EN    EN  
 EUROPEAN COMMISSION 
Brussels, 20.7.2011 
SEC(2011) 952 final 
  
COMMISSION STAFF WORKING PAPER 
IMPACT ASSESSMENT 
Accompanying the document 
Proposal for a 
 
DIRECTIVE OF THE EUROPEAN PARLIAMENT AND THE COUNCIL 
on the access to the activity of credit institutions and the prudential supervision of credit 
institutions and investment firms and am ending Directive 2002/87/EC of the European 
Parliament and of the Council on the supplementary supervision of credit institutions, 
insurance undertakings and investment firms in a financial conglomerate 
{COM(2011) 453 final} 
{SEC(2011) 953 final}  
 
EN 1   EN PART I  
 
SANCTIONS IN THE FINANCIAL SECTOR 
 
TABLE OF CONTENTS 
1. Introduction................................................................................................................ ...3 
2. Procedural Issues and Consulta tion of Interested Parties .............................................4 
3. Policy context, Problem de finition and Subsidiarity ....................................................5 
3.1. Background and context ...............................................................................................6 3.1.1. Nature and size of the market concerned......................................................................6 3.1.2. Overview of legislative framework ..............................................................................6 3.2. Problem definition ........................................................................................................ 7 
3.2.1. Affected stakeholders .................................................................................................18  
3.2.2. Baseline scenario ....................................................................................................... .18 
3.3. The EU's right to act and justification ........................................................................20 3.3.1. Subsidiarity and proportionality .................................................................................21 4. Objectives .................................................................................................................. .22 
5. Policy Options, impact analysis and comparison .......................................................23 5.1. Options to approximate and reinforc e the legal framework of sanctions ...................24 
5.1.1. Options concerning appropriate  administrative sanctions ..........................................24 
5.1.2. Options concerning the personal sc ope of administrative sanctions ..........................38 
5.1.3. Options concerning the publication of sanctions........................................................42 5.2. Options concerning the framework for detection of violations ..................................46 
5.3. Preferred policy options..............................................................................................53 5.3.1. Cumulative impacts of the preferred options..............................................................54 5.3.2. Impact on EU budget ..................................................................................................55 6. Monitoring and Evaluation .........................................................................................55 
ANNEX I ........................................................................................................................ ..........57 
 
EN 2   EN ANNEX II....................................................................................................................... ..........63 
ANNEX III...................................................................................................................... ..........73 
ANNEX IV ....................................................................................................................... ........76 
ANNEX V........................................................................................................................ .........82 
ANNEX VI ....................................................................................................................... ........90 
 
EN 3   EN 1. INTRODUCTION  
The "CRD IV" package is a comprehensive review of EU banking prudential rules and 
supervisory arrangements, currently provided for in Directives 2006/48/EC1 (the Capital 
Requirements Directive) and 2006/49/EC2. It implements the international Basel accord 
on banking supervision. The key objective of the proposal is to address the shortcomings 
exposed during the financial crisis, to move towards a single rulebook regulating credit 
institutions in order to prevent recent prob lems from reoccurring in the future, and to 
ensure that risks linked to the issues of fina ncial instability and pr o-cyclicality are more 
effectively contained.  
In order to achieve these objectives, the CRD  IV proposal fundament ally overhauls the 
substantive prudential rules applicable to ba nks. But these rules will only achieve their 
objective if they are effectiv ely and consistently enforced throughout the EU. This 
requires that competent authorities have at their disposal not only supervisory powers 
allowing them to effectively oversee credit in stitutions but also sufficiently strict and 
convergent sanctioning powers to respond ad equately to the violations which may 
nevertheless occur, and prev ent future violations.  
However, the banking sector is one of the areas where national sanctioning regimes are 
divergent and not always appropr iate to ensure deterrence. 
In its Communication of 9 December 2010 "Reinforcing sanctioning regimes in the 
financial sector"3 the Commission presented policy orientations on how to promote 
convergence and reinforcement of national sanc tioning regimes in the financial services 
sector. The Communication sugges ted EU legislative action ma y be necessary to set EU 
minimum common standards on certain key issues of sanctioning regimes. Such 
standards are to be develope d in the framework of common basic principles but adapted 
to the specifics of the different sectors and EU legislative acts in the financial services area.  
This Impact Assessment provides an analysis of the possible measures that may be taken 
to approximate and reinforce sanctioning powers appl icable to violations of the CRD. It 
builds on the analysis outlined in the Impact Assessment accompanying the above-mentioned Communication, and focuses in grea ter detail on the issu es specific to the 
banking sector, and particularly  the area covered by the CRD.
4 
                                                 
1 Council and Parliament Directive 2006/48/EC of 14 June 2006 relating to the taking up and 
pursuit of the business of credit institutions, OJ L177/1 of 30 June 2006 
2 Council and Parliament Directive 2006/49/EC of 14 June 2006 on the capital adequacy of 
investment firms and credit institutions, OJ L177/201 of 30 June 2006 
3 COM(2010)716 final. 
4 For an overview of the interaction of this initia tive with other initiatives in the Financial Services 
Sector see Annex VI. 
 
EN 4   EN It is a complement to the Impact Assessment for the “CRD IV” proposal. It supplements 
that document with a detailed assessment of  the impact of the provisions relating to 
sanctions contained in the proposal. 
2. PROCEDURAL ISSUES AND CONSULTATION OF INTERESTED PARTIES  
The Communication of 9 December 2010 "Reinforcing sanctioning regimes in the 
financial sector" (hereafter: "the Sanctio ns Communication") id entified a number of 
shortcomings of existing sanctioning regime s in the banking, insurance and securities 
sectors (divergent and insufficiently deterrent sanctions), it explained the negative consequences they may have (lack of complia nce with EU legislation, unlevel playing 
field, lack of trust between supervisors) a nd suggested possible EU actions to achieve 
greater convergence and efficiency of national sanctioning regimes.  
The Sanctions Communication launched a pub lic consultation on the problems identified 
and the policy actions envisaged. In line with  the Commission's minimum standards, the 
consultation, which remained open for eight w eeks, covered all the issues addressed in 
this Impact Assessment (types and level of sanctions, criteria for their application, 
addresses of sanctions, publication of sa nctions, mechanisms supporting effective 
application of sanctions su ch as whistleblowing).  
Concerning the banking sector, the Communication analysed the problems and the issues 
for possible EU actions based on a study ca rried out in 2008 by the European Committee 
of Banking Supervisors (h ereunder: CEBS report)
5, and provided information concerning 
the administrative sanctions laid down in national banking legislati on and the actual use 
of sanctions by banking supervisors. This allo wed stakeholders to comment on the issues 
specifically relevant in the banking sector. 
Indeed, the Commission receiv ed comments from a variety of respondents, including a 
significant number of stakeholders in the bank ing sector (supervisory authorities, central 
banks, banks and associations of bankers), which provided co mments on the need for EU 
action in this field and the level of harm onisation warranted but also on the specific 
actions suggested and their pote ntial benefits or disadvantag es. A summary of the results 
of the consultation is enclosed (Annex 1). The non confidential replies are being 
published in the Commission website together w ith a feedback statement on the results of 
the consultation. 
The actions envisaged in the Sanctions Communication were also discussed with 
Member States in the meeting of the Fina ncial Services Committee held on 17 January 
2011. Member States, which will have to impl ement those actions, agreed on the need to 
                                                 
5 CEBS: "Mapping of supervisory objectives, including early intervention measures and sanctioning 
powers", March 2009/47, available on < http://www.c-ebs.org/home.aspx >. Information contained 
in this report has been subse quently updated on the basis of the contributions  received from 
member States. 
 
EN 5   EN promote further convergence of national sanc tioning regimes while underlying the need 
to be respectful of the different national  legal frameworks and judicial systems. 
In February 2011, additional information has been collected by the Commission on 
sanctions for violations of the CRD6, which supplements and updates the information 
contained in the CEBS report. This Impact Assessment is based on this information and 
the replies to the public consultation. 
An Impact Assessment Steering group was set up to steer the preparation of this Impact 
Assessment, comprising representatives from th e Directorate General for Internal Market 
and Services, the Directorate General fo r Competition, the Directorate General for 
Economic and Financial Affairs,  the Directorate General for Enterprise and Industry, the 
Directorate General for Employment, Social  Affairs and Inclusion, the Directorate 
General for Health and Consum ers, the Directorate General for Justice, the Directorate 
General for Home Affairs, the Legal Servi ce and the Secretariat General. The Steering 
group met on 11 February, on 7 March and on 15 March. 
A draft Report was sent to the Impact Asse ssment Board on 21 March and discussed at 
the Board meeting of 13 April. Further to opinions of the Board of 15 April and 6 May, 
the following main changes have been implem ented : the policy context of the measures 
proposed and their relation with the other prov isions of the CRD IV package have been 
clarified (sections 1 and 5); the scope of the public consul tation and its compliance with 
the Commission's minimum standards have  been clarified (section 2.1) and the 
stakeholders view better refl ected in the report; in the pr oblem definition (section 3.2) the 
analysis of enforcement issues, proportionali ty, and the role of EBA has been further 
developed; and it has been clarified how th e existing divergences and weaknesses could 
lead to the problems identified, including by strengthening the evidence base by more 
recent data and by introducing more precise references to the replies to the public 
consultation; the description and the analysis  of the policy options (section 5) has been 
developed by clarifying how types and level of  sanctions  and criteria to be taken into 
account will be established and linked to key violations, and by providing indications on 
the administrative costs of the options rela ting to effective application. In addition, the 
importance of the proposed intervention in li ght of the recent creation of EBA has been 
further justified (section 3), th e analysis of all factors unde rlying the ineffectiveness of 
sanctioning regimes has been further deepened (section 3), in the analysis of the policy 
options, further clarification has been provide d on the content of the envisaged minimum 
harmonisation and the assessment of efficiency  has been further explained (section 5). 
                                                 
6 Additional information has been received for twenty-three  Member States. Based on this 
information, tables in Annex IV provide an overview of the sanctions currently applicable to key 
violations of the CRD. 
 
EN 6   EN 3. POLICY CONTEXT , PROBLEM DEFINITION AND SUBSIDIARITY  
3.1. Background and context 
This Impact Assessment addresses problems relating to divergences and weaknesses of 
administrative sanctions. It is without prej udice to the situation concerning criminal 
sanctions regimes in the field of CRD, whic h deserves further analysis. Following such 
analysis the Commission will decide on policy acti ons to be taken in this regard, based on 
a full assessment of the relevant impacts.  
3.1.1.  Nature and size of the market concerned 
The EU banking sector is a ke y sector in the EU economy (f or a detailed description of 
the EU banking sector see Annex II). In rela tive terms, the EU banking sector is larger 
than its US counterpart, which accounted in terms of assets respectively for 340% of GDP and 92% of GDP in 2009. Until the outbreak  of the crisis, the EU banking sector 
grew steadily, in terms of total assets, to reach a maximum of over €45,000 bn in late 
2008. After this peak, it slight ly declined to around €43,000 bn. 
The EU banking sector is the main financi ng source for the real economy. It is also a 
major contributor to the added value of our economies, and an  important employer. As an 
illustration, the Euro Area financial sector generates an added value of over €400 bn 
(equivalent to 5% of GDP). In 2007, people wo rking in the financia l sector represented 
around 3% of the Euro Area workforce. 
The European financial services market is becoming more and more integrated, 
particularly in the wholesale financial sect or, and there is a growing number of large 
financial groups and infrastr uctures operating on a pan-Eur opean basis. Although the 
financial crisis led to increased market segm entation, the level of financial integration 
remains high.  
The banking market is dominated by pan-Eu ropean groups active in several Member 
States, whose risk management functions ar e centralised in the group's headquarters. 
Currently around 70% of EU banking assets is  in the hands of some 40 banking groups 
with substantial cross-border  activities. Especially in the EU-12, banking markets are 
dominated by foreign (mostly Western Europ ean) financial groups (see Chart 2 in Annex 
II). In these countries, on average 65% of ba nking assets are in foreign-owned banks. In 
countries like Estonia, the Czech Republic and Slovakia, over 92% of banking assets are 
in foreign-owned banks. 
3.1.2.  Overview of legislative framework  
The key Directives in the ba nking sector are Directive 2006/48/EC of the European 
Parliament and the Council of 14 June 2006, re lating to the taking up  and pursuit of the 
business of credit institutions  and Directive 2006/49/EC of the European Parliament and 
the Council of 14 June 2006, on the capital ad equacy of investment firms and credit 
institutions. The “CRD IV” proposal, of wh ich the provisions on sanctions discussed 
 
EN 7   EN herein are an integral part, will substantially reframe these rules. This impact assessment 
refers to the Capital Requirements Directiv e (hereunder: "the CRD") as comprising the 
Directives referred to above as reframed  by the planned CRD IV proposal, which is 
analysed in a separate Impact Assessment.  
Currently, the CRD provides some limited oblig ations in the area of  sanctions (for a 
description of these obligati ons see Annex IV) and leaves considerable discretion for 
Member States as to the type and level of sa nctions to be applied for violations of its 
requirements. .  
Effective, proportionate and di ssuasive sanctions are of rele vance to ensure respect of 
three groups of key provisions of the CRD (for a detailed list  of these key provisions see 
Annex IV):  
(1) Violations relating to prior author isation, including unauthorised banking 
activity and authoris ation obtained by de ceit (e.g. through false 
statements); 
(2) Violation of prudential requirements, including violati ons of rules on 
capital adequacy and limits on risk exposures and obligations relating to 
the governance of credit institutions;  
(3) Violation of reporting obligations, in cluding the obligations to publicly 
disclose information and to report information to supervisors on capital as well as under CRD IV on liquidity and leverage. 
Annex IV provides also an overview of the sanctioning powers provided for by Member 
States in the transposition of the CRD in relation to these violations.  
3.2. Problem definition 
National sanctioning regimes currently in place  for violations of the CRD are divergent 
and not always appropriate to ensure effective enforcement of CRD rules. 
First , regulatory problems arise from the legal framework of sanctions . Sanctions 
currently laid down in national legislation fo r violations of author isation requirements, 
prudential obligations and reporting obligati ons (see Charts 1 to 6 in Annex IV) and 
criteria taken into account in their applicat ion (see Table 1 in A nnex IV) vary across 
Member States and in several Member States sanctions appear to be too weak to ensure sufficient deterrence. The existing divergences between sanctioning re gimes partly reflect 
the specificities of the different national lega l systems and traditions and may also be 
explained by the fact that certain Member St ates have more experience in dealing with 
violations of banking legislation or give more political priority to the enforcement of prudential rules, due to the importance of th eir financial sector. However, divergences 
exist even between Member States with ba nking sectors of a similar size and even 
between geographically adjacent States that may have similar legislative cultures (see 
Annex III). Moreover, taking in to account the incr easing integration of  the EU banking 
 
EN 8   EN sector, where credit institutions operate in several Member States , those reasons cannot 
justify that sanctions applied to the same type  of violation in certa in Member States are 
significantly lower that t hose applied in others. 
The fact that some Member Stat es provide also for criminal sanctions does not seem to be 
the main reason for the differences identified. Indeed, the scope of criminal sanctions is 
much narrower: they are usuall y applied to individuals rath er than to credit institutions7 
and only for some of the most serious violations of the CRD. Moreover, for some key violations of the CRD, certain Member States have in place neither criminal sanctions nor 
strict administrative sanctions
8. 
Second , the information received on the actual application of sanctions  shows that in 
some Member States few sanctions or no sancti ons at all, have been applied during the 
last years, which could be symptomatic of a weak enforcement of EU rules.  
The limited number of sanctions applied in th e last years may be explained by few actual 
violations but it may also be due to insu fficient detection of violations by national 
authorities or by the difficulty to prove t hose violations. Significant divergences on the 
number of sanctions applied in Member Stat es with similar banking sectors suggest that 
violations of CRD rules are not always de tected and sanctioned. This phenomenon and 
the main problem drivers behind it have been described for financial services in general 
in the Impact Assessment for the Sanctions  Communication. This section analyses the 
specific problem drivers in relation to sanc tioning regimes in the banking sector.  
Problem drivers  
A legal framework conducive to effective de terrence should enable competent authorities 
to use a combination of various levers, de pending on the specific circumstances of each 
case, taking into account all key fact ors determining effective deterrence: 
• A credible threat of reput ational risk for violator s by way of publication of 
information on violations. 
• A credible threat of pecuniary sanc tions going well beyond disgorgement of 
benefits to remove any economic incentive for violations, including by offsetting 
the likelihood that a violation will remain undetected. 
• A credible threat to ban violators – be it banks or  their managers - from 
continuing the exercise of th eir professional activities. 
                                                 
7 A majority of Member States can not fine credit institutions under a criminal regime: for instance, 
18 Member States cannot impose criminal fines for failure to report information and for violations 
concerning sound governance 
8 For instance, for violations c oncerning sound governance , 11 Memb er States have in place neither 
fines over 1 million nor imprisonment. 
 
EN 9   EN However, today the legal framework  of sanctions for violati ons of the CRD varies 
widely across Member States and does not seem  to be always approp riate to ensure that 
all these levers can be used and sanctions  are proportionate, eff ective and sufficiently 
severe to deter credit institu tions and their managers from infringing the CRD rules.  
First, in case of some key violatio ns of the CRD, certain important sanctioning powers  
are not available to all national authorities (for more detail on the situation in Member 
States see Annex IV), in cluding in Member States with large banking sector9.  
Supervision of compliance with prudential le gislation by credit in stitutions requires a 
wide range of sanctions in order to respond adequately to  infringements ranging from 
unauthorised banking operations to failure to meet obligations rela ting to reporting of 
information, notification, organisation and cap ital requirements. A number of sanctioning 
powers are important to ensure that sanctions are sufficiently effective and deterrent. This 
is confirmed by the respondents to the consul tation and particularly public authorities, 
e.g. a Central Bank from a Member State, seve ral supervisory authorities who considered 
that certain key sanctioning powers should be guaranteed by EU law in all EU Member 
States to ensure effective enforcement. .  
The dismissal of the responsible persons  in the institution's management can be an 
effective sanction to prevent further violations. This sanction can be particularly appropriate in case of serious and repeat ed violations of reporting obligations.  Public 
reprimand or warning  can have a considerable impact in  a sector such as banking, in 
which reputation is of crucial importance. For ex ample, in case of violations of prudential 
requirements relating to the governance of a credit institution, su ch reprimands or 
warnings can encourage public pressure by de posit holders and investors in the credit 
institution to adjust its governance a rrangements. Significant administrative pecuniary 
sanctions  going well beyond the profits accruing from an infringement can be 
appropriate for example in case of violations  relating to prior authorisation, and notably 
unauthorised provision of banking services, to  deter unauthorised se rvice providers from 
continuing their activity, which may be seriou sly detrimental to de positor's protection.  
However, these powers are not available in several Member States: 
• Eight Member States  do not provide for this type of sanction even in cases 
where credit institutions fail to report  important financial information to the 
supervisory authorities.  
• No provision is made for a public reprimand or warning in seven Member 
States . 
• Ten Member States  do not provide for the a pplication of administrative 
pecuniary sanctions in case of viola tions relating to pr ior authorisation. 
                                                
 
9 In three of those Member States, the total value of banks' liabilities is higher than 2,5 billions 
euros. 
 
EN 10   EN Second, the maximum levels of administrative pecuniary sanctions  (fines) provided for 
in national legislation vary widely across Member States and seem too low in some 
Member States .  
Administrative pecuniary sancti ons can play a significant role to deter violations of the 
CRD, in particular by offsetting the benefits that can be derived from it.10 
Complementing the supervision of banks by co mpetent authorities, sufficiently high fines 
can deter credit institutions from infringing disclosure obligations, which would better ensure that supervisory authorities receive all the information necessary for them to 
perform efficiently their activity.  
For these purposes the maximum level of fi nes must be considerably higher than the 
benefit that can be expected from those viol ations, in particular because the potential 
offender may always hope that the infrin gement will remain undetected by the 
authorities. To ensure that a fine has a suffi ciently dissuasive effect on a rational market 
operator, the possibility that an infringement will remain undetected must be offset by 
imposing fines which are higher than the bene fit that the undertak ing would gain from 
breaching the law. Certain violations of the CRD  can lead to consider able benefits for a 
banking institution. For example, the benefits derived from unauthorised banking services 
engaged in at a large scale can reach several million Euros.
11 Similarly, by not reporting 
disadvantageous financial information to supe rvisory authorities, credit institutions may 
avoid the need to hold the necessary additiona l capital, leading to important cost savings. 
In case of a major European bank, a failure  to report information can lead to an 
underestimation by the supervisor of its risk-w eighted assets. Such an underestimation of 
only 1% can reduce the minimum capital the bank must hold by more than EUR 100 
million .12 In addition, in the banking sector, wher e a large number of potential offenders 
are cross-border financial inst itutions with very c onsiderable turnover, sanctions of a few 
thousand euros are unlikely to  be sufficiently deterrent. 
However, in several Member States the maximum level of fines that competent 
authorities can apply is rather low:  
                                                 
10 Research on the level of fines and its relation to the level of enforcement, as well as on the optimal 
level of fines includes the following: John C. Coffee, Law and the Market: The Impact of Enforcement, Columbia Law and Economics Working Paper No. 304, 2007, p. 13 ssq (20 
September 2010); Uldis Cerpsa Greg Mathersb an d Anete Pajustec: Securities Laws Enforcement 
in Transition Economies, p. 12 ssq., (20 September 2010); with a specific focus on another area (antitrust) see Wouter Wils, Optimal Antitrust fines – theory and practice, World Competition 
2006, p. 183, 199 ssq; Peik Granlund: Regulatory choices in global financial markets – restoring 
the role of aggregate utility in the shaping of market supervision, Bank of Finland Research 
Discussion Papers 1, 2008, p. 13 ssq; CRA International/City of London: Assessing the 
Effectiveness of Enforcement and Regulation, London, April 2009. 
11 See e.g. a recent case pursued by the FSA where the benefit derived by one individual was about 
2.5 million pounds, see FSA press release FSA/PN/111/2010 of 29 June 2010. 
12 Estimation for a bank holding EUR 300 000 000 000 of risk-weighted assets, based on a minimum 
capital requirement of 7%. For an analysis of the costs of capital requirements as amended by the 
CRD IV, see the main impact a ssessment on the CRD IV proposal. 
 
EN 11   EN • In five Member States  administrative fines laid down in national legislation 
are unlimited or variable and in ni ne Member States are at over EUR 
1 million while in seven Member States they are below EUR 150 000. 
• For example, maximum fines applicable  for violation of reporting obligations  
are less than EUR 100 000 in six Member States  (updated data available for 
22 MS). These Member States would be unable to impose a fine of 17,5 million pounds (21,3 Million Euros) as recently imposed by the FSA on Goldman Sachs for violation of reporting obligations  in relation to a failure to 
disclose facts relating to ongoing inve stigations in the US to the UK 
authorities. 
• For example, maximum fines for viol ations of prudential requirements 
relating to the governance of  a credit institution do not exceed EUR 250 000 
in five Member States . These Member States would be unable to impose a 
fine of 4 million Euros as recently impos ed by in France on Société Générale 
in the Kerviel case for violations of prudential requirements relating to risk 
management
13  
• For example, maximum fines for viola tions relating to pr ior authorisation, 
and notably unauthorised provision of  banking services vary between less 
than EUR 150 000 (with a maximum fine as low as EUR 50 000 in at least 
one Member State) and more than EUR 1 000 000 in four Member States  
(updated data available for 22 Member States).  
The result of these divergences, which concern almost all the violations of the CRD, is 
that all competent authorities are not able  to apply sufficiently deterrent fines. 
The results of the public consultation show that several national governments, regulators 
and some industry representatives consider that the existing low level of fines, at least in 
some Member States where low absolute le vels are laid down in  legislation, cannot 
ensure sufficient deterrence in the internal market.  
Third, the criteria taken into account  to determine the type and the level of 
administrative sanctions to be imposed in a particular case vary substantially and some 
                                                 
13 Kerviel is a former trader for the French bank Société Générale who was convicted at first instance 
of breach of trust, forgery and unauthorized use of the bank's computer system for rogue bets that 
had the bank teetering near collapse when the tr ades were discovered in January 2008. He was 
sentenced in October 2010 to at least three years in prison, and was also ordered to pay restitution 
of €4.9 billion. Mr. Kerviel filed an appeal against the judgment which is still pending. Société Générale has acknowledged management failures and weaknesses in its risk control system. An 
internal audit published in May 2008 described Mr. Kerviel's immediate supervisors as "deficient" 
and acknowledged that the bank had failed to follow through on at least 74 internal trading alerts dating from mid-2006. The French Banking Commission later fined Société Générale 4 million 
euros. 
 
EN 12   EN criteria which are important to ensure propor tionality and deterrence of sanctions, are not 
always taken into account by competent authorities . 
A number of criteria are partic ularly relevant in the field of the CRD. Taking into account 
the financial strength14 of the author of a violation can help to ensure that pecuniary 
sanctions imposed have an equivalent effect on all credit institutions: a fine of a small 
level, while being clearly dissuasive for cer tain smaller banking in stitutions, may have 
only a very limited dissuasive effect for so me of the larger gr oups operating in the 
banking sector. Therefore, when competent author ities have to calculate the actual fine to 
be imposed in a specific case (most often within the maximum and/or minimum levels 
established in national legislation) they s hould consider the financial capacity of the 
offender. Taking into account the benefits  derived from a violation or the losses  caused 
to third parties by a violation may significa ntly contribute to proportionality and 
deterrence of the sanctions imposed in specific cases. Taking into account the 
cooperation  of the author of a violation can encourage offenders to cooperate and 
therefore increase the investigator y capacity of the authorities.  
However, these criteria are not taken into account by all Member States: 
• Only  seventeen Member States  take into account the financial strength of a 
credit institution when determining the level of a fine imposed on it. 
• Only  seventeen Member States  take account of the benefit/profit derived 
from the offence. Eighteen Member States  take account of the loss caused 
by an infringement. 
• Only  twenty Member States  take into account the c ooperation of the author 
of a violation. 
The majority of the respondents to the cons ultation, including severa l public authorities 
and stakeholders of the banking industry, c onfirmed that those cr iteria should be taken 
into account by all competent authori ties for the reasons explained above.  
Fourth, not all Member States  can impose sanctions both on credit institutions and on 
individuals responsible for certain violations .  
As the CRD imposes obligations on credit institutions, sanctions should always be 
applicable to those institutions. However, in areas where certain individuals within a 
credit institution are responsible for a viol ation by that institution, there should be the 
possibility of applying sanctions al so on them. For example in case of violation of 
prudential requirements , the exclusion of  individuals from sanctions does not allow 
                                                 
14 The financial strength of an undertaking may be indicated for example by the level of its own 
funds, its turnover, or its total assets; when an individual is responsible for the violation, his 
financial strength may be indicated by his annual income. The relevant factors to be considered are 
clarified in national legislation. 
 
EN 13   EN competent authorities to choose a sanction th at is optimal in te rms deterrence: . a 
manager  of a credit institution who is essentia lly responsible for such  a violation  is less 
likely to be discouraged from infringing the ru les if he doesn't risk to be sanctioned for 
his illicit conduct because sanctions are applied to the credit institution only.  
• However, while administrative financ ial sanctions can be imposed on both 
natural and legal persons in the vast majority of Member States, two 
Member States  do not provide for the possibil ity to sanction natural persons. 
There is a broad consensus in the public consultation (governments, regulators, and 
banking industry) that competent authorities sh ould be able to apply sanctions to both 
credit institutions and individua ls responsible for a violation in order to ensure effective 
compliance. In its response to the public co nsultation a bank highlig hted that this would 
incentivise both natural and legal persons to take full account of their responsibilities and 
the implications of their actions. 
Fifth , sanctions are not published  on a systematic basis in all Member States, while 
publication of sanctions may ha ve a strong deterrent effe ct on credit institutions, 
especially when they concern violations of  prudential requirements which may alert the 
public and raise concerns about the financ ial soundness or the proper management of a 
credit institution. For example, pub lication of sanctions imposed for violations of 
prudential requirements  relating to the governance of  a credit institution can be 
appropriate to encourage public pressure by deposit holders and investors on the credit 
institution to adjust its governance arrangements.  
• However, only twelve Member States  publish sanctions on a systematic 
basis, subject to certain exceptions (s uch as situations where publication may 
jeopardise financial stability).  
The responses received from the banking industr y show that credit in stitutions consider 
the publication of sanctions as one of the mo st deterrent tools, mainly because of the 
reputational damage they will incur. In addition, consumers/investors association believe that wide publication of sanctions would help  consumers and investors to take informed 
decision and "punish" indirectly wrongdoe rs by avoiding usin g their services. 
In addition to these divergences and weaknesses of the legal framework, the level of 
application of sanctions  is significantly divergent across the EU. 
The effectiveness, proportionality and dissu asiveness of sanctioni ng regimes depend not 
only on the sanctions provided for by law but also on their application. In addition to the provision for appropriate sanctions in national le gislation, it is key for the effectiveness of 
sanctioning regimes to ensure that sanctions ar e actually applied when a violation occurs. 
The lack of sufficient and uniform actual enforcement across all EU 27 Member States 
was listed as a major problem by severa l respondents in the public consultation 
(governments, industry).  
 
EN 14   EN There are important divergences in the number of sanctions applied by  Member States in 
the last three years.  
In the period 2008-2010 out of 19 Member States for which da ta is available, 6 Member 
States imposed no sanction in at least one of those three years. Moreover, in 2010, at least 
5 Member States imposed no administrative fine s during that year (3/6 Member States for 
2009; 6/9 Member States for 2008; see data in Annex III).  
Numbers of applied sanctions can be low either because there have not been any 
violations, or because violations are not de tected, or cannot be proven. While the total 
absence of violations in some Member Stat es cannot be ruled out as a possibility, it 
appears more likely that violations are not de tected, especially when considering that in 
the same reference period a significantly diffe rent number of sanctions have been applied 
in Member States having banking sectors of similar size. In an integrated financial 
market, economic and cultural differences alon e cannot explain such divergences. It is 
therefore very likely that the divergent number of sanctions applied is due, at least partly, 
to poor enforcement of EU rules 
Poor enforcement may be due to a number of  reasons, mainly related to the organisation 
and functioning of national administration. Fo r instance, lack of human and financial 
resources devoted to the activities of nati onal supervisory authorities or lack of 
appropriate training of persons carrying out investig ations may make it difficult to detect 
violations. Moreover, insufficient application of sanctions might be the result of the 
difficulty to prove certain viola tions of financial services rules, the strict rules on burden 
of proof, and possibly the lack of specific expert ise in the field of financial services of the 
national authorities responsible fo r the application of sanctions.  
Since the CRD leaves the application of sancti ons in the responsibilit y of Member States, 
in line with the principle of subsidiarity, this initiative focuses on the problems linked to the investigative tools which are necessary to facilitate detection of violations and 
therefore improve the application of sanctions . In particular, the information available 
shows that a majority of Member States do not have in place any mechanism encouraging 
persons who are aware of potential violations  of the CRD to report those violations 
within a financial institution or to the co mpetent authorities (whistle blowing). While 
some industry representatives raised doubts on the appropriateness of an EU mechanism, 
almost all respondents to the c onsultation agreed that  whistle blowing is an important tool 
to facilitate detection of violations. I ndeed, whistleblowing programmes have been 
successful across sectors within the EU and in other jurisdictions. For example, on the 
basis of an internal whistleblowing program me, OLAF, the European Anti-Fraud Office, 
has received important pieces of informa tion – for example in five cases in 2008.
15 In the 
US, the SEC reports that in 2009 in 303 cas es investigations were triggered by tips.16 
Consequences of the problem drivers – specific problems  
                                                 
15 http://ec.europa.eu/anti_fraud/reports/olaf/2008/EN.pdf 
16 http://www.sec.gov/about/secpar/ secpar2010.pdf#performance  
 
EN 15   EN First, weak and divergent sanctioning regimes risk being insufficiently deterrent to 
prevent violations of the CRD, which can result in a lack of compliance with the EU 
bank capital rules .  
A study carried out on a set of countries incl uding nine Member States confirms that 
"enforcement actions do have a statisticall y significant disciplinary effect upon banks. 
Therefore, it is corroborated that by im posing direct or reputation costs upon banks, 
supervisory sanctions contri bute considerably to constr aining banks’ risk-taking 
appetite ."17 
Lack of important sanctioning powers and appr opriate criteria for the application of 
sanctions may send the message that consequences of illega l behaviours are not serious, 
which will not discourage such behaviours. This view was e xpressed by the majority of 
respondents in the public cons ultation on the Communication on sanctions (governments, 
some industry representatives, cons umers/investors associations). 
• When competent authorities cannot issue orders to put an end the unauthorised 
provision of banking services, there is a risk that the provi ders of those services would 
not be discouraged to continue  this activity, from which they may be very profitable 
for them. 
• When sanctions are not published on a regular  basis and competent authorities are not 
empowered to issue public warning, credit institutions will not fear risks to their 
reputation and possible loss of customers if  they infringe prude ntial requirements. 
Therefore they will not be en couraged to take all the m easures necessary to prevent 
violations of those requirements. 
• When the maximum amount of the pecuniary sanctions is very low and the level of 
those sanctions is not linked to the benefits  derived from a violation of the CRD, there 
is a high risk that they will not have a sufficiently dissuasive effect, as the perceived reward from such behaviour will far outwe igh the real risk. In addition, even in 
Member States where the level of pec uniary sanctions provided for by national 
legislation is sufficiently high, if competen t authorities calculate  the amount of the 
sanction to be imposed in a specific case without taking into acc ount criteria such as 
the financial strength of the author of the violation, there is a risk that sanctions 
actually applied will not be de terrent for larger groups opera ting in the banking sector.  
• When the managers of a credit institution responsible for ensuring compliance with 
reporting obligations cannot be dismissed even in case of serious and repeated 
violations of those obligati ons, they could not be disc ouraged enough from repeating 
such violations.  
                                                
 
17 "On-site audits, sanctions, and bank risk-taking: An empirical overture towards a novel regulatory 
and supervisory philosophy"; Delis, Manthos D and Staikouras, Panagiotis 17. August 2009 
 
EN 16   EN Second, divergences and weaknesses in national sanctioning regimes may also prevent 
the development of a level playing field  within the Internal Market, where cross-border 
groups have a considerable market share in EU banking markets (see section 3.1.1 
above). Unequal treatment of violations in different Me mber States may result in 
different costs for credit inst itutions, which along with othe r regulatory divergences risks 
creating competitive disadvantages for institutions from certain Member States. The importance of such cost differences is illust rated by the fact that, as indicated above, 
failures by major banks to report informati on to the supervisor, which lead to an 
underestimation of only 1% by the supervisor of the bank's risk-weighted assets, can 
reduce the minimum capital the bank must hold by more than EUR 100 million. Unequal 
treatment of violations may encourage cr edit institutions ope rating branches or 
subsidiaries in several Member States to exploit differences between sanctioning regimes 
in different Member States.  
• For example, a credit institution operating under the CRD regime in Member State A 
may exploit the fact that if it  breaches reporting requirements it will be subject to fines 
exceeding several millions of Euros, whereas a subsidiary of the same company based in Member State B under the same regime may be subject to fines of no more than 
EUR 15 000.  
The responses sent by several supervisors a nd stakeholders from the financial industry 
(including a bank and an associ ation of banks) show that they share concerns about 
possible competitive distortions and see a risk of regulatory arbitrage linked to divergent 
and weak sanctioning regimes. This is also  confirmed by research investigating the 
factors influencing international bank flows
18. 
Third, divergences of sanctioning regimes risk having a negative impact on effective 
supervision of cross border banks . This is particularly important given the considerable 
number of credit institutions operating in the EU which are structured as cross-border 
groups. 
Cooperation and trust between supervisors is ke y to ensure effective supervision of cross-
border banks. Partly as a response to the se rious failings in the cooperation, coordination, 
consistency and trust among national supervisors exposed  by the crisis, colleges of 
supervisors  have been set up under the CRD (Art 131a) to ensure coordination of 
supervision for cross-border groups and to facilitate among others the exchange of 
information and the consistent application of  prudential requirements across the banking 
group. However, if national supervisors are not  equipped with equiva lent and consistent 
                                                 
18 Regulatory Arbitrage and International Bank Flows , Joel F. Houston University of Florida - 
Department of Finance, Insurance and Real Estate; Chen Lin Chinese University of Hong Kong 
(CUHK) - Department of Finance; Yue Ma  Lingnan University, Hong Kong - December 18, 
2009), this research found evidence " suggesting that a type of regulatory arbitrage has taken 
place where banks have transferred funds to markets with fewer banking regulations", taking into 
account both banking rules and their enforcement. 
 
EN 17   EN powers, including sanctioning powers, there is a risk that the decisions agreed within a 
college will not be applied in a consistent way by the supervisors concerned.  
• For example, the authorities of Member State A may be reluctant to rely on 
the completeness of information collected by authorities in a college from 
Member State B, if it is clear that in  Member State B violations of reporting 
requirements cannot be sa nctioned effectively.  
• For example, if in a college of supervis ors, the authorities of Member States 
A, B and C agreed to replace the managers of a bank at central and subsidiary level because of failures at both leve ls, the authority of Member State A 
would apply the measure without difficu lty, the authority of Member State B 
would need the cooperation of other natio nal authorities and the authority of 
Member State C would be unable to  do anything, because it lacks the 
necessary power.  
In addition, supervisors can delegate  some of their supervisory tasks to supervisory 
authorities in the college from other Memb er States (Art. 28 of  Regulation No (EU) 
1093/2010 establishing a European Banking Author ity). However, a na tional supervisory 
authority could be unwilling to delegate powers to an authority in a nother Member States 
in which the sanctioning regime  is considerably weaker. 
Moreover, in relation to cross-border groups structured by way of branches, the CRD 
confers powers for the supervision of those  branches  to the home Member State. Such 
arrangements, which are key to the functioni ng of the internal market for banking 
services, may be put into doubt if sanctioning regimes in home Member States are weak, 
and host Member States can therefore not rely  on effective enforcement of the CRD by 
the home Member State. For example, in re sponse to the consu ltation, one supervisory 
authority explicitly reported that it has expe rienced situations where it has identified 
violations as a host Member State but the competent home Member State has not acted 
effectively.
19 
General problems  
Insufficiently deterrent sanctions leading to lack of compliance with the EU bank capital 
rules, unlevel playing field and ine ffective supervision risks seriously undermining 
proper functioning of banking markets, which can be detrimental to the protection of 
deposit-holders and investors, whether they are consumers or undert akings and can also 
negatively affect the whole economy. Indeed, if prudential rules are not complied with 
and effective supervision of  cross-border banking groups  is not ensured, credit 
institutions could take excessive risks in th eir activity. As shown by the financial crisis, 
this may cause serious economic damages to investors and deposit holders and to safety and stability of financial mark ets, which in turn can have serious negative repercussions 
on the whole economy. Similarly, proper functioning of banking markets could be 
                                                
 
19 However, the authority has not clarified the reasons of that lack of effective action. 
 
EN 18   EN undermined if credit institutions may take co mpetitive advantages from the weaknesses 
and the divergences of sanctioning regimes. 
This situation also risks undermining confidence in the banking sector , where 
consumers see that illegal behaviour is not  met with appropriate sanctions which are 
capable of discouraging furthe r infringements. If consumers have the impression that 
even major financial institutions are not suffici ently stable to fulfil their obligations for 
any financial instruments they issue, they w ill not invest in such instruments. Consumers 
will be reluctant to shop around Europe if they feel that the level of protection of deposit 
holders is significantl y different in different Member States.  
3.2.1.  Affected stakeholders  
The following stakeholders may be affected  by EU action aiming at approximating and 
reinforcing sanctioning regimes for violations of the CRD:  
– credit institutions, incl uding their stakeholders; 
– employees of credit institutions; 
– depositors-holders and investors, includi ng retail consumers and non financial 
companies;  
– public authorities, including central banks, supervisors and other national authorities 
in charge of the application of sanctions. 
3.2.2.  Baseline scenario 
The baseline scenario would be one in whic h no action is taken. The EU would continue 
to rely on the existing national sanctioning regi mes, which are divergent both in terms of 
the available sanctioning powers  and their application , and are sometimes not 
sufficiently dissuasive.  
The provisions on sanctions alr eady contained in the CRD would be maintained. Member 
States would be therefore obliged to ensure that sanctions regimes are in place, but they 
would be free to decide how to achieve this result.  
As regards convergence of sanctioning powers  available to competent authorities, they 
will have to ensure that competent authoriti es have at their disposal some sanctioning 
powers provided for in the CRD, for instance the power to withdraw the authorisation in 
the cases listed in Article 17 of Directive 2006/48/EC or the power to take measures to 
put an end to the unlawful situ ation deriving from the viol ation of the obligations on 
acquisition of qualifying holdings.  
However, those provisions are limited in scope  and could hardly ensure that effective, 
proportionate and sufficiently deterrent sancti ons are in place in all Member States.  
 
EN 19   EN As regards convergence on the application of these sanctioning powers , the baseline 
scenario takes into account the recent crea tion of the European Banking Authority (EBA) 
on 1 January 201120, which should enhance the previous coordination work of the CEBS, 
predecessor to the EBA. The EBA would c ontinue such work and could play an 
important role in increasing the coherence a nd monitoring of the application of sanctions. 
In particular, the EBA has powers to 
– carry out peer reviews of national sanc tioning regimes, and receive information 
about sanctions applied by national author ities; those powers can be used in 
order to monitor national legislation a nd to promote excha nge of information 
and best practices between Member Stat es in relation to the application of 
sanctions, which is expected to improve the overall applicati on track record of 
competent authorities;  
– settle disagreements between national auth orities, where in cross-border cases 
the application of sanctions requires cooperation and exchange of information between  supervisory authorities from more than one Member State; this is expected to improve the application of  sanctions in cases of cross-border 
banking groups; 
– issue guidelines and recommendations  on the applicatio n of sanctions by 
national authorities; this is expected to make administrative practices more 
convergent.  
However, the EBA powers are limited to coordi nate application of sanctions by national 
supervisors , while sanctioning powers are made ava ilable to those authorities by national 
legislators  .EBA will be unable to tackle deficien cies of sanctioning powers framed by 
national legislators,. Moreover, without a st ronger convergence in national supervisors' 
sanctioning powers, coherence in the applic ation of sanctions promoted by EBA would 
face certain limits, as national supervisors will have diverging powers and will not be 
able to overcome those divergences  set by the legislative framework. 
Within this scenario, national authorities in different Member States would continue to 
have different sanctioning powers and the same  infringements to European rules would 
be dealt with in a different way across the EU. Member States with strong sanctioning 
regimes could be reluctant to fully trust t hose with weaker sanctioning regimes, making it 
difficult to ensure effective cross-bor der supervision. The Commission would 
continuously monitor the functioning of sanc tioning regimes and would assess the need 
for policy action at later stage.  
In the baseline scenario, credit institutions will also be subject to civil liability for 
violations in accordance with national law. However, the deterrent effect is very limited as this would probably not cover several viol ations of the CRD: violation of prudential 
requirements (e.g. capital adequacy) or reportin g obligations, which are severe violations 
                                                
 
20 Regulation No (EU) 1093/2010. 
 
EN 20   EN of that directive, does not always lead to actual damages for which third parties can claim 
a compensation and/or the damages caused by th e violation cannot ofte n be quantified. In 
any case, the purpose of civi l actions is to compensate  damages caused, which would 
probably not be deterrent in cases where the profit derived from the violation is higher 
than the damages to be compensated.  
Credit institutions will also be  subject to reputational damage  linked to a violation that 
becomes publicly known. However, the public w ill not be aware of all sanctions imposed, 
as they will not be systematically published.  
At the international level, the EU would c ontinue to push for rigorous enforcement of 
financial regulations in order to ensure more effective, proportionate and dissuasive 
sanctions, but the lack of common standard s at EU level would make it difficult to 
propose concrete measures to be adopted at  international level. Lack of European 
common standards would weaken the EU’s cred ibility at international level and could 
threaten its global competitiv eness as a financial centre. 
Problem tree * 
Problems drivers   Specific problems  General problems 
 
Divergent and weak legal 
framework  
1. Types and levels of administrative 
sanctions and criteria for their 
application divergent and not always appropriate 
2. Sanctions not always published 3. Personal scope of administrative not 
always appropriate  
 
Lack of mechanisms 
facilitating detection of 
violations 
No effective mechanisms in place for 
whistleblowers to report misconducts to 
competent authorities  Lack of effective, 
proportionate and 
sufficiently deterrent 
sanctions => lack of 
compliance with the 
CDR 
Lack of trust and 
cooperation between 
national supervisors 
=> ineffective 
supervision  Improper functioning 
of financial markets 
in the Internal 
Market 
• Risk to financial 
stability, eg. 
excessive risk 
taking 
• Risk of 
consumer 
detriment  
• Risk to market 
integrity  
 
Undermined 
confidence in the 
financial sector  
 
3.3. The EU's right to act and justification  
The legal bases for EU level action in this specific field are: Article 53 TFEU (former 
Article 47 CE) which provide the EU legisl ature with the possibility of adopting 
directives for the coordination of the provisi ons concerning the taki ng-up and pursuit of 
activities as self-employed pers ons and the provision of services in the Internal Market, 
 
EN 21   EN and Article 114 TFEU according to which the European legislator can adopt "measures 
for the approximation of the pr ovisions laid down by law, regulation or administrative 
action in Member States which have as their object the esta blishment and the functioning 
of the Internal Market." The European legislature has discretion as to the method of approximation which is the most appropriate in order to improve the conditions for the 
establishment and proper functioning of th e Internal Market. This may include the 
approximation of national laws concerning the type and level of administrative sanctions 
to be imposed. 
The objective of the CRD is to contribute to the achievement of an integrated, open, 
competitive, and economically efficient Eu ropean financial market, where credit 
institutions benefit from equal conditions of competition and financial services can circulate freely at the lowest possible cost throughout the EU, with adequate and effective 
levels of prudential control, financial stabil ity and a high level of consumer protection. 
The corollary of an integrated financial serv ices market is that the same unlawful conduct 
incurs similar sanctions wherever the infringement is committed in the European Union. Such sanctions should be sufficiently diss uasive in order to discourage future 
wrongdoings. In this way, the EU would put out a strong message that certain types of 
conduct are unacceptable and punishable on an equivalent basis, which would increase confidence in the financial sector. This re quires some convergence in sanctioning regimes 
across the EU.   
The impact of the measures under considera tion on the relevant fundamental rights and 
principles as embodied in the Charter of F undamental Rights of the European Union is 
analysed in section 5. 
3.3.1.  Subsidiarity and proportionality 
Convergence of national sanctioning regimes seems necessary to promote deterrence, 
thereby ensuring a level playing field, a uniform application of the CRD, and full 
cooperation and mutual trust between ba nking supervisors acro ss the EU. These 
objectives cannot be sufficiently achieved by the Member States alone. This is 
particularly important in the banking sector where large credit institutions operate across the EU and full cooperation and trust within  the colleges of ba nking supervisors is 
essential for the credit institutions to be eff ectively supervised on a consolidated basis. 
Member States will remain responsible to ensure application of sanctions. However, 
better use of the existing sanctioning powers by competent authorities at national level would be insufficient to achieve the above mentioned objectives if those powers are 
divergent and too weak. Approximating nationa l legislation is therefore necessary to 
ensure that all national authorities have at their disposal appropria te sanctioning powers, 
which is a necessary condition for improvement  and convergence in the application of 
sanctions. This requires that sanctioning powers available in every single Member State 
adhere to common minimum standards, to be established at EU level.  
 
EN 22   EN Moreover, proper enforcement of banking legi slation across the EU requires that all 
Member States provide for adequate tools to detect violations and to ensure they are 
punished. Most of the issues relating to the enforcement of EU legislation can be better 
addressed at national level (eg. adequate human and fina ncial resources devoted to 
investigations). However, EU action seem ne cessary to ensure that all Member States 
have at least in place some mechanisms facilit ating the detection of violations, such as 
those encouraging persons who are aware of  potential violations  to denounce them.  
The objectives of the proposal can therefore be be tter achieved through EU action rather 
than by different national initiatives. 
The measures proposed will not go beyond what is necessary to achieve those objectives. 
They will approximate the legislation of Memb er States on sanctions applicable to the 
key violations of the CRD, based on common prin ciples to be applied consistently across 
the European Union. This appears particular ly important when considering that EU 
financial markets are increasingly integrat ed, especially at the wholesale level21.  
The proposal will ensure respect for diffe rent national legal systems and traditions. 
Changes in national legislation will be ne cessary only where the existing rules do not 
comply with some basic standards of an efficient sanctioning regime. In principle, 
Member States will not be obl iged to put in place new admi nistrative procedures. As to 
the regional and local dimension of the acti on envisaged, no specific implications of the 
proposal for certain regions has been identifie d, as sanctions in th e banking sector are 
generally laid down in national legislation and applied by national banking supervisors.  
4. OBJECTIVES  
The general policy objectives of this exercise are the following:  
• Proper functioning of banking markets and rest ored confidence in the banking sector 
To achieve these general objectives, the fo llowing specific objectives must also be 
achieved: 
• Effective, proportionate and de terrent sanctions which better ensure compliance with 
CRD rules,  
• Development of a level playing field whic h minimises the opportunities for regulatory 
arbitrage,  
• Effective supervision of banking service providers. 
                                                 
21 See European Financial Integration Report 2009. 
 
EN 23   EN The specific objectives listed above require the attainment  of the following operational 
objectives: 
• Reinforcement and approximation of the legal framework concerning sanctions,  
• Reinforcement and approximation of mechanis ms facilitating detection of violations. 
5. POLICY OPTIONS , IMPACT ANALYSIS AND COMPARISON  
Different policy options have been envisa ged to approximate and reinforce national 
sanctioning regimes on the issues identified in the problem definition. They concern 
sanctions applicable to the key violations of the CRD, as identified in section 3.1.2. For 
each option, it has been assessed whether it is of specific relevance for some of the key violations identified (s ee detailed analysis in Annex V). The options concern two main 
areas: the legal framework of sanctions and the mechanisms facilitating detection of 
violations.  
The envisaged policy actions are complementary to the other policy actions 
introduced by the CRD IV proposal . The measures for the implementation of the Basel 
agreement on banking supervision in the EU will maintain the basic prudential rules 
contained in the CRD (requirement of pr ior authorisation for banking activities, 
prudential requirements includi ng in particular capital rule s, reporting requirements) and 
will strengthen these rules. The policy act ions in relation to corporate governance 
maintain the fundamental prudential ru les contained in the CRD on governance and 
strengthen these rules. Approximating and reinforcing national sanctioning regimes for 
violations of these rules will support the effec tive application of thes e prudential rules as 
updated by the CRD IV proposal. 
The policy options have been evaluated and compared against crit eria deriving from the 
problems identified and the specific objectives of this proposal. The analysis takes into 
account the issues relating to proportional ity, subsidiary and the impact on the 
stakeholders concerned including the impact  on fundamental righ ts. The options are 
compared with regard to their effectiveness and efficiency in achieving the objectives of 
approximating and reinforcing sanctioning re gimes with regard to both the legal 
framework of sanctions and th e detection of violations.  
The following schema is used to compare the contribution of the diffe rent options to the 
achievement of the objectives: +++ (strongly pos itive), ++ (positive), + (slightly positive) 
0 (neutral), slightly negative (-). 
In view of the limits of the data availabl e and the nature of the subject-matter, the 
analysis is essentially of a qualitative nature. The options envisaged aim at ensuring better compliance with CRD rules by reinforcing national legal frameworks. As the number of undetected violations is by de finition unknown, it is very difficult to quantify 
the reduction of the number of violations th at reinforced sanctioni ng regimes could bring 
 
EN 24   EN about and therefore their pote ntial impact. An attempt to quantify the costs for credit 
institutions of the option on whistleblowing systems has been made, but the actual costs 
would largely depend on how Member States wi ll implement those systems. The impacts 
of the options envisaged incl ude the need to amend national legislation, which would 
have the same cost of any other national legi slative procedure. This impact is therefore 
taken into account in terms of efficiency based on the num ber of Member States which 
will be required to amend their legislati on and the scope of the revision needed. 
5.1. Options to approximate and reinforce the legal framework of sanctions 
Options are grouped in the following sub-groups : 1) appropriate administrative sanctions, 
2) personal scope of administrative sa nctions, 3) publication of sanctions. 
5.1.1.  Options concerning appropriate administrative sanctions  
Options Description 
1: no EU action The existing sanctioning regimes will con tinue to exist. Member States will have to ensure 
compliance with the provisions on sanctions already contained in the CRD (e.g. empower the 
competent authorities to withdraw the authorisa tion in the cases listed in Article 17 of the 
Directive 2006/48/EC or to take the measures laid down in Article 21) 
2. Uniform rules 
on types and level 
of administrative 
sanctions  Uniform rules would determine both the types of administrative sanctions available to 
competent authorities and the minimum and maximum levels of fines.  
 Member States would not be allowed to stipulate different types of sanctions and would not be 
able to exceed the maximum levels laid down in the uniform rules.  
3. Minimum 
common rules on 
types of 
administrative 
sanctions  Minimum common rules on the types of administrative sanctions laid down in national 
legislation would be determined.   
This would include a list of key sanctioning powers that should be available to all competent 
authorities in case of violations of key obligations of the CRD. The list would include the sanctions which, based on the CEBS report, on the Sanctions Communication, and on the 
replies to the public consultation, have been identified as key sanctions  for ensuring 
compliance with the CRD (administrative fine s, cease-and-desist orders, dismissal of 
management, public warning, w ithdrawal of authorisation).  
 Member States should ensure that national legislation provides at least for the types of 
sanctions included in the minimum list. 
They would remain free to provide for additional sanctioning powers.  
4. Minimum 
common rules on 
levels (minimum 
and maximum) of 
administrative 
fines  Minimum common rules on the level of administrative fines would be established, including 
the formulation of minimum and maximum levels of administrative fines.  
Those levels should be sufficiently high to ensure dissuasiveness (e.g. the maximum level 
should significantly ex ceed the potential benefit derived from the infringement, and the 
minimum level should reflect the seriousness of the violation). A range of minimum and 
maximum levels would be established for each ke y violation or category of key violations of 
the CRD, depending on their nature and seriousness. This option would not impose the obligation to provide for unlimited pecuniary fines, which may not be compatible with the 
fundamental principles of all national legal systems.  
 Member States would be prevented from setting minimum and maximum levels lower that 
those established at the EU level. They would remain free to set  levels higher than those  
 
EN 25   EN determined by the EU, or to provide for an unlimited maximum level. In principle, competent 
authorities would not be allowed to impose fines which are lower than the common minimum 
level. 
5. Minimum 
common rules on 
maximum level of 
administrative 
fines  Minimum common rules would be set on the maximum level of administrative fines. It would 
be established that the maximum level laid down in national legislation cannot be lower than a common EU level. This option would not impose the obligation to provide for unlimited 
pecuniary fines, which may not be compatible with the fundamental principles of all national 
legal systems. The level should exceed the benefits derived from the violations and, in any case, should be sufficiently high to ensure dissuasiveness: it would combine reference to a 
fixed amount and to the turnover of the author of the infringement.  
 
Member States would be prevented from setting maximum levels lower that those established 
at the EU level. Member States would remain free to set higher maximum levels or provide for an unlimited maximum level. They would also remain free to decide whether or not a 
minimum level has to be set and to establish that level. 
6. Uniform rules 
on factors to be 
taken into account 
in the application 
of sanctions All factors to be taken into account by comp etent authorities when determining the actual 
sanction to be imposed in a specific case, would be defined in order to ensure that sanctions imposed are effective, proportionate and dissuasiv e. In this case, the same factors would be 
applied by competent authorities throughout the European Union. Competent authorities would 
not be allowed to consider other factors. 
7. Minimum 
common rules on 
factors to be taken 
into account in the 
application of 
sanctions  EU-level provisions would establish a minimum list of common key factors to be taken into 
account by all competent national authorities when determining the level of the sanction to be 
imposed in a specific case.  
Those factors would include the mitigating and aggravating factors which based on the CEBS 
report on the Sanctions Communication and on the replies to the public consultation have been 
identified as key factors for ensuring proportionality and dissuasiveness of sanctions. This 
would include the benefits derived from the violation when they can be determined, the financial strength of the author of the infringement, cooperation of the authors of the violation, 
and recurrence of violations.  
Member States would be obliged to provide in national legislation that the key factors 
established at EU level have to be taken into account by competent authorities. Member States 
would be allowed to provide for additional factors they consider relevant, to be taken into 
account in addition to the common ones.  
Analysis of options  22 
(1) No EU action 
Mere compliance with the current provisi ons of the CRD, which do not cover all 
violations nor all relevant sanctioning powers, will be insufficient to ensure sufficient convergence in the type of sa nctioning powers that should be  available to all national 
authorities.  
In the absence of any action at EU level, Member States' sanctioning regimes will 
continue to diverge as regards the level of  administrative fines that can be imposed.  
                                                
 
22 The specific impacts of these option have been also analysed in relation to sanctions applicable to 
the  different types of violations of the CRD concerned. A more detailed analysis of this option is 
provided in  Annex V.  
 
