Banking Supervision


    Introduction

    Transparency is a key element in effective banking supervision, as evidenced by its inclusion in Principle 1 of the Core Principles on Effective Banking Supervision. The effectiveness of supervision is closely related to the legitimacy and credibility of the competent supervisory authorities.

    Moreover, supervisory transparency and accountability has been stressed by the Basel Committee on Banking Supervision and by the European legislation through the recast directives 2006/48/EC and 2006/49/EC, known as the Capital Requirements Directive (the CRD), in particular through Article 144 of 2006/48/EC which requires competent authorities to provide information on their supervisory and regulatory systems, and specifically that these disclosures be published in a common format and be made accessible in electronic format both on the Committee of European Banking Supervisors (CEBS) and national authorities’ websites.

    Article 144 of Directive 2006/48/EC states that competent authorities shall disclose the following information:

    1. the texts of laws, regulations and administrative rules and general guidance adopted in their Member State in the field of prudential regulation;
    2. the manner of exercise of the options and discretions available in the Community legislation;
    3. the general criteria and methodologies they use in the review and evaluation referred to in Article 124;
    4. without prejudice to the provisions laid down in Chapter 1, Section 2, aggregate statistical data on key aspects of the implementation of the prudential framework in each Member State

    The disclosures provided for in the first subparagraph shall be sufficient to enable a meaningful comparison of the approaches adopted by the competent authorities of the different Member States.

    In this respect, CEBS developed a supervisory disclosure framework allowing meaningful comparisons of supervisory rules and practices across EU Member States. The tables of information in this section were developed by one of the CEBS Working Groups and are implemented on the individual homepage of each competent authority of EU Member States. The CEBS website will serve as a centralised electronic repository and will allow for quick and easy comparison of the relevant information whilst the individual websites of national competent authorities will provide the exhaustive and detailed information required by the CRD.

    The main objective of the supervisory disclosure framework is to enhance the effectiveness of supervision and helping to promote a level playing field throughout Europe. Thus, its aim is to provide easy access to information giving a comprehensive overview of the supervisory and regulatory framework in Europe.

    The scope of the framework devised by CEBS is limited to the provisions of the CRD that reflect the revised Basel Framework (Basel II).

    Content – Malta Disclosures

    An area on the MFSA website is dedicated to the information required to be disclosed.

    In this section, access is given to information regarding the texts of laws, regulations, administrative rules and general guidance adopted in the field of prudential regulation and supervision in Malta.

    The supervisory disclosure requirements cover options and national discretions, general criteria as well as methodologies used in the Supervisory Review and Evaluation Process (SREP).

    This section will also contain aggregate statistical data on key aspects of the implementation of the prudential framework for regulation and supervision in Malta.

    Thus, in adhering to the requirements of Article 144, this section is mainly structured in four sub-sections:

    1. Rules and Guidance
    2. Options and National Discretions
    3. Supervisory Review
    4. Statistical Data

    Rules and Guidance

    The supervisory disclosure framework will display the text of laws, regulations and administrative rules (Article 144(a)) used by each Member State to transpose the provisions of Directives 2006/48/EC and 2006/49/EC. The texts outline the primary legislative and regulatory framework for supervised credit institutions and investment firms.

    The meaning of administrative rules for the purpose of disclosure is understood as instructions to supervised institutions on how to fulfil legislative and regulatory requirements.

    General guidance includes the explicit disclosure requirements from the CRD and explanations which are deemed necessary to set out how the rules should be applied by licensed institutions. Moreover, such guidance covers any other relevant information that competent authorities would like to release to enhance the understanding of the capital adequacy framework.

    Options and national discretions

    Article 144(b) of 2006/48/EC requires competent authorities to disclose the manner with which they exercise the options and national discretions available in EU legislation and those that have been applied or otherwise, on the basis of the position taken at national level. This will inevitably create differences in supervisory practices, national circumstances and individual strategies. The list of options and national discretions under the above heading indicates whether or not the MFSA has adopted the particular discretions in the course of its CRD implementation.

    Supervisory Review

    Article 144(c) requires competent authorities to disclose the general criteria and methodologies they use in the review and evaluation referred to Article 124 of 2006/48/EC which includes the general criteria and methodologies of the Supervisory Review and Evaluation Process (SREP), minimum requirements for institutions' own Internal Capital Adequacy Assessment Process (ICAAP) and policies on supervisory measures.

