CPL02

1. The Consultative Panel appointed from its midst Mr Freddy van den Spiegel as the new Chair of the Panel. Mr. Van den Spiegel (Fortis, Belgium) will chair as of the third meeting, and will be assisted by the secretariat of CEBS.

2.The timeline of CRD is discussed. Currently, the anticipated timeline is still possible. CEBS will only delay the timelines for its work if delays actually materialize.

3.With regard to the COREP consultation proposals, it was remarked that they are very technical. There are a lot of proposals, which are not all useful for a proper management nor supervision of an institution. The amount of information would appear to be difficult to digest. There is benefit in cleaning it up and making the package more compact. Panel members will provide input on usefulness and cost/benefit of certain tables during the consultation process.

National discretions

4.With regard to national discretions, CEBS reported on the follow up of its report to the Council working group, and its current work on convergence in the areas where national discretions exist. Written contributions on the prioritisation of CEBS’ work as well as practical solutions on various issues were received from the EBF and the BBA, as well as from Panel members. These will be taken into consideration during the follow up work. Technical convergence will cause national discretions to be used in the same way, effectively removing them. Also, in practice, the supervisory disclosure exercise might show that with regard to some discretions (almost) all countries will make similar choices, especially where the discretion is not based on (still existing) market or legal differences amongst member states economies.

5.The prioritisation will be done on the basis of impact (do they disturb the level playing field, do different choices lead to high implementation costs). For cross border operating institutions, each national discretion adds to complexity and thus costs. Some panel members referred to the fact that this EU-wide convergence meant that difficultly achieved domestic harmonisation would need to be revisited. This while the benefit for especially smaller institutions is deemed limited. Others mentioned the unavoidability of EU-wide convergence, in order to facilitate an open EU market. Issues mentioned for prioritisation include the definition of default, partial use rules, retail portfolio definition, whole group weighting, recognition of decisions on collateral by the country where the collateral is located, mortgage lending. Also mentioned were directive issues, such as identical treatment of branches and subsidiaries (which also relates to the home/host work of CEBS).

6.The industry has proposed mutual recognition as a solution in various areas. CEBS is studying this, and differentiates between two forms. It can mean (i) recognizing a decision on a localized issue e.g. weighting of a certain institution, which could (with a positive effect on the level playing field) be ‘recognized’ by other supervisors (with benefit for institutions supervised by them who deal with the localized issue in the state of the deciding supervisor), and (ii) the application of a decision to both a parent and its subsidiaries, if either of the supervisors involved reached a decision. The panel members request that both be considered. If for instance different procedures are adopted in different countries, it means having to install shadow procedures for local purposes, which leads to e.g. unnecessary capital allocations and miscommunications. A recognition or waiver instrument might lead to future convergence. For smaller institutions the second form might hamper the local level playing field.

7.The timeline for eliminating the differences resulting from national discretions can be long, but the distorting national discretions should, however, in due course be phased out. Immediate changes might damage local markets for smaller institutions. It is agreed that in the near future some national discretions are necessary, but that might be converged over time. Some members indicate that they would prefer some of the market distortions to be addressed more strongly by the EU. There is some urgency amongst members of the panel with regard to decisions on possible differing treatment of businesses on a solo and a consolidated basis across member states, as this involves costly solutions for cross border operating banking groups. Reference is made to the CRD, which states that host country rules apply to the subsidiary (with some latitude for both host and home supervisors).

8.It was concluded that there are many issues. Many are not of a purely technical nature. A clarifying and practical approach is necessary to make progress towards phasing out differences. There will be a focus on level playing field issues and discretions which lead to high costs, as well as on ‘easy gains’ where national discretions are little used. The subsidiarity issue will play a role, as well as requests for flexibility. Smaller institutions should not be overburdened, but cross border operations should benefit from the work to be done. CEBS will meet with the EBF and BBA to get further explanations on their contributions, also with regard to the cost impact of some discretions.

Home/Host

9.The current CRD text has been the basis for CEBS work, and aims to provide a practical working model for supervisors and supervised. The draft paper discussed was well received by the Panel. There were, however, some remarks on the lengthy description of procedures in the annexes (which might unnecessarily give the impression of difficult or bureaucratic issues), which on the other hand were deemed helpful to flesh out and understand the more general guidance of the main paper. This will also ensure compliance with the guidance set out. Implementation will be deemed the key. The fact that the part on the cooperation between supervisors on model validation was missing from the draft consultation paper was considered a major shortcoming.

