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EXPLANATORY MEMORANDUM

1. Context of the proposed act

Directive 2006/48/EC of the European Parliament and of the Council of 14 June 2006 relating to the taking up and pursuit of the business of credit institutions contains provisions closely related to the coordination of national provisions concerning the access to the activity of credit institutions and their supervisory framework (such as provisions governing the authorisation of the business, the the exercise of the freedom of establishment, the powers of supervisory authorities of home and host Member States in this regard, and the supervisory review of credit institutions). However, that Directive, Directive 2006/49/EC and in particular their annexes also set out prudential rules. In order to approximate further the legislative provisions that result from the transposition of Directives 2006/48/EC and 2006/49/EC into national law and in order to ensure that the same prudential rules directly apply to them, which is essential for the functioning of the internal market, these prudential rules are subject of the proposal for a Regulation [inserted by OP], with which this proposal forms a package.

This proposal contains the following new elements: Provisions on sanctions, effective corporate governance and provisions preventing the overreliance on external credit ratings. This memorandum will therefore deal exclusively with these new elements. The other elements of this Directive repeat existing legislation or are adaptations to the proposed Regulation. For sake of clarity, this proposal also unifies provisions on credit institutions and investment firms, the latter of which are dealt with by Directive 2006/49/EC. This is described in more detail in chapter 5 below. Changes related to the 'Basel III' agreement are dealt with by the proposal for a Regulation except for the provisions on capital buffers that are part of this proposal for a Directive. Therefore, only the objectives and legal elements concerning the capital buffers are part of this explanatory memorandum.The general context of Basel III including the results of impact assessment and public consultations is explained in detail in the proposal for a Regulation.

1.1. Reasons for and objectives of the proposal

1.1.1. Sanctions

Effective, proportionate and dissuasive sanctioning regimes are key to ensure compliance with EU banking rules, protect users of banking services and ensure safety, stability and integrity of banking markets.

The analysis of national sanctioning regimes in the areas covered by this Directive and the Regulation has revealed divergences and weaknesses in the legal framework of sanctioning powers and the investigative powers available to national authorities.

Sanctions which are divergent and too weak risk being insufficient to effectively prevent violations of this Directive and the Regulation to ensure effective supervision and the development of a level playing field. The Commission therefore proposes to reinforce and approximate Member States' legal framework concerning administrative sanctions and measures by providing for sufficiently deterrent administrative sanctions applicable to the key violations of this Directive and the Regulation, appropriate personal scope of administrative sanctions, publication of sanctions and mechanisms encouraging the reporting of violations.

1.1.2. Corporate Governance

The collapse of financial markets in autumn 2008 and the credit crunch that followed can be attributed to multiple, often inter-related, factors at both macro- and micro-economic levels, as identified in the Report of the High-Level Group on Financial Supervision in the EU published on 25 February 2009, 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 governance of financial institutions, especially in banks. Whilst not all banks suffered from systemic weaknesses of governance arrangements, the Basel Committee on Banking Supervision (BCBS) referred to "a number of corporate governance failures and lapses".

The need for change in this area has been widely recognised. Firms, competent authorities and international bodies (OECD, Financial Stability Board (FSB) and the BCBS) have reviewed their existing practices and guidelines or are in process of doing so. Strengthening corporate governance is a priority for the Commission, especially in the context of its financial markets reform and crisis prevention programme.

1.1.3. Overreliance on external ratings

Overreliance on external credit ratings occurs when financial institutions and institutional investors rely solely or mechanistically on ratings issued by credit rating agencies while neglecting their own due diligence and internal risk management obligations. Overreliance on credit ratings may lead to herding behaviour of financial actors, e.g. parallel selling-off of debt instruments after that instrument has been downgraded below investment grade, which may affect financial stability – in particular when the few big rating agencies err collectively in their assessments.

1.1.4. Pro-cyclicality of institution lending

Pro-cyclicalityeffects are defined as those which tend to follow the direction and amplify the economic cycle. One feauture of current-risk based capital requirements is that they vary over the economic cycle. Provided that credit institutions could meet them there is no explicit regulatory constraint on the amount of risk they can take on, and then on their leverage.

1.2. General context

1.2.1. Sanctions

In its 2010 Communication "Reinforcing sanctioning regimes in the financial sector" [1] the Commission has envisaged EU legislative action to set minimum common standards on certain key issues of sanctioning regimes, to be adapted to the specifics of the different sectors.

First, sanctions applicable for key violations of the CRD, such as authorisation requirements, prudential obligations and reporting obligations, vary across Member States and do not seem always appropriate to ensure sanctions are sufficiently effective, proportionate and dissuasive.

Second, a certain divergence exists in the level of application of sanctions in different Member States, including those having banking sectors of similar size and in some Member States no sanctions have been applied for more than one year, which could be symptomatic of a weak enforcement of EU rules.

1.2.2. Corporate Governance

In its Communication of 4 March 2009 [2], the European Commission announced that it would (i) examine corporate governance rules and practice within financial institutions in the light of the financial crisis, and (ii) where appropriate, make recommendations, or propose regulatory measures, in order to remedy any weaknesses in the corporate governance system in this important sector of the economy.

In June 2010, the Commission published a Green Paper on corporate governance in financial institutions and remuneration policies [3] and an accompanying staff working document [4] which analysed the deficiencies in corporate governance arrangements in the financial services industry and proposed possible ways forward.

The results of this public consultation demonstrated a broad consensus on the deficiencies identified, receiving support from different public authorities and Member States. The European Parliament has also recognised the importance of strengthening corporate governance standards and practices in financial institutions in its Report on remuneration of directors of listed companies and remuneration policies in the financial services sector [5]. Economic and Social Committee in its opinion on the Green Paper - Corporate governance in financial institutions and remuneration policies [6] welcomes the Commission Green Paper and supports the proposed action.

1.2.3. Overreliance on external ratings

At the international level, the FSB recently issued principles to reduce authorities’ and financial institutions’ reliance on external ratings [7]. The principles call for removing or replacing references to such ratings in legislation where suitable alternative standards of creditworthiness are available and for requiring banks to make their own credit assessments. The proposed provisions are in line with the FSB principles.

1.2.4. Capital buffers:

Capital conservation and most especially countercyclical buffers are meant to attenuate the risk of pro-cyclicality and the risk of excessive leverage referred to in 1.1.4 above.

1.3. Existing Community provisions in this area

Directive 2006/48/EC relating to the taking up and pursuit of the business of credit institutions requires credit institutions to have robust governance arrangements. However, it did not specify what the governance arrangements should look like in detail.

In order to reduce reliance on external ratings, an obligation for banks to undertake own due diligence regarding the underlying assets of securitisation exposures has been introduced into Directive 2006/48/EC.

1.4. Consistency with other policies

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. Corporate governance reform should also be seen in the context of the recent Commission Communication on reinforcing sanctioning regimes in the financial services sector.

The Commission has launched a horizontal initiative to encourage industry to increase the representation of women on boards, that after one year it will assess whether self-regulatory initiatives have had the desired effect and if not it will consider legislative approaches. Given that the impact assessment shows that this issue is pertinent for the banking sector, the approach taken at this stage is consistent with a bottom up approach. However, if the wider evaluation in one year finds that there is a need to legislate, then the approach taken in this sector will need to be adapted.

2. Results of the consultations with the interested parties and of the impact assessments

2.1. Consultation with interested parties

2.1.1. Sanctions

The Commission carried out a public consultation ending on 19 February 2011 on the measures envisaged to reinforce and approximate sanctioning regimes in the financial sector [8], including on the issues relevant in the banking sector, as identified on the basis of a study carried out by the European Committee of Banking Supervisors on national sanctioning regimes in this sector [9].

The Commission received comments from a variety of respondents, including a significant number of stakeholders in the banking sector (supervisory authorities, central banks, banks and associations of bankers), which provided comments on the need for EU action in this field, the level of harmonisation warranted, the specific actions suggested and their potential benefits or disadvantages.

The actions envisaged to approximate and reinforce sanctioning regimes were also discussed with Member States in the meeting of the Financial Services Committee held on 17 January 2011.

2.1.2. Corporate Governance

The initiative and impact assessment is the result of an extensive and continuous dialogue and consultation with all major stakeholders, including securities regulators, market participants (issuers, intermediaries and investors), and consumers.

Questionnaires on their corporate governance practices were sent to a diverse cross-section of 10 major listed banks or insurance companies established in the EU. The questionnaires were augmented by 30 follow-up interviews with Board members, company secretaries, chief financial officers, chief risk officers, internal controllers.

A questionnaire on their views and role regarding corporate governance of financial institutions was also sent to the European banking supervisors. Similarly, a cross-section of major European institutional investors and shareholders' associations received a questionnaire 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.

The Green Paper finally launched a public consultation from 2 June 2010 to 1st September 2010 on the possible ways forward to deal with failures in corporate governance in financial institutions. The responses and their analysis can be consulted on the Commission website [10].