EN 26   EN Divergences will also remain on the criteria  taken into account by competent authorities 
when deciding the type of administrative sanc tions and/or calcula ting the amount of the 
administrative pecuniary sanction to be applie d to the author of a specific violation. 
Almost all Member States will continue to take into account some criteria (e.g. the 
gravity of the violation) but various other factors will be ta ken into account only in some 
Member States or for some violations of th e CRD (e.g. the impact of the violation or the 
financial strength of the au thor of the violation). 
The new EBA will monitor the functioning of  national sanctioning regimes and conduct 
peer review analyses of those regimes (for  more detail see section 3.2.2 above). The EBA 
will have the power to actively promote fu rther convergence in the application of 
sanctions by competent authorities via gu idelines and recomme ndations. Without any 
approximation of the legal framework, however, it is very likely that type and level of 
sanctions would remain divergent and not alwa ys optimal in terms of dissuasiveness.  
A large majority of the respondents to the consultation on the Sanc tions Communication, 
including almost all public authorities, the ma jority of the industry representatives and all 
the consumers/investors associations, shar e the view that minimum harmonisation of 
sanctions is warranted to achieve suffi cient deterrence and convergence for the 
development of a level playing field within  EU. Even the minority  who is unfavourable 
to EU legislative action in this field, acknowledges the existing problems (lack of 
deterrence and convergence), considering that  soft law measures may be adequate to 
solve them. 
(2) Uniform rules on types and level of administrative sanctions 
This option would imply that administrative sanctions are fully harmonised and that the 
violation of any of the key pr ovisions of the CRD would be s ubject to the same type and 
level of sanctions across all Member States.   
As pointed out in the public consultation  by several respondents, this would assist the 
development of a level playing field in the Eu ropean financial market: credit institutions 
would not derive any advantage from differi ng national regimes, as they would risk 
incurring the same sanctions and therefore bear the same costs
23 wherever they commit a 
violation. This would also increase consum er confidence and mutual trust between 
supervisors, leading to more efficient cr oss-border supervision. This option would 
increase the deterrent effect of sanctions by ensuring that appropriate  types of sanctioning 
powers are available and suffici ently high fines are applicable  for each key violation of 
the CRD. This could consequently reduce risk s of violations of EU law, which would 
have a significant positive impact on consumer protection, competition, safety and integrity of credit institutions.  
However, the fact that Member States would not be able to provide for further types of 
sanctions or higher levels of fines than those provided for in the uniform EU framework 
would weaken the overall deterrence of some national regimes. In particular, in some 
                                                
 
23 This term is broadly defined as to include all potential negative consequences. 
 
EN 27   EN Member States  which currently have a very high or an unlimited maximum level for 
pecuniary sanctions, this might lead to a reduction in the maximum level and reduce 
deterrence if the actual level es tablished would be lower than what is currently in place. 
This risk has been highlighted by several stakeholders in the public consultation, who 
consider that EU action in th is field should allow Member St ates to maintain stricter 
sanctioning regimes.  
The majority of the respondents to the c onsultation on the Sanc tion Communication, in 
particular public authorities, are in favour of  a list of core sanctioning powers available to 
all competent authorities, provided that such  a list is not exhaustive and allow competent 
authorities to apply stricter sanctions. For this reason, the bi g majority of the respondents 
do not support the principle of full harm onisation and full-fledged EU sanctioning 
regime. 
For this policy option, the following fundamental rights  of the EU Charter are of 
relevance: the right to an effective reme dy and fair trial (Art. 47), presumption of 
innocence and right of defence (Art 48) , freedom to conduct a business (Art 16), 
consumer protection (Art 38), and – ev en though Art. 49 on the legality and 
proportionality of criminal offences and penaltie s may not be directly applicable to all of 
the administrative sanctions envisaged – th e general principles  of legality and 
proportionality underpinning the Ch arter. In relation to thes e fundamental rights, this 
option would ensure that a violation of re quirements for authorisation, of prudential 
requirements and of reporting requirements w ould be subject to the same type of 
administrative sanctions across the EU. These uniform rules would particularly ensure 
that the types and leve ls of administrative sanctions that  can be imposed are proportionate 
to each specific violation across all Member States, and that Member States lay down 
those sanctions by law.  
This option will not create an administrative burden  on financial institutions, or non-
financial companies, which are already toda y subject to sanctioning regimes in all 
Member States. More uniform sanctioning regime s throughout the EU may in fact lead to 
reduced compliance costs for market particip ants through the simplif ication of the legal 
framework for cross-border financial institutions.  
As to the impact on Member States , this option would require  significant changes in 
national legislation of all Memb er States, in order to make types and level of sanctions 
uniform. Types and levels of sa nctions would have to be modified in almost all Member 
States, as types of sanctions  different from the common one s would no longer be allowed 
and some Member State would have to prov ide for the application of new types of 
sanctions. This could require th e overall sanctioning regime to  be revised. Therefore, the 
impact on Member States could be signifi cant and the uniform regime may not fit 
national legal system and culture in different Member States.  
This option is expected to ensure better en forcement of the CRD obligations. The specific 
impacts of those options on stakeholders  are in fact the same as the impacts of those 
 
EN 28   EN rules themselves, which are identified and asse ssed in the impact assessments of the main 
parts of the Commission proposal  for the CRD, not covered by this impact assessment.  
In particular, a large part of deposit-holders and investors are consumers  for whom 
savings placed with credit institutions constitute  a key part of their financial means and a 
major element of provision for retirement. The confidence of consumers in the stability of 
the banking system has been severely hit during the financ ial crisis, and the 
reinforcement and convergence of sanctioni ng regimes for violations of banking capital 
rules will have a positive impact on the protection of consumers holding deposits and 
investments, and the availabi lity of such sanctions fo r misconduct will contribute to 
restore consumer confidence in credit institutions. This policy option can therefore have positive effects on  consumer protection as enshrined in Art. 38 of the EU Charter.  
This option is  not expected to have specific negative impacts on  SMEs . More efficient 
sanctioning regimes ensuring better compliance with EU law would benefit all players in 
financial markets, as well as all users of fi nancial services, including in both cases SMEs. 
As the reinforcement and convergence of sanc tioning regimes for violations of banking 
capital rules will contribute to ensure credit in stitutions are stable, they reduce the risk of 
financial instabilities caused by violations of EU law, which – as the financial crisis in 
2007/2008 has shown – can have a strong negative impact on the economy at large and on employment . The option will therefore also have a positive impact on employees and 
society at large 
Environmental  impacts of this option have not been identified. 
The reinforced focus on effective, proporti onate and dissuasive sanctioning regimes is 
compatible with the common objectives of major third country jurisdictions  within the 
G20 Group to strengthen the regul ation and supervision of the financial sector. It is in 
line with developments in other jurisdictions.
24 This option is also expected to have a 
positive impact on the EU's global competitiveness . A strong and credible enforcement 
of banking capital rules contributes to the st ability of the EU financial sector, with 
positive effects on it. Moreover, it contributes to strengthening the EU's reputation as a global centre for the provision of competitive reliable and stable financial services, benefiting from a high level of inve stor and consumer confidence. 
(3) Minimum common rules on the type of  administrative sanctions to be 
available to competent authorities 
This option would contribute to the objectiv e of improving the deterrent effect of 
administrative sanctions by ensuri ng that all competent authorit ies have at their disposal 
certain key sanctioning powers which can be particularly effective for the different 
                                                
 
24 For example, the US has recently adopted rules to reinforce the detection of violations, including 
better protection of whistleblowers, in the framework of the Dodd-Frank-Bill of July 2010. 
Moreover, several sanctions applied by US regulators in the aftermath of the financial crisis express a level of concern to ensure sufficient de terrence that is without doubt equivalent to the 
suggestions made in this Communication. 
 
EN 29   EN violations of the CRD while allowing Member  States to keep or introduce any other 
additional powers which they c onsider to be effective.  
In their replies to the consultation , several stakeholders, in cluding some financial 
supervisors and banks, have spec ified the key powers that shoul d in their view be in the 
minimum list of sanctioning powers available to all competent authorities. Those powers should include the withdrawal of authorisati on, which may be appr opriate for the most 
serious violations of the ba nking legislation, the dismissal of management, which may be 
appropriate in case of serious and repeated violations of pr udential rules or disclosure 
obligations, the possibility of issuing cease and desist orders, which can effectively ensure that the responsible cred it institution put an end to th e violation, public warning or 
reprimand, which can effectively prevent cred it institutions from repeating violations. 
Common rules on the types of sanctions would help in ensuring that violations of the 
CRD are dealt with in a similar way in al l Member States. This would reinforce the 
development of a level playing field, as cred it institutions would risk incurring similar, 
even if not identical sanctions. Even in Memb er States where already today all necessary 
types of sanctions are available and therefore no changes would be brought about by this 
option, banks and supervisors could be confident that competitors from other Member States are subject to simila rly stringent powers – applica tion of which is subject to 
coordination by EBA as outlined in section 3.2.2 - and therefore th ese powers will not 
place banks at a competitive disadvantage. K nowing that the response to violations of 
banking legislation is broa dly equivalent throughout th e EU would also increase 
consumer confidence and may lead to more  cross-border provision of banking services, 
reducing the fragmentation of the si ngle market along national lines.  
Further, a minimum list of sanctioning pow ers would increase mutual trust between 
national supervisors and improve supervision of cross-border credit institutions. Where 
the use of the passport limits the host Memb er State's power to impose sanctions for 
violations of the CRD, that Memb er State could count on the f act that violations will be 
sanctioned in an equivalent manner in the home Member State. For example, where the 
risk management systems of a cross-border branch are not appropr iate, the host Member 
State can count on the fact that the home Member State can sanction such a violation 
effectively. 
This option would require only a minority of Member States  to modify their legal 
framework (7 Member States would have to  amend their laws in relation to public 
warnings, 2 Member States in relation to the dismissal of the management).
25 
The benefits of this option are unanimously recognised by the respondents to the public 
consultation  on the Sanctions Communication, with  only one respondent considering 
that this should be left to Member States. In particular, there is a common view that all 
European competent authorities should have at their disposal a minimum set of core 
administrative sanctions to be established at  EU level, which would reduce divergence 
                                                 
25 Assessment based on CEBS report, and additional information by national authorities. 
 
EN 30   EN and improve efficiency of sanctioning regimes while maintaining some flexibility in the 
sense that Member States may provide for any additional sanctions.  
The impacts of this option on fundamental rights, stakeholders including consumers 
and SMEs, social and environmental matters , third countries and the EU’s global 
competitiveness  are similar to the impacts of option 2 above albeit less accentuated as 
the level of convergence achieved under th is option is lower than under option 2. 
(4) Minimum common rules on minimum a nd maximum levels of pecuniary 
administrative sanctions 
This option would significantl y contribute to the objectiv e of improving the deterrent 
effect of the administrative fines, as it w ould ensure that fines applied are sufficiently 
high, and improve convergence of national regimes, as the minimum and maximum levels of administrative sanctions  would be based on common rules 
In the Member States where the maximum level laid down in the legislation is lower than 
the level laid down at EU level, this opti on would allow competent authorities to apply 
pecuniary sanctions higher than those they can  currently apply on the basis of the national 
legislation.  
In addition, common rules on the minimum leve l of pecuniary sanctions would prevent 
competent authorities from applying pecuni ary sanctions which are too low to ensure 
sufficient deterrence. They would be obliged to impose a sanction at least equal to the 
minimum level established on the basis of the EU common rules.  
Those rules could therefore increase the am ount of the sanctions actually imposed, 
especially in Member States where no minimu m amount is laid down in the legislation, 
which would ensure better deterrence. Ho wever, a minimum level would reduce the 
possibility of adapting the amount of the act ual pecuniary sanction to the circumstances 
of the specific case concerned, which coul d make it more di fficult to ensure 
proportionality.  
Ensuring that the level of fines envisaged in national legislation cannot be lower than the 
level determined by the EU would allow for the imposition of fines that are optimal in 
terms of dissuasiveness and consequently redu ce risks of violations of EU legislation. 
This would have a significant positive impact on competition between financial 
institutions (e.g. by removing the competitive advantages derived from violations of 
banking legislation), and on safety of financ ial markets (e.g. increas ed compliance with 
prudential rules). Even in Member States where already today the level of fines is sufficiently high and therefore no changes w ould be brought by this option, banks and 
supervisors could be confident that competitors  from other Member States are subject to 
similarly high fining powers – application of which is subject to coordination by EBA as 
outlined in section 3.2.2 - and therefore the high level of fines will not place banks at a competitive disadvantage. At the same time it would not prevent Member States from going beyond the EU minimum criteria, and fi ne other violations, provide for higher 
levels of fines or for fu rther types of sanctions. 
 
EN 31   EN The majority of the respondents to the consultation  are favourable to a minimum 
harmonisation of the level of fines but their view s diverge significantly  on the scope of 
the harmonisation. While most of them cons ider that common rule s should be set to 
ensure a sufficiently high maximum level for fines to be applied across the EU, only a 
few stakeholders are favourable to setting rules on the minimum level and several of 
them are opposed, the latter underlining the di fferences between national legal systems in 
this respect and arguing that such a mini mum level may lead to the application of 
disproportionate sanctions.  
However, this option would ha ve a significant impact on Member States  a t  i t  w o u l d  
require changes in all national legislati on which provide for minimum and maximum 
levels lower than those established on the basis of the EU common rules. In addition, 
Member States where the legislation does not establish any mini mum level would be 
obliged to introduce that level.  
The impacts of this option on fundamental rights, stakeholders including consumers 
and SMEs, social and environmental matters , third countries and the EU’s global 
competitiveness  are similar to the impacts of option 2 above albeit less accentuated as 
the level of convergence achieved under this  option is lower th an under option 2. 
However, in relation to fundamental rights, fixed and inflexible minimum levels, when 
applicable to all violations across the EU  and when not set with due regard to 
proportionality, could prevent authorities from  imposing lower sanctions in cases where 
particular mitigating circumstances would warrant this.  
(5) Minimum common rules on maximum le vel of pecuniary administrative 
sanctions 
This option will require setting only the maximu m level of fines to be imposed across the 
EU, the Member States being left free to provide higher levels and will refrain from requiring any minimum leve l to be established.  
 
In particular, when setting the maximum level of fines in their law,  Member States would 
have to take into account the following common rules.   First
, national legislation woul d be required to provide th at the maximum level should 
exceed the benefits  derived from a violation. Th is would significantly increase 
deterrence since, where the benefits derive d from the violation can be established, 
wrongdoers will be deprived of the benefits th ey made and will have to pay an additional 
amount. The administrative practice of some  Member States shows that competent 
authorities are able to establish the benefits  derived by one person or company from some 
violations, for instance in case of the unauthorised provision of banking services26.  
However, this rule would be insufficient to ensure sufficient deterrence in the situations 
                                                 
26 See e.g. a recent case pursued by the FSA (UK) where the benefit derived from unauthorised 
activity by one individual was about 2.5 million pounds, see FSA press release FSA/PN/111/2010 
of 29 June 2010. 
 
EN 32   EN where it is very difficult or even impossible to estimate the benefits derived from a 
violation of the CRD (for instan ce in case of failure to report information to supervisors).  
 Second
, given these limitations national legislat ion would in addition be required to 
provide that, in any case (inc luding those where the benefits  cannot be established), the 
maximum level is not lower than (1) a fixed absolute amount  or (2) a percentage of the 
total annual turnover  of the wrongdoer. 
They will remain free to provide for maximum levels higher that the absolute amount or 
the percentage set by the EU or for an unlimited maximum level.   (1) As regards natural persons , Member States where maximum levels are lower than a 
specific absolute amount , to be fixed on the basis of the highest levels currently 
provided for in national legislations, would be required to increas e them. This would 
increase the deterrent effect of the sanctions, in  particular in the Member States with very 
low levels, while being compatible with th e way maximum sanctions are fixed today in 
most Member States and therefore not requir ing modifications of those Member States' 
legislation. The actual amount c ould be set at EUR 5 000 000 wh ich is the level of fines 
provided for or exceeded by the 20% of Member States with the highest levels of fines 
currently provided for in national legislati on (see data in Annex III). It would be a 
sufficiently high amount to impose deterrent sanctions for the most serious violations even for the most well paid managers of cred it institutions (for in stance, as of 2010, the 
highest-paid CEOs of a credit institution in the EU received about EUR 10 000 000 
annual compensation). In particular, it would be  sufficiently high to exceed the benefits 
which wrongdoers could derive from  a violation in past cases.
27  
However, as regards credit institutions  such a fixed amount would not take into account 
the size of the wrongdoer: in case of very seri ous violations by the largest cross-border 
credit institutions it may not be sufficient to offset the expected benefits from a violation 
and to ensure appropriate attention by senior  management. These concerns were reflected 
in the public consultation by a significant number of respondents who argued that the 
maximum amount of the fine to be imposed s hould relate to the obj ective characteristics 
of the wrongdoer such as its annual turnover or assets. 
 (2) A common floor for maximu m fines for credit institu tions would therefore be 
established by reference to a percentage of their total annual turnover , as suggested by 
                                                                                                                                                 
27 See previous footnote; pls note that a broader asse ssment of the benefits derived from violations of 
the CRD is difficult,as in many  cases due to the nature of the violations these cannot be 
established. 
28 Council Regulation (EC) No 1/20 03 of 16 December 2002 on the implementation of the rules on 
competition laid down in Articles 81 and 82 of the Treaty (Article 23(2); OJ L 1/1; 01/04/2003, 
Art. 23(2).  
29 Council and Parliament Directive 20097/73/EC of 13 July 2009 concerning common rules for the 
internal market in natural gas and repealing Directive 2003/55/EC, OJ L211/94 of 14.8.2009. 
30 Regulation of the Council and the Parliament amending Regulation (EC) No 1060/2009 on credit 
rating agencies, Doc 70/10, http://register.consilium.europa.eu/pdf/en/10/pe00/pe00070.en10.pdf . 
31 Estimate based on information on a survey of information about EU bank’s risk weighted assets 
and income from annual reports. 
 
EN 33   EN several respondents in the pub lic consultation. Requiring the Member States to provide 
that maximum levels should be based on a percentage of the annual turnover would 
ensure sufficient deterrence, including for bi gger cross-border player s, as the objective 
characteristics of the wrongdoer (in particul ar its size) will be taken into account.  
The actual percentage of turnover would be  determined on the basis of the existing 
experience in other fields where administrativ e fines are imposed and at a level which is 
sufficiently high to offset the benefits that  can be expected from violations of CRD 
requirements. The following existing practice  exists in other areas of EU policy: 
– EU competition rules  28provide already that the Commission cannot impose a 
fine in excess of 10 % of the company's total annual turnover for violations. This 
provision was replicated and applied w ithout major difficulties in several 
Member States.  
– Similarly, a percentage of 10% of the tu rnover has been cons idered appropriate 
in the context of the Directive 2009/73/EC concerning common rules for the  
internal market in natural gas29. This Directive obliges Member States to 
ensure that those authorities must be em powered to apply penalties of up to 10% 
of the annual turnover of the undertaking concerned. 
– Under the newly adopted regulation on credit rating agencies  (CRAs)30 the 
European Securities Markets Authority (ESMA) may by decision impose on a 
CRA a fine for a breach of the regulation, which can not be in excess of 20% of 
the total annual tu rnover of the CRA.  
The objective of the CRD  review is to provide only for minimum rules on levels of fines 
while leaving the possibility for the Member St ates to provide higher maximum levels for 
fines. The level of fines therefore does not have to be equally high than in the CRA 
Regulation which establishes absolute maximu m levels of fines. On the other hand a 
maximum fine of less than 10% could be too lo w in order to effectively deter breaches of 
CRD capital and reporting requirements which can lead to important benefits in terms of 
the level of regulatory capital requirements.  Depending on the specific circumstances of 
the bank, 10% of total annual turnover equa tes to about 10% of the minimum capital 
banks are required to hold under CRD IV/Basel  III when the new regime will be fully 
phased in.31 Violations of the CRD may imply that  banks hold less capital than required 
under the CRD. A minimum level significantly lower than this would risk to be 
insufficiently deterrent in certain cases of serious violations affecting a bank's entire business and leading to important benefits in terms of regulatory capital requirements.  
 
This option would not prevent competent aut horities from applying fines significantly 
lower than the maximum, and therefore would not ensure that fines actually imposed are 
sufficiently high to be deterr ent. However, this could be  ensured by providing for 
appropriate criteria (such as the seriousness of the violation, the fina ncial strength of the 
credit institutions involved and the benefits/losses derived from  the violation) to be taken 
into account by competent authorities when they  calculate the actual fine to be imposed 
in each individual case. The introduction of a lis t of relevant criteria is analysed under 
options 6 and 7. 
 
EN 34   EN Similarly to option 4, this option would have a significant positive impact on competition 
between financial institutions and on safety of  financial markets. However, this option 
would also leave sufficient flexibility to  ensure proportionality of the fines since 
competent authorities will not be restra ined by a minimum level to impose lower 
pecuniary sanctions in less serious cases involving smaller players or less severe 
violations within the same category.  
This option is supported by the ma jority of respondents to the public consultation  since 
it can increase deterrence and empower compet ent authorities to im pose sufficiently high 
fines in the most serious cases while l eaving sufficient discretion for competent 
authorities to decide on the ac tual level (no minimum require d level). Similarly to option 
4, this option would contribute  to the objective of improvi ng the deterrent effect of 
administrative fines, as it would ensure th at competent authoritie s have the power to 
apply fines which are sufficiently high to be deterrent even on the larger credit 
institutions.  
The impact of this option on Member States  would be less signifi cant than in option 4, 
as it would require changes only in nationa l legislation where the maximum level does 
not comply with the common minimum standa rd. No changes would be required where 
that level is higher or unlimited and Member States would not be obliged to introduce a 
minimum level. Based on the information available to the Commission, legislative 
amendments would be necessary in 8 Member States.32 
The impacts of this option on fundamental rights, stakeholders including consumers 
and SMEs, social matters, third countries  and the EU’s global competitiveness  are 
similar to the impacts of option 2 above albeit less accentuated as the level of convergence achieved under this option is lower than under option 2. In relation to fundamental rights, this option respects the principle of proportionali ty in particular by 
refraining from laying down fixed and inflex ible minimum levels of administrative 
pecuniary sanctions, thereby allowing Member  States and competent authorities to 
imposing lower sanctions in cases where particular mitigating circumstances would warrant this. 
(6) Uniform rules on the factors to be take n into account in the application of 
sanctions 
This option would eliminate any divergence on factors to be taken into account in 
deciding the type of sanctions and/or calculating the amount of  the fine to be applied to 
the author of a specific viola tion of the CRD, within the rang e of sanctions and the levels 
of pecuniary sanctions laid down in the legisl ation. The factors to be taken into account 
would include the seriousness of the violation,  its consequences (e.g.  benefits obtained, 
losses caused to third parties, etc), and th e personal conditions of the author of the 
violations (e.g. the financial st rength of the credit institution)  or its cooperation with the 
competent authorities. 
                                                
 
32 Assessment based on CEBS report, p. 53, and additional information by national authorities. 
 
EN 35   EN Providing for similar types and level of sa nctions in national legislation would be 
insufficient to ensure that the perpetrators  of similar violations would incur similar 
sanctions in different Member States if th e factors taken into account to determine the 
actual sanctions imposed were completely diffe rent. In particular, th is option would help 
to ensure that the level of fines actually applied is sufficiently high even when no 
minimum level is fixed. This option will theref ore reinforce the deterrent effect of option 
(5) above. 
Uniformity in the way sanctions are app lied would facilitate cooperation between 
competent authorities and therefore ensu re better cross-bo rder supervision. 
This option would also help in ensuring pr oportionality and dissuas iveness of sanctions. 
The sanctions imposed would always be linke d to criteria ensuring that competent 
authorities take duly into accoun t the seriousness of the viola tion, its conse quences (e.g. 
benefits obtained, losses caused to  third parties, etc), the pers onal conditions of the author 
of the violations (e.g. the financial strength of the credit institution) or its cooperation 
with the competent au thorities. The respondents to th e consultation on the Sanctions 
Communication agree that the above-mentioned cr iteria should be taken into account by 
all competent authorities in the EU to ensure  proportionality and de terrence of sanctions.  
In the banking sector, those criteria are part icularly relevant: for instance, taking into 
account the financial strength of the credit institution is important to ensure that sanctions for the violations of the CRD have an eq uivalent effect on sm all and large credit 
institutions, linking the sanction applied to the benefits, potentially very high, derived 
from the violation of prudential rules w ould increase their deterrent effect.  
However, under this option, the common list woul d in principle include only factors that 
can be applied in the same way in all nati onal legal systems, which would preclude the 
possibility to take also into account those fact ors which can be part of the principles of 
some legal systems but not relevant in others.  
This option would require changes  in all national legislation , as it implies a revision of 
all provisions concerning the way sanctions are applied.  
The impacts of this option on fundamental rights, stakeholders including consumers 
and SMEs, social and environmental matters , third countries and the EU’s global 
competitiveness  are similar to the impacts of option 2. However, in relation to 
fundamental rights, uniform criteria may make  more difficult to en sure the respect the 
principle of proportionality, as competent aut horities would no longer be allowed to take 
into account certain factors cu rrently provided for in some Member States which may be 
relevant in their legal systems to adapt sanc tions to the particular ities of each specific 
case. 
(7) Minimum common rules on the factors to be taken into account in the 
application of  sanctions 
 
EN 36   EN Likewise option 6, this option would allow competent authori ties to better adapt the type 
and the level of sanctions imposed to the se riousness and the impacts of the violation and 
to the personal conditions of the author of  the violation, which would help ensuring 
effectiveness, proportionality and dissuasiven ess of the sanctions actually applied. It 
would also reinforce the deterrent effect of option (5) above: even if no minimum level of 
fines if established, the fact that competen t authorities would take  into account factors 
such as the gains obtained from the violati on and the financial strength of the credit 
institution would help ensuring that the fine actually imposed is not too low.  
The common list of key factors would includ e the factors mentioned in option 6. This 
option would therefore have the same pos itive impacts on competition, consumer 
protection and stability of  financial markets.  
This option would lead to increased converg ence in the way sanctions are applied by 
competent authorities across Europe while ma intaining some flexibility. This would ease 
cooperation between banking supervisors w ho would rely on a co mmon understanding of 
how sanctions imposed for a particular violatio n should be adapted to the specifics of that 
violation. At the same time, Member States  would have the possibility to consider 
additional factors that are pa rticularly relevant in a specific national context.  
The results of the consultation  on the Sanctions Communication show that a large 
majority of stakeholders are opposed to an ex haustive list of factor s to be taken into 
account by all competent author ities, since this would pr event Member States from 
considering other relevant factors in their national legal systems.  
This option would not require major changes in national legislation . Some Member 
States already provide for the most relevant  factors, and the others could add those 
factors without repealing the existing provisions. For exampl e, in the banking sector, 
thirteen Member States already take into account the financial strength of the author of an 
infringement, while the remaining Member St ates would have to add that factor to 
existing provisions.33 Based on the information availa ble to the Commission, 10 Member 
States would have to amend their laws to take into account the benefit derived from a 
violation and the financial strength of the offend er, 7 Member States in  order to take into 
account the cooperation of the offender, and 6 Member States in order to take into 
account the losses for third part ies caused by a violation).34 
The impacts of this option on fundamental rights, stakeholders including consumers 
and SMEs, social and environmental matters , third countries and the EU’s global 
competitiveness  are similar to the impacts of option 2 above albeit less accentuated as 
the level of convergence achieved under this option is lower than under option 2. In 
relation to the fundamental rights the criteria  relating for example to the gravity of a 
violation or to the benefit deri ved from a violation contribute to ensure that the principle 
of proportionality is re spected when determini ng applicable fines.  
                                                 
33 CEBS report, p. 53, and responses by national authorities. 
34 Assessment based on CEBS report, p. 53, and additional information by national authorities. 
 
EN 37   EN Comparison of options  
The objectives outlined in section 4 cannot be  achieved under option 1, which preserves 
the "status quo" and thus the problems iden tified in section 3.2. A lthough the EBA could 
promote further convergence of national pr ovisions concerning sanctions, this action 
would hardly be effective without an EU framework in place.  
Options 2 and 6 would eliminate any divergence in types, level of sanctions and criteria 
for their application, and therefore will be th e most effective in terms of ensuring level 
playing field and facilitating cross-border supervision. Opti ons 3, 4, 5 and 7 would be 
less effective as they woul d set only minimum common ru les on types, levels of 
sanctions and criteria for their application. However, they would leave some flexibility 
which would permit to adapt sanctions to the specificities of the di fferent national legal 
systems, and therefore help competent authoriti es to apply optimal sanctions in terms of 
deterrence. Option 4 would be more effectiv e than Option 5 in reducing divergences in 
the levels of pecuniary sanctions, as it would set common rules on both maximum and 
minimum levels while Option 5 will better en sure proportionality, as it would not oblige 
competent authorities to impose pecuniary sa nctions of a minimum amount which could 
be disproportionately high in  certain particular cases. 
Options 2, 3 and 4 are considered to be si milarly effective in terms of ensuring 
deterrence: uniform types and le vel of sanctions are not nece ssarily more dissuasive than 
different sanctions complying with minimu m standards which are sufficiently strict. 
However, option 3 would allow for the provision of additional types, which can increase dissuasiveness in some Member States. option 5 will be less effective in ensuring that 
sufficiently high pecuniary sanctions are actual ly applied but could better ensure those 
sanctions are proportionate. Similarly, both Op tions 6 and 7 can be considered equally 
effective to the extent the relevant factor s identified in Option 6 are included in the 
minimum list of factors established under Option 7. However, the latter could better 
ensure appropriateness of sanc tions actually applied, as it would not prevent competent 
authorities from taking into acc ount other factors relevant in their national legal systems. 
Regarding efficiency, Options 2 and 6 are the less effici ent as they would require 
important changes in national legislation. Th e substantial impact Options 2 and 6 would 
have in terms of the number of Member Stat es required to modify their rules and their 
overall sanctioning regimes is not compensate d for by an equally s ubstantial increase in 
effectiveness compared to options 3 and 7 – in fact a full harmonisation of types of 
sanctions and factors to be taken into account may be less effective in  some respects as it 
will not allow Member States to provide for types and factors that may be necessary to respond to specific national circ umstances. Option 5 is more efficient than option 4 as it 
would require legislative changes only in some Member States. In addition, Option 4, 
while being more effective to achieve the objectives of dissuasiveness, a level playing field and improving trust between supervisors,  would have a substantial negative impact 
on the objective of proportionality because it wo uld limit the possibility  of authorities to 
take into account the specificities of each case when determining the level of a fine. Therefore, an obligation to provide for mini mum levels of fines w ould require important 
 
EN 38   EN legislative changes, especially in Member States where current national legislation does 
not lay down any minimum level, without br inging and equivalent contribution to the 
achievement of the objectives envisaged.  
None of the Options considered will harmonise the procedure for the imposition of 
administrative sanctions for violations of th e CRD and will therefore preserve Member 
States’ current arrangements ensuring complian ce with the rights for judicial protection 
of the Charter, such as the right to an eff ective remedy and to a fair trial (Art. 47), the 
presumption of innocence and the right of defence (Art.48).  
Based on the analysis of the impacts above, Options 3, 5 and 7 have been selected.   
Effectiveness in achieving the specific objectives 
below through the relevant operational objective   
Improve effectiveness, 
dissuasiveness and 
proportionality of 
sanctions Develop 
level 
playing 
field Improve trust 
between 
supervisors Efficiency in 
achieving all 
objectives 
1. Do nothing 0 0 0 0 
2. uniform rules on types and level of administrative sanctions  ++ +++ +++ - 
3. Minimum common rules on types 
of administrative sanctions  +++ ++ ++ +++ 
4. Minimum common rules on levels 
(minimum and maximum) of 
administrative fines  +++ ++ ++ + 
5. Minimum common rules on 
maximum level of administrative 
fines   ++ ++ ++ +++ 
6. Uniform rules on factors to be 
taken into account for the application 
of sanctions + +++ +++ - 
7. Minimum common rules on 
factors to be taken into account for 
the application of sanctions  +++ ++ ++ +++ 
5.1.2.  Options concerning the personal sc ope of administrative sanctions  
Options35 Description 
1: no EU action The existing sanctioning regimes will continue to exist. Member States will 
have to ensure compliance with the pr ovisions on sanctions already contained 
                                                 
35 These options would apply to all key violations of the CRD. 
 
EN 39   EN in the CRD.  
2. general obligation to 
provide for the application of 
administrative sanctions to 
both individuals and credit 
institutions  Member States would be obliged to provide competent authorities with 
possibility of applying sanctions to both individuals and credit institutions 
responsible for a violation. Competent authorities would establish whether the 
responsibility for a specific violation is on an individual or a credit institution or both, on the basis of the existing national rules on liability. 
3. Minimum common rules 
on the application of 
administrative sanctions to 
individuals and/or credit 
institutions  Minimum common rules would be set out on the liability of individuals (i.e. 
managers, employees of a credit institution) and/or credit institutions. For 
instance, those rules may establish the conditions under which the credit institutions and its managers are jointly responsible for a violation. 
Analysis of options   
(1) No EU action 
The CRD requires Member States only to provi de for the application of administrative 
sanctions "against credit inst itutions or those who effec tively control the business of 
credit institutions" (Art. 54 Directive 2006/ 48/EC). However, compliance with this 
general clause cannot ensure th at sanctions may be applied to the individuals who have 
key positions within the credit instit utions (e.g. members of the Board).  
In the absence of any action at EU level, Member States would probably not extend the 
personal scope of administrative sanctions as currently provided in their legislation and 
they would continue to apply their national liability regimes. The fact that, in some 
Member States, the individuals responsible for a violation will evade sanctions for their illegal behaviour would probably not ensu re optimal dissuasiveness. The problems 
relating to insufficient deterrence of sancti ons (lack of enforcem ent of banking rules, 
leading to improper functioning of fina ncial markets) would remain unsolved. 
(2) Administrative sanctions applicable  to both credit institutions and 
individuals  
Under this option, competent authorities would have th e power to establish the 
responsibility for a violation on an individual or a credit institution or both of them. 
However, they would be left free to decide how to attribute this re sponsibility in a given 
case. This would apply to all violations of the CRD for which sanctions are provided. 
This would significantly increa se dissuasiveness of sanctio ns: knowing that they cannot 
escape the negative consequences of their ille gal behaviours, for instance the violation of 
reporting obligations, the managers of credit institutions would be discouraged from 
reiterating such behaviours. Increased dissu asiveness of sanctions would ensure better 
compliance with EU rules, with positive impacts on consumer protection, fair competition, safety and stability of financial markets.  
Harmonising the personal scope of sanctions across Member States would also have a 
positive impact on the level playing field in th e European financial market, as the players 
would risk to be held liable  for violations of EU rules wherever they operate in the 
 
EN 40   EN European Union. This would also increas e consumer confidence and mutual trust 
between supervisors.  
The majority of the respondents to the consultation  on the Sanctions Communication 
agree that competent authorities should have the power to impose administrative 
sanctions to both individuals and legal pers ons, some of them arguing that sanctions 
imposed to credit institutions are more deterre nt others that indivi duals should also be 
held liable for some violations. Respondents are of the view that competent authorities 
should enjoy sufficient flexibility  to decide in each individu al case to whom attributing 
responsibility for an infringement.  
This option would require legislative measures to be taken at national level only in 
Member States  where the scope of sanctions do not cover both indi viduals and credit 
institutions responsible for the violation (based on the information available to the 
Commission this concerns 3 Member States). 
For this option, the following fundamental rights  are of relevance: right to an effective 
remedy and fair trial (Art. 47), presumption of  innocence and right of defence (Art 48), 
freedom to conduct a business  (Art 16), c onsumer protection (Art 38), and – even though 
Art. 49 on the legality and proportionality of criminal offences and penalties may not be 
directly applicable to all of the admini strative sanctions envisaged – the general 
principles of legality and proportionality unde rpinning the Charter. In relation to these 
fundamental rights, introducing the possibility of applying administrative sanctions to 
both individuals and credit institutions will improve a coherent sanctioning regime across 
the EU and will increase deterrence of sanctions.  
This option will not harmonise the national liability regimes and will not affect the 
procedure for the imposition of administrative sanctions. Therefore it will preserve Member States’ current arrangements ensuring compliance with procedural rights such as 
the right to an effective remedy and to a fair  trial (Art. 47), the presumption of innocence 
and the right of defence (Art.48). 
The impacts of this option, and in particular the increased de terrence of sanctions brought 
by it, on stakeholders including consumers a nd SMEs, social and environmental 
matters, third countries and the EU’s global competitiveness are similar to the 
impacts analysed in section 5.1.1 above (option 2). 
(3) Common rules on the application of admi nistrative sanctions to individuals 
and/or credit institutions  
Under this option, competent authorities w ould not only be empow ered to attribute 
responsibility for an infringement to both indi viduals and credit instit utions, but also will 
apply common criteria when establishing who is  responsible for a key violation of the 
CRD. Therefore, when a violation of the CRD  occurs, the individuals and the credit 
institutions involved would be treated similarly in terms of liability in all Member States. 
 
EN 41   EN This option would reduce diverg ences in the application of sanctions, which would have 
a positive impact on the level playing field in the European financial market. To the extent the common rules introduced would bette r target the response to a violation, this 
option may also increase dissuasiveness of sanctions. 
Several stakeholders  have raised the issue of how responsibility should be shared 
between financial institutions and individuals, and particularly  between credit institutions 
and their managers or employees. However, they have divergent and sometimes unclear 
views on the conditions under which credit  institutions should or should not be 
responsible for the misconducts  of their employees and managers should be held 
responsible for violations of ba nking rules. Some of them ha ve expressed concerns on the 
possible impact that common rules in this ar ea may have on the civil liability regime. In 
any event, the majority of the stakeholders , including the public authorities, are of the 
view that the rules on responsib ility should be left to the Me mber States at this stage. 
Indeed, this option would have a significant impact on Member States : they would be 
obliged to adapt their liability  regimes to the common rules set at EU level, which may 
requires significant changes in the legisla tion. Those changes would probably concern not 
only the banking legislation but also general rules and principles of the national legal 
systems and may have an impact on the civil liability of the persons concerned.  
The impacts of this option on fundamental rights, stakeholders including consumers 
and SMEs, social and environmental matters , third countries and the EU’s global 
competitiveness  are similar to the impacts of option 2.  
Comparison of options 
 
Option 1 would preserve the "status quo" a nd therefore would not contribute to the 
achievement of the objectives set out in sec tion 4. Option 3 would be more effective than 
option 2 in ensuring level playi ng field and better cross-bord er supervision, as it would 
introduce common rules on liability  of individuals and credit  institutions while option 2 
would only ensure that sanctions  can be applied to both of th em. As to the dissuasiveness 
of sanctions, the difference on the effectivenes s of those options is considered to be 
minor: general rules on liabili ty would help ensuring deterrence and proportionality of 
sanction only to the extent the existing liability regimes are inappropriate.  
Option 3 is much less efficient than opti on 2, as it would require more changes in 
national legislation and may oblige Member States to adapt their general liability 
regimes: under Option 3 they would have to revise the national ru les that competent 
authorities apply to decide who may be he ld responsible for a violation while under 
Option 2, amendments of national legislati on would be necessary only in the Member 
States (3 according to the available informa tion) where sanctions are not applicable to 
both credit institutions and individuals. The substantial impact option 3 would have on 
Member States' legal systems is not compensated for by an equally substantial increase in effectiveness compared to option 2 – the ke y objective to ensure that all responsible 
persons can be sanctioned can be achieved by option 2 as we ll, while the only difference 
is that detailed rules and conditions for liability would not be harmonised.  
 
EN 42   EN Based on the analysis of the impact s above, Option 2 has been selected.  
Effectiveness in achieving the sp ecific objectives below through the 
relevant operational objective   
Improve effectiveness, 
dissuasiveness and 
proportionality of sanctions Develop level 
playing field Improve trust 
between 
supervisors Efficiency 
in achieving 
all 
objectives 
1. Do nothing 0 0 0 0 
2. general obligation to provide for the 
application of 
administrative sanctions 
to both individuals and 
credit institutions  + ++ ++ +++ 
3. Minimum common 
rules on the application 
of administrative 
sanctions to individuals 
and/or credit institutions  ++ +++ +++ + 
5.1.3.  Options concerning the publication of sanctions 
Options36 Description 
1. Do nothing The existing sanctioning regimes will continue  to exist. Member States will have to 
ensure compliance with the provisions on sanctions contained in the CRD, which do 
not deal with the publication of sanctions  
2. publication of 
sanctions as general 
rule Publication of sanctions would be imposed  as a general rule. Exceptions will be 
allowed but only in certain narrowly defined cases (e.g. when publication would seriously jeopardise the financial markets) 
3. publication of 
sanctions decided 
by competent 
authorities Member States would have to ensure that competent authorities have the power to 
publish all sanctions imposed. Those authorities could decide whether or not sanctions imposed in a particular case are to be published , but they would have to properly 
justify the decision not to publish 
Analysis of options  
(1) No EU action 
In the absence of EU action, divergences will remain on the publication of sanctions. In 
seven Member States, competent authorities would continue to publish sanctions relating 
to violations of banking legislation as a matter of course without restrictions37 while in 
the other Member States similar sanctions would not be always published. In those 
                                                 
36 These options would apply to all key violations of the CRD. 
37 CEBS report, p.58 
 
EN 43   EN Member States, competent authorities will maintain the discretionary power to decide 
whether or not sanctions have to be publis hed, either on a named basis or anonymously.  
Inconsistencies will remain. In some Memb er States the systematic publication of 
sanctions for violations of the CRD will ensure those sanctions will have a strong dissuasive effect not only on th e credit institution or indivi duals concerned, which when 
considering a violation of th e CRD will likely take into ac count that when sanctioned 
they risk a significant negative impact on th eir reputation, but also on other potential 
perpetrators to whom the publication of sanc tions is likely to recall the chance of their 
violation being detected and sanctioned. In ot her Member States however, these positive 
effects of publication will not be present.  
(2) Publication of sanctions as a general rule  
This option would significantly increase di ssuasiveness of sanctions, as competent 
authorities would be obliged to publish all sanctions imposed unless an exception is 
applicable.  
Credit institutions would fear a negative impact  on their reputation when they violate the 
CRD, and would be well informed about th e enforcement activity of the competent 
authorities, which would raise th eir awareness of the risk th at violations are detected. 
This will make such violati ons less attractive for them.  
The public consultation  has shown that a large majority of stakeholders, including 
public authorities, banks and a ssociations of banks, consider  the publication of sanctions 
as one of the most deterrent t ools, particularly be cause of the reputati onal damage that the 
author of the violation will incur.  
Publication of imposed sanc tions would contribute to im prove market integrity and 
investor protection. Deposit-hold ers and investors would be al erted about the fact that a 
credit institution did not respect the app licable rules on financial soundness and proper 
management, and would therefore be able to  take this into account when judging the 
reliability of credit institutions for their investment and deposits. 
Public authorities as well as some banks and associati ons of banks, su pport systematic 
publication of sanctions with ve ry limited exceptions, as they consider it as being of high 
importance to enhance transparency and maintain confidence in financial markets. Consumers associations ar e particularly vocal on this issu e since in their view systematic 
publication of sanctions can he lp consumers to make informed decision and avoid using 
the services of companies which infringe the rules.  This option would require limited cha nges in national legislation of the Member States  
where competent authorities are not obliged to  systematically publish sanctions (based on 
the information available to the Comm ission, today 15 Member States do not 
systematically publish sanctions
38). 
                                                 
38 Assessment based on CEBS report, and additional information by national authorities. 
 
EN 44   EN For this policy option the following fundamental rights  are of relevance: right to an 
effective remedy and fair trial (Art. 47), pr esumption of innocence (Art 48), freedom to 
conduct a business (Art 16), data  protection (Art 8), consum er protection (Art 38). In 
relation to these fundamental rights, an oblig ation to publish all sa nctions imposed unless 
an exception is applicable may have a negative impact on the right to protection of personal data (Art. 8) in regard to any indi viduals concerned. More over, it could have a 
negative impact on the credit institutions’ freedom to conduct a business (Art. 16), as any 
publication of the value judgm ent by the authorities impo sing the sanction risks to 
impinge on the public image of the credit inst itution and to alienate existing or potential 
customers and investors. Those impacts are part icularly relevant where the identity of the 
addressee of the sanction is disclosed. Howeve r, publication of sanctions is an important 
element in ensuring that sanctions have a dissuasive effect on the addressees and is 
necessary to ensure that sanctions have a dissuasive effect on  the general public. 
Publication of sanctions is al so proportionate, provided that it includes information on the 
nature and seriousness of the sanctioned viola tion which is factually correct. This will 
ensure that the public value judgment inhere nt in the publication of a sanction will be 
proportionate to the violation. The interference with private life (Art.7) and protection of 
personal data (Art. 8) resulting from the publi cation and processing of sanctions will be 
addressed by national laws regulating time limits on publicity of sanctions and data 
processing of sanctions pursua nt to Directive 95/46/EC. 
To the extent that a decision by a competen t authority to impose a sanction is published 
when court appeals against that decision are st ill pending, the right to a fair trial (Art. 47) 
and the presumption of innocence (Art 48) ar e also relevant. Howe ver, the envisaged 
policy option will enable national authorities to clearly indicate in the publication that the 
published decision is still subject to appeal. P ublication of a sanction which clearly states 
that it is subject to appeal is not equivalent  to a presumption of guiltiness and does not 
unfairly restrict the rights of the addressee in the court proc eedings against that sanction, 
the very object of which is to ascertain whether the sanctioning decision is correct.  
The publication of sanctions can have a positive impact on consumer  protection (Art. 38) 
as it will enable consumers to judge whether sp ecific credit institutions respect applicable 
laws. 
The impacts of this option, and in particular the increase in effec tive deterrence brought 
by it, on stakeholders including SMEs, social  and environmental matters, third 
countries and the EU’s global competitiveness  are similar to the impacts analysed in 
section 5.1.1above (option 2). 
(3) Publication of sanctions to be decided by competent authorities 
Similarly to option (2), this option w ould increase deterrence of sanctions.  
However, the competent authorities would have  to assess if the publication is appropriate 
in a specific case and may decide not to  publish sanctions, which would reduce the 
deterrent effect of  the publication.  
 
EN 45   EN In the public consultation , some minority stakeholders who are not in favour of a 
systematic publication of sanctions mention a number of different reasons that may 
justify the decision not to pub lish: disproportionate damage s to the parties involved, 
public interest, minor offences, data  protection, and lia bility issues. 
If publication is excluded on the basis of factors such as the potential reputational 
damages to the author of the violation, deterrence would be significantly weakened. 
Similarly, the positive effects of the public ation on market inte grity and consumer 
protection, would be reduced under this option as the p ublic would not always be 
informed about the violati on of prudentia l rules and will therefore not be able to take this 
into account when judging the re liability of credit institutio ns for their investment and 
deposits. 
This option would ha ve a very limited impact on Member States  as it would require 
changes only in national legislation of the Member States where competent authorities 
have not the power to publish all sanctions im posed for violations of the CRD or are not 
obliged to properly justify th eir decision not to publish. 
In relation to the fundamental rights , the impact is similar in na ture to the impact of the 
previous option. However, to the extent that the fact that publica tion is not mandatory 
will lead to a smaller amount of sanctions be ing published, the impact is less severe. 
Correspondingly, the positive impact on cons umer protection (Art. 38) may be less 
accentuated.   
The impacts of this option on stakeholders including consumers and SMEs, social and 
environmental matters, third countries and the EU’s global competitiveness  are 
similar to the impacts of option 2. 
Comparison of options  
Option 1 would preserve the "status quo" a nd therefore would not contribute to the 
achievement of the objectives set out in section 4. Option 2 would be much more 
effective than option 3 in increasing deterrence of sanctions leading to better protection 
of consumers and market integrity, and in  improving supervisi on. Publication of 
sanctions is expected to have a limited impact  on the development of a level playing field 
but option 2 would be more effective also in this regards as credit institutions will be 
treated similarly in all Member States. Option 3 is slightly more efficient than option 2, 
as it would require fewer changes in nati onal legislation and Member States which 
already provide for the possibility to publis h sanctions under certain conditions to be 
assessed by competent authorities would not  be obliged modify their legislation. 
Based on the analysis of the impact s above, Option 2 has been selected.  
Effectiveness in achieving the specific objectives below through the 
relevant operational objective   
Improve effectiveness, 
dissuasiveness and Develop level Improve trust 
between Efficiency in 
achieving all 
objectives 
 
EN 46   EN proportionality of sanctions playing field supervisors 
1. Do nothing 0 0 0 0 
2. publication of 
sanctions as general rule  +++ ++ ++ +++ 
3. publication of 
sanctions decided by 
competent authorities + + ++ ++ 
5.2. Options concerning the framework for detection of violations  
The mechanisms facilitating the detection of sanctions have been identified in the 
Sanctions Communication as an area where EU  action may be envisaged. The analysis of 
other possible measures that may help improvi ng application of sanc tions and the reasons 
why EU action does not seem to be appropriate in other areas is contained in the Impact 
Assessment accompanying the Sanction Communication. 
Options39 Description 
1: no EU action Member states would continue to use the existing investigatory tools 
2. internal 
whistleblowing 
procedure in credit 
institutions Member States will be obliged to provide an obligation on credit institutions  to 
put in place dedicated procedure for the in ternal reporting of potential violations 
as part of their corporate go vernance and audit arrangements 
3. Member States to set 
up systems for the 
promotion and protection 
of whistleblowers   Member States will be required to take appropriate measures to promote whistle 
blowing and to protect persons who denounce potential violations of the banking 
legislation they become aware of. No detailed rules will be established on how 
whistle blowing systems have to be designed, which will allow Member States to adopt the measures which best fit their legal systems. 
 
4. Detailed EU 
requirements for whistle 
blowing programmes This option would establish detailed requirements at EU level on the whistle 
blowing systems and procedures that Member  States are required to put in place.  
Analysis of options  
(1) No EU action 
Under this option, certain Memb er States would continue to  provide for rules obliging 
credit institutions to put in place early warn ing systems for malfunctions in the internal 
control mechanisms and prohibiting retaliat ion against whistleblowers. However, other 
Member States would probably not put in pl ace consistent and predictable programs to 
encourage whistle blowing.  
                                                 
39 These options would apply to all key violations of the CRD. 
 
EN 47   EN Competent authorities would c ontinue to cooperate with each other making use of the 
existing mechanisms. They would render assist ance to competent au thorities of other 
Member States, particularly by exchanging in formation and cooperating in investigation 
activities.  
Under this option, the EBA could further facilitate cooperation between competent 
authorities, which would help in ensuring more  consistent application of sanctions and 
more efficient supervisory activities. To this purpose, the EBA can use its power to carry out peer reviews and collect informati on on sanctions to pr omote exchange of 
information and best practices between Member States. 
(2) Internal whistle blowing procedures to be  put in place by credit institutions  
In several Member States, financial institutions are either required (eg FR
40, DE41) or 
encouraged (UK42) by the financial regulators to ha ve in place appropriate internal 
procedures which will encourag e employees with concerns to blow the whistle internally 
about potential violations of financial servic es rules. Beyond the fina ncial services sector, 
corporate governance codes in some Member States (eg UK43, NL44) encourage 
undertakings to have such procedures in place. Several senior employees of credit institu tions which required public support during the 
financial crisis in 2008/2009 had alerted th eir employers about prudential risks and 
violations of prudential rules well before , but their alerts ha d been disregarded.
45 
This option would oblige all Member States  to provide for an obligation on credit 
institution to ensure that appropriate whis tleblowing procedures are in place, which 
would encourage the employees to report misconducts to the persons responsible within 
the institution. Those procedur es would guarantee confidential ity and adequate protection 
of the personal data of both the wh istleblower and the person denounced. 
                                                 
40 See Article 11-2(2) of CRBF [Banking and Financial Regulation Committee] Regulation No 97-
02; Article 321-23 of the General Rules of the AMF [Financial Markets Authority]. 
41
 http://www.bafin.de/SharedDocs /Veroeffentlichungen/DE/Service/Rundschreiben/2009/rs__0915
__ba__marisk.html   
42 http://fsahandbook.info/FSA/html/handbook/SYSC/18/2 ;  
43 UK Corporate Governan ce Code, and the relevant auditors' guidelines 
(http://www.pcaw.co.uk/orga nisations_pdf/icaew.pdf). 
44 NL Corporate Governance Code: “The management board shall ensure that employees have the 
possibility of reporting alleged irregularities of a general, operational and financial nature in the company to the chairman of the management board or to an official designated by him, without 
jeopardising their legal position. Alleged irregular ities concerning the functioning of management 
board members shall be reported to the chairman of the supervisory board. The arrangements for 
whistleblowers shall in any event be posted on the company’s website.” 
45 Whistleblowers had alerted internal management or supervisory authorities before about failures 
that were exposed by the financial crisis, including in important financial institutions such as 
Fortis, HBOS, or Northern Rock, Lehman, AIG and in relation to the Madoff fund. See also 
United States Securities and Exchange Commission - Office of Inspector General, Investigation of Failure of the SEC To Uncover Bernard Madoff's Ponzi Scheme, Case No. OIG-509, August 
2009,http://www.sec.gov/news/studies /2009/oig-509-exec-summary.pdf. 
 
EN 48   EN Clear and effective reporting and follow-up proc edures for the receip t of whistle blowing 
alerts and for the protection of  whistle blowers are key for the successful use of whistle 
blowing.46 This will be mutually reinforcing with  the option (3) below. It will encourage 
persons (e.g. the employees of a bank) who ha ve knowledge of a suspect violation thanks 
to their position within the credit institution, to  report their suspicions to internal control 
functions. The "insider knowledge" may be a very useful source of information for a 
credit institution’s senior management to beco me aware of violations of prudential rules, 
which often requires complex analysis of a large amount of information. The 
management or control functions should then  ensure appropriate follow up and inform 
the competent authorities where necessary.  
Increasing the information available to superv isors means that this  option significantly 
contributes to meeting the objective of in creasing the detection of violations by 
supervisors and thereby enable competent auth orities to ensure sanctions provided for by 
law are effectively applied in all Member Stat es. This will increase the dissuasiveness of 
sanctioning regimes for violations of the CRD , and will help create a level playing field 
between credit institutions in different EU  Member States and a better cooperation 
between banking supervisors.  
In the public consultation , almost all respondents agreed on the usefulness of whistle 
blowing systems. While the majority of pub lic authorities, industry, unions and financial 
services users supported minimum convergen ce in the area of whistleblowing, another 
group of public authorities and i ndustry felt that there is a need for further studies and 
examination before acting at EU level, fo r example on national practices, or on the 
impact of whistle blowing on civil liability or criminal sanctions, and another group was 
fully opposed to EU action in this area. Among the few opponents to whistle blowing, 
some feared a negative impact on privacy and a reversal of the burden of proof. 
In terms of administrative costs , this option could involve some costs for credit 
institutions to set up and manage the whistl eblowers systems. An exact quantification of 
those costs cannot be made as they woul d largely depend on the requirements that 
national legislation may laid down on how to implement those internal systems. 
However, an indication of the potential cost s involved could be found in the evaluation 
made by the UK FSA in 2002, which conclude s that costs to firms of introducing 
whistleblowing procedures are minimal, as they mainly use in-house resources47. For 
instance, setting up costs (awareness and tr aining, management time, consultancy fees) 
were estimated at maximum £ 18.000 for large firms and much lower for small firms and 
continuing costs (management time, recording of complaints made) which are estimated at about £ 5.000 per year.  
                                                
 
46 Transparency International, “Alternative to s ilence – whistleblower protection in 10 European 
Countries”, 2010. 
47 Policy statement, Whistleblowing,the FSA & the financial services industry – Feedback on CP101 
and made text, April 2002, http://www.fsa.gov .uk/pages/Library/Policy/CP/2001/101.shtml 
 
EN 49   EN In addition, the cost of setting up internal whistleblowing systems will be mitigated by 
the fact that these systems will be part of  the corporate governance systems which those 
institutions are obliged to put in place unde r the CRD in any event (see in particular 
impact assessment on CRD amendments  relating to corporate governance). 
The following fundamental rights  of the Charter of Fundamental Rights are of particular 
relevance: respect for private and family life (Art. 7) and protection of personal data (Art. 
8).  
The proposed measure will ensure that credit institutions and investment firms provide 
adequate procedures and protection to wh istle blowers which report misconduct to the 
persons responsible with in the institution, including the pr otection of private and personal 
data. In addition, the personal and private data of suspects under inves tigation as a result 
of whistle blowing should be protected by th e credit institution. If after an internal 
investigation the credit institution fails to detect a violation, the data provided by the 
whistle blower should be deleted by it.  
As indicated above, whistle bl owing activities may affect th e protection of personal data. 
In order to mitigate this effect  and ensure that it is not di sproportionate to the objectives 
pursued by this option, the implementation of  whistle blowing schemes must comply 
with data protection rules la id down in Directive 95/46/EC48 and all the criteria indicated 
by the data protection authorities.49  
Due to the low expected compliance costs, this  option is not expected to have specific 
negative impacts on SMEs .  
In relation to  social impacts, e mployees of credit institution s who act as whistle blowers 
and report suspected violations to the authorities will benefit from better protection. The existing horizontal rules on the protection of  whistleblowers, and particularly those 
contained in labour legislation will remain in place and will be reinforced by the 
provision of more targeted rules. 
(3) Require Member States to set up systems for the protection of whistleblowers   
Some Member States have already in place sp ecific systems to protect whistle blowers 
against reprisals, but such systems are usually  horizontal rules (rela ting to, for example, 
labour law), and therefore are not speci fic to the financial services area.
50 Other Member 
                                                 
48 Directive 95/46/EC of the European Parliament and of the Council of 24 October 1995 on the 
protection of individuals with regard to the processing of personal data and on the free movement 
of such data. 
49 Article 29 working party Opinion 1/2006 on the app lication of EU data protection rules to internal 
whistle blowing schemes in the fields of accoun ting, internal controls, auditing matters, fight 
against bribery, banking and financial crime, available at:  
http://ec.europa.eu/justice/policies/privacy/docs/wpdocs/2006/wp117_en.pdf 
50 For example see the Public Interest Disclosure Act 1998 (PIDA) in the UK which protects 
employment rights for individuals who "blow the whistle", e.g. from and employer not offering a 
 
EN 50   EN states have no specific provisions at all. Th is option would ensure that whistleblowers 
receive appropriate at tention, protection and are not disc riminated against. This option 
will be without prejudice of the existi ng horizontal rules on the protection of 
whistleblowers, and particularly those contai ned in labour legisla tion, which will remain 
in place and will be reinforced by the provisi on of measures specific to the banking 
sector. 
In the financial sector , several senior employees of cr edit institutions which required 
public support during the fina ncial crisis in 2008/2009 had al erted the authorities about 
prudential risks and violations of prudential rules well befo re, but their alerts had not 
received strong attention, and in some cases they suffered retaliation by their 
employers51. Clear and effective reporting and fo llow-up procedures for the receipt of 
whistle blowing alerts and for the protection of whistle blowers are key for the successful 
use of whistle blowing as an investigative tool.52 This option will ensure competent 
authorities put in place specific systems to r eceive whistle blowing alerts, to dedicate to 
them the necessary investigative atten tion and to protect whistle blowers.  
In the public consultation , almost all respondents agreed on the usefulness of whistle 
blowing systems. Respondents considered that  sufficient protection of whistleblowers is 
indispensible for that mechanism to work effi ciently in practice in all Member States.  
 This option could involve some costs for Member States  to put in place and to manage 
whistleblowing systems, which would mainly  depend on how they will implement those 
systems. As they would be allowed to set up those systems within the existing 
administrative structure and to manage them by using the financial and human resources 
already affected to the compet ent authorities activities, the costs relating to this option are 
expected to be limited limited.
53  
 
This option will be mutually reinforcing with  the option (2) above as credit institutions’ 
internal whistle blowing systems may not alwa ys ensure that violations are terminated 
and the necessary information is forwarded to the competent authoritie s. It will encourage 
persons (e.g. the employees of a bank) who ha ve knowledge of a suspect violation thanks 
to their position within the cr edit institution, to report thei r suspicions to competent 
authorities and will encourage competent aut horities to take such alerts seriously.  
                                                                                                                                                 
promotion or other opportunities they would have otherwise offered. For example, in FR, under 
Labour law retaliation against whistleblowers is prohibited (See Article L. 1161-1 of the Labour 
Code).  
51 See above footnote 46. 
52 Transparency International, “Alternative to s ilence – whistleblower protection in 10 European 
Countries”. On the effectiveness of whistleblowing programmes see also US SEC – Assessment of 
the SEC bounty programme, March 2010, http://www.sec-
oig.gov/Reports/AuditsInspections/2010/474.pdf  
53 The UK FSA authority estimated that the total amount of work undertaken to implement a 
 complete guidance and information sheet on whistleblowing is equivalent to one full-time member 
 of staff working  for one year. See reference in footnote 50.  
 
