COMMISSION STAFF WORKING PAPER IMPACT ASSESSMENT
Date: 2011-07-20
Institutions: European Commission
Subjects: banking policy, credit institution, financial legislation, provision of services, right of establishment, speculative capital

EUROPEAN COMMISSION 

Brussels, 20.7.2011 
SEC(2011) 952 final 

COMMISSION STAFF WORKING PAPER 

IMPACT ASSESSMENT 

Accompanying the document 

Proposal for a 

DIRECTIVE OF THE EUROPEAN PARLIAMENT AND THE COUNCIL 

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

{COM(2011) 453 final} 
{SEC(2011) 953 final} 

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PART I  

SANCTIONS IN THE FINANCIAL SECTOR 

TABLE OF CONTENTS 

1. 

2. 

3. 

Introduction...................................................................................................................3 

Procedural Issues and Consultation of Interested Parties .............................................4 

Policy context, Problem definition and Subsidiarity ....................................................5 

3.1. 

Background and context ...............................................................................................6 

3.1.1.  Nature and size of the market concerned......................................................................6 

3.1.2.  Overview of legislative framework ..............................................................................6 

3.2. 

Problem definition ........................................................................................................7 

3.2.1.  Affected stakeholders .................................................................................................18 

3.2.2.  Baseline scenario ........................................................................................................18 

3.3. 

The EU's right to act and justification ........................................................................20 

3.3.1.  Subsidiarity and proportionality .................................................................................21 

4. 

5. 

Objectives ...................................................................................................................22 

Policy Options, impact analysis and comparison .......................................................23 

5.1. 

Options to approximate and reinforce the legal framework of sanctions ...................24 

5.1.1.  Options concerning appropriate administrative sanctions ..........................................24 

5.1.2.  Options concerning the personal scope of administrative sanctions ..........................38 

5.1.3.  Options concerning the publication of sanctions........................................................42 

5.2. 

5.3. 

Options concerning the framework for detection of violations ..................................46 

Preferred policy options..............................................................................................53 

5.3.1.  Cumulative impacts of the preferred options..............................................................54 

5.3.2. 

Impact on EU budget ..................................................................................................55 

6. 

Monitoring and Evaluation .........................................................................................55 

ANNEX I ..................................................................................................................................57 

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ANNEX II .................................................................................................................................63 

ANNEX III................................................................................................................................73 

ANNEX IV ...............................................................................................................................76 

ANNEX V.................................................................................................................................82 

ANNEX VI ...............................................................................................................................90 

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1. 

INTRODUCTION 

The "CRD IV" package is a comprehensive review of EU  banking prudential rules and 
supervisory arrangements, currently provided for in Directives 2006/48/EC1 (the Capital 
Requirements Directive) and 2006/49/EC2. It implements the international Basel accord 
on banking supervision. The key objective of the proposal is to address the shortcomings 
exposed during the financial crisis, to move towards a single rulebook regulating credit 
institutions  in  order  to  prevent  recent  problems  from  reoccurring  in  the  future,  and  to 
ensure that risks linked to the issues of financial instability and pro-cyclicality are more 
effectively contained.  

In order to achieve these objectives, the CRD IV proposal fundamentally overhauls  the 
substantive  prudential  rules  applicable  to  banks.  But  these  rules  will  only  achieve  their 
objective  if  they  are  effectively  and  consistently  enforced  throughout  the  EU.  This 
requires  that  competent  authorities  have  at  their  disposal  not  only  supervisory  powers 
allowing  them  to  effectively  oversee  credit  institutions  but  also  sufficiently  strict  and 
convergent  sanctioning  powers  to  respond  adequately  to  the  violations  which  may 
nevertheless occur, and prevent future violations.  

However, the banking sector is one of the areas where national sanctioning regimes are 
divergent and not always appropriate to ensure deterrence. 

In  its  Communication  of  9  December  2010  "Reinforcing  sanctioning  regimes  in  the 
financial  sector"3  the  Commission  presented  policy  orientations  on  how  to  promote 
convergence and reinforcement of national sanctioning regimes in the financial services 
sector. The Communication suggested EU legislative action may be necessary to set EU 
minimum  common  standards  on  certain  key  issues  of  sanctioning  regimes.  Such 
standards are to be developed in the framework of common basic principles but adapted 
to  the  specifics  of  the  different  sectors  and  EU  legislative  acts  in  the  financial  services 
area.  

This Impact Assessment provides an analysis of the possible measures that may be taken 
to approximate and reinforce sanctioning powers applicable to violations of the CRD. It 
builds  on  the  analysis  outlined  in  the  Impact  Assessment  accompanying  the  above-
mentioned  Communication,  and  focuses  in  greater  detail  on  the  issues  specific  to  the 
banking sector, and particularly the area covered by the CRD.4 

1 

2 

3 
4 

Council  and  Parliament  Directive  2006/48/EC  of  14  June  2006  relating  to  the  taking  up  and 
pursuit of the business of credit institutions, OJ L177/1 of 30 June 2006 
Council  and  Parliament  Directive  2006/49/EC  of  14  June  2006  on  the  capital  adequacy  of 
investment firms and credit institutions, OJ L177/201 of 30 June 2006 
COM(2010)716 final. 
For an overview of the interaction of this initiative with other initiatives in the Financial Services 
Sector see Annex VI. 

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It is a complement to the Impact Assessment for the “CRD IV” proposal. It supplements 
that  document  with  a  detailed  assessment  of  the  impact  of  the  provisions  relating  to 
sanctions contained in the proposal. 

2. 

PROCEDURAL ISSUES AND CONSULTATION OF INTERESTED PARTIES 

The  Communication  of  9  December  2010  "Reinforcing  sanctioning  regimes  in  the 
financial  sector"  (hereafter:  "the  Sanctions  Communication")  identified  a  number  of 
shortcomings  of  existing  sanctioning  regimes  in  the  banking,  insurance  and  securities 
sectors  (divergent  and  insufficiently  deterrent  sanctions),  it  explained  the  negative 
consequences  they  may  have  (lack  of  compliance  with  EU  legislation,  unlevel  playing 
field,  lack  of  trust  between  supervisors)  and  suggested  possible  EU  actions  to  achieve 
greater convergence and efficiency of national sanctioning regimes.  

The Sanctions Communication launched a public consultation on the problems identified 
and the policy actions envisaged. In line with the Commission's minimum standards, the 
consultation,  which  remained  open  for  eight  weeks,  covered  all  the  issues  addressed  in 
this  Impact  Assessment  (types  and  level  of  sanctions,  criteria  for  their  application, 
addresses  of  sanctions,  publication  of  sanctions,  mechanisms  supporting  effective 
application of sanctions such as whistleblowing).  

Concerning the banking sector, the Communication analysed the problems and the issues 
for possible EU actions based on a study carried out in 2008 by the European Committee 
of Banking Supervisors (hereunder: CEBS report)5, and provided information concerning 
the administrative sanctions laid down in national banking legislation and the actual use 
of sanctions by banking supervisors. This allowed stakeholders to comment on the issues 
specifically relevant in the banking sector. 

Indeed,  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  and  the  level  of  harmonisation  warranted  but  also  on  the  specific 
actions suggested and their potential benefits or disadvantages. A summary of the results 
of  the  consultation  is  enclosed  (Annex  1).  The  non  confidential  replies  are  being 
published in the Commission website together with a feedback statement on the results of 
the consultation. 

The  actions  envisaged  in  the  Sanctions  Communication  were  also  discussed  with 
Member States in the meeting of the Financial Services Committee held on 17 January 
2011. Member States, which will have to implement those actions, agreed on the need to 

5 

CEBS: "Mapping of supervisory objectives, including early intervention measures and sanctioning 
powers", March 2009/47, available on <http://www.c-ebs.org/home.aspx>. Information contained 
in  this  report  has  been  subsequently  updated  on  the  basis  of  the  contributions  received  from 
member States. 

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promote further convergence of national sanctioning regimes while underlying the need 
to be respectful of the different national legal frameworks and judicial systems. 

In  February  2011,  additional  information  has  been  collected  by  the  Commission  on 
sanctions  for  violations  of  the  CRD6,  which  supplements  and  updates  the  information 
contained in the CEBS report. This Impact Assessment is based on this information and 
the replies to the public consultation. 

An Impact Assessment Steering group was set up to steer the preparation of this Impact 
Assessment, comprising representatives from the Directorate General for Internal Market 
and  Services,  the  Directorate  General  for  Competition,  the  Directorate  General  for 
Economic and Financial Affairs, the Directorate General for Enterprise and Industry, the 
Directorate  General  for  Employment,  Social  Affairs  and  Inclusion,  the  Directorate 
General  for  Health  and  Consumers,  the  Directorate  General  for  Justice,  the  Directorate 
General  for  Home  Affairs,  the  Legal  Service  and  the  Secretariat  General.  The  Steering 
group met on 11 February, on 7 March and on 15 March. 

A draft Report was sent to the Impact Assessment Board on 21 March and discussed at 
the Board meeting of 13 April. Further to opinions of the Board of 15 April and 6 May, 
the following main changes have been implemented : the policy context of the measures 
proposed and their relation with the other provisions of the CRD IV package have been 
clarified (sections 1 and 5); the scope of the public consultation and its compliance with 
the  Commission's  minimum  standards  have  been  clarified  (section  2.1)  and  the 
stakeholders view better reflected in the report; in the problem definition (section 3.2) the 
analysis  of  enforcement  issues,  proportionality,  and  the  role  of  EBA  has  been  further 
developed; and it has been clarified how the existing divergences and weaknesses could 
lead  to  the  problems  identified,  including  by  strengthening  the  evidence  base  by  more 
recent  data  and  by  introducing  more  precise  references  to  the  replies  to  the  public 
consultation; the description and  the analysis of the policy options (section 5) has been 
developed  by  clarifying  how  types  and  level  of  sanctions    and  criteria  to  be  taken  into 
account will be established and linked to key violations, and by providing indications on 
the  administrative  costs  of  the  options  relating  to  effective  application.  In  addition,  the 
importance of the proposed intervention in light of the recent creation of EBA has been 
further  justified  (section  3),  the  analysis  of  all  factors  underlying  the  ineffectiveness  of 
sanctioning regimes has been further deepened (section 3), in the analysis of the policy 
options, further clarification has been provided on the content of the envisaged minimum 
harmonisation and the assessment of efficiency has been further explained (section 5). 

6 

Additional  information  has  been  received  for  twenty-three    Member  States.  Based  on  this 
information, tables in Annex IV provide an overview of the sanctions currently applicable to key 
violations of the CRD. 

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3. 

POLICY CONTEXT, PROBLEM DEFINITION AND SUBSIDIARITY 

3.1. 

Background and context 

This  Impact  Assessment  addresses  problems  relating  to  divergences  and  weaknesses  of 
administrative  sanctions.  It  is  without  prejudice  to  the  situation  concerning  criminal 
sanctions regimes in the field of CRD, which deserves further analysis. Following such 
analysis the Commission will decide on policy actions to be taken in this regard, based on 
a full assessment of the relevant impacts. 

3.1.1.  Nature and size of the market concerned 

The EU banking sector is a key sector in the EU economy (for a detailed description of 
the EU banking sector see Annex II). In relative terms, the EU banking sector is larger 
than  its  US  counterpart,  which  accounted  in  terms  of  assets  respectively  for  340%  of 
GDP and 92% of GDP in 2009. Until the outbreak of the crisis, the EU banking sector 
grew  steadily,  in  terms  of  total  assets,  to  reach  a  maximum  of  over  €45,000  bn  in  late 
2008. After this peak, it slightly declined to around €43,000 bn. 

The  EU  banking  sector  is  the  main  financing  source  for  the  real  economy.  It  is  also  a 
major contributor to the added value of our economies, and an important employer. As an 
illustration,  the  Euro  Area  financial  sector  generates  an  added  value  of  over  €400  bn 
(equivalent to 5% of GDP). In 2007, people working in the financial sector represented 
around 3% of the Euro Area workforce. 

The  European  financial  services  market  is  becoming  more  and  more  integrated, 
particularly  in  the  wholesale  financial  sector,  and  there  is  a  growing  number  of  large 
financial  groups  and  infrastructures  operating  on  a  pan-European  basis.  Although  the 
financial  crisis  led  to  increased  market  segmentation,  the  level  of  financial  integration 
remains high.  

The  banking  market  is  dominated  by  pan-European  groups  active  in  several  Member 
States,  whose  risk  management  functions  are  centralised  in  the  group's  headquarters. 
Currently around 70% of EU banking assets is in the hands of some 40 banking groups 
with  substantial  cross-border  activities.  Especially  in  the  EU-12,  banking  markets  are 
dominated by foreign (mostly Western European) financial groups (see Chart 2 in Annex 
II). In these countries, on average 65% of banking assets are in foreign-owned banks. In 
countries like Estonia, the Czech Republic and Slovakia, over 92% of banking assets are 
in foreign-owned banks. 

3.1.2.  Overview of legislative framework  

The  key  Directives  in  the  banking  sector  are  Directive  2006/48/EC  of  the  European 
Parliament and the Council of 14 June 2006, relating to the taking up and pursuit of the 
business of credit institutions and Directive 2006/49/EC of the European Parliament and 
the  Council  of  14  June  2006,  on  the  capital  adequacy  of  investment  firms  and  credit 
institutions.  The  “CRD  IV”  proposal,  of  which  the  provisions  on  sanctions  discussed 

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herein are an integral part, will substantially reframe these rules. This impact assessment 
refers  to  the  Capital  Requirements  Directive  (hereunder:  "the  CRD")  as  comprising  the 
Directives  referred  to  above  as  reframed  by  the  planned  CRD  IV  proposal,  which  is 
analysed in a separate Impact Assessment.  

Currently,  the  CRD  provides  some  limited  obligations  in  the  area  of  sanctions  (for  a 
description  of  these  obligations  see  Annex  IV)  and  leaves  considerable  discretion  for 
Member  States  as  to  the  type  and  level  of  sanctions  to  be  applied  for  violations  of  its 
requirements. .  

Effective,  proportionate  and  dissuasive  sanctions  are  of  relevance  to  ensure  respect  of 
three groups of key provisions of the CRD (for a detailed list of these key provisions see 
Annex IV):  

(1) 

(2) 

(3) 

Violations relating to prior authorisation, including unauthorised banking 
activity  and  authorisation  obtained  by  deceit  (e.g.  through  false 
statements); 

Violation  of  prudential  requirements,  including  violations  of  rules  on 
capital adequacy and limits on risk exposures and obligations relating to 
the governance of credit institutions;  

Violation  of  reporting  obligations,  including  the  obligations  to  publicly 
disclose  information  and  to  report  information  to  supervisors  on  capital 
as well as under CRD IV on liquidity and leverage. 

Annex IV provides also an overview of the sanctioning powers provided for by Member 
States in the transposition of the CRD in relation to these violations.  

3.2. 

Problem definition 

National sanctioning regimes currently in place for violations of the CRD are divergent 
and not always appropriate to ensure effective enforcement of CRD rules. 

First,  regulatory  problems  arise  from  the  legal  framework  of  sanctions.  Sanctions 
currently  laid  down  in  national  legislation  for  violations  of  authorisation  requirements, 
prudential  obligations  and  reporting  obligations  (see  Charts  1  to  6  in  Annex  IV)  and 
criteria  taken  into  account  in  their  application  (see  Table  1  in  Annex  IV)  vary  across 
Member States and in several Member States sanctions appear to be too weak to ensure 
sufficient deterrence. The existing divergences between sanctioning regimes partly reflect 
the  specificities  of  the  different  national  legal  systems  and  traditions  and  may  also  be 
explained  by  the  fact  that  certain  Member  States  have  more  experience  in  dealing  with 
violations  of  banking  legislation  or  give  more  political  priority  to  the  enforcement  of 
prudential  rules,  due  to  the  importance  of  their  financial  sector.  However,  divergences 
exist  even  between  Member  States  with  banking  sectors  of  a  similar  size  and  even 
between  geographically  adjacent  States  that  may  have  similar  legislative  cultures  (see 
Annex III). Moreover, taking into account the increasing integration of the EU banking 

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sector, where credit institutions operate in several Member  States, those reasons cannot 
justify that sanctions applied to the same type of violation in certain Member States are 
significantly lower that those applied in others. 

The fact that some Member States provide also for criminal sanctions does not seem to be 
the main reason for the differences identified. Indeed, the scope of criminal sanctions is 
much narrower: they are usually applied to individuals rather than to credit institutions7 
and  only  for  some  of  the  most  serious  violations  of  the  CRD.  Moreover,  for  some  key 
violations of the CRD, certain Member States have in place neither criminal sanctions nor 
strict administrative sanctions8. 

Second, the information  received on  the actual application of sanctions shows that in 
some Member States few sanctions or no sanctions at all, have been applied during the 
last years, which could be symptomatic of a weak enforcement of EU rules.  

The limited number of sanctions applied in the last years may be explained by few actual 
violations  but  it  may  also  be  due  to  insufficient  detection  of  violations  by  national 
authorities  or  by  the  difficulty  to  prove  those  violations.  Significant  divergences  on  the 
number of sanctions applied in Member States with similar banking sectors suggest that 
violations  of  CRD  rules  are  not  always  detected  and  sanctioned.  This  phenomenon  and 
the main problem drivers behind it have been described for financial services in general 
in  the  Impact  Assessment  for  the  Sanctions  Communication.  This  section  analyses  the 
specific problem drivers in relation to sanctioning regimes in the banking sector.  

Problem drivers 

A legal framework conducive to effective deterrence should enable competent authorities 
to use a combination of various levers, depending on the specific circumstances of each 
case, taking into account all key factors determining effective deterrence: 

• 

• 

• 

7 

8 

A  credible  threat  of  reputational  risk  for  violators  by  way  of  publication  of 
information on violations. 

A  credible  threat  of  pecuniary  sanctions  going  well  beyond  disgorgement  of 
benefits to remove any economic incentive for violations, including by offsetting 
the likelihood that a violation will remain undetected. 

A  credible  threat  to  ban  violators  –  be  it  banks  or  their  managers  -  from 
continuing the exercise of their professional activities. 

A majority of Member States can not fine credit institutions under a criminal regime: for instance, 
18 Member States cannot impose criminal fines for failure to report information and for violations 
concerning sound governance 
For instance, for violations concerning sound governance , 11 Member States have in place neither 
fines over 1 million nor imprisonment. 

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However,  today  the  legal  framework  of  sanctions  for  violations  of  the  CRD  varies 
widely across Member States and does not seem to be always appropriate to ensure that 
all  these  levers  can  be  used  and  sanctions  are  proportionate,  effective  and  sufficiently 
severe to deter credit institutions and their managers from infringing the CRD rules.  

First, in case of some key violations of the CRD, certain important sanctioning powers 
are  not  available  to  all  national  authorities  (for  more  detail  on  the  situation  in  Member 
States see Annex IV), including in Member States with large banking sector9.  

Supervision  of  compliance  with  prudential  legislation  by  credit  institutions  requires  a 
wide  range  of  sanctions  in  order  to  respond  adequately  to  infringements  ranging  from 
unauthorised  banking  operations  to  failure  to  meet  obligations  relating  to  reporting  of 
information, notification, organisation and capital requirements. A number of sanctioning 
powers are important to ensure that sanctions are sufficiently effective and deterrent. This 
is  confirmed  by  the  respondents  to  the  consultation  and  particularly  public  authorities, 
e.g. a Central Bank from a Member State, several supervisory authorities who considered 
that certain key sanctioning powers should be guaranteed by EU law in all EU Member 
States to ensure effective enforcement. .  

The  dismissal  of  the  responsible  persons  in  the  institution's  management  can  be  an 
effective  sanction  to  prevent  further  violations.  This  sanction  can  be  particularly 
appropriate  in  case  of  serious  and  repeated  violations  of  reporting  obligations.  Public 
reprimand or warning can have a considerable impact in a sector such  as banking, in 
which reputation is of crucial importance. For example, in case of violations of prudential 
requirements  relating  to  the  governance  of  a  credit  institution,  such  reprimands  or 
warnings  can  encourage  public  pressure  by  deposit  holders  and  investors  in  the  credit 
institution  to  adjust  its  governance  arrangements.  Significant  administrative  pecuniary 
sanctions  going  well  beyond  the  profits  accruing  from  an  infringement  can  be 
appropriate for example in case of violations relating to prior authorisation, and notably 
unauthorised provision of banking services, to deter unauthorised service providers from 
continuing their activity, which may be seriously detrimental to depositor's protection.  

However, these powers are not available in several Member States: 

•  Eight Member States do not provide for this type of sanction even in cases 
where credit institutions fail  to  report important financial information to the 
supervisory authorities.  

•  No  provision  is  made  for  a  public  reprimand  or  warning  in  seven  Member 

States. 

•  Ten  Member  States  do  not  provide  for  the  application  of  administrative 

pecuniary sanctions in case of violations relating to prior authorisation. 

9 

In  three  of  those  Member  States,  the  total  value  of  banks'  liabilities  is  higher  than  2,5  billions 
euros. 

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Second, the maximum levels of administrative pecuniary sanctions (fines) provided for 
in  national  legislation  vary  widely  across  Member  States  and  seem  too  low  in  some 
Member States.  

Administrative  pecuniary  sanctions  can  play  a  significant  role to  deter  violations  of  the 
CRD,  in  particular  by  offsetting  the  benefits  that  can  be  derived  from  it.10 
Complementing the supervision of banks by competent authorities, sufficiently high fines 
can  deter  credit  institutions  from  infringing  disclosure  obligations,  which  would  better 
ensure  that  supervisory  authorities  receive  all  the  information  necessary  for  them  to 
perform efficiently their activity.  

For  these  purposes  the  maximum  level  of  fines  must  be  considerably  higher  than  the 
benefit  that  can  be  expected  from  those  violations,  in  particular  because  the  potential 
offender  may  always  hope  that  the  infringement  will  remain  undetected  by  the 
authorities. To ensure that a fine has a sufficiently dissuasive effect on a rational market 
operator,  the  possibility  that  an  infringement  will  remain  undetected  must  be  offset  by 
imposing  fines  which  are  higher  than  the  benefit  that  the  undertaking  would  gain  from 
breaching the law. Certain violations of the CRD can lead to considerable benefits for a 
banking institution. For example, the benefits derived from unauthorised banking services 
engaged in at a large scale can reach several million Euros.11 Similarly, by not reporting 
disadvantageous financial  information to supervisory  authorities,  credit  institutions  may 
avoid the need to hold the necessary additional capital, leading to important cost savings. 
In  case  of  a  major  European  bank,  a  failure  to  report  information  can  lead  to  an 
underestimation by the supervisor of its risk-weighted assets. Such an underestimation of 
only  1%  can  reduce  the  minimum  capital  the  bank  must  hold  by  more  than  EUR  100 
million .12 In addition, in the banking sector, where a large number of potential offenders 
are cross-border financial institutions with very considerable turnover, sanctions of a few 
thousand euros are unlikely to be sufficiently deterrent. 

However,  in  several  Member  States  the  maximum  level  of  fines  that  competent 
authorities can apply is rather low:  

10 

11 

12 

Research on the level of fines and its relation to the level of enforcement, as well as on the optimal 
level  of  fines  includes  the  following:  John  C.  Coffee,  Law  and  the  Market:  The  Impact  of 
Enforcement,  Columbia  Law  and  Economics  Working  Paper  No.  304,  2007,  p.  13  ssq  (20 
September 2010); Uldis Cerpsa Greg Mathersb and Anete Pajustec: Securities Laws Enforcement 
in Transition Economies, p. 12 ssq., (20 September 2010); with a specific focus on another area 
(antitrust)  see  Wouter  Wils,  Optimal  Antitrust  fines  –  theory  and  practice,  World  Competition 
2006, p. 183, 199 ssq; Peik Granlund: Regulatory choices in global financial markets – restoring 
the  role  of  aggregate  utility  in  the  shaping  of  market  supervision,  Bank  of  Finland  Research 
Discussion  Papers  1,  2008,  p.  13  ssq;  CRA  International/City  of  London:  Assessing  the 
Effectiveness of Enforcement and Regulation, London, April 2009. 
See e.g. a recent case pursued by the FSA where the benefit derived by one individual was about 
2.5 million pounds, see FSA press release FSA/PN/111/2010 of 29 June 2010. 
Estimation for a bank holding EUR 300 000 000 000 of risk-weighted assets, based on a minimum 
capital requirement of 7%. For an analysis of the costs of capital requirements as amended by the 
CRD IV, see the main impact assessment on the CRD IV proposal. 

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•  In five Member States administrative fines laid down in national legislation 
are  unlimited  or  variable  and  in  nine  Member  States  are  at  over  EUR 
1 million while in seven Member States they are below EUR 150 000. 

•  For example, maximum fines applicable for violation of reporting obligations 
are less than EUR 100 000 in six Member States (updated data available for 
22  MS).  These  Member  States  would  be  unable  to  impose  a  fine  of  17,5 
million  pounds  (21,3  Million  Euros)  as  recently  imposed  by  the  FSA  on 
Goldman Sachs for violation of reporting obligations in relation to a failure to 
disclose  facts  relating  to  ongoing  investigations  in  the  US  to  the  UK 
authorities. 

•  For  example,  maximum  fines  for  violations  of  prudential  requirements 
relating to the governance of a credit institution do not exceed EUR 250 000 
in five Member States. These Member States would be unable to impose a 
fine of 4 million Euros as recently imposed by in France on Société Générale 
in  the  Kerviel  case  for  violations  of  prudential  requirements  relating  to  risk 
management13  

•  For  example,  maximum  fines  for  violations  relating  to  prior  authorisation, 
and  notably  unauthorised  provision  of  banking  services  vary  between  less 
than EUR 150 000 (with a maximum fine as low as EUR 50 000 in at least 
one  Member  State)  and  more  than  EUR  1  000  000  in  four  Member States 
(updated data available for 22 Member States).  

The result of these divergences, which concern almost all the violations of the CRD, is 
that all competent authorities are not able to apply sufficiently deterrent fines. 

The results of the public consultation show that several national governments, regulators 
and some industry representatives consider that the existing low level of fines, at least in 
some  Member  States  where  low  absolute  levels  are  laid  down  in  legislation,  cannot 
ensure sufficient deterrence in the internal market.  

Third,  the  criteria  taken  into  account  to  determine  the  type  and  the  level  of 
administrative  sanctions  to  be  imposed  in  a  particular  case  vary  substantially  and  some 

13 

Kerviel is a former trader for the French bank Société Générale who was convicted at first instance 
of breach of trust, forgery and unauthorized use of the bank's computer system for rogue bets that 
had  the  bank  teetering  near  collapse  when  the  trades  were  discovered  in  January  2008.  He  was 
sentenced in October 2010 to at least three years in prison, and was also ordered to pay restitution 
of  €4.9  billion.  Mr.  Kerviel  filed  an  appeal  against  the  judgment  which  is  still  pending.  Société 
Générale  has  acknowledged  management  failures  and  weaknesses  in  its  risk  control  system.  An 
internal audit published in May 2008 described Mr. Kerviel's immediate supervisors as "deficient" 
and acknowledged that the bank had failed to follow through on at least 74 internal trading alerts 
dating  from  mid-2006.  The  French  Banking  Commission  later  fined  Société  Générale  4  million 
euros. 

EN 

11 

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criteria which are important to ensure proportionality and deterrence of sanctions, are not 
always taken into account by competent authorities. 

A number of criteria are particularly relevant in the field of the CRD. Taking into account 
the  financial  strength14  of  the  author  of  a  violation  can  help  to  ensure  that  pecuniary 
sanctions  imposed  have  an  equivalent  effect  on  all  credit  institutions:  a  fine  of  a  small 
level,  while  being  clearly  dissuasive  for  certain  smaller  banking  institutions,  may  have 
only  a  very  limited  dissuasive  effect  for  some  of  the  larger  groups  operating  in  the 
banking sector. Therefore, when competent authorities have to calculate the actual fine to 
be  imposed  in  a  specific  case  (most  often  within  the  maximum  and/or  minimum  levels 
established  in  national  legislation)  they  should  consider  the  financial  capacity  of  the 
offender. Taking into account the benefits derived from a violation or the losses caused 
to  third  parties  by  a  violation  may  significantly  contribute  to  proportionality  and 
deterrence  of  the  sanctions  imposed  in  specific  cases.  Taking  into  account  the 
cooperation  of  the  author  of  a  violation  can  encourage  offenders  to  cooperate  and 
therefore increase the investigatory capacity of the authorities.  

