European Banking Authority plans to strengthen group financial support

Summary:

Proposals for strengthening integrated risk management by removing possible uncertainties around supporting entities in distress within the same group have been set out for consultation by the European Banking Authority (EBA).

Views are sought on draft Regulatory Technical Standards (RTS) and Guidelines specifying the various conditions for the provision of group financial support, and on draft Implementing Technical Standards (ITS) on the disclosure of group financial support agreements. The standards and guidelines have been developed within the framework established by the Bank Recovery and Resolution Directive (BRRD). The consultation is open until 4 January 2015.

Background

The draft RTS and Guidelines have been developed according to Directive 2014/59/EU (BRRD), which mandates the EBA to specify the conditions for the provision of group financial support.

The draft ITS are based on the BRRD, art 26 which mandates the EBA to specify the format and content of the disclosure of group financial support agreements.

Group financial support refers to one entity of a banking group providing support to another entity of the same group on the basis of a financial support agreement, provided the latter entity encounters financial difficulties and meets the conditions the BRRD requires for early intervention measures by the competent authority.

Consultation

The EBA asserts the legal framework for financial support within a group is widely different across the EU countries, in particular if the group is in financial difficulties and with regard to support from a subsidiary to a parent company. This makes it difficult for cross border groups in financial distress to allocate and manage liquidity optimally; meaning individual entities may be at risk of failure. Therefore, uncertainties around conditions and resources for supporting the group entity in distress and excessive constraints can ultimately result in a destabilisation of the whole group.

The purpose of the proposed RTS and Guidelines is therefore to establish a clear harmonised legal framework to facilitate group support and to enhance legal certainty by overcoming existing legal obstacles. They ensure competent authorities of the providing entity grant the authorisation to the support on the basis of a number of conditions:

  • the interest of the group as a whole and the risks which would materialise for the providing entity if the support was not provided
  • the expected success of the support, the terms of the support (and various prudential requirements applying to the providing entity)
  • the possible impact on financial stability and the resolvability of the providing entity

The draft RTS and Guidelines also require authorities and institutions to consider the possible reasons for the financial distress of the institution concerned, including their business model, the current market situation and potential further adverse developments.

Whether the above conditions are fulfilled must be assessed based on a description and a projection of the capital and liquidity situation, as well as the needs of the receiving entity, also on the basis of the information provided by the competent authority of the latter.

Next steps

Responses should be sent via the online form

A public hearing on the proposals will take place at the EBA premises on 8 December 2014.

Source: Consultation: Draft Regulatory Technical Standards and guidelines specifying the conditions for group financial support and draft Implementing Technical Standards on the form and content of disclosure of financial support agreements

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