EN 51   EN Likewise option 2, increasing the information available to supervisors means that this 
proposal significantly contributes to meeting the objective of increasing the detection of 
violations by supervisors. This will increas e the dissuasiveness of sanctioning regimes for 
violations of the CRD, and will contribute to the development of a level playing field 
between credit institutions in different EU  Member States and a better cooperation 
between banking supervisors.  
By protecting those who support law enforcem ent by competent authorities, this option 
will have a positive impact on such individuals. On the other hand it may have a negative impact on the confidentiality of information held by credit institutions, as information submitted by employees to public authoritie s will likely include personal data and 
business secrets. Therefore, whistle blowing systems must comply with data protection 
principles and criteria indicated by the data protection authorities.
54 
In relation to fundamental rights , the proposed measure will ensure protection of 
whistle blowers, including the protection of private and personal data. In addition, the personal and private data of su spects under investigation for violations of the CRD as a 
result of whistle blowing should be prot ected by the competent authorities. If the 
investigation fails to detect a violation, the data provided by the whistle blower should be 
deleted by the competent authorities. To this  end, competent authorities should assess if 
there are reasonable grounds to suspect a vi olation. In addition, whistle blowing activity 
should preserve the "presumpti on of innocence and right of de fence" (Art. 48). While the 
whistle blowing activity will contribute to the detection of violations, competent authorities should assess if th ere are reasonable grounds to suspect a violation, based on 
the presumption of innocence and right of defe nce when they pursue their investigations. 
As indicated above, whistle blowing activities affect the protection of personal data. In 
order to mitigate this effect and ensure that  it is not disproportionate to the objectives 
pursued by this option, the implementation of  whistle blowing schemes must comply 
with data protection rules laid down in Di rective 95/46/EC and all criteria indicated by 
the data protection authorities.
55  
As regards social impacts , this option will have similar positive effects on the protection 
of employees as option 2. 
(4) Detailed EU requirements for whistle blowing systems 
This option would establish de tailed requirements at EU le vel on the whistle blowing 
systems and procedures that Member States are required to establish. These requirements 
would include specific provisions on reporti ng mechanisms (for example telephone 
numbers or email boxes) and published guidanc e to be provided by competent authorities 
(for example a web page outlining the protect ion available to whistl e blowers), and rules 
                                                 
54 See above footnote 49 
55 Article 29 working party Opinion 1/2006 on the app lication of EU data protection rules to internal 
whistle blowing schemes in the fields of accoun ting, internal controls, auditing matters, fight 
against bribery, banking and financial crime, available at:  
http://ec.europa.eu/justice/policies/privacy/docs/wpdocs/2006/wp117_en.pdf 
 
EN 52   EN on the competent authorities' procedures  for handling the information including 
confidentiality requirements.  This option would ensure that persons envisagi ng to blow the whistle could be sure to 
receive the same support and protection in al l EU Member States. Procedures would be 
harmonised across the EU, and in cases  rele vant to authorities from several Member 
States involved for example in the superv ision of a cross-border banking group, whistle 
blowers could be sure that the procedures to be followe d would be the same for all 
Member States concerned.  However, in the absence of a convergence in procedural rules 
for the imposition of sanctions between Me mber States this would require major 
modifications of these rules in most Member States . Moreover, such detailed rules may 
require adjustments depending on whether sa nctioning powers are held exclusively by 
supervisory authorities or are shared between  supervisory authorities and courts. In the 
latter case this may require a modi fication of judicial procedures.  
In relation to fundamental rights , any whistle blowing pr ogramme should preserve 
particularly the "presumption of innocence and right of defence" (Art.48). While whistle 
blowing programmes will contribute to the de tection of violations and the gathering of 
evidence, this should not affect the standard  of proof to be applied by the competent 
authorities when imposing a sanction. Competen t authorities will have to prove to the 
requisite standards under national law whethe r a violation has been committed or not, 
based on the presumption of innocence and ri ght of defence when they pursue their 
investigations. As stated in Options 2 and 3, this option may aff ect the protection of 
personal data. In order to mitigate this effect and ensure that it is not disproportionate to 
the objectives pursued, the EU rules on whis tle blowing schemes would include detailed 
safeguards for the compliance with data prot ection rules laid down in Directive 95/46/EC 
and all the criteria indicated  by the data protection aut horities. Incentives for whistle 
blowers should be proportionate and only be granted in case where the investigation has 
lead to the effective detection of a viola tion and to a sanction and should not interfere 
with the fundamental right of presumption of innocence.   
As regards social impacts , this option will have similar positive effects on the protection 
of employees as option 2. 
Comparison of options 
 
Options 2, 3 and 4 are all effective in pursu ing the objective achieved, a higher detection 
of violations of the CRD leading to a higher  level of enforcement and ultimately to a 
more effective, dissuasive and proportionate sanctioning regime in all Member States. 
Option 4 is considered slightly more effective in this regard as it will ensure procedural convergence between the systems put in place in Member States.  
All three options have impacts on fundamental ri ghts, in particular the respect for private 
and family life (Art. 7), protection of personal data (Art. 8) and pres umption of innocence 
and right of defence (Art 48). However, thos e impacts can be mitigated by requiring the 
processing of personal data in complian ce with Directive 95/46/EC and adequate 
procedures for the protection of confidential information, and clarification that competent 
 
EN 53   EN authorities should assess if th ere are reasonable grounds to susp ect a violation. In view of 
this mitigation, and given the importance of the objectives to ensure sanctioning regimes 
for violations of the CD ar e effective, dissuasive and proportionate, this impact is 
necessary and proportionate. 
Options 2 and 3 are equally efficient in term s of impact on Member States and credit 
insitutions: they would both require changes in  national legislation a nd procedures to be 
put in place by Member States and credit institutions, and would involve compliance costs to set up and manage the whistle blow ing systems. This would concern Member 
States where no whistle blowing mechanisms ar e currently in place (i.e. a large majority 
of member States).   Option 4 is considered to be inefficient as  it would require more radical changes in 
national legislation, probably also in Me mber States which already provide for 
whistleblowing mechanisms, in order to comp ly with the EU requi rements. Moreover, 
EU detailed rules may require adjustment s depending on whether sanctioning powers are 
exercised exclusively by supervisory author ities or are shared between supervisory 
authorities and courts. In the latter case this may require  a modification of judicial 
procedures. Compliance costs could also be higher than those required by Options 2 and 
3 as Member States will have less flexibil ity on how to implement the whistleblowing 
mechanisms. Those impacts are not justified by the slightly higher effectiveness of this 
option in improving dissuasiveness of sanctions. 
Based on the analysis of the impacts above , Options 2 and 3 have been selected.  
Effectiveness in achieving the sp ecific objectives below through 
the relevant operational objective  
Improve effectiveness, 
dissuasiveness and 
proportionality of sanctions Develop 
level playing 
field Improve trust 
between 
supervisors Efficiency in 
achieving all 
objectives 
1. Do nothing 0 0 0 0 
2. Internal whistleblowing procedure in credit 
institutions + + + + 
3. Member States to set up 
systems for the protection of 
whistleblowers   + + + + 
4. Detailed EU requirements 
for whistle blowing 
programmes ++ + + - 
5.3. Preferred policy options 
In the light of the comparative analysis ca rried out in section 5.1, the following options 
have been selected in the two main ar eas of the legal framework and the actual 
application of sanctions. 
 
EN 54   EN Legal framework of sanctions 
The most appropriate to approximate and rein force the legal framework is a combination 
of the options analysed in th e four sub-groups identified, which are considered to be 
mutually reinforcing: 
Appropriate administrative sanctions:  
• Minimum common rules on the type of administrative sanctions to be 
available to competent authorities 
• Minimum common rules on maximum le vel of pecuniary administrative 
sanctions 
•  List of key factors to be taken into account when determining the 
administrative sanctions 
Personal scope of administrative sanctions  
• Obligation to provide for the applica tion of administrative sanctions to 
both individuals and credit institutions 
Publication of sanctions  
• Publication of sanctions  as a general rule. 
Detection of violations 
The most appropriate to approximate and reinforce the mechanisms facilitating detection 
of violations is a combination of th e following mutually reinforcing options  
• Internal whistleblowing proce dure in credit institutions 
• Require Member States to set up systems for the protection of 
whistleblowers   
Choice of the instrument 
Legislative action is necessary to implement  the preferred policy options, which require 
changes in national legislati on. Those policy options will be implemented by way of 
introducing provisions on sanctions in the CRD. 
5.3.1.  Cumulative impacts of the preferred options  
The impacts of the preferred options will be further reinforced by the cumulative nature 
of the action taken, as convergence on all of those issues together will ensure national 
authorities have at their disposal a broad range  of sanctioning powers that enable them to 
apply, in each specific case, the sanctions that are the most appropriate in terms of 
 
EN 55   EN effectiveness, proportionality, and dissuasiveness. On the other hand, taking policy action 
on only some of the issues considered (e .g. the publication of sanctions), but not on 
others (e.g. the type and level of sanctions ) will not lead to such synergies and will 
substantially reduce the positive impact on the specific objectives of the initiative to 
achieve stronger deterrence. The publication of sanctions will have a clear deterrent effect on some potential violator s such as instituti ons with a strong brand but the negative 
publicity linked to it may have only minima l impacts on other institutions competing 
exclusively on factors such as price, for whom on the contrary high fines may have a 
much stronger deterrent effect. 
The cumulative action will therefore increase the positive effect on credit institutions, 
deposit-holders and investors, and on public authorities in ch arge of the application of 
sanctions, as well as on stakeholders, SMEs, and in relation to social impacts, third 
countries and EU competitiveness. 
5.3.2.  Impact on EU budget 
The policy options selected do not have any implication for the budget of the European 
Union. Revision of sanctioning regimes wo uld be primarily managed by national 
authorities. 
6. M
ONITORING AND EVALUATION  
The Commission is the guardian of  the Treaty and therefore will verify timely and correct 
implementation of the provisions on sanctions introduced in the CRD. When necessary, the Commission will pursue infringement pr oceedings under the EU Treaty in case any 
Member State fails to respect its duties conc erning the implementation and application of 
EU Law.  
The evaluation of the consequences of the a pplication of the legislative measure could 
take place three years after the entry into forc e of the legislative measure, in the context 
of a report to the Council and the Parliament. 
The main indicators of the effectiven ess of the measures introduced are: 
• Number of violations detected a nd number of sanctions applied; 
• Practice of the national compet ent authorities in the application of sanctions (e.g. 
sources of information used in the investig ation, level of fines applied, criteria taken 
into account in calcu lation that level); 
The main sources of information that could be used in the evaluation are as follows: 
• Peer reviews carried out by the Europ ean Banking Authority, which has taken 
up its work on 1 January 2011 an d has been conferred the explicit task to carry 
out peer reviews of competen t authorities, including in  the area of sanctioning.  
 
EN 56   EN • A report (which could be undertaken by the European Banking Authority) on the 
experience gained by supervisors in enforcing the legislation. 
• If not already covered by the EBA peer  reviews, information from national 
competent authorities on the modifications made following the entry into force of the directive and the number of cases  they have investigated and sanctioned. 
 
EN 57   EN ANNEX  I 
Summary of responses to the public cons ultation on Commission Communication -  
Reinforcing sanctioning regimes  in the financial sector  
Introduction  
On 8 December 2010, the European Commission published a consultation document on 
sanctioning regimes in the financial sector a nd invited the stakeholders to respond by 18 
of February 2011. The Commission received 61  replies. This document summarises the 
contributions received. 
The public consultation raised interest among a broad range of stakeholders. Responses 
were categorised in the following br oad definitions shown in Figure 1. 
28%
44%9%19%Public autorities
Industry
Consumers/investors
associations
Others
 
Public authorities (governments, regulators and supervisors) 
Financial industry (industry associations and individual financial institutions) 
Consumers/investors associations Others (individuals, academics, research bodies, law firms etc)  
Among all the responses received, 28% were sent by the intere st representatives 
registered within the EU Register  of Interest Representatives. 
Responses to the public consultation  
General comments on envis aged legislative approach 
A significant majority of respondents sh ared the Commission's analysis of the 
shortcomings in the existing national sanctioning  regimes in the financial sector in terms 
of lack of sufficient deterrenc e and divergences in the application of sanctions across the 
EU. Different views were expressed on the so lution to solve the ex isting shortcomings.  
 
EN 58   EN The majority of the respondents agreed that  there should be a minimum harmonisation of 
national sanctioning regimes while the minor ity suggested considering alternative 
solutions. Some minority respondents (t wo public institutions, some industry 
representatives) considered  that the Commission shou ld provide for non-binding 
recommendations rather than for binding le gislation. Other minor ity respondents (one 
public institution, an individual company) were of the view  that the Commission should 
rather act against some indi vidual Member States, which fa il to enforce properly the 
financial services legislation, ra ther than harmonising the rules. 
Comments on key issues for approximation  
The majority of the respondents are to a varying degree supportive of a minimum 
harmonisation of national sanctioning comprisi ng the following issues: appropriate types 
of sanctions (1), publication of sanctions (2), level of admini strative fines (3); addressees 
of sanctions (4), appropriate cr iteria to be taken into account  when applying sanctions (5), 
appropriateness to introduce at EU level some  mechanisms facilitating enforcement such 
as whistle-blowing and leniency (6). Numer ous comments were also submitted on the 
introduction of criminal sanctions for the most serious violations of the EU financial services legislation (7). 
(1) Appropriate types of administrative sanctions 
There is a consensual view among different st akeholders that, to have a level playing 
field in the EU, a common set of core admi nistrative tools should be available to all 
national competent authorities to address key violations of  the EU financial services 
legislation. Respondents underlin ed, however, that this se t of tools should be non-
exhaustive in the sense that the Member States should be left free to provide their 
authorities with additional pow ers. Respondents also stated th at the EU init iative should 
be limited at this stage to a common set of administrative tools. Indeed, the competent 
national authorities should continue to benefi t from a wide flexibility to use the most 
appropriate tool for each individual violation.  
In the view of the majority of responde nts, the common set should comprise both 
sanctions and measures taken by competen t authorities to address a breach of EU 
financial services legislation. There is a broad agreement that the Commission should 
reflect on including at least the following to ols: warnings; cease and desist orders; 
restriction/prohibition of certain activities;  removal of individuals from management 
positions; revocation of authorisation/licence if  the activity in question is subject to 
authorisation/licensing; impos ition of monetary sanctions. 
(2) Publication of sanctions 
The publication of the sanctions triggere d numerous comments. Respondents broadly 
agree that sanctions should be published but there were di fferent views expressed on how 
to publish the sanctions. Some respondents, in particular the public authorities and 
consumer associations, considered that th ere should be a genera l rule requiring the 
publication of sanctions. This is because the publication of sanc tions creates more 
 
EN 59   EN transparency in the decisional practice, re inforces deterrence of  sanctions and helps 
customers of the companies concerned and i nvestors to take informed decisions. Other 
respondents, in particular the industry repres entatives, believe that the publication should 
be decided on a case-by case basis in view of the high reputational damage this could 
create for an individual company.  
As regards the exceptions to the publication, the public authorities considered that the 
exceptions to the publication should be limited to the situation when disclosure of the 
sanctions to the public at la rge would seriously jeopardise the financial markets. Some 
respondents from the industry considered th at there should be a case-by-case assessment 
whether the publication of the sanction is li able to create disproportionate reputation 
damage for the company concerned, in whic h case the sanction should not be published. 
Others proposed to have a de minimis  rule, that is not to publish the sanctions imposed on 
small companies or for small offences. 
The respondents provided different answers on when a decision should be published. 
Some respondents, in particular consum er associations, favoured a maximum of 
transparency with a wide publication requi rement. Other respondents considered that 
only final decisions of competent authori ties punishing an identifiable breach of law 
should be published (excluding intermediate decisions such as th e decision to launch 
investigation or simple warnings). A group of  respondents considered that decisions can 
only be published when all legal remedies (a ppeals) available agai nst a decision were 
exhausted.  
(3) Level of administrative pecuniary sanctions 
Respondents were in general favourable to harmonising certain aspe cts related to the 
level of administrative fines in order to ha ve more deterrent a nd effective sanctioning 
regimes in the EU. Only a small minorit y expressed the view that legislative 
harmonisation is not warranted in this area.  
The public consultation triggered a lot of discussions on which levels should be subject to 
harmonisation. To increase deterrence, few respondents advocated for a harmonisation of 
the minimum levels of the fines. However, most of the respondents rejected this idea 
mainly because of the difficulty to establis h an appropriate minimum figure in the EU 27. 
There is however a broad agreement among the stakeholders that the EU law could 
provide for a sufficiently high maximum levels  to be applied across the EU to allow 
competent authorities to apply deterrent sanc tions even for the most  serious violations. 
As regards the issue of how to calculate the le vels of fines, some stakeholders expressed 
their preference for a calculation based on objec tive criteria such as a percentage of the 
turnover or based on profits derived from the violation. 
(4) Addressees of the administrative sanctions 
The results of the public consultation showed  that there is a la rge consensus on the 
principle that the national competent author ities should be able to impose sanctions on 
both individuals and financial institutions. Only two public authorities from a Member 
 
EN 60   EN State and one industry representative considered  that it is inappropria te to introduce at 
EU level the possibility for regulators to impose sanctions on individuals. The two opposing public authoritie s considered that regulators are not well equipped to scrutinise 
the subjective elements of an offence (intent, negligence) committed by individuals, which can be better assessed by courts in criminal cases. The industry representative 
considered that the issue on whom to impos e sanctions should be left to the Member 
States to decide. 
Respondents provided numerous  comments on whom to impose a sanction in an 
individual case. Some respondents are of the view that sanctions should be imposed on 
individuals only in exceptiona l cases when they are individually obliged to fulfil some 
legal requirements (i.e. appropriate qualif ication required by law) . Other respondents 
favoured a more extensive approach whereby an authority decides on case-by-case basis 
whether a sanction to be imposed on an individual is appropriate. 
(5) Appropriate criteria for sanctions 
There is a consensual view among different st akeholders that all the national competent 
authorities from the EU have to use a comm on set of appropriate criteria when applying 
sanctions. As for the types of sanctions, respondents underlined that this set of 
appropriate criteria should be non-exhaustive in the sense that the Member States may 
provide any additional criterion to be taken in to account by their authorities. Respondents 
also stated that, at this stage, the EU  initiative should not limit the freedom of the 
competent national authorities to weigh differe nt criteria when determining a sanction in 
an individual case.  
In the view of the majority of respondents, the common set of criteria should comprise at 
least the following: seriousness and duration of  the violation; financial strength and size 
of the offender; benefits deriving from the violation when those can be established; 
impact on the market/losses incurred by third parties; repeated breach; cooperation by the 
offender during the investigation; survival of  the company as a result of the sanction. 
(6) Mechanisms facilitating administra tive enforcement and cooperation among 
enforcers 
The results of the public consultation show  that there is a broad agreement among 
stakeholders that some mechanisms, such as  the whistle-blowing and to a lesser degree 
leniency, could considerably facilitate the enforcement of the EU financial services legislation. The views are, however, divided on the necessity to foresee any 
harmonisation in this area at the EU level. Some stakeholders suppo rt the idea of some 
degree of harmonisation while others consider that any EU action at this stage is still 
premature in the light of the limite d knowledge about the national practices. 
Respondents expressed a bigger interest for whistle-blowing than for leniency. The 
respondents, who were in favour of harmoni sation in the area of whistle-blowing, 
considered that the EU initiative should be limited to general principles. Some 
respondents, in particular some  industry representatives and companies, considered that 
 
EN 61   EN the EU initiative could require the Member States to introduce only internal (intra-
company) whistle-blowing. Other respondents, in  particular the public authorities, were 
of the view that the EU in itiative should cover also the external whistle-blowing (i.e. 
whistle-blowing directly to the competent authorities).  
Some respondents also pointed out that any successful wh istle-blowing procedure should 
provide for an adequate protection for whis tle-blowers against the retaliation of the 
offender by preserving their anonymity and/or providing for immunity from any judicial 
action against bona fide  whistle-blowers. As to the issue of financial incentives for 
whistle-blowers, some respondents, includ ing a consumer association, expressed a 
negative opinion in view of the risk of abuse.  
Fewer comments were received on lenienc y. A respondent (academic) indicated that 
leniency should be available only for infringements involving several 
individuals/companies, such as for inst ance the insider dealing rings. Some other 
respondents stated that leniency should only be available for undetected breaches since 
cooperation in the ongoing investigation is already taken into account to reduce 
sanctions. A law firm insisted on the righ t incentives to be provided for leniency 
applicants. 
There is a large consensus that a good coopera tion between enforcers is key to ensure a 
convergent decisional practice across the EU. Many respondents  underlined the important 
role of the new European Supervisory Authorities (ESAs) in that respect. 
(7) Criminal sanctions 
The respondents are divided on requiring th e Member States to introduce criminal 
sanctions for some violations of the EU  financial services legislation. Although 
respondents generally agree that criminal sanctions could considerably increase 
deterrence, different views we re expressed on whether the EU  should act in this area.  
Some respondents, including public authorities,  a consumer association and to a lesser 
degree some industry representatives, are favour able for introducing the obligation for the 
Member States to foresee criminal sanctions under strict conditions. Thus in their view, 
criminal sanctions could be introduced fo r the most serious violations for which 
administrative sanctions are not sufficiently deterrent and under st rict compliance with 
fundamental rights and with proportional ity and subsidiarity principles.  
Other respondents, in particul ar some public authorities and to larger degree the industry, 
are not favourable for requiring the Member Stat es to criminalise certain violations of the 
EU financial services legisla tion. Some respondents, who shared the view that criminal 
sanctions could be more deterrent than admini strative sanctions in some cases, considered 
that it should be left to the Member States to decide when and for which infringements to 
introduce criminal sanctions. Other responde nts questioned the assumption that the 
criminal sanctions are more efficient than admi nistrative sanctions. In their view, it is in 
general more difficult to handle criminal ca ses because of the higher procedural and 
evidence requirements in criminal proceedings  and because of the reliance on criminal 
 
EN 62   EN courts, which are not always well prepared to assess complex financial issues. Other 
respondents with a negative view on criminal sanctions pointed at the risk of having 
divergences in the application of the EU law since it is not easy to foresee a cooperation 
mechanism among criminal courts within the EU.  
 
EN 63   EN ANNEX II  
Nature and size of the market concerned  
This annex aims at providing a general desc ription of the banking sector in the EU, 
namely, its size, main characteristics and role in the financing of the real economy. 
The size of the EU banking sector 
The EU banking sector is a ke y sector in the EU economy. In relative terms, the EU 
banking sector is larger than its US counter part, which accounted respectively for 340% 
of GDP and 92% of GDP in 2009. Until the outbr eak of the crisis, the EU banking sector 
grew steadily, in term of total assets, to reach a ma ximum of over €45,000 bn in late 
2008. After this peak, it slightly de clined and stagnated at around €43,000 bn. 
Chart 01: Total assets of Euro Area MFIs 
MFIs excluding the Eurosystem. € bn 
1 5,00020,00025,00030,00035,00040,00045,000
2002 2003 2004 2005 2006 2007 2008 2009 2010EU 27
Euro Area
 
   Source : ECB: Aggregated balance sheet of EA MFIs and own calculations 
Chart 01 illustrates the increasing size of th e banking sector by plotting the evolution of 
the total assets of Euro Area Monetary a nd Financial Institutions (MFIs). Although MFIs 
include both money markets f unds and credit institutions, th e share of the former is 
relatively negligible (just ove r €1,000 bn, around 4% of MFIs).  
In 2008, the banking sector in EU27 was 3.4 times its GDP56. However, these aggregate 
figures hide very different r ealities across countries. The ba nking sector is, in general, 
much more developed in the old Member Stat es than in the recent ly acceded ones. LU, 
                                                 
56 It should however be kept in mind that GDP is an annual flow  while the size of the banking sector 
in terms of total assets is a stock. 
 
EN 64   EN MT, IE, CY, UK and DK have a very importa nt banking sector with a size over 4 times 
their GDP. On the other hand, RO, LT, PL, BG , SK, CZ are characterized by a banking 
sector smaller than th eir GDP (See Chart 02). 
Over the recent years (2005-2008), the banking sector grew steadily in most countries, 
although the growth has been particularly  important in MT, IE, CY and DK.  
Chart 02: Total assets of credit in stitutions with respect to GDP  
012345678
Luxembourg
Malta
Ireland
Cyprus
UK
Denmark
Netherlands
France
Austria
EU27
MU15
Belgium
Germany
Sweden
Spain
Portugal
Italy
Finland
Greece
Estonia
Slovenia
Latvia
Hungary
Czech Rep
Slovakia
Bulgaria
Poland
Lithuania
Romania
2005
 2006
 2007
 2008
 
Note : Values for Luxembourg  ranked from 26.2 in 2005 to 25.4 in 2008. 
           Source: European Central Bank and own calculations. 
The EU banking sector is the main financi ng source for the real economy. It is also a 
major contributor to the added value of our economies and an important employer. As an 
illustration, the EA financial sector generate s an added value of over €400 bn (equivalent 
to 5% of the GDP). In 2007, people working in  the financial sector  represents around 3% 
of the EA workforce. 
European integration of banking markets 
The European financial market is becoming more  and more integrated, particularly in the 
wholesale financial sector, a nd there are a growing number of  large financial groups and 
infrastructures operating on a pan-European basis. Although the financial crisis led to 
increased market segmentation, the level of financial integration remains high.  
The banking market is dominated by pan-Eu ropean groups active in several Member 
States, whose risk management functions ar e centralised in the group's headquarters. 
Currently around 70% of EU banking assets is  in the hands of some 40 banking groups 
with substantial cross-border  activities. Especially in the EU-12, banking markets are 
dominated by foreign (mostly Western Europ ean) financial groups (see Chart 2). In these 
countries, on average 65% of banking assets are in foreign-owned ba nks. In countries like 
Estonia, the Czech Republic and Slovakia ove r 92% of banking assets are in foreign-
owned banks. 
 
EN 65   EN Chart 3 - Market share of foreign-owned banks (% of total assets) 
0102030405060708090100
EECZ LU SK RO BG LT PLLV FIHU UK IEGRMT CYSI
EU-25BE PT DKAT
EMU-12NLIT ES DE FRSE
 
Source: European Commission, European Financial Integration Report 2008 (2009)  
The crucial role of bank intermediation for the real economy: intermediation vs. 
direct financing  
In general, financial system impacts allocative efficiency in the real economy through its intermediary role, 
producing information about possible investments, mobilizing savings, monitoring investments, managing 
and diversifying risk as well as easing the excha nge of goods and services. Empirical evidence would 
indicate that restricting bank activities has generally negative repercussions for economic growth although 
there may be a trade-off in terms of stability. Similarl y, facilitating bank entry generally yields benefits in 
terms of competition and access to finance and so  enhances economic grow th. Although effects of 
competition on financial stability have been subject of  controversy, most recen t evidence suggests that 
increased competition via contestable markets is positive for stability.  
In the EU, the banking sector is the main financing s ource for the real economy. In the Euro Area, almost 
50% of the financing of the real economy is performed via banking loans57.   
In 2009, the outstanding amount of loans granted by  Euro Area MFIs was €17,700 bn, while outstanding 
amount of securities issued in offici al markets were €15,30 0 bn for bonds and €4, 400 bn for shares and 
equity. When the interbank loans and the securities issued by banks are not considered the figures were 
€11,750 bn for loans, €10,000 bn for bonds and €3,800 bn for shares and equity. 
It should be underlined that the role of the banks as providers of financing to the economy goes beyond 
their "direct" intermediation activity. Beyond the lending activities, MFIs are very active in both the equity 
and bond markets. Indeed, in 2009, EA MFIs held over €5,000 bn bonds and €1,200 bn shares, 
corresponding to approximately one th ird of the respective markets. Ther efore, taking into consideration 
the lending activity through loans and the financing through securities, the banking sector is responsible for 
about two thirds of the financing available in the Euro Area (see Chart 4). 
Chart 4: Sources of financing in the Euro Area 
        Total, € bn     Excluding MFIs, € bn 
                                                 
57 Equity, bonds and loans not issued in official market or through the banking system are neglected 
 
EN 66   EN 02, 0004, 0006, 0008, 00010,00012,00014,00016,00018,000
1999 2001 2003 2005 2007 2009Total loans
Total bonds
Total shares
02,0004,0006,0008,00010,00012,00014,00016,00018,000
1999 2001 2003 2005 2007 2009Loans t o non-MFIs
B onds (non-MFIs)
S hares (non-MFI s)
 
        Total, %     Excluding MFIs, % 
0%20%40%60%80%100%
1999 2001 2003 2005 2007 2009Total shar es
Total bonds
Total loans
0%20%40%60%80%100%
1999 2001 2003 2005 2007 2009Shar es (non-MFIs)
Bonds ( non-MFIs)
Loans to non-MF Is
 
          Note: Data for bonds and shares issued outside  official markets are not available. 
          Source: European Central Bank and own calculations. 
Chart 5: Aggregate balance sheet of Euro Area MFIs 
MFIs excluding the Eurosystem 
2006           2009 
Loans to EA 
residentsDebt securitiesSharesExternal assetsRemaining assets
DepositsDebt securities 
i ssuedExter nal  li abi l iti esCapital and reservesMMF sharesRemaining liabilities
0%10%20%30%40%50%60%70%80%90%100%
Assets LiabilitiesLoans to EA 
residentsDebt securitiesSharesExternal a ssetsRemaining  assets
DepositsDebt securit ies 
issuedExternal liabilitiesCapital and 
reservesMMF sharesRem aining liabilities
0%10%20%30%40%50%60%70%80%90%100%
Assets Liabilities 
         Source : European Central Bank and own calculations. 
 
EN 67   EN The importance of financial regulation for fi nancial stability and sustainable growth  
While the banking sector generally contributes to economic and financial development, the financial crisis 
has painfully revealed its weaknesses and the risks it bears for the entire economy. This section briefly 
reviews the theory and empirical ev idences regarding the role of regulation (for example minimum capital 
requirement), the capacity to le nd and the economic activity. 
A growing body of empirical research on the links between financial development and economic growth 
produces a remarkably consistent narrative: The services provided by the financial system exert a first-order impact on long-run economic growth.
58  
First, countries with better-developed financial systems tend to grow faster. Specifically, countries with (i) 
large, privately-owned banks that funnel credit to private enterprises and (ii) liquid stock exchanges tend to grow faster than countries with corresponding lower levels of financial development. The level of banking 
development and stock market liquidity each exerts  an independent, positive influence on economic 
growth. Second, simultaneity bias (whether economic growth leads to financial development or vice versa) 
does not seem to be present, suggesting that it is ind eed financial development that contributes to economic 
growth. Third, better-functioning financial systems ease the external financing constraints that impede firm and industrial expansion. Thus, one channel through which financial development matters for growth is by 
easing the ability of financially constrained firms to access external capital and expand. 
Building on this last point, some studies suggest th is is due to a "broad cr edit channel" (Oliner and 
Rudebusch, 1996), where the supply of funds comes from all financial intermediaries and markets, not just banks. This view is supported by Discroll (2004) who finds that for U.S. states, bank loans themselves have small, often negative and statistically insignificant effects on output. This could be due to the fact that firms 
are not in fact bank-dependent, and are able to substitu te other forms of finance, such as bond or equity 
financing for firms with ready access to such markets, trade credit or other kinds of borrowing from other 
firms in the case of firms which do not have such access.  
The existence of a credit channel operating through the banking system cannot be denied however. 
Kroszner, Laeven and Klingebiel (2007) analyse the e ffects of financial crisis on externally dependent 
sectors in both, well- and poorly-developed financial syst ems. They show that in times of crisis, externally 
dependent sectors (comprised of young firms or firms with a large fraction of hard-to-measure intangible assets) tend to experience a greater contraction of valu e added in well-developed, financial systems than in 
countries with shallower financial systems. Their reasoning is that a deeper financial system allows sectors 
dependent on external finance to obtai n relatively more external funding in normal periods, so a crisis that 
significantly impairs the functioning of banks has a disproportionately negative effect on externally 
dependent firms in such systems. In contrast, since externally dependent firms tend to obtain relatively less external financing in shallower financial systems, a cris is in such countries has less of an effect on the 
growth of these sectors. Similarly, the authors find a disproportionately negative impact of banking crises 
on real growth in sales, real growth in earnings, and real stock returns for firms in externally dependent industries. While these results might suggest a dark side of financial development, the authors do not find 
evidence that on net the externally dependent firms fare worse in deep financial systems. 
Overall, while the finding that financial development has a positive impact on economic growth is 
generally accepted , an important limitation of almost all studies on financial development and growth 
should be noted: There is a significant difficulty in designing empirical proxies for “financial development” (Levine and Demirgüç-Kunt, 2008).  
                                                 
58 The following paragraph builds on work by Bagehot (1873), Gurley and Shaw (1955), Goldsmith 
(1969), and McKinnon (1973), recent research has employed different econometric methodologies 
and data sets in producing three core results (Levine and Demirgüç-Kunt, 2008) 
 
EN 68   EN There are two reasons for this difficulty: First, researchers do not have very good cross-country measures of 
the ability of financial systems to provide their services (to facilitate the screening of firms before they are 
financed, the monitoring of firms after they are financed, the managing of idiosyncratic project risk and 
liquidity risk, as well as the exchange of goods, se rvices, and financial claims ) to the economy. Second, 
international financial market integration makes the size of a domestic financial system an inadequate 
indicator of efficiency gains in te rms of accessibility to credit and financ ial services, intermediation costs, 
or productivity of capital employed (Guiso et al. 2004).  
Traditional approaches to bank regulation emphasize the positive features of capital adequacy 
requirements (Dewatripont and Tirole, 1994). Capital serves as a buffer against losses and hence failure. 
Furthermore, with limited liability, the proclivity of banks towards higher risk activities is curtailed with 
greater amounts of capital at risk. Capital adequacy requirements, especially with deposit insurance, play a 
crucial role in aligning the incentives of bank owners with depositors and other creditors (Berger et al., 
1995).  
As reviewed in Santos (2001) and Gorton and Winton (2003), however, theory provides conflicting 
predictions as to whether the imposition of capital re quirements will have positive effects on stability and 
growth. For instance, Kim and Santomero (1988), Besanko and Kanatas (1996), and Blum (1999) argue that capital requirements may increase risk-taking behaviour . Furthermore, Thakor (1996) models the 
impact of an increase in risk-based capital requirem ents and concludes these reduce banks’ willingness to 
screen and lend. In a general equilibrium context, Gorton and Winton (2000) show that raising capital 
requirements forces banks to supply fewer deposits , reducing the liquidity-providing role of banks.  
Barrell et al. (2009) argue that changing capital and liquidity ratios  changes the probability of financial 
crises . They show that it would have been beneficial in terms of output to have had a one or even two 
percentage point higher level of capital and liquidity requirements in the UK prior to the current crisis. 
These results do not hold for the Euro Area or the US as they argue that a crisis in the UK was more likely, 
suggesting that with higher probabilities for a crisis, higher capital requirements are beneficial for long-
term economic output.
59 
As banking sector plays a central role in economy any changes in regulatory environment that have impact 
on banking sector should indirectly affect also ec onomic activity. The existing literature suggests the 
following relationships between the regulation and economic growth: 
- Effects of capital requirements and leverage ratios on sustainable financial development are 
ambiguous; yet it is suggested that combining these policies may yield positive results.  
- Effects of deposit insurance in terms of financial stability are ambiguous as they can reduce the 
systemic risk associated with bank runs but may reduce incentives for risk management in covered 
institutions and incentives for private sector oversight.  
- Strong supervisory power on banks is beneficial for building robust legal systems. 
- Evidence on the effectiveness of private sector monitoring of banks is ambiguous.  
- Bank governance is found to be relevant to financial stability in two important respects: 
- Bank risk is generally higher in banks that have concentrated ownership with substantial cash flow 
rights. 
                                                 
59 They also refer to the case of Spain where the robustness of the banks shows the value of higher 
capital 
 
EN 69   EN - The relation between risk and regulation depends critically on each bank’s ownership structure, 
because it can determine whether the impact of regulation is either po sitive or negative with regard to 
stability. 
- While private ownership of banks entails risks and needs careful design, government ownership of 
banks usually yields lower levels of financial deve lopment and growth, yet more concentrated lending 
and higher systemic fragility. 
Available evidence from the cost of financial (banking) crisis  
As illustrated in the previous section, financial and banking regulation is crucial to the stability of the sector and eventually the long-term economi c growth. These findings are furthe r underlined by the evidence on 
the cost of past (and current) financial and banking crisis and provide a good rationale for designing and 
implementing appropriate regulation. 
Financial crises, defined as systemic banking crises
60, which can be aggravated by foreign exchange or 
sovereign debt crises, are particularly socially costly, no t only for the rescue of ailing institutions but also in 
terms of opportunity costs and foregone growth. The traditional computations of the cost of such a crisis for 
a country are based on a calculation of its direct and indirect fiscal costs, as described in the graph below. 
                                                 
60 Following the definition of Leaven and Valencia (2008) cited by the "Public Finances in EMU 
2009" of the European Commission 
 
EN 70   EN  
Chart 6: The costs of a financial crisis  
 
Source: European Commission, DG Economic and Financial Affairs (2009): "Public Finances in EMU 2009", European Economy 5, 
10th edition  
 
 
EN 71   EN However, these fiscal costs do not include costs borne by depositors and borrowers, stemming from 
exposure to failed banks, or when facing higher costs for services provided by banks that compensate for 
losses. 
The debate also focuses on the best way to compute th e economic costs of a banking crisis and the extent of 
what is referred to as the output gap caused by this crisis. The literature offers different means to conduct 
such calculations. On the one hand, it would be possible to approximate output losses as the difference between output growth before and a few years after the cr isis – usually the time that it returns to its trend; 
on the other hand, to be more accurate, the difference could be computed in levels rather than in growth 
rates of GDP. Finally, econometric estimations of ou tput gaps allow controlling for the bias that could 
come from "normal" cyclical output variations. 
The European Commission analysed empirically in its publication, Public Finances Report in the EMU 
2009,  the costs of 49 crises that occurred in emerging  and market economies since the 1970s. Consistent 
with the figures found by Leaven and Valencia (2008) , the Commission reported an average direct net cost 
of 13%, i.e. expenses due only to the rehabilitation of the banking sector and already accounting for the 
recovery that the government can get from the sale or repayment of impaired assets that it had to buy – 
even though the average recovery rate did not exceed 18% of the initial gross outlays. Focusing only on the 
EU27, these figures show an average net fiscal cost of 6.6% of GDP, with a 23.9% recovery ratio, both 
under the OECD averages (respectively 11.4% of GDP and 29.7%). 
All in all, the net fiscal costs of the last financial cr isis should be rather greater than those of past crises, 
mainly because of its global nature, and given the rece nt expansion of the banking sector and low laid down 
recovery of impaired assets. In the EU, according to the Commission repo rt, these net fiscal costs could 
reach 16.5% of GDP on av erage, with higher figures for some  Member-States taken individually.  
Indeed, as it appears in the graphs below, the extent of capital injections and of guarantees on bank 
liabilities, in terms of percentage of GDP, varied greatly from one European country to another, 
respectively from 1% to 7% and from 1% to almost 240%. 
Chart 7: Public interventions in the banking sector (% of GDP)  - situation at 31/12/2009  
012345678
I E LU BE NL U K DK DE AT LV EU EA GR FR I T SE HU PT FI PL SK
Total approved injections
 Effective capital injections 
 
   Source : Commission Services 
Beyond the direct burden of the banking rescue measures, the indirect costs of past financial crises have 
also weighted significantly on social wealth. The gross public debt-to-GDP ratio has on average grown by 18% in the course of the years when past crises occurred, under the multiple pressures of automatic 
stabilizers and fiscal stimuli. In addition to this ex penditure effect (+1.1% of  GDP in EU27 on average), 
financial crises also trigger a loss through the revenue effect (on average -0.9% in the EU27), notably in 
 
EN 72   EN terms of foregone tax payments, as well as a potential strong market effect lead ing to higher premia on 
interest payments. 
This consequence is particularly wo rrying because of its long-term im plications. Indeed, in the sample 
analysed by the Commission, it took governments at least eight years to come back to pre-crisis levels of 
debt-to-GDP ratios, driven up both by the changes in the primary deficit and by the "snow-ball effect" of 
interest payments. 
Chart 8: Guarantees on bank liabilities (% of GDP)  
02040608010 0
DK IE BE SE NL SI FI LV AT EU UK EA DE ES CY FR PT LU GR HU SK PL
Total approved guarantees
 Effective guarantees granted
 
       Notes:   Denmark: 237.5% approved guarantees and 205.3% effective guarantees granted. 
Ireland: 167.5% approved and ef fective guarantees granted. 
       Source :  Commission services 
 
EN 73   EN ANNEX III  
Sanctions applied in the banking sector  
Range of (financial) administrative  sanctions against legal persons   
(Data included in the Impact Assess ment on the Sanctions Communication) 
Chart 1, compiled from input from Member St ates, gives an overview of the amount of 
administrative financial sanctions imposed in  the banking sector (compared with the 
range of sanctions, that is the minimum and maximum levels provided for in the 
legislation).  
Chart 1 – Range of (financial) administrative sanctions against legal persons, and sanctions applied 
from 2005 to 2007 (in Euros)  
 
• II Amount of sanctions applied I Range of financial sanctions 
Comments: there is no maximum set amount in FR and ES, but the fines are linked to the minimum capital (FR) or 
equity capital (ES). Correction: SK applied 195 000 - S ource: CEBS report, reply sheet s from national authorities. 
Sanctions applied in the banking sector in 2008-2010 
Charts 2 and 3, compiled based on informa tion from Member States, shows the number 
of sanctions imposed in 2009 in comparison to  the value of banks' assets and to the 
number of credit institutions in these Member States 
Chart 2 – Number of sanctions co mpared to banks' liabilities 
 
EN 74   EN Sanctions vs Bank liabilities
050100150200250
AU BG CY CZ DE EE ES FR UK GR IR LT LU LV MT NL PT SE SK
Member StateNumber of
 Sanctions
020000000004000000000600000000080000000001000000000012000000000
Total bank liabilitie sTotal
bankliabilities2008(EUR)
Number ofSanctions2009
 
Chart 3 – Number of sanctions compared to number of banks  
Sanctions vs Number of Banks
050100150200250
AU BG CY CZ DE EE ES FR UK GR IR LT LU LV MT NL PT SE SK
Member StateNumber of
 Sanctions
05001000150020002500
Number of banksNumbe
r ofbanks(2008)
Number ofSanctions2009
 
Source: CEBS report, page 55, ECB statistics  
Among the Member States which make indicat ions as to the types of violations 
sanctioned, the following violations occu r most frequently during that period: 
 
 
Unauthorised 
provision of banking 
Large exposures 
requirements 
Capital requirements 
Governance 
requirements 
Reporting 
requirements 
Acquisitions of 
qualifying holdin gs 
Public disclosure 
requirements 
Number of 
MS having 
imposed 3 5 5 10 4 4 2 
 
EN 75   EN sanctions for 
violations of 
these 
requirements 
 
EN 76   EN ANNEX IV  
I. Current Legislative framework 
The CRD contains a general cl ause requiring Member States to provide that "competent 
authorities may, as against credit institutions or those who effectively control the business 
of credit institutions, which breach laws , regulations or administrative provisions 
concerning the supervision or the pursuit of th eir activities, adopt or impose penalties or 
measures aimed specifically ad ending the obse rved breaches or the causes of breaches" 
(Art. 54 Directive 2006/48/EC). This provision re fers to administrativ e sanctions and it is 
without prejudice to the provi sions of criminal law.  
In addition, some specific rules are provide d for on the use of the sanctioning powers 
available to competent authorities in certain cases. For instance, Article 1761 of the 
Directive 2006/48/EC lists th e cases where competent aut horities may withdrawal the 
authorisation granted to a credit institution (e.g. when it no longer fulfils the conditions 
under which the authorisation was granted or has obtained the authorisation through false 
statements). A specific provision concerning th e violation of obliga tions on acquisition of 
qualifying holdings requires competent authoritie s to take appropriate measures to put an 
end to the unlawful situation, and it specify  that such measures may consist in 
injunctions, sanctions against di rectors and managers, or the su spension of the exercise of 
voting rights (Art. 21 Directive 2006/48/EC). 
Finally, the CRD contains provisions on th e coordination of the power to impose 
sanctions between Member States concer ned by a violation (e .g. Art. 30 Directive 
2006/48/EC), and on the cooperation betwee n competent authorities (e.g. Art. 132 
Directive 2006/48/EC). The power to impose sanctions is exercised principally by the 
competent authorities of the Member Stat e in which the credit institution has been 
authorised ("home" Member State) acting in  coordination with th e authorities of the 
Member State where it has a branch or it pr ovides services ("host" Member State).  
Key violations of the CRD: 
Violations relating to prior authorisation  
– Unauthorised provision of banking services  (Artt. 5-6 of Directive 2006/48/EC) 
– Authorisation obtained through false stat ements/irregular means (Art. 17.1, b of 
Directive 2006/48/EC) 
Violation of prudential requirements 
                                                 
61 This text refers to the numbers of the articles in the existing Directives 2006/48/EC and 
2006/49/EC. As the proposal will recast these texts, the numbers w ill be subject to modification in 
the recasted legislative acts 
 
EN 77   EN – Failure to have in place sound and r obust governance arrangements (Art 22 of 
Directive 2006/48/EC, see al so Art. 109 of Directive 2006/48/EC and Art 34 of 
Directive 2006/49/EC) 
– Failure to comply with "fit and proper"  conditions of aut horisation (11, 135 of 
Directive 2006/48/EC)  
– Violation of own capital requirements (A rt. 10, 75, 76 of Dir ective 2006/48/EC; Art 5-
9; 18 of Directive 2006/49/EC) 
– Violations of obligations on acquisition of qualifying holdings (Art 19-21 of Directive 
2006/48/EC, as amended by Directive 2007/44/EC) 
– Failure to comply with limits on large e xposure (Art 111 of Directive 2006/48/EC; Art 
28 of Directive 2006/49/EC) 
– Failure to meet requirements as to exposures  to transferred credit  risk (Art 122a of 
Directive 2006/48/EC 
Violation of reporting obligations 
– Violation of reporting obligations on the pe rsons responsible for the legal control of 
accounts (Art.53 of Di rective 2006/48/EC) 
– Failure to report information to the compet ent authorities (Art.74( 2), 110 of Directive 
2006/48/EC; Art 35 of Directive 2006/ 49/EC; newly introduced reporting 
requirements on liquidity and leverage)  
– Failure of public disclosure (Art 145-149 of Directive 2006/ 48/EC; Art 39 of Directive 
2006/49/EC) 
– Failure to comply with limits on qualifying holding outside the financial sector (Art 
120) 
II. Sanctioning powers provided for by Member St ates in the transposition of the CRD in 
relation to three ty pes of violations 
In certain Member States different provision s on sanctions are applicable to different 
categories of violations. Howeve r, in several of them the sa me provisions apply to all the 
above-mentioned violations (e.g. FR, UK).  
Charts 1 and 2, based on the information collected by the Commission in 2011, show the 
differences in the types of ad ministrative sanctions and the level of administrative fines 
provided for by national legislat ion in case of violations relating to prior authorisation 
(Unauthorised provision of banking servic es, Art. 5-6 of Directive 2006/48/EC): 
Chart 1: types of sanctions applicable for violations relating to prior authorisation 
 
EN 78   EN Unauthorised Provision of Banking Services
0102030405060
public reprimand  replacement of
management cease and desist
order withdrawal of
license administrative fine  otherPercentage of Member States Having Sanction at Their Dispos a
 
 
Chart 2: administrative fines applicable for violations relating to prior authorisation 
Unauthorised Provision of Banking Services
0102030405060
levels of administrative finesPercentage of Member States Having Level of Administrative Fin e
at Their Disposalno administrative fines (max level at 0
EUR)
max administrative fine over 0 up to200000 EUR
max administrative fine over 200000 upt to1000000 EUR
max administrative fine over 1000000
 
Charts 3 and 4 based on the information collected by the Commission in 2011, show the 
differences in the types of ad ministrative sanctions and the level of administrative fines 
provided for by national legislation in case of violations of pr udential requirements 
(Failure to have in place sound and robust governance arrangements, Art 22 of Directive 
2006/48/EC, see also Art. 109 of Direct ive 2006/48/EC and Art 34 of Directive 
2006/49/EC): 
Chart 3: types of sanctions applicable for violations of prudential requirements relating to 
governance  
 
EN 79   EN Failure to Have in Place Sound and Robust Governance Arrangements
020406080100120
public reprimant  replacement of
management cease and
desist order withdrawal of
license adminstrative
fine otherPercentage of Member States Having Type of Administrati ve
Sanction at Their Disposal
 
Chart 4: administra tive fines applicable fo r violations of prudenti al requirements relating to 
governance 
Failure to Have in Place Sound and Robust Gouvernance Arrangements
0102030405060
administrative finesPercentage of Member States having at their Disposal th e
Respective Levels of Finesno admin fine (max at 0 EUR)
max admin fine up to 200000
max admin fine over 200000 up to
1000000
max admin fine over 1000000
 
Charts 5 and 6, based on the information collected by the Commission in 2011, show the 
differences in the types of ad ministrative sanctions and the level of administrative fines 
provided for by national legislation in case of violations of reporting requirements 
(Art.74(2), 110 of Directive 2006/48/EC ; Art 35 of Directive 2006/49/EC): 
Chart 5: types of sanctions applicable for violations of reporting requirements. 
 
EN 80   EN Failure to Report Information to the Competent Authorities
020406080100120
public reprimant  replacement of
management cease and desist
order withdrawal of
license administrative
fine otherPercentage of Member States hHaving sanction at Their Dispos a
 
Chart 6: administrative fi nes applicable for violatio ns of reporting requirements  
Failure to Report Information to the Competent Authorities
0102030405060
levels of finesPercentage of Member States having Respective Max Leve
Fines at Their Disposalno administrative fines (max level 0
EUR)
max administrative fines over 0 up to200000
max administrative fines over 200000up to 1000000
max administrative fines over 1000000
 
Table 1, based on the CEBS report and respons es received by Member States, shows the 
divergences in the criteria take n into account in diffe rent Member States  to calculate the 
administrative fine, to be imposed in a specific case.  
Table 1: criteria taken into account when  calculating fines in the banking sector  (in SK all factors 
taken into account in practice although  not explicitly provided for by law). 
 
 Gravity of the 
infringement Cooperation with the 
authorities Financial strength of 
the firm or 
responsible person concerned (e.g. own funds) Loss inflicted by  the 
infringement Benefit / Profit 
derived from 
infringement Amount imposed 
in previous cases 
Number 
of Member 
States 
taking account 
of each 
criterion All 
BE, CZ, DE, AT, ES, 
EE, FI, HU, EI, LT, 
LU, LV, MT, NL, PL, PT, SE, SI, UK, IE
 BE, BG, ES, 
EL, HU, IE, IT, 
NL, PL, RO, SE, CY, UK, 
PT, CZ, SI AT, BG, CY, 
CZ, DE, EE, 
ES, EL, HU, IE, MT, NL, 
PL, PT, SE, SI, 
SK, UK, LU, SL, LU AT, BE, BG, 
CY, CZ, DE, 
EE, ES, EL, IE, LU, NL, PT, 
SI, SK, UK, 
HU
 AT, BE, BG, 
CY, CZ, DE, 
EE, FI, EL, HU, IE, IT, 
LT, LU, LV, 
NL, PL, PT, RO, SE, SI, 
UK, MT, DK,  
 
 
EN 81   EN 
 
EN 82   EN ANNEX V  
Detailed analysis of the impacts of th e policy options concerning appropriate 
administrative sanctions   
(1) No EU action 
(2) Uniform rules on types and level of administrative sanctions 
This option would imply that administrative sanctions are fully harmonised and that the 
violation of any of the key pr ovisions of the CRD would be s ubject to the same type and 
level of sanction across all Member States. 
Analysis of impacts in relation to sancti ons for unauthorised pr ovision of banking 
services  
Uniform types and levels of sanctions fo r unauthorised provision of banking services 
would in particular increase consumer conf idence in the internal market for banking 
services, as consumers could be sure that a bank offering banking se rvices to them from 
any Member State without being authorised a nd supervised would be subject to the same 
effective and deterrent sanctions.  
The availability of high fines for unauthoris ed provision of banking services will make 
such misconduct - which due to the circumve ntion of any prudentia l supervision poses 
considerable risks to customers' deposits- le ss attractive even where high benefits can be 
expected.  
Requirements for authorisation limit the free dom to conduct a busine ss as provided for in 
the Charter of Fundamental Rights (Art.16), and uniform types and levels of sanctions for violations of these requirements reinforce this limitation. However, ensuring prudential 
supervision is exercised over all banks is n ecessary to mitigate the risks banking activities 
can pose for deposit-holders, and in view of the importance of these risks for the means 
of consumers (including pr ovision for their retiremen t) and businesses, also 
proportionate.   
(a) Analysis of impacts in relation to sa nctions for violations of prudential 
requirements  
Empowering competent authorities  in all Member States to be able to impose uniform 
types and levels of sanctions for violations of  prudential requirements  would contribute to 
ensure credit institutions in all Member  States effectively meet banking capital 
requirements.  
The power to issue public wa rnings/reprimands in case of  violations of prudential 
requirements relating to governance is approp riate to encourage public pressure by 
deposit holders and investors on the cred it institution to ad just its governance 
arrangements, and will thereby reduce the likelihood that credit institutions do not have in 
 
EN 83   EN place appropriate risk management to anticipate  situations of financial stress which can 
lead to an increase risk of failure.  
The possibility to impose high fines for violat ions of prudential requirements relating to 
governance will reduce the likelihood that cr edit institutions do not have in place 
appropriate risk management to anticipate situat ions of financial stre ss which can lead to 
an increase risk of failure.  
The possibility to impose high fines for violatio ns of prudential requirements is important 
to ensure that sanctions fo r violations of banking capital  requirements are sufficiently 
high to exceed the economic benefits from su ch violations for the banks concerned which 
can be very important.  
As prudential requirements contribute heavily to credit institutions' operating costs, this 
option would assist the development of a le vel playing field in the European banking 
market. It could also increase consumer confid ence that credit institutions are stable, and 
improve mutual trust between supervisors, leading to more efficient cross-border 
supervision.  
Prudential requirements limit the freedom to conduct a business as provided for in the 
Charter of Fundamental Rights (Art 16), and uniform types and levels of sanctions for 
violations of these requirements reinforce th is limitation. However, as underlined by the 
events of the financ ial crisis in 2007/2008,62 ensuring that banks make the necessary 
financial provisions for situations of stress is essential to mitigate the risk of a bank 
failure, leading to losses of deposits wiping out all or most  of the financial means of 
consumers (including provision for their retire ment) and businesses, but also avoid that 
taxpayers money has to be used to restore the bank's financial health. While preventative 
supervisory action is a key tool to ensure vi olations of pr udential rules are not continued 
after their detection, appropriate types and levels of sanctions are necessary to ensure that 
credit institutions incur actual and important  cost for past violations, making commitment 
of such violations less attractive. 
(b) Analysis of impacts in relation to sanctions for violations of reporting 
requirements  
Empowering competent authorities  in all Member States to be able to impose uniform 
types and levels of sanctions for violations of reporting re quirements would contribute to 
ensure credit institutions in all Member St ates fully inform competent authorities about 
their financial situation which enables the au thorities to require appropriate levels of 
prudential provisioning. The power to dismi ss the managers or the persons responsible 
for the legal control of accounts can effectivel y prevent repeated viol ations of reporting 
requirements which will in turn reduce the li kelihood that credit instit utions avoid to hold 
the necessary capital by not reporting disa dvantageous financial information to 
supervisors, leading to an increased risk of failure.  
                                                 
62 See analysis and recommendations of the De Larosière Report, reference see above. 
 
EN 84   EN As prudential requirements, which credit in stitutions can avoid by failing to report 
information to the authorities, contribute h eavily to credit institutions' operating costs, 
this option would assist the de velopment of a level playing fi eld in the European banking 
market. It could also increase consumer confid ence that credit institutions are stable, and 
improve mutual trust between supervisors, leading to more efficient cross-border 
supervision.  
Reporting requirements limit the freedom to conduct a business as provided for in the 
Charter of Fundamental Rights (Art 16), and uniform types and levels of sanctions for 
violations of these requirements reinforce th is limitation. However, as underlined by the 
events of the financ ial crisis in 2007/2008,63 full information of the authorities about 
credit institutions' financial situation is key to ensure that supervisors can require the 
necessary financial provisions for situations of stress, and is a precondition for competent 
authorities to be able to apply any preventa tive supervisory powers.  As violations of 
reporting requirements can be addressed by preventative supervisory powers only to a 
limited extent, appropriate types and levels of sanctions are ne cessary to ensure respect of 
these rules, and proportionate in view of the importance of these risks. 
(2) Minimum common rules on the type of  administrative sanctions to be 
available to competent authorities 
This option would contribute to the objectiv e of improving the deterrent effect of 
administrative sanctions by ensuri ng that all competent authorit ies have at their disposal 
certain sanctioning powers which can be particul arly effective for the different violations 
of the CRD. For instance, the power to dism iss the managers or the persons responsible 
for the legal control of accounts can effectivel y prevent repeated viol ations of reporting 
obligations. 
Analysis of impacts in relation to sancti ons for unauthorised pr ovision of banking 
services  
Ensuring that certain key types of administra tive sanctions are available in case of 
unauthorised provision of banking services , even though not providing for a full 
harmonisation, would increase consumer confid ence in the internal market for banking 
services, as consumers could be sure that a bank offering banking se rvices to them from 
any Member State without being authorised and superv ised would be subj ect to a core set 
of effective and deterrent types of sanctions , including administrativ e fines, and public 
warning/reprimand.  
Limitations of the freedom to conduct a business as provided for in the Charter of 
Fundamental Rights (Art. 16) ar e similar in nature than un der option (1), but would be 
less accentuated given that only a limited list of core sanctioning powers would be made 
available across the EU, while further sa nctioning powers would be decided on by 
                                                 
63 See analysis and recommendations of the De Larosière Report, reference see above. 
 
EN 85   EN Member States and would be available only in  the Member States where this is the case 
already today.   
(a) Analysis of impacts in relation to sa nctions for violations of prudential 
requirements  
Empowering competent authorities in all Member States to be able to impose certain core 
types of sanctions for viola tions of prudential requiremen ts, while not achieving full 
harmonisation, would contribute to ensure co mpetent authorities in  all Member States 
have at least certain key pow ers to ensure credit institutions effectively meet banking 
capital requirements.  
This option would contribute to the developmen t of a level playing field in the European 
banking market, of consumer confidence that  credit institutions are stable, and of 
improved mutual trust between supervisors, leading to more efficient cross-border supervision.  
Limitations of the freedom to conduct a business as provided for in the Charter of 
Fundamental Rights (Art. 16) would be similar in nature than under option (1), but would 
be less accentuated given that only a limite d list of core sanctioning powers would be 
made available across the EU, while furthe r sanctioning powers would be decided on by 
Member States and would be available only in  the Member States where this is the case 
already today. 
(b) Analysis of impacts in relation to sanctions for violations of reporting 
requirements  
Empowering competent authorities in all Member States to be able to impose certain core 
types of sanctions for viola tions of reporting requirement s, while not achieving full 
harmonisation, would contribute to ensure co mpetent authorities in  all Member States 
have at least certain key powers to ensure th at credit institutions fully inform competent 
authorities about their financ ial situation which enables the author ities to require 
appropriate levels of prudential provisioning.  
This option, while not achieving full harmoni sation, would still ensure that key types of 
sanctions can be imposed for violations of reporting requirements. As prudential 
requirements, which credit institutions can avoid by failing to report information to the authorities, contribute heavily to credit inst itutions' operating costs, this option would 
assist the development of a level playing fi eld in the European banking market. It could 
also increase consumer confidence that credit institutions are stable, and improve mutual trust between supervisors, leading to mo re efficient cross-border supervision.  
Limitations of the freedom to conduct a business as provided for in the Charter of 
Fundamental Rights would be similar in natu re than under option (1 ), but would be less 
accentuated given that only a limited list of core sanctioning powers would be made available across the EU, while further sa nctioning powers would be decided on by 
 
EN 86   EN Member States and would be available only in  the Member States where this is the case 
already today. 
(2) Minimum common rules on minimum a nd maximum levels of pecuniary 
administrative sanctions 
This option would significantl y contribute to the objectiv e of improving the deterrent 
effect of the administrative fines, as it w ould ensure that fines applied are sufficiently 
high, and improve convergence of national regimes, as the levels of administrative sanctions would be based on common rules.  Those rules would be based on objective 
factors including the benefit th at can be derived from a viol ation and the turnover of the 
perpetrator.  
Analysis of impacts in relation to sancti ons for unauthorised pr ovision of banking 
services  
This option would ensure the availability in all Member States of high fines for 
unauthorised provision of banking services. This would make such misconduct - which 
due to the circumvention of any prudential supervision poses considerable risks to 
customers' deposits - less attractive even  where high benefits can be expected. 
Minimum rules on minimum and maximum levels  of administrative pecuniary sanctions 
for unauthorised provision of banking services  would be very conducive to increase 
consumer confidence in the internal market  for banking services. Consumers could be 
sure that a bank offering banking services to them from any Member State without being 
authorised and supervised would be subjec t not only to high potential fines but would 
also be sure about the minimum fine applied to each violation in each case. This will send 
a clear signal and will make such misconduct le ss attractive even where high benefits can 
be expected.  
Limitations of the freedom to conduct a business as provided for in the Charter of 
Fundamental Rights would be similar in na ture than under option (2). The minimum 
harmonisation character of these rules woul d not mitigate those impacts, as minimum 
amounts for administrative pecuniary sanc tions would prevent Member States from 
fixing lower amounts of sanctions. 
(a) Analysis of impacts in relation to sa nctions for violations of prudential 
requirements  
Minimum rules on minimum and maximum levels  of administrative pecuniary sanctions 
for violations of prudential re quirements would contribute to ensure credit institutions in 
all Member States effectively meet banking capital requirements. The possibility to 
impose high fines for violations of prudent ial requirements relating to governance will 
reduce the likelihood that credit institutions  do not have in place appropriate risk 
management to anticipate situations of financia l stress which can lead to an increase risk 
of failure. The requirement that fines shall not in any case be below a certain minimum 
will further contribute to this objective, in  particular for smaller credit institutions. 
 