However, these criteria are not taken into account by all Member States: 

•  Only seventeen Member States take into account the financial strength of a 

credit institution when determining the level of a fine imposed on it. 

•  Only  seventeen  Member  States  take  account  of  the  benefit/profit  derived 
from  the  offence.  Eighteen  Member  States  take  account  of  the  loss  caused 
by an infringement. 

•  Only twenty Member States take into account the cooperation of the author 

of a violation. 

The majority of the respondents to the consultation, including several public authorities 
and  stakeholders  of  the  banking  industry,  confirmed  that  those  criteria  should  be  taken 
into account by all competent authorities for the reasons explained above.  

Fourth, not all Member States can impose sanctions both on credit institutions and on 
individuals responsible for certain violations.  

As  the  CRD  imposes  obligations  on  credit  institutions,  sanctions  should  always  be 
applicable  to  those  institutions.  However,  in  areas  where  certain  individuals  within  a 
credit  institution  are  responsible  for  a  violation  by  that  institution,  there  should  be  the 
possibility  of  applying  sanctions  also  on  them.  For  example  in  case  of  violation  of 
prudential  requirements,  the  exclusion  of    individuals  from  sanctions  does  not  allow 

14 

The  financial  strength  of  an  undertaking  may  be  indicated  for  example  by  the  level  of  its  own 
funds,  its  turnover,  or  its  total  assets;  when  an  individual  is  responsible  for  the  violation,  his 
financial strength may be indicated by his annual income. The relevant factors to be considered are 
clarified in national legislation. 

EN 

12 

   EN 

 
                                                 
competent  authorities  to  choose  a  sanction  that  is  optimal  in  terms  deterrence:  .  a 
manager  of a credit institution who is essentially responsible for such a violation  is less 
likely to be discouraged from infringing the rules if he doesn't risk to be sanctioned for 
his illicit conduct because sanctions are applied to the credit institution only.  

•  However,  while  administrative  financial  sanctions  can  be  imposed  on  both 
natural  and  legal  persons  in  the  vast  majority  of  Member  States,  two 
Member States do not provide for the possibility to sanction natural persons. 

There  is  a  broad  consensus  in  the  public  consultation  (governments,  regulators,  and 
banking  industry)  that  competent  authorities  should  be  able  to  apply  sanctions  to  both 
credit institutions and individuals responsible for a violation in order to ensure effective 
compliance. In its response to the public consultation a bank highlighted that this would 
incentivise both natural and legal persons to take full account of their responsibilities and 
the implications of their actions. 

Fifth,  sanctions  are  not  published  on  a  systematic  basis  in  all  Member  States,  while 
publication  of  sanctions  may  have  a  strong  deterrent  effect  on  credit  institutions, 
especially when they concern violations of prudential requirements which may alert the 
public and raise concerns about the financial soundness or the proper management of a 
credit  institution.  For  example,  publication  of  sanctions  imposed  for  violations  of 
prudential  requirements  relating  to  the  governance  of  a  credit  institution  can  be 
appropriate  to  encourage  public  pressure  by  deposit  holders  and  investors  on  the  credit 
institution to adjust its governance arrangements.  

•  However,  only  twelve  Member  States  publish  sanctions  on  a  systematic 
basis, subject to certain exceptions (such as situations where publication may 
jeopardise financial stability).  

The responses received from the banking industry show that credit institutions consider 
the  publication  of  sanctions  as  one  of  the  most  deterrent  tools,  mainly  because  of  the 
reputational damage they will incur. In addition, consumers/investors association believe 
that wide publication of sanctions would help consumers and investors to take informed 
decision and "punish" indirectly wrongdoers by avoiding using their services. 

In  addition  to  these  divergences  and  weaknesses  of  the  legal  framework,  the  level  of 
application of sanctions is significantly divergent across the EU. 

The effectiveness, proportionality and dissuasiveness of sanctioning regimes depend not 
only on the sanctions provided for by law but also on their application. In addition to the 
provision for appropriate sanctions in national legislation, it is key for the effectiveness of 
sanctioning regimes to ensure that sanctions are actually applied when a violation occurs. 
The lack of sufficient and uniform actual enforcement across all EU 27 Member States 
was  listed  as  a  major  problem  by  several  respondents  in  the  public  consultation 
(governments, industry).  

EN 

13 

   EN 

 
There are important divergences in the number of sanctions applied by Member States in 
the last three years.  

In the period 2008-2010 out of 19 Member States for which data is available, 6 Member 
States imposed no sanction in at least one of those three years. Moreover, in 2010, at least 
5 Member States imposed no administrative fines during that year (3/6 Member States for 
2009; 6/9 Member States for 2008; see data in Annex III). 

Numbers  of  applied  sanctions  can  be  low  either  because  there  have  not  been  any 
violations,  or  because  violations  are  not  detected,  or  cannot  be  proven.  While  the  total 
absence  of  violations  in  some  Member  States  cannot  be  ruled  out  as  a  possibility,  it 
appears more likely that violations are not detected, especially when considering that in 
the same reference period a significantly different number of sanctions have been applied 
in  Member  States  having  banking  sectors  of  similar  size.  In  an  integrated  financial 
market,  economic  and  cultural  differences  alone  cannot  explain  such  divergences.  It  is 
therefore very likely that the divergent number of sanctions applied is due, at least partly, 
to poor enforcement of EU rules 

Poor enforcement may be due to a number of reasons, mainly related to the organisation 
and  functioning  of  national  administration.  For  instance,  lack  of  human  and  financial 
resources  devoted  to  the  activities  of  national  supervisory  authorities  or  lack  of 
appropriate training of persons carrying out investigations may make it difficult to detect 
violations.  Moreover,  insufficient  application  of  sanctions  might  be  the  result  of  the 
difficulty to prove certain violations of financial services rules, the strict rules on burden 
of proof, and possibly the lack of specific expertise in the field of financial services of the 
national authorities responsible for the application of sanctions.  

Since the CRD leaves the application of sanctions in the responsibility of Member States, 
in line with the principle of subsidiarity, this initiative focuses on the problems linked to 
the  investigative  tools  which  are  necessary  to  facilitate  detection  of  violations  and 
therefore  improve  the  application  of  sanctions.  In  particular,  the  information  available 
shows that a majority of Member States do not have in place any mechanism encouraging 
persons  who  are  aware  of  potential  violations  of  the  CRD  to  report  those  violations 
within  a  financial  institution  or  to  the  competent  authorities  (whistle  blowing).  While 
some industry representatives raised doubts on the appropriateness of an EU mechanism, 
almost all respondents to the consultation agreed that whistle blowing is an important tool 
to  facilitate  detection  of  violations.  Indeed,  whistleblowing  programmes  have  been 
successful  across  sectors  within  the  EU  and  in  other  jurisdictions.  For  example,  on  the 
basis of an internal whistleblowing programme, OLAF, the European Anti-Fraud Office, 
has received important pieces of information – for example in five cases in 2008.15 In the 
US, the SEC reports that in 2009 in 303 cases investigations were triggered by tips.16 

Consequences of the problem drivers – specific problems 

15 
16 

http://ec.europa.eu/anti_fraud/reports/olaf/2008/EN.pdf 
http://www.sec.gov/about/secpar/secpar2010.pdf#performance 

EN 

14 

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First,  weak  and  divergent  sanctioning  regimes  risk  being  insufficiently  deterrent  to 
prevent  violations  of  the  CRD,  which  can  result  in  a  lack  of  compliance  with  the  EU 
bank capital rules.  

A  study  carried  out  on  a  set  of  countries  including  nine  Member  States  confirms  that 
"enforcement  actions  do  have  a  statistically  significant  disciplinary  effect  upon  banks. 
Therefore,  it  is  corroborated  that  by  imposing  direct  or  reputation  costs  upon  banks, 
supervisory  sanctions  contribute  considerably  to  constraining  banks’  risk-taking 
appetite."17 

Lack  of  important  sanctioning  powers  and  appropriate  criteria  for  the  application  of 
sanctions may send the message that consequences of illegal behaviours are not serious, 
which will not discourage such behaviours. This view was expressed by the majority of 
respondents in the public consultation on the Communication on sanctions (governments, 
some industry representatives, consumers/investors associations). 

•  When  competent  authorities  cannot  issue  orders  to  put  an  end  the  unauthorised 
provision of banking services, there is a risk that the providers of those services would 
not be discouraged to continue this activity, from which they may be very profitable 
for them. 

•  When sanctions are not published on a regular basis and competent authorities are not 
empowered  to  issue  public  warning,  credit  institutions  will  not  fear  risks  to  their 
reputation  and  possible  loss  of  customers  if  they  infringe  prudential  requirements. 
Therefore  they  will  not  be  encouraged  to  take  all  the  measures  necessary  to  prevent 
violations of those requirements. 

•  When  the  maximum  amount  of  the  pecuniary  sanctions  is  very  low  and  the  level  of 
those sanctions is not linked to the benefits derived from a violation of the CRD, there 
is a high risk that they will not have a sufficiently dissuasive effect, as the perceived 
reward  from  such  behaviour  will  far  outweigh  the  real  risk.  In  addition,  even  in 
Member  States  where  the  level  of  pecuniary  sanctions  provided  for  by  national 
legislation  is  sufficiently  high,  if  competent  authorities  calculate  the  amount  of  the 
sanction to be imposed in a specific case without taking into account criteria such as 
the  financial  strength  of  the  author  of  the  violation,  there  is  a  risk  that  sanctions 
actually applied will not be deterrent for larger groups operating in the banking sector.  

•  When  the  managers  of  a  credit  institution  responsible  for  ensuring  compliance  with 
reporting  obligations  cannot  be  dismissed  even  in  case  of  serious  and  repeated 
violations of those obligations, they could not be discouraged enough from repeating 
such violations.  

17 

"On-site audits, sanctions, and bank risk-taking: An empirical overture towards a novel regulatory 
and supervisory philosophy"; Delis, Manthos D and Staikouras, Panagiotis 17. August 2009 

EN 

15 

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Second,  divergences  and  weaknesses  in  national  sanctioning  regimes  may  also  prevent 
the development of a level playing field within the Internal Market, where cross-border 
groups  have  a  considerable  market  share  in  EU  banking  markets  (see  section  3.1.1 
above).  Unequal  treatment  of  violations  in  different  Member  States  may  result  in 
different costs for credit institutions, which along with other regulatory divergences risks 
creating  competitive  disadvantages  for  institutions  from  certain  Member  States.  The 
importance  of  such  cost  differences  is  illustrated  by  the  fact  that,  as  indicated  above, 
failures  by  major  banks  to  report  information  to  the  supervisor,  which  lead  to  an 
underestimation  of  only  1%  by  the  supervisor  of  the  bank's  risk-weighted  assets,  can 
reduce the minimum capital the bank must hold by more than EUR 100 million. Unequal 
treatment  of  violations  may  encourage  credit  institutions  operating  branches  or 
subsidiaries in several Member States to exploit differences between sanctioning regimes 
in different Member States.  

•  For example, a credit institution operating under the CRD regime in Member State A 
may exploit the fact that if it breaches reporting requirements it will be subject to fines 
exceeding several millions of Euros, whereas a subsidiary of the same company based 
in  Member  State  B  under  the  same  regime  may  be  subject  to  fines  of  no  more  than 
EUR 15 000.  

The  responses  sent  by  several  supervisors  and  stakeholders  from  the  financial  industry 
(including  a  bank  and  an  association  of  banks)  show  that  they  share  concerns  about 
possible competitive distortions and see a risk of regulatory arbitrage linked to divergent 
and  weak  sanctioning  regimes.  This  is  also  confirmed  by  research  investigating  the 
factors influencing international bank flows18. 

Third,  divergences  of  sanctioning  regimes  risk  having  a  negative  impact  on  effective 
supervision of cross border banks. This is particularly important given the considerable 
number  of  credit  institutions  operating  in  the  EU  which  are  structured  as  cross-border 
groups. 

Cooperation and trust between supervisors is key to ensure effective supervision of cross-
border banks. Partly as a response to the serious failings in the cooperation, coordination, 
consistency  and  trust  among  national  supervisors  exposed  by  the  crisis,  colleges  of 
supervisors  have  been  set  up  under  the  CRD  (Art  131a)  to  ensure  coordination  of 
supervision  for  cross-border  groups  and  to  facilitate  among  others  the  exchange  of 
information and the consistent application of prudential requirements across the banking 
group. However, if national supervisors are not equipped with equivalent and consistent 

18 

Regulatory  Arbitrage  and  International  Bank  Flows,  Joel  F.  Houston  University  of  Florida  - 
Department of Finance, Insurance and Real Estate; Chen Lin Chinese University of Hong Kong 
(CUHK)  -  Department  of  Finance;  Yue  Ma    Lingnan  University,  Hong  Kong  -  December  18, 
2009),  this  research  found  evidence  "suggesting  that  a  type  of  regulatory  arbitrage  has  taken 
place where banks have transferred funds to markets with fewer banking regulations", taking into 
account both banking rules and their enforcement. 

EN 

16 

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powers,  including  sanctioning  powers,  there  is  a risk  that  the  decisions  agreed  within  a 
college will not be applied in a consistent way by the supervisors concerned.  

•  For example, the authorities of Member State A may be reluctant to rely on 
the  completeness  of  information  collected  by  authorities  in  a  college  from 
Member State B, if it is clear that in Member State B violations of reporting 
requirements cannot be sanctioned effectively.  

•  For example, if in a college of supervisors, the authorities of Member States 
A, B and C agreed to replace the managers of a bank at central and subsidiary 
level  because  of  failures  at  both  levels,  the  authority  of  Member  State  A 
would apply the measure without difficulty, the authority of Member State B 
would need the cooperation of other national authorities and the authority of 
Member  State  C  would  be  unable  to  do  anything,  because  it  lacks  the 
necessary power.  

In  addition,  supervisors  can  delegate  some  of  their  supervisory  tasks  to  supervisory 
authorities  in  the  college  from  other  Member  States  (Art.  28  of  Regulation  No  (EU) 
1093/2010 establishing a European Banking Authority). However, a national supervisory 
authority could be unwilling to delegate powers to an authority in another Member States 
in which the sanctioning regime is considerably weaker. 

Moreover,  in  relation  to  cross-border  groups  structured  by  way  of  branches,  the  CRD 
confers powers for the supervision of those branches to the home Member State. Such 
arrangements,  which  are  key  to  the  functioning  of  the  internal  market  for  banking 
services, may be put into doubt if sanctioning regimes in home Member States are weak, 
and host Member States can therefore not rely on effective enforcement of the CRD by 
the  home  Member  State.  For  example,  in  response  to  the  consultation,  one  supervisory 
authority  explicitly  reported  that  it  has  experienced  situations  where  it  has  identified 
violations as a host Member State but the competent home Member State has not acted 
effectively.19 

General problems  

Insufficiently deterrent sanctions leading to lack of compliance with the EU bank capital 
rules,  unlevel  playing  field  and  ineffective  supervision  risks  seriously  undermining 
proper functioning of banking markets, which can be detrimental to the protection of 
deposit-holders and investors, whether they are consumers or undertakings and can also 
negatively  affect  the  whole  economy.  Indeed,  if  prudential  rules  are  not  complied  with 
and  effective  supervision  of  cross-border  banking  groups  is  not  ensured,  credit 
institutions could take excessive risks in their activity. As shown by the financial crisis, 
this may cause serious economic damages to investors and deposit holders and to safety 
and stability of financial markets, which in turn can have serious negative repercussions 
on  the  whole  economy.  Similarly,  proper  functioning  of  banking  markets  could  be 

19 

However, the authority has not clarified the reasons of that lack of effective action. 

EN 

17 

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undermined  if credit  institutions  may  take  competitive advantages from  the weaknesses 
and the divergences of sanctioning regimes. 

This  situation  also  risks  undermining  confidence  in  the  banking  sector,  where 
consumers  see  that  illegal  behaviour  is  not  met  with  appropriate  sanctions  which  are 
capable  of  discouraging  further  infringements.  If  consumers  have  the  impression  that 
even  major  financial  institutions  are  not  sufficiently  stable  to  fulfil their  obligations  for 
any financial instruments they issue, they will not invest in such instruments. Consumers 
will be reluctant to shop around Europe if they feel that the level of protection of deposit 
holders is significantly different in different Member States.  

3.2.1.  Affected stakeholders  

The following stakeholders may be affected by EU action aiming at approximating and 
reinforcing sanctioning regimes for violations of the CRD:  

–  credit institutions, including their stakeholders; 

–  employees of credit institutions; 

–  depositors-holders  and  investors,  including  retail  consumers  and  non  financial 

companies;  

–  public  authorities,  including  central  banks,  supervisors  and  other  national  authorities 

in charge of the application of sanctions. 

3.2.2.  Baseline scenario 

The baseline scenario would be one in which no action is taken. The EU would continue 
to rely on the existing national sanctioning regimes, which are divergent both in terms of 
the  available  sanctioning  powers  and  their  application,  and  are  sometimes  not 
sufficiently dissuasive.  

The provisions on sanctions already contained in the CRD would be maintained. Member 
States would be therefore obliged to ensure that sanctions regimes are in place, but they 
would be free to decide how to achieve this result.  

As regards convergence of sanctioning powers available to competent authorities, they 
will  have  to  ensure  that  competent  authorities  have  at  their  disposal  some  sanctioning 
powers provided for in the CRD, for instance the power to withdraw the authorisation in 
the cases listed in Article 17 of Directive 2006/48/EC or the power to take measures to 
put  an  end  to  the  unlawful  situation  deriving  from  the  violation  of  the  obligations  on 
acquisition of qualifying holdings.  

However,  those  provisions  are  limited  in  scope  and  could  hardly  ensure  that  effective, 
proportionate and sufficiently deterrent sanctions are in place in all Member States.  

EN 

18 

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As  regards  convergence  on  the  application  of  these  sanctioning  powers,  the  baseline 
scenario takes into account the recent creation of the European Banking Authority (EBA) 
on 1 January 201120, which should enhance the previous coordination work of the CEBS, 
predecessor  to  the  EBA.  The  EBA  would  continue  such  work  and  could  play  an 
important role in increasing the coherence and monitoring of the application of sanctions. 
In particular, the EBA has powers to 

– 

– 

– 

carry out peer reviews of national sanctioning regimes, and receive information 
about  sanctions  applied  by  national  authorities;  those  powers  can  be  used  in 
order  to  monitor  national  legislation  and  to  promote  exchange  of  information 
and  best  practices  between  Member  States  in  relation  to  the  application  of 
sanctions,  which  is  expected  to  improve  the  overall  application  track  record  of 
competent authorities;  

settle  disagreements  between  national  authorities,  where  in  cross-border  cases 
the  application  of  sanctions  requires  cooperation  and  exchange  of  information 
between    supervisory  authorities  from  more  than  one  Member  State;  this  is 
expected  to  improve  the  application  of  sanctions  in  cases  of  cross-border 
banking groups; 

issue  guidelines  and  recommendations  on  the  application  of  sanctions  by 
national  authorities;  this  is  expected  to  make  administrative  practices  more 
convergent.  

However, the EBA powers are limited to coordinate application of sanctions by national 
supervisors, while sanctioning powers are made available to those authorities by national 
legislators  .EBA  will  be  unable  to  tackle  deficiencies  of  sanctioning  powers  framed  by 
national  legislators,.  Moreover,  without  a  stronger  convergence  in  national  supervisors' 
sanctioning powers, coherence in the application of sanctions promoted  by  EBA  would 
face  certain  limits,  as  national  supervisors  will  have  diverging  powers  and  will  not  be 
able to overcome those divergences set by the legislative framework. 

Within  this  scenario,  national  authorities  in  different  Member  States  would  continue  to 
have different sanctioning powers and the same infringements to European  rules  would 
be  dealt  with  in  a  different  way  across  the  EU.  Member  States  with  strong  sanctioning 
regimes could be reluctant to fully trust those with weaker sanctioning regimes, making it 
difficult 
to  ensure  effective  cross-border  supervision.  The  Commission  would 
continuously monitor the functioning of sanctioning regimes and would assess the need 
for policy action at later stage.  

In  the  baseline  scenario,  credit  institutions  will  also  be  subject  to  civil  liability  for 
violations in accordance with national law. However, the deterrent effect is very limited 
as this would probably not cover several violations  of the CRD: violation of prudential 
requirements (e.g. capital adequacy) or reporting obligations, which are severe violations 

20 

Regulation No (EU) 1093/2010. 

EN 

19 

   EN 

 
                                                 
of that directive, does not always lead to actual damages for which third parties can claim 
a compensation and/or the damages caused by the violation cannot often be quantified. In 
any  case,  the  purpose  of  civil  actions  is  to  compensate  damages  caused,  which  would 
probably  not  be  deterrent  in cases  where  the  profit  derived  from  the  violation  is  higher 
than the damages to be compensated.  

Credit  institutions  will  also  be  subject  to  reputational  damage  linked  to  a  violation  that 
becomes publicly known. However, the public will not be aware of all sanctions imposed, 
as they will not be systematically published.  

At  the  international  level,  the  EU  would  continue  to  push  for  rigorous  enforcement  of 
financial  regulations  in  order  to  ensure  more  effective,  proportionate  and  dissuasive 
sanctions,  but  the  lack  of  common  standards  at  EU  level  would  make  it  difficult  to 
propose  concrete  measures  to  be  adopted  at  international  level.  Lack  of  European 
common  standards  would  weaken  the  EU’s  credibility  at  international  level  and  could 
threaten its global competitiveness as a financial centre. 

Problem tree * 

Problems drivers 

Specific problems 

General problems 

Divergent and weak legal 
framework  
1. Types and levels of administrative 
sanctions and criteria for their 
application divergent and not always 
appropriate 
2. Sanctions not always published 
3. Personal scope of administrative not 
always appropriate  

Lack of mechanisms 
facilitating detection of 
violations 
No effective mechanisms in place for 
whistleblowers to report misconducts to 
competent authorities  

Lack of effective, 
proportionate and 
sufficiently deterrent 
sanctions => lack of 
compliance with the 
CDR 

Lack of trust and 
cooperation between 
national supervisors 
=> ineffective 
supervision 

Improper functioning 
of financial markets 
in the Internal 
Market 
•  Risk to financial 
stability, eg. 
excessive risk 
taking 
•  Risk of 

consumer 
detriment  
•  Risk to market 
integrity  

Undermined 
confidence in the 
financial sector  

3.3. 

The EU's right to act and justification  

The  legal  bases  for  EU  level  action  in  this  specific  field  are:  Article  53  TFEU  (former 
Article  47  CE)  which  provide  the  EU  legislature  with  the  possibility  of  adopting 
directives for the coordination of the provisions concerning the taking-up and pursuit of 
activities as self-employed persons and the provision of services in the Internal Market, 

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and Article 114 TFEU according to which the European legislator can adopt "measures 
for  the  approximation  of  the  provisions  laid  down  by  law,  regulation  or  administrative 
action in Member States which have as their object the establishment and the functioning 
of  the  Internal  Market."  The  European  legislature  has  discretion  as  to  the  method  of 
approximation which  is the most appropriate in  order  to improve the conditions  for  the 
establishment  and  proper  functioning  of  the  Internal  Market.  This  may  include  the 
approximation of national laws concerning the type and level of administrative sanctions 
to be imposed. 

The  objective  of  the  CRD  is  to  contribute  to  the  achievement  of  an  integrated,  open, 
competitive,  and  economically  efficient  European  financial  market,  where  credit 
institutions  benefit  from  equal  conditions  of  competition  and  financial  services  can 
circulate freely at the lowest possible cost throughout the EU, with adequate and effective 
levels of prudential control, financial stability and a high level of consumer protection. 

The corollary of an integrated financial services market is that the same unlawful conduct 
incurs similar sanctions wherever the infringement is committed in the European Union. 
Such  sanctions  should  be  sufficiently  dissuasive  in  order  to  discourage  future 
wrongdoings. In this way, the EU would put out a strong message that certain types of 
conduct  are  unacceptable  and  punishable  on  an  equivalent  basis,  which  would  increase 
confidence in the financial sector. This requires some convergence in sanctioning regimes 
across the EU.  

The impact of the measures under consideration on the relevant fundamental rights and 
principles  as  embodied  in  the  Charter  of  Fundamental  Rights of  the  European Union is 
analysed in section 5. 

3.3.1.  Subsidiarity and proportionality 

Convergence  of  national  sanctioning  regimes  seems  necessary  to  promote  deterrence, 
thereby  ensuring  a  level  playing  field,  a  uniform  application  of  the  CRD,  and  full 
cooperation  and  mutual  trust  between  banking  supervisors  across  the  EU.  These 
objectives  cannot  be  sufficiently  achieved  by  the  Member  States  alone.  This  is 
particularly important in the banking sector where large credit institutions operate across 
the  EU  and  full  cooperation  and  trust  within  the  colleges  of  banking  supervisors  is 
essential for the credit institutions to be effectively supervised on a consolidated basis. 

Member  States  will  remain  responsible  to  ensure  application  of  sanctions.  However, 
better  use  of  the  existing  sanctioning  powers  by  competent  authorities  at  national  level 
would  be  insufficient  to  achieve  the  above  mentioned  objectives  if  those  powers  are 
divergent  and  too  weak.  Approximating  national  legislation  is  therefore  necessary  to 
ensure that all national authorities have at their disposal appropriate sanctioning powers, 
which  is  a  necessary  condition  for  improvement  and  convergence  in  the  application  of 
sanctions. This requires that sanctioning powers available in every single Member State 
adhere to common minimum standards, to be established at EU level.  

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Moreover,  proper  enforcement  of  banking  legislation  across  the  EU  requires  that  all 
Member  States  provide  for  adequate  tools  to  detect  violations  and  to  ensure  they  are 
punished. Most of the issues relating to the enforcement of EU legislation can be better 
addressed  at  national  level  (eg.  adequate  human  and  financial  resources  devoted  to 
investigations).  However,  EU  action  seem  necessary  to  ensure  that  all  Member  States 
have  at  least  in  place  some  mechanisms  facilitating  the  detection  of  violations,  such  as 
those encouraging persons who are aware of potential violations to denounce them.  

The objectives of the proposal can therefore be better achieved through EU action rather 
than by different national initiatives. 

The measures proposed will not go beyond what is necessary to achieve those objectives. 
They  will  approximate  the  legislation  of  Member  States  on  sanctions  applicable  to  the 
key violations of the CRD, based on common principles to be applied consistently across 
the  European  Union.  This  appears  particularly  important  when  considering  that  EU 
financial markets are increasingly integrated, especially at the wholesale level21.  

The  proposal  will  ensure  respect  for  different  national  legal  systems  and  traditions. 
Changes  in  national  legislation  will  be  necessary  only  where  the  existing  rules  do  not 
comply  with  some  basic  standards  of  an  efficient  sanctioning  regime.  In  principle, 
Member States will not be obliged to put in place new administrative procedures. As to 
the regional and local dimension of the action envisaged, no specific implications of the 
proposal  for  certain  regions  has  been  identified,  as  sanctions  in  the  banking  sector  are 
generally laid down in national legislation and applied by national banking supervisors.  

4. 

OBJECTIVES 

The general policy objectives of this exercise are the following:  

•  Proper functioning of banking markets and restored confidence in the banking sector 

To  achieve  these  general  objectives,  the  following  specific  objectives  must  also  be 
achieved: 

•  Effective, proportionate and deterrent sanctions which better ensure compliance with 

CRD rules,  

•  Development of a level playing field which minimises the opportunities for regulatory 

arbitrage,  

•  Effective supervision of banking service providers. 

21 

See European Financial Integration Report 2009. 

EN 

22 

   EN 

 
                                                 
The  specific  objectives  listed  above  require  the  attainment  of  the  following  operational 
objectives: 

•  Reinforcement and approximation of the legal framework concerning sanctions,  

•  Reinforcement and approximation of mechanisms facilitating detection of violations. 

5. 

POLICY OPTIONS, IMPACT ANALYSIS AND COMPARISON  

Different  policy  options  have  been  envisaged  to  approximate  and  reinforce  national 
sanctioning  regimes  on  the  issues  identified  in  the  problem  definition.  They  concern 
sanctions applicable to the key violations of the CRD, as identified in section 3.1.2. For 
each option, it has been assessed whether it is of specific relevance for some of the key 
violations  identified  (see  detailed  analysis  in  Annex  V).  The  options  concern  two  main 
areas:  the  legal  framework  of  sanctions  and  the  mechanisms  facilitating  detection  of 
violations.  