2.1.3. Overreliance on external ratings

The Commission conducted a public consultation on issues concerning external ratings which also covered overreliance on them. The consultation closed on 7 January 2011 and attracted 93 responses. Several options were proposed, ranging from incentivising the use of internal models to requiring firms to carry out their own risk management without relying exclusively or mechanistically on external ratings. The responses and their analysis can be consulted on the Commission website [11].

2.1.4. Capital Buffers

Capital Buffers are part of the BCBS 2010 agreement and as such they were consulted extensively both within the Basel framework and in the framework of the Commission's specific consultations

2.2. Collection and use of expertise

2.2.1. Sanctions

The study carried out by the European Committee of Banking Supervisors in 2008 [12] provided information concerning the administrative sanctions laid down in national legislation and the actual use of sanctions by banking supervisors. In 2011, additional information has been collected by the Commission on sanctions provided for in national legislation for key violations of the CRD.

The measures proposed are based on this information and the responses to the public consultation.

2.2.2. Corporate Governance

As part of the consultation process, and in the course of preparation of the Green Paper, the Commission services also organised on 12 October 2009 a public conference, a number of stakeholders participated. Discussion focused on the role and competence of the Board of directors, governance issues related to internal control and risk management, the respective role of shareholders, supervisors and statutory auditors.

The Green Paper is also based on the analysis and studies that have been performed or are still carried out by public or private organisations, at the international level as well as the European and national levels. In their work, the Commission 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.

2.2.3. Overreliance on external ratings

The Commission is actively participating in the work of the FSB referred to above. Furthermore, it participates in the BCBS that is also undertaking work to reduce reliance on ratings in its Working Groups on Liquidity and on Ratings and Securitisation.

2.2.4. Capital Buffers

Sub-groups of the Capital Requirements Directive Working Group, whose members are nominated by the European Banking Committee, have also conducted work at a technical level concerning capital buffers.

2.3. Impact assessment

2.3.1. Sanctions

The Communication on "Reinforcing sanctioning regimes in the financial sector" was accompanied by an impact assessment analysing the main policy options for approximating and strengthening sanctioning regimes for violations of financial services rules including in the banking sector. A second impact assessment accompanies this proposal, examining the specific problems in the capital requirements area in more detail.

The main objective of the measures proposed is to ensure better compliance with EU banking rules by increasing effectiveness and dissuasiveness of national sanctioning regimes. This requires the achievement of the following operational objectives:

· Reinforcement and approximation of the legal framework concerning sanctions by ensuring

– Appropriate administrative sanctions for the key violations of CRD

– Appropriate personal scope of administrative sanctions

– Publication of sanctions

· Reinforcement and approximation of the mechanisms facilitating detection of violations by ensuring

– Effective mechanisms encouraging the reporting of misconducts

2.3.2. Corporate Governance

The overarching goal of this initiative is to ensure that the effectiveness of risk governance in European credit institutions and investment firms is strengthened. The measures envisaged should help avoid excessive risk-taking by individual credit institutions and ultimately the accumulation of excessive risk in the financial system. In order to achieve this goal, this initiative focuses on the following operational objectives:

– increasing the effectiveness of risk oversight by Boards;

– improving the status of the risk management function; and

– ensuring effective monitoring by supervisors of risk governance.

To achieve these objectives, the Commission has chosen to improve the existing legal framework.

The requirements regarding Board composition and selection of Board members will ensure more appropriate behaviours, competencies, time commitment and increased accountability. Well-informed, competent Boards and a strong risk management function will increase the ability of credit institutions to identify and manage emerging risks thereby reducing excessive risk-taking. Disclosure requirements will support increased transparency, leading to a more informed market and improved market discipline.

Opening the Board to more diverse candidates might give opportunity to people who were for the time being absent from Board rooms to become members of the Board. It would enlarge the pool of suitable candidates for board membership and improve expertise. Therefore, any potential negative impact on the pool of suitable candidates of the proposal should not be significant.

More stringent requirements at European level could have a negative impact on the competitiveness of European credit institutions at international level. However, the possible decrease in competitiveness due to more stringent requirements should be mitigated by a positive impact on investors, depositors and other stakeholders. Improved risk governance would contribute to the resilience of the banking sector.

The proposal would neither entail significant costs for credit institutions nor have a significant impact on lending activities.

2.3.3. Overreliance on external ratings

A general part on overreliance covering the proposed elements will be included in the forthcoming impact Assessment on the new initiative on credit rating agencies (expected beginning of July 2011).

2.3.4. Capital Buffers

As Capital Buffers are part of the Basel agreement their impact assessment is made together with all the other measures and detailed in the Regulation accompanied this Directive.

3. Budgetary implications

The proposal has no implications for the EU budget.

4. Legal elements of the proposal

4.1. Legal basis

The legal basis for this proposal is Article 53(1) TFEU. Directives 2006/48/EC and 2006/49/EC, which would be replaced by this Directive and the proposed regulation [inserted by OP], constitute an essential instrument for the achievement of the Internal Market from the point of view of both the freedom of establishment and the freedom to provide financial services, in the field of credit institutions and investment firms. This proposal replaces Directives 2006/48/EC and 2006/49/EC with regard to the coordination of national provisions governing the authorisation of the business, the acquisition of qualifying holdings, the exercise of the freedom of establishment and of the freedom to provide services, the powers of supervisory authorities of home and host Member States in this regard and the provisions governing the initial capital and the supervisory review of credit institutions and investment firms. The main objective and subject-matter of this proposal is to coordinate national provisions concerning the access to the activity of credit institutions and investment firms, the modalities for their governance, and their supervisory framework. The proposal is therefore based on Article 53(1) TFEU.

This proposal is complementary to the proposed regulation [inserted by OP], establishing uniform and directly applicable prudential requirements for credit institutions and investment firms, since such requirements are closely related to the functioning of financial markets in respect of a number of assets held by credit institutions and investment firms, and is based on Article 114 TFEU.

4.2. Subsidiarity

In accordance with the principles of subsidiarity and proportionality set out in Article 5 TFEU, the objectives of the proposed action cannot be sufficiently achieved by the Member States and can therefore be better achieved by the EU. Its provisions do not go beyond what is necessary to achieve the objectives pursued. Only EU action can ensure that credit institutions and investment firms operating in more than one Member State are subject to the same requirements and thereby ensure a level playing field, reduce regulatory complexity, avoid unwarranted compliance costs for cross-border activities, promote further integration in the EU market and contribute to the elimination of regulatory arbitrage opportunities. EU action also ensures a high level of financial stability in the EU.

4.3. Compliance with Articles 290 and 291 TFEU

On 23 September 2009, the Commission adopted proposals for Regulations establishing EBA, EIOPA, and ESMA [13]. In this respect the Commission wishes to recall the Statements in relation to Articles 290 and 291 TFEU it made at the adoption of the Regulations establishing the European Supervisory Authorities according to which: "As regards the process for the adoption of regulatory standards, the Commission emphasises the unique character of the financial services sector, following from the Lamfalussy structure and explicitly recognised in Declaration 39 to the TFEU. However, the Commission has serious doubts whether the restrictions on its role when adopting delegated acts and implementing measures are in line with Articles 290 and 291 TFEU."

5. Detailed explanation

5.1. Interaction and consistency between elements of the package

This Directive forms a package with the proposed Regulation [inserted by OP]. This package would replace Directives 2006/48/EC and 2006/49/EC. This means that both the Directive and the Regulation would each deal with both credit institutions and investment firms. Currently, the latter are merely 'annexed' to Directive 2006/48/EC by Directive 2006/49/EC. A large part of it merely contains references to Directive 2006/48/EC. Joining provisions applicable to both businesses in the package would therefore improve the readability of provisions governing them. Moreover, the extensive annexes of both Directives would be integrated into the enacting terms, hereby further simplifying their application.

Prudential regulations directly applicable to banks and investment firms are set out in the proposal for a Regulation. In the proposal for a Directive remain provisions concerning the authorisation of credit institutions and the exercise of the freedom of establishment and the free movement of services. This would not concern investment firms, as the corresponding rights and obligations are regulated by Directive 2004/39/EC ('MiFiD'). General principles of the supervision of credit institutions and investment firms, which are addressed to Member States and their competent authorities, would also remain in the Directive. This encompasses in particular the exchange of information, the distribution of tasks between home and host country supervisors and the exercise of sanctioning powers (which would be newly introduced). The Directive would still contain the provisions governing the supervisory review of credit institutions and investment firms by the competent authorities of the Member States. These provisions supplement the general prudential requirements set out in the Regulation for credit institutions and investment firms by individual arrangements that are decided by the competent authorities as a result of their ongoing supervisory review of each individual credit institution and investment firm. The range of such supervisory arrangements would be set out in the Directive since the competent authorities should be able to exert their judgment as to which arrangements should be imposed. This includes the internal processes within a credit institution or investment firm notably concerning the management of risks and the corporate governance requirements that are newly introduced.

5.2. Sanctions

Member States should provide that appropriate administrative sanctions and measures can be applied to breaches of the banking legislation. To this end, the Directive will require them to comply with the following minimum rules.

