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CEBS Advice on Information Exchange under Article 42 CRD

1. Introduction

The European Commission requested CEBS to provide advice on the categories of information required to be exchanged under Article 42 of the Capital Requirements Directive (CRD), with a focus on enhancing cooperation and understanding between home and host supervisors. CEBS was also asked to anticipate the implications of the proposed Article 42a, which introduces the concept of "significant branches" and requires host supervisors to be involved in supervisory colleges.

2. Background

2.1. Ongoing Supervision of Branches

The Directive 2006/48/EC outlines the responsibilities of home and host supervisors for the ongoing supervision of credit institutions with branches in other Member States. The home supervisor is responsible for prudential aspects such as governance, internal controls, solvency, and large exposures. Host supervisors, on the other hand, are responsible for:

• Conduct of business and market transparency
• Monetary policy and liquidity
• Statistical reporting
• Non-prudential rules in the interest of the general good
• Prevention of money laundering and terrorism financing

2.2. Host Powers of Supervisory Intervention

Host supervisors have additional powers to intervene in specific circumstances, such as:

• Article 30: Intervention if a branch breaches prudential rules.
• Article 31: Measures to prevent or punish breaches of non-prudential rules.
• Article 33: Emergency measures to protect depositors and payment systems.
• Article 34: General powers to prevent or punish irregularities within their territory.

2.3. Article 42: Co-operation and Information

Article 42 mandates that home and host supervisors must exchange all information necessary for effective supervision. This includes:

• Information on management and ownership
• Internal control mechanisms
• Liquidity and capital adequacy
• Risk assessments and supervisory activities
• Major sanctions and exceptional measures
• Information on exposures and business strategy

2.4. Proposed Article 42a: Significant Branches

Article 42a introduces the concept of "significant branches" based on specific criteria, such as:

• Market share of deposits exceeding 2% in the host country
• Impact on market liquidity and payment systems if the branch were to close
• Size and importance of the branch in terms of client numbers and systemic relevance

Host supervisors of significant branches will be involved in supervisory colleges, and home supervisors must provide them with relevant information. If no joint decision is reached within two months, the host supervisor may make a unilateral decision, which must be fully reasoned and communicated to the home supervisor.

3. Methodology

CEBS conducted a survey among its members and observers, receiving 27 responses. The survey was divided into two parts:

• Scope and process: To identify the number of host supervisors of significant branches and assess the role of colleges in information exchange.
• Content: information to be exchanged: To compile a list of information items that supervisors may need to exchange, based on the type of branch (significant or non-significant) and the supervisory responsibilities of each authority.

Participants were invited to mark relevant information items and suggest additional ones if the list was incomplete.

4. Advice

4.1. Categories of Information Covered by Article 42

CEBS outlined four categories of information that should be exchanged between home and host supervisors:

1. Information from home to host supervisors of significant branches
2. Information from home to host supervisors of non-significant branches
3. Information from host to home supervisors of significant branches
4. Information from host to home supervisors of non-significant branches

4.1.1. Information Flows from Home to Host Supervisors

Significant branches:

• Structure and activities: Cross-border structure, key business lines, legal structure, capital links, business strategy, and changes in strategy.
• Management and ownership: Updated organisation charts, management structure, changes in senior management, and major shareholder changes.
• Internal control mechanisms: Governance agreements, lines of responsibility, risk management processes, and administrative procedures.
• Solvency and capital adequacy: Capital ratios, Pillar 1 and 2 capital requirements, and changes in capital structure.
• Liquidity: Liquidity risk profile, liquidity strategy, obstacles to cash transfers, maturity transformation indicators, funding ratios, and market-related indicators.
• Supervisory Review and Evaluation Process (SREP): Risk assessments, planning of supervisory activities, and follow-up actions.
• Major sanctions and exceptional measures: Home supervisors must inform host supervisors of any major sanctions or exceptional measures taken against the credit institution.
• College meetings: Home supervisors must inform host supervisors of significant branches about the organisation, issues, and actions taken in college meetings.

Non-significant branches:

• CEBS suggested a more limited set of information items, focusing on key areas of supervision, such as internal governance, liquidity, and capital adequacy, but with less depth compared to significant branches.

4.2. Anticipation of Article 42a

CEBS emphasized that the significance of a branch will greatly influence the depth and scope of information exchanges. For significant branches, the supervisory colleges will be the primary forum for information sharing, and host supervisors will be involved in the decision-making process. The advice highlights the need for harmonization, reducing duplication of information requests, and ensuring that information exchanges are relevant and not burdensome.

5. Key Considerations

• Information exchanges should be targeted, timely, and relevant to the supervisory needs of both home and host authorities.
• Publicly available information should not be requested unnecessarily to avoid duplication and burden.
• Agreement on format, depth, and frequency of information exchanges is essential for effective cooperation.
• The indicative nature of the lists provided by CEBS should be noted, as the type of information needed depends on the specific situation of the institution.
• The college structure is proposed as a mechanism to enhance cooperation and coordination between home and host supervisors.