The  envisaged  policy  actions  are  complementary  to  the  other  policy  actions 
introduced by the CRD IV proposal. The measures for the implementation of the Basel 
agreement  on  banking  supervision  in  the  EU  will  maintain  the  basic  prudential  rules 
contained  in  the  CRD  (requirement  of  prior  authorisation  for  banking  activities, 
prudential requirements including in particular capital rules, reporting requirements) and 
will  strengthen  these  rules.  The  policy  actions  in  relation  to  corporate  governance 
maintain  the  fundamental  prudential  rules  contained  in  the  CRD  on  governance  and 
strengthen  these  rules.  Approximating  and  reinforcing  national  sanctioning  regimes  for 
violations of these rules will support the effective application of these prudential rules as 
updated by the CRD IV proposal. 

The policy options have been evaluated and compared against criteria deriving from the 
problems  identified  and  the  specific  objectives of  this  proposal.  The  analysis takes into 
account  the  issues  relating  to  proportionality,  subsidiary  and  the  impact  on  the 
stakeholders  concerned  including  the  impact  on  fundamental  rights.  The  options  are 
compared with regard to their effectiveness and efficiency in achieving the objectives of 
approximating  and  reinforcing  sanctioning  regimes  with  regard  to  both  the  legal 
framework of sanctions and the detection of violations.  

The following schema is used to compare the contribution of the different options to the 
achievement of the objectives: +++ (strongly positive), ++ (positive), + (slightly positive) 
0 (neutral), slightly negative (-). 

In  view  of  the  limits  of  the  data  available  and  the  nature  of  the  subject-matter,  the 
analysis  is  essentially  of  a  qualitative  nature.  The  options  envisaged  aim  at  ensuring 
better  compliance  with  CRD  rules  by  reinforcing  national  legal  frameworks.  As  the 
number of undetected violations is by definition unknown, it is very difficult to quantify 
the reduction of the number of violations that reinforced sanctioning regimes could bring 

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about  and  therefore  their  potential  impact.  An  attempt  to  quantify  the  costs  for  credit 
institutions of the option on whistleblowing systems has been made, but the actual costs 
would largely depend on how Member States will implement those systems. The impacts 
of  the  options  envisaged  include  the  need  to  amend  national  legislation,  which  would 
have the  same cost  of  any other national  legislative procedure. This impact is therefore 
taken into account in terms of efficiency based on the number of Member States which 
will be required to amend their legislation and the scope of the revision needed. 

5.1. 

Options to approximate and reinforce the legal framework of sanctions 

Options are grouped in the following sub-groups: 1) appropriate administrative sanctions, 
2) personal scope of administrative sanctions, 3) publication of sanctions. 

5.1.1.  Options concerning appropriate administrative sanctions  

Options 

Description 

1: no EU action 

The  existing  sanctioning  regimes  will  continue  to  exist.  Member  States  will  have  to  ensure 
compliance with the provisions on sanctions already contained in the CRD (e.g. empower the 
competent  authorities  to  withdraw  the  authorisation  in  the  cases  listed  in  Article  17  of  the 
Directive 2006/48/EC or to take the measures laid down in Article 21) 

2.  Uniform  rules 
on  types  and  level 
of 
administrative 
sanctions  

Uniform  rules  would  determine  both  the  types  of  administrative  sanctions  available  to 
competent authorities and the minimum and maximum levels of fines.  

Member States would not be allowed to stipulate different types of sanctions and would not be 
able to exceed the maximum levels laid down in the uniform rules.  
Minimum  common  rules  on  the  types  of  administrative  sanctions  laid  down  in  national 
legislation would be determined.  

3. 
Minimum 
common  rules  on 
types 
of 
administrative 
sanctions  

This would include a list of key sanctioning powers that should be available to all competent 
authorities  in  case  of  violations  of  key  obligations  of  the  CRD.  The  list  would  include  the 
sanctions  which,  based  on  the  CEBS  report,  on  the  Sanctions  Communication,  and  on  the 
replies  to  the  public  consultation,  have  been  identified  as  key  sanctions    for  ensuring 
compliance  with  the  CRD  (administrative  fines,  cease-and-desist  orders,  dismissal  of 
management, public warning, withdrawal of authorisation).  

Member  States  should  ensure  that  national  legislation  provides  at  least  for  the  types  of 
sanctions included in the minimum list. 
They would remain free to provide for additional sanctioning powers.  
Minimum  common  rules on  the  level of  administrative  fines would  be established,  including 
the formulation of minimum and maximum levels of administrative fines.  
Those  levels  should  be  sufficiently  high  to  ensure  dissuasiveness  (e.g.  the  maximum  level 
should  significantly  exceed  the  potential  benefit  derived  from  the  infringement,  and  the 
minimum  level  should  reflect  the  seriousness  of  the  violation).  A  range  of  minimum  and 
maximum levels would be established for each key violation or category of key violations of 
the  CRD,  depending  on  their  nature  and  seriousness.  This  option  would  not  impose  the 
obligation  to  provide  for  unlimited  pecuniary  fines,  which  may  not  be  compatible  with  the 
fundamental principles of all national legal systems.  

Member  States  would  be  prevented  from  setting  minimum  and  maximum  levels  lower  that 
those  established  at  the  EU  level.  They  would  remain  free  to  set    levels  higher  than  those  

4. 
Minimum 
common  rules  on 
levels 
(minimum 
and  maximum)  of 
administrative 
fines  

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24 

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determined by the EU, or to provide for an unlimited maximum level. In principle, competent 
authorities would not be allowed to impose fines which are lower than the common minimum 
level. 
Minimum common rules would be set on the maximum level of administrative fines. It would 
be established that the maximum level laid down in national legislation cannot be lower than a 
common  EU  level.  This  option  would  not  impose  the  obligation  to  provide  for  unlimited 
pecuniary fines, which may not be compatible with the fundamental principles of all national 
legal  systems.  The  level  should  exceed  the  benefits  derived  from  the  violations  and,  in  any 
case,  should  be  sufficiently  high  to  ensure  dissuasiveness:  it  would  combine  reference  to  a 
fixed amount and to the turnover of the author of the infringement.  

Member States would be prevented from setting maximum levels lower that those established 
at the EU level. Member States would remain free to set higher maximum levels or provide for 
an  unlimited  maximum  level.  They  would  also  remain  free  to  decide  whether  or  not  a 
minimum level has to be set and to establish that level. 

5. 
Minimum 
common  rules  on 
maximum  level  of 
administrative 
fines  

6.  Uniform  rules 
on  factors  to  be 
taken  into  account 
in  the  application 
of sanctions 

All  factors  to  be  taken  into  account  by  competent  authorities  when  determining  the  actual 
sanction to be imposed in a specific case, would be defined in order to ensure that sanctions 
imposed  are  effective,  proportionate  and  dissuasive.  In  this  case,  the  same  factors  would  be 
applied by competent authorities throughout the European Union. Competent authorities would 
not be allowed to consider other factors. 

Minimum 
7. 
common  rules  on 
factors  to  be  taken 
into account in the 
application 
of 
sanctions  

EU-level  provisions would  establish  a  minimum  list  of  common  key  factors  to be  taken  into 
account by all competent national authorities when determining the level of the sanction to be 
imposed in a specific case.  

Those factors would include the mitigating and aggravating factors which based on the CEBS 
report on the Sanctions Communication and on the replies to the public consultation have been 
identified  as  key  factors  for  ensuring  proportionality  and  dissuasiveness  of  sanctions.  This 
would  include  the  benefits  derived  from  the  violation  when  they  can  be  determined,  the 
financial strength of the author of the infringement, cooperation of the authors of the violation, 
and recurrence of violations.  

Member  States  would  be  obliged  to  provide  in  national  legislation  that  the  key  factors 
established at EU level have to be taken into account by competent authorities. Member States 
would  be  allowed  to  provide  for  additional  factors  they  consider  relevant,  to  be  taken  into 
account in addition to the common ones.  

Analysis of options 22 

(1) 

No EU action 

Mere  compliance  with  the  current  provisions  of  the  CRD,  which  do  not  cover  all 
violations  nor  all  relevant  sanctioning  powers,  will  be  insufficient  to  ensure  sufficient 
convergence  in  the  type  of  sanctioning  powers  that  should  be  available  to  all  national 
authorities.  

In  the  absence  of  any  action  at  EU  level,  Member  States'  sanctioning  regimes  will 
continue to diverge as regards the level of administrative fines that can be imposed.  

22 
the  
provided in  

Annex V.  

The specific impacts of these option have been also analysed in relation to sanctions applicable to 
different  types  of  violations  of  the  CRD  concerned.  A  more  detailed  analysis  of  this  option  is 

EN 

25 

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Divergences will also remain on the criteria taken into account by competent authorities 
when deciding the type of administrative sanctions and/or calculating the amount of the 
administrative  pecuniary  sanction  to  be  applied  to  the  author  of  a  specific  violation. 
Almost  all  Member  States  will  continue  to  take  into  account  some  criteria  (e.g.  the 
gravity of the violation) but various other factors will be taken into account only in some 
Member States or for some violations of the CRD (e.g. the impact of the violation or the 
financial strength of the author of the violation). 

The new EBA will monitor the functioning of national sanctioning regimes and conduct 
peer review analyses of those regimes (for more detail see section 3.2.2 above). The EBA 
will  have  the  power  to  actively  promote  further  convergence  in  the  application  of 
sanctions  by  competent  authorities  via  guidelines  and  recommendations.  Without  any 
approximation  of  the  legal  framework,  however,  it  is  very  likely  that  type  and  level  of 
sanctions would remain divergent and not always optimal in terms of dissuasiveness.  

A large majority of the respondents to the consultation on the Sanctions Communication, 
including almost all public authorities, the majority of the industry representatives and all 
the  consumers/investors  associations,  share  the  view  that  minimum  harmonisation  of 
sanctions  is  warranted  to  achieve  sufficient  deterrence  and  convergence  for  the 
development of a level playing field within EU. Even the minority who is unfavourable 
to  EU  legislative  action  in  this  field,  acknowledges  the  existing  problems  (lack  of 
deterrence  and  convergence),  considering  that  soft  law  measures  may  be  adequate  to 
solve them. 

(2) 

Uniform rules on types and level of administrative sanctions 

This option would imply that administrative sanctions are fully harmonised and that the 
violation of any of the key provisions of the CRD would be subject to the same type and 
level of sanctions across all Member States.  

As pointed out in the  public consultation by several respondents, this would assist the 
development of a level playing field in the European financial market: credit institutions 
would  not  derive  any  advantage  from  differing  national  regimes,  as  they  would  risk 
incurring the same sanctions and therefore bear the same costs23 wherever they commit a 
violation.  This  would  also  increase  consumer  confidence  and  mutual  trust  between 
supervisors,  leading  to  more  efficient  cross-border  supervision.  This  option  would 
increase the deterrent effect of sanctions by ensuring that appropriate types of sanctioning 
powers are available and sufficiently high fines are applicable for each key violation of 
the  CRD.  This  could  consequently  reduce  risks  of  violations  of  EU  law,  which  would 
have  a  significant  positive  impact  on  consumer  protection,  competition,  safety  and 
integrity of credit institutions.  

However, the fact that Member States would not be able to provide for further types of 
sanctions or higher levels of fines than those provided for in the uniform EU framework 
would  weaken  the  overall  deterrence  of  some  national  regimes.  In  particular,  in  some 

23 

This term is broadly defined as to include all potential negative consequences. 

EN 

26 

   EN 

 
 
                                                 
Member  States  which  currently  have  a  very  high  or  an  unlimited  maximum  level  for 
pecuniary  sanctions,  this  might  lead  to  a  reduction  in  the  maximum  level  and  reduce 
deterrence if the actual level established would be lower than what is currently in place. 
This  risk  has  been  highlighted  by  several  stakeholders  in  the  public  consultation,  who 
consider  that  EU  action  in  this  field  should  allow  Member  States  to  maintain  stricter 
sanctioning regimes.  

The majority of the respondents to the consultation on the Sanction Communication, in 
particular public authorities, are in favour of a list of core sanctioning powers available to 
all competent authorities, provided that such a list is not exhaustive and allow competent 
authorities to apply stricter sanctions. For this reason, the big majority of the respondents 
do  not  support  the  principle  of  full  harmonisation  and  full-fledged  EU  sanctioning 
regime. 

For  this  policy  option,  the  following  fundamental  rights  of  the  EU  Charter  are  of 
relevance:  the  right  to  an  effective  remedy  and  fair  trial  (Art.  47),  presumption  of 
innocence  and  right  of  defence  (Art  48),  freedom  to  conduct  a  business  (Art  16), 
consumer  protection  (Art  38),  and  –  even  though  Art.  49  on  the  legality  and 
proportionality of criminal offences and penalties may not be directly applicable to all of 
the  administrative  sanctions  envisaged  –  the  general  principles  of  legality  and 
proportionality  underpinning  the  Charter.  In  relation  to  these  fundamental  rights,  this 
option  would  ensure  that  a  violation  of  requirements  for  authorisation,  of  prudential 
requirements  and  of  reporting  requirements  would  be  subject  to  the  same  type  of 
administrative  sanctions  across  the  EU.  These  uniform  rules  would  particularly  ensure 
that the types and levels of administrative sanctions that can be imposed are proportionate 
to  each  specific  violation  across  all  Member  States,  and  that  Member  States  lay  down 
those sanctions by law.  

This  option  will  not  create  an  administrative  burden  on  financial  institutions,  or  non-
financial  companies,  which  are  already  today  subject  to  sanctioning  regimes  in  all 
Member States. More uniform sanctioning regimes throughout the EU may in fact lead to 
reduced compliance costs for market participants through the simplification of the legal 
framework for cross-border financial institutions.  

As  to  the  impact  on  Member  States,  this  option  would  require  significant  changes  in 
national legislation of all Member States, in order to make types and  level of sanctions 
uniform. Types and levels of sanctions would have to be modified in almost all Member 
States, as types of sanctions different from the common ones would no longer be allowed 
and  some  Member  State  would  have  to  provide  for  the  application  of  new  types  of 
sanctions. This could require the overall sanctioning regime to be revised. Therefore, the 
impact  on  Member  States  could  be  significant  and  the  uniform  regime  may  not  fit 
national legal system and culture in different Member States.  

This option is expected to ensure better enforcement of the CRD obligations. The specific 
impacts  of  those  options  on  stakeholders  are  in  fact  the  same  as  the  impacts  of  those 

EN 

27 

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rules themselves, which are identified and assessed in the impact assessments of the main 
parts of the Commission proposal for the CRD, not covered by this impact assessment.  

In  particular,  a  large  part  of  deposit-holders  and  investors  are  consumers  for  whom 
savings placed with credit institutions constitute a key part of their financial means and a 
major element of provision for retirement. The confidence of consumers in the stability of 
the  banking  system  has  been  severely  hit  during  the  financial  crisis,  and  the 
reinforcement and convergence of sanctioning regimes for violations of banking capital 
rules  will  have  a  positive  impact  on  the  protection  of  consumers  holding  deposits  and 
investments,  and  the  availability  of  such  sanctions  for  misconduct  will  contribute  to 
restore consumer confidence in credit institutions. This policy option can therefore have 
positive effects on consumer protection as enshrined in Art. 38 of the EU Charter.  

This  option  is  not  expected  to  have  specific  negative  impacts  on  SMEs.  More  efficient 
sanctioning regimes ensuring better compliance with EU law would benefit all players in 
financial markets, as well as all users of financial services, including in both cases SMEs. 
As the reinforcement and convergence of sanctioning regimes for violations of banking 
capital rules will contribute to ensure credit institutions are stable, they reduce the risk of 
financial  instabilities  caused  by  violations  of EU  law,  which  –  as  the  financial  crisis  in 
2007/2008 has shown – can have a strong negative impact on the economy at large and 
on employment. The option will therefore also have a positive impact on employees and 
society at large 

Environmental impacts of this option have not been identified. 

The  reinforced  focus  on  effective,  proportionate  and  dissuasive  sanctioning  regimes  is 
compatible with the common objectives of major third country jurisdictions within the 
G20  Group  to  strengthen  the  regulation  and  supervision  of  the  financial  sector.  It  is  in 
line  with  developments  in  other  jurisdictions.24  This  option  is  also  expected  to  have  a 
positive impact on the EU's global competitiveness. A strong and credible enforcement 
of  banking  capital  rules  contributes  to  the  stability  of  the  EU  financial  sector,  with 
positive effects on it. Moreover, it contributes to strengthening the EU's reputation as a 
global  centre  for  the  provision  of  competitive  reliable  and  stable  financial  services, 
benefiting from a high level of investor and consumer confidence. 

(3)  Minimum  common  rules  on  the  type  of  administrative  sanctions  to  be 

available to competent authorities 

This  option  would  contribute  to  the  objective  of  improving  the  deterrent  effect  of 
administrative sanctions by ensuring that all competent authorities have at their disposal 
certain  key  sanctioning  powers  which  can  be  particularly  effective  for  the  different 

24 

For example, the US has recently adopted rules to reinforce the detection of violations, including 
better  protection  of  whistleblowers,  in  the  framework  of  the  Dodd-Frank-Bill  of  July  2010. 
Moreover,  several  sanctions  applied  by  US  regulators  in  the  aftermath  of  the  financial  crisis 
express a level of concern to ensure sufficient deterrence that is without doubt equivalent to the 
suggestions made in this Communication. 

EN 

28 

   EN 

 
                                                 
violations  of  the  CRD  while  allowing  Member  States  to  keep  or  introduce  any  other 
additional powers which they consider to be effective.  

In  their  replies  to  the  consultation,  several  stakeholders,  including  some  financial 
supervisors and banks, have specified the key powers that should in their view be in the 
minimum list of sanctioning powers available to all competent authorities. Those powers 
should  include  the  withdrawal  of  authorisation,  which  may  be  appropriate  for  the  most 
serious violations of the banking legislation, the dismissal of management, which may be 
appropriate  in  case  of  serious  and  repeated  violations  of  prudential  rules  or  disclosure 
obligations,  the  possibility  of  issuing  cease  and  desist  orders,  which  can  effectively 
ensure that the responsible credit institution put an end to the violation, public warning or 
reprimand, which can effectively prevent credit institutions from repeating violations. 

Common  rules  on  the  types  of  sanctions  would  help  in  ensuring  that  violations  of  the 
CRD  are  dealt  with  in  a  similar  way  in  all  Member  States.  This  would  reinforce  the 
development  of  a  level  playing  field,  as  credit  institutions  would  risk  incurring  similar, 
even if not identical sanctions. Even in Member States where already today all necessary 
types of sanctions are available and therefore no changes would be brought about by this 
option,  banks  and  supervisors  could  be  confident  that  competitors  from  other  Member 
States  are  subject  to  similarly  stringent  powers  –  application  of  which  is  subject  to 
coordination  by  EBA  as  outlined  in  section  3.2.2  -  and  therefore  these  powers  will  not 
place  banks  at  a  competitive  disadvantage.  Knowing  that  the  response  to  violations  of 
banking  legislation  is  broadly  equivalent  throughout  the  EU  would  also  increase 
consumer confidence and may lead to more cross-border provision of banking services, 
reducing the fragmentation of the single market along national lines.  

Further,  a  minimum  list  of  sanctioning  powers  would  increase  mutual  trust  between 
national  supervisors  and  improve  supervision  of  cross-border  credit  institutions.  Where 
the  use  of  the  passport  limits  the  host  Member  State's  power  to  impose  sanctions  for 
violations of the CRD, that Member State could count on the fact that violations will be 
sanctioned in an equivalent manner in the home Member State. For example, where the 
risk management systems of a cross-border branch are not appropriate, the host Member 
State  can  count  on  the  fact  that  the  home  Member  State  can  sanction  such  a  violation 
effectively. 

This  option  would  require  only  a  minority  of  Member  States  to  modify  their  legal 
framework  (7  Member  States  would  have  to  amend  their  laws  in  relation  to  public 
warnings, 2 Member States in relation to the dismissal of the management).25 

The benefits of this option are unanimously recognised by the respondents to the public 
consultation  on  the  Sanctions  Communication,  with  only  one  respondent  considering 
that this should be left to Member States. In particular, there is a common view that all 
European  competent  authorities  should  have  at  their  disposal  a  minimum  set  of  core 
administrative  sanctions  to  be  established  at  EU  level,  which  would  reduce  divergence 

25 

Assessment based on CEBS report, and additional information by national authorities. 

EN 

29 

   EN 

 
                                                 
and improve efficiency of sanctioning regimes while maintaining some flexibility in the 
sense that Member States may provide for any additional sanctions.  

The impacts of this option on fundamental rights, stakeholders including consumers 
and  SMEs,  social  and  environmental  matters,  third  countries  and  the  EU’s  global 
competitiveness  are  similar  to  the  impacts  of  option  2  above  albeit  less  accentuated  as 
the level of convergence achieved under this option is lower than under option 2. 

(4)  Minimum  common  rules  on  minimum  and  maximum  levels  of  pecuniary 

administrative sanctions 

This  option  would  significantly  contribute  to  the  objective  of  improving  the  deterrent 
effect  of  the  administrative  fines,  as  it  would  ensure  that  fines  applied  are  sufficiently 
high,  and  improve  convergence  of  national  regimes,  as  the  minimum  and  maximum 
levels of administrative sanctions would be based on common rules 

In the Member States where the maximum level laid down in the legislation is lower than 
the level laid down at EU level, this option would allow competent authorities to apply 
pecuniary sanctions higher than those they can currently apply on the basis of the national 
legislation.  

In addition, common rules on the minimum level of pecuniary sanctions would prevent 
competent  authorities  from  applying  pecuniary  sanctions  which  are  too  low  to  ensure 
sufficient  deterrence.  They  would  be  obliged  to  impose  a  sanction  at  least  equal  to  the 
minimum level established on the basis of the EU common rules.  

Those  rules  could  therefore  increase  the  amount  of  the  sanctions  actually  imposed, 
especially in Member States where no minimum amount is laid down in the legislation, 
which  would  ensure  better  deterrence.  However,  a  minimum  level  would  reduce  the 
possibility of adapting the amount of the actual pecuniary sanction to the circumstances 
of  the  specific  case  concerned,  which  could  make  it  more  difficult  to  ensure 
proportionality.  

Ensuring that the level of fines envisaged in national legislation cannot be lower than the 
level determined by  the EU would  allow for the  imposition  of  fines  that  are  optimal  in 
terms  of  dissuasiveness  and  consequently  reduce  risks  of  violations  of  EU  legislation. 
This  would  have  a  significant  positive  impact  on  competition  between  financial 
institutions  (e.g.  by  removing  the  competitive  advantages  derived  from  violations  of 
banking legislation), and on safety of financial markets (e.g. increased compliance with 
prudential  rules).  Even  in  Member  States  where  already  today  the  level  of  fines  is 
sufficiently  high  and  therefore  no  changes  would  be  brought  by  this  option,  banks  and 
supervisors could be confident that competitors from other Member States are subject to 
similarly high fining powers – application of which is subject to coordination by EBA as 
outlined in section 3.2.2 - and therefore the high level of fines will not place banks at a 
competitive  disadvantage.  At  the  same  time  it  would  not  prevent  Member  States  from 
going  beyond  the  EU  minimum  criteria,  and  fine  other  violations,  provide  for  higher 
levels of fines or for further types of sanctions. 

EN 

30 

   EN 

 
The  majority  of  the  respondents  to  the  consultation  are  favourable  to  a  minimum 
harmonisation of the level of fines but their views diverge significantly on the scope of 
the  harmonisation.  While  most  of  them  consider  that  common  rules  should  be  set  to 
ensure  a  sufficiently  high  maximum  level  for  fines  to  be  applied  across  the  EU,  only  a 
few  stakeholders  are  favourable  to  setting  rules  on  the  minimum  level  and  several  of 
them are opposed, the latter underlining the differences between national legal systems in 
this  respect  and  arguing  that  such  a  minimum  level  may  lead  to  the  application  of 
disproportionate sanctions.  

However,  this  option  would  have  a  significant  impact  on  Member  States  at  it  would 
require  changes  in  all  national  legislation  which  provide  for  minimum  and  maximum 
levels  lower  than  those  established  on  the  basis  of  the  EU  common  rules.  In  addition, 
Member  States  where  the  legislation  does  not  establish  any  minimum  level  would  be 
obliged to introduce that level.  

The impacts of this option on fundamental rights, stakeholders including consumers 
and  SMEs,  social  and  environmental  matters,  third  countries  and  the  EU’s  global 
competitiveness  are  similar  to  the  impacts  of  option  2  above  albeit  less  accentuated  as 
the  level  of  convergence  achieved  under  this  option  is  lower  than  under  option  2. 
However,  in  relation  to  fundamental  rights,  fixed  and  inflexible  minimum  levels,  when 
applicable  to  all  violations  across  the  EU  and  when  not  set  with  due  regard  to 
proportionality, could prevent authorities from imposing lower sanctions in cases where 
particular mitigating circumstances would warrant this.  

(5)  Minimum  common  rules  on  maximum  level  of  pecuniary  administrative 

sanctions 

This option will require setting only the maximum level of fines to be imposed across the 
EU,  the  Member  States  being  left  free  to  provide  higher  levels  and  will  refrain  from 
requiring any minimum level to be established.  

In particular, when setting the maximum level of fines in their law, Member States would 
have to take into account the following common rules.  

First,  national  legislation  would  be  required  to  provide  that  the  maximum  level  should 
exceed  the  benefits  derived  from  a  violation.  This  would  significantly  increase 
deterrence  since,  where  the  benefits  derived  from  the  violation  can  be  established, 
wrongdoers will be deprived of the benefits they made and will have to pay an additional 
amount.  The  administrative  practice  of  some  Member  States  shows  that  competent 
authorities are able to establish the benefits derived by one person or company from some 
violations, for instance in case of the unauthorised provision of banking services26.  
However, this rule would be insufficient to ensure sufficient deterrence in the situations 

26 

See  e.g.  a  recent  case  pursued  by  the  FSA  (UK)  where  the  benefit  derived  from  unauthorised 
activity by one individual was about 2.5 million pounds, see FSA press release FSA/PN/111/2010 
of 29 June 2010. 

EN 

31 

   EN 

 
 
 
                                                 
where  it  is  very  difficult  or  even  impossible  to  estimate  the  benefits  derived  from  a 
violation of the CRD (for instance in case of failure to report information to supervisors).  

Second,  given  these  limitations  national  legislation  would  in  addition  be  required  to 
provide that, in any case (including those where the benefits cannot be established), the 
maximum level is not lower than (1) a fixed absolute amount or (2) a percentage of the 
total annual turnover of the wrongdoer. 
They will remain free to provide for maximum levels higher that the absolute amount or 
the percentage set by the EU or for an unlimited maximum level.  

(1) As regards natural persons, Member States where maximum levels are lower than a 
specific  absolute  amount,  to  be  fixed  on  the  basis  of  the  highest  levels  currently 
provided  for  in  national  legislations,  would  be  required  to  increase  them.  This  would 
increase the deterrent effect of the sanctions, in particular in the Member States with very 
low levels, while being compatible with the way maximum sanctions are fixed today in 
most  Member  States  and  therefore  not  requiring  modifications  of  those  Member  States' 
legislation. The actual amount could be set at EUR 5 000 000 which is the level of fines 
provided for or exceeded by the 20% of Member States with the highest levels of fines 
currently  provided  for  in  national  legislation  (see  data  in  Annex  III).  It  would  be  a 
sufficiently  high  amount  to  impose  deterrent  sanctions  for  the  most  serious  violations 
even for the most well paid managers of credit institutions (for instance, as of 2010, the 
highest-paid  CEOs  of  a  credit  institution  in  the  EU  received  about  EUR  10 000  000 
annual compensation). In particular, it would be sufficiently high to exceed the benefits 
which wrongdoers could derive from a violation in past cases.27  
However, as regards credit institutions such a fixed amount would not take into account 
the size of the wrongdoer: in case of very serious violations by the largest cross-border 
credit institutions it may not be sufficient to offset the expected benefits from a violation 
and to ensure appropriate attention by senior management. These concerns were reflected 
in  the  public  consultation  by  a  significant  number  of  respondents  who  argued  that  the 
maximum amount of the fine to be imposed should relate to the objective characteristics 
of the wrongdoer such as its annual turnover or assets. 