First, administrative sanctions and measures should apply to those natural or legal to credit institutions and to individuals responsible for a breach. This would include credit institutions, investment firms and individuals, where appropriate.

Second, in the case of a breach of key provisions of this Directive and the Regulation, a minimum set of administrative sanctions and measures should be available to competent authorities. This includes withdrawal of authorisation, cease and desist orders, public statement, dismissal of management, administrative pecuniary sanctions.

Third, the maximum level of administrative pecuniary sanctions laid down in national legislation should exceed the benefits derived from the violation if they can be determined and, in any case, should not be lower than the level provided for by the Directive (10% of the total annual turnover of the institution concerned in the case of a legal person, 5 millions euros or 10% of the annual income of an individual in the case of a natural person).

Fourth, the criteria taken into account by competent authorities when determining the type and level of the sanction to be applied in a particular case should include at least the criteria set out in the Directive (eg. benefits derived from the violation or losses caused to third parties, cooperative behaviour of the responsible person, etc).

Fifth, sanctions and measures applied should be published, as provided in this Directive.

Finally, appropriate mechanism should be put in place to encourage reporting of breaches within credit institutions and investment firms.

Criminal sanctions are not covered by this proposal.

5.3. Corporate Governance

The management body of a credit institution or investment firm as a whole should at all times commit sufficient time and possess adequate knowledge, skills and experience to be able to understand the business of the credit institution and its main risk exposures. All members of the management body should be of sufficiently good repute and possess individual qualities and independence of mind which enable them to constructively challenge and oversee the decisions of the management. To avoid group think and facilitate critical challenge, management boards of credit institutions should be sufficiently diverse as regards age, gender, geographical provenance, educational and professional background to present a variety of views and experiences. Gender balance is of particular importance to ensure adequate representation of demographical reality.

In order to have an effective risk oversight and control, the management body should be responsible and accountable for the overall risk strategy of the credit institution or investment firm and for the adequacy of the risk management systems, taking into account the credit institution's risk profile. Given the importance of sound risk management in credit institutions, the management body in its supervisory function should set up a separate risk committee to deal specifically with risk issues and prepare management body decisions on risk issues. The risk committee should assist the management body in its risk oversight role but the management body should remain finally accountable for risk strategy.

In order to provide a complete view on risk to senior management and to the management body, credit institutions and investment firms should have an independent risk management function which should be able to form an effective and holistic view of the whole range of risks in a credit institution. Risk management function should possess sufficient stature and authority to influence strategic risk-management decisions and have direct access to the management body.

5.4. Overreliance on external ratings

Credit institutions and investment firms are required to have their own sound credit granting criteria and credit decision processes in place. This applies irrespective of whether institutions grant loans to customers or whether they incur securitisation exposures. External credit ratings may be used as one factor among others in this process but shall not prevail. In particular, internal methodologies shall not rely solely or mechanistically on external ratings.

For the specific purposes of calculating regulatory bank capital requirements, rating agency assessments are, in certain instances, applied as a basis for differentiating capital requirements according to risks and not for determining the minimum required quantum of capital itself. The CRD framework as a whole provides banks with an incentive to use internal rather than external credit ratings even for purposes of calculating regulatory capital requirements.

The proposed provision would require credit institutions and investment firms with material credit risk exposure or a significant number of counterparties to develop and use internal models rather than the standardized approach which is relying on external ratings.

In addition, it is proposed that EBA publicly discloses, on an annual basis, information on the steps taken by institutions and by supervisory authorities to reduce overreliance on external ratings and reports on the degree of supervisory convergence in this regard.

5.5. Capital buffers

On the basis of Basel III, this proposal introduces two capital buffers on top of the requirements: a Capital Conservation Buffer and a countercyclical capital buffer.

The Capital Conservation Buffer amounts to 2,5% of risk weighted assets, applies at all times and has to be met with capital of highest quality.

It is aimed at ensuring institutions' capacity to absorb losses in stressed periods that may span a number of years. Institutions would be expected to build up such capital in good economic times. Those credit institutions that fall below the buffer target will face constraints on discretionary distributions of earnings until the target is reached.

The Countercyclical Capital buffer is intended to achieve the broader macro-prudential goal of protecting the banking sector and the real economy from the system-wide risks stemming from the boom-bust evolution in aggregate credit growth and more generally from any other structural variables and from the exposure of the banking sector to any other risk factors related to risks to financial stability. It will be applied by adjusting the size of the buffer range established by the conservation buffer by up to additional 2.5%.

The Countercyclical Capital Buffer is set by national authorities for loans provided to natural and legal persons within their Member State. It can be set between 0% and 2.5% of risk weighted assets and has to be met by capital of highest quality likewise. If justified, authorities can even set a buffer beyond 2.5%. The Countercyclical Capital Buffer will be required during periods of excessive credit growth and released in a downturn. The ESRB could issue recommendations for the buffer settings by national authorities and its monitoring, including instances where the buffer exceeds 2.5%. So long as the Countercyclical Capital Buffer is set below 2.5%, Member States have to mutually recognise and apply the capital charge to banks in their Member State. For parts of the buffer exceeding 2.5%, authorities can choose if they accept the judgement of their peers and apply the higher rate or leave it at 2.5% for institutions authorised in their Member State.

Credit institutions and investment firms whose capital falls below the buffers will be subject to restrictions on the distribution of profits, payments on Additional Tier 1 instruments and the award of variable remuneration and discretionary pension benefits. In addition, these institutions will have to submit capital conservation plans to the supervisory authorities to ensure a swift replenishment of the buffers.

2011/0203 (COD)

Proposal for a

DIRECTIVE OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL

on the access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms and amending 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

(Text with EEA relevance)

THE EUROPEAN PARLIAMENT AND THE COUNCIL OF THE EUROPEAN UNION,

Having regard to the Treaty on the Functioning of the European Union, and in particular Article 53(1) thereof,

Having regard to the proposal from the European Commission,

After transmission of the draft legislative act to the national Parliaments,

Having regard to the opinion of the European Central Bank [14],

Having regard to the opinion of the European Data Protection Supervisor [15],

Acting in accordance with the ordinary legislative procedure,

Whereas:

(1) Directive 2006/48/EC of the European Parliament and of the Council of 14 June 2006 [16] relating to the taking up and pursuit of the business of credit institutions and Directive 2006/49/EC of the European Parliament and of the Council of 14 June 2006 [17] on the capital adequacy of investment firms and credit institutions ("institutions") have been significantly amended on several occasions. Many provisions of Directives 2006/48/EC and 2006/49/EC are applicable to both credit institutions and investment firms. For the sake of clarity and in order to ensure a coherent application of those provisions, it would be desirable to merge these provisions into new legislation applicable to both credit institutions and investment firms. For greater accessibility, the provisions of the Annexes to those Directives should be integrated into the enacting terms of this new legislation.

(2) The new legislation should consist of two different legal instruments. This Directive should contain the provisions governing the authorisation of the business, the acquisition of qualifying holdings, the exercise of the freedom of establishment and of the freedom to provide services, the powers of supervisory authorities of home and host Member States in this regard and the provisions governing the initial capital and the supervisory review of credit institutions and investment firms. The main objective and subject-matter of this Directive is to coordinate national provisions concerning the access to the activity of credit institutions and investment firms, the modalities for their governance, and their supervisory framework. Apart from these provisions, Directives 2006/48/EC and 2006/49/EC also contained prudential requirements for credit institutions and investment firms. These requirements should be provided for in a Regulation establishing uniform and directly applicable prudential requirements for credit institutions and investment firms, since such requirements are closely related to the functioning of financial markets in respect of a number of assets held by credit institutions and investment firms. This Directive should therefore be read together with that Regulation. Both legal instruments together should form the legal framework governing banking activities and the prudential rules for credit institutions and investment firms.

(3) The general prudential requirements laid down in Regulation [inserted by OP] are supplemented by individual arrangements to be decided by the competent authorities as a result of their ongoing supervisory review of each individual credit institution and investment firm. The range of such supervisory arrangements should be set out in this Directive and the competent authorities should be able to exert their judgment as to which arrangements should be imposed. With regard to such individual arrangements concerning liquidity, competent authorities should take into account the principles set out in the guidelines on liquidity published by the Committee of European Banking Supervisors [18].

(4) Directive 2004/39/EC of the European Parliament and of the Council of 21 April 2004 on markets in financial instruments [19] allows investment firms authorised by the competent authorities of their home Member State and supervised by the same authorities to establish branches and provide services freely in other Member States. That Directive accordingly provides for the coordination of the rules governing the authorisation and pursuit of the business of investment firms. It does not, however, establish the amounts of the initial capital of such firms or a common framework for monitoring the risks incurred by them, which should be provided by this Directive.

(5) This Directive should constitute the essential instrument for the achievement of the internal market from the point of view of both the freedom of establishment and the freedom to provide financial services in the field of credit institutions.

(6) The smooth operation of the internal market requires not only legal rules but also close and regular cooperation and significantly enhanced convergence of regulatory and supervisory practices between the competent authorities of the Member States.

