Annexes to COM(2014)327 - Legal Obstacles to the Free Movement of Funds between Institutions within a Single Liquidity Sub-Group - Main contents
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This page contains a limited version of this dossier in the EU Monitor.
| dossier | COM(2014)327 - Legal Obstacles to the Free Movement of Funds between Institutions within a Single Liquidity Sub-Group. |
|---|---|
| document | COM(2014)327  |
| date | June 5, 2014 |
After the observation period and after full implementation of a liquidity coverage requirement in accordance with CRR, the Commission will assess whether additional measures are necessary.[8]
The Single Supervisory Mechanism
An important step forward has been achieved with the creation of the Single Supervisory Mechanism ("SSM") through Council Regulation (EU) No 1024/2013[9]. The ECB will indeed have the legal capacity to supervise all credit institutions of the euro area as well as those of countries that decide to join the Banking Union.
The SSM Regulation confers key supervisory tasks and powers to the ECB over all credit institutions established within the euro area. The ECB will directly supervise certain large credit institutions and credit institutions which have requested or received direct public financial assistance. The ECB will also monitor supervision by competent authorities of less significant credit institutions. The ECB may, at any moment, decide to directly supervise one or more of these credit institutions to ensure consistent application of supervisory standards.
For cross-border credit institutions, active both within and outside Member States participating in the SSM, existing coordination procedures among home/host competent authorities will continue to exist as they do today. However, to the extent that the ECB has taken over direct supervisory tasks, it will carry out the functions of the home and host authority for all participating Member States. This should lead to a significant elimination of undesirable ring-fencing practices as described above. The greater the number of Member States participating in the SSM, the less likely undesirable ring-fencing practices will become.
The Single Resolution Mechanism
The establishment of the SSM is a first step towards the Banking Union and one of the pre-conditions for direct recapitalisation of credit institutions by the European Stability Mechanism. An integrated Banking Union also includes a common credit institution resolution mechanism underpinned by a single rulebook.
The Commission emphasized the importance of reaching agreement on the proposals on credit institution restructuring and resolution and deposit guarantee schemes, and on the Commission's proposal for a single European resolution mechanism, to deal efficiently with cross-border credit institution resolution and avoid taxpayers' money going into rescuing credit institutions. The agreed legislation should contribute significantly to the alignment of the objectives of public authorities and further limit incentives for ring-fencing practices.
European Liquidity Requirements
The Commission is preparing a delegated act, to introduce a detailed and harmonised liquidity coverage requirement in the Union. This delegated act shall, according to Article 460(2) CRR, enter into force by 31 December 2014, but shall not apply before 1 January 2015.
The delegated act should also help limit any undesirable practices that trap liquidity within national borders, as it will provide for harmonised, uniform, detailed and binding rules on liquidity, thereby promoting mutual supervisory confidence between competent authorities.
In particular, the delegated act should seek to address some issues linked to the cross-border intra-group liquidity management. In the interests of efficiency and effectiveness, some banks conduct their liquidity and treasury management on a group wide-basis. For groups not making use of the SLSG (single liquidity sub-group) waiver, a preferential intra-group flow can act as an important source of liquidity. This is described as 'preferential' because a higher inflow is allowed to the beneficiary bank than would normally be allowed on a ‘solo’ basis under the CRR. This could be coupled if necessary with a corresponding higher outflow for the bank providing the liquidity. Unfortunately, during the financial crisis the realisation of these intra-group flows on a cross-border basis sometimes proved unreliable.
Article 425.4 CRR sets out the conditions that must be satisfied for the competent authorities to grant such a preferential treatment for an inflow under a credit and liquidity facility. Article 425.4d CRR requires the institution and the counterparty to be established in the same Member State. But Article 425.5 CRR allows competent authorities to waive this condition provided additional objective criteria are met. The Commission will examine whether these additional objective criteria can be framed in the forthcoming delegated act. Corresponding provisions exist in Article 422.8d and Art 422.9 CRR in relation to intra-group outflows.
In conclusion, in preparing the liquidity coverage ratio delegated act, the Commission services will examine whether additional objective criteria can be set to enable preferential treatment for cross-border intra-group inflows and outflows. This should clarify and improve the operation of cross-border intra-group flows that have sometimes been problematic in the past.
Defence against discrimination of cross-border groups
One possible source of discriminatory treatment is that national authorities allow SLSG formation at a national level but not for an international group. However, this should be partly mitigated by the fact that according to Article 8(2) CRR, the competent authorities may waive the application of CRR liquidity requirements to an SLSG at a national level only if the same basic conditions[10] that a cross-border group has to meet are fulfilled.
As both the EU law requirements on non-discrimination and general administrative legal principles would preclude applying the same conditions in a different manner to purely national and cross-border groups, there would have to be a relevant difference between those groups in order not to allow creating a SLSG in a cross-border context where a SLSG is allowed in national context. The mere fact that a group is a cross-border one and that it is supervised by different competent authorities cannot be considered on itself as a relevant difference.
