-set prudential requirements
-carry out supervisory reviews
-impose sanctions
macro prudential tasks:Define higher requirements for capital buffers than applied by NCAs and set a buffer rate if NCA has not done so
what are significant banks?
Total value of assets (TVA)> €30 billion (consolidated basis)
* TVA> €5 billion and > 20% GDP (same)
* TVA> €5 billion and the ratio of cross-border assets/ liabilities in more
than 1 other participating MS > 20% (same)
* Threemost significant credit institutions established in a Member State;
* Recipient of direct assistance from the European Stability Mechanism
→ 1yearto upgrade;3 consecutiveyearsto downgrade
The ECB can declare an institution significant irrespective of the criteria and can also downgrade one accordingly.
which acts are the 2 exceptions in the supervisory regime of NCAs for less significant banks?
- Licensing: authorization and withdrawal
- Qualifying shareholdings
what is the structure of supervision under SSM?
ECB directly supervises significant banks through joint supervisory teams with the relevant NCA, and indirectly supervises the less relevant banks which instead are under direct control of the NCAs (excluding shareholder qualification and licensing)
what are the characteristics of joint supervisory teams?
A JST is established for each significant institution
Size,overall composition and organization of JSTs are tailored to size, business model and risk profile of the bank they supervise. and are formed by member of both NCAs and ECB.
They foster a common supervisory culture and consistent supervisory practices as well as cooperation with the NCAs.