(2)  A  common  floor  for  maximum  fines  for  credit  institutions  would  therefore  be 
established by reference to a percentage of their total annual turnover, as suggested by 

27 

28 

29 

30 

31 

See previous footnote; pls note that a broader assessment of the benefits derived from violations of 
the  CRD  is  difficult,as  in  many  cases  due  to  the  nature  of  the  violations  these  cannot  be 
established. 
Council Regulation (EC) No 1/2003 of 16 December 2002 on the implementation of the rules on 
competition laid down in Articles 81 and 82 of the Treaty (Article 23(2); OJ L 1/1; 01/04/2003, 
Art. 23(2).  
Council and Parliament Directive 20097/73/EC of 13 July 2009 concerning common rules for the 
internal market in natural gas and repealing Directive 2003/55/EC, OJ L211/94 of 14.8.2009. 
Regulation of the Council and the Parliament amending Regulation (EC) No 1060/2009 on credit 
rating agencies, Doc 70/10, http://register.consilium.europa.eu/pdf/en/10/pe00/pe00070.en10.pdf. 
Estimate based on information on a survey of information about EU bank’s risk weighted assets 
and income from annual reports. 

EN 

32 

   EN 

 
 
 
 
                                                                                                                                                 
several  respondents  in  the  public  consultation.  Requiring  the  Member  States  to  provide 
that  maximum  levels  should  be  based  on  a  percentage  of  the  annual  turnover  would 
ensure  sufficient  deterrence,  including  for  bigger  cross-border  players,  as  the  objective 
characteristics of the wrongdoer (in particular its size) will be taken into account.  
The  actual  percentage  of  turnover  would  be  determined  on  the  basis  of  the  existing 
experience in other fields where administrative fines are imposed and at a level which is 
sufficiently  high  to  offset  the  benefits  that  can  be  expected  from  violations  of  CRD 
requirements. The following existing practice exists in other areas of EU policy: 

– 

– 

– 

EU competition  rules  28provide already that the Commission cannot impose a 
fine in excess of 10 % of the company's total annual turnover for violations. This 
provision  was  replicated  and  applied  without  major  difficulties  in  several 
Member States.  

Similarly, a percentage of 10% of the turnover has been considered appropriate 
in  the  context  of  the  Directive  2009/73/EC  concerning  common  rules  for  the 
internal  market  in  natural  gas29.  This  Directive  obliges  Member  States  to 
ensure that those authorities must be empowered to apply penalties of up to 10% 
of the annual turnover of the undertaking concerned. 

Under  the  newly  adopted  regulation  on  credit  rating  agencies  (CRAs)30  the 
European  Securities  Markets  Authority  (ESMA)  may  by  decision  impose  on  a 
CRA a fine for a breach of the regulation, which can not be in excess of 20% of 
the total annual turnover of the CRA.  

The objective of the CRD review is to provide only for minimum rules on levels of fines 
while leaving the possibility for the Member States to provide higher maximum levels for 
fines.  The  level  of  fines  therefore  does  not  have  to  be  equally  high  than  in  the  CRA 
Regulation  which  establishes  absolute  maximum  levels  of  fines.  On  the  other  hand  a 
maximum fine of less than 10% could be too low in order to effectively deter breaches of 
CRD capital and reporting requirements which can lead to important benefits in terms of 
the level of regulatory capital requirements. Depending on the specific circumstances of 
the  bank,  10%  of  total  annual  turnover  equates  to  about  10%  of  the  minimum  capital 
banks  are  required  to  hold  under  CRD  IV/Basel  III  when  the  new  regime  will  be  fully 
phased in.31 Violations of the CRD may imply that banks hold less capital than required 
under  the  CRD.  A  minimum  level  significantly  lower  than  this  would  risk  to  be 
insufficiently  deterrent  in  certain  cases  of  serious  violations  affecting  a  bank's  entire 
business and leading to important benefits in terms of regulatory capital requirements. 

This  option  would  not  prevent  competent  authorities  from  applying  fines  significantly 
lower than the maximum, and therefore would not ensure that fines actually imposed are 
sufficiently  high  to  be  deterrent.  However,  this  could  be  ensured  by  providing  for 
appropriate criteria (such as the seriousness of the violation, the financial strength of the 
credit institutions involved and the benefits/losses derived from the violation) to be taken 
into account by competent authorities when they calculate the actual fine to be imposed 
in  each  individual  case.  The  introduction  of  a  list  of  relevant  criteria  is  analysed  under 
options 6 and 7. 

EN 

33 

   EN 

 
 
Similarly to option 4, this option would have a significant positive impact on competition 
between  financial  institutions  and  on  safety  of  financial  markets.  However,  this  option 
would  also  leave  sufficient  flexibility  to  ensure  proportionality  of  the  fines  since 
competent  authorities  will  not  be  restrained  by  a  minimum  level  to  impose  lower 
pecuniary  sanctions  in  less  serious  cases  involving  smaller  players  or  less  severe 
violations within the same category.  

This option is supported by the majority of respondents to the public consultation since 
it can increase deterrence and empower competent authorities to impose sufficiently high 
fines  in  the  most  serious  cases  while  leaving  sufficient  discretion  for  competent 
authorities to decide on the actual level (no minimum required level). Similarly to option 
4,  this  option  would  contribute  to  the  objective  of  improving  the  deterrent  effect  of 
administrative  fines,  as  it  would  ensure  that  competent  authorities  have  the  power  to 
apply  fines  which  are  sufficiently  high  to  be  deterrent  even  on  the  larger  credit 
institutions.  

The impact of this option on Member States would be less significant than in option 4, 
as  it  would  require  changes  only  in  national  legislation  where  the  maximum  level  does 
not comply with the common minimum standard. No changes would be required where 
that level is higher or unlimited and Member States would not be obliged to introduce a 
minimum  level.  Based  on  the  information  available  to  the  Commission,  legislative 
amendments would be necessary in 8 Member States.32 

The impacts of this option on fundamental rights, stakeholders including consumers 
and  SMEs,  social  matters,  third  countries  and  the  EU’s  global  competitiveness  are 
similar  to  the  impacts  of  option  2  above  albeit  less  accentuated  as  the  level  of 
convergence  achieved  under  this  option  is  lower  than  under  option  2.  In  relation  to 
fundamental  rights,  this  option  respects  the  principle  of  proportionality  in  particular  by 
refraining  from  laying  down  fixed  and  inflexible  minimum  levels  of  administrative 
pecuniary  sanctions,  thereby  allowing  Member  States  and  competent  authorities  to 
imposing  lower  sanctions  in  cases  where  particular  mitigating  circumstances  would 
warrant this. 

(6) 

Uniform  rules  on  the  factors  to  be  taken  into  account  in  the  application  of 
sanctions 

This  option  would  eliminate  any  divergence  on  factors  to  be  taken  into  account  in 
deciding the type of sanctions and/or calculating the amount of the fine to be applied to 
the author of a specific violation of the CRD, within the range of sanctions and the levels 
of pecuniary sanctions laid down in the legislation. The factors to be taken into account 
would include  the seriousness  of the violation, its consequences (e.g. benefits  obtained, 
losses  caused  to  third  parties,  etc),  and  the  personal  conditions  of  the  author  of  the 
violations (e.g. the financial strength of the credit institution) or its cooperation with the 
competent authorities. 

32 

Assessment based on CEBS report, p. 53, and additional information by national authorities. 

EN 

34 

   EN 

 
                                                 
Providing  for  similar  types  and  level  of  sanctions  in  national  legislation  would  be 
insufficient  to  ensure  that  the  perpetrators  of  similar  violations  would  incur  similar 
sanctions  in  different  Member  States  if  the  factors  taken  into  account  to  determine  the 
actual sanctions imposed were completely different. In particular, this option would help 
to  ensure  that  the  level  of  fines  actually  applied  is  sufficiently  high  even  when  no 
minimum level is fixed. This option will therefore reinforce the deterrent effect of option 
(5) above. 

Uniformity  in  the  way  sanctions  are  applied  would  facilitate  cooperation  between 
competent authorities and therefore ensure better cross-border supervision. 

This option would also help in ensuring proportionality and dissuasiveness of sanctions. 
The  sanctions  imposed  would  always  be  linked  to  criteria  ensuring  that  competent 
authorities take duly into account the seriousness of the violation, its consequences (e.g. 
benefits obtained, losses caused to third parties, etc), the personal conditions of the author 
of  the  violations  (e.g.  the  financial  strength  of  the  credit  institution)  or  its  cooperation 
with  the  competent  authorities.  The  respondents  to  the  consultation  on  the  Sanctions 
Communication agree that the above-mentioned criteria should be taken into account by 
all competent authorities in the EU to ensure proportionality and deterrence of sanctions.  

In  the  banking  sector,  those  criteria  are  particularly  relevant:  for  instance,  taking  into 
account the financial strength of the credit institution is important to ensure that sanctions 
for  the  violations  of  the  CRD  have  an  equivalent  effect  on  small  and  large  credit 
institutions,  linking  the  sanction  applied  to  the  benefits,  potentially  very  high,  derived 
from the violation of prudential rules would increase their deterrent effect.  

However, under this option, the common list would in principle include only factors that 
can be applied in the same way in all national legal systems, which would preclude the 
possibility to take also into account those factors which can be part of the principles of 
some legal systems but not relevant in others.  

This option would require changes in all national legislation, as it implies a revision of 
all provisions concerning the way sanctions are applied.  

The impacts of this option on fundamental rights, stakeholders including consumers 
and  SMEs,  social  and  environmental  matters,  third  countries  and  the  EU’s  global 
competitiveness  are  similar  to  the  impacts  of  option  2.  However,  in  relation  to 
fundamental  rights,  uniform  criteria  may  make  more  difficult  to  ensure  the  respect  the 
principle of proportionality, as competent authorities would no longer be allowed to take 
into account certain factors currently provided for in some Member States which may be 
relevant  in  their  legal  systems  to  adapt  sanctions  to  the  particularities  of  each  specific 
case. 

(7)  Minimum  common  rules  on  the  factors  to  be  taken  into  account  in  the 

application of  sanctions 

EN 

35 

   EN 

 
Likewise option 6, this option would allow competent authorities to better adapt the type 
and the level of sanctions imposed to the seriousness and the impacts of the violation and 
to  the  personal  conditions  of  the  author  of  the  violation,  which  would  help  ensuring 
effectiveness,  proportionality  and  dissuasiveness  of  the  sanctions  actually  applied.  It 
would also reinforce the deterrent effect of option (5) above: even if no minimum level of 
fines  if  established,  the  fact  that  competent  authorities  would  take  into  account  factors 
such  as  the  gains  obtained  from  the  violation  and  the  financial  strength  of  the  credit 
institution would help ensuring that the fine actually imposed is not too low.  

The  common  list  of  key  factors  would  include  the  factors  mentioned  in  option  6.  This 
option  would  therefore  have  the  same  positive  impacts  on  competition,  consumer 
protection and stability of financial markets.  

This  option  would  lead  to  increased  convergence  in  the  way  sanctions  are  applied  by 
competent authorities across Europe while maintaining some flexibility. This would ease 
cooperation between banking supervisors who would rely on a common understanding of 
how sanctions imposed for a particular violation should be adapted to the specifics of that 
violation.  At  the  same  time,  Member  States  would  have  the  possibility  to  consider 
additional factors that are particularly relevant in a specific national context.  

The  results  of  the  consultation  on  the  Sanctions  Communication  show  that  a  large 
majority  of  stakeholders  are  opposed  to  an  exhaustive  list  of  factors  to  be  taken  into 
account  by  all  competent  authorities,  since  this  would  prevent  Member  States  from 
considering other relevant factors in their national legal systems.  

This  option  would  not  require  major  changes  in  national  legislation.  Some  Member 
States  already  provide  for  the  most  relevant  factors,  and  the  others  could  add  those 
factors  without  repealing  the  existing  provisions.  For  example,  in  the  banking  sector, 
thirteen Member States already take into account the financial strength of the author of an 
infringement,  while  the  remaining  Member  States  would  have  to  add  that  factor  to 
existing provisions.33 Based on the information available to the Commission, 10 Member 
States  would  have  to  amend  their  laws  to  take  into  account  the  benefit  derived  from  a 
violation and the financial strength of the offender, 7 Member States in order to take into 
account  the  cooperation  of  the  offender,  and  6  Member  States  in  order  to  take  into 
account the losses for third parties caused by a violation).34 

The impacts of this option on fundamental rights, stakeholders including consumers 
and  SMEs,  social  and  environmental  matters,  third  countries  and  the  EU’s  global 
competitiveness  are  similar  to  the  impacts  of  option  2  above  albeit  less  accentuated  as 
the  level  of  convergence  achieved  under  this  option  is  lower  than  under  option  2.  In 
relation  to  the  fundamental  rights  the  criteria  relating  for  example  to  the  gravity  of  a 
violation or to the benefit derived from a violation contribute to ensure that the principle 
of proportionality is respected when determining applicable fines.  

33 
34 

CEBS report, p. 53, and responses by national authorities. 
Assessment based on CEBS report, p. 53, and additional information by national authorities. 

EN 

36 

   EN 

 
                                                 
Comparison of options  

The objectives outlined in section 4 cannot be achieved under option 1, which preserves 
the "status quo" and thus the problems identified in section 3.2. Although the EBA could 
promote  further  convergence  of  national  provisions  concerning  sanctions,  this  action 
would hardly be effective without an EU framework in place.  

Options 2 and 6 would eliminate any divergence in types, level of sanctions and criteria 
for their application, and therefore will be the most effective in terms of ensuring level 
playing  field  and  facilitating  cross-border  supervision.  Options  3,  4,  5  and  7  would  be 
less  effective  as  they  would  set  only  minimum  common  rules  on  types,  levels  of 
sanctions  and  criteria  for  their  application.  However,  they  would  leave  some  flexibility 
which would permit to adapt sanctions to the specificities of the different national legal 
systems, and therefore help competent authorities to apply optimal sanctions in terms of 
deterrence. Option 4 would be more effective than Option 5 in reducing divergences in 
the  levels  of  pecuniary  sanctions,  as  it would  set  common  rules  on  both  maximum  and 
minimum levels while Option 5 will better ensure proportionality, as it would not oblige 
competent authorities to impose pecuniary sanctions of a minimum amount which could 
be disproportionately high in certain particular cases. 

Options  2,  3  and  4  are  considered  to  be  similarly  effective  in  terms  of  ensuring 
deterrence: uniform types and level of sanctions are not necessarily more dissuasive than 
different  sanctions  complying  with  minimum  standards  which  are  sufficiently  strict. 
However, option 3 would allow for the provision of additional types, which can increase 
dissuasiveness  in  some  Member  States.  option  5  will  be  less  effective  in  ensuring  that 
sufficiently  high  pecuniary  sanctions  are  actually  applied  but  could  better  ensure  those 
sanctions  are  proportionate.  Similarly,  both  Options  6  and  7  can  be  considered  equally 
effective  to  the  extent  the  relevant  factors  identified  in  Option  6  are  included  in  the 
minimum  list  of  factors  established  under  Option  7.  However,  the  latter  could  better 
ensure appropriateness of sanctions  actually applied, as  it  would not  prevent competent 
authorities from taking into account other factors relevant in their national legal systems. 

Regarding  efficiency,  Options  2  and  6  are  the  less  efficient  as  they  would  require 
important changes in national legislation. The substantial impact Options 2 and 6 would 
have  in  terms  of  the  number  of  Member  States  required  to  modify  their  rules  and  their 
overall sanctioning regimes is not compensated for by an equally substantial increase in 
effectiveness  compared  to  options  3  and  7  –  in  fact  a  full  harmonisation  of  types  of 
sanctions and factors to be taken into account may be less effective in some respects as it 
will not allow Member States to provide for types and factors that may be necessary to 
respond to specific national circumstances. Option 5 is more efficient than option 4 as it 
would  require  legislative  changes  only  in  some  Member  States.  In  addition,  Option  4, 
while  being  more  effective  to  achieve  the  objectives  of  dissuasiveness,  a  level  playing 
field and improving trust between supervisors, would have a substantial negative impact 
on the objective of proportionality because it would limit the possibility of authorities to 
take  into  account  the  specificities  of  each  case  when  determining  the  level  of  a  fine. 
Therefore, an obligation to provide for minimum levels of fines would require important 

EN 

37 

   EN 

 
legislative changes, especially in Member States where current national legislation does 
not  lay  down  any  minimum  level,  without  bringing  and  equivalent  contribution  to  the 
achievement of the objectives envisaged.  

None  of  the  Options  considered  will  harmonise  the  procedure  for  the  imposition  of 
administrative  sanctions  for  violations  of  the  CRD  and  will  therefore  preserve  Member 
States’ current  arrangements ensuring compliance with the rights  for judicial protection 
of the Charter, such as the right to an effective remedy and to a fair trial (Art. 47), the 
presumption of innocence and the right of defence (Art.48).  

Based on the analysis of the impacts above, Options 3, 5 and 7 have been selected.   

Effectiveness  in  achieving  the  specific  objectives 
below through the relevant operational objective  

Efficiency 
achieving 
objectives 

in 
all 

Improve  effectiveness, 
and 
dissuasiveness 
proportionality 
of 
sanctions 

Develop 
level 
playing 
field 

trust 

Improve 
between 
supervisors 

1. Do nothing 

2. uniform rules on types and level of 
administrative sanctions  

3. Minimum common rules on types 
of administrative sanctions  

4.  Minimum  common  rules  on  levels 
(minimum 
of 
administrative fines  

and  maximum) 

5.  Minimum  common  rules  on 
maximum  level  of  administrative 
fines  

6.  Uniform  rules  on  factors  to  be 
taken into account for the application 
of sanctions 

7.  Minimum  common  rules  on 
factors to be taken into account for 
the application of sanctions  

0 

++ 

+++ 

+++ 

++ 

+ 

0 

0 

+++ 

+++ 

++ 

++ 

++ 

++ 

0 

- 

+++ 

+ 

++ 

++ 

+++ 

+++ 

+++ 

- 

+++ 

++ 

++ 

+++ 

5.1.2.  Options concerning the personal scope of administrative sanctions  

Options35 

Description 

1: no EU action 

The  existing  sanctioning regimes will  continue  to  exist.  Member  States  will 
have to ensure compliance with the provisions on sanctions already contained 

35 

These options would apply to all key violations of the CRD. 

EN 

38 

   EN 

 
 
                                                 
in the CRD.  

2.  general  obligation 
to 
provide for the application of 
administrative  sanctions 
to 
both  individuals  and  credit 
institutions  

Member  States  would  be  obliged  to  provide  competent  authorities  with 
possibility  of  applying  sanctions  to  both  individuals  and  credit  institutions 
responsible for a violation. Competent authorities would establish whether the 
responsibility for a specific violation is on an individual or a credit institution 
or both, on the basis of the existing national rules on liability. 

the 

application 

3.  Minimum  common  rules 
of 
on 
to 
administrative  sanctions 
individuals 
credit 
institutions  

and/or 

Minimum common rules would be set out on the liability of individuals (i.e. 
managers,  employees  of  a  credit  institution)  and/or  credit  institutions.  For 
instance,  those  rules  may  establish  the  conditions  under  which  the  credit 
institutions and its managers are jointly responsible for a violation. 

Analysis of options  

(1) 

No EU action 

The  CRD  requires  Member  States  only  to  provide  for  the  application  of  administrative 
sanctions  "against  credit  institutions  or  those  who  effectively  control  the  business  of 
credit  institutions"  (Art.  54  Directive  2006/48/EC).  However,  compliance  with  this 
general clause cannot ensure that sanctions may be applied to the individuals who have 
key positions within the credit institutions (e.g. members of the Board).  

In the absence of any action at EU level, Member States would probably not extend the 
personal scope of administrative sanctions as currently provided in their legislation and 
they  would  continue  to  apply  their  national  liability  regimes.  The  fact  that,  in  some 
Member States, the individuals responsible for a violation will evade sanctions for their 
illegal  behaviour  would  probably  not  ensure  optimal  dissuasiveness.  The  problems 
relating  to  insufficient  deterrence  of  sanctions  (lack  of  enforcement  of  banking  rules, 
leading to improper functioning of financial markets) would remain unsolved. 

(2) 

Administrative  sanctions  applicable 
individuals  

to  both  credit 

institutions  and 

Under  this  option,  competent  authorities  would  have  the  power  to  establish  the 
responsibility  for  a  violation  on  an  individual  or  a  credit  institution  or  both  of  them. 
However, they would be left free to decide how to attribute this responsibility in a given 
case.  This  would  apply  to  all  violations  of  the  CRD  for  which  sanctions  are  provided. 
This would significantly increase dissuasiveness of sanctions: knowing that they cannot 
escape the negative consequences of their illegal behaviours, for instance the violation of 
reporting  obligations,  the  managers  of  credit  institutions  would  be  discouraged  from 
reiterating  such  behaviours.  Increased  dissuasiveness  of  sanctions  would  ensure  better 
compliance  with  EU  rules,  with  positive  impacts  on  consumer  protection,  fair 
competition, safety and stability of financial markets.  

Harmonising  the  personal  scope  of  sanctions  across  Member  States  would  also  have  a 
positive impact on the level playing field in the European financial market, as the players 
would  risk  to  be  held  liable  for  violations  of  EU  rules  wherever  they  operate  in  the 

EN 

39 

   EN 

 
European  Union.  This  would  also  increase  consumer  confidence  and  mutual  trust 
between supervisors.  

The  majority  of  the  respondents  to  the  consultation  on  the  Sanctions  Communication 
agree  that  competent  authorities  should  have  the  power  to  impose  administrative 
sanctions  to  both  individuals  and  legal  persons,  some  of  them  arguing  that  sanctions 
imposed  to  credit  institutions  are  more  deterrent  others  that  individuals  should  also  be 
held  liable  for  some  violations.  Respondents  are  of  the  view  that  competent  authorities 
should enjoy sufficient flexibility to decide  in each individual case to whom attributing 
responsibility for an infringement.  

This  option  would  require  legislative  measures  to  be  taken  at  national  level  only  in 
Member  States  where  the  scope  of  sanctions  do  not  cover  both  individuals  and  credit 
institutions  responsible  for  the  violation  (based  on  the  information  available  to  the 
Commission this concerns 3 Member States). 

For this option, the following fundamental rights are of relevance: right to an effective 
remedy and fair trial (Art. 47), presumption of innocence and right of defence (Art 48), 
freedom to conduct a business  (Art 16), consumer protection (Art 38), and – even though 
Art. 49 on the legality and proportionality of criminal offences and penalties may not be 
directly  applicable  to  all  of  the  administrative  sanctions  envisaged  –  the  general 
principles  of  legality  and  proportionality  underpinning  the  Charter.  In  relation  to  these 
fundamental  rights,  introducing  the  possibility  of  applying  administrative  sanctions  to 
both individuals and credit institutions will improve a coherent sanctioning regime across 
the EU and will increase deterrence of sanctions.  

This  option  will  not  harmonise  the  national  liability  regimes  and  will  not  affect  the 
procedure  for  the  imposition  of  administrative  sanctions.  Therefore  it  will  preserve 
Member States’ current arrangements ensuring compliance with procedural rights such as 
the right to an effective remedy and to a fair trial (Art. 47), the presumption of innocence 
and the right of defence (Art.48). 

The impacts of this option, and in particular the increased deterrence of sanctions brought 
by  it,  on  stakeholders  including  consumers  and  SMEs,  social  and  environmental 
matters,  third  countries  and  the  EU’s  global  competitiveness  are  similar  to  the 
impacts analysed in section 5.1.1 above (option 2). 

(3) 

Common  rules  on  the  application  of  administrative  sanctions  to  individuals 
and/or credit institutions  

Under  this  option,  competent  authorities  would  not  only  be  empowered  to  attribute 
responsibility for an infringement to both individuals and credit institutions, but also will 
apply  common  criteria  when  establishing  who  is  responsible  for  a  key  violation  of  the 
CRD.  Therefore,  when  a  violation  of  the  CRD  occurs,  the  individuals  and  the  credit 
institutions involved would be treated similarly in terms of liability in all Member States. 

EN 

40 

   EN 

 
This option would reduce divergences in the application of sanctions, which would have 
a  positive  impact  on  the  level  playing  field  in  the  European  financial  market.  To  the 
extent the common rules introduced would better target the response to a violation, this 
option may also increase dissuasiveness of sanctions. 

Several  stakeholders  have  raised  the  issue  of  how  responsibility  should  be  shared 
between financial institutions and individuals, and particularly between credit institutions 
and their managers or employees. However, they have divergent and sometimes unclear 
views  on  the  conditions  under  which  credit  institutions  should  or  should  not  be 
responsible  for  the  misconducts  of  their  employees  and  managers  should  be  held 
responsible for violations of banking rules. Some of them have expressed concerns on the 
possible impact that common rules in this area may have on the civil liability regime. In 
any  event,  the  majority  of  the  stakeholders,  including  the  public  authorities,  are  of  the 
view that the rules on responsibility should be left to the Member States at this stage. 

Indeed, this option would have a significant impact on Member States: they would be 
obliged to adapt their liability regimes to the common rules set at EU level, which may 
requires significant changes in the legislation. Those changes would probably concern not 
only  the  banking  legislation  but  also  general  rules  and  principles  of  the  national  legal 
systems and may have an impact on the civil liability of the persons concerned.  

The impacts of this option on fundamental rights, stakeholders including consumers 
and  SMEs,  social  and  environmental  matters,  third  countries  and  the  EU’s  global 
competitiveness are similar to the impacts of option 2.  

Comparison of options  

Option  1  would  preserve  the  "status  quo"  and  therefore  would  not  contribute  to  the 
achievement of the objectives set out in section 4. Option 3 would be more effective than 
option 2 in ensuring level playing field and better cross-border supervision, as it would 
introduce common rules on liability of individuals and credit institutions while option 2 
would only ensure that sanctions can be applied to both of them. As to the dissuasiveness 
of  sanctions,  the  difference  on  the  effectiveness  of  those  options  is  considered  to  be 
minor:  general  rules  on  liability  would  help  ensuring  deterrence  and  proportionality  of 
sanction only to the extent the existing liability regimes are inappropriate.  

Option  3  is  much  less  efficient  than  option  2,  as  it  would  require  more  changes  in 
national  legislation  and  may  oblige  Member  States  to  adapt  their  general  liability 
regimes:  under  Option  3  they  would  have  to  revise  the  national  rules  that  competent 
authorities  apply  to  decide  who  may  be  held  responsible  for  a  violation  while  under 
Option  2,  amendments  of  national  legislation  would  be  necessary  only  in  the  Member 
States  (3  according  to  the  available  information)  where  sanctions  are  not  applicable  to 
both  credit  institutions  and  individuals.  The  substantial  impact  option  3  would  have  on 
Member States' legal systems is not compensated for by an equally substantial increase in 
effectiveness  compared  to  option  2  –  the  key  objective  to  ensure  that  all  responsible 
persons can be sanctioned can be achieved by option 2 as well, while the only difference 
is that detailed rules and conditions for liability would not be harmonised.  

EN 

41 

   EN 

 
Based on the analysis of the impacts above, Option 2 has been selected. 

Effectiveness  in  achieving  the  specific  objectives  below  through  the 
relevant operational objective  

Improve 
dissuasiveness 
proportionality of sanctions 

effectiveness, 
and 

Develop 
playing field 

level 

Improve  trust 
between 
supervisors 

Efficiency 
in  achieving 
all 
objectives 

0 

+ 

0 

++ 

0 

0 

++ 

+++ 

++ 

+++ 

+++ 

+ 

1. Do nothing 

for 

2.  general  obligation  to 
the 
provide 
application 
of 
administrative sanctions 
to  both  individuals  and 
credit institutions  

3.  Minimum  common 
rules  on  the  application 
of 
administrative 
sanctions  to  individuals 
and/or credit institutions  

5.1.3.  Options concerning the publication of sanctions 

Options36 

Description 

1. Do nothing 

2.  publication  of 
sanctions  as  general 
rule 

3.  publication  of 
decided 
sanctions 
by 
competent 
authorities 

The  existing  sanctioning  regimes  will  continue  to  exist. Member  States  will  have  to 
ensure compliance with the provisions on sanctions contained in the CRD, which do 
not deal with the publication of sanctions  

Publication  of  sanctions  would  be  imposed  as  a  general  rule.  Exceptions  will  be 
allowed  but  only  in  certain  narrowly  defined  cases  (e.g.  when  publication  would 
seriously jeopardise the financial markets) 

Member  States  would  have  to  ensure  that  competent  authorities  have  the  power  to 
publish all sanctions imposed. Those authorities could decide whether or not sanctions 
imposed  in  a  particular  case  are  to  be  published  ,  but  they  would  have  to  properly 
justify the decision not to publish 

Analysis of options  

(1) 

No EU action 

In the absence of EU action, divergences will remain on the publication of sanctions. In 
seven Member States, competent authorities would continue to publish sanctions relating 
to  violations  of  banking  legislation  as  a  matter  of  course  without  restrictions37  while  in 
the  other  Member  States  similar  sanctions  would  not  be  always  published.  In  those 

36 
37 

These options would apply to all key violations of the CRD. 
CEBS report, p.58 

EN 

42 

   EN 

 
 
                                                 
Member  States,  competent  authorities  will  maintain  the  discretionary  power  to  decide 
whether or not sanctions have to be published, either on a named basis or anonymously.  