EN 87   EN However, depending on the level where the mi nimum is set, in case of bigger credit 
institutions such a minimum level will necessa rily be too low to have any dissuasive 
effect. 
Limitations of the freedom to conduct a business as provided for in the Charter of 
Fundamental Rights would be similar in na ture than under option (2). The minimum 
harmonisation character of these rules woul d not mitigate those impacts, as minimum 
amounts for administrative pecuniary sanc tions would prevent Member States from 
fixing lower amounts of sanctions. 
(b) Analysis of impacts in relation to sanctions for violations of reporting 
requirements  
Minimum rules on minimum and maximum levels  of administrative pecuniary sanctions 
for violations of sanctions for violations of reporting requirement s would contribute to 
ensure credit institutions in all Member St ates fully inform competent authorities about 
their financial situation which enables the au thorities to require appropriate levels of 
prudential provisioning.  
For example, this option would move up the maximum level pecuniary sanctions 
applicable in case of failure to have in  place sound and robust governance arrangements: 
in several Member States that level is lower than 150.000, which does not seem 
sufficiently high to be deterrent for a credit institution. Rais ing that level can contribute 
to prevent violations of repor ting requirements which will in  turn reduce the likelihood 
that credit institutions avoid to hold the necessary capital by not reporting 
disadvantageous financial information to supe rvisors, leading to an increased risk of 
failure.  
However, a minimum level would reduce the possibility of adapting the amount of the 
actual pecuniary sanction to the circumstances  of the specific case concerned, which 
could make more difficult to ensure proport ionality. For example, if a small credit 
institution does not report to the supervisory authorities with the required information, 
but this violation relates to information whic h is of minor supervis ory relevance, it may 
be disproportionate to require imposition of a significant fine. 
Limitations of the freedom to conduct a business as provided for in the Charter of 
Fundamental Rights would be similar in na ture than under option (2). The minimum 
harmonisation character of these rules woul d not mitigate those impacts, as minimum 
amounts for administrative pecuniary sanc tions would prevent Member States from 
fixing lower amounts of sanctions. 
(2) Minimum common rules on maximum le vel of pecuniary administrative 
sanctions 
Similarly to option 4, this option would contribute to th e objective of improving the 
deterrent effect of the administrative fines, as it would ensure that competent authorities 
 
EN 88   EN have the power to apply fines which are suffi ciently high to be deterrent even on the 
larger credit institutions.   
(a) Analysis of impacts in relation to sanctions for unauthorised provision of 
banking services  
Minimum rules on maximum levels of administrative pecuniary sanctions for 
unauthorised provision of banki ng services would be conducive to increase consumer 
confidence in the internal mark et for banking services, albe it to a lesser extent than 
option (4). While Consumers could be sure th at a bank offering banking services to them 
from any Member State without being author ised and supervised would be subject not 
only to high potential fines, they would not be sure about the minimum fine applied to 
each violation in each case.  
Limitations of the freedom to conduct a business as provided for in the Charter of 
Fundamental Rights would be similar in nature than under option (2). However, minimum rules limited to the issue of maximum levels of sanctions will limit the impact 
on that right especially in cases of lesser economic importance or where mitigating effects are present.  
(b) Analysis of impacts in relation to sa nctions for violations of prudential 
requirements  
Minimum rules maximum levels of administra tive pecuniary sanctions for violations of 
prudential requirements would c ontribute to ensure credit institutions in all Member 
States effectively meet banking capital requirem ents, albeit to a lesser extent than option 
(4). The possibility to impose high fines for vi olations of prudential requirements relating 
to governance will reduce the likelihood that credit institu tions do not have in place 
appropriate risk management to anticipate situat ions of financial stre ss which can lead to 
an increase risk of failure.  
Limitations of the freedom to conduct a business as provided for in the Charter of 
Fundamental Rights (Art. 16) would be similar in nature than under option (2). However, 
minimum rules limited to the issue of maximum levels of sanctions will limit the impact 
on that right especially in cases of lesser economic importance or where mitigating effects are present. 
(c) Analysis of impacts in relation to sanctions for violations of reporting 
requirements  
Minimum rules maximum levels of administra tive pecuniary sanctions for violations of 
reporting requirements would - al beit to a lesser extent than option (4) - contribute to 
ensure credit institutions in all Member St ates fully inform competent authorities about 
their financial situation which enables the au thorities to require appropriate levels of 
prudential provisioning. 
 
EN 89   EN Limitations of the freedom to conduct a business as provided for in the Charter of 
Fundamental Rights would be similar in nature than under option (2). However, minimum rules limited to the issue of maximum levels of sanctions will limit the impact 
on that right especially in cases of lesser economic importance or where mitigating effects are present. 
 
EN 90   EN ANNEX VI  
Interaction of this initiative with other in itiatives in the Financial Services Sector  
CRD / Sanctions amendmentsRegulating Financial Services 
for Sustainable Growth
COM(2010)301 of 2.6.2010Single Market Act
COM(2011)206/4 of 4.2011
Enhanced
transparencyEffective 
supervision 
&
enforcementResilience
&
stabilityPromoting
access to 
finance 
for SMEsPromoting
social 
Entrepre-
neurshipResponsibility
& 
consumer 
protection
Comm on sanctioning regimesMarket Abuse Directive ReviewCRD IV ReviewUCITS V review
Packaged Retail inv. Products Leg.
Crisis Managemetn Leg.
MiFiD ReviewEMIR PropShort Selling Prop.Centr. Securities Depositories Prop
Securities Law Prop.Deposit Guar. Schemes ReviewInvestor Guar. Schemes Prop.Insurance Guar. Schemes Prop
Insurance Mediation Review
Credit Rating Agencies III ReviewCorporate Gov. In FI Green Paper
Policy Objectives Policy Initiatives Linkages
 
 
EN 91   EN PART II  
 
CORPORATE GOVERNANCE OF FINANCIAL INSTITUTIONS 
 
TABLE OF CONTENTS  
1. Introduction................................................................................................................ .92 
2. Procedural issues and consulta tion of interested parties.............................................94 
3. Policy context and Problem definition .......................................................................97 4. Baseline scenario and Subsidiarity ...........................................................................110 5. Objectives .................................................................................................................1 13 
6. Policy options, analysis of  impacts and comparison ................................................113 
7. Monitoring and Evaluation .......................................................................................133 
 
EN 92   EN 1. INTRODUCTION  
This document is the impact assessment acco mpanying the initiative for the reform of 
corporate governance in credit institutions ai med at preventing exce ssive risk-taking. It 
presents solutions to improve corporate governance systems in credit institutions to have a more resilient banking sector. It does not prejudge the fina l form of any decision to be 
taken by the European Commission.  
The collapse of financial markets in autumn  2008 and the credit crunch that followed can 
be attributed to multiple, often inter-relate d, factors at both macro- and micro-economic 
levels, as identified in the De Larosière Report
64, and in particular to  the accumulation of 
excessive risk in the financial system. This  excessive accumulation of risk was in part 
due to the weaknesses in corporate governance65 of financial institutions, especially in 
banks66. Whilst not all banks suffered from systemic weaknesses of governance 
arrangements, the Basel Committee on Ba nking Supervision (BCBS) Basel Committee 
on Banking Supervision (BCBS) referred to "a  number of corporate governance failures 
and lapses"67.  
Strengthening corporate governan ce is at the hear t of the Commission's programme of 
financial market reform and crisis preventi on. Sustainable economi c growth cannot exist 
without proper awareness of and effective ma nagement of risks w ithin a company. The 
activities of some international organizati ons and standard setters, (including the 
Organisation for Economic Co-operation and Development (OECD), Financial Stability 
Board and Basel Committee on Banking Supe rvision (BCBS)), and Member States68, 
who have launched several reviews on the role of corporate governance in the crisis and 
are updating their principles and guidelines accordingly, demonstrates the recognition of 
                                                 
64 The Report of the High-Level Group on Financial Supervision in the EU published on 25 February 
2009. The Group was chaired by Mr Jacques de Larosière. 
65 Corporate governance is understood in this document as encompassing the standards for decision-
making within a financial institution, the duties of the Board and the management, the internal structure of the financial institution and the rela tionships between the financial institution and its 
stakeholders. This concept is in line with the Basel Committee's understanding of corporate 
governance as embodied in its Principles for  Enhancing corporate governance , October 2010 and 
also OECD Principles of Corporate Governance , June 1999. 
66 For all these issues, see, for instance, OECD , Corporate Governance Lessons from the Financial 
Crisis, February 2009;  OECD , Corporate Governance and the Financial Crisis: Key Findings 
and Main Messages,  June 2009; Walker, D. , A Review of Corporate Governance in UK Banks and 
Other Financial Industry Entities, Final Recommendations , 26 November 2009; Institute for 
International Finance (IIF), Reform in the Financial Services Industry: Strengthening Practices for 
a More Stable System , December 2009; De Larosière report (2009). 
67 Basel Committee on Banking Supervision (BCBS), Principles for enhancing corporate 
governance , October 2010. 
68 For instance, UK Financial Services Authority adopted in 2009 a more intensive supervisory 
approach of firms and individuals with renewed focus on the quality of governance. German financial supervisor (Bafin) issued in 2010 several circulars with minimum requirements for risk 
management and governance. 
 
EN 93   EN the importance of good governance.  In particular, the BCBS revised its bank governance 
principles in October 2010 (re vised Basel Principles), with a key focus on Board 
practices, risk governance, transpar ency, and “know your structure". 
In its Communication of 4 March 200969, the European Commission announced that it 
would (i) examine corporate gove rnance rules and prac tice within financ ial institutions, 
particularly banks, in the light  of the financial crisis, and (ii) where appropriate, make 
recommendations, or propose regulatory measur es, in order to remedy any weaknesses in 
the corporate governance system in this key sector of the economy.  
As a first step, the Commission presented a pr oposal to regulate re muneration policies in 
credit institutions which has been adopted by the European Parliament and the Council in 
201070 and is preparing other measures to al ign remuneration polic ies with sound risk 
management in the remaining sectors of the financial services indus try. As a second step, 
in June 2010 the Commission published a Gr een Paper on corporate governance in 
financial institutions and remuneration policies71 and an accompanying staff working 
document72 which analysed the deficiencies in corporate governance arrangements in the 
financial services industry and proposed possibl e ways forward. The results of this public 
consultation demonstrated a broad consen sus on the deficiencies identified.  
The Commission Green Paper and the responses receiv ed to the public consultation show 
that the main weaknesses in corporate gove rnance systems concerne d to large extent 
credit institutions as opposed to insuran ce companies and investment funds. The vast 
majority of respondents to the public consul tation underlined that corporate governance 
mechanisms in these latter sectors of financ ial services have recently been reformed and 
the existing legislation is quite comprehens ive. Consequently, the priority should be 
enhancing corporate governance systems in credit institutions, where the main failures 
were observed and where the legislation contai ns only very general pr inciples on internal 
governance. There is clearly room for impr ovement and more detailed and specific 
principles in banking sector, in particular in the li ght of the recently re vised Principles for 
enhancing corporate governance of Basel Committee on Banking Supervision73. More 
detailed principles would pr ovide industry with a clear model for corporate governance 
standards and supervisors a more resilient framework within which to exercise their supervisory power. In order to  ensure consistency between other sectors of financial 
services industry and to ensure that all appropriate lessons are learnt from the financial crisis, as a second step, a revisi on of other relevant sectoral directives could be envisaged, 
where necessary. 
                                                
 
69 COM (2009) 114 final 
70 Directive 2010/76/EU of the European Parliament and of the Council of 24 November 2010 
amending Directives 2006/48/EC and 2006/49/EC as regards capital requirements for the trading 
book and for re-securitisations, and the supe rvisory review of remuneration policies, OJ L 329, 
14.12.2010.  
71 COM(2010)0284 final  
72 Commission staff working document - Corporate Governance in Financial Institutions: Lessons to 
be drawn from the current financial crisis, best practices, SEC(2010) 0669 final 
73 BCBS, Principles for enhancing corporate governance , October 2010 
 
EN 94   EN In the context of the reform of the European  supervisory architecture, the enhancement of 
capital requirements and crisis management  and resolution, the proposed reform of 
corporate governance in credit institutions is an  integral part of an overall reform of the 
financial services sector. As regards the general issue of implementation, corporate 
governance reform should also be seen in  the context of the recent Commission 
Communication on reinforcing sanctioning regimes in the financial services sector74. 
2. PROCEDURAL ISSUES AND CONSULTATION OF INTERESTED PARTIES  
2.1. Procedural issues 
In July 2010, a Steering Group  was set up by Directorate General Internal Market and 
Services to monitor the progress of the im pact assessment report. The Steering Group 
comprised representatives of a number of se rvices of the European Commission, namely 
the Directorate General Internal Market  and Services, the Directorate General 
Competition, the Directorate General Economic  and Financial Affairs, the Directorate 
General Enterprise and Industry, the Director ate General Trade, the Directorate General 
Justice, the Legal Service an d the Secretariat-General. Th e Steering Group met 3 times 
(21 September 2010, 16 December 2010 and 28 January 2011). In accordance with the rules for the elaboration of impact assessments, the minutes of the final meeting of the steering group have been submitted to the Impact Assessment Board together with this impact assessment. 
The Impact Assessment Board  delivered its opinion on 11 March 2011. Following the 
Board's opinion several changes were made to this IA, in particular the following:  
- the report now provides greater evidence of the problem drivers, with illustrative 
examples, and examines their relative importance; it discusses more in detail the problem linked to the failure to sanction inadequate risk oversight; 
- the argumentation for EU action is strengthe ned, the measures taken by Member States 
and the private sector in res ponse to the crisis are incorpor ated more explicitly into the 
baseline scenario, illustrating how the EU ac tion would have an added value to the work 
of national authorities and th e European Banking Authority; 
- the proportionality of the options is analysed in more detail and the degree of flexibility 
and discretion of supervisory au thority is made more clear; 
- the assessment of impacts is improved, especi ally the cumulative impact of the options 
on the supply of suitable candidates for board membership is analysed, implementing costs for supervisors and their distribution across Member States are described and impact on competitiveness of EU banks is further discussed; employee participation on boards is presented;  
                                                
 
74 COM(2010) 716 final 
 
EN 95   EN - stakeholders' views are presented more exte nsively, the summary of the results of the 
public consultation is annexed to the report; 
- some information has been moved from Annex I to the main text; - other technical adjustments have been made to incorporate suggestions from the Impact 
Assessment Board. 
Agenda planning or WP reference: 66.  
2.2. Consultation of interested parties 
The review of the Directive 2006/48/EC and this impact assessment have been prepared 
in accordance with the Commission's approach to applying the better regulation  
principles. The initiative and impact assessm ent is the result of an extensive and 
continuous dialogue and consu ltation with all major stake holders, including securities 
regulators, market participants (issuers, inte rmediaries and investors), and consumers. It 
is built upon the observations a nd analysis contained in the Commission Green Paper 
on corporate governance in financial institutions  and the more detailed Commission staff 
working document which accompanies it. The Gr een Paper describes the deficiencies in 
corporate governance systems in financial inst itutions revealed by th e financial crisis; and 
explores possible solutions to remedy these deficiencies.  
The Green Paper is based on the analysis and studies that have  been performed or are still 
carried out by public or private organisations, at the interna tional level as well as the 
European and national levels
75. In their work, the Commissi on staff benefited from the 
advice of the European Corporate Governance Forum (ECGF) and of the ad hoc advisory 
group on corporate governance composed of  some members of the ECGF and other 
renowned corporate governance specialists.  
Questionnaires on their corporate governance pr actices were sent to a diverse cross-
section of 10 major listed ba nks or insurance companies established in the EU. The 
questionnaires were augmented by 30 follo w-up interviews with Board members, 
company secretaries, chief fina ncial officers, chief risk offi cers, internal controllers.  
A questionnaire on their views and role re garding corporate governance of financial 
institutions was also sent to the European banking, insurance and securities markets 
supervisors. Similarly, a cross-section of major European institutional investors and 
shareholders' associations received a questi onnaire on their practices and expectations 
regarding corporate governance of  financial institutions. A follow-up meeting with about 
30 investors was held on 2 February 2010. A limite d series of open interviews also took 
place with a few financial analysts, asse t managers, and statutory auditors.  
                                                 
75 See, for instance, OECD (June 2009); Walker , D., (November 2009); IIF (December 2009); De 
Larosière report (2009). 
 
EN 96   EN As part of the consultation process, and in th e course of preparation of the Green Paper, 
the Commission services also organised on 12 October 2009 a public conference , a 
number of stakeholders part icipated. Discussion focused on the role and competence of 
the Board of directors, govern ance issues related to internal  control and risk management, 
the respective role of sh areholders, supervisors and statutory auditors. 
The Green Paper launched a public consultation  from 2 June 2010 to 1st September 2010 
on the possible ways forward to deal with fa ilures in corporate governance in financial 
institutions. The Commission services receiv ed 214 replies. The comments were taken 
into account in this impact assessment. The analysis of the results of the consultation is annexed to this report (see Annex V). Non-conf idential contributions can be consulted on 
the Commission website: 
http://ec.europa.eu/internal _market/company/modern/corpo rate_governance_in_financial
_institutions_en.htm#consultation2010  
The respondents agree  with the analysis in the Green Paper regarding the weaknesses in 
corporate governance in financial institutio ns. They support the Commission's goal of 
promoting effective corporate governance as well as the policy intent underlying the 
principles articulated in the Green  Paper. The respondents also support a more effective 
supervision  of the implementation by credit institu tions of principles on good corporate 
governance. Although many respondents highlight that certain failur es in corporate 
governance in financial institutions were to a large extent due to a lack of effective implementation of existing rules , a number of respondents think that regulatory 
framework could be improved  further.  A number of respondents think that  any future 
proposals of the Commission should  be principle-based and proportionate  in order to 
take account the differences in business models  of financial institutions, the nature of 
their activity, their size, complexity, lega l form and different corporate governance 
systems and arrangements. Many respondents  are of the opinion that future action at 
European level should focus on  desired outcomes and the detailed implementation of the 
principles could be dealt w ith at national level through le gislation, supervisory review, 
increased transparency or codes of best prac tice with "comply or explain" approach. The 
views of the respondents have been take n account of in this impact assessment. 
The Green Paper received support from differe nt public authorities and Member States. 
European Parliament has also recognised the importance of strengthening corporate 
governance standards and practices in financial institutions
76. 
                                                 
76 Report on remuneration of directors of listed companies and remuneration policies in the financial 
services sector (2010/2009(INI) calls on the Commission to investigate strengthening the roles of 
non-executive directors, including ensuring that firms provide on-going training and independent remuneration packages that reflect the independen t role of non-executive directors, as well as 
providing the powers to supervisors to conduct ‘approved persons’ interviews. 
 
EN 97   EN 3. POLICY CONTEXT AND PROBLEM DEFINITION  
3.1. Background and context 
3.1.1.  Nature and size of the market concerned 
The reform of the corporate governance is ai med at credit institutio ns and investment 
firms. At the end of 2009, the number of cr edit institutions in  27 Member States, 
amounted to 8,358 and their total number of assets exceeded 350% of GDP. 
Figure 1: total assets of the Europe an Figure 2: total number of credit 
banking sector  institutions  
 
  
EU27: European Union (27 countries after enlargements in 2004 and 2007 
EU15: European Union (15 countries before enlargement on 1 May 2004) MU16: Monetary Union (16 countri es participating in the euro area as at 31 December 2009) 
NMS: New Member States (12 new countries of 1 May 2004 enlargement) 
The total amount of loans to  non-credit institutions in 2009 neared €20,000 billion, credit 
institutions being the remained the dominan t suppliers of financing. This shows the 
importance of the banking sector in the European economy and the impact any failures may on the other sectors of economy. 
3.1.2.  Overview of legislative framework  
The following table summarises the existing legislative framework on corporate 
governance. 
 
EN 98   EN  
Article 22 CRD, paragraph 1  "Home Member State competent authorities shall require that 
every credit institution have robust governance arrangements, 
which include a clear organisational structure with well 
defined, transparent and consis tent lines of responsibility, 
effective processes to  identify, manage, monitor and report the 
risks it is or might be exposed to, and adequate internal control 
mechanisms, including sound administrative and accounting procedures, and remuneration policies that are consistent with 
and promote sound and effective risk management". 
Article 11 CRD, paragraph 1  "The competent authorities shall grant an authorisation to the 
credit institution only when ther e are at least two persons who 
effectively direct the busine ss of the credit institution. 
They shall not grant authorisation if these persons are not of 
sufficiently good repute or lack sufficient experience to 
perform such duties".  Binding  
National company laws  National company laws define the rules for the setting up and the functioning of a company, including rules on the 
functioning and the composition of Boards 
Revised Basel Principles  Revised Basel Principles provi de guidance at international 
level to credit institutions and supervisors on sound corporate governance in credit institutions.  
EBA guidelines on internal 
governance  EBA guidelines on internal governance provide guidance to 
European supervisors and credit institutions on the 
implementation of principles on  internal governance contained 
in CRD  Non-binding  
Corporate governance codes  Corporate governance codes are focused on best practices for listed companies, therefore they apply to listed credit institutions only.
 
 
As showed in the table, CRD contains very ge neral principles in EU legislation which do 
not define roles and responsibilities of different actors within credit institutions, 
especially of Board and management, or specify what the governance arrangements 
should look like. This is left to national supervisors, guide lines, national legislation, non-
binding domestic corporate governance codes and to auto-regulation. National 
supervisors monitor the compliance of cred it institutions with national legislation 
implementing CRD rules and can sanction non- compliance. EBA is currently preparing 
guidelines for credit institutions and nationa l supervisors on internal governance which 
would provide credit institutions with supervisory expectations on the implementation of Article 22 and Article 11. National corporat e governance codes are non-binding in nature 
and are focused on "comply or explain" princi ple: companies should either comply with 
the recommendations of a code or explain w hy they do not comply. The monitoring of 
the "comply or explain" prin ciple is usually left to the market and investors. 
 
EN 99   EN 3.2. Problem definition 
The financial crisis triggered by the bankrupt cy of Lehman Brothers in autumn 2008 
necessitated a massive injecti on of public funding into credit institutions in the US and 
Europe – up to 25% of GDP. The resulting credit contracti on and increasing public debt 
had a strong negative impact on the r eal economy. Banking stock prices soured. 
The financial crisis was caused largely by accumulation of excessive risk in the financial 
system. The De Larosière Report77 notes that there were fundamental failures in 
assessment of risk, both by financial firms a nd those who regulated and supervised them. 
These failures were due to misunderstandings  about the interaction between credit and 
liquidity, weaknesses in model-ba sed risk assessments, which led to an overestimation of 
the ability of financial firms as a whole to manage their risk and a corresponding 
underestimation of the capital they should hold. As showed in the Commission Green 
Paper and its accompanying Staff Working Do cument, the failures were also due to 
weaknesses in the governance aspe cts of risk management.  
Credit institutions that faile d or encountered difficulties and had to be bailed out by 
governments were generally lacking an approp riate risk culture. To illustrate, in many 
cases, credit institutions were not able to identify and control risk internally due to 
inefficient risk oversight by Bo ards of directors and ineffect ive internal risk management 
as well as the consequences of the unsound remuneration structures that encouraged 
excessive risk-taking which had been put in place.  
These weaknesses were also due in part to th e lack of effectiveness of the existing rules 
on corporate governance and the failure of sh areholders and superv isors to effectively 
monitor risk. Statutory auditors had a limited role with regard to risk issues. In fact, the 
general consensus78 is that the principles on corpor ate governance existing prior to the 
crisis, namely the OECD principles, the recommendations of the Basel Committee, and European legislation, already covered to a ce rtain extent the problem s highlighted by the 
financial crisis. However, the financial crisis  revealed the lack of genuine effectiveness 
and implementation of the corporate governance principles and mechanisms in the financial services sector, particularly with regard to banks. This was due to different 
factors.  
First, it seems that the existing principles we re too general, too broad in scope and were 
not sufficiently precise. As a result, they do not seem to have been well understood in 
practice and they left a wide margin of appr eciation for financial institutions. In most 
cases, this seems to have led to a purely formal application of corporate governance 
principles (i.e., a box-ticking exercise), with no real qualitative assessment. Existing rules 
on governance of credit institutions were not  sufficient to prevent behavioural excesses 
that contributed to the crisis because Boards failed to challenge management.  
                                                
 
77 De Larosière Report (2009), pp. 8 to 9. 
78 See the OECD's public consultation Corporate governance and the financial crisis  of 18 March 
2009 and in particular the sec tion entitled 'Implementation gap'.  
 
EN 100   EN Second, the non-binding nature of most of th e corporate governance principles in Europe 
and the fact that there was no legal oblig ation to comply with recommendations by 
international organisations or the provisions  of corporate governance codes contributed to 
the lack of effective compliance by financial institutions with the corporate governance principles
79.  
Finally, in the absence of legal requirements , there are three principal drivers in the 
banking sector towards compliance with the codes of corporate governance: voluntary 
self-regulation, investor pressu res and regulatory oversight. Ho wever, as showed below, 
neither of these mechanisms worked in practi ce. In particular, there was a clear lack of 
effective monitoring of implementation of corporat e governance principles by 
shareholders and supervisory authorities, pa rtly due to insufficient information from 
credit institutions.  
The detailed problem analysis which follows  is based on the findings of the Commission 
Green Paper on Corporate Governance in Financial Institutions and Remuneration 
policies (COM(2010) 284 final)  and its accompanying staff working document Corporate 
Governance in Financial Institutions: Lessons to be drawn from the current financial crisis, best practi ces (SEC(2010) 669).  
3.2.1.  Weaknesses in internal ove rsight of risk strategies 
The Board and senior management are prim arily responsible and accountable for the 
governance and performance of  credit institutions. Notwithstanding the differences in 
Boards' structures across Europe, part of th e Board’s responsibility is to monitor the 
performance of the company, supervise the mana gement and, as a consequence, to act as 
a counter-weight to the often risk-laden grow th aspirations of some management teams
80. 
Boards of a credit institution have explicit a nd implicit obligation to safeguard the monies 
credit institution receives from the public (de posits, investments etc. ) and consequently to 
ensure that credit institution is managed in a safe and sound manner81. However, in many 
instances this respons ible oversight did not occur due Board failures but also to 
inappropriate standing and authority of the risk management and control function. As a 
consequence, government intervention was re quired to protect stakeholders and the 
stability of the financial system.  
3.2.1.1.  Inadequate risk oversight by Boards 
The current financial crisis revealed serious flaws and shortcomings in risk oversight by 
Boards at a number of financial institutions . According to the Basel Committee, these 
                                                 
79 Directive 2006/46/EC obliges financial institutions listed on regulated markets to draw up a 
corporate governance code to whic h they are subject, and to indi cate any parts of the code from 
which they have departed and the reasons for doing so. 
80 See Comparative study on corporate governance codes relevant to the EU and its Member States,  
Weil, Gotshal & Manges LLP, on behalf of the European Commission, March 2002. 
81 See, for instance, J. Palmer, C.S. Hoong, How can financial supervisors improve the effectiveness 
of corporate governance? ", October 2010. 
 
EN 101   EN shortcomings were mainly attributable, to insufficient Board oversight of executive 
management82. In addition, Board was not ade quately involved in strategy and 
consequently gave low priority to risk issues  as compared to other topics. Finally, Boards 
did not receive adequate and timely informa tion on risk. As a result of these failures, 
credit institutions were allowed and, in some  cases, even encouraged, by their Boards to 
take excessive risks that included unprecedente d levels of leverage and high-risk business 
strategies83.  
A) Lack of effective challenge of se nior management decisions by Boards 
Credit institutions are, by definition, complex entities with different types of risks linked 
to their activity. In order fo r the Board to fulfil its dutie s and to be able to understand 
fully all relevant risks and constructively challenge management decisions, members of 
the Board should devote sufficient time to their duties and posse ss the appropriate 
expertise.  
However, in many cases, non-executi ve Board members did not devote sufficient time  to 
fulfil their duties, mainly due to the accu mulation of a large number of mandates in 
different companies. For instance, a non-executive director without any committee membership would, until recently, typically expe ct to work about fi fteen days per annum 
in a credit institution
84, whereas it is now recognised th at a board member should spend 
from 30 to 60 days per annum, depending on th e complexity of the financial institution. 
For example, at Bear Stearns, in the seven- member audit committee, three directors held 
among them 18 board seats on listed companies.  The audit committee chairman served on 
the boards of five listed companies in addition to Bear Stearns. Two members of the audit 
committee served on the audit committees of  11 public companies between them. This 
model of part-time Boards with Board me mbers combining a number of mandates in 
different companies has proved unworkable, particularly in large complex financial 
institutions. The crisis has revealed the difficulties whic h non-executive directors face 
understanding all dimensions of risks being taken by financial institutions within the time 
commitments typically required from them. 
As shown by different studies85, the presence of a sufficient number of experienced and 
informed non-executives encourages challe nge, as opposed to Boards whose members do 
not question management decisions because the subject is too technical for them. 
However, the crisis showed that many non-executive Board members lacked relevant expertise  and skills to be able to perform their duties and efficiently challenge dominant 
chief executives pursuing aggressive growth strategies. As an example, at Lehman 
Brothers, there was a notable absence of fina ncial services expertise on the board. There 
                                                
 
82 BCBS, October 2010. 
83 J. Palmer, C.S. Hoong. 
84 See for instance, report was prepared  f or the OEC D by R. C. Anders on, Risk management and 
Corporate governance , where it results from the interviews conducted with that few non-executive 
directors have more than an absolute maximum of 20% of their year to devote to any given Board, and in many cases their attendance at meetings may be as little as fifteen days a year. 
85 See, for instance, Walker, D. (November 2009). 
 
EN 102   EN was also an absence of current business experi ence. The chairman of the audit and of the 
risk committees was a trus tee of a non-profit foundation86. In many cases, lack of 
expertise of non-executive Board members pr evented them from ca rrying out checks on 
the plausibility of information presented to th em and explains in pa rt the over-reliance on 
ratings. In addition, the nomi nation process for non-executive s often did not sufficiently 
assess their capacity to carry  out non-executive functions, including the ability to 
challenge the management.  
Although insufficient time commitment and inad equate expertise were the main drivers 
of the lack of effective challenge by Boar ds of management decisions, other factors 
contributed to this situation. Several reports87 have clearly demonstrated that, faced with 
a chief executive officer who is omnipres ent and in some cases authoritarian, non-
executive directors felt unable to raise obje ctions to, or even question, the proposed 
guidelines or conclusions of the management du e to a lack of technical expertise and/or 
confidence ( management dominance ). The results of the public consultation show that 
combining functions of Chairman and Chie f Executive Officer in the same financial 
institution disregards the di vergence of duties and capaci ties and concentrates an 
unwarranted amount of power and dominance in the hands of one person. Also, due to 
the amount of work, especially in system ically important fi nancial institutions, 
cumulating both functions does not a llow for sufficient time-commitment. 
Finally, the selection of candidates for non-ex ecutive positions in financial institutions 
has drawn on a too narrow pool of people, non- executive directors being often recruited 
through an “old boy network” from among bu siness and personal contacts of current 
board members. For instance, the Higgs Review in the UK of  2003 found that the 
majority of non-executive directors in UK co mpanies, including financial institutions, 
were white, middle-aged males of British origin  with previous plc director experience. 
Non-British nationals accounted for only 7%  of non-executive positions, while British 
citizens from ethnic minority backgrounds accounted for only 1% of such positions. The 
survey also found that although about 30% of managers in the UK corporate sector were 
female, women held only 6% of non-executive positions. Recent research shows that this 
situation has not evolved. This lack of diversity  in the composition of Boards with 
regard to cultural, educationa l, professional and legal backgr ound and also with regard to 
age and gender resulted in Boards being dominated by a narrow group-think which, in 
many cases, contributed to the failure of non-executive Board memb ers to effectively 
challenge management decisions88.  
                                                 
86 For a detailed analysis of Lehman Brothers Board composition, see Lehman Bothers: Peaking 
under the Board Façade , Stanford Graduate School of Business, CGRP-03, April 2010. 
87 See for instance, report by R. C. Anderson where many interviewees have referred to CEO’s as 
dominant, persuasive individuals who are used to getting their own way within their organisations. 
Some have been described as “imperial”, others have been described as “bullying”. See also 
Walker D. (2009). 
88 For instance, the British Treasury Select Committee report Women in the City , July 2010, said 
that: "We believe the lack of diversity on the Boards of many, if not most, of our major financial 
 
EN 103   EN Whilst it is not exclusive to credit institutions, lack of diversity and, in particular, gender 
gap, on Boards of credit institut ions is particularly acute, as showed in the charter below.  
Figure 3: Women representation on Boards in corporate sector in Europe 
 
An increasing number of reports indicate, howe ver, that there is a positive correlation 
between diverse Boards and the companies’ performance89. Agency theory suggests that 
a more diverse Board is a better monitor of management because Board diversity 
increases Board independence. People with different gender, cultural background might 
ask questions that would not be asked by dire ctors with more traditional backgrounds. A 
report commissioned by the California Public Employees' Retirement System (CalPERS) 
for example, found that companies that have diverse Boards perform better than Boards 
without diversity90. The report stated that companies without ethnic minorities and 
women on their Boards eventually may be at a competitive disadvantage and have an under-performing share value. A plethora of European studies came up with the same 
                                                                                                                                                
 
institutions may have heightened the problems of ’group think’ and made effective challenge and 
scrutiny of executive decisions less effective". 
89 Baumgarten, P., Desvaux, G., & Devillard-Hoeillinger, Women Matter 1: Gender diversity, a 
corporate performance driver , McKinsey & Company, 2007; The Bottom Line: Connecting 
Corporate Performance and Gender Diversity’, by Catalyst, 2004; ‘Women to the Top!’, 2007, by 
EVA.  
90 Deborah L. Rhode and Amanda K. Packel, Diversity on Corporate Boards,  Stanford Centre on the 
Legal Profession, September 2009. 
 
EN 104   EN result no matter the number of co mpanies surveyed in each report91. For example, 
research conducted by McKinsey in 2007 of over 500 European companies with a market 
cap over 150 million euros, found greater prof itability of companies with a higher 
proportion of women executiv es and Board directors92. 
In addition, there is substantial economics lit erature on the effect of  gender on attitudes 
toward risk, and most of it appears to support the idea that men are le ss risk averse than 
women in their financial decision making93.  
Nevertheless, this positive correlation between gender balance and performance of 
companies has not led to an im proved situation as regards diversity on Boards of credit 
institutions. Competitive pressure apparently  does not suffice to bring change through the 
relative advantages offered by gender diversity with regard to profit ability and economic 
growth. This seems to be undermined in pa rticular by co-optation in the process for 
selection of Board members, i.e. when candi dates for Board membership are selected by 
existing Board members. This perpetuates sele ction of candidates of similar profile and 
background. 
B) Lack of ownership by Boards of risk strategy 
In addition to the lack of effective ch allenge by Boards of management decisions, 
excessive risk-taking in credit institutions has been partly due to lack of adequate Board 
involvement in approving and overseeing the risk strategy (risk appetite) and risk 
management structure. Board members did not feel themselves sufficiently concerned by 
risk issues which resulted in lack of owne rship of risk matters by Boards. Often, there 
were no clear lines of responsibility with re gard to risk identification and management. 
The evidence gathered94 shows that in several credit in stitutions, there was a lack of 
acknowledgement at the Board le vel of the risk certain tr ansactions implied, while the 
risk appetite was either not properly define d or not defined at all. There was also no 
effective monitoring of whether the limits set by the risk strategy and the risk appetite 
were respected. This can be illustrated by th e example of UBS, wher e there were no clear 
guidance on front desk on the limits of risk  exposure and lack of coordination of risk 
strategy. 
C) Low priority given by Boards to consideration of risk issues 
                                                 
91 See, for instance, S. Nielsen and M. Huse, The Contribution of Women on Boards of Directors: 
Going beyond the Surface, Corporate Governance: An International Review, 2010, 18(2): 136–
148. 
92 McKinsey and Company, Women Matter: Gender  Diversity, A Corporate Performance Driver, 
October 2007. 
93 See, for instance, Powell, M. and Ansic, D, Gender difference in risk behaviour in financial 
decision making: an experimental analysis , Journal of Economic Psychology, 1997; Jianakopolos, 
N. A. and Bernasek, A., Are women more risk-averse ?, Economic Enquiry 1998.  
94 See, for instance, evidence of fo rmer Chairmen and Chief Executive s to the Treasury Select of the 
House of Commons. 
 
EN 105   EN In credit institutions, risk is at the core of the company business models. Many banks run 
complex businesses with many different busin ess lines. It takes both skill and time to 
understand all the risks to which these institutions are e xposed, how these ri sks interrelate 
and how they could expose the banks to lo sses beyond the risk tolerance. Without this 
awareness and understanding it is difficult for the Board to provide effective checks and 
balances to the bank's management. However, it was reported that Boards did not spend sufficient time in meetings discussing issues related to risk
95. For instance, at Lehman 
Brothers, the finance and risk committee me t only two times during the course of 2008. 
This was partly a consequence of the lack of  a clear role of the Board in overseeing a 
company’s risk management, insufficient tim e commitment and inadequate expertise. 
Also, during the market boom, risk was genera lly not considered as an issue of high 
relevance to the Board, and low priority wa s given to discussion of risk matters as 
compared to other subjects, such as growth  strategy or mergers and acquisitions. In 
addition, due to internal organisation struct ure, Boards tended to focus mainly on 
financial reporting risk (i.e. risk linked to accounting misstatements) and tasked the audit 
committees to handle most of the risk mana gement activities, thereby failing to see the 
need for a separate risk committee to manage risks on an enterprise-wide level96. This 
insufficient attention by Boards to risk issu es prevented them from efficiently overseeing 
risk on the broad company level. 
D) Inadequate information of Boards on risk issues Even where all necessary systems to oversee risk  are in place, it is essential that Boards 
receive timely and accurate information in order to be able to take informed decisions. However, the crisis revealed that Boards di d not always have a cl ear understanding of 
what information on risk they actually ne eded. Reporting on risk has not been in all 
situations timely, comprehe nsive and understandable for decision-making or control 
bodies, limiting thereby the capacity of anal ysis and critical review of executive 
management and/or the Board
97.  
According to corporate governance professi onals, “Boards tend to live in a partial 
assurance vacuum. The risks are known by ma nagement but the Board does not get to 
hear about them. The Board only gets the a ssurance that manageme nt chooses to give 
                                                 
95 See, for instance, the Beyond box-ticking: A new era for risk governance , a report from the 
Economist Intelligence Unit Sponsored by ACE and KPMG, 2009, where many respondents to the 
survey – across geographies and company sizes – admit that their companies do not spend enough 
time at Board level discussing risk issues. 
96 See, for instance, General Counsel Roundtable, Chief Risk Officers and Risk Committees, Key 
Findings, August 2007 . 
97 According to report the Economist Intelligence Unit Beyond box-ticking: A new era for risk 
governance,  the communication of risk information to th e Board is seen as a problem area, with 
only 40% believing that their organisation is good at ensuring clear lines of reporting to allow risk 
information to be escalated. 
 
EN 106   EN them. It is relatively rare that managers  report candidly to the audit committee and the 
Board because of the disincentives of doing so.98” 
There was a lack of direct lines of reporting of the risk  management function to the 
Board. For instance, the Senior Supervisor s Group (SSG) found that "in some cases, 
hierarchical structures tended to serve as filters when information was sent up the 
management chain, leading to delays or distor tion in sharing important data with senior 
management".  
Moreover, in a number of cases there has been a general lack  of appropriate presentation 
of information on risks to the Board. Mana gement rarely compiled for their Boards 
relevant measures of risk, a view of how ri sk levels compare with limits, the level of 
capital that the firm would need to maintain  after sustaining a loss and the actions that 
management could take to restore capital after sustaining a loss. 
3.2.1.2.  Inappropriate standing of th e risk management function 
The risk management and control functions to gether with the Board play an important 
role in efficient risk oversight. Howeve r, many banks saw the corporate governance 
aspects of risk management as "a paper pus hing exercise that adds little value" and 
institutions were reported to  lack fundamental risk culture99. In many cases, the risk 
management function in credit institutions ha s not been given proper weight in decision-
making process. Moreover, the risk function as such has often not been respected and 
regarded at the same level as  the operational /trade function.  
The highest representative, generally the Chie f Risk Officer (CRO), was not always in a 
position to speak up or raise concerns  due to hierarchical constraints100 and did not have 
sufficient levers to either sanction or veto in vestment decisions. As a result, risk issues 
were often not given appropr iate consideration in major management decisions. 
Furthermore, there was a lack of existing stru ctures at Board level, within which the CRO 
was able to interact and to ensure that th e all dimensions of ri sk were appropriately 
considered.  
As described in the report of the OECD101, at a number of banks, the lower prestige and 
status of risk management st aff vis-à-vis traders played an  important role. For example, 
Société Générale noted that "the general environment did not encourage the development of a strong support function able to assume th e full breadth of its re sponsibilities in terms 
of transaction security a nd operational risk management . An imbalance therefore 
emerged between the front office, focused on expanding its activitie s, and the control 
                                                
 
98 See, for instance the interview of Andrew Cham bers, head of the corporate governance committee 
at the Association of Chartered Certified Accountants in the Beyond box-ticking: A new era for 
risk governance.   
99 See, for instance, the report fr om by R. C. Anderson to OECD. 
100 For example, the CRO was placed under rather than at equal level to the CFO. 
101 OECD, February 2009.  
 
EN 107   EN functions which were unable to develop the critical scrutiny necessary for their role”102. 
The inability of risk management staff to im pose effective controls was also noted at 
Credit Suisse103.  
3.2.2.  Lack of effective external control 
Until now, very general and/or non-binding nature of most existing principles on 
corporate governance has meant that external control of effective implementation of these 
principles has been crucial. However, the financial crisis has s hown that neither the 
shareholders nor the supervisory authorities were effectively monitoring and controlling 
the implementation by credit inst itution of these principles.  
Shareholders did not fulfil their role of "r esponsible owners", which entails actively 
monitoring companies and using shareholder righ ts to ensure long-term value creation of 
companies and improve their corporate gove rnance and strategy. Consequently, market 
discipline which is essential for effectiv e implementation of corporate governance 
principles did not work properly.  
In additional, in many instances, the serious difficulties and failures of banks occurred 
only a few months after their accounts ha d been issued wit hout any qualification, 
emphasis of matter or even indication in the a uditors' reports regarding such risks in the 
financial statements. 
Whilst lack of shareholders engagement a nd auditor's involvement were one of the 
drivers of the corporate govern ance failures in cr edit institutions, th ey are out of the 
scope of this impact assessment and will be  dealt with in other Commission initiatives 
(See Section 6.4.). Inadequate supervisory review of internal governance is analysed below. 
3.2.2.1.  Inadequate supervisory review  of internal governance 
The financial crisis revealed a lack of suffi cient dialogue between Bo ards and supervisors 
regarding corporate governance is sues. This lack of supervisory oversight did not allow 
the timely identification of the financial inst itutions that were experiencing weaknesses in 
their corporate governance practices.  
Inadequate supervisory control of governance practices in credit in stitutions was mainly 
due to the lack of clear role for supervisor s in overseeing corporat e governance structures 
and no clear guidance on the methodology. Nati onal supervisors took varying degrees of 
interest in the governance of credit instituti ons. While some supervisors took steps to 
assess compliance with the exiting national principles and guidelines, the majority were too much focused on formal compliance by fi nancial institutions with some limited 
                                                
 
102 Société Générale, Report of the Board of Direct ors to the General Shareholders Meeting, 2008, 
company website. 
103 Financial Services Authority, Final notice to Credit Suisse First Boston, 13 August 2008, London 
 
EN 108   EN requirements rather than on the proper f unctioning of the Boar ds and on effective 
implementation by financial institutions of sound corporate governance principles104.  
In many cases, supervisors did not monitor whether the risk governance frameworks and 
internal organisation could easily adapt to cha nges in the business model or risk profile of 
the credit institution. They also failed to ensu re appropriate expertise of Boards and to 
apply "fit and proper" test, focu sing essentially on probity test105. In addition, the 
majority of supervisors had few interactions with Boards and Board committees, preferring to deal directly with management
106.  
Moreover, due to the lack of clarity in their role in over seeing corporate governance in 
credit institutions and to the non-binding na ture of a significant part of corporate 
governance principles, most s upervisors were unable to a pply sanctions for corporate 
governance failures in financial institutions or their Boards on grounds of lack of appropriate risk oversight. They also did not possess adequate tools to monitor the 
functioning of Boards (e.g. no access to performance eval uation, no competence with 
regard to diversity). 
Finally, the financial crisis revealed serious limitations in the existing supervisory 
framework globally, both in a national and cro ss-border context. Supervisors did not have 
sufficient resources nor did they have an adequate mix of skills. The consequence was a lack of understanding of and pr oper monitoring of financial in stitutions' activities. Also, 
the existence of different national system s of supervision has led to inconsistent 
supervisory powers across Member States, regulatory competition and supervisory capture. This prevented the authorities from exercising efficient supervision in the context of expansion of i nvestment bank business model
107. In general, the evidence 
tends to show that the crisis prevention f unction of supervisors has not been performed 
well. However, these problems are of a more general nature and are out of the scope of 
the analysis of this document. This doc ument will only focus on the role of the 
supervisors in risk governance of credit institutions. 
                                                 
104 For instance, under the UK FSA supervisory approach before the crisis, governance of credit 
institutions was evaluated according to a set of criteria, compliance with which could be assessed 
using a box-ticking approach. See The FSA's Risk-based approach: guidance for non-executive 
directors , November 2006.  
105 See, for example, OECD (November 2009), p.27. 
106 See J. Palmer, C.S. Hoong 
107 See De Larosière report (2009), pp. 41 to 42; Guido Tabellini, Why did bank supervision fail? in 
The First Global Financial Crisis of the 21st Century, June 2008;  
 
EN 109             
 
     Management 
dominance of 
Boards  Lack of challenge of 
senior management 
decisions by the Boards 
Poor 
expertise 
of Board 
members Lack of 
diversity of 
views  within 
Boards Insufficient 
time 
commitment 
of Board 
members 
Inadequate voluntary and binding 
rules/principles on corporate 
governance: too high level, non-
binding and lack of penalties Ineffective supervisory guidance and 
monitoring of internal corporate 
governanceLimited role of 
external auditors on 
risk issues Shareholder inaction 
with regard to excessive risky strate
giesOut of sco pe EXTERNAL DRIVERS MICROECONOMIC EFFECTS: 
Negative impact on stakeholders: 
depositors, employees, shareholders, etc.  MACROECONOMIC EFFECTS: 
Systemic risk and damage to the real 
economy due to  credit contraction; 
taxpayers money might be used to support 
credit institutions  
INTERNAL DRIVERS 
(CREDIT INSTITUTION )PROBLEM: 
Credit institutions implement short-term, excessively risky strategies and are unprep ared to weather cr isis situations  CONSEQUENCE: 
FAILURE OF CREDIT INSTITUTION 
Wrong 
incentives for management and 
employees, 
mainly within remuneration policies  Inadequate risk oversight by Boards Inappropriate standing of risk management function 
Lack of ownership by 
Boards of risk 
strategy 
 Low priority given 
by Boards to 
discussion of risk issues  Inadequate information 
of Boards 
on risk 
issues The risk 
management 
function does 
not have 
direct access 
to the Board  The risk management 
function lacks 
appropriate authority 
over and 
independence from 
operational units 
 
EN 110   EN 4. BASELINE SCENARIO AND SUBSIDIARITY  
The issue of corporate governance is currentl y being addressed both at an international 
and European level, and by Member States a nd credit institutions. However, the existing 
initiatives risk not being suffici ent to change the behaviours.  
4.1. Baseline scenario: expected developm ent if no EU action is taken 
Excessive risk-taking by credit institutions has been or is in process of being addressed 
by different reforms at EU level, in partic ular the new capital adequacy requirements and 
the past and future amendments to the Cap ital Requirements Directive. These measures 
will contribute to avoiding excessive risk exposures and strengthen the European financial system. However, these new capital requirements rules should be complemented 
by reforms to corporate governance practices within credit institutions and change in 
corporate behaviour. Credit institutions are in the process of changing their risk oversight and management practices, demonstrating r ecognition of the importance of improving 
governance standards as a conseq uence of the financial crisis.
108 Moody’s report  of 
March 2010109 which reviewed board composition at 20 large global banks in North 
America and Europe since the beginning of th e crisis in July 2007 shows, for instance, 
that experience in the financial industry is now more prominent fact or in building bank 
boards as compared to pre-crisis situation: 46% of the banks’ outside directors now have 
financial backgrounds, as opposed to 32% pre-crisis, on averag e; and 13 banks had split 
the roles of chairman and CEO. However, the same report also recognises that there is 
still need for improvement and that the change s are far from complete: financial industry 
experience among outside directors remains weak at some banks, such as the BNP 
Paribas, Deutsche Bank or KBC where 20% or fewer of the outsi de directors possess 
relevant experience. A number  of banks do not have any form of independent board 
leadership (either via an independent chairm an or independent lead director / senior 
independent director role), such as BNP Paribas, Credit Suisse, Deutsche Bank, KBC, 
Santander Group and Société Générale. Also, th is report only analyses the situation of 
large institutions that have by definition st rong capacities to rapidly respond to corporate 
governance challenges and shareholders' exp ectations. The progress of small banks in 
changing their corporate governan ce practices has not been subj ect to a detailed survey.  
Additionally, as demonstrated by past experien ce, corporate governance practices tend to 
be subject to procyclicality. Im mediately after the crisis, co mpanies focus their attention 
on enhancing corporate governance  standards but when the mark et recovers and there is a 
new economic boom, sound risk governance often gives way to profit-maximising 
strategies driven by investor's appetite and herd effect110. Boards tend to become 
                                                 
108 See IIF Report Final Report of the IIF Committee on Ma rket Best Practices: Principles of 
Conduct and Best Practice Recommendations, July 2008 . 
109 Moody's, Bank Boards in the Aftermath of the Financial Crisis, March 2010. 
110 As Alan Greenspan has admitted, "the innate human responses […] result in swings between 
euphoria and fear that repeat themselves gene ration after generation with little evidence of a 
 
EN 111   EN "cheerleaders of […] unlimited li quidity, low interest rates, perpetual growth, and rapidly 
growing profits, bonuses and stock-option benefits."111 People generally underestimate 
risks that have not materialised for a long time—a phenomenon known as disaster 
myopia—and are biased towards information that  is in line with their a priori beliefs112.  
This issue could be addressed through th e introduction of new corporate governance 
framework at national, interna tional or European level.  
At national level, some Member States ar e undertaking their own initiatives to improve 
corporate governance in financial institutions . A major initiative to improve corporate 
governance in the German banking sector was the introduction of new Minimum 
Requirements for Risk Management, which required banks to de velop a risk strategy for 
the entire group, regulated executive remunerati on and aimed at further professionalizing 
the supervisory board (the supervisory board must now include at least one person that 
has the required knowledge, abilities and ex pert experience to properly fulfil his 
monitoring task). However, the new regulat ion is limited and does not, for example, 
encompass explicit criteria to assess the co mpetence and experience of supervisory board 
members. Other reforms focused on listed co mpanies only. This sugge sts that the recent 
changes would be unlikely to address all weaknesses of the German corporate 
governance system. 
In UK, FSA has strengthened its requirements w ith regard to select ion of candidates for 
Board membership and other key persons, improved their selection procedure and 
published guidance with regard to Risk Com mittees and Chief Risk Officers. Financial 
Reporting Council (FRC) has published a Stewar dship Code for institutional investors 
and introduced changes to the UK Corporate Governance Code to help company boards 
become more effective and more accountable to  their shareholders. These measures could 
help ensuring shareholders' engagement and thus contribute to impr oved external control 
of corporate governance. However, they remain limited to listed companies. 
At international level, the revised Basel Princi ples aim at addressing fundamental 
deficiencies in bank corporate governance which became apparent during the financial crisis. At a European level, the European  Banking Authority (EBA ) is in process of 
revising its principles on Inte rnal Governance with a view  to enhance and consolidate 
supervisory expectations in order to impr ove the sound implementation of internal 
governance arrangements in fina ncial institutions. Th ese revisions may contribute to the 
avoidance of excessive risk-taking by credit institutions in the future, help them better 
withstand financial turmoil and finally lower the risk of future crises. However, the change is neither far from complete nor is it  clear whether it will remain embedded so far 
as to guarantee the necessary changes in the culture towards sound corporate governance.  
                                                                                                                                                
 
learning curve." , We will never have a perfect model of risk - FT - By Alan Greenspan, 16 March 
2008. 
111111 See J. Palmer, S.C. Hoong. 
112 See A. Houben and J. Kakes, Risk identification and mitigation: lessons from the crisis , 
September 2010. 
 