    Statistical Data

    Article 144(d) requires competent authorities to disclose aggregate statistical data on key aspects of the implementation of the prudential framework in each Member State. The disclosure includes national statistical data both of a qualitative and quantitative nature about banks and investment firms on both the supervisory review process and outcomes. The information includes data on Pillar I (credit risk, market risk and operational risk) and supervisory actions and measures.
    It is to be noted that no disclosure will be made regarding any confidential information received, except in summary and in aggregated format.

    Pillar II Process

    In view of the introduction of Pillar II of the CRD, the MFSA sought to introduce guidelines for licensed credit institutions for these to draw up an ICAAP. Hence, Banking Rule BR/12 – The Supervisory Review Process of Credit Institutions Authorised under the Banking Act 1994 – was introduced in July 2008 as part of the secondary legislative framework of the MFSA. This Rule is based entirely on the relative CEBS GL 03 – Guidelines for the Application of the Supervisory Review Process under Pillar II published in January 2006 and includes the adoption of other CEBS guidelines on Internal Rate Risk in the Banking Book (IRRBB) and Concentration Risk.

    Related Downloads

    CEBS Guidelines on Supervisory Disclosure
    CEBS Guidelines on Supervisory Disclosure - Revised


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    Rules and Guidance

    The supervisory disclosure framework displays the text of laws, regulations and administrative rules (Article 144(a)) used by each Member State to transpose the Basel II related provisions of Directives 2006/48/EC and 2006/49/EC. The texts outline the primary legislative and regulatory framework for supervised credit institutions and investment firms.

    The meaning of administrative rules for the purpose of disclosure is understood as instructions to supervised institutions on how to fulfil legislative and regulatory requirements.

    General guidance includes the explicit disclosure requirements from the CRD and explanations which are deemed necessary to set out how the rules should be applied by licensed institutions. Moreover, such guidance covers any other relevant information that competent authorities would like to release to enhance the understanding of the CRD.

    The transposition of the CRD into Maltese legislation has been entrusted to the Malta Financial Services Authority (MFSA) in its role of regulator of financial services in the country.

    Thus, the MFSA has transposed the majority of the CRD provisions by making or amending Banking Rules (formerly known as Banking Directives) using the powers granted to it by Article 4 (2) of the Banking Act 1994 (the Act) which is the primary legislative tool. Moreover, the Act has also been amended to include or update certain provisions as a direct result from transposing the CRD.

    The following Banking Rules have been amended, re-drafted or introduced due to the adoption of the provisions of the CRD in relation to the relevant topic.

    • BR/01 - Application Procedures and Requirements for Authorisation of Licences for Banking Activities under the Banking Act 1994

    The Authority has adopted in full all the provisions of the CRD relating to application procedures and requirements for authorisations of entities seeking a licence to undertake the business of banking.

    • BR/02 - Large Exposures of Credit Institutions

    The provisions of the CRD relating to large exposures have been adopted in full.

    • BR/03 – Own Funds of Credit Institutions

    The MFSA has adopted the provisions of the CRD (Articles 56 to 67) of 2006/48/EC. Moreover, the CEBS Guidelines on Prudential Filters have also been taken into consideration when re-drafting this Banking Rule.

    • BR/04 – Capital Requirements Rule

    The relevant provisions of the CRD have been transposed to include the three approaches to calculate Credit Risk namely, the Standardised Approach and the two methods of calculating the Internal Ratings Based approach which under the Basel II provisions are addressed as the Foundation IRB and the Advanced IRB approaches.

    Capital requirements for operational risk have also been included in this Rule namely under the headings Basic Indicator Approach, Standardised Approach and the Advanced Measurement Approach.

    In this Banking Rule, the CEBS Common Reporting Framework (COREP) has also been adopted in its entirety except for some minor departures emanating from the CEBS Guidelines on Common Reporting (Click here to access Press Release dated January 2010).

    • BR/07 – Publication of Audited Financial Statements of Credit Institutions

    A decision was taken by the Authority not to implement the CEBS Framework for Consolidated Financial Reporting (FINREP) for the time being. However, this decision is not a final one and should the Authority deem that circumstances have changed, then it would consider reviewing the situation in order to verify whether or not FINREP will be implemented.

    It is pertinent to point out that Malta adopts full compliance with International Financial Reporting Standards (IFRS) and International Standards on Auditing (ISA) through the Companies Acts (Chapters 386 and 383 of the Laws of Malta). Furthermore, this Rule has also incorporated disclosure requirements emanating from the Pillar III provisions of Basel II.

    • BR/08 – Capital Adequacy of Credit Institutions

    This Banking Rule has been amended to include the new requirements of EU Directive 2006/49/EC in relation to market risk.

