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CEBS Draft Guidelines on Joint Assessment and Decision for Cross-Border Groups (CP39) Summary

Background and Objectives

On 7 April 2010, the Committee of European Banking Supervisors (CEBS) published draft guidelines (CP39) for the joint assessment of supervisory elements and the joint decision on capital adequacy for cross-border banking groups. These guidelines were developed in response to Article 129.3 of the revised Capital Requirements Directive (CRD), which mandates that consolidating and EEA host supervisors collaborate to reach a joint decision on capital adequacy, including the Internal Capital Adequacy Assessment Process (ICAAP) and Supervisory Review and Evaluation Process (SREP).

The core objective of CP39 is to promote convergence in supervisory practices and ensure a shared understanding of the risks and vulnerabilities of cross-border banking groups at both the consolidated and individual entity level. The guidelines aim to support supervisors in making informed decisions on the level of own funds required for each entity, either at the consolidated level or individually, as required by the CRD.

Key Elements of the Guidelines

• Joint Assessment Process: CEBS proposes a structured approach to assess the group’s capital adequacy, including the use of scoring methodologies and templates to summarise findings.
• Institutional Dialogue: The process must involve close interaction with the supervised institutions, including the sharing of ICAAP reports, coordinated dialogue with group functions, and communication of results.
• Role of the Consolidating Supervisor: The consolidating supervisor plays a central role in coordinating the joint assessment and decision process, with the option to use either a bottom-up or top-down approach, as long as host supervisors' inputs are clearly considered.
• Proportionality and Relevance: The guidelines emphasize that the joint assessment should focus on material risks, vulnerabilities, and entities, with a flexible approach that allows for different weights in host supervisors' contributions based on their relevance.
• Forward-Looking Approach: The joint assessment is intended to be a continuous process based on ongoing supervisory information rather than a one-off annual event.
• Stress Testing Coordination: Stress tests should be conducted at the consolidated group level, with the college of supervisors ensuring that all material risks are captured. Institution-specific capital buffers resulting from stress tests should be discussed within the joint decision framework.
• Capital Add-ons: Capital add-ons required to mitigate stress test outcomes should be covered using regulatory capital, with a preference for Tier 1 capital due to its loss absorbency.

Participants' Key Remarks

• Non-EEA Supervisors' Involvement: The draft guidelines allow for the inclusion of non-EEA supervisors in the joint assessment where relevant to the group's risk profile, though only EEA supervisors are legally bound by the joint decision.
• Consistency Across Colleges: The use of common templates and scoring scales is seen as a step towards harmonization, but participants suggested that a European common framework might be necessary for full consistency.
• Role of CEBS: CEBS is committed to ensuring the clarity of the guidelines, particularly regarding the integration of host supervisors' inputs, and is working to promote supervisory convergence through its secretariat and future collaboration with the EBA.
• Clarification of Guideline 23: A participant noted a potential discrepancy in the wording of Guideline 23, which was clarified to include both consolidated and individual capital adequacy assessments.

Next Steps

• CEBS invites written comments on the draft guidelines by 9 July 2010.
• All comments will be published on the CEBS website unless the respondents request otherwise.
• The final version of the guidelines, incorporating public feedback, is expected to be published by the end of 2010.

Conclusion

The draft guidelines represent a significant step towards enhancing supervisory cooperation and convergence in the European banking sector. By promoting a joint assessment and decision process, CEBS aims to ensure that cross-border banking groups are supervised in a consistent and effective manner, with a focus on risk-based supervision, proportionality, and transparent communication. The guidelines are expected to be finalized by the end of 2010, following a public consultation period.