The current thesis aims to provide a concise but comprehensive overview of the micro-prudential supervision of financial conglomerates by the European Central Bank (ECB) within the Single Supervisory System (SSM) under the Financial Conglomerates Directive (FICOD). The following chapters of this study provide a brief but comprehensive overview of the main measures and policies adopted to facilitate the micro-prudential supervision of financial conglomerates.
Financial Conglomerates: Relevant features and structures
The bankruptcy of Lehman Brothers and the economic collapse of the financial crisis of 2007-2009 gave the answer to this question. The large losses reported by financial conglomerates since the outbreak of the financial crisis indicate that (a) large and complex financial institutions were the main catalysts of the credit boom that led to the crisis, and (b) the same institutions are the epicenter of the crisis.
The leading path to the adoption of the FICOD
Global Initiatives
- The 1995 Report of the Tripartite Group on Financial Conglomerates
- The 1999 Principles of the Joint Forum on Financial Conglomerates
- The 2012 Principles of the Joint Forum on Financial Conglomerates…
A convergence towards the idea of establishing a "lead supervisor or convenor" was observed by the participants of the tripartite group. The Tripartite Group believed that complex group structures could hinder the work of regulators.
EU Initiatives
- The adoption of the FICOD
- The evolution of the FICOD
In particular, procedures are included in the prescription for the appointment of a coordinating supervisor and the tasks of this coordinator. As a result of the revisions, the coordinating supervisor in the conglomerate, in collaboration with the other relevant sectoral supervisors, can decide which provisions will then apply exclusively to a specific conglomerate. 48. Apart from the 2011 technical revision of the FICOD, a more fundamental revision of the directive was also envisaged in the 2011 revision directive.
This includes any entity within the group that is not directly regulated prudentially, even if it carries out activities outside the financial sector, including non-regulated holding and parent companies at the top of the group. The "Commission Working Document" accompanying the 2012 report highlights that the lack of a harmonized approach to unregulated entities may have caused uncertainty and inconsistency in the application of the requirements by regulators.50.
Identification of a group as a financial conglomerate under the FICOD
Definition of a financial conglomerate according to the FICOD
Additional requirements under the FICOD
- Prerequisites set by article 5 of the FICOD
- Other conditions in identifying a financial conglomerate
Although the supervision of financial conglomerates is described in chapter B, for the sake of completeness, a brief presentation of supervision under Article 18 of FICOD is placed in this chapter. According to Article 18 of FICOD, competent authorities must first verify whether regulated entities whose parent company has its seat outside the EU are subject to supervision by a third country competent authority which is equivalent to that . provided by the provisions of FICOD on supplementary supervision of regulated entities referred to in article 5 paragraph 2. The guidance prepared under article 21 paragraph 5 of FICOD refers to whether the supplementary supervision agreements of competent authorities in third countries are likely to achieve the supplementary supervision objectives set out in FICOD, in relation to regulated entities in a financial conglomerate whose head has its headquarters outside the EU.
However, for the supplementary supervision of FICOD, it is important that at least one of the entities is used, which must be a regulated entity as stated in Article 1 of FICOD and the conditions from Article 2 of paragraph 14(d) and (e) must be fulfilled, as described above. As a result, this means that the regulated entity must have its registered office and main administration in the Member State whose relevant authorities have authorized it to provide services.69 However, it is emphasized that when the regulated entities are subsidiaries of regulated entities or mixed financial holding companies with their registered office outside EUs are subject to the additional control of Article 18 of FICOD based on Article 5(3) of FICOD as described above.
The establishment of the ESFS and its components
A brief description of the ESAs
The objective of the EBA is to protect the public interest by contributing to the short-, medium- and long-term stability and efficiency of the financial system for the EU economy, its citizens and businesses, in accordance with Article 1(5) of Regulation 1093/2010 of the European Parliament and of the Council of 24 November 2010. The EBA is an independent regulatory body of the EU whose purpose is to ensure effective and consistent prudential regulation and supervision in the entire European banking sector by adopting binding Technical Standards (BTS), Guidelines, Recommendations, making individual decisions addressed to competent authorities and banking groups, issuing opinions to the European Parliament, the Council or the Commission, gathering the necessary information regarding groups.78 The main task of the EBA is to contribute to the creation of a single European rulebook in banking, which aims to provide a single set of harmonized prudential rules for financial institutions throughout the EU. ESMA's objective is threefold, as set out in Article 1 of Regulation 1095/2010 of the European Parliament and of the Council of 24 November 2010, namely to improve investor protection and promote stability in the functioning of financial markets, to ensure that consumers' financial needs are better met and their rights they are strengthened as investors, while recognizing their responsibilities and ultimately strengthening the financial system to cope with shocks and address financial imbalances and promote economic growth.