EN 112   EN In fact, the existing interna tional standards and future EB A guidelines are non-binding in 
nature. Although they should usefully elabor ate on existing high-level principles in 
European legislation and provide  detailed guidance to financial institutions as regards 
supervisory expectations, their implementa tion will depend on each financial institution 
and on the effective supervision by competent authorities. These guidelines will not solve the problems outlined in Part 3, that st em from the ineffective implementation by 
financial institutions of existing rules due to the non-binding nature of the principles in 
EU legislation themselves, which left corporate governance issues to non-binding 
domestic codes, auto regulati on and failed to clearly define the roles and re sponsibilities 
of different actors.  
If no action is taken, the problems related to the lack of effective control of risk will 
remain. In addition, unclear and open-ended rules will c ontinue to generate legal 
uncertainty, which might find only temporary and partial cl arification through guidelines, 
coordination and convergent application by na tional competent aut horities within the 
European Banking Authority. 
4.2. The EU's right to act and subsidiarity 
The EU has the right to act in the field of  corporate in credit institutions according to 
Article 53(1) TFEU and to Article 114 TFEU. 
Although, as described above, some Member Stat es have taken some actions to reform 
corporate governance of cr edit intuitions, these actions  fall short of introducing a 
comprehensive reform of corporate governance throughout the European Union. However, due to integrated capital markets a nd interrelatedness of the European financial 
sector, no reform could be successful unless ad opted by the majority of EU jurisdictions. 
Whilst some Member States are taking specific measures to improve corporate governance in their credit inst itutions, these actions remain limited, as described in 
paragraph 4.1. above. Member States are hes itant to act at national level and adopt 
stricter rules due to the first mover disa dvantage which could jeopardize a country’s 
competitive position as a financial centre. This ‘level playing field’ argument is 
frequently used to resist regulatory reform. Credit institutions will threaten to move to 
other, more lenient, countries. Moreover, th ey will use their influence on politicians and 
the media to dilute reform efforts and protect their freedom to manage credit institutions as they want. Certain shareholders will join in these efforts, as they aim at inducing 
management to maximize shareholder wealth  through increased risk  taking. This would 
result in regulatory arbitrage and underm ine or create new obs tacles to the good 
functioning of the in ternal market.  
In addition, unilateral reforms would not prevent contagion fro m other countries choosing 
not to regulate corporate gove rnance in credit instituti ons. Assuming that failures in 
corporate governance would be possible in one  Member States and would lead to the 
failure of a large credit institution as a result of excessive risk taking, the negative 
externalities from such a failure would eas ily impact on other countr ies, including those 
that have reformed corporate gover nance in their ow n institutions. 
 
EN 113   EN Finally, it results from the contributions to  the public consultation that a uniform and 
consistent approach at European level is crucial to effectively deal with corporate 
governance weaknesses in credit institut ions. Common standards at EU level are 
necessary to promote a well f unctioning internal market and avoid the development of 
different rules and practices  in the Member States. 
5. OBJECTIVES  
The general, specific and operational objectives of the reform of corporate governance in 
credit institutions are pres ented in the following table. 
Figure 5: Objectives 
General Specific Operational 
Improve time-commitment of 
Board members 
Improve expertise of Board 
members  
Counterbalance management 
dominance  
 
Improve effective 
challenge by Board 
of management 
decisions Improve diversity of Board 
composition  
Improve ownership by Board members of risk 
strategy 
Increase the priority given by Board members to 
consideration of risk issues  
 
Increase the 
effectiveness 
of risk 
oversight by 
Boards 
Improve the information flows to Board on risk 
Improve the standing of the risk management function Prevent failure of 
credit institutions 
 
Reduce systemic 
risk  
 
  
 
Prevent 
excessive risk-taking by credit institutions by 
remedying the 
weaknesses in risk governance system. 
 
 
Ensure efficient monitoring of risk governance by supervisors 
6. POLICY OPTIONS , ANALYSIS OF IMPACTS AND COMPARISON  
In this part, options will be identified and analysed for policies which could target the 
problems described in Part 3 and could realis e the objectives set out in Part 5. Then the 
choice of instrument will be discussed. 
 
EN 114   EN 6.1. Substantive policy options: description, analysis of impacts and comparison 
The substantive policy options that will be disc ussed are: A (baseline scenario), B (better 
implementation of existing EU framewor k) and C (new provisions on corporate 
governance). The options are discussed and m easured against the ge neral and specific 
objectives set out in Part 5. In the first se ction, option A, option B and option C will be 
discussed and compared. The second secti on will examine different sub-options under 
option C. 
6.1.1.  Discussion and comparison of options A, B and C 
6.1.1.1.  Option A - No action at EU level (baseline scenario) 
This option implies a do-nothi ng policy which leaves the existing EU-measures as they 
are, without introducing new measures to remedy the identified weaknesses in risk 
governance in credit institutions. This option leaves a very high degree of flexibility to 
credit intuitions and to national supervisors which result in insufficient and diverging implementation of existing requirements. This option seems unlikely to achieve the underlying objective to improve the effectiv eness of the risk governance and prevent 
excessive risk-taking by credit  institutions and therefor e reduce systemic risk.  
6.1.1.2.  Option B - Better implementation of existing EU framework 
This option implies the better implementation of the existing EU legislative framework, 
i.e. the Directive 2006/46/EC , the Capital Requirements Directive and the new EBA 
guidelines on internal governance, as well  as national corporat e governance codes by 
credit institutions and supervisory authorities. This option would leave as similar degree of flexibility to credit institutions and to  supervisory authorities as compared to the 
baseline scenario. 
One method to incentivise credit institutions to put in place adequate risk governance 
arrangements is the possibility of credit institutions' arrangements being benchmarked 
and the results being put into the public domain. Another option would be to organise 
training seminars for banking supervisors in  order to ensure uniform and effective 
supervisory review of the exiti ng corporate governance practices. 
However, most existing risk governance provi sions are part of corporate governance and 
are, for the time being, part of nationa l corporate governance codes which are non-
binding in nature. Future EBA guidelines w ould not be binding either. Therefore, the 
effectiveness of this option relies solely on market discipline and the effectiveness of 
supervisory monitoring, which, as shown in Part 3, do not work sufficiently.  
Market discipline does not appear to have work ed as shareholders tend to be passive with 
regards to excessive risk-taking by credit institutions or encourage short-term risk strategies. Supervisors do not necessarily ha ve appropriate tools to effectively monitor 
the implementation of corporate governance pr inciples by credit institutions, in many 
cases because their role is not specified in a legal instrument. Competent authorities can 
 
EN 115   EN also be subject to re gulatory capture, applyi ng their supervisory power s in order to favour 
their national financial centre. Th is could result in regulatory ar bitrage, credit institutions 
choosing Member Sates with more lenien t requirements as their headquarters. 
The respondents to the public consultation, wh ereas recognising the importance of and 
the scope for improved implementation of ex isting principles, thought that this option 
will not be sufficient to achieve the underl ying objective of sound risk governance. In 
their opinion, the existing rules need to be furt her specified and clarified in order to avoid 
future corporate governance failures. 
Option B is therefore not the preferred opti on to achieve the objec tive of improved risk 
governance. 
6.1.1.3.  Option C - New provisions on risk governance 
This option goes beyond the existing framew ork on corporate governance in credit 
institutions and implies the development of additional and enhanced provisions and guidelines to improve risk governance. These additional provisions will contain measures 
to achieve the underlying operatio nal objectives, i.e.  increase the effec tiveness of risk 
oversight by Boards, improve  the standing and independen ce of the risk management 
function and ensure efficient monitoring of risk governance by supervisors. The detailed sub-options under option C are further examin ed in Section 2 below and in Annex I. 
This option will consist of measures which enhance transparency of corporate 
governance practices, principles-based, out come-focused rules and more specific 
organisational requirements. It will leave le ss flexibility to credit institutions and 
supervisory authorities and thus avoid regulat ory arbitrage. This option seems the most 
likely to achieve the specific objective of im proved risk governance in credit institutions 
and therefore contribute to ac hieve the more general objective  of preventing failures of 
credit institutions and reduce systemic ris k. It will enshrine best practice in hard 
requirements, set minimum standards, and give clear guidance to credit institutions and to 
supervisors on what is expected with regard to sound risk governance. At the same time, 
this option will still leave enough flexibility to credit institutions and supervisory 
authorities to take apply new requirements in  proportionate manner,  taking into account, 
the nature, scale and complexity  of activities of a credit intuition. The level playing field 
will be ensured by EBA guidelines which will  provide for a common approach on the 
application of the proportionality  principle and specify the deta iled application of the new 
principles to ensure their uniform implemen tation. The results of the public consultation 
show a general support for the reform of  the existing corporate governance framework 
and the introduction of new principles at Eur opean level, provided th at future proposals 
of the Commission are sufficiently  flexible and proportionate in  order to take account the 
differences in business models of financial inst itutions, the nature of their activity, their 
size, complexity, legal form and diffe rent corporate governance systems and 
arrangements, and avoid box-ticking exercise. . 
Option C is therefore the preferred opti on as compared to options A and B. 
 
EN 116   EN 6.1.2.  Discussion and analysis of sub-options under option C 
Option C contains sub-options th at relate to the operational objectives as identified in 
Part 5. This section shortly describes a nd analyses these sub-options. A detailed 
description, analysis and comparison of th e sub-options are provided in Annex I.  
The different sub-options have been chos en following the results of the public 
consultation on the Commission Green Paper as  most likely to achieve the underlying 
operational objectives: I. Increase the effectiveness of risk oversight by Boards; II. 
Improve the standing and independence of the risk management function; III. Ensure 
efficient monitoring of risk governance by supervisors.  
For the purposes of the discussion, the sub-options will be grouped according to the three 
operational objectives. Within each group, the s ub-options will be measured against the 
corresponding more specific ope rational objectives set out in Part 5 and also, where 
relevant, the following criteria will be used: 
Impact on effectiveness The sub-options should achieve  the operational objectives 
Impact on flexibility Credit institutions should be able to  adapt the principles to their 
structures and the specific nature of their activities 
Impact on enforceability The transposition and implementation of the principle should 
be easy to monitor 
Impact on the level playing field Regulatory arbitrage between Member States and at international level should be avoided. 
The different sub-options could be further classified into the following types: (i) 
measures which enhance transparency of co rporate governance practices to the market 
and to the supervisors, (ii) principles-bas ed, outcome-focused rules, leaving to credit 
institutions high degree of fl exibility to achieve the underlyi ng objective and (iii) specific 
and organisational rules, leavi ng credit institutions a limited de gree of flexibility. In fact, 
given the nature of the problems identified in Part 3, a combination between measures 
enhancing transparency, outcome-focused prin ciples and more specific rules establishing 
minimum standards will be mutually reinforci ng and present an appr opriate combination. 
For further details, see section on methodology in Annex I.  
6.1.2.1.  Sub-options to increase the effectiven ess of risk oversight by Boards 
The following table shows the sub-options under option C aimed at improving risk 
oversight by Boards of credit institutions. Th ese sub-options are classified according to 
different specific operational objectives they  aim to achieve. A detailed description, 
analysis and comparison of the sub-options are provided in Annex I together with the 
reasons why some of the sub-options have been rejected. 
 
EN 117   EN Figure 6: Sub-options to increase the effectiveness of risk oversight by Boards  
Operational objectives  Retained sub-options  Rejected sub-options 
Improve challenge by 
Board of management 
decisions  
Improve time commitment 
of Board members  - disclose the number of mandates of Board members in 
the annual report* 
- Board members must spend sufficient time to exercise their duties ** 
- limit the number of mandates a Board member may 
hold in different companies at the same time*** - disclose in the annual report the actual 
time spent by each Board member 
annually to exercise his/her function* - specify the minimum number of days 
that a Board member must spend per year 
to exercise its function*** 
Improve expertise of 
Board members  - disclose recruitment policy and the actual expertise of 
Board members in the annual report* 
- Board members shall be subject to an enhanced "fit and proper" test ** 
- Board members should recei ve appropriate induction 
and continuous training** - Nomination Committee at Board level*** - Board members must possess 
individually and collectively appropriate 
expertise** - set up detailed requirements with regard 
to the expertise of Board members*** 
Counterbalance 
management dominance  - prohibit cumulating mandates of Chairman and Chief 
Executive Officer in the same credit institution*** - disclosure of the existing practice* 
- Board members must behave independently from management** 
- minimum number of non-executive 
directors*** 
Improve diversity in Board 
composition  - disclose policy on diversity in annual report* 
- benchmarking of different practices at national and 
European level* 
- diversity must be one of the criteria of Board 
composition** - credit institutions shall esta blish a policy with regard 
to diversity** 
- put in place a quantitative target for gender balance*** - positive discrimination*** 
- increase employee participation*** 
Improve ownership by 
Boards of risk strategy - Boards must produce a declaration on the adequacy of 
risk management systems* 
- Boards must publish on an annual basis a risk 
statement* - Board must determine or approve the 
risk profile and strategy and any 
changes** 
- Board must approve new financial products*** 
Improve priority given 
by Boards to risk issues - disclose policy and practice with regard to discussion 
and analysis of risk issues during Board meetings* 
- Boards must devote sufficient time to risk issues**  
- Risk Committee at Board level*** - minimum time that Board must be 
spend to discuss risk issues*** 
Improve the information 
flows to Board on risk - disclose policy and practice with regard to the 
information flow on risk to the Board* 
- Board must determine the content, format and 
frequency of risk inform ation it should receive ** 
- risk management function must be able to report 
directly to the Board or risk committee ** - specific structures and formats for 
information flows to the Board and 
specific escalation procedures*** 
* measures which enhance transparency, ** principles-based, outcome-focused rules, *** specific rules  
The following table shows the different impacts of the retained sub-options to improve 
risk oversight by Boards as compared to th e baseline scenario. For detailed analysis of 
the impacts, see Annex I. 
 
EN 118   EN Figure 7: Analysis of impacts of retained sub-options: risk oversight by Boards 
Sub-options Effectiveness Enforceability Flexibility Impact on 
level playing 
field Estimation of related costs 
per credit institution 
Improve time-commitment of Board members 
Disclosure of number of mandates + + = = € 600 - € 1,000 
Board members must spend 
sufficient time to exercise their 
duties  + = = = 
Limit the number of mandates, with exceptions on proportionality 
grounds ++ ++ - ++ ? linked to the process of recruitment and possible 
increase in remuneration 
 
Improve expertise of Board members 
Disclosure of existing practice + + = = € 600 - € 1,000 
Appropriate expertise + + = = ? linked to the process of recruitment and possible increase in remuneration 
Enhanced "fit and proper" test  ++ ++ - ++ ? linked to the process of recruitment and possible 
increase in remuneration 
Induction and continuous training ++ + = + € 20,000 - 30,000  
Nomination Committee with 
exceptions on proportionality 
grounds + ++ - ++ € 8,000 - 15,000  
Counterbalancing management dominance 
Prohibit cumulating mandates of Chairman and Chief Executive 
Officer with exceptions on proportionality grounds ++ ++ - ++ 0 
Improve diversity of Board composition 
Disclosure and benchmarking  + + =  = € 600 - € 1,000 
Diversity as one of the criteria of 
Board composition + = =  = 0 
Policy with regard to diversity + + -  + 
Quantitative target for gender balance ++ ++ --  ++ ? linked to the process of recruitment and possible 
increase of Board members 
Improve ownership of Board for risk strategy 
Declaration on the adequacy of risk management systems ++ + - = ? could be significant and linked to the underlying 
internal process  
Risk statement  ++ + - = € 600 - € 1,000  
Improve priority given to co nsideration of risk issues 
Disclosure of existing practice + + = = € 600 - € 1,000 
Board shall devote sufficient time 
to risk issues + = = = ? should not be significant 
Risk committee at Board level with exceptions on proportionality grounds ++ ++ - ++ ? should not be significant 
Improve the information flow to Boards on risk  
Disclosure of existing practice + + = = € 600 - € 1,000 
Board must determine the content, format and frequency of risk information  + + = + 0 
Risk management function must be able to report directly the Board or 
risk committee  ++ ++ - + 0 
Magnitude of impact as compared with the baseline scenario: ++ strongly positi ve; + positive; – – strongly negative; – 
negative; = marginal/neutral; ? uncertain; n.a. not applicable 
 
EN 119   EN The retained sub-options aim at implementi ng at European level the recommendation of 
the revised Basel Principles that "the Bo ard has overall responsibility for the bank, 
including approving and overs eeing the implementation of the bank’s strategic 
objectives, risk strategy, corporate governan ce and corporate values. The Board is also 
responsible for providing oversig ht of senior management". They have been chosen as 
most effective, proportionate, enforceable  and efficient to achieve the underlying 
operational objective.  
In order to increase effectiveness of risk oversight by Boards, the combination between 
different sub-options (measures enhancing tr ansparency, outcome-focused principles and 
more detailed rules establishing minimum st andards) seems necessary. These different 
sub-options will be mutually reinforcing an d will not entail disproportional costs for 
credit institutions and su pervisory authorities.  
Sub-options with regard to disclosure will allow the market and the supervisors, at 
limited costs to credit institutions, to easily evaluate whether the existing practice is adequate taking into account th e size, the nature and the co mplexity of activities of a 
credit institution. Disclosure of  the number of mandates of Board members will allow the 
market and the supervisors, at limited cost to credit institutions, to easily evaluate 
whether a Board member has too many mandates, hamperi ng his/her ability to devote 
sufficient time to the credit institution, thus fa cilitating supervisory review. Disclosure of 
recruitment policies and of expertise of Bo ard members will inform the market and the 
supervisors on the required and actual expe rtise of Board members and allow them to 
verify that this expertise is adequate. Disc losure of exiting diversity and benchmarking of 
practices will make public credit institutions which do not have an appropriate diversity policy and thus will have a positive imp act on the improved diversity in Boards. 
Disclosure of existing practice with regard to  time devoted by Boards to risk will help 
supervisors to easily evaluate whether the Bo ards devote sufficient time to risk issues. 
Disclosure of the exiting policy (with regard to  information flows will help supervisors to 
easily check what kind of information Boar d receives and on the timeliness of that 
information and asses whether this informa tion flow is adequate. This facilitates 
supervisory review and contributes to redu ce costs of supervision because competent 
authorities do not have to sear for information. 
The sub-option limiting the number of mandates of Board members seems the most 
effective to achieve the underlying objective as  compared to the sub-option specifying the 
minimum number of days a Board member must spend per year to exercise its function, 
which would be difficult to monitor and enforce .Limiting the number of mandates sets a minimum standard and provides clear guidance to credit institutions and supervisors on 
the number of mandates which would exceed th e reasonable capacity of a Board member 
to spent sufficient time on the Board of a cred it institution. It is therefore easy to monitor 
and facilitates supervision. On the other hand, providing exceptions to this limitation 
allows to take account of the different types of  credit institutions an d different situations 
of Board members. However, to avoid box-ticking, the sub-option limiting the number of mandates need to be combined with a gene ral principle that a Board member should 
spend sufficient time to exercise his/her duties, which will allow supervisors to check 
 
EN 120   EN whether a Board member does in fact sp end sufficed time, although the number of 
directorship he/she holds does not exceed the maximum.  
The enhanced "fit and proper" test with minimum criteria a lthough less flexible than a 
general principle that Boards should posse ss appropriate expertise, without minimum 
criteria, is effective and easily enforceable and ensures a level playing field. Although the 
two sub-options would have similar impacts and costs, enhanced "fit and proper" test 
seems to better achieve the underlying obj ective, provides more guidance to credit 
institutions and supervisors, and therefore reduces the risk of different national practices, 
whilst still remaining proportioned compar ed. This sub-option will be usefully 
complemented by induction and continuous tr aining of Board members. In addition, 
setting a Nomination Committee at Board level will help prepare the decisions of the 
Board as regards the selection of candidates for Board membership and will ensure the independence of the selection process from management dominance.  The proportionality 
of this requirements will be  ensured by possible exceptions where establishing a separate 
Nomination Committee woul d not be appropriate. 
As regards management dominance, the most  effective way to ensure the independence 
of the Board in its oversight function and wh ich is most easy to monitor and enforce is 
the separation of the function of  the Chairman and the CEO, with possible exceptions in 
order to take into account particular circum stances. Sub-options requ iring disclosure of 
the existing practice in the credit institutions as regards independence of Board members, that Board members must behave independe ntly from management and to have a 
minimum number of non-executive directors on a Board of a credit institution, seem in 
fact either difficult to monitor, unenforceab le or unduly inflexible and disproportionate. 
Quantitative target for gender balance seems the most effective option to achieve the 
underlying objective of improved gender diversity as compared to positive 
discrimination. The latter sub-option seems in fact to be very difficult to monitor and 
enforce and would discriminate against me n. Increasing employee participation in 
Boards, whilst contributing to enhance diversity would be di fficult to implement, giving 
the existing differences in Member Stat es regarding co-determination and employee 
participation regimes, which are subject to  company law rules. However, quantitative 
targets for gender diversity are not flexible a nd cannot be adopted to particular situations 
of instituions of different types and sizes. It  would also be inconsistent with the more 
general strategy of the Commission with rega rd to gender equality which forsees a two 
step approach, first encouraging self-regula tion and eventually imposing hard quotas if 
the results of this self-regulation do not prove sufficient. A more  principle-based sub-
options on diversity policy and diversity as a criteria  of Board composition would 
therefore be more appropriate . Although less effective than quantitative targets, these 
sub-options are more flexible, less costly and  would help avoidi ng box-ticking and allow 
supervisors to ensure that credit institutions include diversity of views as one of the criteria of board composition, at the same le vel as time-commitment and expertise. This 
latter sub-option will also cover types of diversity other than gender balance for which a quantitative target is very difficult to foresee.  
 
EN 121   EN As regards risk ownership by Boards, only s ub-option on risk statement and declaration 
on the adequacy of internal control system s seem to effectively achieve the underlying 
objective and remain proportionate. In fact, su b-option requiring systematic approval by 
the Board of all new products would be dispro portionate, as it would entail involvement 
of Boards in operational issues, which is the responsibility of executive management. 
Sub-option requiring that Board must determine or approve the risk profile and strategy 
and any changes is superfluous  as the existing EU legisla tive framework already prides 
for such duty.  
The sub-option establishing a mandatory ri sk committee at Board level accompanied by 
exceptions to take account of different types of credit institutions seems to be the most 
effective, easily enforceable and proportio nate to achieve the underlying objective of 
improved priority given to the consideration of risk issues. Alternative sub-option requiring minimum time that Board must be sp end to discuss risk issues, although equally 
effective, would be disproportionate and di fficult to put in place in practice as the 
minimum number of days necessary to fully cover all risk matters will vary enormously according to different types of credit institu tions. However, in order to avoid box-ticking, 
the sub-option requiring a mandatory risk committee will be usefully complemented by 
the general principle that Boar d devote sufficient time to ri sk issues, which will allow 
supervisors to check that, even if there is a stand-alone risk committee, Boards of credit 
institutions spend adequate time to discuss ri sk issue taking into account the nature of the 
activities of the credit institution.  
As regards information on risk, requiring sp ecific templates and procedures for the 
information flow seems unduly inflexible and wi ll not necessarily be effective. However, 
general principles that Board must determine the content of the information and that the 
risk management function should be able to report directly to th e Board seem to be 
effective, flexible and efficient in or der to achieve the underlying objective.  
Most requirements should be immediately app licable except for limita tion of mandates of 
Board members and separation of functions Chairman/CEO, where a transitional period 
could be appropriate to leave credit institutions sufficient time to implement these requirements.  
The costs for credit institutions of the combin ed sub-options to increase the effectiveness 
of risk oversight by Boards should mainly  be linked to the publ ication of required 
information, recruitment of suitable Board me mbers and updating internal processes to 
take account of new requirements. Whilst costs linked to the publication of the 
information are easy to estimate and do not appear  to be significant, other costs, such as 
those linked to recruitment and selection of Board members and eventual increase in their 
remuneration, are more difficult to quantify. Ho wever, it results from the questionnaire 
on costs sent to credit instit utions that these costs would remain proportionate to the 
underlying objectives. For small credit institutions, any potential increase in costs could 
be further mitigated by applying the excepti ons provided for by different sub-options and 
by the general principle of pr oportionality which already exis ts in the EU legislation. 
 
EN 122   EN The costs and impacts are further analysed in detail in Annex I and in Annex II.  
6.1.2.2.  Sub-options to improve the standing of the risk management function 
The following table shows the sub-options  under option C aimed at improving the 
standing of the risk management function. A de tailed description and analysis of the sub-
options is provided in Annex I together with  the reasons why some  of the sub-options 
have been rejected.  
Figure 8: Sub-options to improve the standing of the risk management function 
Operational objective Retained sub-options  Rejected sub-options 
Improve the standing 
and the authority of the risk management function - disclose in the annual report their policy with 
regard to the standing and authority of risk 
management function* - head of risk management function must have an 
appropriate status and authority to influence risk 
strategy and risk-relevant management decisions** - risk management function must be created and 
have an appropriate stat us and authority and be 
independent from the operational and business 
units** 
- appoint an independent  Chief Risk Officer *** 
- removal of the Chief Risk Officer must be subject 
to prior approval by the Board*** - head of risk management function must 
be member of executive management or 
Board*** 
* measures which enhance transparency, ** principles-based, outco me-focused rules, *** specific and organisational 
rules  
The retained sub-options aim at implementi ng at European level the recommendation of 
the revised Basel Principles that "banks should have an effective internal controls system 
and a risk management function (including a chief risk officer or equivalent) with 
sufficient authority, stature, independence, re sources and access to the Board." They have 
been chosen as most effective, enforceable , proportionate and efficient to achieve the 
underlying operational objective. The following ta ble shows the different impacts of the 
retained sub-options to improve  the standing of the risk ma nagement function. For further 
analysis of the impacts, see Annex I. 
Figure 9: Analysis of impacts of retained sub-options: standing of the risk management 
function 
Sub-options  Effectiveness  Enforceability  Flexibility  Impact on 
level playing 
field  Estimation of 
related costs per 
credit institution  
Disclose in the annual report their 
policy with regard to the standing 
and authority of risk management 
function + + = = € 600 - € 1,000  
Head of risk management function 
must have an appropriate status and authority to influence risk strategy 
and risk-relevant management 
decisions ++ = = = 0 
Risk management function must be 
created and have an appropriate 
status and authority and be independent from the operational 
and business units ++ = = = 0 
Appoint an independent Chief Risk ++ ++ - ++ ? limited cost 
 
EN 123   EN Officer 
Removal of the Chief Risk Officer 
must be subject to prior approval by the Board + ++ - ++ 0 
Magnitude of impact as compared with the baseline scenario: ++ strongly positi ve; + positive; – – strongly negative; – 
negative; = marginal/neutral; ? uncertain; n.a. not applicable 
It results from the analysis of the sub-op tions that a combination between measures 
enhancing transparency, outcome-focused pr inciples and minimu m standards is an 
appropriate combination. Different sub-op tions will be mutually reinforcing.  
The disclosure of existing prac tice with regard to the stat us of the risk management 
function will allow supervisors to easily evalua te whether this stature is appropriate. This 
option could incentivise credit institutions to give the appropriate status to the risk 
management function as public disclosure allo ws for benchmarking of different practices 
in different credit institutions  and for having a public view on  whether a credit institution 
gives sufficient independence and authority to its risk management function as compared 
to its peers.  
The sub-option regarding the establishment of a risk management function and its 
independence seems very effective to achie ve the underlying objec tive and flexible 
enough. Sub-options requiring cr edit institutions  to appoint a chief risk officer (with 
possible exemptions) with appropriate status an d authority to be able  to influence risk 
strategy and which should not be removed without prior approval of th e Board, are very 
effective to achieve the underlying objectiv e of having a strong and independent risk 
management function. In addition, these sub-op tions would contribute  to a consolidated 
approach to risk management and minimize potential for compliance failures. At the 
same time these sub-options remain flexib le enough to allow cred it institutions to 
determine the appropriate position of the CR O according to their size and the nature of 
their activities. In comparison, sub-option re quiring CRO to be part of the executive 
management or Board seems unduly in flexible and disproportionate. . 
As regards different potential costs related to these sub-options, they seem to be marginal 
according to the responses to the questionnaire on costs sent to credit institutions and should mainly be linked to the setting up of th e necessary internal pr ocesses. This is due 
to the fact that most credit institutions, esp ecially the largest one, do already have a risk 
management function or equivalent and theref ore should not recruit a significant number 
of additional staff to perform this function. For small credit inst itutions, any additional 
costs should be mitigated due to proportionality principle which aligns the necessary structures with the nature and complexity of  the activities of the credit institution. . The 
costs and impacts are analysed in de tail in Annex I and in Annex II.  
6.1.2.3.  Sub-options to ensure efficient mon itoring of risk governance by supervisors 
The following table shows the retained s ub-options under option C aimed at improving  
supervisory review of corporate governance pr actices. A detailed description, analysis 
and comparison of the sub-options are provided in Annex I together with the reasons why 
some of the sub-options have been rejected. 
 
EN 124   EN Figure 10: Sub-options to ensure efficient moni toring of risk governance by supervisors 
Operational objective Retained sub-options Rejected sub-options 
Ensure efficient 
monitoring of risk governance by 
supervisors 
 - corporate governance issues must be part of a 
dialogue with supervisors and the adequacy of 
corporate governance structures must be part of 
supervisory review** 
- extensive supervisory revi ew which must examine the 
ability of Board members to exercise their oversight 
function** 
- supervisors must review agendas and supporting 
documents for meetings of the Board and Board 
committees*** 
- supervisors must review the evaluation of the Board 
performance*** - supervisors must attend Board 
meetings*** 
** principles-based, outcome-focused rules, *** specific and organisational rules  
The retained sub-options aim at implementi ng at European level the recommendation of 
the revised Basel Principles that "superviso rs should regularly perform a comprehensive 
evaluation of a bank’s overall corporate gover nance policies and practices and evaluate 
the bank’s implementation of the principles." They have been chosen as most effective, proportionate and efficient to achieve the underlying operational objective.  
The following table shows the different impacts of the retained sub-options to ensure 
effective monitoring by supervisors of risk  governance. For furthe r analysis of the 
impacts, see Annex I. 
Figure 11: Analysis of impacts of retained sub-options:  Ensure efficient monitoring of risk 
governance by supervisors 
Sub-options Effectiv
eness Enforceability Flexibility Impact on 
level playing 
field Estimation of related 
costs for a supervisory 
authority 
Corporate governance issues 
must be part of a dialogue with 
supervisors and the adequacy of corporate governance structures 
must be part of supervisory 
review  ++ = = = 
0,000 € - 1,500,000 €  
Extensive supervisory review 
which must examine the ability of 
Board members to exercise their 
oversight function ++ + = + 40,000 € - 12,000,000 €  
Supervisors must review agendas 
and supporting documents for meetings of the Board and Board 
committees + ++ - ++ ? no precise estimation, 
costs are part of the general cost of corporate 
governance review 
Supervisors must review the evaluation of the Board 
performance + ++ - ++ ? no precise estimation, 
costs are part of the general 
cost of corporate governance review 
Magnitude of impact as compared with the baseline scenario: ++ strongly positi ve; + positive; – – strongly negative; – 
negative; = marginal/neutral; ? uncertain; n.a. not applicable 
 
EN 125   EN The combination of retained sub-options seems effective to achieve the underlying 
objective of effective monitoring by supervisor s of risk governance. The overall impact 
on the level playing field and enforceability is positive. Some sub-options are less flexible for supervisory authority but this  negative impact is mitigated by enhanced 
enforceability and positive impact on the le vel playing field. In addition, requiring 
supervisors to monitor corporate governan ce practices for compliance with new 
principles will allow supervisors to apply the whole range of sanctions available to them under the Capital Requirements Directive, such as requiring credit institutions to modify 
their practices or, in more extreme cases, wit hdraw the license of the institution or impose 
capital add-ons. 
As regards different costs rela ted to the sub-options, they a ppear to be relatively more 
important for some financial supervisors with  large banking sectors with a big number of 
credit institutions to supervise,  such as Germany, and that w ill have to pu t in place new 
internal processes and devote staff to the new tasks. These costs should remain limited 
for other financial supervisors with small ba nking sectors, such as Greece or Lithuania. 
However, those costs are inherent to impr oved supervision of corporate governance of 
credit institutions and thus could not be avoided if the u nderlying objective is to be 
achieved. Effective supervision of risk govern ance in credit institution which is followed 
by effective enforcement is crucial for the correct implementation of new principles. 
Furthermore, the potential costs could be mitigated by the future guidelines of EBA on internal governance which will give concrete guidance to supe rvisory authorities on their 
role in the monitoring of the implementation of the new principles, how to simplify the 
work for supervisors and methods to reduce unnecessary costs. Consequently, it seems 
that the potential increase in administrative  burden for supervisors is justified by the 
underlying objective. 
The costs and impacts are analysed in detail in Annex I and in Annex II.  
6.1.3.  Cumulative impact of sub- options under Option C 
6.1.3.1.  Impact on effectiveness to achieve the sp ecific objective of preventing excessive 
risk-taking by credit institutions by remedying the weaknesses in risk governance system
 
The different sub-options under Option C are mu tually reinforcing and present synergies 
which are most likely to contribute to improve  risk governance of cred it institutions with 
a view to efficiently controllin g risk within credit instituti ons and prevent excessive risk-
taking. They effectively respond to the underlying specific objectives and aim and 
changing the risk culture within credit in stitutions. Improved oversight by Boards of 
management decisions and risk strategies  will not be sufficient without improved 
authority of the risk management function which monitors risk-t aking on day-to-day 
basis and is the first barrier to  excessive risk exposures. Inte rnal control of risk will not 
be efficient without appropriate external  oversight and eventual sanctioning of non-
compliance by supervisors. Therefore, Option C seems to be the most likely to address 
the problems described in Part 3 o this document. 
 
EN 126   EN 6.1.3.2.  Impact on the available pool of suita ble candidates for Board membership 
The following policy options under Option C could have a potential impact on the 
availability of suitable candi dates for Board membership: 
- limiting the number of manda tes of Board members; 
- enhanced "fit and proper" test; - quantitative target with re gard to gender diversity; 
Limiting the number of mandates and introduci ng a quantitative target for gender balance 
on Boards could potentially have a negative impact on the pool of experiences people 
available for Board membership, and thus on the objective of Board expertise. On the 
other hand, as a result of enhanced sta ndards for selection of potential candidates 
(enhanced "fit and proper" test), the number  of suitable candidates may also decrease 
accordingly. However, this would only be tr ue if there were not enough experienced 
women and men to populate the Board rooms of credit institutions. Bu t there is evidence 
of sufficient expertise within credit institutio ns, and the pool of selection of candidates 
for Board membership is currently artificia lly reduced as a conse quence of networking 
and glass ceilings. According to a study
113, in Europe it is beco ming considerably easier 
to recruit high-quality directors. In 2005, 54 % of respondents said that they were having 
difficulty recruiting, but by 2007 that figure had fallen to 42 %. In addition, opening the 
Board to more diverse candidates within cr edit institutions might give opportunity to 
people who were for the time being absent fr om Board rooms for many different reasons 
to become members of the Board. It would enlarge the pool of suitable candidates for 
board membership and improve expertise. In  addition, induction and training of Board 
members would contribute to form more expe rienced pool of candida tes. There is also 
evidence of a growing market  of professional Board member s with appropriate skills to 
populate Board rooms. Therefore, the potenti al negative impact on the pool of suitable 
candidates of the preferred policy opti ons should not be significant.  
6.1.3.3.  Impact on costs for credit institutions and supervisors 
As regards different costs for credit institutio ns linked to the sub-options under Option C, 
they mainly relate to the possible increase of  administrative burden due to the preparation 
and publication of related information, to esta blishing the necessary  internal processes 
and to a possible increase in remuneration of Board members. With regard to information 
disclosure, actual costs seem to be rath er limited and would depend on whether the 
publication is on group or subsidiary level. Costs will be lower for publication at group level and higher for publication at subsidiary level for groups with  a significant number 
of subsidiaries. According to the responses to  the questionnaire on costs sent to credit 
institutions, recurrent disclosure costs and co sts linked to internal processes are estimated 
at € 33,000 - 55,000 per annum and one-off cost s at € 65,000 - 100,000. Other costs are 
difficult to estimate and their actual amount  would depend on the way each individual 
                                                
 
113 Korn/Ferry Institute, 3rd Annual Board of Directors Study , 2007 
 
EN 127   EN financial institution chooses to ensure the implementation of the policy options. These 
costs could be linked to the need to recru it additional Board members or to remunerate 
HR specialists or head hunters that will s earch for Board members with adequate time-
commitment and expertise. Additional costs could result from a possible need to increase remuneration of the Board members with specific expertise and because the Board 
members will be able to cumulate a lower number of mandates. The average Board in 
Europe consists of 12 direct ors, the majority being non- executive directors with an 
average annual remuneration of €77,000. This m eans that recruitment of additional Board 
members or any potential increase in remune ration should not be significant. It cannot be 
excluded that there could be a potential impact of Option C on profitability of credit institutions and therefor e on lending activities. 
However, all these potential costs seem to be insignificant compared to the annual 
operational expenses for credit institutions' in EU which reached €454 billion for the 
whole European banking sector in 2009
114. 
For national supervisors, the policy options under Option C could entail additional costs. 
These costs are linked to additional time spen t to review corporate governance practices 
of credit institutions and to check that candidates for Board membership are fit and proper.  
Compliance costs related to extensive supervisory review of board’s fitness and 
propriety:  according to the questionnaire on costs sent to supervisors, 17 out of the 18 
responding supervisors indicate that the measure would lead to adaptatio ns of the existing 
practice and thus involve additi onal costs for the supervisors,  notably being the recurring 
costs of having to conduct a review more de tailed than the current one and doing it more 
frequently than at present, and in some ca ses that the potential new measure targets non-
executive board members, whereas the curr ent review is focused on executive board 
members (/management board members). 
Compliance costs related to benchmarki ng of practices on diversity of board 
composition:  16 out of the 17 supervisors that responde d to this question indicate that the 
measure would involve additional costs for the supervisors, since no such measure 
currently exists. The sources of the additional costs are related to the setting up of a data base (investments in IT and data collec tion from all banks) and updating it (data 
consolidation. 
Compliance costs related to the requirement that  risk governance issues to be part of the 
dialogue with supervisors and th e adequacy of risk governance st ructures to be part of the 
supervisory review:  11 of the 17 supervisors that responded to this question indicate that 
this measure would lead to no additional cost s or no material additi onal costs. The reason 
is that the requirement of the measure is alr eady in place (or largely so). In addition some 
mention that they also alrea dy carry out reviews of the co rporate governance structures, 
but that there might be room for improvemen t: some additional effort for the review of 
                                                 
114 ECB, EU banking Sector Stability Report, September 2010. 
 
EN 128   EN corporate governance issues th at go beyond risk management, or  an annual review on top 
of the current review at authorisation. 
The one-off costs are estimated betw een €120,000 - €1,100,000 and recurrent costs 
between €20,000 - €1,630,000. They should be sma ll for competent authorities with a 
limited number of credit intuit ions under supervision and higher for some financial 
supervisors with large banking sectors that will have to put in place new internal 
processes and devote staff to the new tasks.  
6.2. Summary of the impacts of Options A, B and C 
6.2.1.  Impacts on stakeholders 
The following table summarises the impact of Options A, B and C on different 
stakeholders. 
Figure 12: Comparison between options by categories of affected stakeholder groups 
Stakeholders 
Options Credit 
institutions Supervisors Shareholders Depositors Taxpayers 
Option A 0 0 0 0 0 
Option B ? ? ? ? ? 
Option C  + + ++ ++ ++ 
Sub-options to improve 
effectiveness of risk 
oversight by boards + + ++ ++ ++ 
Sub-options to improve 
the standing of risk 
management function + + ++ ++ ++ 
Sub-options to ensure 
efficient monitoring by 
supervisors of risk 
governance + - ++ ++ ++ 
Magnitude of impact as compared with the baseline scenario (the baseline is indicated as 0): ++ strongly positive; + 
positive; – – strongly negative; – negative; = marginal/neutral; ? uncertain; n.a. not applicable 
Option C is likely to have a positive impact on different stakeholders and the society as a 
whole115.  
                                                 
115 From a generic perspective, credit institutions are viewed as any firm with a broad range of 
stakeholders. In the case of banks, the stakeholder groups includes shareholders, who contribute 
to the formation of capital, as well as other categories who have a direct interest, such as: 
governments and regulators, staff, depositors, creditors and the general public 
 
EN 129   EN Improved risk governance will help avoid excessi ve risk-taking by cred it institutions. The 
risk of failure of credit institutions due to excessive risk could also be lowered. Therefore, the impact on credit institutions should be  positive. Option C will however entail 
additional administrative burden for credit institutions. In addition, more stringent requirements at European level could have a negative impact on the competitiveness of European credit institutions at international level. Contrary to capital requirements rules, G20 member did not engage to  implement revised Basel Principles in their national 
legislation. For instance, the fi nancial crisis has not led to  widespread changes in US, 
although the Dodd-Frank Act di d introduce corporate transp arency rules, including 
provisions to force companies to disclose  information on executive pay and measures 
designed to give investors grea ter say in nominating directors.  Nor has the financial crisis 
triggered a corporate governance reform acros s Asia. It has been argued therefore that 
banks could leave European markets for markets with less regulation.  
However, the possible decrease in competitiv eness due to more stringent requirements 
could be mitigated by a positive impact on i nvestors, depositors and other stakeholders. 
Improved risk governance would contribute to  the resilience of the banking sector and 
improve investor confidence. The need for additional capital to cover excessive risk exposures could be reduced. Therefore, shar eholder value will be preserved, moneys of 
depositors will be safely kept (and therefore no recourse to the deposit guarantee schemes will be needed), other creditors will not lose their moneys and ultimately Member States 
will not have to bail out credit institutions.   In addition, EU is encouraging G20 to unde rtake a review of corporate governance in 
credit institutions at international level, therefore working towards for a level playing 
field between European banking sector and cr edit institutions from third countries. 
At a macroeconomic level, sound risk govern ance system of credit institutions would 
contribute to avoid future crises, increas e confidence in the banking system and the 
efficiency of credit institutions’ fundi ng mechanisms, which accelerates economic 
growth.  
As regards supervisors, option C would entail additional administrative burden to 
supervise risk governance of credit instituti ons. However, the implementation of new 
principles is the respons ibility of credit institutions at fi rst place. Clear a nd more specific 
rules will facilitate supervisory review of existing practice.  
If risk governance in credit institutions is not improved, credit inst itutions may in the 
future encounter the same problems as describe d in Part 3, that is excessive risk-taking 
which may result in need for recapitalisation
116 and loss of shareholder value117, credit 
institutions’ failures, financial system inst ability and the need for Member States to 
intervene and bail out credit institutions118. This will have a negative impact on different 
                                                 
116 64 For instance, in 2008 Royal Bank of Scotland had to raise £12 bn and Dexia €6 bn; and BNP 
Paribas had to rise in 2009 €4.3bn  in capital. 
117 For instance, Dexia share lost 90% of its value in from 2008 to 2009. 
118 See Annex IV on the detail of financial crisis measures adopted by Member States until 31 March 
2010. 
 
EN 130   EN stakeholders. When the social costs of an outcome exceed the private costs of an 
outcome, there is a negative externality effect. 
Consequently, the benefits linked to this op tion C for different stakeholders seem to 
outweigh the underlying costs. 
6.2.2.  Impacts on the environment, employment and third countries 
It is not expected that the new principles  on corporate governance in credit institutions 
are going to have any direct impact on the natural environment or on third countries.  
Measures enhancing disclosures could have an  indirect impact on th e issuance of paper 
documents and thus on the environment. Howe ver, compared to the general volume of 
paper documentation already published by credit institutions, this impact should not be significant. Branches of third country credit institutions are not as such subject to the 
European requirements. Consequently, th ere should be no significant impact on third 
countries of new provisions on corporate gove rnance, unless Member States impose the 
same obligations to these branches as for othe r EU subsidiaries. In this case the impact on 
the third countries will be the same as for EU Member States. As explained in Annex I, the introductio n of measures on diversity in Boards' 
composition is likely to have a positive impact  on the gender policy of the EU, breaching 
glass ceilings and helping women to access leadership positions in companies and could 
have a positive impact on women employment. 
6.3. Choice of instrument 
The new EU principles on corporate governance in credit institutions could be included 
in a Commission Recommendati on or in a legislative inst rument (a Directive or a 
Regulation). 
6.3.1.  Recommendation 
A Commission Recommendation could be envi saged to implement new principles on 
corporate governance in credit institutions. Such a Recommendation would have the advantages of flexibility that hard law lack. Soft laws have been described as "rules of 
conduct which, in principle, have no legall y binding force but which nevertheless may 
have practical effects"
119. Although credit institutions may choose to conform to soft law, 
there is an assumption that behaviour is mo re likely to be consistent with codified 
guidance and statements of best  practice than with binding legislation. It has been argued 
that non-binding rules can have the same political  and social effects and benefits as hard 
law120. But, because soft law is not legally binding, implementation rests solely on the 
goodwill of credit institutions and where such goodwill is absent, soft law could result in 
non-compliance.  
                                                 
119 See Snyder, F., Soft Law and Institutional Practice in the European Community,  Law Working 
Paper 93/5. Florence, European University Institute, 1993 
120 Borchardt, G. M. and Wellens, K. C., Soft Law in European Community Law , European Law 
Review, 1989 
 
EN 131   EN The question thus is whether organisatio ns would voluntarily pay the price for 
implementing adequate governance fram eworks based on best practice and 
recommendations or whether more prescriptive  rules are needed. The financial crisis has 
shown the limitations of the current self-regula ting system of largely voluntary codes and 
high-level, principle-based le gislation. As shown by the fina ncial crisis, concerns for 
reputation alone are unlikely to  deter each and every credit institution from misconduct. 
Risk-taking managers can depend on barri ers to information, and information 
asymmetries, which will allow them to engage  in unethical behaviour , for a considerable 
time, before being detected121. Even where detection takes place, this may have a limited 
effect on senior managers as they may simply switch jobs.  
External pressures in the form of market forces and sharehol der scrutiny can play a role 
in ensuring adequate governan ce structures. Market disc ipline could force credit 
institutions to implement adequate stru ctures without necessa rily having a binding 
legislative framework. However,  as described in Part 3, th e financial crisis has also 
shown the limitations of market and share holders' control of corporate governance.  
6.3.2.  Legislative instrument  
It could be argued that more  rigid, prescriptive regulati on would result in “form over 
substance” compliance while failing to achieve  better risk governance  and more effective 
Board and oversight structures. However, more  detailed, prescriptive legislation could be 
seen as the only means of ensuring proper corporate conduct.  
A Regulation does not seem to be an appropr iate instrument for the implementation of 
principles on corporate governance. Although the objective of the Commission is to set 
up a comprehensible and sufficiently detail ed framework for corporate governance, the 
diversity of corporate governance structures  and company laws in Member States does 
not allow for a directly applicable "one size fits all" approach. There is a need for a 
degree of flexibility for the Member States as to the manner to implement the new 
legislation according to their national company law and corporate governance 
environment. 
The Capital Requirements Directive already c ontains some high-level principles with 
regard to organisation of internal governan ce of credit institutions and gives the 
Commission the power to adopt delegated acts. This Directive also has the advantage of 
being a legally binding instrument which at the same time leaves to Member States the flexibility to adapt measures on corporat e governance to their national legislative 
framework. It is also a suitable instrument to reinforce the role of the supervisors with a 
view to empower them to assess the co rporate governance practices of financial 
institutions in a broader context of sound risk  management. It also allows for effective 
application of the proportionality principl e under the supervisory review. It seems 
therefore to be a suitable instrument for the new provisions on corporate governance. 
                                                
 
121 See, for example, Kerviel case at Société Générale. 
 
EN 132   EN Commission could either amend this Directive in order to specify existing principles and 
give supervisory authorities the power to ove rsee more effectively corporate governance 
practices in credit institutions or adopt im plementing measures. It seems appropriate to 
amend this Directive rather than introduce new measures by a delegated act, as new 
provisions touch on some sensitive aspects of national company law, such as limitation of number of mandates and quantitat ive targets on ge nder balance. 
6.4. Consistency  
New principles on corporate governance will apply to all institutions which are covered 
by the requirements of the Capital Requirements Directive (credit institutions and investments firms). Although good corporate governance is es sential for any type of 
financial institution, the main weaknesses in corporate governance revealed by the 
financial crisis were primarily witnessed in the banking and investment banking sector, 
rather than the insurance and fund management industry . This is why in the first 
instance it is proposed to limit the new provisions on corp orate governance to financial 
institutions covered by the CRD. Furthermor e, insurance and fund management have 
recently been subject to a legislative reform
122 which introduced, inter alia , detailed rules 
on internal governance arrangements for these types of financial institutions. These new 
rules were not introduced as a reaction to pa rticular weaknesses in corporate governance 
in these institutions but were part of a more general reform of these sectors. The Commission will examine these rules and their practical appreciation in order to judge 
whether they provide an appropriate framewor k and, if so, whether, they need to be 
adjusted to ensure consistency amongs t the financial services industry.  
The engagement of shareholders  is an issue of relevance not just for financial 
institutions, but also for companies more gene rally. On the basis of the evidence gathered 
during the preparation of the Green Pa per on corporate governance in financial 
institutions, the findings regarding the lack of shareholder engagement and the reasons 
for this are, to a large extent, also relevant as regards shareholder behaviour in listed and 
non-listed companies generally. In this cont ext, the Commission decided to publish a 
Green Paper on corporate governance framework which will consult specifically, inter 
alia, on different possible ways forward to improve shareholders involvement in 
companies and incentivise shareholders to act w ith regard to long-term interest of their 
companies. Consequently, the problem of shar eholder inaction with regard to excessive 
risk-taking by credit institutions will be dealt with as a follow-up to that Green Paper. In addition, in its Communication on a possible re gime for reorganising and resolving cross-
border banking groups under a coordinated or integrated resolution framework envisages 
modifying existing EU rules in order to ensure that national authorities will be able to 
                                                
 
122 Directive 2009/138/EC of the European Parliament and of the Council of 25 November 2009 on 
the taking-up and pursuit of the business of Insurance and Reinsurance (Solvency II), OJ L 335, 
17.12.2009, p. 1–155 ; Directive 2009/65/EC of the European Parliament and of the Council of 13 
July 2009 on the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable se curities (UCITS), OJ L 302, 17.11.2009, 
p. 32–96.  
 
EN 133   EN carry out certain operations (as e.g. capital increases) withou t having to seek shareholder 
approval.  
7. MONITORING AND EVALUATION  
The Commission is the guardian of the Treaty and therefore will monitor how Member 
States have implemented the changes of th e Capital Requirements Directive. Where 
needed, the Commission services will offer assistance to Member States for the implementation of the legislativ e changes in the form of transposition workshops with all 
the Member States or bilateral meetings at the request of any of them. When necessary, 
the Commission will pursue the procedure set ou t in Article 258 of th e Treaty in case any 
Member State fails to respect its duties conc erning the implementation and application of 
Community Law.  The evaluation of the consequences of the a pplication of the legislative measure could 
take place three years after the entry into for ce of the legislative measure in the form of a 
Commission report to the Council and the Eu ropean Parliament. The Commission will be 
monitoring the application of the Capital Re quirements Directive, as amended, through 
EBA and an extensive and continuous dial ogue with all major stakeholders, including 
market participants (credit institutions, invest ors). It may also use of the findings of 
studies carried out by stakeholders.  
 
EN 134   EN References 
Basel Committee on Banking Supervision, Enha ncing corporate governance for banking 
institutions, February 2006  
Basel Committee on Banking Supervision (BCBS),  Principles for enhancing corporate 
governance, October 2010 
Baumgarten, P., Desvaux, G., & Devillard -Hoeillinger, Women Matter 1: Gender 
diversity, a corporate performance driver, McKinsey & Company, 2007;  
Beyond box-ticking: A new era for risk g overnance, a report from the Economist 
Intelligence Unit Sponsored by ACE and KPMG, 2009 
Borchardt, G. M. and Wellens, K. C., Soft Law in European Community Law , European 
Law Review, 1989 
CEBS, Report on a case study analysis of how European banks have implemented CEBS 
Guidelines on Internal Governance, 12 January 2010  
Erkens, D., Hung, M., Matos P., Corporat e Governance in the 2007-2008 Financial 
Crisis: Evidence from Financial Inst itutions Worldwide, November 2009  
Female FTSE report, Cranfiel d School of Management, 2009 
Financial Services Agency, The Turner Revi ew: A regulatory respons e to the global bank 
crisis, March 2009 
Financial Services Authority, The FSA’s inte rnal audit review of  its supervision of 
Northern Rock, and the FSA’s mana gement response, London, April 2008 
Financial Services Authority, The FSA's Risk-based approach: guidance for non-
executive directors, November 2006 
Global Association of Risk Professionals, Risk  Governance: let us start with the Board of 
Directors, June 2009, http://www.garpriskexchange.com /2009/07/risk-governance-let-us-
start-with-Board.html  
Gup, B., Corporate Governance in Banki ng: A Global Perspective, Elgar, 2007 
Hagendorff, J. and Keasey, K., Value of Boar d Diversity in Banking: Evidence from the 
Market for Corporate Control Leeds University  Business School, the Un iversity of Leeds, 
LS2 9JT, UK, December 2008 
Houben, A., and Kakes, J., Risk identificati on and mitigation: lessons from the crisis, 
September 2010 
 
EN 135   EN House of Commons Treasury Committee, Banking crisis: Reforming corporate 
governance and pay in the City, 2009  
Institute for International Finance, Refo rm in the Financial Services Industry: 
Strengthening Practices for a More Stable System, December 2009. 
Institute of International Fi nance, Final Report of the IIF Committee on Market Best 
Practices: Principles of Conduct a nd Best Practice Recommendations, 2008 
Jianakopolos, N. A. and Bernasek, A., Are women more risk-averse?, Economic Enquiry 
1998. 
Kirkpatrick, G., The Corporate Governance Lessons from the Financial Crisis, OECD, 
February 2009 
Ladipo, D. et al., Board profile , structure and practice in la rge European banks, Nestor 
Advisors, 2008  
Mateos de Cabo, R., Gimeno, R., Nieto, M. J., Gender Diversity on European Banks' 
Board of Directors: Traces of Discrimination, July 2009 
McKinsey and Company, Wome n Matter: Gender Diversit y, A Corporate Performance 
Driver, October 2007. 
Nestor Advisors, Report on Bank Boards  and the Financial Crisis: A corporate 
governance study of the 25 largest European banks, May 2009  
Nielsen, S. and Huse, M., The Contribution of Women on Bo ards of Directors: Going 
beyond the Surface, Corporate Governance: An International Review, 2010, 18(2): 136–
148. 
OECD, Corporate Governance and the Fina ncial Crisis: Key Findings and Main 
Messages, June 2009  
OECD, Corporate Governance and the Fina ncial Crisis: Recomme ndations, November 
2009. 
OECD, Corporate Governance and the Financ ial Crisis: Conclusions and emerging good 
practices to enhance implementation of the Principles, 24 February 2010 
Palmer J., Hoong C.S., How can financial su pervisors improve the effectiveness of 
corporate governance?", October 2010. 
Powell, M. and Ansic, D, Gender difference in risk behaviour in financial decision 
making: an experimental analysis, Journal of Economic Psychology, 1997;  
Ricol, R., Report to the President of the French Republic on the Financial Crisis, 2008 
 
EN 136   EN Rhode, D. L., and Packel A. K., Diversity on Corporate Boards, Stanford Centre on the 
Legal Profession, September 2009. 
Senior Supervisors Group (SSG), Risk on Management Lessons from the Global Banking 
Crisis of 2008, 21 October 2009 
Senior Supervisors Group (SSG), Observations  on Risk Management Practices during the 
Recent Market Turbulence, March 2008  
Société Générale), Report of the Board of Di rectors to the General Shareholders Meeting, 
company website (2008). 
Snyder, F., Soft Law and Institutional Practice in the European Community , Law 
Working Paper 93/5. Florence, Euro pean University Institute, 1993 
Tabellini, G., Why did bank supervision fail?, in The First Global Financial Crisis of the 
21st Century, ed. Felton, A. and Reinhart, C., June 2008, VoxEU.org 
The Report of the High-Level Group on Financial Supervision in the EU chaired by Mr 
Jacques de Larosière, 25 February 2009.  
The Bottom Line: Connecting Corporate Pe rformance and Gender Diversity’, by 
Catalyst, 2004;  
Van den Berghe, L., To what extent is the fi nancial crisis a govern ance crisis? June 2009  
Walker D., A Review of Corporate Gove rnance in UK Banks and Other Financial 
Industry Entities, Fi nal Recommendations, 26 November 2009 
Walker D., Review of Corporate Governan ce in UK banks and Other Financial Industry 
Entities, 16 July 2009  
Weil, Gotshal & Manges LLP, on behalf of the European Commission, Comparative 
study on corporate governance codes relevant to the EU and its Member States, March 
2002. 
‘Women to the Top!’, 2007, by EVA.  
 