Future review of CRR and CRD
The Commission is confident that a Single rulebook together with the Banking Union will ensure consistency and safeguard financial stability. These new rules will also ensure a level-playing field across the single market between home and host authorities, as well as between Member States participating and not participating in the SSM, thus preventing regulatory arbitrage opportunities, artificial ring-fencing of capital and liquidity, and facilitating cross-border banking recovery and resolution.
In possible future revisions of CRR and CRD, it might be useful to re-examine the effect of discretionary powers by competent authorities on the free flow of capital within groups. If necessary and where possible (i.e. without impairing the scope and effectiveness of the relevant instruments in justified cases), the Commission will assess whether such powers should be framed in a way which leaves less discretion for potential measures restricting the free flow of capital.
4. Conclusion
In conclusion, given the fact that
(i) the legislative process on CRR and CRD has been completed only very recently (and thus the co-legislators’ approval of existing national discretionary powers is recent),
(ii) the Commission will explore whether the forthcoming liquidity coverage ratio delegated act can help to limit any undesirable practices that trap liquidity within national borders. In this respect, it can seek to develop uniform, detailed and binding rules on liquidity, thereby promoting mutual supervisory confidence between competent authorities. More particularly,, the delegated act could be an opportunity to establish additional objective criteria facilitating the allowance of a preferential treatment for cross-border intra-group inflows and outflows, thereby clarifying and improving the operation of cross-border intra-group flows,
(iii) there is a steady process improving the alignment of objectives of public stakeholders through greater European integration with a Single Rulebook, the EBA and especially through the Banking Union, and
(iv) this review has not revealed relevant legal obstacles that would prevent institutions from entering into contracts that provide for the free movement of funds between them within a single liquidity sub-group,
the Commission does not see a need currently to present a legislative proposal on this matter. However, the Commission will continue to closely monitor and review the situation and should this deteriorate, the Commission will reassess the need to make such a legislative proposal.
[1] Regulation of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms and amending Regulation (EU) No 648/2012. OJ L 176, 27.6.2013, p. 1.
[2] Directive 2013/36/EU of the European Parliament and of the Council of 26 June 2013 on access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms, amending Directive 2002/87/EC and repealing Directives 2006/48/EC and 2006/49/EC. OJ L 176, 27.6.2013, p. 338.
[3] Where the position of an institution is deemed not sufficiently strong or stable despite the fulfilment of the Pillar 1 requirements, competent authorities are authorised to take Pillar 2 measures. According to Article 86(3) CRD, competent authorities shall take effective action where institutions have risk profiles in excess of those required for a well-functioning and robust system. Articles 104((1)(k) and 105 CRD allow imposing specific liquidity requirements.
[4] Under the large exposures regime, there is potential leeway for capital movement restriction where intra-group exposures are restricted within a binding large exposures limit. According to Article 395(1) of the CRR, an institution shall not be exposed to another group entity, after taking into account the effect of credit risk mitigation, beyond 25% of its eligible capital, unless exempted from the large exposures regime according to Articles 400(1)(f) and 400(2)(c), (e) and (f) CRR. The competent authorities may also impose stricter large exposures limits on institutions under Pillar 2, in particular where they consider that the concentration risk is not appropriately monitored and addressed (Article 81 CRD). The large exposures regime also establishes specific provisions aimed directly at intra-group exposures for which Member States may, under certain conditions, apply a large exposures limit below 25% on a sub-consolidated basis (Article 395(6) CRR). However, in this particular case, the Commission may reject the proposed national measures if it considers that they, inter alia, create an obstacle to the free movement of capital in accordance with the provisions of the TFEU (Article 395(8) CRR).
[5] Under Articles 412(5) and 413(3) CRR, Member States may maintain or introduce national provisions in the area of liquidity and stable funding requirements before binding minimum standards are specified and fully introduced in the Union. As a result, and at least until 2018 (or 2019 where the Commission decides to alter the phase-in specified in Article 460 and defers until 2019 the introduction of a 100 % binding minimum standard for the liquidity coverage requirement (Article 461 CRR)) for the liquidity coverage requirement, Member States are allowed to maintain or introduce national provisions in the area of liquidity, that are more conservative than the CRR/CRD framework and require a binding liquidity coverage requirement of up to 100%.
[6] However, these tax laws may limit the incentive to provide for the free flow of capital, as they increase the tax burden for the group.
[7] See Article 8(3) and Article 21 CRR in connection with Article 521(2)(a) CRR .
[8] See recital 30 of CRR.
[9] Council Regulation (EU) No 1024/2013 of 15 October 2013 conferring specific tasks on the European Central Bank concerning policies relating to the prudential supervision of credit institutions. OJ L 287, 29.10.2013, p. 63.
[10] Those laid down in Art. 8(1) CRR. Where the SLSG has a cross-border nature, also the conditions laid down in Art. 8(3) CRR (applicable as of 1 January 2015) have to be met.