The first order of business of Vienna Initiative 2.0 was to flesh out the principles which should be expected to govern the cooperation between home and host authorities in the circumstances of CESEE.
The principles laid out by the CEBS (Committee of European Banking Supervisors, later European Banking Authority, EBA) were primarily designed for cases where the major part of a country’s banking system consisted of local banks subject to the local supervisor, and where cross-border establishment was a minor feature.14 Each jurisdiction’s supervisory authority was responsible for
14 Memorandum of Understanding on Cooperation between the Financial Supervisory Authorities, Central Banks and Finance Ministries of the European Union on Cross-Border Financial Stability of 1 June 2008.
financial stability within its borders. Branches located abroad were the supervisory responsibility of the home supervisor, while subsidiaries came under the host supervisor. This failed to address the close relationship between parents and subsidiaries within banking groups, and the spill-overs of home and host regulator decisions on to each other’s financial markets. The tendency to reach for national solutions by ring-fencing had been evident in the response of supervisors to the difficulties in the Franco-Belgian Dexia bank in 2008-9.
After consultation with participants of the Vienna Initiative, Basic Principles for Home-Host Authority Coordination under Vienna 2.0 were adopted by the Fourth Full Forum held in Brussels on 12 March 2012.15
Basic principles for Home-Host Authority Coordination under Vienna 2.0
As parts of the European banking sector undergo a process of deleveraging, it is important to recall that stability of the financial sector and orderly credit conditions in CESEE are in the shared interest of the private sector and home and host country authorities. The following interconnected principles are designed to enhance cooperation and coordination among the various stakeholders so as to help ensure mutually beneficial outcomes even in times of global financial stress and a shifting financial-sector landscape.
1) Principle of free allocation of liquidity and capital consistent with safeguarding financial stability. The commitment to free movement of bank liquidity and capital in accordance with the Treaty for EU members is reaffirmed. In this context, ex-ante coordination of financial stability measures among home and host authorities is essential, especially in conditions of financial market stress.
2) Principle of matching the supervisory framework with the cross-border integration of financial markets: Arrangements for cross-border supervision need to be made compatible with the integrated financial markets across Europe.
Mechanisms should be adopted to involve jurisdictions outside the EU where European banking groups are active.
3) Principle of fiscal authority cooperation: Supervisory coordination must be accompanied by coordination among the fiscal authorities, particularly with regards to crisis management and resolution issues.
4) Principle of considering spill-overs from national actions. Supervisors, central banks, and fiscal authorities must take account of the implications of their actions for other national jurisdictions and for the European financial system as a whole.
5) Principle of the central role of European institutions: The European Commission should play its role in promoting an EU single and stable market in financial services. The European Supervisory Authorities should play a central role in supervisory cooperation and mediate among country authorities. The European Systemic Risk Board should play a key role in macroprudential oversight.
6) Principle of private sector engagement. Banking groups active in the region should cooperate actively with national authorities in efforts to promote financial stability, orderly credit conditions and sustainable cross-border banking.
7) Principle of IFIs involvement. International organizations, internalizing the impact of cross-border spill-overs, should promote adjustment to more robust financial systems. They can assist the implementation of these principles through their surveillance, mediation, timely data collection, and financial support functions.
8) Principle of focus on implementation. Participants are committed to the structured implementation of these principles.
A Steering Committee will report on the proposed approach to operationalize these principles.
15 See Press Release for 13 March 2012 and http://vienna-initiative.com/wp-content/uploads/2012/08/Principles-for-Home-Host-Authority-Coordination.pdf
Following the adoption of the principles, the participants at the March 2012 Full Forum gave their attention to concrete actions that might be possible.
Among the areas to be covered were the functioning of supervisory colleges, cooperation on resolution issues, the establishment of host-country cross-border stability groups and how international institutions might best support this process. A proposal to set up four implementation groups covering these areas was rejected. In particular, a danger was seen that the work on supervisory and resolution colleges would duplicate or conflict with work being done by European Union institutions, work which would lead to the road map for a Banking Union later in the year. The principles were therefore followed up in a more ad hoc fashion, as discussed below.
The March 2012 Fourth Full Forum also adopted the reports of the working groups on Basel III implementation and on Non-Performing Loans (NPLs).
The report of the Working Group on Basel III Implementation in Emerging Europe, coordinated by the World Bank and EBRD, was motivated by the concern that transposition of Basel III rules into the EU’s Capital Requirements Directive (CRD IV) might have unintended consequences for financial market development and cross-border relationships in CESEE. The report made a number of recommendations concerning capital definitions, liquidity requirements, the coordination of macroprudential instruments and home-host supervisory collaboration. It pointed out that future regulation and calibration should better take account of the emerging market perspective and market development needs.
The Working Group on Non-Performing Loans (NPLs) in CESEE, coordinated by the IMF and World Bank, was established in light of concerns that the 2008-9 crisis legacy of a high level of NPLs throughout the region would be a major obstacle to recovery and sustained growth. The working group drew on surveys conducted by the EIB/EBRD and the ECB. It concluded that the resolution of the problem by individual bank action was proceeding slowly. A more comprehensive and concerted approach was needed, with distinct roles for the various stakeholders: the relevant country authorities should press ahead with removing burdensome regulatory, tax and legal impediments to NPL resolution identified in the report; regulators should tighten supervision to eliminate incentives to let NPLs linger; banks should step up their collective effort to speed up NPL resolution; and avenues for out-of-court debt restructuring and corporate rehabilitation negotiations between debtors and creditors should be explored.