EN 137   EN ANNEX I  D ESCRIPTION , ANALYSIS AND COMPARISON OF SUB -OPTIONS UNDER  
 O PTION C 
Methodology 
This Annex describes in more detail the s ub-options under the substantive option C (New 
provisions on risk governance), includes a scre ening of the sub-optio ns and performs an 
assessment of their impacts. Sub-options  will be grouped according the underlying 
objectives: I) Increase effectiveness of risk oversight by Boards; II) Improve standing of 
the risk management function; and III) Ensure effective supervisory review of risk governance.  
Within each group, the sub-options will be presented and discussed separately according 
to each more specific opera tional objective as described in Part 5 of the impact 
assessment. The sub-options for each opera tional objective are complementary and not 
mutually exclusive, so the preferred policy opti on to achieve an objective could be 
composed of a combination of different sub-options. 
The sub-options will be further classified in three types: (i) measures which enhance 
transparency of corporate governance practi ces, (ii) principles-based, outcome-focused 
rules with high degree of flexibility and (iii) st rict rules with limited degree of flexibility.  
The sub-options are discussed and measured against the relevant operational objectives 
set out in Part 5 of the impact assessment and also, where relevant , the following criteria 
will be used: 
Impact on the supply of candidates for Board 
membership and for risk management function The pool of suitable candidates for Board membership 
and for risk management  function should not be 
significantly reduced 
Impact on the clear division of responsibilities In order to avoid moral hazard, there should be a clear division of responsibili ties between executive 
management, operational units  and the risk management 
function 
Impact on the enforceability The implementation of the pr inciple should be easy to 
monitor 
Flexibility Credit institutions should be able to adapt the principles to their structures and the specific nature of  their 
activities 
Impact on the level playing field Regulatory arbitrage between Member States and at 
international level should be avoided. 
Efficiency A measure of cost/benefit comparing the effectiveness to 
reach the objectives with the costs of reaching them 
 
 
EN 138   EN The sub-option improving disclosures are usef ul and efficient but their effectiveness 
depends to a large extent on implementation and supervision. Transparency requirements 
contribute to market discipline, facilitate monitoring and enforcement and reduce the cost 
of financial supervision as supervisors will not need to search for information. However, market discipline presupposes that a firm has private sector stakeholders who are at risk 
of financial loss from the firm’s decisions a nd who can take actions to ‘‘discipline’’ the 
firm, that is, to influence its behaviour. Bu t, as described in Part 3 of the impact 
assessment, the financial crisis has show n the limits of shareholders' and other 
stakeholders' control of credit institutions and their incapacity to effectively influence 
management behaviour. Supervisors also must be able to enforce the implementation of 
sound risk governance. If they do not have the necessary powers, transparency of existing 
practices will not serve its purpose. Therefore,  transparency could be a useful tool to 
inform the market and the supervisors of the credit institutions practices but it would not 
be sufficient on its own to remedy the wea knesses in the corporate governance in credit 
institutions. Consequently, it seems appropriate to combine enhanced disclosure with 
substantive rules and improved supervisory review.  
Sub-options which consist in more specific and organisation rules have a positive impact 
on enforceability and on the le vel playing field as they provi de minimum standards, allow 
for a consistent approach by credit institutions, Member States and supervisory authorities, give clear guidan ce of what is expected and facilitate supervision and 
enforcement. Supervisors can easily verify that the minimum rules have been complied with. Although these sub-options  could have a negative impact  on the flexibility left to 
credit institutions, this negative impact co uld be mitigated by the application of the 
proportionality principle according to which cr edit institutions should comply with the 
rules according to their size, the nature and the complexity of their activities. 
As corporate governance is about behaviour,  the cultural change is essential. 
Consequently, there is a need to accompany specific rules which set minimum standards 
by principles which focus on the desired outcome  that is on the underlying objectives. In 
that way, credit institutions will have to implement the principles in their spirit and 
supervisors will be able to verify that even  in the situation wher e a credit institution 
complies with minimum requirements, its pr actice is adequate with regard to the 
complexity and the nature of its the activ ities. The sub-options which are outcome-
focused may not have a positive impact on th e enforceability and on the level playing 
field between different credit in stitutions and Member States as compared to the baseline 
scenario. However, these principles leave the necessary flexibility to credit institutions to adapt their practices to their specific structur es and avoid box-ticking.  
 
EN 139   EN I. O PTIONS TO INCREASE EFFECTIVE RISK OVERSIGHT BY BOARDS  
Section 1:  Lack of effectiv e challenge of senior manage ment decisions by Boards  
A)  Board time-commitment 
1) Measures to improve transparency  of corporate governance practices 
1. a. Disclose the number of mandates of Board members in the annual report . This sub-
option would entail a public di sclosure in the annual report of the number of mandates a 
Board member holds in different companies. 
1. b. Disclose in the annual report the act ual time spent by each Board member annually 
to exercise his/her functi on in the credit institution . It could also be foreseen to disclose 
the time each Board member commits per year to the credit institution (Board meetings attendance, time spent to prepare the Board meetings, etc.)  
For the time being, there is no disclosure requirement in CRD regarding the time 
commitment of Board members. Greater tran sparency is aimed at fostering market 
discipline through public disclosure and at  the same time providing supervisory 
authorities with the information required fo r effective, risk-based and proportionate 
supervision. Consequently, both sub-options c ould be envisaged to encourage Board time 
commitment in credit institutions. However, to achieve the underlying objective and be 
truly informative, the information provided need s to be accurate. With this respect, the 
second sub-option (1.b.) seems to be less easy  to put in place in  practice. Obtaining 
information on exact time spent by each Boar d member to exercise its functions and 
verifying its accuracy could be time-consumi ng. Whereas the number of Boards meetings 
per annum and the minutes of those meetings could be an indicati on, the declaration of 
Board members themselves is the main sour ce of such information. Consequently, the 
accuracy of those declarations needs to be checked externally which entails additional 
costs. By comparison, information on the nu mber of mandates of Board members is 
much easier to obtain and to verify. At the same time it gives useful information on the 
time available to Board members and provides valuable insight into the internal structure 
and management policies of a firm. Conseque ntly, option 1.a. is a preferred option and 
option 1.b. should be discarded. 
The primary costs of increased disclosure ar e the cost of prepari ng and disseminating the 
information. As credit institutions do already have to publish a lot of  periodic information 
for public use but also for supervisory review, the additional cost of preparation and dissemination of information under option 1.a. w ill not be very high. This cost could be 
relatively higher for small companies as compared  to larger ones, but they remain low in 
any case. It results from the responses to the questionnaire on costs sent to credit institutions that annual cost  of option 1.a. per legal unit could vary between 600 and 
1,000 euros, which does not seem disproportionate compared to the expected benefits, i.e. 
facilitated monitoring by supervisors who do not have to search for information and thus 
reduced cost of supervision. Moreover, for listed credit institutions which already 
 
EN 140   EN disclose such information under a corporate governance code, there will be no additional 
cost linked to this sub-option. For detail ed description of costs, see Annex II. 
2) Principles-based, outcome-focused rules with high degree of flexibility 
2. a. Require that Board members spend suffi cient time to exercise their duties as a 
criterion for recruitment and on an ongoing basis.   
This sub-option would include requiring th e ability of a Board member to devote 
sufficient time to his/her duties as a criterion  for selection of the candidate by credit 
institutions. In addition, Board members woul d be required to devote sufficient time to 
their duties on an ongoing basis.  
This sub-option implements the revised Ba sel Principles recommendation that in 
identifying potential Board members, the Bo ard should ensure that  the candidates are 
able to commit the necessary time and effort  to fulfil their res ponsibilities. There is 
currently no such requirement in CRD. Ac cording to the results of the public 
consultation, such a principle focused on the desired outcome will avoid box-ticking, provide different credit institutions with enough flexibility to adapt th eir practices to their 
particular situation and at the same time is  likely to achieve its underlying objective of 
improved time-commitment of Board members.  
Compared to the baseline scenario, candidate  Board members would in a flexible way be 
encouraged not to accept addi tional Board memberships if they do not have the sufficient 
time to devote, and incumbent Boards would be  encouraged to implement the principle. 
Moreover, the principle would encourage that Board members actually spend the 
necessary time on the Boards where they have a seat.   
However, such general principle, to be really effective to achieve the underlying 
objective, needs to be correctly implemented by credit institutions a nd therefore it would 
seem that there is also a need to have its implementation monitored by financial supervisors. It could be subject to differe nt interpretations and practices in credit 
institutions but also by differe nt Member States and thus al low for regulatory arbitrage. 
To mitigate this, there will be a need for coor dination at European level but, as further 
explained below (see 4. Combin ation of different sub-options), some supplementing sub-
options establishing minimum standards for Board members to commit sufficient time to 
their duties could also be envisaged. 
Depending on the way the individual financia l institution chooses to ensure the 
implementation of the principle, there coul d be costs both for the company and for the 
candidate Board member, but we have no cost estimates available. 
The requirement for Board members to devote su fficient time to their duties in a credit 
institution may also result in the decrease  in the number of Board positions a Board 
member can hold at the same time in different  credit institutions. C onsequently, there can 
be a negative impact on the number of people available for Board memberships. 
However, this negative impact can be mitig ated by enlarged criteria for selection of 
 
EN 141   EN Board members breaking some glass ceilings, in  particular with regard to the gender 
balance on Boards (see sub-options under point C below). Procedures to promote 
candidates within credit institutions could al so mitigate this impact. Finally, the eventual 
negative impact on the pool of available candida tes seems to be acceptable with regard to 
the overall objective which needs to be achieved.  
The possible decrease in the number of Board positions a Board member can hold at the 
same time can also result in the need for credit institutions to pay more to its Board members. In fact, if a Board member cannot cumulate a large number of positions at the same time, he/she may need to be remunera ted better for the reduced  number of positions 
he/she can hold. However, the exact amount of  this costs is difficult to measure and will 
depend on the market practice.  
3) Strict rules with lim ited degree of flexibility 
3. a. Limit the number of mandates a Board me mber of a credit institution may hold in 
different companies at the same time, subject to proportionality .  This sub-option would 
set this limit at one executive mandate to be cumulate d with maximum two non-executive 
mandates or maximum four non-executive mandates to be cumulated at the same time in different companies. Different mandates with in the same group should be counted as one 
mandate. In order to take into account the size and the nature and the complexity of 
activities of a credit institution and specific situations which may occur during the life of 
the credit institution where this limit would not appear appropriate, a boar member could cumulate more mandates, subject to th e control of supervisory authorities. 
In fact, it results from the in terviews with credit institu tions that non-executive Board 
members are expected to spend at least two days a month to prepare Board meetings in 
addition to six Board meetings in average pe r annum. More time commitment is expected 
from directors which are members of differe nt committees. It seems reasonable therefore 
to set a limit of four non-executive mandates, subject to proportionality. 
Currently, a limit on the number of mandates of members of the Board is not foreseen in 
the CRD or in draft EBA guidelines. Such a limit would, however, effectively contribute 
to achieving the objective of improved time-commitment of Board members as it would 
avoid cumulating too many functions at the same  time, where that would otherwise be the 
case
123. Also, limiting the number of seats one  person could be on would give more 
people the opportunity to get Board experience, including more women and other under-
represented groups, and thus have a positive sp ill-over effect on the objective to increase 
Board diversity.  
 
                                                 
123 For the time being, in Member States where legi slation or a corporate go vernance code provide for 
 a limitation in a number of mandates, th is number is limited in average to five. 
 
EN 142   EN However, a large majority of respondents to  the public consultation consider a general 
rule on limitation of the number of boards on wh ich a director may sit as inappropriate. 
One argument expressed against such limitation is that there are not enough experienced women and men to populate the Board room s of credit institutions. Consequently, 
limiting the number of mandates will have  a negative impact on the pool of people 
available for Board membership, and possi bly on the objective of Board expertise. 
However, as already mentioned above (see su b-option 2.a.), this negative impact can be 
mitigated. A limitation of mandates might give  opportunity to people who were for the 
time being absent from Board rooms for ma ny different reasons , including exclusion 
from networks, to become members of the Board. It might help breaching existing glass 
ceilings and bring more diversit y. In this respect, one of the solutions might be changing 
the ways of working of nomination committees , in order to widen their perspective.  
Another argument against such a measure would be that a strict limitation could be seen 
as too arbitrary and inflexible, and would not allow taking account of the situation of 
each particular financial instit ution and individual circumstances  of each director. In fact, 
smaller credit institutions or those in sma ller markets where the available “pool” of 
candidates can be limited may not be able to avoid cross-memberships on Boards of 
directors. Also, given the local focus of sm aller banks, they may in fact find it most 
effective to have local businesspeople or customers on their Boards. Also, some Board 
members could be able to manage more manda tes than the restriction allows. However, 
this issue may be easily solved by the propor tionality principle which would allow for 
exceptions under the control of  the national financial supervisor to take account of 
different situations of particular individua ls and particular credit institutions. Also, 
limiting the number of mandates still leaves  enough flexibility to Board members to 
divide their time between different membership s as needed and appropr iate in particular 
circumstances. 
Finally, some respondents to the public cons ultation were of the opinion that such a 
limitation would not in fact guarantee that a Board member will dedicate enough time for 
his/her position in each given situation and coul d result in a box-ticking exercise. It is 
true that the limitation would not directly ta rget the time spent on each individual Board, 
but rather targets the situations where too many Board commitments in itself is a problem 
for the possibility to devote sufficient time  to all the Boards. However, those two 
perspectives are part of the same root problem. Therefore, if a restriction on the number 
of mandates is combined with the general principle of sufficient time commitment described above, and both measures are made subject to effective supervisory review, it 
should effectively deal with this issue.  
There would not be any material direct compliance costs for credit institutions 
implementing this sub-option, except, as men tioned in sub-option 2.a., that the limitation 
of Board memberships may result in the need for credit institutions to pay more to its Board members. This possible additional cost seems, however, justified compared to the 
underlying objective. 
 
 
EN 143   EN 3. b. Specify the minimum number of days that  a Board member must spend per year to 
exercise its function in a credit institution .  
This option seems at first sight also to be able to contribute effectively to achieve the 
objective of improved time-commitment of Board members. However, such measure would be difficult to put in pl ace in practice. Whilst it is expected that Board members 
should spend at least 2 days per month in a credit institution, it woul d be difficult to for 
credit institutions and supervisors to mon itor that that each Board member actually 
commits at least this amount of time. Ti me commitment does not only consist of 
attendance at Board meetings but also compri ses time spend to prepare these meetings, to 
read different documents and to understa nd the management decisions. However, 
whether a Board member performs all these tasks and devotes sufficient time to them 
would be very difficult to verify in pract ice, as opposed to th e maximum number of 
mandates a Board member may hold (sub-option 2.b.).   .. This sub-option is therefore 
discarded. 
4) Combination of different sub-options 
It results form the discussions of the sub- options that a combination between measures 
enhancing transparency, outcome-focused prin ciples and more deta iled rules establishing 
minimum standards is an appropriate combin ation. Each individual sub-option would not 
suffice alone to achieve the underlying objective of improved time commitment of Board 
members. Different sub-options will be mutually reinforcing and will not entail 
disproportional costs for credit institutions.  
Disclosure of the number of mandates (sub- option 1.a.) will allow the market and the 
supervisors, at limited costs to credit inst itutions, to easily eval uate whether a Board 
member has too many mandates (including in cases it formally respects the maximum 
number of mandates), hamperi ng his/her ability to devote sufficient time to the credit 
institution, thus facilitating supervisory re view. Limiting the number of mandates (sub-
option 3.a.), although not supported by major ity of the respondents to the public 
consultation, seem very effective to achieve the underlying objective as  it sets a minimum 
standard and provides clear guidance to credit institutions and supervisors on the number of mandates which would exceed the reasonabl e capacity of a Board member to spent 
sufficient time on the Board of a credit institution. However, to avoid box-ticking, a 
general principle that a Board member s hould spend sufficient time (sub-option 2.a.) 
allows supervisors to check whether a Board member with the number of mandates that 
does not exceed the limit does in fact commits sufficient time to its functions.  
As a result, the following sub-options will be retained:  Sub-option 1.a.  Disclose the number of mandates of Board members in the annual report 
Sub-option 2.a.  Require that Board members spend sufficient time to exercise their 
duties as a criterion for recr uitment and on an ongoing basis 
 
EN 144   EN Sub-option 3.a . Limit the number of mandates a Boar d member of a credit institution 
may hold in different companies at the same time 
Table 1: Comparison of the sub-options (time commitment)  
 
 Effectiveness Impact on 
supply of 
candidates  Flexibility Enforceability Impact on 
level playing 
field Efficiency  
Sub-option 1a + = = + = + 
Sub-option 1b = = = = + - 
Sub-option 2a + - = = - + 
Sub-option 3a  ++ - - ++ + ++ 
Sub-option 3b ++ - -- + + - 
Magnitude of impact as compared with the baseline scenario: ++ strongly positive; + positive; – – 
strongly negative; – negative; = marginal/neutral; ? uncertain; n.a. not applicable 
B) Expertise of Board members 
1) Measures to improve transparency  of corporate governance practices 
1. a. Disclosure of recruitment policy and of expertise and skills of Board members in the 
annual report.  This sub-option entails a requirement to disclose in the annual report the 
recruitment policies, the criteria chosen to  select the candidates proposed for Board 
membership as well as the skills and expert ise of current Board members. The results of 
the public consultation show a general support for such an enhanced disclosure. 101 out 
of 134 respondents that provided an answer to  the relevant question favoured this sub-
option. For the time being, there is not su ch disclosure requirement in the CRD. 
This sub-option could incentivise credit in stitutions to set up a policy which would 
promote enhanced expertise of Board member s as it would provide the public with the 
insight on the practices of th e credit institution and allow for the benchmarking of the 
existing practices and thus compare the cred it institution to its peers. However, as 
shareholders have the final say on the nomi nation of Board members, the recruitment 
policies could be overridden by shareholders will. In that case, this sub-option would have a limited impact on the increase in Board's expertise. 
In addition, as already mentioned above, measur es to improve transparency are a useful 
tool to inform the market and the supervisors of corporate governance practices but they are not necessarily sufficient by themselves if not properly sanctioned by the market. To 
be really effective, they need to be  accompanied effective monitoring of their 
implementation but it is also possible to  complement them by other sub-options 
establishing substantive provisions with re gard to expertise requirements for Board 
members.  
 
EN 145   EN The primary costs of increased disclosure ar e the cost of prepari ng and disseminating the 
information. As credit institutions do already have to publish a lot of  periodic information 
for public use but also for supervisory review, the additional cost of preparation and dissemination of information under option 1.a. w ill not be very high. This cost could be 
relatively higher for small companies as compared  to larger ones, but they remain low in 
any case. It results from the responses to the questionnaire on costs sent to credit institutions that annual cost  of option 1.a. per legal unit could vary between 600 and 
1,000 euros, which does not seem disproportionate compared to the expected benefits, i.e. 
facilitated monitoring by supervisors who do not have to search for information and thus 
reduced cost of supervision.  
2) Principles-based, outcome-focused rules with high degree of flexibility 
2. a. Board members must possess individually  and collectively appropriate expertise on 
recruitment and on an ongoing basis.  This sub-option puts in place a general principle 
without specific criteria as regards the requi red skills and therefore leaves a high degree 
of flexibility to credit institutions and to supervisors to determine what the appropriate level of expertise of Board members is.  
This sub-option would mean that credit in stitutions should select their candidates for 
Board membership taking into account their sk ills and expertise and ensure that these 
skills are appropriate to the nature and the complexity of the activities of the credit institution. Credit institutions  should also ensure that  once the Board members are 
appointed, their skills remain to be adequate  to the nature and th e complexity of the 
activities of the credit institution as it evolves over time. However, it leaves to the credit institution the responsibility to determ ine what the appropriate skills are. 
Such a requirement seems at first sight lik ely to achieve the underlying objective of 
having a more experienced Board able to eff ectively challenge management decisions. At 
the same time, such a principle would provid e different credit inst itutions with enough 
flexibility to adapt th eir practices to their particular situation.  
However, as already mentioned above, such ge neral principle to be really effective to 
achieve the objective of having experience a nd skilful Board need s to be correctly 
implemented by credit institutions and therefore it would seem that there is also a need to 
have it monitored by financial supervisors.  Also, it could be subject to different 
interpretations and practices in different Me mber States and thus allow for regulatory 
arbitrage.  
In addition, the Capital Requirements Directive already contains a provision in its Article 
11 requiring that competent authorities shal l not grant authorisation to the credit 
institution if the persons who effectively dir ect the business of the credit institution "are 
not of sufficiently good repute or  lack sufficient experience to  perform such duties".  As 
described in Part 3 of the impact assessment,  this provision did not ensure that Board 
members of credit institutions possessed suffi cient experience and skills in practice. 
Therefore, there is a doubt that such a gene ral principle would effectively achieve the 
underlined objective. Therefore, there is a need to examine other sub-options to 
 
EN 146   EN determine which one would be most effectiv e and proportionate to achieve the underlying 
objective. 
This option could have a negative impact  on the supply of candidates for Board 
membership. As a result of enhanced standard s for selection of potential candidates, the 
number of suitable candidates may decrease acc ordingly. It could also  result in the need 
for credit institutions to remunerate better experienced and skilful Boards (see remarks under point A, sub-option 2.a.).  
2. b. Create an enhanced "fit and proper" test for Board members that will specify the 
criteria that Board members must possess individually and collectively with regard to 
appropriate skills and expertise on recruitment and on an ongoing basis.   
As compared to the previous sub-option, this sub-option would set general minimum 
criteria with regard to expertise for recru itment of Board members and require that these 
criteria should also be fulfilled during the duration of their mandates to enable Board members to effectively exercise their oversight function.  
As for the previous sub-option 2.a., credit in stitutions should select  their candidates for 
Board membership taking into account their sk ills and expertise and ensure that these 
skills match the minimum criteria of this sub- option and that they ar e appropriate to the 
nature and the complexity of the activities of the credit institution. Credit institutions 
should also ensure that once the Board member s are appointed, their skills remain to be 
adequate to the nature and the complexity of the activities of the cred it institution as it 
evolves over time. 
In addition, the following criteria would be  included in the sub-option: Board members 
should possess individual expertise and collec tive understanding of all material risks of 
the credit institution, independence of mind,  honesty and integrity and be able to 
effectively and constructively  challenge management decisi ons. As a supplement to this 
sub-option, the fulfilment of these criteria could be subject to extensive supervisory 
review which should examine the ability of Board members to exercise their oversight 
function on recruitment but also on regular  basis. The sub-options regarding the 
supervisory review of Board expertise and skil ls are further describe d below (see chapter 
III). 
This sub-option would align EU requireme nts with the revised Basel Principles 
recommendation that Boards should possess,  both as individual Board members and 
collectively, appropriate experience, comp etencies and personal qualities, including 
professionalism and personal integrity. Current ly, Article 11 of the CRD does not specify 
any criteria for suitability of Board members. 
The results of the public consu ltation show support for extendi ng the fit and proper test to 
include technical and professional skills as well as individual qualities of future members of the Board. 68 respondents out of 127 that pr ovided an answer to the relevant question 
favoured this sub-option. Some respondents th ink that Boards should have expertise and 
knowledge collectively and should be able to ch allenge management as a team, instead of 
 
EN 147   EN each candidate possessing all set of specific skills and qu alities. Some respondents 
mention the difficulty to find an appropriate te st for individual qualities, the appreciation 
of which would always be s ubjective. A number of responde nts emphasise that increased 
competence should not be detrimental to independence and diversity of board members. 
This sub-option has the advantage of re sponding to the above-mentioned concerns, 
leaving sufficient flexibility to  credit institutions to adapt th e required skills to their 
particular situation while at the same ti me defining a precise framework and giving 
enough guidance to credit institutions and supe rvisors regarding the required profile of 
Board members of cr edit institutions.  
However, it could have a negative imp act on the supply of candidates for Board 
membership. As a result of enhanced standard s for selection of potential candidates, the 
number of suitable candidates may decrease  accordingly. However, as mentioned under 
point A, this negative impact can be mitig ated by opening the Board to more diverse 
candidates and promoting people internally with in credit institutions. In any case, such a 
negative impact seems proportionate to the underlying objective of having an 
experienced Board able to effectiv ely challenge management decisions. 
This sub-option could also result in the need for credit institutions to remunerate better 
experienced and skilful Boards (see re marks under point A, sub-option 2.a.). 
Nevertheless, these possible additional cost s seem proportionate as compared to the 
underlying objective. 
Also, some respondents to the public consul tation were opposed to extending the fit and 
proper test to professional skills and individual qualiti es of candidates because 
supervisors are not better suited than shar eholders to select board members and thus 
should not be excessively intrusive in the nom ination process. One respondent considered 
that excessive interven tion of supervisors could result in  an undue transfer of liability to 
the supervisor. However, this sub-option l eaves the responsibility  to select board 
members to credit institution itself, supervis ors checking that the criteria for suitability 
have been respected. Therefore, supervisors will  not substitute themselves to shareholders 
or the credit institution. 
2. c. Appropriate induction and continuous training of Board members . This sub-option 
would require credit institutions to se t up specific training programmes for Board 
members depending on the needs of the credit institution and to devote sufficient resources to this training. There is no such requirement currently in the CRD. 
Respondents to the public consultation that expressed their opinion on the subject (134) 
were all in favour of this sub-option. While this sub-option would not be sufficient in 
itself to achieve the objective of having competent Board members able to effectively 
challenge management, it could usefully comple ment the sub-option on enhanced "fit and 
proper "test" (sub-option 2.b.)  and help Board members acquire, maintain and deepen 
their knowledge and skills and to fulfil their responsibil ities. Therefore, it could be useful 
to ensure that Board members have access to  programmes of tailore d initial and ongoing 
 
EN 148   EN education on relevant issues and that th e Board dedicates sufficient time, budget and 
other resources for this purpose, in addition to the sub-option 2.b.  
The annual compliance costs related to this opt ion would vary according to the size of the 
credit intuition's Board, the complexity of its activities and the extent to which the 
individual credit institution already has such  a practice. At the same time, it could be 
relatively higher for small banks than for bi g ones. Annual costs seem to range between 
20,000 and 30,000 €, whereas a one bank thinks that  it would incur significant additional 
costs. However, this sub-option seems to be  proportionate as comp ared to the underlying 
objective. In particular, for small financial in stitutions with no complex activities and risk 
exposures it would be less cost ly to train their existing Boar d members in order for them 
to attain the required expertise level than to recruit already experienced new Board members.  
3) Strict rules with lim ited degree of flexibility 
3. a. Detailed requirements with rega rd to the expertise of Board members
. This sub-
option would entail to list all necessary skills Board members should have in order to be 
able to exercise his/her func tion in a credit institution.  
Whilst this option at first sight could help  achieve the objectiv e of having competent 
Board members, it seems unduly inflexible and difficult to put in place in practice. In 
fact, credit institutions are very different th roughout Member States and their size and the 
nature of their activities coul d vary enormously form a big investment bank to a small 
local savings bank. It seems therefore di fficult to require all credit institutions 
irrespective of their si ze and the nature of their activity to have Board members with 
identical skills. Either the criteria will be too high and impossible to meet for small banks 
which will be unable to find suitable candi dates or criteria will be too low and 
inappropriate for sophisticat ed credit institutions . In addition, excessive emphasis on 
specific qualifications (such as  finance or risk management backgrounds for all Board 
members) could lead to the risk of "monoculture" which should be avoided. This sub-
option is therefore discarded. 
3. b. Require the creation of a Nominati on Committee, subject to proportionality . This 
sub-option entails requiring credit inst itutions to create a nomination committee 
composed of non-executive Board members that  will advise the Board on the selection of 
suitable candidates for Board membership. Th e main purpose of such a committee is to 
ensure that there is a transparent appointme nt process which is not under the control of 
management alone, and to ensure that the right balance of skills and experience is 
brought to the Board. For proportionality reason s, and to take account of different types 
of credit institutions, the size of their Boards and the complexity of their activities, this 
requirement should be subject to excepti ons under the control of the supervisory 
authority. There is currently no requirement to establish a nomination committee in the 
CRD. 
 
 
EN 149   EN This sub-option was suggested by many resp ondents to the public consultation who 
thought that such a committee is an efficient mechanism for examination of the selection 
and appointment practices of the credit inst itution and is effective to evaluate the 
cognitive capacity of each candidate to comply with his/her duties.  
This sub-option could also have a positiv e impact on the division of responsibilities 
within financial institutions. As Board as a whole would not nece ssarily have time to 
examine in detail all the proposed candida tes, a nomination committee would avoid over-
reliance on executives to assess the capacities of  the candidates for Board membership, as 
is often the case in practice.  
According to the responses to the questionnai re on costs sent to credit institutions, for 
credit institutions to set up a nomination co mmittee, the additional annual costs would be 
between 8.000 and 15.000 euros per year, de pending on how many times the nomination 
committee will meet. The related costs seem to be relatively low as compared to the time the whole Board would otherwise have to spen d to search for the appropriate candidate. 
This spared time would be reallocated to di scuss more strategic i ssues, such as risk 
profile and risk strategy. C onsequently, this sub-option se ems to be proportionate as 
compared to the underlying objective.  
4) Combination of different sub-options 
It results from the discussions of the sub- options that a combination between measures 
enhancing transparency, outcome-focused prin ciples and more deta iled rules establishing 
minimum standards is an appropriate combina tion. Each individual sub-option will not be 
sufficient to achieve the underlying objective of improved expertise on Boards. Different 
sub-options will be mutually reinforcing.  
Disclosure of recruitment policies (sub-optio n 1.a.) will inform the market and the 
supervisors, at limited costs to credit institut ions, on the required a nd actual expertise of 
Board members and allow them to verify that  this expertise is adequate. Therefore, 
supervision will be facilitated. 
The general principle that Boards should po ssess appropriate expert ise (sub-option 2.a.) 
and the enhanced "fit and proper" test w ith minimum criteria ( option 2.b.) could both 
effectively achieve the underl ying objective. The two sub-options 2. a. and 2.b. have 
similar impacts and costs but sub-option 2.b. seems to better ach ieve the underlying 
objective, provides more guidance and therefore reduces the risk of different practices, 
whilst still remains proportioned compared to sub-option 2.a. Therefore, sub-option 2.a. 
should be discarded and sub-option 2.b. will be  the preferred option. This sub-option will 
be usefully complemented by induction and continuous training of Board members (sub-
option 2.c.) which will help to achieve the ad equate level of skills and expertise.  In 
addition, setting a Nomination Committee (sub-op tion 3.b.) at Board level will help 
prepare the decisions of the Board as rega rds the selection of candidates for Board 
membership and will ensure the independence of the selection process from management 
dominance. 
 
EN 150   EN As a result, the following sub-options will be retained:  
Sub-option 1.a.  Disclosure of recruitment policy a nd of expertise and skills of Board 
members in the annual report. 
Sub-option 2.b.  Enhanced "fit and proper" test  for Board members with specific 
minimum criteria that Board members must possess individually and collectively with 
regard to appropriate skills  and expertise on recruitment and on an ongoing basis, subject 
to supervisory review. 
Sub-option 2.c.  Require appropriate induction a nd continuous training of Board 
members. 
Sub-option 3.b . Require the creation of a Nominati on Committee, subject  to exceptions. 
Table 2: Comparison of the sub-options (expertise of Board members)  
 
 Effectiveness Impact on 
supply of 
candidates  Flexibility Impact on 
level playing 
field Enforceability Efficiency  
Sub-option 1a + = = = + + 
Sub-option 2a + - ++ = = - 
Sub-option 2b ++ - - + ++ ++ 
Sub-option 2c  ++ = = + + + 
Sub-option 3a ++ - -- ++ ++ - 
Sub-option 3b  + = - ++ ++ + 
Magnitude of impact as compared with the baseline scenario: ++ strongly positive; + positive; – – 
strongly negative; – negative; = marginal/neutral; ? uncertain; n.a. not applicable 
C)  Counterbalancing management dominance 
1) Measures to improve transparency  of corporate governance practices 
1. a. Disclosure of the existing practice in the credit institutions as  regards independence 
of Board members . As mentioned previously, the disc losure of existing practice is a 
useful tool to inform market and supervisor s of corporate governance practices but it is 
not necessarily sufficient by themselves. Mo reover, what is an independent Board 
member is not easy to define. It is not e nough that Boards are formally independent from 
management. To be able to effectively chal lenge management and reach an independent 
judgement, Board should not be subject in practice to an undue influence by executive 
management. Consequently, it seems difficult to describe in an annual report how a 
Board member acts independent  from management and to ef fectively monitor and verify 
such information. This sub-option should therefore be discarded.  
 
EN 151   EN 2) Principles-based, outcome-focused rules with high degree of flexibility 
2. a. Board members must behave independently from management.  Such a general 
principle could achieve its objective if eff ectively implemented in practice. However, it 
would be very difficult to monitor the correct  implementation of su ch a principle. How 
Board members behave during Board meetings could be reflected in the minutes but how 
they effectively reach their decisions and wh ether they are exempt of any influence of 
executives is impossible to objectively monito r. Consequently, this sub-option should be 
discarded.  
3) Strict rules with lim ited degree of flexibility 
3. a. Prohibit cumulating mandates of Chairman and Chief Executive Officer (CEO) in 
the same credit institution, subject to proportionality.  It might be envisaged to prohibit 
cumulating the mandate of Chairman of the Board with a mandate of CEO in the same 
credit institution.  
Whilst most European governance codes124 suggest that CEO/Chai rman separation is key 
for the maintenance of appropriate checks and balances within the institution, for the time 
being, in the majority of Member States, th e law does not forbid a ppointing the chairman 
as CEO125. There is no such prohibition in the CRD either. 
A majority of respondents to the public c onsultation (75 out of 140) that provided an 
answer to the relevant question favour a mandatory prohibition on cumulating the 
functions of Chairman and of CEO. In their view, the separa tion of the roles of CEO and 
Chairman reduces the power of the CEO and the potential for management to dominate the Board. Combining both functions disregar ds the divergence of duties and capacities 
and concentrates an unwarrant ed amount of power and domi nance in the hands of one 
person. Splitting the roles of Board chair a nd CEO promotes strong, independent Board 
leadership and operation. Sepa rating the roles properly refl ects the differences in the 
positions and offers a better balance of power between the CEO and the Board than 
combining the positions. In addition, 26 res pondents consider that the separation of both 
functions should be best practice on comply or  explain basis to take account of specific 
situations. 
Therefore, due to proportionality considerat ions and taking into account particular 
situations when cumulating both mandates would be necessary, this prohibition may be subject to exceptions (certain credit institutions may cumulate the two functions) under the control of supervisory aut horities. The results of the public consultation show that 
certain exceptions would be ne cessary to accommodate specific  situations, especially for 
                                                
 
124 For example, in Spain, the Neth erlands, Ireland, United Kingdom. 
125 Such prohibition exists for instance, in Austrian and German laws which explicitly require the 
 strict separation of the roles of the management Board and supervisory Board. In France the 
 position of chairman is separated from the position of general manager in principle but the Board  can decide to give the two functions to the same person. In other countries, such as Italy, the 
 Netherlands, United Ki ngdom, Greece, Spain an d Portugal, such prohi bition does not exist. 
 
EN 152   EN small financial institutions given the difficulty  of securing top executive leadership and 
temporary cumulating of functions in particular circumstances..  
On the other hand, some respondents to the public consultation (26) opposed any 
prohibition to cumulate both functions. They considered that there was no conclusive 
evidence that financial institutions where the functions of Chairman and CEO were 
performed by different individuals performe d better or have bette r withstood the crisis 
than those financial institutions where the two functions were pe rformed by the same 
person. It has also to be recognized that, when  the CEO also serves as the chairman, in 
some cases his or her role-duality could provi de unified firm leadership, build trust and 
stimulate the motivation to perform126. Also some of the respondents were of the opinion 
that there is no single correct method of st ructuring the leadership of a bank and 
cumulating the roles of chairman and chief exec utive officer may be th e best solution, or 
simply unavoidable, for a particular bank. Mo reover, there are policies, procedures, and 
internal controls that can be  put in place at banks to avoid excessive domination of the 
governance of the bank by the dual executive. Also, in some jurisdictions and in some specific instances such separation is not  advisable or even legally allowed. 
Nevertheless, taking into acc ount the particular situation of credit institutions where 
executive management tends to adopt risky strate gies in order to maximise profit, there is 
a need for a strong control by the Boards of  the executive management decisions and 
hence the independence of the Boards me mbers from management influence. The 
emerging practice in Member States and the results of the public consultation seem to 
show that, for credit institutions, separati on of functions of Chairman and CEO is 
desirable and, subject to some exception, s hould be mandated by law. Most European 
countries strongly recommend the separation of duty between the CEO and the chairman, 
and many make it mandatory. 
This sub-option should have a strong pos itive impact on the clear division of 
responsibilities. This sub-op tion should not have a significant impact on the supply of 
candidates to become Board members. Ther e are no material direct compliance costs 
associated with this option. 
3. b. Minimum number of  non-executive directors
. Whilst this sub-option seems at first 
sight to improve independence of Board oversig ht function, it seems to be too inflexible 
and does not take into account the different Board structures in Member States. While it 
could make sense in one-tier structure, it does not make sense in two-tier structure or 
mixed Boards with an independent supervis ory Board. Furthermore, in a one-tier Board, 
the minimum number of non-executives will be t oo inflexible for small credit institutions 
with a limited number of Board members. Moreover, it is difficult to determine what the number of non-executives should be as compar ed to executives present on Board. This 
sub-option should therefore be discarded. 
                                                
 
126 Muth, M. M. and Donaldson, L. Stewardship Theory and Board structure: A Contingency 
 Approach , Corporate Governance An International Review, 1998, Vol 6, No1. 
 
EN 153   EN 4) Combination of different sub-options 
It results form the discussion of the different  sub-options that, whilst less flexible than 
other sub-options, the most effective way to ensure the independence of the Board in its 
oversight function and which is most easy to monitor seems to separate the function of 
the Chairman and the CEO. As a result, th e following sub-option will be retained:  
Sub-option 3.a. Prohibit cumulating mandates of Chairman and Chief Executive Officer 
(CEO) in the same credit institution 
Table 3: Comparison of sub-options (co unterbalancing management dominance)  
 
 Effectiveness Impact on 
supply of 
candidates  Impact on clear 
division of 
responsibilities Flexibility Impact on 
level 
playing field Enforceability Efficiency  
Sub-option 1a = = = = = = n.a. 
Sub-option 2a = = = = = = n.a. 
Sub-option 3a ++ = ++ - ++ ++ ++ 
Sub-option 3b  = = = -- + + n.a. 
Magnitude of impact as compared with the baseline scenario: ++ strongly positive; + positive; – – 
strongly negative; – negative; = marginal/neutral; ? uncertain; n.a. not applicable 
D)  Diversity of Board composition 
1) Measures to improve transparency  of corporate governance practices 
1. a. Disclosure of internal policy on diversity in annual report.  The disclosure 
requirement could contain a requirement for cr edit institutions to disclose their diversity 
policy, objectives as to dive rsity and whether these objectives have been achieved. There 
is no such disclosure requirement in the CRD for the time being. 
The following information should be disclosed:  age and gender balance, educational and 
professional background of Board members, how they represent different regions in an 
international group, number of years spent in foreign countries as a professional or a 
student, etc. 
The benefit of transparency with regard to diversity policy is that it allows for public 
insight and grows the perceived legitimacy of  the actions of the credit institution which 
adopts a diversity policy and therefore the effec tiveness of the efforts to address diversity 
challenges. Credit institutions which do not have a diversity policy or do not make the 
necessary efforts to achieve the objectives of such policy should be subject to public 
criticism. Therefore,  this sub-option should encourag e credit instituti ons to adopt 
ambitious diversity policies.  
 
 
EN 154   EN This sub-option was favoured by some responde nts to the public consultation (66) which 
considered that such a soft requirement woul d encourage diversity but in the same time 
would not impose specific choices  to the credit institution.  
1. b. Benchmarking of different practices.  Supervisory authorities could be required to 
collect information on the diversity polic ies and practices in the different credit 
institutions based on individual disclosures by  credit institutions (see sub-option 1.a.) and 
to assemble (in a database) and disclose this  information at national level annually. In 
addition, European Banking Authority could be  required to make a similar disclosure 
annually at European level. There is no such requirement currently in the CRD. 
This sub-option was favoured by some respondents  to the public consultation as a useful 
tool to promote diversity in credit institutions as such a "name and shame" tool would 
impact the reputation of credit institutions and give them an incentive to adopt ambitious 
diversity policies. Also, benchmarking provi des comparable data identifying common 
standards to aspire to  and against which credit institutions can assess their diversity 
policies. 
However, certain supervisors (ex: Belgium, Austria) in response to the questionnaire on 
costs commented that information on diversity in Boards is not  relevant for supervisors as 
it is outside the scope of trad itional prudential instruments.  
Nevertheless, as described in Part 3 of the impact assessment, Board composition and 
especially the lack of diversity, could ha ve an impact on the Board's capacity to 
effectively challenge management decisions. Therefore, information on diversity could 
be a useful tool for supervis ors in their prudential supervision of credit institutions. 
Moreover, to encourage diversity at European le vel, EBA is the most suitable authority to 
benchmark the existing practices  in different Member States  and provide information to 
the public across Europe. 
It is estimated that the compliance cost a ssociated with option 1.a. would be around € 600 
- € 1,000 per company127, whereas compliance with option 1.b. would involve some 
additional costs for all supe rvisory authorities involved.  The additional costs for 
supervisors are related to the setting up of a data base (one-off cost ) and the collection of 
data from all banks by copy-pasting the disclo sures made in the annual reports (recurrent 
cost). The cost estimates for the one-off costs range from 1,600 € in Latvia to 191,000 € in Denmark. The cost estimates for the annua l recurrent costs range from 600 € in Latvia 
to 130,000 in Germany.  
 
                                                
 
127 Although this potential sub-option was not includ ed in the questionnaire, the cost estimates 
provided for the other potential measures involving a similar disclosure requirement in the annual report 
can be used as an estimate. 
 
EN 155   EN Whilst both sub-options 1.a. and 1.b. to im prove transparency and benchmarking 
exercises are useful tools to inform the market and the supervisors of corporate 
governance practices and could incentivise cred it institutions to put in place ambitious 
diversity policies, the costs related to option 1.b. could seem  to be rather high as 
compared to option 1.a. However, as explained above, benchmarking of existing 
practices complements and strengthens transparency requirements as such. This additional cost could be mitigated by requiring to benchmark different policies for a limited period of time (e.g. three-five years) , until credit institu tions change their 
practices and the underlying goal in achieve d. Therefore, the sub-option 2.b. seems 
proportionate when comparing cost s to the expected benefits.  
It could be argued that the two sub-options 1.a. and 1.b. could have a negative impact on 
the pool of people available for Board memb ership, and possibly on the objective of 
Board expertise because there are not enough experienced women or men from 
sufficiently different background to populate the Board rooms of credit institutions. 
However, as will be showed below (see sub-opt ion 3.a.), there is evidence that, at least 
with regard gender balance,  there is enough qualified women which cannot not for the 
time being reach leading positions in companies.  In addition, the disclosure requirements 
leave sufficient flexibility to cr edit institutions to justify why the targeted diversity could 
not be achieved. 
However, as already mentioned above, the sub-options 1.a. and 1.b. are not necessarily 
sufficient by themselves if not properly sancti oned by the market. To be really effective, 
they need to be accompanied by effective mo nitoring of their implementation but also 
other sub-options providing for more subs tantive requirements could be envisaged. 
2) Principles-based, outcome-focused rules with high degree of flexibility 
2. a. Diversity must be one of the criteria of Board composition
. This sub-option includes 
diversity as one of th e criteria which should be taken into  account by the credit institution 
when selecting a Board candidate and by the supervisory authority when approving such 
a candidate. Diversity meaning age and gender balance, different educational, social, 
geographical and professional background. Curren tly, diversity does not form part of the 
criteria for selection of candidates for Board membership in the CRD.  
This option was favoured by many respondents to  the public consultation (131) as putting 
diversity criteria at the same level as expertise and integrity. This option has the advantage of being highly flexible leaving the method to achieve the underlying objective 
of more diverse Boards to credit institutions . However, such general principle might not 
achieve its objective in practice, as it relies  in the first place on the appreciation by a 
credit institution of what is the appropriate  diversity, on the trade- off between diversity 
and expertise and makes it difficult for superv isory authorities to monitor the effective 
implementation of this principle. It could be subject to different interpretations and 
practices by credit institutions but also in different Member States by different supervisory authorities and thus  allow for regulatory arbitrage.  Consequently, this general 
principle needs to be accompanied either by detailed guidelines coor dinated at European 
 
EN 156   EN level by EBA or by other sub-options which provide for more stri ct requirements in 
European legislation. However, for the tim e being, draft EBA guidelines do not foresee 
any detailed guidance on this. 
It could be argued that this sub-option could have a negative  impact on the pool of people 
available for Board membership, and possi bly on the objective of Board expertise 
because there are not enough experienced wome n or men form sufficiently different 
background to populate the Board rooms of cr edit institutions. However, as will be 
showed below (see sub-option 3.a.), there is evidence that, at least with regard gender 
balance, there is enough qualified women wh ich cannot not for the time being reach 
leading positions in companie s. In addition, the disclosure  requirements leave sufficient 
flexibility to credit institutions to justify w hy the targeted diversity could not be achieved. 
There should be no direct additional costs for credit institutions. Ther efore, this option 
seems to be proportionate as compared to expected benefits a nd will be retained. 
2. b. Requirement to establish a pol icy with regard to diversity . It could be required that 
credit institutions should establish a polic y concerning diversity which should include 
requirements for the Board to establish meas urable objectives and targets for achieving 
diversity and to assess annually  both the objectives and the progress in achieving them. 
Credit institutions may also be required to in troduce appropriate proced ures to ensure that 
the policy is implemented properly and an internal review mechanism to assess the effectiveness of the policy.  
According to the interviews conducted with credit institutions, increasingly large number 
of credit institutions is implementing diversity programs with particular emphasis on gender diversity but also on other aspects of  diversity. Many respondents to the public 
consultation think therefore that this trend should be encouraged. This sub-option seems 
thus to be a useful tool to promote diversity  in Board composition of credit institutions, 
leaving a sufficient degree of flexibility to adju st the diversity policy to different types of 
companies.  
However, the effective implementation of th is principle relies mainly on the credit 
institution itself and on the external scruti ny by shareholders. If the monitoring of the 
implementation is deficient or credit instit utions do not derive any economic or other 
benefit from having in place an ambitious di versity policy, this sub-option may not be 
sufficiently effective to achieve its objectiv e. Consequently, this sub-option could be 
combined with other sub-options setting more st rict requirements with regard to diversity. 
It could be argued that this sub-option could have a negative  impact on the pool of people 
available for Board membership, and possi bly on the objective of Board expertise 
because there are not enough experienced wome n or men form sufficiently different 
background to populate the Board rooms of cr edit institutions. However, as will be 
showed below (see sub-option 3.a.), there is evidence that, at least with regard gender 
balance, there is enough qualified women wh ich cannot not for the time being reach 
leading positions in companie s. In addition, the disclosure  requirements leave sufficient 
 
EN 157   EN flexibility to credit institutions to justify w hy the targeted diversity could not be achieved. 
Consequently, this sub-option will be retained. 
There are no significant direct costs linked to  this option. Three coul d be indirect costs 
linked to internal processes and the recruitm ent and remuneration of HR specialists or 
head hunters that will s earch for required diversity as sp ecified in the policy. But these 
costs are hard to estimate and will vary from  one credit institution to another. Also, to 
achieve the objective of diversity, some cred it institutions may increase the number of 
Board members. This could lead to additiona l costs linked to the need to remuneration 
additional directors. However, it is difficult to estimate the ex act amount of this cost, as 
credit institutions may also choose to re place existing Board members to achieve the 
diversity objective. In any case, additional costs should not be significant as the average 
annual remuneration of non-executive directors in credit in stitutions is estimated at 
€77,000.  
3) Strict rules with lim ited degree of flexibility 
3. a. Put in place a quantitative target for gender balance . It could be possible to set a 
quantitative target of a certain percentage of Board members of each gender that credit 
institutions need to achieve in a certain period of time. 
This option aims at harmonising the different  rules recently adopted by Member Sates. 
The adoption of such a quantitat ive target mandating greater diversity was tested in some 
Member States.  In 2003, Norway made a d ecision to enact legisl ation requiring 40% of 
Board membership of publicly owned comp anies to be female by 2007. State owned 
companies were already required to do this  and successfully complied. Although Norway 
has been fairly progressive in gender equality, the corporate Board room remained a 
man’s domain. In the years si nce Norway enacted the legislation, the percentage of 
women on the Board of directors climbed from 6% to 40.3% in 2010128. Spain followed 
Norway’s lead and enacted similar legisla tion requiring the 40% quota in 2007. There are 
already signs of progress: the percentage of women on the Boards of Spain’s largest 
listed companies has more than doubled, rising from 4% in 2006 to 10% in 2010129. 
In France, legislation was adopt ed in January 2011. It gives bu sinesses six year s to ensure 
that 40% of Boardroom positions are taken by women. Within three years French firms 
must ensure that a figure of 20% is reached . The legislation will apply to companies in 
France which are either listed, have more  than 500 employees or revenues over 50 
million euros.  Netherlands are in process of  enacting similar quota laws with at least 
30% of seats to be held by each gender and Belgium, Sweden and Italy are considering 
their own versions. Germany is also envisa ging measure to promote gender balance on 
corporate Boards but is for the time be ing considering voluntary quotas only. 
 
                                                 
128 Norway Central Bureau of Statistics, Focus On Gender Equality: Key Figures, 2010 
129 Commission database: women and men in decision-making.  
 
EN 158   EN The table below summarises different measures which exist in different Member States:  
Table 4: Quota laws in Member States 
Country  
 Status and applicability  Minimum representation and penalties  
Belgium  Federal law proposal prepared but not 
discussed in parliament yet Min. 33% women on Boards of listed 
companies by 2016  
France  Quota law passed in 2011 applicable to 
listed companies and companies with more 
than 500 employees or turnover/asset of 
more than € 50 mln; in total 2000 companies.  
 At least 20% women on Board in 3 years  
and 40% in 6 years from the first Annual 
Meeting since implementation of the law 
Non-compliance brings annulment of 
nominations and deliberations of the Board 
Iceland Quota law was passed in 2010. Applicable to 
publicly owned and publicly limited companies with more than 50 employees 40% of each gender per September 2013 
Netherlands  Dec 2009 propos al for soft targets accepted 
in parliament applicable to companies with 
more than 250 employees. Needs to be passed by senate (unsure) Target of min. 30% of each gender at both 
Board levels (executive and supervisory) per 2016.  
Norway Quota incorporated into Companies’ Law (in 
2003). Applicable to listed companies 
(approx.400), inter-municipal, state-owned, 
municipal and cooperative companies. Min. representation of each gender of 40% 
per 2008. 
Penalties: warnings, fines, ultimately 
delisting 
Spain  Quota law.  Appli cable to public companies 
with more than 250 employees and IBEX-35 Representation  of 40% of each gender by 
2015 
 
If the goal is to accelerate the numbers of women on Boards in a short period of time, the 
figures mentioned above tend to show the eff ectiveness of legislated quotas in increasing 
the numbers of women directors.   
Regardless of whether the targeted percentage  of women directors is  reached in a given 
period of time, the evidence in Member States  which have or will impose quotas seem to 
show that numbers tend to increase, and far mo re swiftly than in past years. The proposal 
of a quota will come with a grea t deal of press attention that  will place the whole issue of 
women on corporate Boards in the public di scourse. In addition, companies that worry 
about appearing discriminatory may accelerate their appointment of women directors as a 
consequence. In France per centage of women directors, for example, was only 6.4% in 
2007 until the lead-up to the passage of its quota law in 2010. In 2010 France had 14.4% 
 
EN 159   EN of its Board directors being women, doubling its earlier numbers  within three years, even 
though the legislation was not yet passed in the Senate.  Quota legislation seems to be the 
therefore an effective tool to accelerate Boar d diversity and reach meaningful levels of 
women’s representation on companies’ Boards. 
One argument frequently used against a wome n quota on Boards is th e lack of qualified 
women that would be detrimental to the quality  of the Board. The need to achieve a quota 
would not allow for selection of the best candidate but would privilege the female 
candidate even if such candidate would not  be the most suitable one. However, recent 
statistics show that more than  half of the students (59%)130 graduating from Europe’s 
higher educational institutes ar e women. Furthermore, in 2009, the Statistical Bureau of 
Norway showed that because of the high e ducational level among female members of the 
Board, the general level of education rose in the Boardrooms. Consequently, women’s 
talents are currently being unde rutilized at decision-making le vels, in particular at top 
level. While women have a higher level of tertiary educational attainment than men in the EU, their professional careers do not fully refl ect their skill levels, which is a waste of 
human resources and competencies.  
However, introducing a quantitative target  for gender balance in Boars of credit 
institution could have some negative aspects. First, such a quota is  not flexible and does 
not allow taking into account different nature  of credit instituti ons. Second, introducing 
gender quotas for credit institut ions would not be coherent w ith the more general strategy 
of the Commission with regard to gender equality which forsees a two step approach, first encouraging self-regulation and then ev entually imposing hard quotas if the results 
of this self-regulation do not prove sufficient.  
In addition, gender quotas would not cover othe r diversity aspects, such as geographical, 
educational and professional backgrounds. There is no experience in Member States or 
studies that show what specific percentage should be desired for each diversity category 
in a Board for it to function properly. Implem entation of such a quantitative target by 
credit institutions seems also to be difficult.  Therefore, a more general out-come focused 
principle with regard to these divers ity aspects is more appropriate.  
Regarding the cost impact of this option, depending on the way the individual financial 
institution chooses to ensure the implementation of the princi ple (whether they choose to 
replace existing Board members or recruit additional ones), there could be costs for the company but there are no cost estimates availa ble. If, to satisfy the target, the credit 
institution recruits additional Board members,  this will entail additional costs linked to 
the need to remuneration these new Board members.  If one Board member is simply replaced by another, this will not entail additional co sts. In any case, additional costs 
should not be significant as the average annu al remuneration of non-executive directors 
in credit institutions is estimated at €77,000. 
                                                
 
130 See Eurostat Labour Forc e Survey, annual averages. 
 
EN 160   EN Other costs could be linked to internal processes or the recruitment or remuneration of 
HR specialists or head hunters that will search for required diversity.   
3. b. Positive discrimination.  In might be envisaged to require  that in case of equivalent 
skills, candidates which contribute to improve  gender balance should be privileged as 
compared to other candidates. This option is mo re flexible that a quant itative target and at 
the same time would achieve its objective if effectively implemented by credit 
institutions. However, it is very difficult to monitor the implementati on of such principle: 
whereas it is possible for the supervisor to objectively see whether a proposed candidate 
for Board membership satisfies required crit eria, it much more difficult to monitor why 
one candidate has been preferred to anothe r. The selection of the candidates is the 
primary responsibility of the credit institution an d the selection process itself is subjective 
and difficult to monitor. This sub- option should theref ore be discarded. 
3.c. Increase employee participation on Boards.  This sub-option should effectively 
contribute to increase diversity on Boards of credit institutions, especially with regard 
gender diversity. According to German experi ence, where the employee representation on 
supervisory boards of companies is manda tory, the percentage of women among 
employee representatives is significantly hi gher than the percentage among shareholder-
elected board members. For instance, in 2010, two-thirds of women on the supervisory 
boards of banks and savings in stitutions were appoi nted to those posi tions as employee 
representatives under employee co-determination legislation131. 
However, this sub-option woul d increase the number of Bo ard members, slowing down 
the decision-making process. Also, this sub-option would touch on company law of 
Member States which, for the time being, have  very different regimes with regard to 
employee representation and different roles of trade unions.  
4) Combination of different sub-options 
It results from the discussions of the sub- options that a combination between measures 
enhancing transparency, outcome-focused prin ciples and more deta iled rules establishing 
minimum standards is an appropriate combina tion. Each sub-option will not be sufficient 
on its own to achieve the underlying obj ective of improved di versity in Board 
composition. Different sub-options will be mutually reinforcing.  
Disclosure of exiting diversity policies (sub-option 1.a.) will allow the market and 
supervisors to monitor whether credit inst itutions have appropriate and ambitious 
diversity targets and whether they have been implemented. Benchmarking of existing 
practice during the transitional period for achievement of quantitative targets will encourage credit institutions to rapidly improve diversity on  Boards. However, these sub-
options will not be sufficient. They should be complemented by   principle-based sub-
options (sub-options 2a  and 2b) on diversity po licy and diversity as a criteria of Board 
                                                
 
131 German Institute for Economic Research, Weekly  Report : A squandered opportunity: Even after 
 the financial crisis, top positions in large financial firms still largely occupied by men, March 2011 
 
EN 161   EN composition, which e are flexible enough  he lp avoid box-ticking and allow supervisors 
to ensure that credit institutions include divers ity of views as one of the criteria of board 
composition, at the same level as time-commitment and expertise.  
As a result, the following sub-options will be retained:  Sub-option 1.a.  Disclosure of internal polic y on diversity in annual report. 
Sub-option 1.b.  Benchmarking of different practices  
Sub-option 2.a.  Diversity must be one of the criteria of Board composition  
Sub-option 2.b.  Requirement to establish a po licy with regard to diversity 
Sub-option 3.a. Put in place a quantitative target for gender balance  
Table 5: Comparison of sub-options (diversity of Board composition)  
 
  
Effectiveness Impact on 
supply of 
candidates  Flexibility Impact on 
level playing 
field Enforceability Efficiency  
Sub-option 1a + = = = + + 
Sub-option 1b + = = = + + 
Sub-option 2a + = = = = + 
Sub-option 2b + = - + + + 
Sub-option 3a  ++ = -- ++ ++ ++ 
Sub-option 3b - = - ++ = n.a. 
Sub-option 3c + = -- + + -- 
Magnitude of impact as compared with the baseline scenario: ++ strongly positive; + positive; – – 
strongly negative; – negative; = marginal/neutral; ? uncertain; n.a. not applicable 
 
Section 2:  Ownership by Board of risk strategy 
A) Measures to improve transparency  of corporate governance practices 
1. a. Boards must produce a declaration on an annual basis on the adequacy of risk 
management systems.   
The Board could be required to publish a declaration on an annual basis providing 
assurance to different stakehol ders that the risk manageme nt systems put in place are 
 
EN 162   EN adequate with regard to credit instituti on's activities and that the Board ensures the 
effective risk oversight.  
Such a declaration could explain to invest ors how members collectively have reviewed, 
challenged and approved management’s information on company risk and risk 
management in light of the company's strategy. Boards could disclose in such declaration 
risk oversight challenges that may have emerged over the reporting period, including 
action taken or planned to a ddress them and how on an ongoi ng basis it seeks to improve 
risk oversight. It could also explain how and how often strate gy, level of risk tolerances, 
and risk oversight are assessed by the Boar d in connection to each other; how and how 
often the suitability of the capital structur e, the capital allocation process, the risk 
management framework and the risk manageme nt process are assessed with respect to 
strategy and risk tolerance; how and how often the structur e of information flow and 
levels of decision making re garding actively taken risks ar e assessed with regard to 
effective risk oversight. 
For the time being, Boards are not required to produce such a decl aration under the CRD. 
Draft EBA guidelines do not provide for it either. Capital Requirement Directive in 
Article 22 only requir es credit institutio ns as such to have robust governance 
arrangement, including effective processes to  identify, manage, monitor and report risks. 
However, the division of responsibilities within  credit institutions with regard to which 
body is responsible for putting in place such  arrangements is not clearly defined.  
Many respondents to th e public consultation supported the view that such a declaration 
on the adequacy of risk management system s would make Boards effectively aware of 
their role in risk oversight and give a powerful tool to sh areholders and supervisors to 
take Boards accountable for putting in place adeq uate procedures to oversee risk in credit 
institutions. In order for the Board to be res ponsible for the risk oversight and effectively 
own the risk strategy of the credit institu tion, the Board should take ownership of 
improving risk management in the organization.  
Therefore, this sub-option seems to have a strongly positive impact on clear division of 
responsibilities within credit  institutions and effectiv ely achieve the objective of 
improving Board's oversight of risk.  
 On the other hand, some respondents thought th at although such a declaration could be 
useful, approval by Boards would not have a ny added value compared  to already existing 
requirements in different nati onal or European legislatio ns or corporate governance 
codes, or would be too formalistic and dispro portionate. In particular, a majority of the 
respondents were opposed to a Sarbanes - Oxley
132 type declaration as they thought it 
was too burdensome and also did not prevent the crisis in US. 
                                                 
132 The Sarbanes-Oxley Act adopted in 2002 in US makes reporting on internal controls mandatory 
 for SEC registrants and their independent aud itors. Section 302 of the Act entitled "Corporate 
 
EN 163   EN However, the present sub-option will be di fferent from Sarbanes-Oxley requirements 
where the declaration should be audited, which makes it very costly to companies. Also, 
Sarbanes-Oxley declaration has to be approved by executives and not by the Board, 
which could partly explain why it di d not prevent the crisis in US.  
This sub-option could also have  an indirect impact on the supply of candidates to become 
Board members due to a possible increase in the accountability of Boards. It could be 
argued that potential candidate s would be discouraged from becoming Board members if 
they know they will be held accountable if ad equate risk management structures are not 
in place. It could also be argued that to mo tivate potential candidates and compensate the 
increase in accountability, the Board members would ask to be paid more and this would 
entail additional cost for credit institutions.  
Nevertheless, the objective to improve risk oversight by Boards underlying this sub-
option would be difficult to achieve without  increased accountability of the Board which 
is the governing body of the credit institution fina lly responsible for the sustainability of 
the credit institution's activity before shareholders.  
Moreover, in most Member States, Board are collectively and not i ndividually (except in 
certain particular circumstan ces) accountable before the sh areholders. Consequently, the 
sub-option should not have an impact on the individual accountability of Board members.  
Thus, the negative impact on the supply of candidates for Board membership should be limited. Therefore, this sub-option seems to be proportionate with regard to the underlying objective. 
Like the other measures that foresee a disclo sure in the annual repor t the compliance cost 
can be estimated to between 600 and 1,000 € p.a. per legal unit. There may be additional costs related to the internal processes, the le gal advice or audit revi ew of the declaration. 
However, these costs are difficult to estimate. For further details, see Annex II.  
 