Inconsistencies  will  remain.  In  some  Member  States  the  systematic  publication  of 
sanctions  for  violations  of  the  CRD  will  ensure  those  sanctions  will  have  a  strong 
dissuasive effect not only on the credit institution or individuals concerned, which when 
considering  a  violation  of  the  CRD  will  likely  take  into  account  that  when  sanctioned 
they  risk  a  significant  negative  impact  on  their  reputation,  but  also  on  other  potential 
perpetrators  to  whom  the  publication  of  sanctions  is  likely  to  recall  the  chance  of  their 
violation being detected and sanctioned. In other Member States however, these positive 
effects of publication will not be present.  

(2) 

Publication of sanctions as a general rule  

This  option  would  significantly  increase  dissuasiveness  of  sanctions,  as  competent 
authorities  would  be  obliged  to  publish  all  sanctions  imposed  unless  an  exception  is 
applicable.  

Credit institutions would fear a negative impact on their reputation when they violate the 
CRD,  and  would  be  well  informed  about  the  enforcement  activity  of  the  competent 
authorities,  which  would  raise  their  awareness  of  the  risk  that  violations  are  detected. 
This will make such violations less attractive for them.  

The  public  consultation  has  shown  that  a  large  majority  of  stakeholders,  including 
public authorities, banks and associations of banks, consider the publication of sanctions 
as one of the most deterrent tools, particularly because of the reputational damage that the 
author of the violation will incur.  

Publication  of  imposed  sanctions  would  contribute  to  improve  market  integrity  and 
investor protection. Deposit-holders and investors would be alerted about the fact that a 
credit  institution  did  not  respect  the  applicable  rules  on  financial  soundness  and  proper 
management,  and  would  therefore  be  able  to  take  this  into  account  when  judging  the 
reliability of credit institutions for their investment and deposits. 

Public  authorities  as  well  as  some  banks  and  associations  of  banks,  support  systematic 
publication of sanctions with very limited exceptions, as they consider it as being of high 
importance  to  enhance  transparency  and  maintain  confidence  in  financial  markets. 
Consumers associations are particularly vocal on this issue since in their view systematic 
publication of sanctions can help consumers to make informed decision and avoid using 
the services of companies which infringe the rules. 

This option would require limited changes in national legislation of the Member States 
where competent authorities are not obliged to systematically publish sanctions (based on 
the  information  available  to  the  Commission,  today  15  Member  States  do  not 
systematically publish sanctions38). 

38 

Assessment based on CEBS report, and additional information by national authorities. 

EN 

43 

   EN 

 
 
                                                 
For  this  policy  option  the  following  fundamental  rights  are  of  relevance:  right  to  an 
effective remedy and fair trial (Art. 47), presumption of innocence (Art 48), freedom to 
conduct  a  business  (Art  16),  data  protection  (Art  8),  consumer  protection  (Art  38).  In 
relation to these fundamental rights, an obligation to publish all sanctions imposed unless 
an  exception  is  applicable  may  have  a  negative  impact  on  the  right  to  protection  of 
personal data (Art. 8) in regard to any individuals concerned. Moreover, it could have a 
negative impact on the credit institutions’ freedom to conduct a business (Art. 16), as any 
publication  of  the  value  judgment  by  the  authorities  imposing  the  sanction  risks  to 
impinge on the public image of the credit institution and to alienate existing or potential 
customers and investors. Those impacts are particularly relevant where the identity of the 
addressee of the sanction is disclosed. However, publication of sanctions is an important 
element  in  ensuring  that  sanctions  have  a  dissuasive  effect  on  the  addressees  and  is 
necessary  to  ensure  that  sanctions  have  a  dissuasive  effect  on  the  general  public. 
Publication of sanctions is also proportionate, provided that it includes information on the 
nature  and  seriousness  of  the  sanctioned  violation  which  is  factually  correct.  This  will 
ensure  that  the  public  value  judgment  inherent  in  the  publication  of  a  sanction  will  be 
proportionate to the violation. The interference with private life (Art.7) and protection of 
personal data (Art. 8) resulting from the publication and processing of sanctions will be 
addressed  by  national  laws  regulating  time  limits  on  publicity  of  sanctions  and  data 
processing of sanctions pursuant to Directive 95/46/EC. 

To the extent that a decision by a competent authority to impose a sanction is published 
when court appeals against that decision are still pending, the right to a fair trial (Art. 47) 
and  the  presumption  of  innocence  (Art  48)  are  also  relevant.  However,  the  envisaged 
policy option will enable national authorities to clearly indicate in the publication that the 
published decision is still subject to appeal. Publication of a sanction which clearly states 
that it is subject to appeal is not equivalent to a presumption of guiltiness and does not 
unfairly restrict the rights of the addressee in the court proceedings against that sanction, 
the very object of which is to ascertain whether the sanctioning decision is correct.  

The publication of sanctions can have a positive impact on consumer protection (Art. 38) 
as it will enable consumers to judge whether specific credit institutions respect applicable 
laws. 

The impacts of this option, and in particular the increase in effective deterrence brought 
by  it,  on  stakeholders  including  SMEs,  social  and  environmental  matters,  third 
countries  and  the  EU’s  global  competitiveness  are  similar  to  the  impacts  analysed  in 
section 5.1.1above (option 2). 

(3) 

Publication of sanctions to be decided by competent authorities 

Similarly to option (2), this option would increase deterrence of sanctions.  

However, the competent authorities would have to assess if the publication is appropriate 
in  a  specific  case  and  may  decide  not  to  publish  sanctions,  which  would  reduce  the 
deterrent effect of the publication.  

EN 

44 

   EN 

 
In  the  public  consultation,  some  minority  stakeholders  who  are  not  in  favour  of  a 
systematic  publication  of  sanctions  mention  a  number  of  different  reasons  that  may 
justify  the  decision  not  to  publish:  disproportionate  damages  to  the  parties  involved, 
public interest, minor offences, data protection, and liability issues. 

If  publication  is  excluded  on  the  basis  of  factors  such  as  the  potential  reputational 
damages to the author of the violation, deterrence would be significantly weakened. 

Similarly,  the  positive  effects  of  the  publication  on  market  integrity  and  consumer 
protection,  would  be  reduced  under  this  option  as  the  public  would  not  always  be 
informed about the violation of prudential rules and will therefore not be able to take this 
into  account  when  judging  the  reliability  of  credit  institutions  for  their  investment  and 
deposits. 

This  option  would  have  a  very  limited  impact  on  Member  States  as  it  would  require 
changes  only  in  national  legislation  of  the  Member  States  where  competent  authorities 
have not the power to publish all sanctions imposed for violations of the CRD or are not 
obliged to properly justify their decision not to publish. 

In relation to the fundamental rights, the impact is similar in nature to the impact of the 
previous  option.  However,  to  the  extent  that  the  fact  that  publication  is  not  mandatory 
will  lead  to  a  smaller  amount  of  sanctions  being  published,  the  impact  is  less  severe. 
Correspondingly,  the  positive  impact  on  consumer  protection  (Art.  38)  may  be  less 
accentuated.   

The impacts of this option on stakeholders including consumers and SMEs, social and 
environmental  matters,  third  countries  and  the  EU’s  global  competitiveness  are 
similar to the impacts of option 2. 

Comparison of options 

Option  1  would  preserve  the  "status  quo"  and  therefore  would  not  contribute  to  the 
achievement  of  the  objectives  set  out  in  section  4.  Option  2  would  be  much  more 
effective than option 3 in increasing deterrence of sanctions leading to better protection 
of  consumers  and  market  integrity,  and  in  improving  supervision.  Publication  of 
sanctions is expected to have a limited impact on the development of a level playing field 
but  option  2  would  be  more  effective  also  in  this  regards  as  credit  institutions  will  be 
treated similarly in all Member States. Option 3 is slightly more efficient than option 2, 
as  it  would  require  fewer  changes  in  national  legislation  and  Member  States  which 
already  provide  for  the  possibility  to  publish  sanctions  under  certain  conditions  to  be 
assessed by competent authorities would not be obliged modify their legislation. 

Based on the analysis of the impacts above, Option 2 has been selected. 

Effectiveness in achieving the specific objectives below through the 
relevant operational objective  

Efficiency 
achieving 
objectives 

in 
all 

Improve 
dissuasiveness 

effectiveness, 
and 

Develop level 

Improve 
between 

trust 

EN 

45 

   EN 

 
 
proportionality of sanctions 

playing field 

supervisors 

1. Do nothing 

2. 
of 
publication 
sanctions as general rule 

publication 

3. 
sanctions 
decided 
competent authorities 

of 
by 

0 

+++ 

+ 

0 

++ 

+ 

0 

++ 

++ 

0 

+++ 

++ 

5.2. 

Options concerning the framework for detection of violations  

The  mechanisms  facilitating  the  detection  of  sanctions  have  been  identified  in  the 
Sanctions Communication as an area where EU action may be envisaged. The analysis of 
other possible measures that may help improving application of sanctions and the reasons 
why EU action does not seem to be appropriate in other areas is contained in the Impact 
Assessment accompanying the Sanction Communication. 

Options39 

Description 

1: no EU action 

Member states would continue to use the existing investigatory tools 

2. 
whistleblowing 
procedure 
in 
institutions 

internal 

credit 

Member States will be obliged to provide an obligation on credit institutions  to 
put in place dedicated procedure for the internal reporting of potential violations 
as part of their corporate governance and audit arrangements 

systems 

3.  Member  States  to  set 
the 
up 
promotion and protection 
of whistleblowers   

for 

EU 
Detailed 
4. 
requirements  for  whistle 
blowing programmes 

Member States will be required to take appropriate measures to promote whistle 
blowing and to protect persons who denounce potential violations of the banking 
legislation  they  become  aware  of.  No  detailed  rules  will  be  established  on  how 
whistle blowing systems have to be designed, which will allow Member States to 
adopt the measures which best fit their legal systems. 

This  option  would  establish  detailed  requirements  at  EU  level  on  the  whistle 
blowing systems and procedures that Member States are required to put in place.  

Analysis of options  

(1) 

No EU action 

Under  this  option,  certain  Member  States  would  continue  to  provide  for  rules  obliging 
credit institutions to put in place early warning systems for malfunctions in the internal 
control  mechanisms  and  prohibiting  retaliation  against  whistleblowers.  However,  other 
Member  States  would  probably  not  put  in  place  consistent  and  predictable  programs  to 
encourage whistle blowing.  

39 

These options would apply to all key violations of the CRD. 

EN 

46 

   EN 

 
 
                                                 
Competent  authorities  would  continue  to  cooperate  with  each  other  making  use  of  the 
existing  mechanisms.  They  would  render  assistance  to  competent  authorities  of  other 
Member States, particularly by exchanging information and cooperating in investigation 
activities.  

Under  this  option,  the  EBA  could  further  facilitate  cooperation  between  competent 
authorities,  which  would  help  in  ensuring  more  consistent  application  of  sanctions  and 
more efficient supervisory activities. To this purpose, the EBA can use its power to carry 
out  peer  reviews  and  collect  information  on  sanctions  to  promote  exchange  of 
information and best practices between Member States. 

Internal whistle blowing procedures to be put in place by credit institutions  

(2) 
In  several  Member  States,  financial  institutions  are  either  required  (eg  FR40,  DE41)  or 
encouraged  (UK42)  by  the  financial  regulators  to  have  in  place  appropriate  internal 
procedures which will encourage employees with concerns to blow the whistle internally 
about potential violations of financial services rules. Beyond the financial services sector, 
corporate  governance  codes  in  some  Member  States  (eg  UK43,  NL44)  encourage 
undertakings to have such procedures in place. 
Several senior employees of credit institutions which required public support during the 
financial  crisis  in  2008/2009  had  alerted  their  employers  about  prudential  risks  and 
violations of prudential rules well before, but their alerts had been disregarded.45 

This  option  would  oblige  all  Member  States  to  provide  for  an  obligation  on  credit 
institution  to  ensure  that  appropriate  whistleblowing  procedures  are  in  place,  which 
would encourage the employees to report misconducts to the persons responsible within 
the institution. Those procedures would guarantee confidentiality and adequate protection 
of the personal data of both the whistleblower and the person denounced. 

40 

41

See Article 11-2(2) of CRBF [Banking and Financial Regulation Committee] Regulation No 97-
02; Article 321-23 of the General Rules of the AMF [Financial Markets Authority]. 

http://www.bafin.de/SharedDocs/Veroeffentlichungen/DE/Service/Rundschreiben/2009/rs__0915

__ba__marisk.html  
42 
43 

44 

45 

the 

and 

Code, 

relevant 

auditors' 

Corporate 

guidelines 

http://fsahandbook.info/FSA/html/handbook/SYSC/18/2;  
UK 
Governance 
(http://www.pcaw.co.uk/organisations_pdf/icaew.pdf). 
NL  Corporate Governance  Code:  “The  management  board  shall  ensure that  employees  have  the 
possibility of reporting alleged irregularities of a general, operational and financial nature in the 
company to the chairman of the management board or to an official designated by him, without 
jeopardising their legal position. Alleged irregularities concerning the functioning of management 
board members shall be reported to the chairman of the supervisory board. The arrangements for 
whistleblowers shall in any event be posted on the company’s website.” 
Whistleblowers had alerted internal  management or supervisory authorities before about failures 
that  were  exposed  by  the  financial  crisis,  including  in  important  financial  institutions  such  as 
Fortis,  HBOS,  or  Northern  Rock,  Lehman,  AIG  and  in  relation  to  the  Madoff  fund.  See  also 
United States Securities and Exchange Commission - Office of Inspector General, Investigation of 
Failure  of  the  SEC  To  Uncover  Bernard  Madoff's  Ponzi  Scheme,  Case  No.  OIG-509,  August 
2009,http://www.sec.gov/news/studies/2009/oig-509-exec-summary.pdf. 

EN 

47 

   EN 

 
                                                 
 
Clear and effective reporting and follow-up procedures for the receipt of whistle blowing 
alerts and for the protection of whistle blowers are key for the successful use of whistle 
blowing.46 This will be mutually reinforcing with the option (3) below. It will encourage 
persons (e.g. the employees of a bank) who have knowledge of a suspect violation thanks 
to their position within the credit institution, to report their suspicions to internal control 
functions.  The  "insider  knowledge"  may  be  a  very  useful  source  of  information  for  a 
credit institution’s senior management to become aware of violations of prudential rules, 
which  often  requires  complex  analysis  of  a  large  amount  of  information.  The 
management  or  control  functions  should  then  ensure  appropriate  follow  up  and  inform 
the competent authorities where necessary.  

Increasing  the  information  available  to  supervisors  means  that  this  option  significantly 
contributes  to  meeting  the  objective  of  increasing  the  detection  of  violations  by 
supervisors and thereby enable competent authorities to ensure sanctions provided for by 
law are effectively applied in all Member States. This will increase the dissuasiveness of 
sanctioning regimes for violations of the CRD, and will help create a level playing field 
between  credit  institutions  in  different  EU  Member  States  and  a  better  cooperation 
between banking supervisors.  

In  the  public  consultation,  almost  all  respondents  agreed  on  the  usefulness  of  whistle 
blowing systems. While the majority of public authorities, industry, unions and financial 
services  users  supported  minimum  convergence  in  the  area  of  whistleblowing,  another 
group  of  public  authorities  and  industry  felt  that  there  is  a  need  for  further  studies  and 
examination  before  acting  at  EU  level,  for  example  on  national  practices,  or  on  the 
impact of whistle blowing on civil liability or criminal sanctions, and another group was 
fully  opposed  to  EU  action  in  this  area.  Among  the  few  opponents  to  whistle  blowing, 
some feared a negative impact on privacy and a reversal of the burden of proof. 

In  terms  of  administrative  costs,  this  option  could  involve  some  costs  for  credit 
institutions to set up and manage the whistleblowers systems. An exact quantification of 
those  costs  cannot  be  made  as  they  would  largely  depend  on  the  requirements  that 
national  legislation  may  laid  down  on  how  to  implement  those  internal  systems. 
However, an indication of the potential costs involved could be found in the evaluation 
made  by  the  UK  FSA  in  2002,  which  concludes  that  costs  to  firms  of  introducing 
whistleblowing  procedures  are  minimal,  as  they  mainly  use  in-house  resources47.  For 
instance,  setting  up  costs  (awareness  and  training,  management  time,  consultancy  fees) 
were estimated at maximum £ 18.000 for large firms and much lower for small firms and 
continuing costs (management time, recording of complaints made) which are estimated 
at about £ 5.000 per year.  

46 

47 

Transparency  International,  “Alternative  to  silence  –  whistleblower  protection  in  10  European 
Countries”, 2010. 
Policy statement, Whistleblowing,the FSA & the financial services industry – Feedback on CP101 
and made text, April 2002, http://www.fsa.gov.uk/pages/Library/Policy/CP/2001/101.shtml 

EN 

48 

   EN 

 
                                                 
In  addition,  the  cost  of  setting  up  internal  whistleblowing  systems  will  be  mitigated  by 
the fact that these systems will be part of the corporate governance systems which those 
institutions  are  obliged  to  put  in  place  under  the  CRD  in  any  event  (see  in  particular 
impact assessment on CRD amendments relating to corporate governance). 

The following fundamental rights of the Charter of Fundamental Rights are of particular 
relevance: respect for private and family life (Art. 7) and protection of personal data (Art. 
8).  

The  proposed  measure  will  ensure  that  credit  institutions  and  investment  firms  provide 
adequate  procedures  and  protection  to  whistle  blowers  which  report  misconduct  to  the 
persons responsible within the institution, including the protection of private and personal 
data. In addition, the personal and private data of suspects under investigation as a result 
of  whistle  blowing  should  be  protected  by  the  credit  institution.  If  after  an  internal 
investigation  the  credit  institution  fails  to  detect  a  violation,  the  data  provided  by  the 
whistle blower should be deleted by it.  

As indicated above, whistle blowing activities may affect the protection of personal data. 
In order to mitigate this effect and ensure that it is not disproportionate to the objectives 
pursued  by  this  option,  the  implementation  of  whistle  blowing  schemes  must  comply 
with data protection rules laid down in Directive 95/46/EC48 and all the criteria indicated 
by the data protection authorities.49  

Due  to  the  low  expected  compliance  costs,  this  option  is  not  expected  to  have  specific 
negative impacts on SMEs.  

In relation to social impacts, employees of credit institutions who act as whistle blowers 
and report suspected violations to the authorities will benefit from better protection. The 
existing  horizontal  rules  on  the  protection  of  whistleblowers,  and  particularly  those 
contained  in  labour  legislation  will  remain  in  place  and  will  be  reinforced  by  the 
provision of more targeted rules. 

(3) 

Require Member States to set up systems for the protection of whistleblowers   

Some  Member  States  have  already  in  place  specific  systems  to  protect  whistle  blowers 
against reprisals, but such systems are usually horizontal rules (relating to, for example, 
labour law), and therefore are not specific to the financial services area.50 Other Member 

48 

49 

50 

Directive  95/46/EC  of  the  European  Parliament  and  of  the  Council  of  24  October  1995  on  the 
protection of individuals with regard to the processing of personal data and on the free movement 
of such data. 
Article 29 working party Opinion 1/2006 on the application of EU data protection rules to internal 
whistle  blowing  schemes  in  the  fields  of  accounting,  internal  controls,  auditing  matters,  fight 
against 
at:  
http://ec.europa.eu/justice/policies/privacy/docs/wpdocs/2006/wp117_en.pdf 
For  example  see  the  Public  Interest  Disclosure  Act  1998  (PIDA)  in  the  UK  which  protects 
employment rights for individuals who "blow the whistle", e.g. from and employer not offering a 

available 

financial 

banking 

bribery, 

crime, 

and 

EN 

49 

   EN 

 
                                                 
states  have  no  specific  provisions  at  all.  This  option  would  ensure  that  whistleblowers 
receive  appropriate  attention,  protection  and  are  not  discriminated  against.  This  option 
will  be  without  prejudice  of  the  existing  horizontal  rules  on  the  protection  of 
whistleblowers, and particularly those contained in labour legislation, which will remain 
in  place  and  will  be  reinforced  by  the  provision  of  measures  specific  to  the  banking 
sector. 

In  the  financial  sector,  several  senior  employees  of  credit  institutions  which  required 
public support during the financial crisis in 2008/2009 had  alerted the authorities about 
prudential  risks  and  violations  of  prudential  rules  well  before,  but  their  alerts  had  not 
received  strong  attention,  and  in  some  cases  they  suffered  retaliation  by  their 
employers51.  Clear  and  effective  reporting  and  follow-up  procedures  for  the  receipt  of 
whistle blowing alerts and for the protection of whistle blowers are key for the successful 
use  of  whistle  blowing  as  an  investigative  tool.52  This  option  will  ensure  competent 
authorities put in place specific systems to receive whistle blowing alerts, to dedicate to 
them the necessary investigative attention and to protect whistle blowers.  

In  the  public  consultation,  almost  all  respondents  agreed  on  the  usefulness  of  whistle 
blowing systems. Respondents considered that sufficient protection of whistleblowers is 
indispensible for that mechanism to work efficiently in practice in all Member States.  

This option could involve some costs for Member States to put in place and to manage 
whistleblowing systems, which would mainly depend on how they will implement those 
systems.  As  they  would  be  allowed  to  set  up  those  systems  within  the  existing 
administrative structure and to manage them by using the financial and human resources 
already affected to the competent authorities activities, the costs relating to this option are 
expected to be limited limited.53  

This option will be mutually reinforcing with the option (2) above as credit institutions’ 
internal  whistle  blowing  systems  may  not  always  ensure  that  violations  are  terminated 
and the necessary information is forwarded to the competent authorities. It will encourage 
persons (e.g. the employees of a bank) who have knowledge of a suspect violation thanks 
to  their  position  within  the  credit  institution,  to  report  their  suspicions  to  competent 
authorities and will encourage competent authorities to take such alerts seriously.  

51 
52 

53 

promotion or other opportunities  they  would have otherwise  offered.  For  example,  in FR,  under 
Labour law retaliation against whistleblowers is prohibited (See Article L. 1161-1 of the Labour 
Code).  
See above footnote 46. 
Transparency  International,  “Alternative  to  silence  –  whistleblower  protection  in  10  European 
Countries”. On the effectiveness of whistleblowing programmes see also US SEC – Assessment of 
the 
http://www.sec-
programme, 
oig.gov/Reports/AuditsInspections/2010/474.pdf 
The UK FSA authority estimated that the total amount of work undertaken to implement a 
complete guidance and information sheet on whistleblowing is equivalent to one full-time member 
of staff working   for one year. See reference in footnote 50.  

bounty 

March 

2010, 

SEC 

EN 

50 

   EN 

 
 
 
                                                                                                                                                 
 
 
Likewise  option  2,  increasing  the  information  available  to  supervisors  means  that  this 
proposal significantly contributes to meeting the objective of increasing the detection of 
violations by supervisors. This will increase the dissuasiveness of sanctioning regimes for 
violations  of  the  CRD,  and  will  contribute  to  the  development  of  a  level  playing  field 
between  credit  institutions  in  different  EU  Member  States  and  a  better  cooperation 
between banking supervisors.  

By protecting those who support law  enforcement by competent  authorities, this option 
will have a positive impact on such individuals. On the other hand it may have a negative 
impact  on  the  confidentiality  of  information  held  by  credit  institutions,  as  information 
submitted  by  employees  to  public  authorities  will  likely  include  personal  data  and 
business  secrets.  Therefore,  whistle  blowing  systems  must  comply  with  data  protection 
principles and criteria indicated by the data protection authorities.54 

In  relation  to  fundamental  rights,  the  proposed  measure  will  ensure  protection  of 
whistle  blowers,  including  the  protection  of  private  and  personal  data.  In  addition,  the 
personal and private data of suspects under investigation for violations of the CRD as a 
result  of  whistle  blowing  should  be  protected  by  the  competent  authorities.  If  the 
investigation fails to detect a violation, the data provided by the whistle blower should be 
deleted by the competent authorities. To this end, competent authorities should assess if 
there are reasonable grounds to suspect a violation. In addition, whistle blowing activity 
should preserve the "presumption of innocence and right of defence" (Art. 48). While the 
whistle  blowing  activity  will  contribute  to  the  detection  of  violations,  competent 
authorities should assess if there are reasonable grounds to suspect a violation, based on 
the presumption of innocence and right of defence when they pursue their investigations. 
As  indicated  above,  whistle  blowing  activities  affect  the  protection  of  personal  data.  In 
order  to  mitigate  this  effect  and  ensure  that  it  is  not  disproportionate  to  the  objectives 
pursued  by  this  option,  the  implementation  of  whistle  blowing  schemes  must  comply 
with data protection rules laid down  in Directive 95/46/EC  and all  criteria  indicated by 
the data protection authorities.55  

As regards social impacts, this option will have similar positive effects on the protection 
of employees as option 2. 

(4) 

Detailed EU requirements for whistle blowing systems 

This  option  would  establish  detailed  requirements  at  EU  level  on  the  whistle  blowing 
systems and procedures that Member States are required to establish. These requirements 
would  include  specific  provisions  on  reporting  mechanisms  (for  example  telephone 
numbers or email boxes) and published guidance to be provided by competent authorities 
(for example a web page outlining the protection available to whistle blowers), and rules 

54 
55 

EN 

See above footnote 49 
Article 29 working party Opinion 1/2006 on the application of EU data protection rules to internal 
whistle  blowing  schemes  in  the  fields  of  accounting,  internal  controls,  auditing  matters,  fight 
against 
at:  
http://ec.europa.eu/justice/policies/privacy/docs/wpdocs/2006/wp117_en.pdf 

available 

financial 

banking 

bribery, 

crime, 

and 

51 

   EN 

 
                                                 
on  the  competent  authorities'  procedures  for  handling  the  information  including 
confidentiality requirements. 

This  option  would  ensure  that  persons  envisaging  to  blow  the  whistle  could  be  sure  to 
receive the same support and protection in all EU Member States. Procedures would be 
harmonised  across  the  EU,  and  in  cases    relevant  to  authorities  from  several  Member 
States involved for example in the supervision of a cross-border banking group, whistle 
blowers  could  be  sure  that  the  procedures  to  be  followed  would  be  the  same  for  all 
Member States concerned.  However, in the absence of a convergence in procedural rules 
for  the  imposition  of  sanctions  between  Member  States  this  would  require  major 
modifications of these rules in most Member States. Moreover, such detailed rules may 
require  adjustments  depending  on  whether  sanctioning  powers  are  held  exclusively  by 
supervisory  authorities  or  are  shared  between  supervisory  authorities  and  courts.  In  the 
latter case this may require a modification of judicial procedures.  

In  relation  to  fundamental  rights,  any  whistle  blowing  programme  should  preserve 
particularly the "presumption of innocence and right of defence" (Art.48). While whistle 
blowing  programmes  will  contribute  to  the  detection  of  violations  and  the  gathering  of 
evidence,  this  should  not  affect  the  standard  of  proof  to  be  applied  by  the  competent 
authorities  when  imposing  a  sanction.  Competent  authorities  will  have  to  prove  to  the 
requisite  standards  under  national  law  whether  a  violation  has  been  committed  or  not, 
based  on  the  presumption  of  innocence  and  right  of  defence  when  they  pursue  their 
investigations.  As  stated  in  Options  2  and  3,  this  option  may  affect  the  protection  of 
personal data. In order to mitigate this effect and ensure that it is not disproportionate to 
the objectives pursued, the EU rules on whistle blowing schemes would include detailed 
safeguards for the compliance with data protection rules laid down in Directive 95/46/EC 
and  all  the  criteria  indicated  by  the  data  protection  authorities.  Incentives  for  whistle 
blowers should be proportionate and only be granted in case where the investigation has 
lead  to  the  effective  detection  of  a  violation  and  to  a  sanction  and  should  not  interfere 
with the fundamental right of presumption of innocence.   