Unlike the EBA, where micro-prudential supervision is exercised by the national competition authorities of the EU member states, ESMA has direct supervisory authority over credit rating agencies in accordance with Regulation 1060/2009 of the European Parliament and of the Council of 16 September 2009. securitization registers and transaction registers in accordance with European Regulation 648/2012 of the Parliament and of the Council on European market infrastructure of 4 July 2012. EIOPA's dual objectives are the protection of consumers and the safeguarding of financial stability, which form the common basis of the ESAs.
The legal regime of the SSM
Consolidated supervision in the banking and investment sector
In addition, Article 117 of CRD IV provides that competent authorities must cooperate diligently and provide each other with any information that is essential or relevant to the exercise of the supervisory tasks of the other authorities. At this point, it is of great interest to point out the ECB's position on the supervision of mixed financial holding companies, which is set out in Article 120(1). 1, in CRD IV. To this end, the ECB also considered it appropriate to include mixed financial holding companies in the application of the parts of CRD IV that relate to the banking sector, as this is the most significant financial sector in which these companies operate.89 .
The supervision of these groups is exercised by the supervisory authority responsible for the supervision of the individual institution, on the transactions between the institution and the holding company with mixed activities and its subsidiaries, pursuant to Article 123 of KRD IV. In addition, it is required that credit institutions and investment firms have adequate risk management processes and internal control mechanisms for identifying, measuring, monitoring and controlling transactions with the holding company of the mixed activity and its subsidiaries and must also report any significant transactions to the responsible supervisor. the authority for the supervision of the individual institution. 90.
Group supervision in the insurance sector
At this point it is important to clarify that groups managed by a holding company with mixed activity are not subject to consolidated supervision. Group supervision of insurance and reinsurance companies is carried out by colleges of supervisors, which are composed along sectoral lines, including the relevant insurance supervisory authorities, as well as EIOPA, but not the supervisory authorities of other sectors. It goes without saying that group supervision in the case of insurance and reinsurance companies is complementary to the supervision of individual undertakings in the group on the basis of solvency II.93.
Finally, a slightly different approach has been taken in the Solvency II Directive with regard to mixed insurance holding companies compared to mixed holding companies. Pursuant to the Solvency II Directive, Article 213, subsection 2, letter d, groups owned by a mixed insurance holding company are subject to Solvency II group supervision, albeit to a limited extent, whereas groups owned by a mixed holding company are not subject to CRD consolidated supervision.
Differences between consolidated supervision and group supervision
The Danish compromise has recently been extended to 31 December 2024 under the revised Article 471 of CRR.98. The group's solvency is calculated on the basis of consolidated data in accordance with Articles 235 and 236 of Solvency II. According to Article 228 of Solvency II, the accounting consolidation method is allowed under special circumstances to be used for related credit institutions, investment companies and insurance and reinsurance institutions.
As noted in article 335, par. 1, letter e) of Solvency II, however, this did not lead to full consolidation of these subsidiaries. Contrary to the consolidated CRR method, the contribution to the group capital of these subsidiaries is essentially based on their contribution to the group's Solvency Capital Requirement, which in most cases is the capital requirement, calculated in accordance with the CRR requirements and is, in most cases, limited to this contribution.99.
The supplementary supervision of financial conglomerates
- Supplementary capital requirements
- Risk concentrations and intra-group transactions
- The Joint Committee report on the reporting of intra-group transactions and risk
- The importance and the purpose of establishing a unified set of rules for
- The main features of the reporting of intra-group transactions and risk
- Risk management and internal controls
- Fit and proper requirements
- Conduction of stress-tests
It is noted that contrary to risk concentration, FICOD sets a threshold for the significance of intra-group transactions, as defined in Annex II of FICOD. Contagion is characterized as one of the most important issues faced by supervisors in relation to the supervision of financial conglomerates, as problems therein. The coordinator is responsible for coordinating and exercising supplementary supervision of regulated entities in a financial conglomerate.
In the event that the SSM bank supervisor is appointed as coordinator, the JST coordinator acts in accordance with the tasks from Article 11 of FICOD. The role of the ECB as a coordinator in the supervision of financial conglomerates and the tasks of European supervisory authorities. It operates only in accordance with the special tasks assigned to it by Article 4 of the SSMR.
The Joint Committee of the ESAs has specific tasks, which in particular are as follows: (a) assume the role of a forum for the exchange of supervisory information, practices and experiences on financial conglomerates; (b) provides assistance in relation to the identification of systemic risks of financial conglomerates and assesses its cross-sectoral implications; (c) act as a forum for ESAs to develop common positions and agree on joint actions in relation to financial conglomerates and carry out background work to support this activity; (d) provides information on regulatory and supervisory measures under FICOD; (e) fulfill any specific tasks defined and agreed upon by the governing bodies of the ESAs; (f) is responsible for the preparation of joint positions; (g) prepare joint acts, i.e.