1. b. Boards must publish on an annual basis a risk statement which would consist of a 
short and clearly understandable report on the credit institution' s approach to risk .  
The Board could be required to publish in the annual report or in a separate document a 
risk statement which would describe the credit institution approach to risk, main risks, 
strategy for delivering the objectives and how this strategy is consistent with risk appetite, and explain the basis on which credit institution generates or preserves value over longer term. This risk statement to fulf il its objective, should be  succinct, highlight 
                                                                                                                                                
 
 Responsibility for Financial Reports" establishes management responsibility for internal controls 
 and requires management to evaluate the effectiv eness of internal controls. Section 404 of the Act 
 directs the SEC to adopt rules requiring annual reports of public companies to include an 
 assessment, as of the end of the fiscal year, of th e effectiveness of internal  controls and procedures 
 for financial reporting. Section 404 also requires  the company's independent auditors to attest to 
 and report on management's assessment. 
 
EN 164   EN major issues, distil key issues in a thematic way and should be updated in case of material 
changes.  
For the time being, credit inst itutions are already required to  publish information on risk 
according to different provisions in the Capi tal Requirements Directive. However, as 
described in Part 3 of the impact assessment,  this information is dispersed throughout the 
annual accounts, is very technica l and difficult to find and analyse. It does not provide the 
shareholders and the market with a clear picture of what is the credit institution's 
approach to risk, what the ri sk strategy is and how the curre nt risk exposures are aligned 
with this risk strategy. 
A formal statement of risk appetite coul d contribute to create a transparent risk 
mechanism and allow stakeholders to take a more considered view of the Board’s pursuit 
of objectives that are for or against stakeholde rs’ interests. Risk appetite statements can 
serve as a clear and objective tool for ensuri ng accountability, ensuring that stakeholders’ 
interests are adequately reflect ed in Board decision-making. 
Half of the respondents to the public consulta tion, especially institutional investors, that 
provided an answer to the re levant question expressed ve ry strong views that the 
disclosure of risk management needs to be enhanced. They think th at a short and clearly 
understandable report informing shareholders  on risk exposures, risk strategy and 
tolerance would help investors to form a co mprehensive view of ri sk appetite of the 
financial institution, if it would not become a boiler plate declaration. In their opinion, it 
would also contribute to rais e Board's awareness of risk is sues. In particular, the dynamic 
nature of risk management ne eds to be captured more effec tively: where si gnificant risks 
have changed over the reporting period, th is should be disclosed, along with an 
explanation as to why. There al so needs to be more effectiv e disclosure of management 
and Board actions to manage and mitigate risks on a dynamic basis.  
Other respondents (mainly financial services  industry) who are against putting in place 
such risk statement think that existing Eur opean legislation on cr edit institutions and 
insurance companies already requires financial institutions to disclose sufficient information on risk. Furthermore, French, German and UK respondents indicated that 
their national legislation or  corporate governance code s require extensive risk 
disclosures. However, this su b-option would not require additi onal information on risk to 
that already required under existing legislation, but improves the presentation of this information to the public which could easily fo r a view of main risk exposures of the 
credit institutions, which are now di spersed throughout the annual report. 
As a response to the questi onnaire on compliance costs an Italian bank states that the 
information that would need to be included in  the statement is alre ady contained in other 
documents which the Board of Directors is re sponsible for, and on that basis assumes a 
cost of 2/3 man-days (between € 400 and € 600 ) to collect and organize this information 
in the Annual Report. Based on general know ledge on measurement of administrative 
burdens the Danish Commerce and Companies Agency on the other hand estimate the compliance costs to be around 4,300 € per comp any and explains th at compliance with 
 
EN 165   EN any requirement on information to be disclosed in the Annual Report would involve a 
substantial amount of time consumption beca use the information normally needs to be 
approved on several levels. The co sts can also be higher if the risk statement is subject to 
external audit. 
However, this sub-option leaves to the cred it institution the choice of appropriate 
document to publish the risk statement. If the risk statement in the annual report is subject 
to statutory audit under the na tional law, n that case credit  institution could decide to 
publish the risk statement as a separate docum ent, avoiding costs linked to the external 
audit.  
This sub-option seems therefore to be proportionate to the underlying objective. 
 
2) Principles-based, outcome-focused rules with high degree of flexibility 
2. a. Board must determine or approve the risk profile and strategy and any changes.   
In order to effectively oversee risk in a credit institution, Boards should be able to 
directly influence its risk profile. This i nvolves making key decisions such as setting 
boundaries outside which the management is not permitted to operate.  
However, Capital Requirements Directive alre ady contains a provisi on that "management 
body (Board) shall approve and periodically revi ew the strategies and policies for taking 
up, managing monitoring and mitigating the risks the credit institution is or might be exposed to". This option should theref ore be discarded and superfluous.  
3) Strict rules with lim ited degree of flexibility 
3. a. Board must approve new financial products
.  
Board could be required to put in place th e new product approval process and scrutinise 
product development and new business activity irrespective of the size of the capital commitments entailed, in order to identify ri sks from a forward l ooking persp ective and 
ensure that the risks involved are consistent with the risk appetite and strategy of the 
financial institution.  
Such product approval process is not fo r the time being required by the Capital 
Requirements Directive nor is it the case in practice. The results of the public 
consultation show that a systematic approval by the Board of all new products would be 
disproportionate, as it would enta il involvement of Boards in  operational issues, which is 
the responsibility of execu tive management. On the othe r hand, Board could approve 
products that have a significant impact on the st rategy and the risk profile of the financial 
institution, as it would be part of global ri sk strategy. Therefore, this sub-option seems 
superfluous with regard to the sub-option 2.a requiring Boards to ap prove risk profile and 
strategy of the credit institution and any subs equent changes. It should therefore be 
discarded. 
 
EN 166   EN 4) Combination of different sub-options 
It results from the discussions of the sub-options that only measures enhancing 
transparency (sub-options 1and 1b) will effectively achieve the underlying objective. Whilst sub-option 1a could entail additional administrative burden, it seems to be still 
proportionate and efficient. As a result, th e following sub-options will be retained:  
Sub-option 1.a. Boards must produce a declaration on an annual basis on the adequacy 
of risk management systems 
Sub-option 1.b.  Boards must publish on an annual basis a risk statement which would 
consist of a short and clearly  understandable report on the cr edit institution's approach to 
risk 
Table 6: Comparison of the sub-options (Board ownership of risk strategy)  
 
 Effectiveness Impact on 
supply of 
candidates  Impact on 
clear division 
of 
responsibilities Flexibility Impact on 
level playing 
field Enforceability Efficiency  
Sub-option 1a ++ = ++ - + ++ + 
Sub-option 1b ++ = ++ - + ++ + 
Sub-option 2a = = = = = = n.a. 
Sub-option 3a ++ = - -- ++ + n.a. 
Magnitude of impact as compared with the baseline scenario: ++ strongly positive; + positive; – – 
strongly negative; – negative; = marginal/neutral; ? uncertain; n.a. not applicable 
Section 3:  Time devoted by Boards to risk issues 
1) Measures to improve transparency  of corporate governance practices 
1. a. Credit institution must disclose its polic y and practice with regard to discussion and 
analysis of risk issues during Board meetings.   It could be envisage d to require the credit 
institution to disclose whether it has set up a standalone risk  committee to deal with risk 
issues and/or how much time it devotes to disc ussing risk in Board meetings. There is no 
such disclosure requirement for the time being in CRD. 
 This sub-option could incentivise credit institutions to devote sufficient time to 
discussion of risk matters as the public disc losure allows for benchmarking of different 
practices in different credit institutions and to  have a public insight on whether a Board of 
a credit institution devotes enough time discu ssing risk as compared to its peers. 
 
EN 167   EN However, as already mentioned previously, tr ansparency of existing practices relies on 
market discipline and could be a useful tool to inform the market and the supervisors of 
the credit institutions practices. But, in the absence of effective monitoring and 
sanctioning by the market, it w ould not be sufficient on its own to improve time devoted 
by Boards to risk. Consequently, it seems a ppropriate to combine enhanced disclosure 
with more stringent requirements  and improved supervisory review. 
Like the other measures that foresee a disclo sure in the annual repor t the compliance cost 
can be estimated to between 600 and 1,000 € p.a. per legal unit. 
2) Principles-based, outcome-focused rules with high degree of flexibility 
2. a. Board must devote sufficient time to risk issues.   
Currently, there is not requirement in CRD that Board should devote sufficient time to 
discuss and analyse risk strategy. However, th is sub-option could be effective to achieve 
the underlying objective if corr ectly implemented by credit institutions and would avoid 
box-ticking exercise. But such general pr inciple could be subject to different 
interpretations and practices by credit institutions but also in different Member States by supervisory authorities and thus allow for regulatory arbitrage.  
It could entail costs for supervisors which will need to examine practi ces in each specific 
financial institution to monitor whether each  the Board of each financial institutions 
devotes sufficient time to examine risk issues . There should be no direct costs for credit 
institutions. 
Consequently, this general principle need s to be accompanied by detailed guidelines 
coordinated at European level. However,  other sub-options setting more detailed 
requirements in European legislation could al so usefully complement this sub-option. 
3) Strict rules with lim ited degree of flexibility 
3. a. Mandatory risk committee at Board level, subject to exceptions.
 It could be 
envisaged to require credit institutions to set up a mandatory risk committee at Board 
level. 
For the time being, there is no legal requirement in the Ca pital Requirements Directive 
requirement to have a risk committee in cred it institutions. However, whilst there is no 
‘one size fits all’ approach  to risk management, and th e methods by which a company 
may choose to assess, manage, and provide overs ight of its risks can differ from company 
to company, an emerging trend among credit in stitutions has been the formation of stand-
alone risk committees of the Board of directors133. Revised Basel Principles recommend 
the establishment of a risk committee at Board level, in order to increase efficiency and 
allow deeper focus on risk issues.  
                                                 
133 This results form the interviews conducted  by the Commission with credit institutions. 
 
EN 168   EN Also, the majority of respondents to the public  consultation (81 out of 141) that provided 
an answer to this question think that separate risk committees are good practice, 
especially for large, systemically important financial institutions. It could be therefore 
required that each credit institution puts in place a self-standing risk committee which 
will advise the whole Board on risk issues.  
Such a requirement seems to effectively meet the objective of improving the time 
devoted by Boards to discuss risk issues a nd therefore to the improved understanding of 
main risk exposures of the credit institution. Risk management will become the primary agenda focus of the committee, not simply a nother topic on the list . This approach is 
particularly important for credit institutions with complex risk management issues. Also, 
it will help maintaining a continuous view of risks. The nature of the credit institution's 
risk exposures frequently changes over time . Having a continuous risk dialogue can help 
the Board better understand subtle changes to th e risk profile, as well as help the Board 
better identify emerging risks and risks that ma y be inherent in new or existing operations 
In addition, a stand-alone risk committee could provide other important benefits
134: 
- Setting the tone on the top for a co rporate culture of risk management . Creation of a 
stand-alone risk committee can help inform both investors and supervisory authorities 
that the credit institution is serious  about risk management issues.  
- Additional expertise in managing risks . If there is a body for which the sole focus is 
risk, that body may be able to come to a more nuanced understanding of the operational 
and other risks facing the company and devel op specific risk management expertise.  
- Improving communication processes regarding risks . A risk committee can serve as a 
singular unit to which management can report risk-taking activity and the emergence of 
new risks on a regular basis. In addition, th e members of the committee can serve as an 
effective liaison between the company’s risk management coordinators and the Board as 
a whole.  
However, this sub-option could have some  negative impacts. According to some 
respondents to the pubic consultation which were opposed to mandatory risk committees, some organizations, especially those with smaller Boards, may fi nd that their Board 
members are already strained for time. A dding one more committee means that the 
company will need to assign Board members to  serve on that committee, which might not 
be feasible for companies whose Board members are already serving on multiple 
committees. However, this concern may be mitigated by the proportionality principle 
which allows smaller credit institutions not to establish a stand-alone risk committee 
under the control of supe rvisory authorities.  
                                                
 
134 See, for instance, John C. Partigan and Daniel McAvoy, The role and construction of risk 
 committees , August 2010  
 
EN 169   EN Also, typically, credit institutions will pay Board members for attendance at Board and 
committee meetings. An additional committ ee and committee chair means additional 
compensation to the Board members serving on that committee. This would entail additional costs for credit institutions.  
In addition, even if the Board establishes a stand-alone risk committee, the committee 
may not be able to effectively provide oversig ht of enterprise risk s if processes are not 
put in place to ensure that the committee is informed of risky activities and other 
corporate risks. Lines of co mmunication would need to be established between the risk 
committee, the Board of directors as a whole,  and the other committees of the Board to 
ensure that those other bodies are able to incorporate the analysis of the company’s risks 
into the performance of their duties.  This also could entail additional costs. 
It can be assumed that the additional annual costs for those institutions that do not already 
have a risk committee, all costs would be ar ound the same as for setting up a nomination 
committee, i.e. between 8,000 and 15,000 € per year, depending on how many times the risk committee will meet. These costs seem  to be relatively low and therefore 
proportionate to the underlying objective. As regards smaller credit institutions, these costs will be mitigated by the application of  the proportionality principle, as described 
above. 
Finally, there could be a potential for the ri sk committee to duplicate duties of the audit 
committee and compensation committee where these committees exist. However, this can be mitigated by a well defined role and re sponsibilities of risk committee in the 
legislation or in terms of refere nce of the risk committee itself.  
Consequently, this sub-option seems to be pr oportionate with the re gard to the underlying 
objective. 
3. b. Minimum time that Board must be spend to discuss risk issues
. This sub-option 
means that the number of days per year that Bo ards must spend discussing risk issues will 
be specified.  
At first sight, this option seems to effectiv ely contribute to achievi ng the objective to 
improve time devoted by Boards to risk issues. However, such measure would be 
disproportionate and difficult to put in place in  practice as the minimum number of days 
necessary to fully cover all risk matters will  vary enormously according to different types 
of credit institutions. Also, such a minimu m requirement could result in a box-ticking 
approach which at the end will be contrary  to the objective of the Board spending 
sufficient time on risk issues according to th e needs of a specific credit institution. This 
option should therefore be discarded. 
4) Combination of different sub-options 
It results from the discussions of the sub- options that a combination between measures 
enhancing transparency, outcome-focused prin ciples and more deta iled rules establishing 
minimum standards is an appropriate combina tion. Each individual sub-option will not on 
 
EN 170   EN itself be sufficient to achieve improved risk  oversight by Boards. Different sub-options 
will be mutually reinforcing.  
Disclosure of existing practice with regard to time devoted by Boards to risk (sub-option 
1a) will help supervisors to easily evaluate whether the Boards devote sufficient time to risk issues at limited costs for credit in stitutions. Supervisory review will thus be 
facilitated. Mandatory risk committee at Board level (sub-option 3a), whilst less flexible than other sub-options, is the most eff ective to achieve the underlying objective. 
However, in order to avoid box-ticking, the s ub-option 3a will be us efully complemented 
by the general principle that Board devote sufficient time to risk issues, even when there is a stand-alone risk co mmittee at Board level.  
As a result, the following sub-options will be retained:  Sub-option 1.a. Require credit institution to disclose its policy and practice with regard 
to discussion and analysis of risk issues during Board meetings. 
Sub-option 2.a.  Set up a general requirement for Boards to devote sufficient time to risk 
issues, subject to supervisory review.  
Sub-option 3.a.  Mandatory risk committee at Board level, subject to exceptions under 
the control of supervisory authorities 
Table 7: Comparison of the sub-options (time devoted by Boards to consideration of risk 
issues)  
 
 Effectiveness Impact on 
supply of 
candidates  Impact on clear 
division of 
responsibilities Flexibility Impact on 
level playing 
field Enforceability  Efficiency  
Sub-option 1a + = = = = ++ + 
Sub-option 2a + = ++ = = ++ + 
Sub-option 3a ++ = ++ - ++ ++ ++ 
Sub-option 3b = n.a. n.a. -- = = n.a. 
Magnitude of impact as compared with the baseline scenario: ++ strongly positive; + positive; – – 
strongly negative; – negative; = marginal/neutral; ? uncertain; n.a. not applicable 
 
 
Section 4.  Information on risk 
1) Measures to improve transparency  of corporate governance practices 
 
EN 171   EN 1. a. Require credit institution to disclose its policy and practice with regard to the 
information flow on risk to the Board.  
This sub-option could incentivise credit institutions to put in place timely and accurate 
information flows on risk to the Board as th e public disclosure a llows for benchmarking 
of different practices in different credit inst itutions and for having a public insight on 
whether a Board of a credit institution is sufficiently informed on risk issues as compared to its peers.  
However, as already mentioned previously, tr ansparency of existing practices relies on 
market discipline and could be a useful tool to inform the market and the supervisors of 
the credit institutions practices. But, in the absence of effective monitoring and 
sanctioning by the market, it w ould not be sufficient on its own to improve time devoted 
by Boards to risk. Consequently, it seems a ppropriate to combine enhanced disclosure 
other sub-options with subs tantive requirements and improved supervisory review. 
It is estimated that this sub-option would entail no or very small additional costs for 
financial institutions. 
2) Principles-based, outcome-focused rules with high degree of flexibility 
2. a. Board must determine the content, format and frequency of risk information it 
should receive from management to perform its risk oversight function.  
Accurate and timely information are important features as they allow Board members to 
incorporate insightful information in making decisions. If the Board has incomplete or 
inaccurate information, its decisions may ma gnify risks rather than mitigate them. 
However, currently there is no general re quirement in CRD rega rding the type and 
timeliness of information to be provided to Boards.  
As described in Part 3 of the impact assessmen t, for the time being either Boards do not 
receive sufficient information on risk or they  receive to much information they are not 
able to analyse for Board meetings. 
Serious consideration should therefore be given by the Board to instituting periodic 
reviews of the amount and quality of informa tion the Board receives or should receive.  
All respondents to the public consultation th at provided an answer to the relevant 
questions agree that the Board needs to receive timely and a ccurate information on risk  
and that correctly identifying the type of information the Board requires to adequately 
fulfil its duties and the capacity of the Board to understand the information provided to it 
are crucial.  
Information protocols within a company shoul d allow for and antici pate the co ntinually 
changing landscape in which credit institutions  operate. Therefore, Boards should obtain 
assurance from management that the risk in formation provided to the Board is complete 
and reliable with regard to identified risks and that the management has undertaken all 
 
EN 172   EN reasonable endeavours to identify all material ri sks. To be truly effective, risk reporting 
to the Board requires careful design in order to  ensure all relevant risks are conveyed in a 
concise and meaningful manner. 
This sub-option is flexible enough to allow cr edit institutions to adapt the information 
flow to the Board depending on the nature of its activities and its own particular needs. 
At the same time it makes the Board think about the information it needs and to ask for this information. Consequently, it seems to be affective to achieve the underlying 
objective be objective to improve information of the Board on risk and at the end risk 
oversight by Boards.  
Whilst it could result in different practices in cr edit institutions, such flexibility is crucial 
to allow Boards to adapt the information they  receive to their particular needs. What 
matters in this case, is the fina l outcome and not the process.  
This sub-option will not entail significant costs for credit institutions and is therefore 
proportionate with regard to the underlying objective. 
2. b. Risk management function must be able to report directly to the Board or risk 
committee if necessary, independent from management.  
For the time being, there is no provision in th e Capital Requirements Directive explicitly 
allowing for such a practice. Direct reporting of the CRO to the Board exists in some credit institutions but not in others.  
This sub-option would implement at Europ ean level the revised Basel Principles 
recommendation that while the Chief Risk O fficer (CRO) may report to the CEO or other 
senior management, the CRO should also report  and have direct access to the Board and 
its risk committee without impediment.  
The majority of respondents to the public cons ultation consider that the chief risk officer 
should be able to report directly to the Boar d or to the risk committee in order to alert 
boar on any risk issues it  thinks appropriate and wh ich were not reported upon by 
management. This mechanism could not only serve as an important way to inform the 
Board on some specific issues, it  will also incentivise manage ment to provide Board with 
accurate information. In addition, it would help  to achieve another objective of improved 
status, authority and independence of the risk management function. 
However, some respondents from jurisdictions  with mandatory two-tier boards indicate 
that in their system only the management board  has the competence to report directly to 
the supervisory board, not the chief risk offi cer who can report to the management board 
only. This concern could be mitigated by the fact that direct reporting to the Board by CRO should not be a common reporting pr ocedure but should only take place in 
exceptional circumstances. There is sufficient flexibility to Member States to adapt the 
sub-option to their national Board structures. 
There should be no significant costs for credit institutions associated with this sub-option. 
 
EN 173   EN This sub-option seems therefore to effectiv ely achieve the underlying objective and be 
proportionate. 
3) Strict rules with lim ited degree of flexibility 
3. a. Specific structures and formats for information flows to the Board and specific 
escalation procedures  
It could be envisaged to require credit institu tions to put in place specific procedures for 
information flows on risk as well as specific templates and formats for such information.  
Whilst this sub-option seems form the firs t sight likely to achieve the underlying 
objective of improving information flows to  the Board, it is too inflexible and 
disproportionate as compared to the expected benefits. It would enta il additional costs to 
put in place all required minimum procedur es and templates whilst not necessarily 
proving more adequate information to the Bo ard as a result, given the very different 
natures of risks in different financial institutions. This option should therefore be discarded. 
4) Combination of different sub-options  
It results from the discussions of the sub- options that a combination between measures 
enhancing transparency and outcome-focused pr inciples is an appropriate combination. 
Each sub-option taken alone will not be suffici ent to improve information flow to Boards 
on risk. Different sub-options wi ll be mutually reinforcing.  
Disclosure of the exiting policy (sub-option 1a ) will help supervisors, at limited costs to 
credit institutions, to easily check what ki nd of information Board receives and on the 
timeliness of that information and asses whether this information flow is adequate. This reduces costs for the supervis ion. Requiring specific templa tes and procedures for the 
information flow seems unduly inflexible and wi ll not necessarily be effective. However, 
general principles that Board must determin e the content of the information (sub-option 
2a), and that the risk manage ment function should be ale to  report directly to the Board 
(sub-option 2b) seem to be effective, flexib le and efficient in order to achieve the 
underlying objective.   
As a result, the following sub-options will be retained:  Sub-option 1.a. Require credit institution to disclose its policy and practice with regard 
to the information flow on risk to the Board. 
Sub-option 2.a.  Board must determine the content, format and frequency of risk 
information it should receive from management  to perform its risk oversight function  
Sub-option 2.b.  Risk management function must be ab le to report directly to the Board 
or risk committee if necessary, independent from management 
 
EN 174   EN Table 8: Comparison of the sub-options (information flow to Board on risk)  
 
 Effectiveness Impact on clear 
division of 
responsibilities Flexibility Impact on 
level playing 
field Enforceability Efficiency  
Sub-option 1a + = = = + + 
Sub-option 2a ++ + = + + + 
Sub-option 2b ++ = - + ++ ++ 
Sub-option 3a = n.a. -- ++ ++ - 
Magnitude of impact as compared with the baseline scenario: ++ strongly positive; + positive; – – 
strongly negative; – negative; = marginal/neutral; ? uncertain; n.a. not applicable  
II. O PTIONS TO IMPROVE THE STANDING OF THE RISK MANAGEMENT FUNCTION  
To establish a risk culture in credit institutions, in addition to improved oversight of risk 
by Boards, the following options could be envisaged:   
1) Measures to improve transparency  of corporate governance practices 
1. a. Credit institution must disclose in th e annual report its policy with regard to the 
standing and authority of risk management function.   
This option could incentivise credit institutions to give the appropriate status to the risk 
management function as public disclosure allo ws for benchmarking of different practices 
in different credit institutions and for having a public insight  on whether a credit 
institution gives sufficient inde pendence and authority to its risk management function as 
compared to its peers.   
However, as already mentioned previously, tr ansparency of existing practices relies on 
market discipline and, whilst it could be a useful tool to inform the market and the 
supervisors of the credit instit utions practices, in the absen ce of effective monitoring and 
sanctioning by the market, it w ould not be sufficient on its own to achieve the underlying 
objective. Consequently, it seem s appropriate to combine enha nced disclosure with other 
sub-options establishing more detailed requi rements and an improved supervisory review. 
 Like the other measures that foresee a disclo sure in the annual repor t the compliance cost 
can be estimated to between 600 and 1,000 € p.a. per legal unit. 
2) Principles-based, outcome-focused ru les with high degree of flexibility  
2. a.  Head of risk management function must have an appropriate status and authority to 
influence risk strategy and risk -relevant management decisions . 
 
EN 175   EN Many credit institutions recognise the benef its of centralizing the risk management 
function within an organizati on and giving a Chief Risk Offi cer (CRO) a prominent role 
in the company.  
All respondents to the public consultation th at provided an answer to the relevant 
question (think that the CRO should be a catal yst for change in risk-related behaviours. 
They also agree that CRO should have high status and authority, be independent from 
operational and business units and have close relationship with the Board. 
This sub-option will implement the revised Basel Principles recommendation that the 
CRO should have sufficient stature, authority and seniority within the organisation which 
will typically be reflected in th e ability of the CRO to influence decisions that affect the 
bank’s exposure to risk. Currently, there is no provision in CRD regarding the stature of 
the head of the risk management function. 
This sub-option seems likely to achieve the underlying objective of improving the 
standing of the risk management function. It  could also have othe r benefits, such as 
motivating talented staff to join the risk ma nagement function and to  retain the existing 
staff once they have earned in experience and expertise. It has been showed that often 
risk management was not seen as presti gious enough and operational and trading units 
drained staff form risk management units. 
At the same time, this sub-option is flex ible enough to allow cr edit institutions to 
determine the appropriate position of the CR O according to their size and the nature of 
their activities. However, it could lead to differe nt practices in different  credit institutions 
and in different Member States. It could al so be difficult for supervisors to monitor 
whether in a specific credit institution CRO ha s the sufficient standing and authority. It 
seems appropriate therefore to accompany th is sub-option by other sub-options with a 
more detailed requirements. 
It is estimated that this sub-option would entail no or very small additional costs for 
financial institutions. 
3) Strict rules with lim ited degree of flexibility 
3. a. Credit institution should have a risk ma nagement function or equivalent, which must  
have an appropriate status and authority and be independe nt from the operational and 
business units.  
This sub-option would implement the revised Basel Principles recommendation that the 
risk management function should have sufficient stature within the bank such that issues 
raised by risk managers receive the neces sary attention from the Board, senior 
management and business lines and should be  sufficiently independent of the business 
units whose activities an d exposures it reviews. 
For the time being, the Capital Requirements Directive provides only that arrangement 
should be defined concerning  the segregation of duties in the organisation and the 
 
EN 176   EN prevention of conflicts of interest. However,  nothing is mentioned regarding the authority 
and the independence of the risk management function. 
This sub-option seems likely to achieve the underlying objective to improve the status of 
the risk management function with in credit institutions. It is al so likely to have additional 
benefits as described in sub-option 2.a above. 
However, it is likely to lead to different  practices and its implementation could be 
difficult to monitor by supervisors. It leav es a large amount of discretion to credit 
institutions to decide what the appropriate status of the risk management function should 
be. This could also lead to different prac tices in different Member States and to 
regulatory arbitrage. It seems appropriate th erefore to accompany this sub-option by other 
sub-options with a more detailed requirements. 
It is estimated that this sub-option would entail no or very small additional costs for 
financial institutions. 
 3. b. Credit institutions must appoint an independent Chief Risk Officer .  
This sub-option would implement the revised Basel Principles recommendation that at 
least significant credit instit utions should have an indepe ndent senior executive with 
distinct responsibility fo r the risk management function and the institution’s 
comprehensive risk management framework across the entire organisation. For the time being, there is no such requirement in the CRD. 
It results from the interviews conducted with  credit institutions that appointing an 
independent chief risk officer  without any management or financial responsibility in 
respect of any operational bus iness lines or revenue-genera ting functions should be best 
practice. This sub-option seems likely to ac hieve the underlying obje ctive of having an 
independent risk management function and woul d help to avoid conflict of interest with 
operation units. 
In addition to avoiding conflicts of interest  regarding risk management, by appointing a 
single manager as the CRO, companies can take advantage of the benefits listed below:  
 - Consolidated approach to risk management: Hiring a top-level executive with sole 
responsibility over the ri sk function helps to ensure a mo re comprehensive assessment of 
company-wide risk. 
- Minimized potential for compliance failures: CEOs and CFOs, the traditional risk 
owners, can now rarely devot e enough time to the management of operational risk. The 
growing importance of risk management warrants a dedicated position and enables 
companies to fully understand risks and thei r potential outcomes, to make a more 
informed business decisions. 
 
EN 177   EN This sub-option seems therefore to effectivel y achieve its underlyi ng objective and have a 
positive impact on clear division of respons ibilities within the credit institution. 
3. c. Head of risk management function mu st be member of executive management or 
Board.  
Many respondents to the public co nsultation (52 out of 96) that provided an answer to the 
relevant question suggested this option in  order to improve th e standing and the 
independence of the CRO. This sub-option seems to be an effective tool to achieve the 
underlying objective of having a strong and independent CRO.  It gives the guarantee that 
CRO will have sufficient status within the cred it institution as compared to the CFO and 
thus by definition will be able to influence management decisions.  
On the other hand, prescribing th e exact hierarchical status of  the chief risk officer could 
appear disproportionate. It has been ar gued by some respondents to the public 
consultation (44 out of 96) that  it should be better left to each fi nancial institution to 
decide upon. Whilst this issue may be easily solved by the proportionality principle, it 
still seems that this sub-op tion is unduly inflexible.  
In addition, requiring CRO to be member of th e Board would interfer e with the power of 
the shareholders to nominate Board members.  It could also entail additional costs as 
being member of the Board wi ll require remunerating CRO fo r additional responsibilities 
as board member. It could also have a negative impact on the clear division of 
responsibilities and on the independence of th e CRO. Therefore, this  sub-option seems to 
be disproportionate proportio nate with regard to the unde rlying objective and should be 
discarded. 
3. d. Removal of the Head of risk management  function must be subject to prior approval 
by Board.  
This sub-option would implement the revised Ba sel Principles recommendation that if the 
CRO is removed from his or her position fo r any reason, this should be done with the 
prior approval of the Board and generally should be disclosed publicly. The bank should 
also discuss the reasons for such removal with  its supervisor. There is currently no such 
requirement in the CRD. 
 Some respondents to the public consultati on suggested this option to improve the 
standing of the CRO and ensure its independe nce from management. This sub-option is 
seen as a guarantee that CRO cannot be sanc tioned by the CEO in case of disagreement 
and if CRO reports directly to the Board on specific issues on which there is disagreement with management. 
This sub-option seems therefore to effec tively achieve the objec tive of improving the 
standing and the independence of the risk management function. 
 
EN 178   EN There would be marginal opportunity costs fo r the Board, but as the relevant incidents 
would presumably be very rare those costs ar e negligible. The costs of having to contact 
and discuss it with the supervisor would on the other hand be more substantial per 
incident, but again since the incident pres umably would occur very seldom and could 
potentially be a cause of great concern th e costs would not be disproportionate.  
4) Combination of different sub-options  
It results from the discussions of the sub- options that a combination between measures 
enhancing transparency, outcome-focused pr inciples and minimu m standards is an 
appropriate combination. Different sub-opti ons taken alone will not suffice to improve 
the stature and authority of the risk manage ment function. Different sub-options will be 
mutually reinforcing.  
The disclosure of existing prac tice with regard to the stat us of the risk management 
function (sub-option 1.a.) will allow supervisor to easily evaluate whether this standing is appropriate.  Requiring credit institutions to appoint a chief risk officer (sub-option 3.a.) 
which should not be removed without prior approval of the Board (sub-option 2.a.), 
whilst less flexible that other sub-options, are very effective to achieve the underlying 
objective of having a strong risk management  function. Sub-option requiring CRO to be 
part of the executive management or Boar d seem however unduly inflexible. Sub-option 
2a, requiring that CRO should have an approp riate status and authority to be able to 
influence risk strategy, seems, on the contra ry flexible enough and effective. Sub-option 
3a regarding the risk management function a nd its status also seems very effective to 
achieve the underlying objective and flexible enough. 
As a result, the following sub-options will be retained:  Sub-option 1.a. Require credit instituti on to disclose in the a nnual report its policy with 
regard to the standing and author ity of risk management function. 
Sub-option 2.a.  Head of risk management function mu st have an appropriate status and 
authority to influence risk strategy an d risk-relevant management decisions 
Sub-option 3.a. Risk management function must have an appropriate status and authority 
and be independent from the operational and business units 
Sub-option 3.b.  Credit institutions must appoint an independent Chief Risk Officer  
Sub-option 3.d.  Removal of the Head of risk mana gement function must be subject to 
prior approval by Board. 
Table 9: Comparison of the sub-options (status of risk management function)  
 
 Effectiveness  Impact on 
supply of 
candidates  Impact on clear 
division of 
responsibilities Flexibility Impact on 
level playing 
field Enforceability Efficiency  
 
EN 179   EN Sub-option 1a + = = = = + + 
Sub-option 2a ++ + + = = = + 
Sub-option 3a ++ ++ + = = = + 
Sub-option 3b ++ ++ + - ++ ++ ++ 
Sub-option 3c ++ ++ - -- ++ ++ - 
Sub-option 3d + = ++ - ++ ++ ++ 
Magnitude of impact as compared with the baseline scenario: ++ strongly positive; + positive; – – 
strongly negative; – negative; = marginal/neutral; ? uncertain; n.a. not applicable  
III.  O PTIONS TO IMPROVE SUPERVISORY REVIEW OF CORPORATE GOVERNANCE 
PRACTICES  
1) Measures to improve transparency  of corporate governance practices 
There are no sub-options under this category. 
2) Principles-based, outcome-focused ru les with high degree of flexibility  
2.a. Corporate Governance issues  must be part of a dialo gue with supervisors and the 
adequacy of CG structures shoul d be part of supervisory review .  
This sub-option entails that corporate governance arrangements i.e. Board composition, 
performance, role in risk oversight, status of the risk management  functions, should be 
part of the regular discussions between credit institution and the supervisory authority as part of the prudential supervision. For the time being, some supervisors are changing 
their practices to include specifically these issues into the supervisory review (ex : 
Belgium, United Kingdom) but it is not the ca se in each Member State. For the time 
being, there is no empowerment in CRD for supervisor to evaluate and monitor internal 
culture and behaviour within credit institutions. 
 As explained in the impact assessment, supe rvisory review and monitoring of corporate 
governance arrangements is e ssential for effective implem entation of the existing and 
new principles. 
To be effective, supervisors must go beyond box-ticking and formal analysis of 
compliance and find ways to be tter evaluate Board performa nce and corporate culture. 
Previously, supervisors tended to focus only on the formal compliance by credit 
institutions with the requirement of Article  22 of the Capital Re quirements Directive. 
 
EN 180   EN This sub-option would implement the revise d Basel Principles recommendation that 
supervisors should regularly perform a comprehensive evaluation of a bank’s overall 
corporate governance policies and practices and evaluate the bank’s implementation of 
the principles. 
Almost all respondents to the public consultation that provided an answ er to the relevant 
question agree that supervisory authorities, in  course of the period ic supervisory review, 
should be able to challenge the efficiency of  internal governance structures and monitor 
whether these structures could have a negativ e impact on financial stability. A number of 
respondents (61 out of 136) th ink that supervisory authori ties should have more powers 
to control the performance of the Boards a nd to sanction any shortcomings in internal 
governance of financial institutions. In part icular, many respondents (58) were of the 
view that supervisors should gi ve closer attention to the balance in the Board in relation 
to risk strategy and satisfy themselves that th e Board is able to exercise efficiently its 
oversight function. 
Supervisors could in particul ar, on a regular basis, review  the governance arrangements 
of risk management, risk profile and overall  business strategy of the FI.  They could 
engage proactively with Board members, repo rt on supervisory findings and seek the 
responses of the Boards to these findings. However, some respond ents to the public 
consultation (7) doubted that even the most soph isticated regulators ha ve either the staff 
level expertise or the resources to en gage in such comprehensive governance 
assessments. 
The costs of this sub-option seem to range from 50,000 € p.a. in DK (one day per institute 
or 3,000 hours in total), 103,700 € p.a. in AT (on average 2 hours) and approximately 
1,500,000 € in DE (assuming that it will corre spond to 3% for both on-site inspections 
and off-site reviews).135 For the majority of supervisors, this sub-option does not seem to 
entail material additional costs. For a limited number of financial supervisors with a big 
number of credit institutions to supervis e and which will have to put in place the 
necessary procedures and dedicate staff for the corresponding tasks these costs could be 
significant. However, these cost s are inherent to improved s upervision of risk governance 
in credit institutions which is essential for the correct implementation of substantive principles and cannot be avoided if th e underlying objective is to be achieved. 
Nevertheless, these costs may be mitigated by the risk-based supervision where supervisors check the available informati on which is directly disclosed by credit 
institutions on regular basis a nd, if this information or th e regular supervisory review 
gives indication of possible infringements to sound risk governance, perform a deep 
review of risk governance practices in  this specific credit institution.  
2. b. Extensive supervisory review which must  examine the ability of Board members to 
exercise their oversight function . This sub-option entails the examination by supervisors 
when giving their authorisation to the credit  intuition, at the time of recruitment of new 
                                                 
135 See Annex II for details on the compliance costs for supervisors. 
 
EN 181   EN Board members and afterwards, the ability of Board members to exercise their function. 
This review should include the following criteria: 
- time commitment; - individual and collective understanding of a ll material risks of financial institutions; 
- independence of mind; - honesty, integrity; - effective and constructive cha llenge of management decisions. 
Supervisors might also as part of this s upervisory review ensure that Board members 
continue to possess all necessary qualific ations taking into account the risk profile of the 
credit institution. 
For the time being, Capital Requirements Dir ective provides that supervisory authorities 
shall not grant authorisation to the credit inst itution if the persons who effectively direct 
the business of the credit institution are not of sufficiently good repute or lack sufficient 
experience. However, what is meant by sufficient experience and what should 
supervisors exactly look upon, is not specified.  
Prior to the crisis, in the majority of Memb er States the "fit and proper test" of Board 
members performed by supervisors takes the fo rm essentially of probity requirements. It 
does not include a review of technical and pr ofessional competence of candidates, such as 
general governance and risk management skills  and behavioural and other qualities, and 
does not clarify their strategy and personal objectives as Board members. However, the 
financial crisis has revealed the need for Bo ard members in credit institutions to possess 
sufficient expertise to understand  all material risks in order to be ab le to effectively 
control them.  
This sub-option seems to effectively achie ve the underlying objective of having Board 
members capable of effectively performing their oversight function. At the same time it remains flexible enough to allow supervisors to put in place relevant procedures in order 
to satisfy themselves that Board members satisfy the necessary requirements. This sub-
option also takes account of the risk-based  approach of the financial supervision. 
 This sub-option will entail additional co sts for supervisors. According to the 
questionnaire on costs sent to national supe rvisory authorities, 17 out of the 18 
responding supervisors indicate that this s ub-option would lead to adaptations of the 
existing practice and thus involve additional costs for the supervisors, notably being the recurring costs of having to  conduct a review more detail ed than the current one and 
doing it more frequently than at present, and in some cases that the potential new measure 
targets non-executive Board members, wher eas the current review is focused on 
 
EN 182   EN executive Board members (/management Board members). Those responses that 
quantitatively estimate the a dditional recurrent costs contain estimates ranging from 
15,500 € (in Greece) to around 12 million € per year (in Germany). Other estimates include 1,250 € per examination (in the UK), 500 hours every 3 years per bank (in Spain) 
and four to five full time equi valents per year (in Belgium).  
Some respondents also give a quantitative estimate of the one-off costs ranging from 
30,000 € in Latvia (costs of m odifying the official regulati ons and internal assessment 
criteria, etc.), 95,000 € in Slovenia (costs  of updating the internal supervisory 
methodology and the thematic supervisory re view) to 1,070,000 € in Denmark (the cost 
of interviewing all existing Board members). In  Spain the one-time cost of adapting the 
supervisory guidelines is estimated to 500 hours. The FSA in the UK estimate that the 
additional costs per interview for the i ndividual banks would be £1850 (€2,200). See 
Annex II for details on the costs for supervisors. 
These costs will be significant for financial supervisors with a big number of credit 
institutions to supervise and the number of  Board members to authorise and which will 
have to put in place the necessary procedures  and dedicate staff for the corresponding 
tasks. However, these costs are inherent to the improved authorisation procedure of 
executive and non-executive Board members wh ich is essential to ensure that Board 
members of a credit institution are able to challenge management decisions and thus effectively control risk strate gy and risk profile.  These costs cannot be avoided if the 
underlying objective is to be achieved. The UK  experience (which has put in place a 
procedure for authorisation of key persons , including interviews) shows that the 
importance to have in place this authorisat ion procedure and the ability of a Member 
State to put it in place even in a time of public deficit. It should be kept in mind that in many Member States financial supervisors ha ve their own budget whic h is in partly or 
entirely financed by superv ised financial institutions. 
3) Strict rules with lim ited degree of flexibility 
3. a. Supervisors must attend Board meetings
. In order to ensure that Board members 
actually constructively challe nge management decisions, s upervisors could regularly 
attend Board meetings.   
Some supervisors already attend Board meeti ngs, to assess if non-executive directors are 
sufficiently challenging vis-à-vis manageme nt. Feedback from supervisors of their 
assessments after participation in Board meetings is often seen as helpful with a view to improving the functioning of the Board. Howeve r, supervisors do not always have access 
to these meetings. Moreover, some supervisor s do not make use of the right to attend 
Board meetings.  
Whilst this sub-option seems likely to achie ve the underlying objec tive of improving 
supervisory review of corporate governance arrangements and the effectiveness of the 
implementation of existing and new princi ples, the sub-option could appear as 
disproportionate. According to some supervisors, attending Board meetings would not be 
feasible given the large number of credit in stitutions in their jurisdiction and would not 
 
EN 183   EN have any added value. Furthermore, the pr esence of supervisors could influence the 
discussion during the Board meetings and Bo ard members would be reluctant to speak 
freely. Moreover, the costs related to this sub- option would be too high  with regard to the 
expected benefits. 
Consequently, this sub-option should be discarded. 3.b. Supervisors must review agendas and su pporting documents for meetings of the 
Board and Board committees . Supervisors could look for ag endas that address key areas 
and offer sufficient time for discussion, questions  and critics; for supporting material that 
is adequate to provide Board or comm ittee members with good understanding of the 
issues. Supervisors could satisfy themselves that supporting documents are sent in timely 
manner before the Board or committee meetings . Where these conditions  do not exist, it 
will be difficult for Board members to perform effectively. 
This sub-option is seen by many supervisors as a useful tool to monitor the correct 
functioning of the Board of the cr edit institution. It is also seen as having an added value 
and being proportionate with regard to th e additional administrative burden and the 
relating costs. 
Therefore, this sub-option seems likely to  achieve the underlyi ng objective and be 
proportionate. 
 3.c. Supervisors should review the evaluation of the Board performance.  Supervisors 
could review the results of Board self-evaluatio n as part of their prud ential supervision to 
ensure that Boards perform effectivel y and challenge management decisions. 
This sub-option was supported by a number of respondents to  the public consultation. It 
seems as effectively achieving the underlyi ng objective to improve the supervisory 
oversight of the Board's ability to effectivel y oversee management. It also seems that the 
related costs are proportionate to the expected benefits.  
4) Combination of different sub-options  
It results from the discussions of the sub- options that a combination between outcome-
focused principles and minimum standards is  an appropriate combination. Different sub-
options will be mutually reinforcing.  
All the sub-options, except sub-option 3a, are effective to achieve the underlying 
objective of improved supervisor y review of risk governance.  Sub-options 2a and 2b are 
complementary to all other sub-option in optio n C examined in Chapters I and II of this 
Annex. Without supervisory review of risk  governance and Board member's ability to 
exercise their function, the implementation of  other sub-option may not be effective. 
As regards sub-option 3b and 3c, although less  flexible, they give clear guidance and 
powers to superiors which seem necessary fo r them to be able to exercise their 
supervisory review. The relating costs, though significant, are inherent to the improved 
 
EN 184   EN supervisory review of risk governance and seem  proportionate with re gard to the overall 
benefits. 
As a result, the following sub-options will be retained:  Sub-option 2.a. Corporate Governance issues must be part of a dialogue with supervisors 
and the adequacy of CG structures sh ould be part of supervisory review. 
Sub-option 2.b.  Extensive supervisory review which must examine the ability of Board 
members to exercise their oversight function 
Sub-option 3.b. Supervisors must review agendas and supporting documents for 
meetings of the Board and Board committees 
Sub-option 3.c.  Supervisors should review the ev aluation of the Board performance  
Table 10: Comparison of the sub-options (supervisory review of risk governance)  
 
 Effectiveness Flexibility Impact on level 
playing field Enforceability  Efficiency  
Sub-option 2a ++ = = = + 
Sub-option 2b ++ = + + + 
Sub-option 3a + -- + ++ - 
Sub-option 3.b + - ++ ++ + 
Sub-option 3c + - ++ ++ + 
Magnitude of impact as compared with the baseline scenario: ++ strongly positive; + positive; – – 
strongly negative; – negative; = marginal/neutral; ? uncertain; n.a. not applicable  
 
EN 185   EN ANNEX II: ADMINISTRATIVE BURDEN FOR CREDIT INSTITUTIONS AND SUPERVISORS  
The cost estimates described in the table belo w are based on the avai lable public data and 
on the responses to a questionnaire sent by DG  Internal Market and Services to credit 
institutions and to national supervisory au thorities in the Member States. In a few 
instances, where possible, it was necessary to recalculate the figures provided by the 
respondents to the questionnaire in order to ad just the estimate to the intended scope of 
the potential measure, which was not alwa ys clear to the respondents. Several 
respondents have been unsure what would be th e exact scope and detail of some of the 
potential measures described in the questi onnaire, which has made it difficult for the 
respondents to assess exactly the need to adapt their current pr actices and thus assess the 
compliance costs precisely. Therefore, and due to the qualitative nature of the measures 
potentially to be implemented, a fair amount of uncertainty needs to be included in the 
numbers provided.  
Table 1: Additional costs for credit institutions  of implementing necessary modifications of 
current policies resulting from the potential new requirements 
Costs in relation to One-off costs Recurrent costs per 
annum Remarks 
Board time commitment   
Disclosure of the  
number of mandates of 
board members 0 € 600 - € 1,000  Actual costs would depend on whether the publication is on 
group or subsidiary level. Co sts will be less for publication 
at group level and higher if pub lication at subsidiary level 
for groups with a significant number of subsidiaries. 
Board members must 
spend sufficient time to 
exercise their duties  Not available   Not available Depending on the way the indivi dual financial institution 
chooses to ensure the implementation of the principle, there 
could be costs for the company but there are no cost estimates available. These costs could be linked to internal 
processes or the recruitment or remuneration of HR 
specialists or head hunters that will search for board 
members with adequate time-commitment.  
The increase in time spent by board members as a result of 
this principle could result in increase in remuneration of these board members.  
Limit the number of 
mandates that a board 
member may hold at the 
same time Not available Not available There are no cost estimates available. Limited costs could 
be linked to internal processes or the recruitment or 
remuneration of HR specialists or head hunters that will 
search globally for more board members with adequate time-commitment.  Additional costs could result from an increase in remuneration of the board members which will 
cumulate less mandates. 
 
  
 
EN 186   EN Expertise of board members   
Disclosure of recruitment 
policy and of expertise 
and skills of board 
members in the annual 
report 0 € 600 - € 1,000  Actual costs would depend on whether the publication is on 
group or subsidiary level. Co sts will be less for publication 
at group level and higher if pub lication at subsidiary level 
for groups with a significant number of subsidiaries. 
Minimum expertise 
requirements for board 
members Not available Not available Depending on the way the indivi dual financial institution 
chooses to ensure the implementation of the principle, there 
could be costs for the company but there are no cost estimates available. These costs could be linked to internal 
processes or the recruitment or remuneration of HR 
specialists or head hunters that will search for board 
members with adequate exper tise.  Additional costs could 
result from an increase in remuneration of the board 
members with specific expertise. 
Continuous induction 
and training  € 20,000 - 30,000 However the actual costs are difficult to estimate and will 
depend on the size of the board and the expertise needs 
Nomination Committee  0 € 8,000 - 15,000 These costs are linked to the internal organisational costs 
and to the additional remuneration of board members that are members of Nomination Committee. 
Counterbalancing management dominance   
Disclosure of the existing 
practice 0 € 600 - € 1,000 Actual costs would depend on whether the publication is on 
group or subsidiary level. Co sts will be less for publication 
at group level and higher if pub lication at subsidiary level 
for groups with a significant number of subsidiaries. 
Mandatory prohibition to 
cumulate the mandates of 
Chairman /CEO  0 0 There should be no additional co sts or the costs should be 
limited as the two compensations (for the Chairman and for 
the CEO) already exist but w ould be then dissociated.  
Diversity    
Disclosure 0 € 600 - € 1,000 Actual costs would depend on whether the publication is on 
group or subsidiary level. Co sts will be less for publication 
at group level and higher if pub lication at subsidiary level 
for groups with a significant number of subsidiaries. 
Diversity as a criteria of 
board composition 0 0 There should be no direct additional costs for credit 
institutions. 
Establishment of a policy 
on diversity Not available  Not available  There are no cost estimates available. These costs could be 
linked to internal processes and the recruitment and remuneration of HR specialists or head hunters that will 
search for required diversity.   
Quantitative targets Not available  Not available  Depending on the way the indivi dual financial institution 
chooses to ensure the implementation of the principle, there 
could be costs for the company but there are no cost estimates available. If, to sa tisfy the target, the credit 
institution recruits additional board members, this will 
entail additional costs.  If one board member is simply replaced by another, this w ill not entail additional costs. 
Other costs could be linked to  internal processes or the 
recruitment or remuneration of HR specialists or head hunters that will search for required diversity.   
 
EN 187   EN Responsibility of the board for risk strategy 
Board is responsible for 
publication in the Annual 
Report of a risk 
statement  0 € 600 - € 1,000 Actual costs would depend on whether the publication is on 
group or subsidiary level. Co sts will be less for publication 
at group level and higher if pub lication at subsidiary level 
for groups with a significant number of subsidiaries. 
Costs would mainly consist in publication costs. There 
should not be additional signifi cant costs as the information 
to be disclosed should be already produced by the 
institution and part of its information system. 
Boards to disclose in the 
Annual Report a 
declaration on the 
adequacy of internal 
control systems Not available  € 600 - € 1,000 There are no cost estimates available. Direct costs will be 
linked to publication.  Indirect costs will be linked to the 
underlying process to ensure that internal control systems 
are adequate.  
These costs should not be significant as they are already 
part of the assurance process which is built by the Internal 
Auditors and External Auditors while developing their 
missions on a risk based approach. 
  
Time devoted by boards to risk issues  
Disclosure of existing 
practice 0 € 600 - € 1,000 Actual costs would depend on whether the publication is on 
group or subsidiary level. Co sts will be less for publication 
at group level and higher if pub lication at subsidiary level 
for groups with a significant number of subsidiaries 
Boards must devote 
sufficient time to risk 
issues Not available  Not available  Depending on the way the indivi dual financial institution 
chooses to ensure the implementation of the principle, there 
could be costs for the company linked to internal processes 
but there are no cost estimates available. Costs should not be significant. 
Risk Committee  Not available  Not available  There are no cost estimates available, however they should not be significant.  
These costs are linked to the internal organisational costs 
and to the additional remuneration of board members that 
are members of Risk Committee. Actual costs will be linked to the number of days per year a Risk Committee 
will have to meet. On average, based on existing practice 
of credit institutions with se parate Risk Committees, it is 
expected that Risk Committee will be composed of at least 
three persons and will meet at least 4 times a year 
On the other side there is a moderate gain to expect on the 
Audit Committee side which will not have to cover in 
depth risk issues.. 
Communication of information on risk   
Disclosure of existing 
policy 0 € 600 - € 1,000 Actual costs would depend on whether the publication is on 
group or subsidiary level. Co sts will be less for publication 
at group level and higher if pub lication at subsidiary level 
for groups with a significant number of subsidiaries 
 
EN 188   EN Board to determine the 
content, format and 
frequency of risk 
information  0 0 To be integrated in  the alr eady existing internal processes 
Risk Management 
Function must be able to 
report directly to the 
Board or Risk Committee  0 0 To be integrated in  the alr eady existing internal processes 
Standing and independence of Risk Management Function   
Disclosure of existing 
practice 0 € 600 - € 1,000  
CRO must have an 
appropriate status to 
influence risk strategy  0 0 To be integrated in  the alr eady existing internal processes 
Risk Management 
Function must have 
appropriate status and be  
independent from the 
operational and business 
units  0 0 However, limited costs may be linked to put in place the 
necessary processes 
CRO must be appointed 0 € 200,000 - € 
500,000  There are no cost estimates available. If credit institution 
recruits a new person as a CRO there will be a additional 
cost. If an existing staff member is promoted as CRO, there should be no significant additional costs. 
Removal of the CRO 
must be appproved by 
the board  0 0 Some marginal costs may be linked to the set up of the 
necessary internal process. 
 
 
 
 
 
 
 
 
  
 
 
EN 189   EN Table 2: Additional costs for supervisors of implementing necessary modifications of 
current policies resulting from the potential new requirements 
Costs in relation to One-off costs Recurrent costs per 
annum Remarks 
Extensive supervisory 
review of board’s  fitness 
and propriety 100,000€ - 1,000,000 € 40,000 € - 12,000,000 € The lowest numbers were reported were 
supervisors with small number of supervised 
credit institutions and the highest numbers for 
supervisors with a big number of supervised credit institutions 
Benchmarking of 
practices on diversity of 
board composition 20,000 € - 100,000 € 20,000 € - 130,000 € The lowest numbers were reported were 
supervisors with small number of supervised 
credit institutions and the highest numbers for 
supervisors with a big number of supervised credit institutions 
Risk governance issues 
to be part of the dialogue 
with supervisors + 
adequacy of risk 
governance structures to 
be part of the supervisory 
review 0 0,000 € - 1,500,000 € No cost for supervisor s that already review 
corporate governance systems and significant additional cost for supervisors with a big 
number of supervised  credit institutions. 
Supervisors must review 
agendas and supporting 
documents for meetings 
of the board and board committees ? ? No precise estimation, costs are part of the 
general cost of corporate governance review 
Supervisors must review 
the evaluation of the 
board performance ? ? No precise estimation, costs are part of the 
general cost of corporate governance review 
 
Detailed analysis of responses in Table 2 :  
Compliance costs related to extensive supervisory review of board’s fitness and 
propriety:  
17 out of the 18 responding supervisors indi cate that the measure would lead to 
adaptations of the existing prac tice and thus involve additional costs for the supervisors, 
notably being the recurring costs  of having to conduct a review  more detailed than the 
current one and doing it more fr equently than at present136, and in some cases that the 
potential new measure targets non-executive bo ard members, whereas the current review 
is focused on executive board members (/mana gement board members). Those responses 
that quantitatively estimate the additional recu rrent costs contain estimates ranging from 
                                                 
136 From the response of the only respondent that did not indicate any additional costs (LT) it could 
however seem that there would in  fact also be recurring new co sts of conducting a review more 
often than presently required.  
 
