CEBS work on Home Host issues and Pillar 2 implementation

High Level Meeting on theImplementation of Basel IIin Africa<strong>CEBS</strong> <strong>work</strong> on Home­Host issues and Pillar 2implementationKerstin af Jochnick | 28 February 2008

Outline1.<strong>CEBS</strong>’ role2.<strong>CEBS</strong>’ Pillar 2 implementation3.Operational net<strong>work</strong>ing4.Challenges aheadCape Town, 28 February 2008 | Kerstin af Jochnick 2

<strong>CEBS</strong>’ roleMain tasks:• Advise the Commission onbanking policy issues,• Promote consistentimplementation of the EUlegislation and convergence ofsupervisory practices,• Enhance supervisorycooperation and informationexchange.Objectives:Promote cross­bordersupervisory cooperation andsafety and soundness of the EUfinancial system through:• Effective regulation,• Efficient and cost­effectiveapproaches to supervisionof cross­border groups,• Good supervisorypractices,• Level playing field andproportionality.Cape Town, 28 February 2008 | Kerstin af Jochnick 3

<strong>CEBS</strong>¨’ organisation chart<strong>CEBS</strong>Chair Kerstin af JochnickThe BureauGroupe de ContactThe SecretariatSecretary General Andrea EnriaExpert Group on CapitalRequirementExpert Group on FinancialInformation

Introduction• Basel II and <strong>CEBS</strong>– The new paradigm: risk­focused supervision– A window of opportunity for convergence in supervisorypractices in the EU: the role of <strong>CEBS</strong>• Four main challenges in EU implementation– Consistent implementation– Convergence in supervisory practices– Streamlining the supervisory process for cross­border groups– Effective consultations

<strong>CEBS</strong> responses: efforts to address implementationissuesPhase I: guidelines• Home Host co operation• Structured use of supervisory judgment: Supervisory ReviewProcess (Pillar 2).• Frame<strong>work</strong> for supervisory disclosure: enhanced transparency;• Validation of advanced approaches for credit and operational risk(high level principles not enough to achieve convergence);• Common reporting frame<strong>work</strong>s (COREP and FINREP);• è Joint effort <strong>CEBS</strong> and Commission to ensure consistentinterpretation of Basel II in Europe.

Guidelines for co­operation between home/host• Addressing the concern of a complex and fragmentedsupervisory process• Practical frame<strong>work</strong> for coordinated planning in supervisorycolleges; structured exchange of information; and optimal use ofsupervisory resources and avoiding overlapKey points:­notion of significance and systemic relevance­two­way information exchange­transparency of arrangements­neutrality with respect to business model and structureCape Town, 28 February 2008 | Kerstin af Jochnick 8

Supervisory Review ProcessSUPERVISORY REVIEW PROCESSICAAPSREPINTERNAL GOVERNANCEAssess all risks; identify materialones; identify controls to mitigate therisksIdentify amount and quality of internalcapital in relation to risk profile,strategies and business planDIALOGUECHALLENGEIdentify, review and evaluate all riskfactors and control factors/ RASAssess, review and evaluate theICAAPAssess, review and evaluatecompliance with minium standardsset in DirectiveSupervisoryevaluation ofon­goingcompliancewithminimumstandards &requirementsPRODUCE ICAAP NUMBERAND ASSESSMENTSREP CONCLUSIONSICAAP process/ resultsfully satisfactoryICAAPprocess/results notfully satisfactoryCAPITALICAAP resultsPillar 1minimumregulatorycapitalCapitalallocated forPillar 2Specificown fundsrequirementWhole range ofavailable prudentialmeasures (Art. 136),including own funds

Supervisory review process: a building blockapproachCredit riskSettlement riskResidual riskOther risks associatedwith securitisation andconcentration riskCorrelation anddiversificationMarket riskInterest rate riskarising from nontradingactivitiesLegal andcompliance riskInternalcapitalPeer groupComparisonSupervisoryoutcomesPrudential measures­Capital adjustment­Provisioning­Systems & controls­ Business restrictions­Reduction of inherent riskKey:OperationalriskLiquidity riskEconomic andregulatoryenvironmentBlock 1 Block 2 & 3 Block 4Forward capitalplanning•Business risks(earnings and costs)•Strategy•Stress test

Supervisory Disclosure• Supervisors are required to publish:– Rules and guidance– How options and national discretions are exercised– Supervisory review and evaluation– Statistical data on national banking sectors• Easy access and meaningful comparison Þ peergroup pressure– Internet access via <strong>CEBS</strong> website www.c­ebs.org– Links to national websites– Comparable information– Common language ­ English

Supervisory disclosure: Market pressureLinks to nationalwebsitesfor more detailedinformation

<strong>CEBS</strong> responses: operational net<strong>work</strong>ingPhase II: Shift to implementation and operationalnet<strong>work</strong>ing, market and peer pressure• Via enhanced coordination and cooperation:– Operational net<strong>work</strong>ing: e.g. net<strong>work</strong>s of validation experts,– Developing new tools; developing a common supervisoryculture, delegation of tasks, mediation.• Via market pressure:– Supervisory disclosure as a tool for market pressure,– Peer review.

Operational net<strong>work</strong>ing: concept and pilotprojectSpecific efforts to establish an operational net<strong>work</strong> of linesupervisors in charge of day­to­day supervision of crossbordergroups• Test phase, centred on a sample of 10 cross­border groups,• Objective: identifying and addressing Basel 2 implementation issuesin a bottom­up fashion,• Deliverables: surveys of supervisory and market practices,catalogue of pragmatic supervisory solutions,• Dialogue with the Industry Operational Net<strong>work</strong> Platform.

Operational net<strong>work</strong>ing: concept and pilotprojectSupport functions:• Validation experts• credit risk• operational risk• Tasks to follow­up <strong>work</strong> resulting from the guidelines:• Exchange information on technical validation issues,• Suggest areas where further input from <strong>CEBS</strong> is deemednecessary,• Where necessary, conduct surveys of good supervisory ormarket practices on validation issues and suggest to the<strong>CEBS</strong> any further action.• Similar approach in the area of reporting (FINREP and COREPnet<strong>work</strong>s).

Operational net<strong>work</strong>ing: current <strong>work</strong>Deliverables‣First Priority: <strong>work</strong>ing of colleges, identification and prioritisation ofIRBA and AMA validation issues, Pillar 2 cross border issues‣Paper on range of practices of colleges of supervisors‣Template for written arrangements for banking groups‣Analyses on the practical implementation of article 129 paragraph 2CRD.‣Collection of Pillar 2 cross­border processes and issues.

<strong>CEBS</strong>’ main focus and challenges in 2008Supervision of cross border groupsv Enhancing supervisory cooperation through collegesof supervisorsv Increased use of delegation between supervisorsv Co­ordination of supervisory requests andsupervisory responsesv Consideration of cross sector dimensionv Consideration of diversification benefitsv Technical assessments of economic capital modelsCape Town, 28 February 2008 | Kerstin af Jochnick 18

To create a virtuous circle …Consistent implementation1­<strong>CEBS</strong>Guidelines2­Practicalapplication inMember States3­Monitoringandupdating

Contacts:<strong>CEBS</strong> – http://www.c­ebs.orgKerstin af Jochnick<strong>CEBS</strong> ChairKerstin.Jochnick@c­ebs.org