(7) Regulation (EU) No 1093/2010 of the European Parliament and of the Council of 24 November 2010 establishing a European Supervisory Authority (European Banking Authority), [20] established EBA. This Directive should take into account the role and function of EBA set out in that Regulation and the procedures to be followed when conferring tasks to EBA.

(8) Measures to coordinate the supervision of credit institutions should, both in order to protect savings and to create equal conditions of competition between these institutions, apply to all of them. Due regard should however be had to the objective differences in their statutes and their proper aims as laid down by national laws.

(9) The scope of measures should therefore be as broad as possible, covering all institutions whose business is to receive repayable funds from the public, whether in the form of deposits or in other forms such as the continuing issue of bonds and other comparable securities and to grant credits for their own account. Exceptions should be provided for in the case of certain credit institutions to which this Directive does not apply. The provisions of this Directive should not affect the application of national laws which provide for special supplementary authorisations permitting credit institutions to carry on specific activities or undertake specific kinds of operations.

(10) It is appropriate to effect harmonisation which is necessary and sufficient to secure the mutual recognition of authorisation and of prudential supervision systems, making possible the granting of a single licence recognised throughout the Union and the application of the principle of home Member State prudential supervision.

(11) The principles of mutual recognition and home Member State supervision require that Member States' competent authorities should not grant or should withdraw an authorisation where factors such as the content of the activities programmes, the geographical distribution of activities or the activities actually carried on indicate clearly that a credit institution has opted for the legal system of one Member State for the purpose of evading the stricter standards in force in another Member State within whose territory it carries on or intends to carry on the greater part of its activities. Where there is no such clear indication, but the majority of the total assets of the entities in a banking group are located in another Member State, the competent authorities of which are responsible for exercising supervision on a consolidated basis, responsibility for exercising supervision on a consolidated basis should be changed only with the agreement of those competent authorities.

(12) The competent authorities should not authorise or continue the authorisation of a credit institution where they are liable to be prevented from effectively exercising their supervisory functions by the close links between that institution and other natural or legal persons. Credit institutions already authorised should also satisfy the competent authorities in respect of those close links.

(13) The reference to the supervisory authorities' effective exercise of their supervisory functions covers supervision on a consolidated basis which should be exercised over a credit institution or investment firm where the provisions of Union law so provide. In such cases, the authorities applied to for authorisation should be able to identify the authorities competent to exercise supervision on a consolidated basis over that credit institution or investment firm.

(14) Credit institutions authorised in their home Member States should be allowed to carry on, throughout the Union, any or all of the activities listed in Annex I to this Directive by establishing branches or by providing services.

(15) It is appropriate to extend mutual recognition to the activities listed in Annex I to this Directive when they are carried out by financial institutions which are subsidiaries of credit institutions, provided that such subsidiaries are covered by the consolidated supervision of their parent undertakings and meet certain strict conditions.

(16) The host Member State should be able, in connection with the exercise of the right of establishment and the freedom to provide services, to require compliance with specific provisions of its own national laws or regulations on the part of institutions not authorised as credit institutions in their home Member States and with regard to activities not listed in Annex I to this Directive provided that, on the one hand, such provisions are not already covered by Regulation [inserted by OP], are compatible with Union law and are intended to protect the general good and that, on the other hand, such institutions or such activities are not subject to equivalent rules under this legislation or regulations of their home Member States.

(17) Beyond Regulation [inserted by OP] that establishes directly applicable prudential rules for credit institutions and investment firms, Member States should ensure that there are no obstacles to carrying on activities receiving mutual recognition in the same manner as in the home Member State, as long as the latter do not conflict with legal provisions protecting the general good in the host Member State.

(18) The rules governing branches of credit institutions having their head office outside the Union should be analogous in all Member States. It is important to provide that such rules may not be more favourable than those for branches of credit institutions from another Member State. The Union should be able to conclude agreements with third countries providing for the application of rules which accord such branches the same treatment throughout its territory. The branches of credit institutions authorised in third countries should not enjoy the freedom to provide services or the freedom of establishment in Member States other than those in which they are established.

(19) Agreement should be reached, between the Union and third countries with a view to allowing the practical exercise of consolidated supervision over the largest possible geographical area.

(20) Responsibility for supervising the financial soundness of a credit institution, and in particular its solvency should lie with its home Member State. The supervision of market risk should be the subject of close cooperation between the competent authorities of the home and host Member States.

(21) Host Member State authorities should obtain information about activities carried out in their territories. Supervisory measures should be taken by the home Member State authorities unless the host authorities have to take precautionary emergency measures.

(22) The smooth operation of the internal banking market requires not only legal rules but also close and regular cooperation and significantly enhanced convergence of regulatory and supervisory practices between the competent authorities of the Member States. To this end, consideration of problems concerning individual credit institutions and the mutual exchange of information should take place through EBA. That mutual information procedure should in no case replace bilateral cooperation. Competent authorities of the host Member States should always be able, in an emergency, on their own initiative or following the initiative of the competent authorities of home Member State, to verify that the activities of a credit institution established within their territories comply with the relevant laws and with the principles of sound administrative and accounting procedures and adequate internal control.

(23) It is appropriate to allow the exchange of information between the competent authorities and authorities or bodies which, by virtue of their function, help to strengthen the stability of the financial system. In order to preserve the confidential nature of the information forwarded, the list of addressees should remain within strict limits.

(24) Certain behaviour, such as fraud or insider trading offences, is liable to affect the stability, including the integrity, of the financial system. It is necessary to specify the conditions under which exchange of information in such cases is authorised.

(25) Where it is stipulated that information may be disclosed only with the express agreement of the competent authorities, these should be able to make their agreement subject to compliance with strict conditions.

(26) Exchanges of information between, the competent authorities and central banks and other bodies with a similar function in their capacity as monetary authorities and, where appropriate, other public authorities responsible for supervising payment systems and departments of central government administrations should also be authorised.

(27) For the purposes of strengthening the prudential supervision of institutions and the protection of clients of credit institutions, auditors should have a duty to report promptly to the competent authorities, wherever, during the performance of their tasks, they become aware of certain facts which are liable to have a serious effect on the financial situation or the administrative and accounting organisation of an institution. For that same reason Member States should also provide that such a duty applies in all circumstances where such facts are discovered by an auditor during the performance of his tasks in an undertaking which has close links with a credit institution. The duty of auditors to communicate, where appropriate, to the competent authorities certain facts and decisions concerning an institution which they discover during the performance of their tasks in a non-financial undertaking should not in itself change the nature of their tasks in that undertaking nor the manner in which they should perform those tasks in that undertaking.

(28) In order to ensure compliance by institutions, those who effectively control their business and the members of the institutions' management body with the obligations deriving from this Directive and from Regulation [inserted by OP] and to ensure that they are subject to similar treatment across the Union, Member States should be required to provide for administrative sanctions and measures which are effective, proportionate and dissuasive. Therefore, administrative sanctions and measures set out by Member States should satisfy certain essential requirements in relation to addressees, criteria to be taken into account when applying a sanction or measure, publication of sanctions or measures, key sanctioning powers and levels of administrative pecuniary sanctions.

(29) In particular, competent authorities should be empowered to impose pecuniary sanctions which are sufficiently high to offset the benefits that can be expected and to be dissuasive even for larger institutions and their managers.

(30) In order to ensure a consistent application of sanctions across Member States, when determining the type of administrative sanctions or measures and the level of administrative pecuniary sanctions, Member States should be required to ensure that the competent authorities take into account all relevant circumstances.

(31) In order to ensure sanctions have a dissuasive effect on the public at large, sanctions should normally be published, except in certain well-defined circumstances.

(32) In order to detect potential breaches, competent authorities should have the necessary investigatory powers, and should establish effective mechanisms to encourage reporting of potential or actual breaches. These mechanisms should be without prejudice to adequate safeguards for accused persons.

(33) This Directive should refer to both administrative sanctions and measures in order to cover all actions applied after a violation is committed, and which are intended to prevent further infringements, irrespective of their qualification as a sanction or a measure under national law.

(34) This Directive should be without prejudice to any provisions in the law of Member States relating to criminal sanctions.

(35) Member States should ensure that credit institutions and investment firms have internal capital that, having regard to the risks to which they are or may be exposed, is adequate in quantity, quality and distribution. Accordingly, Member States should ensure that credit institutions and investment firms have strategies and processes in place for assessing and maintaining the adequacy of their internal capital.

(36) Competent authorities should be entrusted with ensuring that institutions have a good organisation and adequate own funds, having regard to the risks to which the institutions are or might be exposed. In this context, competent authorities of Member States may also take into account the risks to which part of the balance sheets of the institutions is exposed, in order to set the adequate own funds.

(37) To ensure that credit institutions which are active in several Member States are not disproportionately burdened as a result of the continued responsibilities of individual Member State competent authorities as regards authorisation and supervision, it is essential to significantly enhance the cooperation between competent authorities. In this context, the role of the consolidating supervisor should be strengthened. EBA should support and enhance such cooperation.