As regards social impacts, this option will have similar positive effects on the protection 
of employees as option 2. 

Comparison of options  

Options 2, 3 and 4 are all effective in pursuing the objective achieved, a higher detection 
of  violations  of  the  CRD  leading  to  a  higher  level  of  enforcement  and  ultimately  to  a 
more  effective,  dissuasive  and  proportionate  sanctioning  regime  in  all  Member  States. 
Option 4 is considered slightly more effective in this regard as it will ensure procedural 
convergence between the systems put in place in Member States.  

All three options have impacts on fundamental rights, in particular the respect for private 
and family life (Art. 7), protection of personal data (Art. 8) and presumption of innocence 
and right of defence (Art 48). However, those impacts can be mitigated by requiring the 
processing  of  personal  data  in  compliance  with  Directive  95/46/EC  and  adequate 
procedures for the protection of confidential information, and clarification that competent 

EN 

52 

   EN 

 
 
authorities should assess if there are reasonable grounds to suspect a violation. In view of 
this mitigation, and given the importance of the objectives to ensure sanctioning regimes 
for  violations  of  the  CD  are  effective,  dissuasive  and  proportionate,  this  impact  is 
necessary and proportionate. 

Options  2  and  3  are  equally  efficient  in  terms  of  impact  on  Member  States  and  credit 
insitutions: they would both require changes in national legislation and procedures to be 
put  in  place  by  Member  States  and  credit  institutions,  and  would  involve  compliance 
costs  to  set  up  and  manage  the  whistle  blowing  systems.  This  would  concern  Member 
States where no whistle blowing mechanisms are currently in place (i.e. a large majority 
of member States).  

Option  4  is  considered  to  be  inefficient  as  it  would  require  more  radical  changes  in 
national  legislation,  probably  also  in  Member  States  which  already  provide  for 
whistleblowing  mechanisms,  in  order  to  comply  with  the  EU  requirements.  Moreover, 
EU detailed rules may require adjustments depending on whether sanctioning powers are 
exercised  exclusively  by  supervisory  authorities  or  are  shared  between  supervisory 
authorities  and  courts.  In  the  latter  case  this  may  require  a  modification  of  judicial 
procedures. Compliance costs could also be higher than those required by Options 2 and 
3  as  Member  States  will  have  less  flexibility  on  how  to  implement  the  whistleblowing 
mechanisms. Those impacts are not justified by the slightly higher effectiveness of this 
option in improving dissuasiveness of sanctions. 

Based on the analysis of the impacts above, Options 2 and 3 have been selected.  

Effectiveness in achieving the specific objectives below through 
the relevant operational objective 

Efficiency 
achieving 
objectives 

in 
all 

Improve 
dissuasiveness 
proportionality of sanctions 

effectiveness, 
and 

Develop 
level  playing 
field 

Improve 
between 
supervisors 

trust 

1. Do nothing 

2.  Internal  whistleblowing 
procedure 
credit 
institutions 

in 

3.  Member  States  to  set  up 
systems for the protection of 
whistleblowers   

4.  Detailed  EU  requirements 
for 
blowing 
programmes 

whistle 

0 

+ 

+ 

++ 

5.3. 

Preferred policy options 

0 

+ 

+ 

+ 

0 

+ 

+ 

+ 

0 

+ 

+ 

- 

In the light of the comparative analysis carried out in section 5.1, the following options 
have  been  selected  in  the  two  main  areas  of  the  legal  framework  and  the  actual 
application of sanctions. 

EN 

53 

   EN 

 
 
 
Legal framework of sanctions 

The most appropriate to approximate and reinforce the legal framework is a combination 
of  the  options  analysed  in  the  four  sub-groups  identified,  which  are  considered  to  be 
mutually reinforcing: 

Appropriate administrative sanctions:  

•  Minimum  common  rules  on  the  type  of  administrative  sanctions  to  be 

available to competent authorities 

•  Minimum  common  rules  on  maximum  level  of  pecuniary  administrative 

sanctions 

•   List  of  key  factors  to  be  taken  into  account  when  determining  the 

administrative sanctions 

Personal scope of administrative sanctions 

•  Obligation  to  provide  for  the  application  of  administrative  sanctions  to 

both individuals and credit institutions 

Publication of sanctions 

•  Publication of sanctions as a general rule. 

Detection of violations 

The most appropriate to approximate and reinforce the mechanisms facilitating detection 
of violations is a combination of the following mutually reinforcing options  

•  Internal whistleblowing procedure in credit institutions 

•  Require  Member  States  to  set  up  systems  for  the  protection  of 

whistleblowers  

Choice of the instrument 

Legislative action is necessary to implement the preferred policy options, which require 
changes  in  national  legislation.  Those  policy  options  will  be  implemented  by  way  of 
introducing provisions on sanctions in the CRD. 

5.3.1.  Cumulative impacts of the preferred options  

The impacts of the preferred options will be further reinforced by the cumulative nature 
of  the  action  taken,  as  convergence  on  all  of  those  issues  together  will  ensure  national 
authorities have at their disposal a broad range of sanctioning powers that enable them to 
apply,  in  each  specific  case,  the  sanctions  that  are  the  most  appropriate  in  terms  of 

EN 

54 

   EN 

 
effectiveness, proportionality, and dissuasiveness. On the other hand, taking policy action 
on  only  some  of  the  issues  considered  (e.g.  the  publication  of  sanctions),  but  not  on 
others  (e.g.  the  type  and  level  of  sanctions)  will  not  lead  to  such  synergies  and  will 
substantially  reduce  the  positive  impact  on  the  specific  objectives  of  the  initiative  to 
achieve  stronger  deterrence.  The  publication  of  sanctions  will  have  a  clear  deterrent 
effect on some potential violators such as institutions with a strong brand but the negative 
publicity  linked  to  it  may  have  only  minimal  impacts  on  other  institutions  competing 
exclusively  on  factors  such  as  price,  for  whom  on  the  contrary  high  fines  may  have  a 
much stronger deterrent effect. 

The  cumulative  action  will  therefore  increase  the  positive  effect  on  credit  institutions, 
deposit-holders  and  investors,  and  on  public  authorities  in  charge  of  the  application  of 
sanctions,  as  well  as  on  stakeholders,  SMEs,  and  in  relation  to  social  impacts,  third 
countries and EU competitiveness. 

5.3.2. 

Impact on EU budget 

The policy options selected do not have any implication for the budget of the European 
Union.  Revision  of  sanctioning  regimes  would  be  primarily  managed  by  national 
authorities. 

6. 

MONITORING AND EVALUATION 

The Commission is the guardian of the Treaty and therefore will verify timely and correct 
implementation of the provisions on sanctions introduced in the CRD. When necessary, 
the Commission will pursue infringement proceedings under the EU Treaty in case any 
Member State fails to respect its duties concerning the implementation and application of 
EU Law.  

The  evaluation  of  the  consequences  of  the  application  of  the  legislative  measure  could 
take place three years after the entry into force of the legislative measure, in the context 
of a report to the Council and the Parliament. 

The main indicators of the effectiveness of the measures introduced are: 

•  Number of violations detected and number of sanctions applied; 

•  Practice  of  the  national  competent  authorities  in  the  application  of  sanctions  (e.g. 
sources of information used in the investigation, level of fines applied, criteria taken 
into account in calculation that level); 

The main sources of information that could be used in the evaluation are as follows: 

• 

Peer  reviews  carried  out  by  the  European  Banking  Authority,  which  has  taken 
up its work on 1 January 2011 and has been conferred the explicit task to carry 
out peer reviews of competent authorities, including in the area of sanctioning.  

EN 

55 

   EN 

 
• 

• 

A report (which could be undertaken by the European Banking Authority) on the 
experience gained by supervisors in enforcing the legislation. 

If  not  already  covered  by  the  EBA  peer  reviews,  information  from  national 
competent authorities on the modifications made following the entry into force 
of the directive and the number of cases they have investigated and sanctioned. 

EN 

56 

   EN 

 
ANNEX I 

Summary of responses to the public consultation on Commission Communication - 
Reinforcing sanctioning regimes in the financial sector  

Introduction 

On 8 December 2010, the European Commission published a consultation document on 
sanctioning regimes in the financial sector and invited the stakeholders to respond by 18 
of February 2011. The Commission received 61 replies. This document summarises the 
contributions received. 

The public consultation raised interest among a broad range of stakeholders. Responses 
were categorised in the following broad definitions shown in Figure 1. 

19%

9%

28%

44%

Public autorities

Industry

Consumers/investors
associations
Others

Public authorities (governments, regulators and supervisors) 

Financial industry (industry associations and individual financial institutions) 

Consumers/investors associations 

Others (individuals, academics, research bodies, law firms etc)  

Among  all  the  responses  received,  28%  were  sent  by  the  interest  representatives 
registered within the EU Register of Interest Representatives. 

Responses to the public consultation  

General comments on envisaged legislative approach 

A  significant  majority  of  respondents  shared  the  Commission's  analysis  of  the 
shortcomings in the existing national sanctioning regimes in the financial sector in terms 
of lack of sufficient deterrence and divergences in the application of sanctions across the 
EU. Different views were expressed on the solution to solve the existing shortcomings.  

EN 

57 

   EN 

 
 
The majority of the respondents agreed that there should be a minimum harmonisation of 
national  sanctioning  regimes  while  the  minority  suggested  considering  alternative 
solutions.  Some  minority  respondents  (two  public 
industry 
representatives)  considered  that  the  Commission  should  provide  for  non-binding 
recommendations  rather  than  for  binding  legislation.  Other  minority  respondents  (one 
public institution, an individual company) were of the view that the Commission should 
rather  act  against  some  individual  Member  States,  which  fail  to  enforce  properly  the 
financial services legislation, rather than harmonising the rules. 

institutions,  some 

Comments on key issues for approximation  

The  majority  of  the  respondents  are  to  a  varying  degree  supportive  of  a  minimum 
harmonisation of national sanctioning comprising the following issues: appropriate types 
of sanctions (1), publication of sanctions (2), level of administrative fines (3); addressees 
of sanctions (4), appropriate criteria to be taken into account when applying sanctions (5), 
appropriateness to introduce at EU level some mechanisms facilitating enforcement such 
as  whistle-blowing  and  leniency  (6).  Numerous  comments  were  also  submitted  on  the 
introduction  of  criminal  sanctions  for  the  most  serious  violations  of  the  EU  financial 
services legislation (7). 

(1) Appropriate types of administrative sanctions 

There  is  a  consensual  view  among  different  stakeholders  that,  to  have  a  level  playing 
field  in  the  EU,  a  common  set  of  core  administrative  tools  should  be  available  to  all 
national  competent  authorities  to  address  key  violations  of  the  EU  financial  services 
legislation.  Respondents  underlined,  however,  that  this  set  of  tools  should  be  non-
exhaustive  in  the  sense  that  the  Member  States  should  be  left  free  to  provide  their 
authorities with additional powers. Respondents also stated that the EU initiative should 
be  limited  at  this  stage  to  a  common  set  of  administrative  tools.  Indeed,  the  competent 
national  authorities  should  continue  to  benefit  from  a  wide  flexibility  to  use  the  most 
appropriate tool for each individual violation.  

In  the  view  of  the  majority  of  respondents,  the  common  set  should  comprise  both 
sanctions  and  measures  taken  by  competent  authorities  to  address  a  breach  of  EU 
financial  services  legislation.  There  is  a  broad  agreement  that  the  Commission  should 
reflect  on  including  at  least  the  following  tools:  warnings;  cease  and  desist  orders; 
restriction/prohibition  of  certain  activities;  removal  of  individuals  from  management 
positions;  revocation  of  authorisation/licence  if  the  activity  in  question  is  subject  to 
authorisation/licensing; imposition of monetary sanctions. 

(2) Publication of sanctions 

The  publication  of  the  sanctions  triggered  numerous  comments.  Respondents  broadly 
agree that sanctions should be published but there were different views expressed on how 
to  publish  the  sanctions.  Some  respondents,  in  particular  the  public  authorities  and 
consumer  associations,  considered  that  there  should  be  a  general  rule  requiring  the 
publication  of  sanctions.  This  is  because  the  publication  of  sanctions  creates  more 

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transparency  in  the  decisional  practice,  reinforces  deterrence  of  sanctions  and  helps 
customers  of  the  companies  concerned  and  investors  to  take  informed  decisions.  Other 
respondents, in particular the industry representatives, believe that the publication should 
be  decided  on  a  case-by  case  basis  in  view  of  the  high  reputational  damage  this  could 
create for an individual company.  

As  regards  the  exceptions  to  the  publication,  the  public  authorities  considered  that  the 
exceptions  to  the  publication  should  be  limited  to  the  situation  when  disclosure  of  the 
sanctions  to  the  public  at  large  would  seriously  jeopardise  the  financial  markets.  Some 
respondents from the industry considered that there should be a case-by-case assessment 
whether  the  publication  of  the  sanction  is  liable  to  create  disproportionate  reputation 
damage for the company concerned, in which case the sanction should not be published. 
Others proposed to have a de minimis rule, that is not to publish the sanctions imposed on 
small companies or for small offences. 

The  respondents  provided  different  answers  on  when  a  decision  should  be  published. 
Some  respondents,  in  particular  consumer  associations,  favoured  a  maximum  of 
transparency  with  a  wide  publication  requirement.  Other  respondents  considered  that 
only  final  decisions  of  competent  authorities  punishing  an  identifiable  breach  of  law 
should  be  published  (excluding  intermediate  decisions  such  as  the  decision  to  launch 
investigation or simple warnings). A group of respondents considered that decisions can 
only  be  published  when  all  legal  remedies  (appeals)  available  against  a  decision  were 
exhausted.  

(3) Level of administrative pecuniary sanctions 

Respondents  were  in  general  favourable  to  harmonising  certain  aspects  related  to  the 
level  of  administrative  fines  in  order  to  have  more  deterrent  and  effective  sanctioning 
regimes  in  the  EU.  Only  a  small  minority  expressed  the  view  that  legislative 
harmonisation is not warranted in this area.  

The public consultation triggered a lot of discussions on which levels should be subject to 
harmonisation. To increase deterrence, few respondents advocated for a harmonisation of 
the  minimum  levels  of  the  fines.  However,  most  of  the  respondents  rejected  this  idea 
mainly because of the difficulty to establish an appropriate minimum figure in the EU 27. 
There  is  however  a  broad  agreement  among  the  stakeholders  that  the  EU  law  could 
provide  for  a  sufficiently  high  maximum  levels  to  be  applied  across  the  EU  to  allow 
competent  authorities  to  apply  deterrent  sanctions  even  for  the  most  serious  violations. 
As regards the issue of how to calculate the levels of fines, some stakeholders expressed 
their preference for a calculation based on objective criteria such as a percentage of the 
turnover or based on profits derived from the violation. 

(4) Addressees of the administrative sanctions 

The  results  of  the  public  consultation  showed  that  there  is  a  large  consensus  on  the 
principle  that  the  national  competent  authorities  should  be  able  to  impose  sanctions  on 
both  individuals  and  financial  institutions.  Only  two  public  authorities  from  a  Member 

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State  and  one  industry  representative  considered  that  it  is  inappropriate  to  introduce  at 
EU  level  the  possibility  for  regulators  to  impose  sanctions  on  individuals.  The  two 
opposing public authorities considered that regulators are not well equipped to scrutinise 
the  subjective  elements  of  an  offence  (intent,  negligence)  committed  by  individuals, 
which  can  be  better  assessed  by  courts  in  criminal  cases.  The  industry  representative 
considered  that  the  issue  on  whom  to  impose  sanctions  should  be  left  to  the  Member 
States to decide. 

Respondents  provided  numerous  comments  on  whom  to  impose  a  sanction  in  an 
individual case. Some respondents are of the view that sanctions should be imposed on 
individuals  only  in  exceptional  cases  when  they  are  individually  obliged  to  fulfil  some 
legal  requirements  (i.e.  appropriate  qualification  required  by  law).  Other  respondents 
favoured a more extensive approach whereby an authority decides on case-by-case basis 
whether a sanction to be imposed on an individual is appropriate. 

(5) Appropriate criteria for sanctions 

There is a consensual view among different stakeholders that all the national competent 
authorities from the EU have to use a common set of appropriate criteria when applying 
sanctions.  As  for  the  types  of  sanctions,  respondents  underlined  that  this  set  of 
appropriate  criteria  should  be  non-exhaustive  in  the  sense  that  the  Member  States  may 
provide any additional criterion to be taken into account by their authorities. Respondents 
also  stated  that,  at  this  stage,  the  EU  initiative  should  not  limit  the  freedom  of  the 
competent national authorities to weigh different criteria when determining a sanction in 
an individual case.  

In the view of the majority of respondents, the common set of criteria should comprise at 
least the following: seriousness and duration of the violation; financial strength and size 
of  the  offender;  benefits  deriving  from  the  violation  when  those  can  be  established; 
impact on the market/losses incurred by third parties; repeated breach; cooperation by the 
offender during the investigation; survival of the company as a result of the sanction. 

(6)  Mechanisms 
enforcers 

facilitating  administrative  enforcement  and  cooperation  among 

The  results  of  the  public  consultation  show  that  there  is  a  broad  agreement  among 
stakeholders that some mechanisms, such as the whistle-blowing  and to  a lesser degree 
leniency,  could  considerably  facilitate  the  enforcement  of  the  EU  financial  services 
legislation.  The  views  are,  however,  divided  on  the  necessity  to  foresee  any 
harmonisation in this area at the EU level. Some stakeholders support the idea of some 
degree  of  harmonisation  while  others  consider  that  any  EU  action  at  this  stage  is  still 
premature in the light of the limited knowledge about the national practices. 

Respondents  expressed  a  bigger  interest  for  whistle-blowing  than  for  leniency.  The 
respondents,  who  were  in  favour  of  harmonisation  in  the  area  of  whistle-blowing, 
considered  that  the  EU  initiative  should  be  limited  to  general  principles.  Some 
respondents,  in  particular  some  industry  representatives  and  companies,  considered  that 

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the  EU  initiative  could  require  the  Member  States  to  introduce  only  internal  (intra-
company)  whistle-blowing.  Other  respondents,  in  particular  the  public  authorities,  were 
of  the  view  that  the  EU  initiative  should  cover  also  the  external  whistle-blowing  (i.e. 
whistle-blowing directly to the competent authorities).  

Some respondents also pointed out that any successful whistle-blowing procedure should 
provide  for  an  adequate  protection  for  whistle-blowers  against  the  retaliation  of  the 
offender by preserving their anonymity and/or providing for immunity from any judicial 
action  against  bona  fide  whistle-blowers.  As  to  the  issue  of  financial  incentives  for 
whistle-blowers,  some  respondents,  including  a  consumer  association,  expressed  a 
negative opinion in view of the risk of abuse.  

be 

should 

available 

Fewer  comments  were  received  on  leniency.  A  respondent  (academic)  indicated  that 
leniency 
several 
individuals/companies,  such  as  for  instance  the  insider  dealing  rings.  Some  other 
respondents  stated  that  leniency  should  only  be  available  for  undetected  breaches  since 
cooperation  in  the  ongoing  investigation  is  already  taken  into  account  to  reduce 
sanctions.  A  law  firm  insisted  on  the  right  incentives  to  be  provided  for  leniency 
applicants. 

infringements 

involving 

only 

for 

There is a large consensus that a good cooperation between enforcers is key to ensure a 
convergent decisional practice across the EU. Many respondents underlined the important 
role of the new European Supervisory Authorities (ESAs) in that respect. 

(7) Criminal sanctions 

The  respondents  are  divided  on  requiring  the  Member  States  to  introduce  criminal 
sanctions  for  some  violations  of  the  EU  financial  services  legislation.  Although 
respondents  generally  agree  that  criminal  sanctions  could  considerably  increase 
deterrence, different views were expressed on whether the EU should act in this area.  

Some  respondents,  including  public  authorities,  a  consumer  association  and  to  a  lesser 
degree some industry representatives, are favourable for introducing the obligation for the 
Member States to foresee criminal sanctions under strict conditions. Thus in their view, 
criminal  sanctions  could  be  introduced  for  the  most  serious  violations  for  which 
administrative  sanctions  are  not  sufficiently  deterrent  and  under  strict  compliance  with 
fundamental rights and with proportionality and subsidiarity principles.  

Other respondents, in particular some public authorities and to larger degree the industry, 
are not favourable for requiring the Member States to criminalise certain violations of the 
EU  financial  services  legislation.  Some  respondents,  who  shared  the  view  that  criminal 
sanctions could be more deterrent than administrative sanctions in some cases, considered 
that it should be left to the Member States to decide when and for which infringements to 
introduce  criminal  sanctions.  Other  respondents  questioned  the  assumption  that  the 
criminal sanctions are more efficient than administrative sanctions. In their view, it is in 
general  more  difficult  to  handle  criminal  cases  because  of  the  higher  procedural  and 
evidence  requirements  in  criminal  proceedings  and  because  of  the  reliance  on  criminal 

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courts,  which  are  not  always  well  prepared  to  assess  complex  financial  issues.  Other 
respondents  with  a  negative  view  on  criminal  sanctions  pointed  at  the  risk  of  having 
divergences in the application of the EU law since it is not easy to foresee a cooperation 
mechanism among criminal courts within the EU.  

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Nature and size of the market concerned  

ANNEX II 

This  annex  aims  at  providing  a  general  description  of  the  banking  sector  in  the  EU, 
namely, its size, main characteristics and role in the financing of the real economy. 

The size of the EU banking sector 

The  EU  banking  sector  is  a  key  sector  in  the  EU  economy.  In  relative  terms,  the  EU 
banking sector is larger than its US counter part, which accounted respectively for 340% 
of GDP and 92% of GDP in 2009. Until the outbreak of the crisis, the EU banking sector 
grew  steadily,  in  term  of  total  assets,  to  reach  a  maximum  of  over  €45,000  bn  in  late 
2008. After this peak, it slightly declined and stagnated at around €43,000 bn. 

Chart 01: Total assets of Euro Area MFIs 

MFIs excluding the Eurosystem. € bn 

EU 27

Euro  A rea

45,000

40,000

35,000

30,000

25,000

20,000

15,000

2002

2003

2004

2005

2006

2007

2008

2009

2010

   Source: ECB: Aggregated balance sheet of EA MFIs and own calculations 

Chart 01 illustrates the increasing size of the banking sector by plotting the evolution of 
the total assets of Euro Area Monetary and Financial Institutions (MFIs). Although MFIs 
include  both  money  markets  funds  and  credit  institutions,  the  share  of  the  former  is 
relatively negligible (just over €1,000 bn, around 4% of MFIs).  

In 2008, the banking sector in EU27 was 3.4 times its GDP56. However, these aggregate 
figures  hide  very  different  realities  across  countries.  The  banking  sector  is,  in  general, 
much more developed in the old Member States than in the recently acceded ones. LU, 

56 

It should however be kept in mind that GDP is an annual flow while the size of the banking sector 
in terms of total assets is a stock. 

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63 

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MT, IE, CY, UK and DK have a very important banking sector with a size over 4 times 
their GDP. On the other hand, RO, LT, PL, BG, SK, CZ are characterized by a banking 
sector smaller than their GDP (See Chart 02). 

Over  the  recent  years  (2005-2008),  the  banking  sector  grew  steadily  in  most  countries, 
although the growth has been particularly important in MT, IE, CY and DK.  

Chart 02: Total assets of credit institutions with respect to GDP  

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Note: Values for Luxembourg ranked from 26.2 in 2005 to 25.4 in 2008. 

Source: European Central Bank and own calculations. 

The  EU  banking  sector  is  the  main  financing  source  for  the  real  economy.  It  is  also  a 
major contributor to the added value of our economies and an important employer. As an 
illustration, the EA financial sector generates an added value of over €400 bn (equivalent 
to 5% of the GDP). In 2007, people working in the financial sector represents around 3% 
of the EA workforce. 

European integration of banking markets 

The European financial market is becoming more and more integrated, particularly in the 
wholesale financial sector, and there are a growing number of large financial groups and 
infrastructures  operating  on  a  pan-European  basis.  Although  the  financial  crisis  led  to 
increased market segmentation, the level of financial integration remains high.  

The  banking  market  is  dominated  by  pan-European  groups  active  in  several  Member 
States,  whose  risk  management  functions  are  centralised  in  the  group's  headquarters. 
Currently around 70% of EU banking assets is in the hands of some 40 banking groups 
with  substantial  cross-border  activities.  Especially  in  the  EU-12,  banking  markets  are 
dominated by foreign (mostly Western European) financial groups (see Chart 2). In these 
countries, on average 65% of banking assets are in foreign-owned banks. In countries like 
Estonia,  the  Czech  Republic  and  Slovakia  over  92%  of  banking  assets  are  in  foreign-
owned banks. 

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Chart 3 - Market share of foreign-owned banks (% of total assets) 

100

90

80

70

60

50

40

30

20

10

0

EE CZ LU SK RO BG LT PL LV FI

HU UK IE GR MT CY SI

EU-25 BE PT DK AT

EMU-12 NL IT ES DE FR SE

Source: European Commission, European Financial Integration Report 2008 (2009) 

The  crucial  role  of  bank  intermediation  for  the  real  economy:  intermediation  vs. 
direct financing 

In general, financial system impacts allocative efficiency in the real economy through its intermediary role, 
producing information about possible investments, mobilizing savings, monitoring investments, managing 
and  diversifying  risk  as  well  as  easing  the  exchange  of  goods  and  services.  Empirical  evidence  would 
indicate that restricting bank activities has generally negative repercussions for economic growth although 
there may be a trade-off in terms of stability. Similarly, facilitating bank entry generally yields benefits in 
terms  of  competition  and  access  to  finance  and  so  enhances  economic  growth.  Although  effects  of 
competition  on  financial  stability  have  been  subject  of  controversy,  most  recent  evidence  suggests  that 
increased competition via contestable markets is positive for stability.  

In the EU, the banking sector is the main financing source for the real economy. In the Euro Area, almost 
50% of the financing of the real economy is performed via banking loans57.   

In 2009, the outstanding amount of loans granted by Euro Area MFIs was €17,700 bn, while outstanding 
amount  of  securities  issued  in  official  markets  were  €15,30 0  bn  for  bonds  and  €4, 400  bn  for  shares  and 
equity.  When  the  interbank  loans  and  the  securities  issued  by  banks  are  not  considered  the  figures  were 
€11,750 bn for loans, €10,000 bn for bonds and €3,800 bn for shares and equity. 

It  should  be underlined  that the  role  of  the  banks  as providers of financing  to  the  economy  goes  beyond 
their "direct" intermediation activity. Beyond the lending activities, MFIs are very active in both the equity 
and  bond  markets.  Indeed,  in  2009,  EA  MFIs  held  over  €5,000  bn  bonds  and  €1,200  bn  shares, 
corresponding  to  approximately  one  third  of  the  respective  markets.  Therefore,  taking  into  consideration 
the lending activity through loans and the financing through securities, the banking sector is responsible for 
about two thirds of the financing available in the Euro Area (see Chart 4). 

Chart 4: Sources of financing in the Euro Area 

        Total, € bn 

Excluding MFIs, € bn 

57 

Equity, bonds and loans not issued in official market or through the banking system are neglected 

EN 

65 

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Total  loans
Total  bonds
Total  shares

18, 000

16, 000

14, 000

12, 000

10, 000

8, 000

6, 000

4, 000

2, 000

0

Loans t o  non-MFIs
Bonds (non-MFIs)
Shares (non-MFI s)

18,000

16,000

14,000

12,000

10,000

8,000

6,000

4,000

2,000

0

1999

2001

2003

2005

2007

2009

1999

2001

2003

2005

2007

2009

        Total, % 

Excluding MFIs, % 

100%

80%

60%

40%

20%

0%

Total shares

Total bonds
Total loans

100%

80%

60%

40%

20%

0%

Shares (non-MFIs)
Bonds  (non-MFIs)
Loans  to non-MF Is

1999

2001

2003

2005

2007

2009

1999

2001

2003

2005

2007

2009

          Note: Data for bonds and shares issued outside official markets are not available. 

          Source: European Central Bank and own calculations. 