    The transposition of the CRD affects all credit institutions and investment firms which are authorised to operate under an MFSA license. 

    • BR/10 – Supervision on a Consolidated Basis of Credit Institutions

    Out of all the changes carried out due to the introduction of the CRD, the requirements of BR/10 will have the least direct impact on credit institutions due to the fact that most of the changes have increased the responsibility of the competent Authority in its regulatory function and furthered the co-operation between the regulatory authorities within the EU and also outside the EU. The amendments carried out have also given an international dimension to the Rule.

    • BR/11 – Extension of the Applicability of the ‘Arm’s Length’ Principle of Credit Institutions

    This Rule, extending the applicability of the “arm’s length” principle, is being made pursuant to the proviso to article 15(1) (a) (b) and (c) of the Banking Act – Prohibited Transactions. Credit institutions shall apply the principle to the following additional connected persons over and above those currently included in paragraph (b) of article 15(1) of the Act:

    qualifying and significant shareholders, auditors, or their respective spouses, whether jointly or severally, and to any commercial partnership in which such persons may have control: andofficers and employees of the credit institution.

    • BR/12 – The Supervisory Review Process of Credit Institutions

    The Supervisory Review Process of Credit Institutions Authorised under the Banking Act 1994 is being made pursuant to Article 17C of the Act. The robustness of a credit institution’s internal governance process is invariably an essential component of the institution’s internal capital adequacy assessment process (ICAAP) in that it is mainly concerned with setting an institution’s business objectives and risk appetite, with how its business is organised, how responsibilities and authority are allocated, how reporting lines are set up and what information they convey and how internal control (including risk control, compliance and internal audit) is organised. Accordingly, while Article 17B of the Act requires every credit institution to put in place robust governance arrangements, Article 17C requires credit institutions to establish their own ICAAP. Furthermore, in accordance with Article 17D, the authority shall carry out a supervisory review and evaluation process (SREP) over licensed credit institutions. Notwithstanding that the principles underlying the Rule relate both to obligations of credit institutions and also of the authority, the authority has deemed that disclosure of its obligations in the Rule would provide licence holders and other stakeholders with information as to how the authority would undertake its SREP.

    • BR/13 – Prudential Assessment of Acquisitions and Increase of Shareholdings in Credit Institutions

    The scope of the Rule is:

    (a) to transpose, in part, the relevant provisions of Directive 2007/44/EC of the European Parliament and of the Council of 5 September 2007 amending Council Directive 92/49/EEC and Directives 2002/83/EC, 2004/39/EC, 2005/68/EC and 2006/48/EC as regards procedural rules and evaluation criteria for the prudential assessment of acquisitions and increase of holdings in the financial sector;

    (b) to determine the criteria to be applied by the authority in the assessment process of a proposed acquirer; and

    (c) to ensure that the proposed acquirer knows what information is required to be provided in order to allow the authority to assess the proposed acquisition in a complete and timely manner.

    In drafting the Rule the authority has been guided by the 3L3 Committees of European Financial Supervisors (CEBS, CESR and CEIOPS) Guidelines for the prudential assessment of acquisitions and increases in holdings in the financial sector required by Directive 2007/44/EC issued on 18 December 2008.

    • BR/14 – Outsourcing by Credit Institutions

    This Rule applies to all credit institutions licensed under the Banking Act and its scope is to outline the general principles regulating the conduct of outsourcing undertaken by credit institutions that are licensed in terms of Article 5(1) of the Act. In drafting the Rule the authority has been guided by the Committee of European Banking Supervisors (CEBS) Guidelines on Outsourcing issued on 14 December 2006.

    Disclosure of tables of information



    Other CRD disclosure requirements

    Disclosure on waivers for solo supervision
      Application of Pillar 3 
      Credit Risk Mitigation
      Mergers and Acquisitions
      Securitisation

    Additional Information
      Art.69-70
      Rules
     
    Supervisory Disclosure on Reporting:
      General and Detailed Information COREP rev1
      General Information FINREP rev1


    For an overview regarding rules and guidance used by other EU Member States refer to the corresponding tables on the CEBS homepage.