(38) In order to ensure comprehensive market discipline across the Union, it is appropriate that competent authorities publish information concerning the carrying on of the business of credit instititions and investment firms. Such information should be sufficient to enable a comparison of the approaches adopted by the different competent authorities of the Member States and complement requirements found in the Regulation regarding disclosure of technical information by institutions.

(39) Supervision of institutions on a consolidated basis aims at protecting the interests of the depositors and investors of institutions and at ensuring the stability of the financial system. In order to be effective, supervision on a consolidated basis should therefore be applied to all banking groups, including those the parent undertakings of which are not credit institutions or investment firms. Member States should provide competent authorities with the necessary legal instruments to enable them to exercise such supervision.

(40) In the case of groups with diversified activities where parent undertakings control at least one subsidiary, the competent authorities should be able to assess the financial situation of a credit institution or investment firm in such a group. The competent authorities should at least have the means of obtaining from all undertakings within a group the information necessary for the performance of their function. Cooperation between the authorities responsible for the supervision of different financial sectors should be established in the case of groups of undertakings carrying on a range of financial activities.

(41) The Member States should be able to refuse or withdraw a banking authorisation in the case of certain group structures considered inappropriate for carrying on banking activities, because such structures cannot be supervised effectively. In this respect the competent authorities should have the necessary powers to ensure the sound and prudent management of credit institutions.

(42) The mandates of competent authorities should take into account, in an appropriate way, the Union dimension. Competent authorities should therefore duly consider the effect of their decisions on the stability of the financial system in all other Member States concerned. Subject to national law, that principle should serve to promote financial stability across the Union and should not legally bind competent authorities to achieve a specific result.

(43) Weaknesses in corporate governance in a number of institutions have contributed to excessive and imprudent risk-taking in the banking sector which led to the failure of individual institutions and systemic problems in Member States and globally. The very general provisions on governance of institutions and the non-binding nature of a substantial part of the corporate governance framework, based essentially on voluntary codes of conduct, did not facilitate the effective implementation of sound corporate governance practices by institutions. The absence of effective checks and balances within institutions resulted in a lack of effective oversight of management decision-making, which exacerbated short-term and excessively risky management strategies. The unclear role of the competent authorities in overseeing corporate governance systems in institutions did not allow for sufficient supervision of the effectiveness of the internal governance processes.

(44) In order to address the potentially detrimental effect of poorly designed corporate governance arrangements on the sound management of risk, Member States should introduce principles and standards to ensure effective oversight by the management body, promote a sound risk culture at all levels of credit institutions and investment firms and enable competent authorities to monitor the adequacy of internal governance arrangements. These principles and standards should apply taking into account the nature, scale and complexity of institutions' activities.

(45) In order to effectively monitor management actions and decisions, the management body of an institution should commit sufficient time to perform its functions and to be able to understand the business of the institution, its main risk exposures and the implications of the business and the risk strategy. Combining a too high number of directorships at the same time would preclude a member of the management body to spend adequate time for the performance of this oversight role. Therefore, it is necessary to limit the number of mandates a member of the management body of an institution may hold at the same time in different entities.

(46) The lack of monitoring by boards of management decisions is partly due to the phenomenon of group think. This phenomenon is, among other reasons, caused by a lack of diversity in boards' composition. To facilitate independent opinions and critical challenge, management bodies of institutions should therefore be sufficiently diverse as regards age, gender, geographical provenance, educational and professional background to present a variety of views and experiences. Gender balance is of particular importance to ensure adequate representation of population. More diverse boards should more effectively monitor management and therefore contribute to improved risk oversight and resilience of institutions. Therefore, diversity should be one of the criteria of board composition.

(47) Remuneration policies which encourage excessive risk-taking behaviour can undermine sound and effective risk management of credit institutions and investment firms. G-20 committed to implement the Financial Stability Board (FSB) Principles for Sound Compensation Practices and Implementing Standards (the FSB principles and standards) which address the potentially detrimental effect of poorly designed remuneration structures on the sound management of risk and control of risk-taking behaviour by individuals. This Directive aims at implementing international principles and standards at European level by introducing an express obligation for credit institutions and investment firms to establish and maintain, for categories of staff whose professional activities have a material impact on the risk profile of credit institutions and investment firms, remuneration policies and practices that are consistent with effective risk management.

(48) In order to ensure that credit institutions and investment firms have in place sound remuneration policies, it is appropriate to specify clear principles on governance and on the structure of remuneration policies. In particular, remuneration policies should be aligned with the risk appetite, values and long-term interests of the credit institution or investment firm. For this purpose, the assessment of the performance-based components of remuneration should be based on longer-term performance and take into account the current and future risks associated with that performance. In order to ensure that the design of remuneration policies is integrated in the risk management of the credit institution, the management body, in its supervisory function, should adopt and periodically review the remuneration policies in place. The provisions on remuneration reflect differences between different types of credit institutions and investment firms in a proportionate manner, according to their size, internal organisation and the nature, scope and complexity of their activities and, in particular, it could not be proportionate for certain types of investment firms to comply with all of the principles.

(49) Since poorly designed remuneration policies and incentive schemes are capable of increasing to an unacceptable extent the risks to which credit institutions and investment firms are exposed, prompt remedial action and, if necessary, appropriate corrective measures should be taken. Consequently, it is appropriate to ensure that competent authorities have the power to impose qualitative or quantitative measures on the relevant entities that are designed to address problems that have been identified in relation to remuneration policies in the supervisory review.

(50) The provisions on remuneration should be without prejudice to the full exercise of fundamental rights guaranteed by Article 153(5) of the TFEU, general principles of national contract and labour law, legislation regarding shareholders’ rights and involvement and the general responsibilities of the management bodies of the institution concerned, as well as the rights, where applicable, of the social partners to conclude and enforce collective agreements, in accordance with national law and customs.

(51) Capital requirements for credit risk and market risk should be based on external credit ratings only to the extent necessary. Where credit risk is material, institutions should therefore generally seek to implement internal ratings based approaches or internal models. However, standardised approaches that rely on external ratings could be used where credit risk is less material, which is typically the case for less sophisticated institutions, for immaterial exposure classes, or in situations where using internal approaches would be overly burdensome.

(52) With respect to the supervision of liquidity, responsibility should lie with home Member States as soon as detailed criteria for the liquidity coverage requirement apply. It is therefore necessary to accomplish the coordination of supervision in this field in order to introduce supervision by the home Member State by that time. In order to ensure effective supervision, home and host country authorities should further cooperate in the field of liquidity.

(53) Where within a group liquid assets in one institution will under stress circumstances match liquidity needs of another member of that group, competent authorities should exempt an institution from liquidity coverage requirements and should apply those requirements on a consolidated basis instead.

(54) Measures taken according to Directive 2001/24/EC of the European Parliament and of the Council of 4 April 2001 on the reorganisation and winding up of credit institutions [21] should not conflict with measures taken on the basis of this Directive. Supervisory measures should not lead to discrimination among creditors from different Member States.

(55) In the light of the financial crisis and the pro-cyclical mechanisms that contributed to its origin and aggravated its effect, the FSB, the BCBS, and the G20 made recommendations to mitigate the pro-cyclical effects of financial regulation. In December 2010, BCBS issued new global regulatory standards on bank capital adequacy, including rules requiring the maintenance of capital conservation and countercyclical capital buffers.

(56) It is therefore appropriate to require credit institutions and investment firms to hold, in addition to other own fund requirements, a Capital Conservation Buffer and a Countercyclical Capital Buffer to ensure that credit institutions and investment firms accumulate during periods of economic growth a sufficient capital base to absorb losses in stressed periods. The Countercyclical Capital Buffer would be built up when aggregate credit growth is judged to be associated with a build-up of system-wide risk, and drawn down during stressed periods.

(57) In order to ensure that countercyclical buffers properly reflect the risk to the banking sector of excessive credit growth, credit institutions and investment firms should calculate their institution specific buffers as a weighted average of the counter-cyclical buffer rates that apply for the countries where their credit exposures are located. Every Member State should therefore designate an authority responsible for quarterly setting the level of the Countercyclical Capital Buffer rate for exposures located in that Member State. That buffer rate should take into account the growth of credit levels and changes to the ratio of credit to GDP in that Member State, and any other variables relevant to the risks to financial stability.

(58) In order to promote international consistency in setting Countercyclical Capital Buffer rates, BCBS has developed a methodology on the basis of the ratio between credits and GDP. This should serve as a common starting point for decisions on buffer rates by the relevant national authorities, but should not give rise to an automatic buffer setting or bind the designated authority. In particular, designated authorities could also take into account structural variables and the exposure of the banking sector to any other risk factors related to risks to financial stability.