Chart 5: Aggregate balance sheet of Euro Area MFIs 

MFIs excluding the Eurosystem 

2006 

100%

90%

80%

70%

60%

50%

40%

30%

20%

10%

0%

Remaining assets

External assets

Shares

Debt securities

     2009 

Remaining liabilities

MMF  shares

Capital and reserves

External liabilities

Debt securities 
issued

Loans to EA 
residents

Deposits

100%

90%

80%

70%

60%

50%

40%

30%

20%

10%

0%

Remaining  assets

External a ssets

Share s

D ebt securities

Re maining liabilities

MMF  shares
Cap ital and 
reserves

External lia bilities

Debt securit ies 
issued

Loans to EA 
residents

Deposits

Assets

Liabilities

Assets

Liabilities

         Source: European Central Bank and own calculations. 

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The importance of financial regulation for financial stability and sustainable growth  

While the banking sector generally contributes to economic and financial development, the financial crisis 
has  painfully  revealed  its  weaknesses  and  the  risks  it  bears  for  the  entire  economy.  This  section  briefly 
reviews the theory and empirical evidences regarding the role of regulation (for example minimum capital 
requirement), the capacity to lend and the economic activity. 

A growing body of empirical research on the links between financial development and economic growth 
produces  a  remarkably  consistent  narrative:  The  services  provided  by  the  financial  system  exert  a  first-
order impact on long-run economic growth.58  

First, countries with better-developed financial systems tend to grow faster. Specifically, countries with (i) 
large, privately-owned banks that funnel credit to private enterprises and (ii) liquid stock exchanges tend to 
grow faster than countries with corresponding lower levels of financial development. The level of banking 
development  and  stock  market  liquidity  each  exerts  an  independent,  positive  influence  on  economic 
growth. Second, simultaneity bias (whether economic growth leads to financial development or vice versa) 
does not seem to be present, suggesting that it is indeed financial development that contributes to economic 
growth. Third, better-functioning financial systems ease the external financing constraints that impede firm 
and industrial expansion. Thus, one channel through which financial development matters for growth is by 
easing the ability of financially constrained firms to access external capital and expand. 

Building  on  this  last  point,  some  studies  suggest  this  is  due  to  a  "broad  credit  channel"  (Oliner  and 
Rudebusch, 1996), where the supply of funds comes from all financial intermediaries and markets, not just 
banks. This view is supported by Discroll (2004) who finds that for U.S. states, bank loans themselves have 
small, often negative and statistically insignificant effects on output. This could be due to the fact that firms 
are  not  in  fact  bank-dependent,  and  are  able  to  substitute  other  forms  of  finance,  such  as  bond  or  equity 
financing for firms with ready access to such markets, trade credit or other kinds of borrowing from other 
firms in the case of firms which do not have such access.  

The  existence  of  a  credit  channel  operating  through  the  banking  system  cannot  be  denied  however. 
Kroszner,  Laeven  and  Klingebiel  (2007)  analyse  the  effects  of  financial  crisis  on  externally  dependent 
sectors in both, well- and poorly-developed financial systems. They show that in times of crisis, externally 
dependent sectors (comprised of young firms or firms with a large fraction of hard-to-measure intangible 
assets) tend to experience a greater contraction of value added in well-developed, financial systems than in 
countries with shallower financial systems. Their reasoning is that a deeper financial system allows sectors 
dependent on external finance to obtain relatively more external funding in normal periods, so a crisis that 
significantly  impairs  the  functioning  of  banks  has  a  disproportionately  negative  effect  on  externally 
dependent firms in such systems. In contrast, since externally dependent firms tend to obtain relatively less 
external  financing  in  shallower  financial  systems,  a  crisis  in  such  countries  has  less  of  an  effect  on  the 
growth of these sectors. Similarly, the authors find a disproportionately negative impact of banking crises 
on  real  growth  in  sales,  real  growth  in  earnings,  and  real  stock  returns  for  firms  in  externally  dependent 
industries. While these results might suggest a dark side of financial development, the authors do not find 
evidence that on net the externally dependent firms fare worse in deep financial systems. 

Overall,  while  the  finding  that  financial  development  has  a  positive  impact  on  economic  growth  is 
generally  accepted,  an  important  limitation  of  almost  all  studies  on  financial  development  and  growth 
should be noted: There is a significant difficulty in designing empirical proxies for “financial development” 
(Levine and Demirgüç-Kunt, 2008).  

58 

The following paragraph builds on work by Bagehot (1873), Gurley and Shaw (1955), Goldsmith 
(1969), and McKinnon (1973), recent research has employed different econometric methodologies 
and data sets in producing three core results (Levine and Demirgüç-Kunt, 2008) 

EN 

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There are two reasons for this difficulty: First, researchers do not have very good cross-country measures of 
the ability of financial systems to provide their services (to facilitate the screening of firms before they are 
financed,  the  monitoring  of  firms  after  they  are  financed,  the  managing  of  idiosyncratic  project  risk  and 
liquidity  risk,  as  well  as  the  exchange  of  goods,  services,  and  financial  claims)  to  the  economy.  Second, 
international  financial  market  integration  makes  the  size  of  a  domestic  financial  system  an  inadequate 
indicator of efficiency gains in terms of accessibility to credit and financial services, intermediation costs, 
or productivity of capital employed (Guiso et al. 2004).  

Traditional  approaches  to  bank  regulation  emphasize  the  positive  features  of  capital  adequacy 
requirements (Dewatripont and Tirole, 1994). Capital serves as a buffer against losses and hence failure. 
Furthermore, with  limited  liability,  the  proclivity  of banks  towards higher  risk  activities  is  curtailed with 
greater amounts of capital at risk. Capital adequacy requirements, especially with deposit insurance, play a 
crucial  role  in  aligning  the  incentives  of  bank  owners  with  depositors  and  other  creditors  (Berger  et  al., 
1995).  

As  reviewed  in  Santos  (2001)  and  Gorton  and  Winton  (2003),  however,  theory  provides  conflicting 
predictions as to whether the imposition of capital requirements will have positive effects on stability and 
growth.  For  instance,  Kim  and  Santomero  (1988),  Besanko  and  Kanatas  (1996),  and  Blum  (1999)  argue 
that  capital  requirements  may  increase  risk-taking  behaviour.  Furthermore,  Thakor  (1996)  models  the 
impact of an increase in risk-based capital requirements and concludes these reduce banks’ willingness to 
screen  and  lend.  In  a  general  equilibrium  context,  Gorton  and  Winton  (2000)  show  that  raising  capital 
requirements forces banks to supply fewer deposits, reducing the liquidity-providing role of banks.  

Barrell et al. (2009) argue that changing capital and liquidity ratios changes the probability of financial 
crises.  They  show  that  it  would  have  been  beneficial  in  terms  of  output  to  have  had  a  one  or  even  two 
percentage  point  higher  level  of  capital  and  liquidity  requirements  in  the  UK  prior  to  the  current  crisis. 
These results do not hold for the Euro Area or the US as they argue that a crisis in the UK was more likely, 
suggesting  that  with  higher  probabilities  for  a  crisis,  higher  capital  requirements  are  beneficial  for  long-
term economic output.59 

As banking sector plays a central role in economy any changes in regulatory environment that have impact 
on  banking  sector  should  indirectly  affect  also  economic  activity.  The  existing  literature  suggests  the 
following relationships between the regulation and economic growth: 

-  Effects  of  capital  requirements  and  leverage  ratios  on  sustainable  financial  development  are 

ambiguous; yet it is suggested that combining these policies may yield positive results.  

-  Effects  of  deposit  insurance  in  terms  of  financial  stability  are  ambiguous  as  they  can  reduce  the 
systemic  risk  associated  with  bank  runs  but  may  reduce  incentives  for  risk  management  in  covered 
institutions and incentives for private sector oversight.  

-  Strong supervisory power on banks is beneficial for building robust legal systems. 

-  Evidence on the effectiveness of private sector monitoring of banks is ambiguous.  

-  Bank governance is found to be relevant to financial stability in two important respects: 

-  Bank  risk  is  generally  higher  in  banks  that  have  concentrated  ownership  with  substantial  cash  flow 

rights. 

59 

They also refer to the case of Spain where the robustness of the banks shows the value of higher 
capital 

EN 

68 

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-  The  relation  between  risk  and  regulation  depends  critically  on  each  bank’s  ownership  structure, 
because it can determine whether the impact of regulation is either positive or negative with regard to 
stability. 

-  While  private  ownership  of  banks  entails  risks  and  needs  careful  design,  government  ownership  of 
banks usually yields lower levels of financial development and growth, yet more concentrated lending 
and higher systemic fragility. 

Available evidence from the cost of financial (banking) crisis 

As illustrated in the previous section, financial and banking regulation is crucial to the stability of the sector 
and eventually the long-term economic growth. These findings are further underlined by the evidence on 
the cost of past (and current) financial and banking crisis and provide a good rationale for designing and 
implementing appropriate regulation. 

Financial  crises,  defined  as  systemic  banking  crises60,  which  can  be  aggravated  by  foreign  exchange  or 
sovereign debt crises, are particularly socially costly, not only for the rescue of ailing institutions but also in 
terms of opportunity costs and foregone growth. The traditional computations of the cost of such a crisis for 
a country are based on a calculation of its direct and indirect fiscal costs, as described in the graph below. 

60 

Following  the  definition  of  Leaven  and  Valencia  (2008)  cited  by  the  "Public  Finances  in  EMU 
2009" of the European Commission 

EN 

69 

   EN 

 
                                                 
Chart 6: The costs of a financial crisis 

Source: European Commission, DG Economic and Financial Affairs (2009): "Public Finances in EMU 2009", European Economy 5, 
10th edition 

EN 

70 

   EN 

 
 
 
 
However,  these  fiscal  costs  do  not  include  costs  borne  by  depositors  and  borrowers,  stemming  from 
exposure to failed banks, or when facing higher costs for services provided by banks that compensate for 
losses. 

The debate also focuses on the best way to compute the economic costs of a banking crisis and the extent of 
what is referred to as the output gap caused by this crisis. The literature offers different means to conduct 
such  calculations.  On  the  one  hand,  it  would  be  possible  to  approximate  output  losses  as  the  difference 
between output growth before and a few years after the crisis – usually the time that it returns to its trend; 
on the other hand, to be more accurate, the difference could be computed in levels rather than in growth 
rates  of  GDP.  Finally,  econometric  estimations  of  output  gaps  allow  controlling  for  the  bias  that  could 
come from "normal" cyclical output variations. 

The  European  Commission  analysed  empirically  in  its  publication,  Public  Finances  Report  in  the  EMU 
2009, the costs of 49 crises that occurred in emerging and market economies since the 1970s. Consistent 
with the figures found by Leaven and Valencia (2008), the Commission reported an average direct net cost 
of  13%,  i.e.  expenses  due  only  to  the  rehabilitation  of  the  banking sector  and  already  accounting  for  the 
recovery  that  the  government  can  get  from  the  sale  or  repayment  of  impaired  assets  that  it  had  to  buy  – 
even though the average recovery rate did not exceed 18% of the initial gross outlays. Focusing only on the 
EU27,  these  figures  show  an  average  net  fiscal  cost  of  6.6%  of  GDP,  with  a  23.9%  recovery  ratio,  both 
under the OECD averages (respectively 11.4% of GDP and 29.7%). 

All in all, the net fiscal costs of the last financial crisis should be rather greater than those of past crises, 
mainly because of its global nature, and given the recent expansion of the banking sector and low laid down 
recovery  of  impaired  assets.  In  the  EU,  according  to  the  Commission  report,  these  net  fiscal  costs  could 
reach 16.5% of GDP on average, with higher figures for some Member-States taken individually.  

Indeed,  as  it  appears  in  the  graphs  below,  the  extent  of  capital  injections  and  of  guarantees  on  bank 
liabilities,  in  terms  of  percentage  of  GDP,  varied  greatly  from  one  European  country  to  another, 
respectively from 1% to 7% and from 1% to almost 240%. 

Chart 7: Public interventions in the banking sector (% of GDP) - situation at 31/12/2009 

To tal appro ved injectio ns

Effective capital injectio ns 

8

7

6

5

4

3

2

1

0

IE

LU

B E

NL

UK

DK

DE

A T

LV

EU

EA

GR

FR

IT

SE

HU

P T

FI

P L

SK

   Source: Commission Services 

Beyond  the  direct  burden of  the banking rescue  measures,  the  indirect costs of  past financial  crises have 
also weighted significantly on social wealth. The gross public debt-to-GDP ratio has on average grown by 
18%  in  the  course  of  the  years  when  past  crises  occurred,  under  the  multiple  pressures  of  automatic 
stabilizers and fiscal stimuli. In addition to this expenditure effect (+1.1% of GDP in EU27 on average), 
financial crises also trigger a loss through the revenue effect (on average -0.9% in the EU27), notably in 

EN 

71 

   EN 

 
 
terms  of  foregone  tax  payments,  as  well  as  a  potential  strong  market  effect  leading  to  higher  premia  on 
interest payments. 

This  consequence  is  particularly  worrying  because  of  its  long-term  implications.  Indeed,  in  the  sample 
analysed by the Commission, it took governments at least eight years to come back to pre-crisis levels of 
debt-to-GDP ratios, driven up both by the changes in the primary deficit and by the "snow-ball effect" of 
interest payments. 

Chart 8: Guarantees on bank liabilities (% of GDP) 

To tal appro ved guarantees

Effective guarantees granted

100

80

60

40

20

0

DK

IE

B E

SE NL

SI

FI

LV

A T

EU

UK

EA

DE ES

CY

FR P T

LU GR

HU SK

P L

       Notes:   

       Source:  

Denmark: 237.5% approved guarantees and 205.3% effective guarantees granted. 
Ireland: 167.5% approved and effective guarantees granted. 
Commission services 

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72 

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Sanctions applied in the banking sector  

ANNEX III 

Range of (financial) administrative sanctions against legal persons   

(Data included in the Impact Assessment on the Sanctions Communication) 

Chart 1, compiled from input from Member States, gives an overview of the amount of 
administrative  financial  sanctions  imposed  in  the  banking  sector  (compared  with  the 
range  of  sanctions,  that  is  the  minimum  and  maximum  levels  provided  for  in  the 
legislation).  

Chart 1 – Range of (financial) administrative sanctions against legal persons, and sanctions applied 
from 2005 to 2007 (in Euros) 

• 

II Amount of sanctions applied 

I Range of financial sanctions 

Comments: there is no maximum set amount in FR and ES, but the fines are linked to the minimum capital (FR) or 
equity capital (ES). Correction: SK applied 195 000 - Source: CEBS report, reply sheets from national authorities. 

Sanctions applied in the banking sector in 2008-2010 

Charts 2 and 3, compiled based on information from Member States, shows the number 
of  sanctions  imposed  in  2009  in  comparison  to  the  value  of  banks'  assets  and  to  the 
number of credit institutions in these Member States 

Chart 2 – Number of sanctions compared to banks' liabilities 

EN 

73 

   EN 

 
 
Sanctions vs Bank liabilities

250

200

f
o

r
e
b
m
u
N

s
n
o

i
t
c
n
a
S

150

100

50

0

AU BG CY CZ DE EE ES FR UK GR IR LT LU LV MT NL PT SE SK

Member State

Chart 3 – Number of sanctions compared to number of banks  

Sanctions vs Number of Banks

250

200

f
o

r
e
b
m
u
N

s
n
o

i
t
c
n
a
S

150

100

50

0

12000000000

10000000000

8000000000

6000000000

4000000000

2000000000

0

2500

2000

1500

1000

500

0

s
e
i
t
i
l
i

b
a
i
l
k
n
a
b

l
a
t
o
T

s
k
n
a
b

f
o

r
e
b
m
u
N

AU BG CY CZ DE EE ES FR UK GR IR LT LU LV MT NL PT SE SK

Member State

Source: CEBS report, page 55, ECB statistics  

Total
bank
liabiliti
es
2008
(EUR)

Numbe
r of
Sancti
ons
2009

Numbe
r of
banks
(2008)

Numbe
r of
Sancti
ons
2009

Among  the  Member  States  which  make  indications  as  to  the  types  of  violations 
sanctioned, the following violations occur most frequently during that period: 

d
e
s
i
r
o
h
t
u
a
n
U

g
n
i
k
n
a
b
f
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n
o
i
s
i
v
o
r
p

s
e
r
u
s
o
p
x
e

e
g
r
a
L

s
t
n
e
m
e
r
i
u
q
e
r

3 

5 

s
t
n
e
m
e
r
i
u
q
e
r

l
a
t
i
p
a
C

5 

e
c
n
a
n
r
e
v
o
G

s
t
n
e
m
e
r
i
u
q
e
r

g
n
i
t
r
o
p
e
R

s
t
n
e
m
e
r
i
u
q
e
r

f
o

s
n
o
i
t
i
s
i
u
q
c
A

s
g
n
i
d
l
o
h

g
n
i
y
f
i
l
a
u
q

e
r
u
s
o
l
c
s
i
d

c
i
l
b
u
P

s
t
n
e
m
e
r
i
u
q
e
r

10 

4 

4 

2 

Number of 
MS having 
imposed 

EN 

74 

   EN 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
sanctions for 
violations of 
these 
requirements 

EN 

75 

   EN 

 
I. Current Legislative framework 

ANNEX IV 

The CRD contains a general clause requiring Member States to provide that "competent 
authorities may, as against credit institutions or those who effectively control the business 
of  credit  institutions,  which  breach  laws,  regulations  or  administrative  provisions 
concerning the supervision or the pursuit of their activities, adopt or impose penalties or 
measures aimed specifically ad ending the observed breaches or the causes of breaches" 
(Art. 54 Directive 2006/48/EC). This provision refers to administrative sanctions and it is 
without prejudice to the provisions of criminal law.  

In  addition,  some  specific  rules  are  provided  for  on  the  use  of  the  sanctioning  powers 
available  to  competent  authorities  in  certain  cases.  For  instance,  Article  1761  of  the 
Directive  2006/48/EC  lists  the  cases  where  competent  authorities  may  withdrawal  the 
authorisation granted to a credit institution (e.g. when it no longer fulfils the conditions 
under which the authorisation was granted or has obtained the authorisation through false 
statements). A specific provision concerning the violation of obligations on acquisition of 
qualifying holdings requires competent authorities to take appropriate measures to put an 
end  to  the  unlawful  situation,  and  it  specify  that  such  measures  may  consist  in 
injunctions, sanctions against directors and managers, or the suspension of the exercise of 
voting rights (Art. 21 Directive 2006/48/EC). 

Finally,  the  CRD  contains  provisions  on  the  coordination  of  the  power  to  impose 
sanctions  between  Member  States  concerned  by  a  violation  (e.g.  Art.  30  Directive 
2006/48/EC),  and  on  the  cooperation  between  competent  authorities  (e.g.  Art.  132 
Directive  2006/48/EC).  The  power  to  impose  sanctions  is  exercised  principally  by  the 
competent  authorities  of  the  Member  State  in  which  the  credit  institution  has  been 
authorised  ("home"  Member  State)  acting  in  coordination  with  the  authorities  of  the 
Member State where it has a branch or it provides services ("host" Member State).  

Key violations of the CRD: 

Violations relating to prior authorisation  

–  Unauthorised provision of banking services (Artt. 5-6 of Directive 2006/48/EC) 

–  Authorisation  obtained  through  false  statements/irregular  means  (Art.  17.1,  b  of 

Directive 2006/48/EC) 

Violation of prudential requirements 

61 

This  text  refers  to  the  numbers  of  the  articles  in  the  existing  Directives  2006/48/EC  and 
2006/49/EC. As the proposal will recast these texts, the numbers will be subject to modification in 
the recasted legislative acts 

EN 

76 

   EN 

 
                                                 
–  Failure  to  have  in  place  sound  and  robust  governance  arrangements  (Art  22  of 
Directive  2006/48/EC,  see  also  Art.  109  of  Directive  2006/48/EC  and  Art  34  of 
Directive 2006/49/EC) 

–  Failure  to  comply  with  "fit  and  proper"  conditions  of  authorisation  (11,  135  of 

Directive 2006/48/EC)  

–  Violation of own capital requirements (Art. 10, 75, 76 of Directive 2006/48/EC; Art 5-

9; 18 of Directive 2006/49/EC) 

–  Violations of obligations on acquisition of qualifying holdings (Art 19-21 of Directive 

2006/48/EC, as amended by Directive 2007/44/EC) 

–  Failure to comply with limits on large exposure (Art 111 of Directive 2006/48/EC; Art 

28 of Directive 2006/49/EC) 

–  Failure  to  meet  requirements  as  to  exposures  to  transferred  credit  risk  (Art  122a  of 

Directive 2006/48/EC 

Violation of reporting obligations 

–  Violation  of  reporting  obligations  on  the  persons  responsible  for  the  legal  control  of 

accounts (Art.53 of Directive 2006/48/EC) 

–  Failure to report information to the competent authorities (Art.74(2), 110 of Directive 
introduced  reporting 

2006/48/EC;  Art  35  of  Directive  2006/49/EC;  newly 
requirements on liquidity and leverage)  

–  Failure of public disclosure (Art 145-149 of Directive 2006/48/EC; Art 39 of Directive 

2006/49/EC) 

–  Failure  to  comply  with  limits  on  qualifying  holding  outside  the  financial  sector  (Art 

120) 

II. Sanctioning powers provided for by Member States in the transposition of the CRD in 
relation to three types of violations 

In  certain  Member  States  different  provisions  on  sanctions  are  applicable  to  different 
categories of violations. However, in several of them the same provisions apply to all the 
above-mentioned violations (e.g. FR, UK).  

Charts 1 and 2, based on the information collected by the Commission in 2011, show the 
differences in the types of administrative sanctions and the level of administrative fines 
provided  for  by  national  legislation  in  case  of  violations  relating  to  prior  authorisation 
(Unauthorised provision of banking services, Art. 5-6 of Directive 2006/48/EC): 

Chart 1: types of sanctions applicable for violations relating to prior authorisation 

EN 

77 

   EN 

 
a
s
o
p
s
Di

i

r
ei
h
T
at
n 
o
ct
n
a
S
g 
n
vi
a
H
s 
e
at
St
r
e
b
m
e
M
of
e 
g
a
nt
e
c
r
e
P

60

50

40

30

20

10

0

Unauthorised Provision of Banking Services

public reprimand

 replacement of
management

 cease and desist
order

 withdrawal of
license

 administrative fine

 other

Chart 2: administrative fines applicable for violations relating to prior authorisation 

Unauthorised Provision of Banking Services

e
n
Fi
e 
v
i
t
a
r
t
s
ni
mi
d
A
f
o
el
v
e
L
g 
n
vi
a
H
s 
e
t
a
St
r
e
b
m
e
M
f
o
e 
g
a
t
n
e
c
r
e
P

al
s
o
p
s
Di

r
ei
h
T
t
a

60

50

40

30

20

10

0

no administrative fines (max level at 0
EUR)
max administrative fine over 0 up to
200000 EUR
max administrative fine over 200000 upt to
1000000 EUR
max administrative fine over 1000000

levels of administrative fines

Charts 3 and 4 based on the information collected by the Commission in 2011, show the 
differences in the types of administrative sanctions and the level of administrative fines 
provided  for  by  national  legislation  in  case  of  violations  of  prudential  requirements 
(Failure to have in place sound and robust governance arrangements, Art 22 of Directive 
2006/48/EC,  see  also  Art.  109  of  Directive  2006/48/EC  and  Art  34  of  Directive 
2006/49/EC): 

Chart  3:  types  of  sanctions  applicable  for  violations  of  prudential  requirements  relating  to 
governance  

EN 

78 

   EN 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
e
v
i
t
a
r
t
s
ni
mi
d
A
f
o
e 
p
y
T
g 
n
vi
a
H
s 
e
t
a
St
r
e
b
m
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M
f
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g
a
t
n
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c
r
e
P

al
s
o
p
s
Di

r
ei
h
T
t
a
n 
o
i
t
c
n
a
S

120

100

80

60

40

20

0

Failure to Have in Place Sound and Robust Governance Arrangements

public reprimant

 replacement of
management

 cease and
desist order

 withdrawal of
license

 adminstrative
fine

 other

Chart  4:  administrative  fines  applicable  for  violations  of  prudential  requirements  relating  to 
governance 

Failure to Have in Place Sound and Robust Gouvernance Arrangements

e
h
t

al
s
o
p
s
Di

r
ei
h
t
t
a
g 
n
vi
a
h
s 
e
t
a
t
S
r
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b
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M
f
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e 
g
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P

s
e
n
Fi
f
o
s 
el
v
e
L
e 
v
i
t
c
e
p
s
e
R

60

50

40

30

20

10

0

no admin fine (max at 0 EUR)

max admin fine up to 200000

max admin fine over 200000 up to
1000000
max admin fine over 1000000

administrative fines

Charts 5 and 6, based on the information collected by the Commission in 2011, show the 
differences in the types of administrative sanctions and the level of administrative fines 
provided  for  by  national  legislation  in  case  of  violations  of  reporting  requirements 
(Art.74(2), 110 of Directive 2006/48/EC; Art 35 of Directive 2006/49/EC): 

Chart 5: types of sanctions applicable for violations of reporting requirements. 

EN 

79 

   EN 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
a
s
o
p
s
Di

r
ei
h
T
t
a
n 
o
i
t
c
n
a
s
g 
n
vi
a
H
h
s 
e
t
a
St
r
e
b
m
e
M
f
o
e 
g
a
t
n
e
c
r
e
P

120

100

80

60

40

20

0

Failure to Report Information to the Competent Authorities

public reprimant

 replacement of
management

 cease and desist
order

 withdrawal of
license

 administrative
fine

 other

Chart 6: administrative fines applicable for violations of reporting requirements 

Failure to Report Information to the Competent Authorities

e
v
e
L
x
a
M
e
v
i
t
c
e
p
s
e
R
g
n
i
v
a
h
s
e
t
a
t
S
r
e
b
m
e
M

f
o
e
g
a
t
n
e
c
r
e
P

l
a
s
o
p
s
i
D
r
i
e
h
T
t
a
s
e
n
F

i

60

50

40

30

20

10

0

levels of fines

no administrative fines (max level 0
EUR)
max administrative fines over 0 up to
200000
max administrative fines over 200000
up to 1000000
max administrative fines over 1000000

Table 1, based on the CEBS report and responses received by Member States, shows the 
divergences in the criteria taken into account in different Member States to calculate the 
administrative fine, to be imposed in a specific case. 

Table  1:  criteria  taken  into  account  when  calculating  fines  in  the  banking  sector  (in  SK  all  factors 
taken into account in practice although not explicitly provided for by law). 

Gravity of the 
infringement 

Cooperation with the 
authorities 

All 

BE, CZ, DE, AT, ES, 
EE,  FI,  HU,  EI,  LT, 
LU, LV, MT, NL, PL, 
PT, SE, SI, UK, IE 

Financial strength of 
the firm or 
responsible person 
concerned (e.g. own 
funds) 

BE,  BG,  ES, 
EL,  HU,  IE,  IT, 
NL,  PL,  RO, 
SE,  CY,  UK, 
PT, CZ, SI 

Loss inflicted by  the 
infringement 

Benefit / Profit 
derived from 
infringement 

Amount imposed 
in previous cases 

AT,  BG,  CY, 
CZ,  DE,  EE, 
ES,  EL,  HU, 
IE,  MT,  NL, 
PL, PT, SE, SI, 
SK,  UK,  LU, 
SL, LU 

AT,  BE,  BG, 
CY,  CZ,  DE, 
EE,  ES,  EL, 
IE, LU, NL, PT, 
SI,  SK,  UK, 
HU 

AT,  BE,  BG, 
CY,  CZ,  DE, 
EE,  FI,  EL, 
HU, 
IT, 
IE, 
LT,  LU,  LV, 
NL,  PL,  PT, 
RO,  SE,  SI, 
UK, MT, DK,  

Number 
of 
Member 
States 
taking 
account 
of 
criterion 

each 

EN 

80 

   EN 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
EN 

81 

   EN 

 
ANNEX V 

Detailed analysis of the impacts of the policy options concerning appropriate 
administrative sanctions  

(1) 

No EU action 

(2) 

Uniform rules on types and level of administrative sanctions 

This option would imply that administrative sanctions are fully harmonised and that the 
violation of any of the key provisions of the CRD would be subject to the same type and 
level of sanction across all Member States. 