EN 190   EN 15,500 € (in EL) to around 12 million € per year (in DE). Other estimates include 1,250 € 
per examination (UK), 500 hours every 3 years per bank (ES) and four to five full time 
equivalents per year (BE).  
Some respondents also give a quantit ative estimate of the one-off costs  ranging from 
30,000 € in LV (costs of modifying the offici al regulations and in ternal assessment 
criteria, etc.), 95,000 € in SI (costs of updating the intern al supervisory methodology and 
the thematic supervisory review) to 1,070,000 € in DK (the cost of interviewing all 
existing board members). In ES the one-time co st of adapting the supervisory guidelines 
is estimated to 500 hours.  
The reasons given by the res pondents explaining why the potential new measure would 
requirement amendments in the ex isting review procedures are: 
• the listed aspects of the qualifications' revi ew are more detailed than the existing 
approach, which is often a more global examination of the qualifications (e.g. 
mainly focused on expertise and experience) [BE, DK137, LV138, PT139, SE140] 
• the new measure targets non-executive boa rd members, whereas the current 
review is focused on executive board members (/management board members) 
[BE, DE, FR141].  
Compliance costs related to benchmarki ng of practices on diversity of board 
composition:  
16 out of the 17 supervisors th at responded to this question indicate that the measure 
would involve additional costs for the supe rvisors, since no such measure currently 
exists.142 The sources of the additional costs are related to the setting up of a data base 
(investments in IT and data collection from all banks) and updating it (data 
consolidation). One supervisor (FI) envisa ges extensive manual work to collect the 
necessary data, including time for contacts with the supervised entities and possible 
requests for resubmitting data in a more detailed way. Another supervisor assumes an effort of approx. 1 hour per bank (DE). The co st estimates for the one-off costs range 
from at least 1,600 € in LV, 1000 hours in ES to approximately 75,000 € in IE. The cost 
                                                
 
137 In DK the additional requirements would be reviewing the understanding all material risks, the 
independence of mind and checking honesty and integrity. Would require interviews of new 
members and a report every three years. 
138 In LV "the criteria differ". 
139 PT: measure 1 would deserve particular attention to comply, especially to cover all criteria and do 
it periodically. 
140 SE: The laws and regulations are not that detailed and should perhaps be modified in order to 
enhance clarity. 
141 In FR a fit and proper process is already in pl ace for certain senior managers (i.e. executives) of 
credit institutions. However, there is currently no requirement in the French regulatory framework 
for a fit and proper process concerning board members. 
142 Only LT inform that there will be no additional costs, but from the description of the legislation it 
seems there is no current requirement covering the potential new measure. 
 
EN 191   EN estimates for the recurrent costs range from  at least 600 € in LV to 191,000 € in DK (and 
perhaps more in AT). 
Compliance costs related to the requirement that  risk governance issues to be part of the 
dialogue with supervisors and th e adequacy of risk governance st ructures to be part of the 
supervisory review:  
11 of the 17 supervisors that responded to th is question indicate that this measure would 
lead to no additional costs or no material additional costs. The reason is that the requirement of the measure is already in pl ace (or largely so). In  addition AT, DE, DK 
and LV mention that they also already carry out reviews of the CG structures, but that 
there might be room for improvement (AT), be  some additional effort for the review of 
corporate governance issues that go beyond ri sk management (DE), or be an annual 
review on top of the current setup (DK). Th e costs of these possi ble additional efforts 
would range from 50,000 € p.a. in DK (one day per institute or 3,000 hours in total), 
103,700 € p.a. in AT (on average 2 hours) and approximately 1,500,000 € in DE (assuming that there will be some additional effort for the review of corporate governance issues that go beyond risk management, the additional effort amounting to 3% for both on-site inspections and off-site review). LV also alr eady carry out extensive 
review of the corporate govern ance structures but expect an yway a need to modify the 
official regulations amounting to one-off costs of approximately 1,200 €. SI expects 
recurrent annual costs of  between 60,000 and 90,000 €.  
 
EN 192   EN ANNEX  III:   CORPORATE  GOVERNANCE  IN CREDIT  INSTITUTUIONS:  
 MECHANIMS  AND  CASE  STUDY 
This Annex describes who corporate governan ce mechanisms work in credit institutions 
and provides the example of UBS to explain a case of bad governance. 
1. Corporate governance mechanism in credit institutions 
Corporate governance is the set of processes,  customs, policies, laws and institutions 
affecting the way a credit institution is dir ected, administered or controlled. Corporate 
governance also includes the relationships among the many stakeholders involved and the 
goals for which the credit institution is gove rned. The principal stakeholders are the 
shareholders, management and the board of  directors. Other st akeholders include 
depositors, employees, customers, regulators,  the environment and the community at 
large. 
It is a system of structuring, operating and controlling a company with a view to achieve 
long term strategic goals to satisfy shareholders, credito rs, employees, customers and 
depositors, and complying with the le gal and regulatory requirements. 
The perceived quality of a company's corpor ate governance can influence its share price 
as well as the cost of raising capital. The positive eff ect of good corporate governance on 
different stakeholders ultimately is a st rengthened economy, and hence good corporate 
governance is a tool for socio-economic development. 
Parties to corporate gover nance in credit institutions 
Parties involved in corpor ate governance include the gove rning bodies (e.g. the Chief 
Executive Officer, the board of directors,  management and shareholders general 
assembly). Other stakeholders include fi nancial regulators, depositors, employees, 
creditors, customers and the community at large. 
In companies, shareholders (the principal) delegate management decisions to the board 
and senior management (the agent) who should act in the principal's best interests. This 
separation of ownership from control implies a loss of effective control by shareholders 
over managerial decisions. Partly as a result of  this separation between the two parties, a 
system of corporate governance controls is  implemented to assist in aligning the 
incentives of managers with those of shareholders. 
A board of directors plays a key role in cor porate governance. It is their respons ibility to 
endorse the strategy, appoint, s upervise and remunerate senior  executives and to ensure 
accountability of the credit institution to its  owners and supervisory authorities.  
Senior executives, under the direction of the Chief Executive Officer, implement the 
strategy and perform the day-to-day ma nagement of the credit institution. 
 
EN 193   EN Credit institutions also generally have in place (i) a risk management function which 
identifies, measures, monitors, mitigates and reports on risks, (ii) an internal audit 
function which evaluates the effectiveness of internal controls and governance processes, 
and (iii) a compliance function which identif ies, measures and reports on compliance 
risks. To be effective, these functions s hould be organisationally independent from the 
units they control. 
Internal governance mechanisms within credit institutions 
Internal controls monitor activities and then take corrective action to accomplish 
organisational goals of a credit institution.  
The board of directors is fina lly accountable for the efficien cy of internal controls and 
plays a crucial role in monitoring management.  
Regular board meetings allow potential problem s to be identified, discussed and avoided. 
However, the ability of the board to monito r the firm's executives  is function of its 
understanding of the management decisions and of its access to adequate and timely 
information.  
The board cannot monitor management on day-to-d ay basis. Therefore, credit institutions 
should have an appropriate in ternal control framework to develop and maintain systems 
that ensure effective and effi cient operations; adequate cont rol of risks; prudent conduct 
of business; reliability of financial and non-financial info rmation reported or disclosed 
(both internally and externally); and comp liance with laws, regulations, supervisory 
requirements and the institution's internal policies and procedures.  
In assessing the efficiency of internal contro l within an institution, the board may rely on 
the work of control functions, including th e risk management function, the compliance 
function and the internal audit function.  
2. The case of UBS143 
In March 2006, the UBS decided, to close revenue gap compared to its competitors, to 
expand its securitised products and develop trading strategies for these products. 
However, these activities were linked to a significant risk which afterwards resulted in huge write downs. 
Notwithstanding the fact that the senior management and the board identified the 
subprime issue as a major risk in September 2006, the management did not adjust until July 2007. The Board did not fe el strongly enough about the risk. Growth and revenue 
were in the interests of the shareholders and the Board woul d not have been able to act 
forcefully.  
                                                
 
143 Based on The Current Financial Crisis: Causes and Policy Issues Adrian Blundell-Wignall, Paul 
Atkinson and Se Hoon Lee , OECD 2008. 
 
EN 194   EN The Shareholder Report (April 2008) states that senior management took comfort from 
the main exposures being AAA ra ted, and that they were prep ared to rely on investment 
bank  assurances that the risk was well managed. Revenue growth and catching up to 
competitors was the dominant culture. All management focus within the investment banking on ‘processes’ for new business initiatives and prior approval of transactions 
were: “…on speeding up approvals as opposed to ensuring that the process achieved the 
goal of delivering substantive and holistic ri sk assessment of the proposals presented”. 
Departing top risk managers were replaced by people from a sales background (consistent 
with growth), not a risk management background. 
The Shareholder Report also stated that inte rnal reporting of risk positions was complex, 
even across the ‘silos’ within a business line. A holistic picture of the risk situation within 
investment banking business lin es was not presented to ma nagement or the board, and 
there was no serious internal challenge to the overall strategy.  
The UBS example illustrates clearly that corp orate governance, too, played a role in the 
crisis. The culture of investment banking is mu ch harder to control from the board room 
and needs strong internal control systems w ith an independent risk management which 
failed in the case of UBS. The business is mo re complex, and the pr oducts are inherently 
more difficult to understand than  simple banking products so that risk control practices 
are much more difficult. Therefore, board me mbers need to have minimum expertise to 
understand the underlying risks and effectivel y challenge management decision, not 
relying on management assurance or extern al ratings, which was the case at UBS. 
 
 
EN 195   EN ANNEX IV :  N ATIONAL FINANCIAL CRISIS MEASURES  
 
Financial crisis measures approved until 31 March 2010 (approved amounts in € billion)  
Member StateGuarantee 
schemesRecapitalisation 
schemesLiquidity 
intervention 
schemesAsset relief 
intervention 
schemesIndividual 
cases
Belgium 274.5
Denmark 580* 13.4 6.3
Germany 400 80 x 107.6
Ireland 376 54 25.6
Greece 15 5 8
Spain 200 99 30
France 265 23.95 62.2
Italy n.a 20
Cyprus 3
Latvia 4.27 3.3
Luxembourg 7.32
Hungary 5.35 1.07 3.87 0.04
Netherlands 200 56.2
Austria 75 15 x 0.5
Poland 4.62 4.62
Portugal 16 4 0.5
Slovakia 2.8 0.66
Slovenia 12 x
Finland 50 4 n.a
Sweden 156 4.71 0.5
United Kingdom 381.87 62.79 405.6
Total EU27** 2746.9 338.2 41.9 54.0 950.1 
Source: State Aid Scoreboard: Commission Report on recent developments on crisis aid to the financial 
sector- Spring 2010 Update 
 
EN 196   EN ANNEX V :  F EEDBACK STATEMENT  
 
 EUROPEAN COMMISSION 
Directorate General Internal Market and Services 
 
FREE MOVEMENT OF CAPITAL, COMPANY LAW AND CORPORATE GOVERNANCE 
Company law, corporate governance and financial crime  
 
 
 
FEEDBACK STATEMENT  
SUMMARY OF RESPONSES TO COMMISSION GREEN 
PAPER  
ON  
CORPORATE GOVERNANCE IN FINANCIAL 
INSTITUTIONS 
 
         
 
EN 197   EN 1. GENERAL  REMARKS  ON  CONSULTATION  PROCEDURE  AND  
FEEDBACK 
On 2nd June 2010,  the European Commission launched a wide-ranging public 
consultation on corporate governance in financial institutions144. 
The scale of the recent financial crisis led governments around the world to question the 
effective strength of financial institutions and the suitability of their regulatory and 
supervisory systems to deal with financial innovation in a globalised world. The massive 
injection of public funding in the US and Europe was accompanied by a strong political 
will to learn the lessons of the financial cris is in all its dimensions to prevent such a 
situation happening again in the future. 
Although corporate governance di d not directly cause the cris is, the lack of effective 
control mechanisms contributed to excessi ve risk-taking on the part of financial 
institutions. The crisis revealed that boards of directors, like supe rvisory authorities, 
rarely comprehended either the nature or sc ale of the risks they were facing. In many 
cases, the shareholders did not properly perfor m their role as owners of the companies. 
Consequently, the Commission decided to a ddress the fundamental question of whether 
the existing corporate governance regime is deficient as far as financial institutions are concerned and to seek views on possibl e ways to address the deficiencies. 
The issues on which the Commission invited views and evidence included: 
• Functioning of boards and th eir role in risk oversight: The consultation invited 
views on how to improve time commitment , experience and diversity of board 
members and their challenge of manage ment decisions, risk oversight and 
accountability of boards for risk issues, boa rds' cooperation with supervisors and how 
to encourage boards to take into account inte rests of depositors and other stakeholders 
of financial institutions. 
• Governance of risk management function: The consultation invited views on how 
to improve the standing and authority of the risk management functions and establish a 
risk culture at all levels of financial inst itutions and how to improve information flow 
on risk from risk management to the board. 
• Supervisory authorities: The consultation invited views on the enhancement of the 
supervisory role with regard to corpor ate governance mechanisms, including the 
eligibility criteria of board me mbers and boards' performance. 
• External auditors: The consultation asked whether th e cooperation between external 
auditors and supervisory authorities should be  enhanced and what should be the role of 
external auditors as regards information on risk. 
                                                
 
144 Green Paper on corporate governance in financial institutions and remuneration policies, 
COM(2010) 284 final 
 
EN 198   EN • Shareholders: The consultation invited views on sh areholder behaviour as regards 
risk-taking by financial institu tions and on the possible wa ys to improve shareholder 
engagement.  
• Enforcement: The consultation asked whether accountability and civil and criminal 
liability of board member s should be strengthened.  
• Remuneration: The consultation invited views on the need for possible further 
regulation of remuneration in financial in stitutions and in listed companies.  
• Conflicts of interest: The consultation invited views on whether there is a need to 
address at European level the question of di fferent rules on conflicts  of interest and on 
possible content of these rules.  
The deadline for responses to this consultation paper was 1st September 2010. The 
following contributions have been received:  178 from organisations, 8 from citizens, and 28 from public authorities. 
Responses to the consultation hi ghlighted the following messages: 
• The respondents agree  with the analysis in the Gr een Paper of the weaknesses in 
corporate governance in financial instituti ons. They support the Commission's goal of 
promoting effective corporate governance as well as the policy intent underlying the 
principles articulated in the Green Paper. The respondents also support a more 
effective supervision  of the implementation by financial institutions of principles on 
good corporate governance. 
• Financial institutions recognise that effective governance makes a meaningful 
difference in corporate perf ormance and are currently reviewing their practices . 
Although many respondents highlig ht that certain failures in  corporate governance in 
financial institutions were to a large extent due to a lack of effective implementation of existing rules , a number of respondents think that regulatory framework could be 
improved  further.   
• Clear definition and division of  responsibilities is fundamental . For a number of 
respondents, more clarity is needed as re gards respective duties of different bodies 
within the financial instituti on. Multiplication of controls  and procedures should not 
lead to a confusion of which body is finally  responsible for the decision-making and 
the overall governance of the financial institution 
• A number of respondents think that  any future proposals of the Commission should  be 
principle-based a nd proportionate  in order to take account the differences in 
business models of financial institutions, the nature of their activity, their size, 
complexity, legal form and different cor porate governance systems and arrangements. 
• Many respondents  are of the opinion that future action at European level should focus 
on desired outcomes and the detailed implementation of the principles could be dealt 
 
EN 199   EN with at national level through legislation, s upervisory review, increased transparency 
or codes of best practice with  "comply or explain" approach. 
• Insurance companies and UCITS145 managers in particular mentioned the recent 
reform of internal governance in insurance and in asset management sectors and called 
on the Commission to take this into account in its reform of corporate governance in 
financial institutions. 
2. OVERVIEW  OF RESPONSES  TO THE  CONSULTATION 
The consultation was launched on 2nd June 2010 and closed on 1st September 2010. 
Responses were invited from all interested pa rties including public authorities, financial 
services industry, investor community, law fi rms, audit and accounting firms, academics, 
trade unions, citizens and civil society in gene ral. 214 answers were received from a wide 
range of professional representative s, citizens and public authorities. 
Figure 1 provides a general presentation of th e spread of the responses received, from 
organisations, public authorities and citizens. 
Figure 2 provides a more detailed presentation of the status of orga nisational respondents, 
broken down into 7 categories: financial services industry, investor community 
(including asset managers), audit and accountin g firms, non-financia l and cross-sector 
professional organisations, law firms, em ployee representatives and civil society 
(including bodies promoti ng good corporate governance). 
Figure 4 lists the 214 answers received accordin g to their nationality: 202 responses were 
received from EU-domiciled organisations or European associations representing 
members from different Member States, 6 answ ers were received from non-EU domiciled 
organisations (US, Norway and Ukraine) and 6 answers from internat ional associations.  
A list of all the organisations, citizens and pub lic authorities, who have  accepted that their 
answers to the consultation be pub lished, is attached in annex 1. 
Figure 1 : 
Organisations 178 83% 
Public Authorities 28 13% 
Citizens 8 4% 
Total Contributions 214 100% 
 
 
                                                 
145 Undertakings for Collective Investment in Tradable Securities 
 
EN 200   EN  Answer per type of respondents
Organisations
83%Citizens
4%Public Authorities
13%
Public Authorities
Organisations
Citizens
 
Figure 2 :   
For the purposes of this feedback statement, answers from respondents have been 
classified into 8 categories: financial se rvices industry (incl uding banks, insurance 
companies and financial markets), investor community (including investors, proxy voting 
agencies, asset managers), non-financial an d cross-sector organi sations (including 
professional chambers and associations and one pharmaceutical company), audit and 
accounting firms, law firms, employee repr esentatives and civil society (including 
organisations promoting good corporate governance). 
 
FINANCIAL SERVICES INDUSTRY 55 31% 
INVESTOR COMMUNITY 45 25% 
NON-FINANCIAL AND CROSS-SECTOR ORGANISATIONS 24 14% 
AUDIT AND ACCOUNTING FIRMS 22 12% 
CIVIL SOCIETY  19 10% 
LAW FIRMS 7 4% 
EMPLOYEE REPRESENTATIVES 7 4% 
TOTAL 178 100% 
 
EN 201   EN  
Answer from or ganisations per t ype of institutions
Civil societ y 
representatives
10% 
Non-financial and cross-
sector organisations 
 14%
Investor community  
25%Law firms
4%Audit and accountin g 
firms
12%Financial services 
industr y
31%Employee 
representatives
4%Financial 
services  industry  
Audit and accounting
firms 
Law 
firms 
Investor community
Non-financial and  
cross-sector  
organisation s 
Civil society  
representative
s 
Employee  
representative
s 
 
Figure 3:  
List of the answers received according to their nationality.  
Country  Country  Country  
AT 7 FI 5 SI 1 
BE 9 FR 26 SK 1 
BG 1 HU 1 UK 58 
CZ 2 IE 5 Sub-total  202 
DE 20 IT 3 UKR 1 
DK 5 LI 1 US 4 
EL 1 LU 2 NO  1 
ES 6 MT 1 INT146 6 
ET 1 NL 9   
EU147 28 SE 9 Total  214 
 
                                                 
146 Responses submitted by international associations 
147 Responses submitted by European associations 
 
EN 202   EN Answers per country
051015202530354045505560
ATBEBGCZDEDKELESEEEUFIFRHUIEINTITLILUMTNLNOSESISKUKUKRUSNumber of responses
  
3. DETAILED  ANALYSIS  OF RESPONSES 
The feedback statement presents a broad summary of responses to each of the 38 specific 
questions raised in the consultation paper. It  is a factual document which presents the 
results of the consultation and does not announce any policy options.  
During the analysis of the responses, opinions have been categorized into 'yes/no' 
categories of answers where possible. The majo rity of the respondents have also provided 
qualitative commentaries to supplement or nuance their 'yes/no' answers. The 
explanations have been grouped under a num ber of sub-headings to enable a more 
detailed analysis of the respondents' views. 
Some answers were unclear as to the allo cation of a "yes" or "no" and required 
interpretation. This interpretation may not reflect fully or effectively the opinion of the respondent. 
It also should be noted that during the anal ysis, all responses were  given equal weight. 
Consequently, any individual respondent ha s the same impact on the result of the 
consultation as a public author ity or an organisation.  In addition, some respondents that 
 
EN 203   EN provided individual contri butions indicated that they also  contributed to a submission by 
a professional association in which they are members.  
Please note that some responde nts have answered only a limited number of questions 
which they considered to be of particular  relevance and did not provide a response to 
other questions. 
 
QUESTION 1.1 
Should the number of boards on which a director  may sit be limited (for example, no 
more than three at once)? 
Whilst almost all respondents th at provided an answer  to this question agree that directors 
should commit sufficient time to their duties, a large majority consider a general rule on 
limitation of the number of boards on which a di rector may sit as inappropriate. The main 
reason for this being that such a limitation would be too arbitrary and inflexible, and 
would not allow to take account of the situa tion of each particular financial institution 
and individual circumstances of each director . Moreover, such a limitation would not in 
fact guarantee that director will  dedicate enough time for his position. 
 The majority of respondents s uggested the following alternatives :  
Instead of a strict limitation of the numbe r of mandates, there should be a general 
principle that directors devote sufficient time to  their duties in a fina ncial institution. The 
implementation of this general principle by fi nancial institutions should be subject to 
monitoring by shareholders and supervisory au thorities. A limitati on of mandates may be 
envisaged as best practice with a "comply or explain" approach.  
The expected time commitment should be defi ned in a letter of appointment for each 
director. All mandates held by each individua l director should be publicly disclosed.  
QUESTION 1.2 
Should combining the functions of chairman of the board of directors and chief executive 
officer be prohibited in financial institutions? 
A majority of respondents that provided an answer to this question favour a mandatory 
prohibition on cumulating the functions of Chai rman and of chief executive officer. In 
their view, combining both functions disregar ds the divergence of duties and capacities 
and concentrates an unwarrant ed amount of power and domi nance in the hands of one 
person. A number of respondents indicated that  in their jurisdiction it was already not 
possible to cumulate both f unctions. Some respondents cons idered, however, that certain 
exceptions would be necessary to accommodate specific situations, especially for small 
financial institutions and temporary cumulation of functions in particular circumstances. 
 
EN 204   EN Those respondents that opposed any prohibition considered that there was no conclusive 
evidence that financial institutions where the functions of Chairman and CEO were 
performed by different individuals performe d better or have bette r withstood the crisis 
than those financial institutions where the two functions were pe rformed by the same 
person.  
QUESTION 1.3 
Should recruitment policies specify the duties and profile of directors, including the 
chairman, ensure that directors have adequate skills, and ensure that the composition of the board of directors is su itably diverse? If so, how? 
The majority of the respondents that provided an answer to this question consider that 
recruitment policies should specify the duties and the profile of the directors and ensure that directors have adequate  skills. A large number of respondents in favour of this 
requirement consider however that the specific content of such recruitment policies should not be laid down in legislation but be left to financial inst itutions to decide upon 
according to their needs. It is also suggest ed by a number of respondents that a general 
profile for all board members should be defined in the recruitment policy and a specific profile should be drawn for each particular vacancy. 
Among those respondents who were not in favour of recruitment policies specifying the 
duties and the profile of directors, some t hought that it was not possible to define in 
advance the detailed profile required for each specific candidate. Others considered that 
shareholders' freedom to nominate board memb ers should not be rest ricted. Cooperative 
banks and insurance companies in particular stressed that where directors were democratically elected by the general assembly  of members, it was difficult to require in 
advance that candidates possess sp ecific skills or profile.   
Almost all respondents agreed that induction and continuous training of board members 
are essential. 
QUESTION 1.4 
Do you agree that including more women and individuals with different backgrounds in 
the board of directors could improve the functioning and efficiency of boards of 
directors? 
The vast majority of respondents that provide d an answer to this question agree that 
increased diversity in boards  avoids "group think" and strengthens challenge within 
boards. Some respondents are in favour of imposing quotas on the presence of women on 
boards. Many respondents consider, however, th at diversity should not be pursued at the 
expense of knowledge and expertise. A board member should be selected taking account 
of a broad set of criteria, including merit, professiona l qualifications, experience, 
personal qualities of the candidate and diversity.  
 
EN 205   EN Some respondents also mentioned that dive rsity should not be lim ited to gender but it 
should also include age and cu ltural background and reflect geographical presence of the 
financial institution. 
Certain respondents consider that diversity can be promoted through different means: 
codes of best practice with "comply or explain" approach, disclosure of board 
composition with regard to diversity crit eria, benchmarking of existing practices. 
Respondents who disagreed that including more  women and individuals with different 
backgrounds in the board of directors could improve the functioning and efficiency of 
boards of directors considered that there was insufficient evidence that more diverse 
boards behaved better or that the different  nationalities have di fferent behaviours.  
QUESTION 1.5 
Should a compulsory evaluation of the functioni ng of the board of directors, carried out 
by an external evaluator, be put in place? Shou ld the result of this evaluation be made 
available to supervisory authorities and shareholders? 
The majority of the respondents that provided an answer to this question consider that 
evaluation of the board performance carried out by an independent expert could be a 
useful tool to assess the board's performance.  There is a general agreement that it should 
at least be best practice. However, a number  of respondents mentioned that there are for 
the time being too few external evaluators  of sufficiently good quality to make the 
external evaluation mandatory for each financ ial institution. Some respondents suggested 
encouraging the professionalisa tion of external evaluation a nd the development of tools 
and methodologies for inde pendent board evaluation. 
On the second part of the question, a slight ma jority of the respondent s were in favour of 
disclosing the main conclusions of the evaluation to the supervisor, but not the full report. 
There is also a strong preference  not to disclose the results to the shareholders. The main 
argument for this is that if the results of the evaluation were publicly disclosed, it would 
inhibit directors' openness to the evaluation pr ocess and significantly undermine its value. 
 QUESTIONS 1.6, 1.7 & 1.8  
Should it be compulsory to set up a risk committee within the board of directors and 
establish rules regarding the composition and functioning of this committee? Should it be 
compulsory for one or more members of the audit committee to be part of the risk 
committee and vice versa? Should the chairman of the risk committee report to the general meeting? 
A number of respondents think that separate risk committees are good practice, especially 
for large, systemically important financial in stitutions. However, they consider that such 
requirement should be proportionate and car e should be taken to avoid diluting the 
responsibilities of the whole boa rd for risk oversight.    
 
EN 206   EN On the membership of audit and risk co mmittees, many respondents consider cross-
participation as best practice where two di fferent committees exist. Some respondents, 
however, consider this unnece ssary, as both committees advise  and report to the board as 
a whole. Others see the cross-participati on as one of different  tools in ensuring 
communication between the two co mmittees and think that it s hould be left to board to 
decide on specific means to ensure such communication. . 
There is a strong opposition to the suggestion that chairman of the risk committee should 
report directly to the annual general meeting of shareholders . The majority of respondents 
consider that the board as a w hole is accountable to shareholde rs and should report to the 
annual general meeting and not an individual director. However, re spondents expressed 
general agreement that the chairman of ri sk committee should be available to answer 
questions. Some respondents also suggested that a report from th e chairman of risk 
committee could be part of the annual report. 
QUESTIONS 1.9, 1.10 & 1.11 
What should be the role of the board of directors in a financ ial institution's risk profile 
and strategy? Should a risk control declara tion be put in place and published? Should an 
approval procedure be established for the board of directors to approve new financial 
products?  
All respondents that provided an answer to these questions agree that the board should 
approve the strategy of the fina ncial institution and the nature  and the extent of risks the 
company is willing to take with  regard to its strategic objec tives. The board should also 
be responsible for the oversight of the implementation of risk strategy by executive 
management. 
Regarding risk statement, the views of th e respondents are split. Almost half of 
respondents (mainly investors) that provided an answer think that a short and clearly 
understandable report informing shareholders  on risk exposures, risk strategy and 
tolerance would help investors to form a co mprehensive view of ri sk appetite of the 
financial institution, if it would not become a boiler plate declaration. In their opinion it 
would also contribute to raise bo ard's awareness of risk issues.  
The respondents (mainly financial services industry) who are agai nst putting in place 
such risk statement think that existing Eur opean legislation on cr edit institutions and 
insurance companies already requires financial institutions to disclose sufficient information on risk. Furthermore, French, German and UK respondents indicated that 
their national legislation or  corporate governance code s require extensive risk 
disclosures. 
On the board's approval of new financial pr oducts, some respondents that provided an 
answer consider a systematic approval by bo ard of new products as inappropriate, as it 
would entail involvement of boards in operatio nal issues, which is the responsibility of 
executive management. However, other respond ents consider that board could approve 
products that have a significant impact on the st rategy and the risk profile of the financial 
 
EN 207   EN institution, as it would be part  of global risk stra tegy. There is also a consensus that there 
should be a procedure with fina ncial institutions to approve new products and that boards 
should be responsible for ensuring that th is procedure is adequate and correctly 
implemented.  
QUESTION 1.12 
Should an obligation be established for the board  of directors to inform the supervisory 
authorities of any material risks they are aware of?  
The majority of the respondents (almost all fina ncial services industry and the majority of 
investors) that provided an answer to this que stion consider such additional obligation as 
unnecessary. In their view, existing European  and national legislat ion already require a 
high degree of communication between supervisory authorities and the boards or the 
executive management, which would cover info rmation about material risks. However, 
some investors, audit and law firms, as well as certain public authorities, citizens and 
civil society represen tatives are in favour of introduc ing a more specific obligation. 
QUESTION 1.13 
Should a specific duty be established for the bo ard of directors to take into account the 
interests of depositors and ot her stakeholders during th e decision-making procedure 
('duty of care')? 
Large majority of respondents that provided an  answer to this question are not in favour 
of creating a specific duty of care with regard to specific stakeholders. They consider that 
the primary fiduciary duty of boards is to th eir shareholders. However, there seems to be 
a general agreement among all re spondents that the boards shoul d act in the best interest 
of the financial institution, which includes inte rests of different stakeholders. A number 
of respondents indicated that su ch duty to act in best interests of the company already 
exits in their jurisdictions.  
QUESTION 2.1 
How can the status of the chief risk officer  be enhanced? Should the status of the chief 
risk officer be at least equivalent to that of the ch ief financial officer? 
All respondents that provided an answer to this question agree that chief risk officer 
should have high status and au thority, be independent from operational and business units 
and have close relationship with the board. Bu t, according to the majority of opinions, the 
exact hierarchical status of the chief risk officer should not be prescribed and should be 
left to each financial institution to de cide, taking into account  the principle of 
proportionality.  
The main suggestions as to different ways to  enhance the status and the authority of the 
chief risk officer include the following: chie f risk officer should be a member of the 
board or of the management board; chief risk officer should be able to report directly to 
 
EN 208   EN the board or to the risk committee; remuneratio n and removal from offi ce of the chief risk 
officer should be subject to the board's appr oval; chief risk officer  should be approved by 
the supervisor.  
Some respondents, in particular cooperative banks, mentioned that the position of chief 
risk officer does not exist in all financial in stitutions. They stressed the importance of a 
proportionate approach that would allow sma ll financial institutions not to have a 
separate and independent positi on of the chief risk officer. 
Respondents from the insurance industry indica ted that there was no need to strengthen 
further the status of the risk management for insurance compan ies as this issue is already 
dealt with in Solvency II148.  
QUESTION 2.2 & 2.3 
How can the communication system between th e risk management function and the board 
of directors be improved? Should a procedur e for referring confli cts/problems to the 
hierarchy for resolution be set up? Should the chief risk officer  be able to report directly 
to the board of directors, including the risk committee? 
Whilst all respondents that provided an answer  to these questions agree that the board 
needs to receive timely and accurate informa tion on risk, the predominant view is that 
setting up a formal escalation procedure for conflicts resolution is not necessary. But the 
majority consider that the chief risk officer should either have a duty to report directly to 
the board or to the risk committ ee on a regular basis or should be  able to do so if needed. 
Some of the respondents also think that the position of the chief risk officer might be 
strengthened by periodically attending board meetings or meetings of the risk committee.  
However, some respondents from jurisdictions  with mandatory two-tier boards indicate 
that in their system only the management board  has the competence to report directly to 
the supervisory board, not the chief risk offi cer who can report to the management board 
only.  
Certain institutional investors indicated that shareholders we re not sufficiently informed 
about risk issues and suggested that co mmunication on risk matters should also be 
improved towards shareholders.  
Respondents from the insurance industry in dicated that the communication on risk 
matters from risk management function to th e board will be sufficiently dealt with under 
Solvency II, where the board has to have effective insight into risk management. 
 
                                                 
148  Directive 2009/138/EC of the European Parliament and of the Council of 25 November 2009 on 
the taking-up and pursuit of the business of Insurance and Reinsurance (Solvency II) 
 
EN 209   EN QUESTION 2.4 
Should IT tools be upgraded in order to improve the quality and speed at which 
information concerning significant risks is  transmitted to the board of directors? 
Whilst all respondents that prov ided an answer to this que stion agree that information 
technologies should enable boards and execu tive management to receive timely and 
accurate information on risk, th e majority consider that the decision to upgrade or not 
these technologies should be left to each financial institution to decide upon. For many 
respondents, correctly identifying the type  of information the board requires to 
adequately fulfil its duties and the capacity of the board to understand the information 
provided to it are crucial.  
Some respondents also indicate d that systematic upgrading of information tools would 
entail huge costs and would be disproportio nate for small financial institutions.  
A number of respondents suggest that it could be a task for supervisors to oversee that 
information tools to transmit information on risk are appropriate for each specific financial institution.  
QUESTION 2.5 
Should executives be required to approve a report on the ade quacy of internal control 
systems? 
Some respondents did not give a specific opi nion on the subject because the content of 
the report on the adequacy of internal control system was not  clear to them.  
But the majority of the responde nts that provided an answer to this question are opposed 
to the requirement for executives to approve  such a report. A number of respondents 
consider that the board  as a whole should approve a repor t on the adequacy of internal 
control systems as opposed to the executive management.  
Others think that such approval would not have any added value compared to already 
existing requirements in different national or European legislat ions or corporate 
governance codes, or would be too formalis tic and disproportionate. In particular, a 
majority of the respondents were  opposed to a Sarbanes - Oxley149 type declaration as 
they thought it was too burdensome and al so did not prevent the crisis in US. 
                                                 
149  The Sarbanes-Oxley Act adopted in 2002 in US makes reporting on internal controls mandatory 
for SEC registrants and their independent audito rs. Section 302 of the Act entitled "Corporate 
Responsibility for Financial Reports" establishes management responsibility for internal controls 
and requires management to evaluate the effectiven ess of internal controls. Section 404 of the Act 
directs the SEC to adopt rules requiring annual reports of public companies to include an 
assessment, as of the end of the fiscal year, of th e effectiveness of internal  controls and procedures 
 
EN 210   EN Among the respondents who were in favour of  the executives approving a report on the 
adequacy of internal control systems, certa in French, German and Spanish respondents 
indicated that such an obliga tion already existed in their national legislation or in a 
corporate governance code and should become a standard at European level. Respondents 
from UK were particularly in favour of a Turnbull150 type declaration.   
QUESTION 3.1 
Should cooperation between external auditors and supervisory authorities be deepened? 
If so, how? 
The majority of respondents that provided an an swer to this question, in particular nearly 
all public authorities, think that there is  a need to deepen the cooperation between 
auditors and supervisors. In their view, th is could be achieved through a more frequent 
communication and a two-way dialogue, fo r example on macro-economic issues; 
trilateral meetings between supervisors, auditors and financia l institutions; regular 
meetings at national or at European level of profession al bodies of auditors with 
supervisory authorities; additional reporti ng requirements on some specific issues. 
Those respondents which are opposed to enhanc ed cooperation between external auditors 
and supervisory authorities c onsider that existing national and European requirements 
sufficiently regulate the duty of auditors to report to superv isors. In their view, any the 
primary duty of auditors is to report to shareholders. Any additional cooperation could 
damage the relationship of trust between au ditors and the financial institution. Those 
respondents also warn against mixing the roles of supervisors and auditors as they have 
different missions. 
QUESTION 3.2 
Should their duty of information towards th e board of directors and/or supervisory 
authorities on possible serious ma tters discovered in the perf ormance of their duties be 
increased? 
A number of respondents (including financia l services industry, investors, audit and 
accounting firms and certain public authorities) that provided an answer to this question 
are not in favour of increasing the duty of info rmation of external auditors. They consider 
that the existing rules at national or Europ ean level on reporting by ex ternal auditors of 
serious matters to boards and supervisors ar e sufficient. However,  other respondents 
think that there is a need to  analyse how these rules were applied in practice, although 
                                                                                                                                                 
for financial reporting. Section 404 also requires the company's independent auditors to attest to 
and report on management's assessment. 
150  The Turnbull guidance sets out best practice on internal control for UK listed companies. It was 
initially published in 1999 and subsequently revi ewed in 2005. Under th is guidance, the board 
should in particular provide a statement on internal control which should, inter alia , include an 
acknowledgement by the board that it is responsibl e for the company's system  of internal control 
and for reviewing its effectiveness. 
 
EN 211   EN there is not evidence showing that they  have been applied. Several respondents 
nevertheless think that further guidance is needed as to the circumstances that external auditor should report to supervisors, on the natu re of information that should be provided 
and on the procedures. 
Those respondents in favour of the increa sed duty of information (mainly public 
authorities, certain financial institutions, investors and audit firms, civil society representatives and citizens), think that  the duty to report  could be widened, for example 
to encompass weaknesses in internal control. 
QUESTION 3.3 
Should external auditors' control be extended to risk-related financial information? 
A majority of respondents that provided an an swer to this questio n were strongly opposed 
to extending the duty of external  auditors to control risk-rel ated financial information. In 
their view, current audit requirements containe d in their national legi slation and in IFRS 
already encompass information related to risk wh ere auditors need to be satisfied that this 
information is consistent with financial and accounting information. They consider that auditors' control should not be further ex tended. Certain respondents also think that 
auditors do not have appropriate  tools to audit non-financial information on risk and that 
the control of such information should be le ft to the board and to the supervisors.  
Other respondents (mainly public authorities , certain investors, audit and accounting 
firms and civil society representatives) consider that it is desirable for auditors to validate 
a greater range of information whic h is relevant for shareholders. 
Some respondents were not opposed to extend auditors' control to risk-related 
information but considered that the scope of such audit should be de fined first and further 
thought should be given to the ability of aud itors to express a prof essional opinion on the 
internal control systems of banks  and other risk-related issues.  
QUESTIONS 4.1 & 4.2 
Should the role of supervisory authorities in the internal governance of financial 
institutions be redefined and strengthened? Should supervisor y authorities be given the 
power and duty to check the correct functioning  of the board of directors and the risk 
management function? How can th is be put into practice? 
Almost all respondents that provided an answer  to this question agree that supervisory 
authorities, in course of the pe riodic supervisory review, shou ld be able to challenge the 
efficiency of internal governance structures  and monitor whether these structures could 
have a negative impact on financial stabil ity. Only few respondents are opposed to any 
role of supervisors in the internal governance.  
However, views are split as to the need to e nhance the existing power s of the supervisors. 
A slight majority of the respondents that prov ided an answer consider that the existing 
 
EN 212   EN national and European rules are sufficient and th at there is no need to strengthen further 
the role of supervisors in corporate governance.  
A number of respondents think, however, that supervisory authorities should have more 
powers to control the performa nce of the boards and risk management and to sanction 
any shortcomings in internal governance of fi nancial institutions. In particular, many 
respondents are of the view that supervisors should give closer  attention to the balance in 
the board in relation to risk strategy and satisfy themselves that the board is able to exercise efficiently its overs ight function. Some responde nts, especially from UK, 
indicated that in their jurisdictions supervis ors have recently been given increased powers 
to monitor internal governance of financial institutions.  
Nevertheless, there is a consensus that boards and shareholders of the financial institution 
should be primary responsible for internal  governance arrangements. Cooperative banks 
in particular stressed that the general assemb ly of members should remain at the heart of 
governance and internal cont rol mechanism. Nearly all respondents agree that any 
enhancement of supervisory powers should not result in supervisory authorities taking 
management decisions.   
QUESTION 4.3 
Should the eligibil ity criteria ('fit and proper test') be extended to cover  the technical and 
professional skills, as well as the individual qualities,  of future directors? How can this 
be achieved in practice? 
The majority of respondents that provided an an swer to this question think that the fit and 
proper test should be extended to include technical and professional skills as well as individual qualities of future members of the board.  
Many respondents think that boards should have expertise and knowledge collectively 
and should be able to challenge management as a team, instead of each candidate possessing all set of specific skills and qualities. Some re spondents mention the difficulty 
to find an appropriate test for individual qualities, the appreci ation of which would 
always be subjective. A number of responde nts emphasise that increased competence 
should not be detrimental to independence and diversity of board members. 
Regarding the ways to apply the enhanced fit and proper test, a number of respondents 
suggest that supervisors should conduct peri odic interviews with board members, attend 
as observers board and sub-committee meetings . They site as example the UK approved 
persons regime
151.  
                                                 
151  In 2009 Financial Services Authority in UK tightened its approved persons regime for Significant 
Influence controlled functions.  FSA increased the number of controlled function categories for which approval is required. To approve a particular person, the FSA needs to be satisfied that he is 
a fit and proper person to perform the function to which the application relates. To this end the 
 
EN 213   EN Those respondents that are opposed to extend the fit and proper test to professional skills 
and individual qualities of candidates think that supervis ors already have sufficient 
powers to check the composition of  the board, are not better suited than shareholders to 
set the board members and thus should not be  excessively intrusive in the nomination 
process. One respondent considered that ex cessive intervention of  supervisors could 
result in an undue transfer of liability to the supervisor. 
QUESTION 5.1 
Should disclosure of institutional investors152 voting practices and policies be 
compulsory? How often? 
The vast majority of respondents that provided an answer to th is question ar e in favour of 
mandatory disclosure of voting policies and records by institutional investors  
They consider that such disclosure would have a positive impact on the awareness of 
investors, optimise investment decision of ultim ate investors, facilitate issuers' dialogue 
with investors and encourage shareholder e ngagement. However, ce rtain respondents are 
relatively cautious with regard to public di sclosure of voting records for confidentiality 
reasons. 
A number of respondents think that  the disclosure s hould be done at le ast on an annual 
basis, with voting records being disclosed after each general mee ting of the invested 
company. There are also some voices in fa vour of half-yearly or even quarterly 
disclosure. 
Those respondents which are opposed to disc losure by institutional investors of their 
voting policies and records either feared that  such disclosure obligation for a specific 
category of shareholders would be contrary to  the principle of equa l treatment or thought 
that it should be left for each institutional investor to decide on whether to disclose or not 
its voting policy. 
QUESTION 5.2 
Should institutional investors be obliged to adhere to a code of best practice (national or 
international) such as, for example, the code  of the International Corporate Governance 
Network (ICGN)? This code requires signatorie s to develop and publis h their investment 
and voting policies, to take measures to avoid co nflicts of interest and to use their voting 
rights in a responsible way. 
                                                                                                                                                 
FSA has the power to conduct interviews in order to assess competence and capability of the 
candidate for the role. 
152  Institutional investors are consider ed to be professional investors which invest on behalf of or for 
the benefit of beneficiaries, including but not limited to pension funds, hedge funds, insurance 
companies and banks 
 
EN 214   EN The majority of respondents that provided an answer to this question think that 
institutional investors should adhere to a c ode of best practice, whether to national, 
European or international code, at least on a "comply or explain" basis. A number of 
respondents consider the UK Stewardship Code as being a model for investor codes of 
best practice. Some respondents are of the opinion that there is a need either for a 
European code of best practice or for a commo n standard at European level with mutual 
recognition of national stewardship codes. 
One respondent thinks that self-regulatory c odices are not a viable means to assure the 
quality of corporate governance. In his view, responsibility of external control should lie 
with the supervisory authorit ies and external auditors. 
QUESTION 5.3 
Should the identification of shareholders be fa cilitated in order to encourage dialogue 
between companies and their sh areholders and reduce the ri sk of abuse connected to 
'empty voting'? 
The majority of respondents that provided an answer to this question support mechanisms 
that would enable investee companies to id entify efficiently their shareholders. Many 
respondents would be in favour of  greater transparency of th e shareholders' register and 
of a uniform binding rule at European level on disclosure of nominees and beneficial 
owners of shares. French and UK respondent s cite their national legislation as an 
example. Those respondents that are not in favour of enhanced identification of 
shareholders think that identification of shareholders is already ensured in other 
instruments, such as the Transparency Directive153.  
With regard to empty voting, some respondents would be in favour of greater disclosure 
of stock lending practices. However, the majo rity of respondents do not think that empty 
voting would be countered by better identifi cation of shareholders, as, in their view, 
empty voting is linked to the record date issue.   
QUESTION 5.4 
Which other measures could encourage shareh olders to engage in financial institutions' 
corporate governance? 
There is a consensus among the respondents that provi ded an answer to this question that 
communication and dialogue between the shar eholders and the invitee companies is 
essential. For that purpose, there is a need  to reduce costs, remove legal obstacles and 
regulatory barriers that  preclude shareholders to actively engage in companies. Many 
respondents underline the necessity to facili tate cross-border voting and would be in 
                                                 
153  Directive 2004/109/EC of the European Parliament and of th e Council of 15 December 2004 on 
the harmonisation of transparency requirements in relation to information about issuers whose 
securities are admitted to trading on a regulated market and amending Directive 2001/34/EC. 
 
EN 215   EN favour of regulating proxy voting agencies. E ffective implementation of the Shareholder 
Right Directive is also seen as a step towa rds better involvement of shareholders, as well 
as improved disclosure of information on risk, strategy and other non-financial 
information. As regards sustainability and long-terms focus of investments, some respondents suggest greater disclosure of re muneration structures of asset managers, 
increased taxation of financia l transactions to limit the portfolio turnover, actions to 
promote the awareness of shareholders as to the long-term enga gement, incentives for 
shareholders to vote and hold th eir participation at long term. 
QUESTIONS 6.1 & 6.2 
Is it necessary to increase the accountabil ity of members of the board of directors? 
Should the civil and criminal liability of direct ors be reinforced, bearing in mind that the 
rules governing criminal proceedings are not harmonised at European level? 
The vast majority of respondents that provide d an answer to these questions are opposed 
to any increase in civil and criminal liability of directors. The genera l view is that current 
rules impose sufficient liability  on directors and their eff ective implementation should be 
studied first before any harmonisation is d ecided at European level. Many respondents 
underline that increased  liability would not automatical ly result in better decisions by 
directors, could be detrimental to sound initia tive and directors woul d discourage talented 
individual to apply for boards' membersh ip. A number of respondents think that 
supervisors need to apply effectively the range  of sanctions they al ready dispose of to 
make directors more accountable. Certain re spondents are also in favour of annual re-
election of board members, whic h in their view would contribu te to enhance the directors' 
accountability to shareholders. 
QUESTION 7.1 
What could be the content and form, bi nding or non-binding, of possible additional 
measures at EU level on remuneration for directors of listed companies? 
Nearly all respondents that provided an answer  to this question agree that incentives for 
directors must be properly structured in order to encourage long-term and sustainable 
performance of companies. However, the va st majority is opposed to any additional 
legislative measures in this field as regards the structure of remuneration. They think that 
recently adopted European legislation, such as the amendment to the Capital 
Requirements Directive154 and the Commission Recommend ation on remuneration of 
directors in listed companies155, sufficiently deal with such  issues. Certain respondents 
                                                 
154  Directive of the European Parliament and of the Council amending Directives 2006/48/EC and 
2006/49/EC as regards capital requirements for the trading book and for re securitisations, and the 
supervisory review of remuneration policies. 
155  Commission Recommendation of 30 April 2009 complementing Recommendations 2004/913/EC 
and 2005/162/EC as regards the regime for the remuneration of directors of listed companies. 
 
EN 216   EN would nevertheless welcome more  transparency of remunerati on policies of directors in 
listed companies as well as an advisory shareholder vote.   
QUESTION 7.2 & 7.3 
Do you consider that problems related to di rectors' stock options should be addressed? If 
so, how? Is it necessary to regulate at Communi ty level, or even prohibit the granting of 
stock options? Whilst respecting Member States' competence where relevant, do you think that the favourable tax treatment of stock options and othe r similar remuneration 
existing in certain Member States helps en courage excessive risk-taking? If so, should 
this issue be discussed at EU level? 
The vast majority of respondents who provided an answer to these questions think that 
stock options are a useful tool to align interest  of directors with thos e of shareholders and 
should not be prohibited if properly structur ed in accordance with existing legislation. 
The only possible field for acti on at European level for so me respondents could be the 
better disclosure of stock option paymen ts and the shareholder advisory vote. 
As regards taxation regime, the predominant view is that favourable taxation of stock 
options, where it exists, does not have any major impact on risk-taking behaviour of 
directors and thus should not be dealt with at European level. 
QUESTION 7.4 
Do you think that the role of shareholders, and also that of employees and their 
representatives, should be strengthened  in establishing remuneration policy? 
The majority of respondents who provided an an swer to this question do not see a need to 
further strengthen the role of shareholders  or employees in establishing remuneration 
policies. In their view, the existing European  or national rules give already sufficient 
weight to shareholders and employees on remuneration issues. 
Some respondents, predominantly investor s and audit and accounting firms, favour 
however, an advisory or a binding vote of sh areholders on remuneration of directors, 
which they think should be set up at European level.  
Certain respondents, essentially employee repres entatives, would be in favour of a clear 
role of employees in remuneration committees  and improved information of employees 
about remuneration of directors. 
QUESTION 7.5 
What is your opinion of se verance packages (so-called ' golden parachutes')? Is it 
necessary to regulate at Community level,  or even prohibit the granting of such 
packages? If so, how? Should they be awarded only to remunerate effective performance 
of directors? 
 
EN 217   EN Whilst the majority of respondents that provid ed an answer to this  question agree that 
pay, including severance packages, should aw ard effective performance and not the 
failure, the majority of respondents that pr ovided an answer to this question do not 
consider appropriate to prohibit severance packages or to further regulate them at 
European level. In their view, the awar d of severance packages should be the 
responsibility of boards and shareholders and should be decided on case by case basis.  
QUESTIONS 7a & 7.6 
Interested parties are also invited to exp ress their views on whether additional measures 
are needed with regard to the structure and governance of remunera tion policies in the 
financial services. If so, what could be the content of these measures? 
Do you think that the variable component of remuneration in financia l institutions which 
have received public funding s hould be reduced or suspended? 
The vast majority of respondent s that provided an answer to  this question think that, in 
view of new rules on remunera tion in credit institutions and investment firms introduced 
by CRD III, no additional measures are required at European level before the effects of the implementation of these new rules is carefully evaluated. As regards financial institutions having received pub lic funding, the general view is  that it should be left to 
each national competent authority to decide on case y case basis whether there is a need 
to reduce or suspend the variable remunera tion for each specific financial institution. 
Many respondents indicate that in some cases it could be justified to pay some bonuses to 
attract new staff to rebuild the financial institution.  
QUESTIONS 8.1 & 8.2 
What could be the content of  possible additional measures at  EU level to reinforce the 
combating and prevention of conflicts of intere st in the financial serv ices sector? Do you 
agree with the view that, wh ile taking into  account the differen t existing legal and 
economic models, it is necessary to harmonise the content and detail of Community rules 
on conflicts of interest to ensure that the various financial institutions are subject to 
similar rules, in accordance with which they must apply the provis ions of MiFID, the 
CRD, the UCITS Directive or Solvency 2? 
Whilst some of the respondents think that no additional measure are needed at European 
level on prevention of conflicts of interest, th e prevailing opinion is that there is a need 
for greater alignment of existing rules at European level. But the majority of the 
respondents agree that the specifici ties of different types of fi nancial institutions and their 
business models should be taken into account.  
The main suggestions as to the content of  the possible measures are the following:  
- formal written conflicts policy which s hould be disclosed in the annual report; 
 
EN 218   EN - public disclosure of exis ting conflicts of interest; 
- harmonisation of the definition of "conflicts of interest"; - adherence to codes of ethics; - reduce complexity of financial institutions; - proper and documented division of res ponsibilities and segregation of duties; 
A number of respondents also indicated that in their view conflicts of interest could arise 
in all type of companies and theref ore should be regulated in general. 
 
 
 
EN 219   EN Annex 1. 
- List of the public author ities that have participat ed in the consultation.  
Austrian Financial Market Authority 
Austrian Ministry of Finance 
Autorité des marches financiers 
Banco de España CEIOPS 
Central Bank of Ireland 
Committee of European Banking Supervisors Czech National Bank 
Danish government 
Dutch Ministry Finance  
Financial Reporting Council  
Finnish Financial Supervisory Authority Finnish Ministry of Finance 
French Ministry of Finance 
German Bundesrat German Bundestag 
German Federal Government 
Malta Financial Services Authority  Ministry of Finance of Estonia 
Ministry of Finance of the Czech Republic  
Secrétariat général de l’Autorité de contrôle prudentiel Slovak Republic Government 
Slovenian Ministry of Finance 
Spanish Government Swedish Ministry of Finance 
Swedish Riksdag 
UK Financial Supervisory Authority  UK Government 
 
- List of the citizens which have participated in the consultation. 
Centre for Inclusive Leadership 
Nicolas Cuzacq, Katrin Deckert, Univer sité Paris Est Créteil Val de Marne 
 
EN 220   EN Daniel Ferreira, Tom Kirchmaier, Daniel Metzger 
Jim Stewart 
Lieve Lowet 
Miroslav Nedelchev Peter Schellinck 
Sabine de Bethune 
 
- List of the organisations which ha ve participated in the consultation. 
AFG 
Allianz 
AMICE 
APG 
Association for Financial Markets in Europe 
Association française des entreprises privées Association française des marchés financiers 
Association of British Insurers 
Association of Chartere d Certified Accountants 
Associaton of Swedish Institutional Owners  
Assogestioni 
Austrian Bundesarbeiterkammer Austrian Raiffeisenverband 
Aviva 
AXA Investment Managers Banco Santander 
Barclays 
BDO Belgian Financial Sector Federation 
BlackRock 
BNP Paribas BPCE  
British Bankers' Association 
Building Societies Association 
Bundessparte Bank und Versicherung 
Bundesverband Investment und Asset Management  
Bundesvereinigung der Deutschen Arbeitgeberverbände & Bundesverband der 
 
EN 221   EN Deutschen Industrie 
Businesseurope 
Bvlaco 
California Public Employees' Retirement Systems  
CBI CD&V 
CEA 
Central Chamber of Commerce of Finland Centre for Corporate Governance, University College Dublin 
CFA Institute 
CFDT Banques Chambre de Commerce et de l'Industrie 
Chartered Accountants Ireland 
Chartered Accountants of Scotland 
CIPD 
Compagnie nationale des commissaires aux comptes Confederation of Finnish Industries 
Confederation of Swedish Enterprise 
Confederation of the Nordic Bank, Finance and Insurance Unions Conseil des barreaux européens 
Consejo General de Colegios de Economistas 
Consiglio Nazionale dei Dottori Commercialisti e degli Esperti Contabili Council of Institutional Investors 
Creative Investment Research, Inc. 
Crédit Agricole Crédit Mutuel 
Danish Bankers' Association 
Danish Financial Sector Associations Danish Shareholders Association 
Deloitte 
Deutsche Gewerkschaftsbund Deutsche Industrie- und Handelskammertag 
Deutsches Aktieninstitut 
Die Fürungskräfte  
DSW 
 
EN 222   EN Dutch Investors’ Association  
EcoDa 
EFAMA 
Ernst and Young Ethical Investment Research Services  
Eumedion 
Euroclear EuroInvestors 
European Assocation of Co-operative Banks 
European Association of Public Banks European Banking Federation 
European Confederation of Institutes of Internal Auditing  
European Federation for Retirement Provision 
European Financial Services Round Table 
European Issuers European Network of Credit Unions 
European Private Equity and Venture Capital Association  
European Savings Bank Group European Trade Union Confederation 
European Union of Women 
European Women Lawyers’ Assocation  European Womens' Lobby 
Eurosif 
F&C Investments Fair Pensions 
Fédération Bancaire Française 
Fédération Française des Sociétés d'Assurance Mutuelles Fédération Française des Sociétés d'Assurances 
Federation of European Accountants 
Federation of Finnish Financial Services Financial Services Consumer Panel 
Forsikring & Pension 
Forum of European Asset Managers 
GC100 
Genworth Financial German Insurance Association 
 
EN 223   EN Glass Lewis  
GlaxoSmithKlein 
GOODCORP 
Governance for Owners Grant Thornton International 
Groupement des Entreprise s Mutuelles d'Assurances 
Groupement National de la Coopération GUBERNA 
Hedge Fund Standards Board 
Hermes HQB partners 
HSBC 
Hungarian Banking Association 
ICAEW 
ICMA Asset Management and Investors Council  ILAG 
ING 
Institut des Actuaires Institut Luxembourgeois des Administrateurs 
Institute for the Accountancy Profession in Sweden  
Institute of Chartered Secretaries and Administrators  Institute of Directors 
Institute of International Finance 
Institute of Public Auditors in Germany Institute of Risk Management 
Institutional Shareholder Services 
Instituto de Censores Jurados de Cuentas de España International Bar Association 
International Research Center of Ba nking & Corporate Governance (Ukraine) 
International Underwriting Association Inverco 
Investment Management Association 
KEPKA 
KPMG Europe 
KPMG France Law Society of England and Wales and the City of London Law Society 
 
EN 224   EN Legal and General  
Legal and General Investment Management 
Linklaters 
Lithuanian Investors Local Authority Pension Fund Forum UK 
London Stock Exchange Group 
Mazars Medef 
NASDAQ OMX  
National Association of Pension Funds UK Nationwide Building Society 
Nederlandse Vereniging van Banken 
Nestor Advisors 
Nordea 
Norges Banks Investment Management OPF&VB 
Österreichischer Arbeitskrei s für Corporate Governance 
Pan European Insurance Forum PIRC 
PricewaterhouseCoopers 
Proxinvest Railpen Investments and Universities Superannuation Scheme  
Regierungskommission Deutscher Corporate Governance Kodex 
Royal Dutch Institute of Registered Accountants RSA Insurance 
Share Plan Lawyers group 
SIFA Societé Générale 
Standard Chartered Bank 
Standard Life Swedish Bankers´ Association 
Swedish Corporate Governance Board  
The Association of Investment Companies 
The Co-operative Asset Management  
The Director´s Office Tomorrow's Company 
 
EN 225   EN Towers Watson 
Transparency International 
Uni Europa Finance 
Unicredit Vereinigung der Bayerischen Wirtshaft 
Wirtschaftskammer Österreich  
Wirtschaftsprüferkammer Wp net 
Zentraler Kreditausschuss