(59) In order to achieve coherent application and to assure macro-prudential oversight across the Union, it is appropriate that the European Systemic Risk Board (ESRB) develops principles tailored for the Union economy and is responsible for monitoring their application. This Directive should not prevent the ESRB from taking any actions it deems necessary under Regulation (EU) No 1092/2010 of the European Parliament and of the Council of 24 November 2010 on European Union macro-prudential oversight of the financial system and establishing a European Systemic Risk Board. [22]

(60) It is appropriate that decisions of Member States on countercyclical buffer rates are coordinated as far as possible. In this regard, the ESRB, if requested by national authorities, could facilitate discussions among them about their proposed buffer settings. In order to promote a consistent approach to the factors on which designated authorities base those decisions, and to ensure that the setting of countercyclical buffer rates is consistent with the fundamental principles of the internal market, designated authorities should also be required to notify the ESRB and the EBA whenever they take into account variables other than the deviation of the ratio of credit-to-GDP from its long term trend and related guidance from the ESRB, and as a result set a buffer rate that is higher than it would have been if those variables had not been taken into account. The purpose of such notification should be for the ESRB and the EBA to assess the nature of those variables and the consistency of the setting of the buffer rate with the internal market principles.

(61) Where a credit institution or investment firm fails to meet in full the requirements for a Capital Conservation Buffer and any additional countercyclical buffer, it should be subject to measures designed to ensure that it restores its levels of own funds in a timely manner. In order to conserve capital, it is appropriate to impose proportionate restrictions on discretionary distributions of profits, including dividend payments and payments of variable remuneration. So as to ensure that such institutions or firms have a credible strategy to restore levels of own funds, they should be required to draw up and agree with the competent authorities a capital conservation plan that sets out how the restrictions on distributions will be applied and other measures that the institution or firm intends to take to ensure compliance with the full buffer requirements.

(62) Technical standards in financial services should ensure consistent harmonisation and adequate protection of depositors, investors and consumers across the Union. As a body with highly specialised expertise, it would be efficient and appropriate to entrust EBA with the elaboration of draft regulatory and implementing technical standards which do not involve policy choices, for submission to the Commission.

(63) The Commission should adopt the draft regulatory technical standards developed by EBA in the areas of authorisation of and acquisitions of significant holdings in credit institutions, information exchange between competent authorities, exercise of the freedom of establishment and the freedom of services, supervisory collaboration, governance, remuneration policies and internal control mechanisms of credit institutions and investment firms, Supervision of mixed financial holding companies, and supervisory review by means of delegated acts pursuant to Article 290 TFEU and in accordance with Articles 10 to 14 of Regulation (EU) No 1093/2010.

(64) The Commission should also be empowered to adopt implementing technical standards in the areas of authorisation of and acquisitions of significant holdings in credit institutions, information exchange between competent authorities, supervisory collaboration, specific prudential requirements, and disclosure of information by supervisory authorities by means of implementing acts pursuant to Article 291 TFEU and in accordance with Article 15 of Regulation (EU) No 1093/2010. EBA should be entrusted with drafting implementing technical standards for submission to the Commission.

(65) In order to ensure uniform conditions for the implementation of this Directive, implementing powers should be conferred on the Commission. Those powers should be exercised in accordance with Regulation (EU) No 182/2011 of the European Parliament and of the Council on laying down the rules and general principles concerning mechanisms for control by the Member States of the Commission's exercise of implementing powers [23].

(66) In order to specify the requirements set out in this Directive, the power to adopt acts in accordance with Article 290 of the TFEU should be delegated to the Commission in respect of clarifying the definitions and the terminology used in this Directive, expanding the list of activities subject to mutual recognition in the Annex, improving the exchange of information concerning branches of credit institutions, and adjusting the provisions dealing with their internal arrangements, processes and mechanisms. It is of particular importance that the Commission carry out appropriate consultations during its preparatory work, including at expert level.

(67) The Commission, when preparing and drawing up delegated acts, should ensure a simultaneous, timely and appropriate transmission of relevant documents to the European Parliament and Council.

(68) 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) [24] is relevant when qualifying holdings in a credit institution are acquired;

(69) References in existing national laws, regulations and administrative provisions to the Directives repealed by this Directive should be construed as references to this Directive.

(70) Directive 2007/64/EC of the European Parliament and of the Council of 13 November 2007 on payment services in the internal market amending Directives 97/7/EC, 2002/65/EC, 2005/60/EC and 2006/48/EC and repealing Directive 97/5/EC [25], 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 securities (UCITS) [26], Directive 2009/110/EC of the European Parliament and of the Council of 16 September 2009 on the taking up, pursuit and prudential supervision of the business of electronic money institutions amending Directives 2005/60/EC and 2006/48/EC and repealing Directive 2000/46/EC [27], Directive 2002/87/EC of the European Parliament and of the Council of 16 December 2002 on the supplementary supervision of credit institutions, insurance undertakings and investment firms in a financial conglomerate [28], and Directive [AIFMD] of the European Parliament and of the Council on Alternative Investment Fund Managers and amending directives 2003/41/EC and 2009/65/EC refer to provisions of Directives 2006/48/EC and 2006/49/EC that deal with own funds requirements and are now set out in Regulation [inserted by OP]. Consequently, references in those Directives to Directives 2006/48/EC and 2006/49/EC should be construed as references to the provisions governing own funds requirements in that Regulation.

(71) In order to allow for technical standards to be developed in order to ensure that institutions that are part of a financial conglomerate apply the appropriate calculation methods for the determination of required capital on a consolidated basis, Directive 2002/87/EC needs to be amended accordingly.

(72) In order for the internal banking market to operate with increasing effectiveness and for citizens of the Union to be afforded adequate levels of transparency, it is necessary that competent authorities publish in a way which allows for meaningful comparison the manner in which this Directive is implemented.

(73) With respect to the supervision of liquidity, there should be a period of time within which Member States effect transition towards the regulatory regime under which detailed criteria for the liquidity coverage requirement apply.

(74) Directive 95/46 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 [29] and Regulation (EU) No 45/2001 of the European Parliament and of the Council of 18 December 2000 on the protection of individuals with regard to the processing of personal data by the EU institutions and bodies and and on the free movement of such data [30], should be fully applicable to the processing of personal data for the purposes of this Directive.

(75) Since the objectives of this Directive, namely the introduction of rules concerning the access to the activity of the business of credit institutions, and the prudential supervision of credit institutions and investment firms, cannot be sufficiently achieved by the Member States and can therefore, by reason of the scale and the effects of the proposed action, be better achieved at European Union (hereinafter Union) level, the Union may adopt measures, in accordance with the principle of subsidiarity as set out in Article 5 of the Treaty on the European Union. In accordance with the principle of proportionality, as set out in that Article, this Directive does not go beyond what is necessary in order to achieve those objectives.

(76) The obligation to transpose this Directive into national law should be confined to those provisions which represent a substantive change as compared with earlier Directives.

(77) Directive 2006/48/EC relating to the taking up and pursuit of the business of credit institutions and Directive 2006/49/EC of the European Parliament and of the Council of 14 June 2006, should therefore be repealed,

HAVE ADOPTED THIS DIRECTIVE:

TABLE OF CONTENTS

Title I Subject matter, scope and definitions (...)29

Title II Competent authorities (...)32

Title III Requirements for access to the activity of the business of credit institutions (...)34

Chapter 1 General requirements for access to activity of the business of credit institutions (...)34

Chapter 2 Qualifying holding in a credit institution (...)39

Title IV Initial capital of investment firms (...)45

Title V Provisions concerning the freedom of establishment and the freedom to provide services (...)48

Chapter 1 General Principles (...)48

Chapter 2 The right of establishment of credit institutions (...)49

Chapter 3 Exercise of the freedom to provide services (...)52

Chapter 4 Powers of the competent authorities of the host Member State (...)53

Title VI Relations with third countries (...)56

Title VII Prudential supervision (...)58

Chapter 1 Principles of prudential supervision (...)58

Section I Competence of home and host Member State (...)58

Section II Exchange of information and professional secrecy (...)63

Section III Duty of persons responsible for the legal control of annual and consolidated accounts (...)68

Section IV Supervisory powers, power of sanction and right of appeal (...)69

Chapter 2 Review Processes (...)75

Section I Internal capital adequacy assessment process (...)75

Section II Arrangements, processes and mechanisms of institutions (...)75

Sub-Section 1 General principles (...)75

Sub-Section 2 Technical criteria concerning the organisation and treatment of risks (...)77

Sub-Section 3 Governance (...)83

Section III Supervisory review and evaluation process (...)90

Section IV Supervisory measures (...)95

Section V Level of application (...)97

Chapter 3 Supervision on a consolidated basis (...)99

Section I Principles for conducting supervision on a consolidated basis (...)99

Section II Financial holding companies and mixed financial holding companies (...)108

Chapter 4 Capital Buffers (...)112

Section I Capital Conservation and Countercyclical Capital Buffers (...)112

Section II Setting and calculating Countercyclical Capital Buffers (...)114

Section III Capital conservation measures (...)121

Title VIII Disclosure by competent authorities (...)125

Title IX Powers of Execution (...)128

Title X Amendments of Directive 2002/87/EC (...)130

Title XI Transitional and final provisions (...)131

Chapter 1 Transitional provisions on the supervision of credit institutions exercising the freedom of establishment and the freedom to provide services (...)131

Chapter 2 Transitional provision on capital buffers (...)135

Chapter 3 Final provisions (...)137

Annex I List of activities subject to mutual recognition (...)139

Annex II Correlation Table (...)141

Title I

Subject matter, scope and definitions

Article 1

Subject matter

This Directive lays down rules requiring Member States to achieve common results in the following areas:

(a) access to the activity of credit institutions and investment firms (hereinafter referred to as institutions);

(b) supervisory powers and tools for the prudential supervision of institutions by competent authorities;

(c) the prudential supervision of institutions by competent authorities in relation to risks not addressed by the uniform rules set out in Regulation [inserted by OP].