    Related Downloads

      Directive 2006/48/EC of the European Parliament and of the Council of 14 June 2006 relating to the taking up and pursuit of the business of credit institutions (recast),
      Directive 2006/49/EC of the European Parliament and of the Council of 14 June 2006 on the capital adequacy of investment firms and credit institutions (recast),
      CEBS, Standards and Guidelines
      Financial Stability & Supervision
      Financial Stability Board
      International Monetary Fund
      Organisation for Economic Co-operation and Development
      CEBS Electronic Guidebook
      BCBS, International Convergence of Capital Measurement and Capital Standards: A Revised Framework - Comprehensive Version (Full Document), June 2006


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    Options and national discretions

    Article 144(b) of the CRD requires competent authorities to disclose the manner with which they exercise the options and national discretions available in EU legislation (including 2006/49/EC) and those that have been applied or otherwise, on the basis of the position taken at national level. Thus, during the implementation of the CRD, certain differences will result in supervisory practices, national circumstances and individual strategies.
    When designing the supervisory disclosure framework, CEBS, for reasons of clarity, defined the following terms as:

    • Option: refers to a situation in which competent authorities or member states are given a choice on how to comply with a given provision selecting from a range of alternatives set forth in community legislation.
    • National Discretion or Discretion: refers to a situation in which competent authorities or member states are given a choice as to whether to apply or not a given provision.
    It is to be noted that not all options and national discretions that might fall within the scope of the framework and meet the above definition are necessarily of interest for supervisory disclosure purposes. Moreover, the supervisory disclosure framework specifically excludes supervisory actions or decisions aimed at individual institutions.


    Mutual recognition of options and national discretions

    In selective cases, the CRD explicitly allows the possibility to mutually recognise the exercise of certain national discretions in another member state. The question of mutual recognition is important in particular for cross border groups. The MFSA has included two tables in this section to give an overview of how to exercise the explicit mutual recognition clauses in the different Member States from the point of view of MFSA as host supervisor and the MFSA as home supervisor.

    Disclosure of tables of information

    Comparative tables of national discretions and options
    Mutual recognition - MFSA position (Malta home/host) in relation to other member states

    For an overview regarding options and national discretions used by other EU Member States refer to the corresponding tables on the CEBS homepage.



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    Supervisory Review

    Article 144(c) requires competent authorities to disclose the general criteria and methodologies they use in the review and evaluation referred to in Article 124 which includes the general criteria and methodologies of the Supervisory Review and Evaluation Process (SREP), minimum requirements for institutions' own Internal Capital Adequacy Assessment Process (ICAAP) and policies on supervisory measures.

    The supervisory disclosure framework provides information on both minimum standards and requirements for ICAAP and on how competent authorities conduct their SREPs.

     

    Supervisory Review and Evaluation Process (SREP)

    As defined in the CEBS Guidelines on the application of the Supervisory Review Process (SRP) under Pillar II, the SREP is the comprehensive process which supervisors use to review and evaluate the institutions' exposure to risks (i.e. risk profile), the adequacy and reliability of the institutions' ICAAP, the adequacy of the institutions' own funds and internal capital in relation to the assessment of its overall risk profile, to monitor ongoing compliance with standards laid down in the CRD (i.e. supervisory evaluation of compliance) and to identify any weaknesses or inadequacies and necessary prudential measures.

    Internal Capital Adequacy Assessment Process (ICAAP)

    The ICAAP is another element of SRP which however is conducted by the institutions themselves. The ICAAP comprehensive process including the management body and senior management oversight, monitoring, reporting and internal control reviews that institutions must have to identify and measure their risks, allowing them to ensure that adequate provision is made for holding internal capital in relation to their risk profile.

    The CEBS has identified four building blocks of supervisory activity that form the core SREP. These are listed below and are common to all competent authorities:

    1. Scope of application (including proportionality)
    2. Individual risk assessment
    3. Review and evaluation of ICAAP
    4. Overall assessment and supervisory measures.

    For an in depth explanation with respect to the above, one can access the relevant download on Pillar II CEBS Guidelines below which have been transposed into the Banking Rule BR/12.

    Disclosure of table of information

    Supervisory review

    For an overview regarding the general criteria and methodologies used by other EU Member States in the review and evaluation referred to in Article 124 of 2006/48/EC refer to the corresponding table on the CEBS homepage.

    Related downloads:

      CEBS, Guidelines for Co-operation between Consolidating Supervisors and Host Supervisors, January 25, 2006
      CEBS, Guidelines on the Application of the Supervisory Review Process under Pillar 2 (CP03 revised), January 25, 2006
      CEBS Guidelines on Concentration Risk, December 14, 2006
      CEBS Guidelines on Stress Testing, December 14, 2006
      CEBS Principles for Remuneration Policies, April 20, 2009
      CEBS Guidelines on Supervisory Cooperation for Cross Border Banking and Investment Firm Groups, January 25, 2006 
     
    Guidelines on Interest Rate risk in the Banking Book, October 3, 2006


    Statistical Data


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