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CEBS’ Carosio Discusses 2010 Focus on Risk and EBA’s Role in Regulatory Data Infrastructure

The Committee of European Banking Supervisors (CEBS) was originally established as a forum to lead the charge towards a new Basel framework but in recent years it has become increasingly focused on the practical realities of risk management. Giovanni Carosio, deputy director general of the Bank of Italy who took over the reins as chairman of CEBS last September from Kerstin af Jochnick, recently elaborated on the regulatory body’s changing role and the position it feels the European Banking Association (EBA) should adopt in the building of a new IT infrastructure for regulatory data exchange in Europe.

Carosio confirmed a number of priorities for the regulatory body in 2010, as he previously referred to at the start of November, including driving forward the package of proposals that have been issued by the Basel Committee on Banking Supervision (BCBS) and the European Commission. As part of the Commission’s planned new European financial architecture, the EBA will take on “significant new tools and responsibilities”, which will mean some of CEBS’ power will be ceded to the EBA at a later date.

One of the key tenets of the new architecture will be the adoption of a single rulebook for the European area, drafted by the European level regulatory bodies. It would remove the need for an extra layer of national interpretation of European directives and thus “contribute to greater consistency in the application of EU financial services law”, said Carosio. As noted by recent attendees to the FS Club, adopting the same regulatory reporting format across the various European jurisdictions would keep technology costs for compliance purposes down. Firms would not be forced to produce a plethora of differently tailored reports to suit each national regulator’s specific edicts.

Carosio explained next steps: “The scope of the binding technical standards will be set out in the Omnibus directive, which is to be adopted in the coming months. For the EBA, the mandate for developing binding technical standards is expected to cover key areas of banking regulation, which is going to be strongly reinforced – in line with the recommendations of the G20 and the Financial Stability Board – by the new package from the BCBS, due to be finalised by the end of 2010. CEBS is best placed to take on the task of incorporating these changes into the EU regulatory framework in a manner that ensures their harmonised application across Europe.”

Of course, this idea is not popular amongst individual national regulators, such as the UK Financial Services Authority (FSA), who are keen to retain more regulatory power at the national level rather than ceding it to Europe. Such a framework would have prevented the FSA from pushing ahead with a liquidity reporting regime, after all.

It would, however, make the oversight of cross border financial institutions much easier due to common practices across regulators and common data formats. Unfortunately, any such coordinated action is likely a way off yet and, in the meantime, Carosio indicated that supervisory colleges would be tasked with conducting coordinated risk assessment of these firms in line with the provisions of the Capital Requirements Directive (CRD).

Moreover, the EBA will be charged with acting as a facilitator of regulatory data exchange by providing an “IT infrastructure for the information exchange between supervisors in colleges, and for providing peer group information about large financial institutions for supervisors”, said Carosio. It will therefore become a key data exchange between regulatory bodies and maintain a database for this purpose.

He added: “This infrastructure will also facilitate the EBA’s task to develop periodic assessments of the resilience of the EU banking sector, complementary to the macro-prudential analyses that will be developed by the European Systemic Risk Board (ESRB).” This is a function that is currently carried out by CEBS itself but would be passed over to the EBA once it has been established in 2011, along with responsibility for coordinated EU-wide stress testing.

In light of the future transition of power from CEBS to the EBA at the start of 2011, Carosio elaborated on the need for a “smooth transition” and detailed some areas that he feels are in need of further work “now”, rather than later. This includes the building of a new IT infrastructure over the next year, likely in cooperation with a vendor partner, or partners, and key European stakeholders. Expect to hear more on this in the coming months.

Carosio also indicated that CEBS will soon be working on identifying the impact of introducing the risk related changes detailed in the BCBS recommendations published at the end of last year. These are expected to be finalised by the end of this year and introduced by the end of 2012, if this turns out to be “consistent with the pace of the economic recovery at the global level”, said Carosio. They include a tighter definition of capital, enhancements to the risk coverage of capital regulations – in particular in the areas of structured finance most affected by the crisis -, the introduction of limits to leverage, countercyclical capital buffers and new standards for liquidity risk.

CEBS will therefore be conducting a quantitative impact study over the next few months in order to determine how putting these proposals into practice will affect financial institutions in the European area. The study will be aimed at collecting together “the information to get the overall calibration right”, said Carosio, and will also help to define transitional periods for the phasing in of the new rules, including grandfathering clauses.

This impact study should hopefully provide industry participants with more data on which to base their new capital requirements and liquidity risk frameworks. The UK FSA received a lot of criticism for not providing enough information on best practices and what it was expecting from the market before the introduction of its liquidity reporting regime, hopefully Europe will learn from that example.

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