(d) publication requirements for competent authorities in the field of prudential regulation and supervision of institutions.

Article 2

Scope

1. Article 34 and Title VII, Chapter 3 shall apply to financial holding companies, mixed financial holding companies and mixed-activity holding companies which have their head offices in the Union;

2. The institutions to which this Directive does not apply pursuant to Paragraph 3 of this Article, with the exception, however, of the central banks, shall be treated as financial institutions for the purposes of Article 34 and Title VII, Chapter 3.

3. This Directive shall not apply to the following:

(1) access to the activity of investment firms in so far as it is regulated by Directive 2004/39/EC;

(2) central banks,

(3) post office giro institutions,

(4) in Belgium, the ‘Institut de Réescompte et de Garantie/Herdiscontering- en Waarborginstituut’,

(5) in Denmark, the ‘Dansk Eksportfinansieringsfond’, the ‘Danmarks Skibskredit A/S’ and the ‘KommuneKredit’,

(6) in Germany, the ‘Kreditanstalt für Wiederaufbau’, undertakings which are recognised under the ‘Wohnungsgemeinnützigkeitsgesetz’ as bodies of State housing policy and are not mainly engaged in banking transactions, and undertakings recognised under that law as non-profit housing undertakings,

(7) in Greece, the ‘Ταμείο Παρακαταθηκών και Δανείων’ (Tamio Parakatathikon kai Danion),

(8) in Spain, the ‘Instituto de Crédito Oficial’,

(9) in France, the ‘Caisse des dépôts et consignations’,

(10) in Ireland, credit unions and the friendly societies,

(11) in Italy, the ‘Cassa depositi e prestiti’,

(12) in Latvia, the ‘krājaizdevu sabiedrības’, undertakings that are recognised under the ‘krājaizdevu sabiedrību likums’ as cooperative undertakings rendering financial services solely to their members,

(13) in Lithuania, the ‘kredito unijos’ other than the ‘Centrinė kredito unija’,

(14) in Hungary, the ‘Magyar Fejlesztési Bank Rt.’ and the ‘Magyar Export-Import Bank Rt.’,

(15) in the Netherlands, the ‘Nederlandse Investeringsbank voor Ontwikkelingslanden NV’, the ‘NV Noordelijke Ontwikkelingsmaatschappij’, the ‘NV Industriebank Limburgs Instituut voor Ontwikkeling en Financiering’ and the ‘Overijsselse Ontwikkelingsmaatschappij NV’,

(16) in Austria, undertakings recognised as housing associations in the public interest and the ‘Österreichische Kontrollbank AG’,

(17) in Poland, the ‘Spółdzielcze Kasy Oszczędnościowo — Kreditowe’ and the ‘Bank Gospodarstwa Krajowego’,

(18) in Portugal, ‘Caixas Económicas’ existing on 1 January 1986 with the exception of those incorporated as limited companies and of the ‘Caixa Económica Montepio Geral’,

(19) in Finland, the ‘Teollisen yhteistyön rahasto Oy/Fonden för industriellt samarbete AB’, and the ‘Finnvera Oyj/Finnvera Abp’,

(20) in Sweden, the ‘Svenska Skeppshypotekskassan’,

(21) in the United Kingdom, the National Savings Bank, the Commonwealth Development Finance Company Ltd, the Agricultural Mortgage Corporation Ltd, the Scottish Agricultural Securities Corporation Ltd, the Crown Agents for overseas governments and administrations, credit unions and municipal banks;

(22) in Slovenia, the “SID-Slovenska izvozna in razvojna banka, d.d. Ljubljana”.

Article 3

Prohibition for undertakings other than credit institutions from carrying on the business of taking deposits or other repayable funds from the public

1. Member States shall prohibit persons or undertakings that are not credit institutions from carrying on the business of taking deposits or other repayable funds from the public.

2. Paragraph 1 shall not apply to the taking of deposits or other funds repayable by a Member State or by a Member State's regional or local authorities or by public international bodies of which one or more Member States are members or to cases expressly covered by national or Union legislation, provided that those activities are subject to regulations and controls intended to protect depositors and investors and applicable to those cases.

Article 4

Definitions

1. The definitions referred to in Article 4 of Regulation [inserted by OP] shall apply.

2. For the purposes of this Directive, the following definitions shall also apply:

(a) ‘ancillary services undertaking’ means an undertaking the principal activity of which consists in owning or managing property, managing data-processing services, or any other similar activity which is ancillary to the principal activity of one or more credit institutions;

(b) 'risk of excessive leverage’ means the risk resulting from an institution’s vulnerability due to leverage or contingent leverage that may require unintended corrective measures to its business plan, including distressed selling of assets which might result in losses or in valuation adjustments to its remaining assets;

(c) 'internal approaches' means the approaches referred to in Articles 138 (1), , 216, 220, 301 (2), 277, 352, and 254 (3) of Regulation [inserted by OP].

Title II

Competent authorities

Article 5

Designation and powers of the competent authorities

1. Member States shall designate competent authorities that carry out the duties provided for in this Directive. They shall inform the Commission and EBA thereof, indicating any division of duties.

2. Member States shall ensure that the competent authorities monitor the activities of institutions so as to assess compliance with the requirements of this Directive and Regulation [inserted by OP].

3. Member States shall ensure that the appropriate measures are in place to enable the competent authorities to obtain the information needed to assess the compliance of institutions with those obligations.

4. Member States shall ensure that the competent authorities have the expertise, resources, operational capacity and independence necessary to carry out the supervisory and investigative functions set out in this Directive and Regulation [inserted by OP]. Competent authorities shall be given all supervisory and investigatory powers that are necessary for the exercise of their functions.

5. Member States shall require that institutions provide the competent authorities of their home Member States with all the information necessary for the assessment of their compliance with the rules adopted in accordance with this Directive and Regulation [inserted by OP]. Member States shall also ensure that internal control mechanisms and administrative and accounting procedures of the institutions permit the verification of their compliance with such rules at all times.

6. Member States shall ensure that institutions shall register all their transactions and document systems and processes, which are subject to this Directive and Regulation [inserted by OP] in such a manner that the competent authorities are able to verify compliance with the requirements of this Directive and Regulation [inserted by OP] at all times.

Article 6

Coordination within Member States

Where Member States have more than one competent authority for the prudential supervision of credit institutions, investment firms and financial institutions, Member States shall take the requisite measures to organise coordination between such authorities.

Article 7

Cooperation with EBA

In the exercise of their duties, the competent authorities shall take into account the convergence in respect of supervisory tools and supervisory practices in the application of the laws, regulations and administrative requirements adopted pursuant to this Directive. For that purpose, Member States shall ensure that:

(a) the competent authorities participate in the activities of EBA;

(b) competent authorities make every effort to comply with those guidelines and recommendations issued by EBA in accordance with Article 16 of Regulation (EU) No. 1093/2010;

(c) national mandates conferred on the competent authorities do not inhibit the performance of their duties as members of EBA or under this Directive and Regulation [inserted by OP].

Article 8

European dimension of supervision

The competent authorities in one Member State shall, in the exercise of their general duties, duly consider the potential impact of their decisions on the stability of the financial system in all other Member States concerned and, in particular, in emergency situations, based on the information available at the relevant time.

Title III

Requirements for access to the activity of credit institutions

Chapter 1

General requirements for access to the activity of credit institutions

Article 9

Authorisation

1. Member States shall require credit institutions to obtain authorisation before commencing their activities. Without prejudice to Articles 10 to 14, they shall lay down the requirements for such authorisation and notify EBA.

2. EBA shall develop draft regulatory technical standards on the following:

(a) specifying the information to be provided to the competent authorities in the application for the authorisation of credit institutions, including the programme of operations provided for in Article 10;

(b) specifying the conditions to comply with the requirement set out in Article 13;

(c) specifying the requirements applicable to shareholders and members with qualifying holdings;

(d) specifying obstacles which may prevent effective exercise of the supervisory functions of the competent authority, as provided for in Article 14.

Power is delegated to the Commission to adopt the regulatory technical standards referred to in points (a) to (d) of the first subparagraph in accordance with the procedure laid down in Articles 10 to 14 of Regulation (EU) No 1093/2010.

3. EBA shall develop draft implementing technical standards on standard forms, templates and procedures for such provision of information.

