Response to consultation paper on draft amending ITS on joint decision process for internal model authorisation
Q1. Do you consider that the changes proposed in the revised ITS are appropriate and sufficiently clear?
The consultation paper seeks comments on the draft amending Implementing Technical Standards (ITS) regarding the joint decision process under Regulation (EU) 575/2013 (CRR). This process is essential for assessing applications for prudential permissions in the European Union banking sector.
1. Clarity of Proposed Changes (Article 1 and Article 3)
The amendments in Article 1 provide clear updates regarding the changes in prudential permissions, especially with the removal of the Advanced Measurement Approach (AMA) for operational risk. However, there is a potential issue with the clarity of the scope involving third-country supervisory authorities in the joint decision-making process under Article 3.
Recommendation:
To enhance clarity, the regulation should specify the conditions and mechanisms for cooperation with third-country authorities. Drawing from Basel Committee on Banking Supervision (BCBS) principles on cross-border cooperation, detailed guidance could be included regarding how the consolidating supervisor should assess the involvement of non-EU supervisors, particularly in cases of differing regulatory frameworks. This is crucial for ensuring consistency in supervisory expectations.
The Australia Prudential Regulation Authority (APRA) has detailed cooperation agreements with other jurisdictions. Adopting similar clear-cut frameworks for involving non-EU regulators would provide more legal certainty and support supervisory convergence.
2. Alignment with International Standards (Article 5)
The proposal under Article 5 aligns the supervisory assessment process with the revised EU framework, referencing changes made in CRR III regarding the scope of internal models. However, while CRR III limits certain operational risks, the ITS could further clarify the rationale for removing the AMA, especially since other international jurisdictions, like the U.S., still employ tailored operational risk frameworks.
Recommendation:
It would be beneficial to include additional clarification on how the elimination of AMA aligns with international standards such as Basel III. It would also help to highlight any transitional arrangements that institutions may need to adhere to in order to shift from AMA to other approaches.
In Canada, the Office of the Superintendent of Financial Institutions (OSFI) has developed a specific operational risk capital framework that combines standardized and advanced approaches, maintaining a flexible stance. The EU could consider such hybrid options for institutions transitioning away from AMA.
3. Harmonization of Supervisory Practices (Article 4)
The draft ITS aims to harmonize supervisory practices across the EU, especially in terms of timeline adherence for assessments. Article 4 mandates that applications be forwarded by the consolidating supervisor to relevant authorities within 10 days, ensuring efficiency in the process.
Recommendation:
While this time limit supports regulatory harmonization, it may be worth considering specific provisions for complex, multinational cases where coordination with multiple authorities can introduce delays. A more flexible approach in line with IOSCO’s principles for cross-border regulation, which emphasize cooperation and mutual recognition agreements, may enhance effectiveness.
Singapore’s Monetary Authority has established guidelines for timely regulatory cooperation, particularly in large multinational institutions. Adapting such models may provide room for flexibility without compromising the efficiency of the supervisory process.
4. Cost-Benefit and Proportionality Analysis (Section 5.1)
The consultation document suggests that the proposed amendments are purely technical, with no significant cost implications. However, the exclusion of AMA for operational risk may increase compliance costs for certain institutions, especially smaller entities that had tailored systems for AMA.
Recommendation:
A more in-depth cost-benefit analysis, specifically addressing how different types of institutions (large vs. small) will be affected by these changes, is recommended. The principle of proportionality, which is a cornerstone of EU law, should be factored in more explicitly in the regulatory design. The Financial Stability Board (FSB) also recommends that regulations be tailored to the complexity and size of institutions, which could be incorporated here.
5. Ensuring Regulatory Consistency (Article 6)
Article 6 deals with the procedural aspects of drafting opinions on whether permissions should be granted, with reference to specific articles in CRR. While the proposed amendments ensure alignment with CRR III, it is critical to ensure consistency across all member states regarding how these permissions are interpreted and applied.
Recommendation:
The regulation could be improved by incorporating guidance on consistent application across different jurisdictions. Drawing on OECD guidelines on regulatory policy, best practices for ensuring uniform interpretation of prudential permissions should be embedded within the ITS framework.