10.Some issues might be further studied, such as more defined thresholds, quickness of cooperation, cost sharing, service agreements, definitions of certain terms used (portfolio, event of default). Also, the consultation paper should mention, and preferably use, the possibility of delegation of supervisory powers across borders. This would help in further aligning the treatment of branches and subsidiaries. Also, as with the national discretions, it would be preferred that the mutual recognition concept was introduced, meaning that on some subjects supervisors on one part of the group should follow the supervisor of another part of the group on e.g. local decisions. The desired level of detail (some members of the panel were in favour of more detail, others in favour of less detailed prescriptions and examples), and level of flexibility are issues upon which the consultation will give valuable input.

11.The panel, by way of comparison, refers to the USA where, though there are many supervisors, in practice they coordinate very well and they do not overburden the banks. The CRD may provide for the establishment of colleges, which should have a similar impact. The panel members emphasize the aim for reducing administrative burdens. There is some concern that supervisors are not accountable, though the increased peer pressure is welcomed.

Supervisory Disclosure

12.The work done by CEBS on the method for disclosure by supervisors (a European webpage, linked to national webpages) was positively received. It will provide for the meaningful comparison required by the CRD, especially if the local disclosure webpages are indeed almost identical. This will help convergence. A remark is made about possible duplication of information on both the national and European webpage. The proposals on language, lay out, and linkages are supported. On the content of the disclosure, the Panel indicated that more time will be needed for a proper assessment. The relation and language of the websites of CEBS and national supervisors are discussed. Upon request, the panel expresses itself to be in favour of a high level of disclosure on Pillar 2 measures. Some harmonisation on a global level would be desirable. It is noted that if many pillar 2 measures are taken, in the opinion of the panel that would indicate that pillar 1 is not working properly. Panel members indicate they will comment further during the public consultation.

Mergers and acquisitions

13.The panel discussed the draft call for advice on mergers and acquisitions. This was deemed to be largely a political issue. The panel acknowledged that supervisory controls on the acquisition of relevant shareholdings are certainly not the only barrier to cross border mergers. The use of supervisory tools for ensuring sound and prudent control of credit institutions is not contested, though the panel pointed out that the criteria could be further fleshed out. This would be relatively easy, and would prevent possible misuse. It would also help if for certain aspects of the decision, the supervisors might rely on recognition of each others’ earlier decisions. CEBS’ advice might differentiate between mergers and acquisitions by EU based supervised institutions, and by third country based institutions. Reciprocity and level of supervision are factors which might be especially relevant there. The panel agreed with CEBS that it would have been better to be able to publicly consult on this issue, but that the timeline for CEBS’ advice does not allow for it. Also, the European Commission has directly approached organisations like FIN-USE and CEIOPS for similar advice.

Pillar 2/Model Validation

14.The work with regard to Pillar 2 and Model Validation was discussed. It was agreed that with regard to both issues, specific experts meetings will be organized between CEBS’ experts and experts indicated by the panel and European representative organisations.

15.With regard to the work on Pillar 2, the discussion mainly focused on some worries the industry has. The panel generally agrees with the progress made, but would like more clarity on various issues. Smaller institutions would appreciate consistency with existing structures, as they see many costs in adapting to new (convergent) structures, without clear benefits for them. Clarification would be also be welcomed by them on proportionality. Specific worries for cross border operating groups are e.g. the possibility for supervisors of subsidiaries who do not agree with (models approved by) the consolidated supervisor to, perhaps arbitrarily, take pillar 2 measures which might add capital to Pillar 1 capital requirements. This would undermine the concept of model approval at the consolidated level. Especially on stress testing, guidance on the way of testing and the possible consequences attached to it would be appreciated. Some of this guidance appears to be part of the indicated consultation paper, parts might be looked into additionally by CEBS. The panel would welcome guidance to supervisors on these issues, though it is recognized that the type of measure taken could be different across member states.

The possibility to delegate the pillar 2 analysis to one supervisor for cross border operating groups is indicated as a possible way forward for avoiding several, perhaps inconsistent, measures for various entities within a group. According to the panel, supervisors should focus on the methods and decision making processes of the institution to allocate capital, not on the end result. Comparisons with other institutions would be difficult as a basis for a supervisory measure, as the reasoning could not be assessed by the institution which receives a measure. Reference is made to the agreement that Basel II should neither lower nor heighten the over all amount of capital required.

16.On model validation, the interaction with the global discussions is welcomed. As the EU has decided upon a tighter timeframe, there is some worry about the EU wide process decide upon a method which afterwards would not be identical to the global decision. The panel agrees that the proposed timeline should be kept, and not delayed to be consistent with third countries timelines. On QIS5, if at all necessary, it would be appreciated by panel members if this would be coordinated across the EU, as the pressure on institutions is already heavy from both national and international implementation processes on Basel II. CEBS indicates that it will try to align the processes, and to keep them on the same basis.

Next meeting

The next meeting will be held 30 June 2005 in London.