Power is conferred on the Commission to adopt the implementing technical standards referred to in the first subparagraph in accordance with Article 15 of Regulation (EU) No 1093/2010.

4. EBA shall submit the draft technical standards referred to in paragraphs 2 and 3 to the Commission by 31 December 2015.

Article 10

Programme of operations and structural organisation

Member States shall require applications for authorisation to be accompanied by a programme of operations setting out the types of business envisaged and the structural organisation of the credit institution.

Article 11

Economic needs

Member States shall not require the application for authorisation to be examined in terms of the economic needs of the market.

Article 12

Initial capital

1. Without prejudice to other general conditions laid down by national law, the competent authorities shall not grant authorisation when the credit institution does not possess separate own funds or in cases where initial capital is less than EUR 5 million.

2. Initial capital shall comprise capital and reserves as referred to in Article 24 (a) to (e) of Regulation [inserted by OP].

3. Member States may decide that credit institutions which do not fulfil the requirement of separate own funds and which were in existence on 15 December 1979 may continue to carry on their business. They may exempt such credit institutions from complying with the requirement contained in the first subparagraph of Article 13(1).

4. Member States may, subject to the following conditions, grant authorisation to particular categories of credit institutions the initial capital of which is less than that specified in paragraph 1:

(a) the initial capital shall be no less than EUR 1 million;

(b) the Member States concerned shall notify the Commission and EBA of their reasons for exercising that option.

Article 13

Effective direction of the business and place of the head office

1. Competent authorities shall grant an authorisation to the credit institution only when there are at least two persons who effectively direct the business of the credit institution.

They shall not grant authorisation if these persons are not of sufficiently good repute or lack sufficient knowledge, skills and experience to perform such duties.

2. Each Member State shall require that:

(a) any credit institution which is a legal person and which, under its national law, has a registered office shall have its head office in the same Member State as its registered office;

(b) any other credit institution shall have its head office in the Member State which granted its authorisation and in which it actually carries on its business.

Article 14

Shareholders and members

1. The competent authorities shall not grant authorisation for commencing the activity of credit institutions unless they have been informed of the identities of the shareholders or members, whether direct or indirect, natural or legal persons, that have qualifying holdings, and of the amounts of those holdings.

In determining whether the criteria for a qualifying holding are fulfilled, the voting rights referred to in Articles 9 and 10 of Directive 2004/109/EC [31], as well as the conditions regarding aggregation thereof laid down in Article 12(4) and (5) of that Directive shall be taken into account.

Member States shall not take into account voting rights or shares which investment firms or credit institutions may hold as a result of providing the underwriting of financial instruments or placing of financial instruments on a firm commitment basis included under point 6 of Section A of Annex I to Directive 2004/39/EC, provided that those rights are not exercised or otherwise used to intervene in the management of the issuer, and disposed of within one year of acquisition.

2. The competent authorities shall not grant authorisation if, taking into account the need to ensure the sound and prudent management of a credit institution, they are not satisfied as to the suitability of the shareholders or members.

3. Where close links exist between the credit institution and other natural or legal persons, the competent authorities shall grant authorisation only if those links do not prevent the effective exercise of their supervisory functions.

The competent authorities shall not grant authorisation where the laws, regulations or administrative provisions of a third country governing one or more natural or legal persons with which the credit institution has close links, or difficulties involved in the enforcement of those laws, regulations or administrative provisions, prevent the effective exercise of their supervisory functions.

The competent authorities shall require credit institutions to provide them with the information they require to monitor compliance with the conditions referred to in this paragraph on a continuous basis.

Article 15

Refusal of the authorisation

Where a competent authority decides not to grant an authorisation, it shall notify the applicant of the decision and the reasons thereof within six months of receipt of the application or, should the application be incomplete, within six months of the applicant sending the information required for the decision.

A decision shall, in any case, be taken within 12 months of the receipt of the application.

Article 16

Prior consultation with the competent authorities of other Member States

1. The competent authority shall, before granting authorisation to a credit institution, consult the competent authorities of the other Member State involved in the following cases:

(a) the credit institution concerned is a subsidiary of a credit institution authorised in another Member State;

(b) the credit institution concerned is a subsidiary of the parent undertaking of a credit institution authorised in another Member State;

(c) the credit institution concerned is controlled by the same persons, whether natural or legal, as control a credit institution authorised in another Member State.

2. The competent authority shall, before granting authorisation to a credit institution, consult the competent authority of a Member State involved, responsible for the supervision of insurance undertakings or investment firms in the following cases:

(a) the credit institution concerned is a subsidiary of an insurance undertaking or investment firm authorised in the Union;

(b) the credit institution concerned is a subsidiary of the parent undertaking of an insurance undertaking or investment firm authorised in the Union;

(c) the credit institution concerned is controlled by the same person, whether natural or legal, as controls an insurance undertaking or investment firm authorised in the Union.

3. The relevant competent authorities referred to in paragraphs 1 and 2 shall in particular consult each other when assessing the suitability of the shareholders and the reputation and experience of members of the management body involved in the management of another entity of the same group. They shall exchange any information regarding the suitability of shareholders and the reputation and experience of members of the management body which is of relevance for the granting of an authorisation as well as for the ongoing assessment of compliance with operating conditions.

Article 17

Branches of credit institutions authorised in another Member State

Host Member States shall not require authorisation or endowment capital for branches of credit institutions authorised in other Member States. The establishment and supervision of such branches shall be effected in accordance with Articles 35, 36(1)-(3), 37, 40 to 46 and 49, 73 and 74.

Article 18

Withdrawal of authorisation

The competent authorities may only withdraw the authorisation granted to a credit institution in any of the following cases where such an institution:

(a) does not make use of the authorisation within 12 months, expressly renounces the authorisation or has ceased to engage in business for more than six months, if the Member State concerned has made no provision for the authorisation to lapse in such cases;

(b) has obtained the authorisation through false statements or any other irregular means;

(c) no longer fulfils the conditions under which authorisation was granted;

(d) no longer possesses sufficient own funds or can no longer be relied on to fulfil its obligations towards its creditors, and in particular no longer provides security for the assets entrusted to it;

(e) falls within one of the other cases where national law provides for withdrawal of authorisation;

(f) commits one of the breaches referred to in Article 67(1).

Article 19

Name of credit institutions

For the purposes of exercising their activities, credit institutions may, notwithstanding any provisions in the host Member State concerning the use of the words ‘bank’, ‘savings bank’ or other banking names, use throughout the territory of the Union the same name that they use in the Member State in which their head office is situated. In the event of there being any danger of confusion, the host Member State may, for the purposes of clarification, require that the name be accompanied by certain explanatory particulars.

Article 20

Notification of the authorisation and withdrawal of authorisation to EBA

1. Competent authorities shall notify to EBA every authorisation granted under Article 9.

2. A list containing the name of each credit institution to which authorisation has been granted shall be published on EBA's website and updated regularly.

3. The consolidating supervisor shall provide the competent authorities concerned and EBA with all information regarding the group of institutions in accordance with Articles 14(3), 73(1) and 104(2), in particular regarding the legal and organisational structure of the group and its governance.

4. The name of each credit institution that does not have the capital specified in Article 12(1) shall be mentioned to that effect in the list.

5. The competent authorities shall notify each withdrawal of authorisation to EBA together with the reasons for such a decision.

Article 21

Exemptions for credit institutions permanently affiliated to a central body

1. Competent authorities may exempt a credit institution that meets the conditions laid down in Article 9 of Regulation [inserted by OP] from Article 10, 12 and 13(1) of this Directive, under the conditions set out in Article 9 of that Regulation.

2. In case of exemptions exercised by the competent authorities in accordance with Article 9 of Regulation [inserted by OP], Articles 17, 33, 34, 35, 36(1)-(3) and 39-46 of this Directive shall apply to the whole as constituted by the central body together with its affiliated institutions.

Chapter 2

Qualifying holding in a credit institution

Article 22

Notification and assessment of proposed acquisitions

1. Member States shall require any natural or legal person or such persons acting in concert (hereinafter referred to as the proposed acquirer), who have taken a decision either to acquire, directly or indirectly, a qualifying holding in a credit institution or to further increase, directly or indirectly, such a qualifying holding in a credit institution as a result of which the proportion of the voting rights or of the capital held would reach or exceed 20 %, 30 % or 50 % or so that the credit institution would become its subsidiary (hereinafter referred to as the proposed acquisition), first to notify in writing the competent authorities of the credit institution in which they are seeking to acquire or increase a qualifying holding, indicating the size of the intended holding and relevant information, as referred to in Article 23(4). Member States need not apply the 30 % threshold where, in accordance with Article 9(3)(a) of Directive 2004/109/EC, they apply a threshold of one-third.

2. The competent authorities shall, promptly and in any event within two working days following receipt of the notification, as well as following the possible subsequent receipt of the information referred to in paragraph 3, acknowledge receipt thereof in writing to the proposed acquirer.

The competent authorities shall have a maximum of sixty working days as from the date of the written acknowledgement of receipt of the notification and all documents required by the Member State to be attached to the notif