What The EBA's Convergence Report Means For Market Participants

Author:Mr Michael Huertas

QuickTake: why this report matters

On March 14, 2019, the European Banking Authority (EBA) published1 its Annual Report on the Convergence of Supervisory Practices in the EU (the Convergence Report). Looking back at the progress made within the past three (or more in the context of the 2014 SREP Guidelines) years, it becomes somewhat easier to determine the overarching goals of the EBA and where these might lead to in the future. The EBA aims at fostering comparable supervisory approaches across the EU's Single Market to ensure a level playing field, effective supervision of cross border groups and promoting supervisory best practices. For market participants, these goals are especially valuable in the context of structuring their operations across EU Member States.

Supervisory convergence is comprised of three components: rules and their application (compliance), supervisory practices (comparability) and supervisory outcomes/measures (consistency). With supervisory convergence still being one of the primary supervisory priorities of the EBA's "sister" European Supervisory Authorities (ESAs), i.e. ESMA and EIOPA, as well as of the European Central Bank (ECB) in its lead in the Banking Union's Single Supervisory Mechanism (SSM), the outcomes set in the Convergence Report point to areas where the ESAs and the authorities in the SSM may continue to focus. As such, this Client Alert should be read in conjunction with coverage by our Eurozone Hub of ESMA's 2019 Supervisory Convergence Work Programme2 as well as our "Navigating 2019" supervisory outlook publication3 as it adds to the non-exhaustive outline of supervisory priorities of various EU institutions and European Supervisory Authorities (ESA) for Banking Union Supervised Institutions and other regulated market participants.

Looking back and ahead

Highlighting the EBA's activities in 2018, the Convergence Report provides a summary of the EBA's observations on the current state of convergence of supervisory practices. It focuses on the EBA's assessment of its tools on how to promote supervisory convergence but also the application of the supervisory review and evaluation process (SREP) as well as the operationalization of ongoing supervision, recovery and resolution at individual and group level. Overall the EBA concludes that good progress has been made on the implementation of the 2014 SREP Guidelines with a number of issues remaining such as challenges in converging capital adequacy assessments and determining institution-specific additional own funds requirements as well as the link between ongoing supervision, early intervention and resolution, for example.

By way of summary, the 2018 assessment of the convergence of supervisory practices focuses on two main areas:

Convergence in ongoing supervision and the supervisory review and evaluation process: Most of the areas highlighted as in need of further work in the 2016 and 2017 assessments as reflected in the EBA's policy work on Pillar 2 have led to the publication of the revised SREP Guidelines4 in 2018; and Convergence in the continuum between ongoing supervision, recovery and resolution: This is a new consideration given the relatively new entry into force of the Bank Recovery and Resolution Directive (BRRD). More work remains to be done in the area to ensure that institutions who do not benefit from a waiver have developed a recovery plan. It is certainly conceivable that the Banking Union authorities, notably the ECB-SSM and Single Resolution Board will continue to act as these remain core supervisory priorities for 2019 through to 2021 for all types of Banking Union Supervised Institutions regardless of whether they are directly or indirectly supervised. The 2018 bilateral convergence visits also led to creating a more comprehensive view on how the BRRD framework applies to those firms in the SSM that are categorized as Less Significant Institutions (LSIs) and which are thus only indirectly supervised by the ECB in the SSM. For 2019, the EBA aims to review the approach applied by competent authorities in monitoring and assessing the key supervisory topics with a focus on areas in which EBA policy products have recently been developed. In terms of core business, the development and application of the Single Rulebook remains at the forefront for the coming years as well, especially in light of the EBA's regulatory work in relation to the endorsement of the "Banking" i.e. CRD V-CRR II-BRRD II package and the preparation for the implementation of the last elements of the Basel III framework. This is outlined further in the EBA's 2019 Convergence plan.

EBA's 2019 Convergence plan - setting a clear tone

Key topics identified for the 2019 convergence plan focus on four areas.

a. Internal governance

After the financial crisis, internal governance has been a major point of attention of the regulators. The CRD reinforces the governance requirements for institutions and stresses the responsibility of the management body for sound governance arrangements. In 2019, the EBA aims to review the approach followed by the competent authorities to monitor and assess the adequacy and robustness of the institutions' internal governance arrangements. As part of its plan, the EBA aims to examine the compliance of this approach with the revised EBA Guidelines on internal governance (EBA/GL/2017/11) and the EBA-ESMA joint Guidelines on the assessment of the suitability of members of management bodies and key function holders (EBA/GL/2017/12), both of which entered into force on June 30, 2018.

b. ICT risk and operational resilience

As a result of the increasing importance of ICT in the banking industry, the EBA has identified some recent trends, including the emergence of (new) cyber risks and increased potential for cybercrime and cyber terrorism; and the increasing reliance on outsourced ICT services and third-party products, often in the form of diverse packaged solutions resulting in manifold dependencies and potential constraints and new concentration risks.

With relation to these, in 2019, the EBA aims to review the approach followed by the competent authorities to monitor...

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