Analysis  of  impacts  in  relation  to  sanctions  for  unauthorised  provision  of  banking 
services  

Uniform  types  and  levels  of  sanctions  for  unauthorised  provision  of  banking  services 
would  in  particular  increase  consumer  confidence  in  the  internal  market  for  banking 
services, as consumers could be sure that a bank offering banking services to them from 
any Member State without being authorised and supervised would be subject to the same 
effective and deterrent sanctions.  

The  availability  of  high  fines  for  unauthorised  provision  of  banking  services  will  make 
such  misconduct  -  which  due  to  the  circumvention  of  any  prudential  supervision  poses 
considerable risks to customers' deposits- less attractive even where high benefits can be 
expected.  

Requirements for authorisation limit the freedom to conduct a business as provided for in 
the Charter of Fundamental Rights (Art.16), and uniform types and levels of sanctions for 
violations  of  these  requirements  reinforce  this  limitation.  However,  ensuring  prudential 
supervision is exercised over all banks is necessary to mitigate the risks banking activities 
can pose for deposit-holders, and in view of the importance of these risks for the means 
of  consumers  (including  provision  for 
their  retirement)  and  businesses,  also 
proportionate.   

(a) 

Analysis  of  impacts  in  relation  to  sanctions  for  violations  of  prudential 
requirements 

Empowering  competent  authorities  in  all  Member  States  to  be  able  to  impose  uniform 
types and levels of sanctions for violations of prudential requirements would contribute to 
ensure  credit  institutions  in  all  Member  States  effectively  meet  banking  capital 
requirements.  

The  power  to  issue  public  warnings/reprimands  in  case  of  violations  of  prudential 
requirements  relating  to  governance  is  appropriate  to  encourage  public  pressure  by 
deposit  holders  and  investors  on  the  credit  institution  to  adjust  its  governance 
arrangements, and will thereby reduce the likelihood that credit institutions do not have in 

EN 

82 

   EN 

 
place appropriate risk management to anticipate situations of financial stress which can 
lead to an increase risk of failure.  

The possibility to impose high fines for violations of prudential requirements relating to 
governance  will  reduce  the  likelihood  that  credit  institutions  do  not  have  in  place 
appropriate risk management to anticipate situations of financial stress which can lead to 
an increase risk of failure.  

The possibility to impose high fines for violations of prudential requirements is important 
to  ensure  that  sanctions  for  violations  of  banking  capital  requirements  are  sufficiently 
high to exceed the economic benefits from such violations for the banks concerned which 
can be very important.  

As prudential requirements contribute heavily to credit institutions' operating costs, this 
option  would  assist  the  development  of  a  level  playing  field  in  the  European  banking 
market. It could also increase consumer confidence that credit institutions are stable, and 
improve  mutual  trust  between  supervisors,  leading  to  more  efficient  cross-border 
supervision.  

Prudential  requirements  limit  the  freedom  to  conduct  a  business  as  provided  for  in  the 
Charter  of  Fundamental  Rights  (Art  16),  and  uniform  types  and  levels  of  sanctions  for 
violations of these requirements reinforce this limitation. However, as underlined by the 
events  of  the  financial  crisis  in  2007/2008,62  ensuring  that  banks  make  the  necessary 
financial  provisions  for  situations  of  stress  is  essential  to  mitigate  the  risk  of  a  bank 
failure,  leading  to  losses  of  deposits  wiping  out  all  or  most  of  the  financial  means  of 
consumers (including  provision  for  their retirement)  and businesses,  but  also  avoid  that 
taxpayers money has to be used to restore the bank's financial health. While preventative 
supervisory action is a key tool to ensure violations of prudential rules are not continued 
after their detection, appropriate types and levels of sanctions are necessary to ensure that 
credit institutions incur actual and important cost for past violations, making commitment 
of such violations less attractive. 

(b) 

Analysis  of  impacts  in  relation  to  sanctions  for  violations  of  reporting 
requirements 

Empowering  competent  authorities  in  all  Member  States  to  be  able  to  impose  uniform 
types and levels of sanctions for violations of reporting requirements would contribute to 
ensure  credit  institutions  in  all  Member  States  fully  inform  competent  authorities  about 
their  financial  situation  which  enables  the  authorities  to  require  appropriate  levels  of 
prudential  provisioning.  The  power  to  dismiss  the  managers  or  the  persons  responsible 
for the legal control of accounts can effectively prevent repeated violations of reporting 
requirements which will in turn reduce the likelihood that credit institutions avoid to hold 
the  necessary  capital  by  not  reporting  disadvantageous  financial  information  to 
supervisors, leading to an increased risk of failure.  

62 

See analysis and recommendations of the De Larosière Report, reference see above. 

EN 

83 

   EN 

 
                                                 
As  prudential  requirements,  which  credit  institutions  can  avoid  by  failing  to  report 
information  to  the  authorities,  contribute  heavily  to  credit  institutions'  operating  costs, 
this option would assist the development of a level playing field in the European banking 
market. It could also increase consumer confidence that credit institutions are stable, and 
improve  mutual  trust  between  supervisors,  leading  to  more  efficient  cross-border 
supervision.  

Reporting  requirements  limit  the  freedom  to  conduct  a  business  as  provided  for  in  the 
Charter  of  Fundamental  Rights  (Art  16),  and  uniform  types  and  levels  of  sanctions  for 
violations of these requirements reinforce this limitation. However, as underlined by the 
events  of  the  financial  crisis  in  2007/2008,63  full  information  of  the  authorities  about 
credit  institutions'  financial  situation  is  key  to  ensure  that  supervisors  can  require  the 
necessary financial provisions for situations of stress, and is a precondition for competent 
authorities  to  be  able  to  apply  any  preventative  supervisory  powers.  As  violations  of 
reporting  requirements  can  be  addressed  by  preventative  supervisory  powers  only  to  a 
limited extent, appropriate types and levels of sanctions are necessary to ensure respect of 
these rules, and proportionate in view of the importance of these risks. 

(2)  Minimum  common  rules  on  the  type  of  administrative  sanctions  to  be 

available to competent authorities 

This  option  would  contribute  to  the  objective  of  improving  the  deterrent  effect  of 
administrative sanctions by ensuring that all competent authorities have at their disposal 
certain sanctioning powers which can be particularly effective for the different violations 
of the CRD. For instance, the power to dismiss the managers or the persons responsible 
for the legal control of accounts can effectively prevent repeated violations of reporting 
obligations. 

Analysis  of  impacts  in  relation  to  sanctions  for  unauthorised  provision  of  banking 
services  

Ensuring  that  certain  key  types  of  administrative  sanctions  are  available  in  case  of 
unauthorised  provision  of  banking  services,  even  though  not  providing  for  a  full 
harmonisation,  would  increase  consumer  confidence  in  the  internal  market  for  banking 
services, as consumers could be sure that a bank offering banking services to them from 
any Member State without being authorised and supervised would be subject to a core set 
of  effective  and  deterrent  types  of  sanctions,  including  administrative  fines,  and  public 
warning/reprimand.  

Limitations  of  the  freedom  to  conduct  a  business  as  provided  for  in  the  Charter  of 
Fundamental  Rights  (Art.  16)  are  similar  in  nature  than  under  option  (1),  but  would  be 
less accentuated given that only a limited list of core sanctioning powers would be made 
available  across  the  EU,  while  further  sanctioning  powers  would  be  decided  on  by 

63 

See analysis and recommendations of the De Larosière Report, reference see above. 

EN 

84 

   EN 

 
                                                 
Member States and would be available only in the Member States where this is the case 
already today.   

(a) 

Analysis  of  impacts  in  relation  to  sanctions  for  violations  of  prudential 
requirements 

Empowering competent authorities in all Member States to be able to impose certain core 
types  of  sanctions  for  violations  of  prudential  requirements,  while  not  achieving  full 
harmonisation,  would  contribute  to  ensure  competent  authorities  in  all  Member  States 
have  at  least  certain  key  powers  to  ensure  credit  institutions  effectively  meet  banking 
capital requirements.  

This option would contribute to the development of a level playing field in the European 
banking  market,  of  consumer  confidence  that  credit  institutions  are  stable,  and  of 
improved  mutual  trust  between  supervisors,  leading  to  more  efficient  cross-border 
supervision.  

Limitations  of  the  freedom  to  conduct  a  business  as  provided  for  in  the  Charter  of 
Fundamental Rights (Art. 16) would be similar in nature than under option (1), but would 
be  less  accentuated  given  that  only  a  limited  list  of  core  sanctioning  powers  would  be 
made available across the EU, while further sanctioning powers would be decided on by 
Member States and would be available only in the Member States where this is the case 
already today. 

(b) 

Analysis  of  impacts  in  relation  to  sanctions  for  violations  of  reporting 
requirements 

Empowering competent authorities in all Member States to be able to impose certain core 
types  of  sanctions  for  violations  of  reporting  requirements,  while  not  achieving  full 
harmonisation,  would  contribute  to  ensure  competent  authorities  in  all  Member  States 
have at least certain key powers to ensure that credit institutions fully inform competent 
authorities  about  their  financial  situation  which  enables  the  authorities  to  require 
appropriate levels of prudential provisioning.  

This option, while not achieving full harmonisation, would still ensure that key types of 
sanctions  can  be  imposed  for  violations  of  reporting  requirements.  As  prudential 
requirements,  which  credit  institutions  can  avoid  by  failing  to  report  information  to  the 
authorities,  contribute  heavily  to  credit  institutions'  operating  costs,  this  option  would 
assist the development of a level playing field in the European banking market. It could 
also increase consumer confidence that credit institutions are stable, and improve mutual 
trust between supervisors, leading to more efficient cross-border supervision.  

Limitations  of  the  freedom  to  conduct  a  business  as  provided  for  in  the  Charter  of 
Fundamental Rights would be similar in nature than under option (1), but would be less 
accentuated  given  that  only  a  limited  list  of  core  sanctioning  powers  would  be  made 
available  across  the  EU,  while  further  sanctioning  powers  would  be  decided  on  by 

EN 

85 

   EN 

 
Member States and would be available only in the Member States where this is the case 
already today. 

(2)  Minimum  common  rules  on  minimum  and  maximum  levels  of  pecuniary 

administrative sanctions 

This  option  would  significantly  contribute  to  the  objective  of  improving  the  deterrent 
effect  of  the  administrative  fines,  as  it  would  ensure  that  fines  applied  are  sufficiently 
high,  and  improve  convergence  of  national  regimes,  as  the  levels  of  administrative 
sanctions  would  be  based  on  common  rules.  Those  rules  would  be  based  on  objective 
factors including the benefit that can be derived from a violation and the turnover of the 
perpetrator. 

Analysis  of  impacts  in  relation  to  sanctions  for  unauthorised  provision  of  banking 
services  

This  option  would  ensure  the  availability  in  all  Member  States  of  high  fines  for 
unauthorised provision of banking services. This  would  make  such  misconduct  -  which 
due  to  the  circumvention  of  any  prudential  supervision  poses  considerable  risks  to 
customers' deposits - less attractive even where high benefits can be expected. 

Minimum rules on minimum and maximum levels of administrative pecuniary sanctions 
for  unauthorised  provision  of  banking  services  would  be  very  conducive  to  increase 
consumer  confidence  in  the  internal  market  for  banking  services.  Consumers  could  be 
sure that a bank offering banking services to them from any Member State without being 
authorised  and  supervised  would  be  subject  not  only  to  high  potential  fines  but  would 
also be sure about the minimum fine applied to each violation in each case. This will send 
a clear signal and will make such misconduct less attractive even where high benefits can 
be expected.  

Limitations  of  the  freedom  to  conduct  a  business  as  provided  for  in  the  Charter  of 
Fundamental  Rights  would  be  similar  in  nature  than  under  option  (2).  The  minimum 
harmonisation  character  of  these  rules  would  not  mitigate  those  impacts,  as  minimum 
amounts  for  administrative  pecuniary  sanctions  would  prevent  Member  States  from 
fixing lower amounts of sanctions. 

(a) 

Analysis  of  impacts  in  relation  to  sanctions  for  violations  of  prudential 
requirements 

Minimum rules on minimum and maximum levels of administrative pecuniary sanctions 
for violations of prudential requirements would contribute to ensure credit institutions in 
all  Member  States  effectively  meet  banking  capital  requirements.  The  possibility  to 
impose  high  fines  for  violations  of  prudential  requirements  relating  to  governance  will 
reduce  the  likelihood  that  credit  institutions  do  not  have  in  place  appropriate  risk 
management to anticipate situations of financial stress which can lead to an increase risk 
of failure. The requirement that fines shall not in any case be below a certain minimum 
will  further  contribute  to  this  objective,  in  particular  for  smaller  credit  institutions. 

EN 

86 

   EN 

 
 
However,  depending  on  the  level  where  the  minimum  is  set,  in  case  of  bigger  credit 
institutions  such  a  minimum  level  will  necessarily  be  too  low  to  have  any  dissuasive 
effect. 

Limitations  of  the  freedom  to  conduct  a  business  as  provided  for  in  the  Charter  of 
Fundamental  Rights  would  be  similar  in  nature  than  under  option  (2).  The  minimum 
harmonisation  character  of  these  rules  would  not  mitigate  those  impacts,  as  minimum 
amounts  for  administrative  pecuniary  sanctions  would  prevent  Member  States  from 
fixing lower amounts of sanctions. 

(b) 

Analysis  of  impacts  in  relation  to  sanctions  for  violations  of  reporting 
requirements 

Minimum rules on minimum and maximum levels of administrative pecuniary sanctions 
for  violations  of  sanctions  for  violations  of  reporting  requirements  would  contribute  to 
ensure  credit  institutions  in  all  Member  States  fully  inform  competent  authorities  about 
their  financial  situation  which  enables  the  authorities  to  require  appropriate  levels  of 
prudential provisioning.  

For  example,  this  option  would  move  up  the  maximum  level  pecuniary  sanctions 
applicable in case of failure to have in place sound and robust governance arrangements: 
in  several  Member  States  that  level  is  lower  than  150.000,  which  does  not  seem 
sufficiently high to be deterrent for a credit institution. Raising that level can contribute 
to  prevent  violations  of  reporting  requirements  which  will  in  turn  reduce  the  likelihood 
that  credit 
the  necessary  capital  by  not  reporting 
disadvantageous  financial  information  to  supervisors,  leading  to  an  increased  risk  of 
failure.  

institutions  avoid 

to  hold 

However,  a  minimum  level  would  reduce  the  possibility  of  adapting  the  amount  of  the 
actual  pecuniary  sanction  to  the  circumstances  of  the  specific  case  concerned,  which 
could  make  more  difficult  to  ensure  proportionality.  For  example,  if  a  small  credit 
institution  does  not  report  to  the  supervisory  authorities  with  the  required  information, 
but this violation relates to information which is of minor supervisory relevance, it may 
be disproportionate to require imposition of a significant fine. 

Limitations  of  the  freedom  to  conduct  a  business  as  provided  for  in  the  Charter  of 
Fundamental  Rights  would  be  similar  in  nature  than  under  option  (2).  The  minimum 
harmonisation  character  of  these  rules  would  not  mitigate  those  impacts,  as  minimum 
amounts  for  administrative  pecuniary  sanctions  would  prevent  Member  States  from 
fixing lower amounts of sanctions. 

(2)  Minimum  common  rules  on  maximum  level  of  pecuniary  administrative 

sanctions 

Similarly  to  option  4,  this  option  would  contribute  to  the  objective  of  improving  the 
deterrent effect of the administrative fines, as it would ensure that competent authorities 

EN 

87 

   EN 

 
have  the  power  to  apply  fines  which  are  sufficiently  high  to  be  deterrent  even  on  the 
larger credit institutions.  

(a) 

Analysis of impacts in relation to sanctions for unauthorised provision of 
banking services  

Minimum  rules  on  maximum 
levels  of  administrative  pecuniary  sanctions  for 
unauthorised  provision  of  banking  services  would  be  conducive  to  increase  consumer 
confidence  in  the  internal  market  for  banking  services,  albeit  to  a  lesser  extent  than 
option (4). While Consumers could be sure that a bank offering banking services to them 
from  any  Member  State  without  being  authorised  and  supervised  would  be  subject  not 
only to high  potential  fines, they  would not be sure about the minimum fine applied to 
each violation in each case.  

Limitations  of  the  freedom  to  conduct  a  business  as  provided  for  in  the  Charter  of 
Fundamental  Rights  would  be  similar  in  nature  than  under  option  (2).  However, 
minimum rules limited to the issue of maximum levels of sanctions will limit the impact 
on  that  right  especially  in  cases  of  lesser  economic  importance  or  where  mitigating 
effects are present.  

(b) 

Analysis  of  impacts  in  relation  to  sanctions  for  violations  of  prudential 
requirements 

Minimum  rules  maximum  levels of administrative  pecuniary sanctions  for violations of 
prudential  requirements  would  contribute  to  ensure  credit  institutions  in  all  Member 
States effectively meet banking capital requirements, albeit to a lesser extent than option 
(4). The possibility to impose high fines for violations of prudential requirements relating 
to  governance  will  reduce  the  likelihood  that  credit  institutions  do  not  have  in  place 
appropriate risk management to anticipate situations of financial stress which can lead to 
an increase risk of failure.  

Limitations  of  the  freedom  to  conduct  a  business  as  provided  for  in  the  Charter  of 
Fundamental Rights (Art. 16) would be similar in nature than under option (2). However, 
minimum rules limited to the issue of maximum levels of sanctions will limit the impact 
on  that  right  especially  in  cases  of  lesser  economic  importance  or  where  mitigating 
effects are present. 

(c) 

Analysis  of  impacts  in  relation  to  sanctions  for  violations  of  reporting 
requirements 

Minimum  rules  maximum levels of administrative  pecuniary sanctions  for violations of 
reporting  requirements  would  -  albeit  to  a  lesser  extent  than  option  (4)  -  contribute  to 
ensure  credit  institutions  in  all  Member  States  fully  inform  competent  authorities  about 
their  financial  situation  which  enables  the  authorities  to  require  appropriate  levels  of 
prudential provisioning. 

EN 

88 

   EN 

 
 
Limitations  of  the  freedom  to  conduct  a  business  as  provided  for  in  the  Charter  of 
Fundamental  Rights  would  be  similar  in  nature  than  under  option  (2).  However, 
minimum rules limited to the issue of maximum levels of sanctions will limit the impact 
on  that  right  especially  in  cases  of  lesser  economic  importance  or  where  mitigating 
effects are present. 

EN 

89 

   EN 

 
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Crisis Managemetn Leg.

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0
9

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E

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
PART II  

CORPORATE GOVERNANCE OF FINANCIAL INSTITUTIONS 

TABLE OF CONTENTS 

1. 

2. 

3. 

4. 

5. 

6. 

7. 

Introduction.................................................................................................................92 

Procedural issues and consultation of interested parties.............................................94 

Policy context and Problem definition .......................................................................97 

Baseline scenario and Subsidiarity ...........................................................................110 

Objectives .................................................................................................................113 

Policy options, analysis of impacts and comparison ................................................113 

Monitoring and Evaluation .......................................................................................133 

EN 

91 

   EN 

 
 
 
1. 

INTRODUCTION 

This  document  is  the  impact  assessment  accompanying  the  initiative  for  the  reform  of 
corporate  governance  in  credit  institutions  aimed  at  preventing  excessive  risk-taking.  It 
presents solutions to improve corporate governance systems in credit institutions to have 
a more resilient banking sector. It does not prejudge the final form of any decision to be 
taken by the European Commission.  

The collapse of financial markets in autumn 2008 and the credit crunch that followed can 
be attributed to multiple, often inter-related, factors at both macro- and micro-economic 
levels, as identified in the De Larosière Report64, and in particular to the accumulation of 
excessive  risk  in  the  financial  system.  This  excessive  accumulation  of  risk  was  in  part 
due  to  the  weaknesses  in  corporate  governance65  of  financial  institutions,  especially  in 
banks66.  Whilst  not  all  banks  suffered  from  systemic  weaknesses  of  governance 
arrangements,  the  Basel  Committee  on  Banking  Supervision  (BCBS)  Basel  Committee 
on Banking Supervision (BCBS) referred to "a number of corporate governance failures 
and lapses"67.  

Strengthening  corporate  governance  is  at  the  heart  of  the  Commission's  programme  of 
financial market reform and crisis prevention. Sustainable economic growth cannot exist 
without proper awareness of and effective management of risks within a company. The 
activities  of  some  international  organizations  and  standard  setters,  (including  the 
Organisation for Economic Co-operation and Development (OECD), Financial Stability 
Board  and  Basel  Committee  on  Banking  Supervision  (BCBS)),  and  Member  States68, 
who have launched several reviews on the role of corporate governance in the crisis and 
are updating their principles and guidelines accordingly, demonstrates the recognition of 

64 

65 

66 

67 

68 

The Report of the High-Level Group on Financial Supervision in the EU published on 25 February 
2009. The Group was chaired by Mr Jacques de Larosière. 
Corporate governance is understood in this document as encompassing the standards for decision-
making  within  a  financial  institution,  the  duties  of  the  Board  and  the  management,  the  internal 
structure of the financial institution and the relationships between the financial institution and its 
stakeholders.  This  concept  is  in  line  with  the  Basel  Committee's  understanding  of  corporate 
governance as embodied in its Principles for Enhancing corporate governance, October 2010 and 
also OECD Principles of Corporate Governance, June 1999. 
For all these issues, see, for instance, OECD, Corporate Governance Lessons from the Financial 
Crisis,  February  2009;  OECD,  Corporate  Governance  and  the  Financial  Crisis:  Key  Findings 
and Main Messages, June 2009; Walker, D., A Review of Corporate Governance in UK Banks and 
Other  Financial  Industry  Entities,  Final  Recommendations,  26  November  2009;  Institute  for 
International Finance (IIF), Reform in the Financial Services Industry: Strengthening Practices for 
a More Stable System, December 2009; De Larosière report (2009). 
Basel  Committee  on  Banking  Supervision  (BCBS),  Principles  for  enhancing  corporate 
governance, October 2010. 
For  instance,  UK  Financial  Services  Authority  adopted  in  2009  a  more  intensive  supervisory 
approach  of  firms  and  individuals  with  renewed  focus  on  the  quality  of  governance.  German 
financial supervisor (Bafin) issued in 2010 several circulars with minimum requirements for risk 
management and governance. 

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the importance of good governance. In particular, the BCBS revised its bank governance 
principles  in  October  2010  (revised  Basel  Principles),  with  a  key  focus  on  Board 
practices, risk governance, transparency, and “know your structure". 

In  its  Communication  of  4  March  200969,  the  European  Commission  announced  that  it 
would (i)  examine corporate governance rules and practice within financial institutions, 
particularly  banks,  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 key sector of the economy.  

As a first step, the Commission presented a proposal to regulate remuneration policies in 
credit institutions which has been adopted by the European Parliament and the Council in 
201070  and  is  preparing  other  measures  to  align  remuneration  policies  with  sound  risk 
management in the remaining sectors of the financial services industry. As a second step, 
in  June  2010  the  Commission  published  a  Green  Paper  on  corporate  governance  in 
financial  institutions  and  remuneration  policies71  and  an  accompanying  staff  working 
document72 which analysed the deficiencies in corporate governance arrangements in the 
financial services industry and proposed possible ways forward. The results of this public 
consultation demonstrated a broad consensus on the deficiencies identified.  

The Commission Green Paper and the responses received to the public consultation show 
that  the  main  weaknesses  in  corporate  governance  systems  concerned  to  large  extent 
credit  institutions  as  opposed  to  insurance  companies  and  investment  funds.  The  vast 
majority of respondents to the public consultation underlined that corporate governance 
mechanisms in these latter sectors of financial services have recently been reformed and 
the  existing  legislation  is  quite  comprehensive.  Consequently,  the  priority  should  be 
enhancing  corporate  governance  systems  in  credit  institutions,  where  the  main  failures 
were observed and where the legislation contains only very general principles on internal 
governance.  There  is  clearly  room  for  improvement  and  more  detailed  and  specific 
principles in banking sector, in particular in the light of the recently revised Principles for 
enhancing  corporate  governance  of  Basel  Committee  on  Banking  Supervision73.  More 
detailed  principles would provide industry with a clear model for corporate  governance 
standards  and  supervisors  a  more  resilient  framework  within  which  to  exercise  their 
supervisory  power.  In  order  to  ensure  consistency  between  other  sectors  of  financial 
services industry and to ensure that all appropriate lessons are learnt from the financial 
crisis, as a second step, a revision of other relevant sectoral directives could be envisaged, 
where necessary. 

69 
70 

71 
72 

73 

COM (2009) 114 final 
Directive  2010/76/EU  of  the  European  Parliament  and  of  the  Council  of  24  November  2010 
amending Directives 2006/48/EC and 2006/49/EC as regards capital requirements for the trading 
book  and  for  re-securitisations,  and  the  supervisory  review  of  remuneration  policies,  OJ  L  329, 
14.12.2010. 
COM(2010)0284 final  
Commission staff working document - Corporate Governance in Financial Institutions: Lessons to 
be drawn from the current financial crisis, best practices, SEC(2010) 0669 final 
BCBS, Principles for enhancing corporate governance, October 2010 

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In the context of the reform of the European supervisory architecture, the enhancement of 
capital  requirements  and  crisis  management  and  resolution,  the  proposed  reform  of 
corporate governance in credit institutions is an integral part of an overall reform of the 
financial  services  sector.  As  regards  the  general  issue  of  implementation,  corporate 
governance  reform  should  also  be  seen  in  the  context  of  the  recent  Commission 
Communication on reinforcing sanctioning regimes in the financial services sector74. 

2. 

PROCEDURAL ISSUES AND CONSULTATION OF INTERESTED PARTIES 

2.1. 

Procedural issues 

In July 2010, a Steering Group was set up by Directorate General Internal Market and 
Services  to  monitor  the  progress  of  the  impact  assessment  report.  The  Steering  Group 
comprised representatives of a number of services of the European Commission, namely 
the  Directorate  General  Internal  Market  and  Services,  the  Directorate  General 
Competition,  the  Directorate  General  Economic  and  Financial  Affairs,  the  Directorate 
General Enterprise and Industry, the Directorate General Trade, the Directorate General 
Justice,  the  Legal  Service  and  the  Secretariat-General.  The  Steering  Group  met  3  times 
(21 September  2010, 16  December  2010 and 28 January 2011). In accordance  with the 
rules  for  the  elaboration  of  impact  assessments,  the  minutes  of  the  final  meeting  of  the 
steering  group  have  been  submitted  to  the  Impact  Assessment  Board  together  with  this 
impact assessment. 

The Impact Assessment Board delivered its opinion on 11 March 2011. Following the 
Board's opinion several changes were made to this IA, in particular the following:  

-  the  report  now  provides  greater  evidence  of  the  problem  drivers,  with  illustrative 
examples, and examines their relative importance; it discusses more in detail the problem 
linked to the failure to sanction inadequate risk oversight; 

- the argumentation for EU action is strengthened, the measures taken by Member States 
and the private sector in response to the crisis are incorporated more explicitly into the 
baseline scenario, illustrating how the EU action would have an added value to the work 
of national authorities and the European Banking Authority; 

- the proportionality of the options is analysed in more detail and the degree of flexibility 
and discretion of supervisory authority is made more clear; 

- the assessment of impacts is improved, especially the cumulative impact of the options 
on  the  supply  of  suitable  candidates  for  board  membership  is  analysed,  implementing 
costs  for  supervisors  and  their  distribution  across  Member  States  are  described  and 
impact  on  competitiveness  of  EU  banks  is  further  discussed;  employee  participation  on 
boards is presented;  

74 

COM(2010) 716 final 

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- stakeholders' views are presented more extensively,  the  summary  of the  results  of the 
public consultation is annexed to the report; 

- some information has been moved from Annex I to the main text; 

- other technical adjustments have been made to incorporate suggestions from the Impact 
Assessment Board. 

Agenda planning or WP reference: 66.  

2.2. 

Consultation of interested parties 

The review of the Directive 2006/48/EC and this impact assessment have been prepared 
in  accordance  with  the  Commission's  approach  to  applying  the  better  regulation 
principles.  The  initiative  and  impact  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. It 
is built upon the  observations  and analysis contained in the  Commission Green Paper 
on corporate governance in financial institutions and the more detailed Commission staff 
working document which accompanies it. The Green Paper describes the deficiencies in 
corporate governance systems in financial institutions revealed by the financial crisis; and 
explores possible solutions to remedy these deficiencies.  

The Green Paper is based on the analysis and studies that have been performed or are still 
carried  out  by  public  or  private  organisations,  at  the  international  level  as  well  as  the 
European  and  national  levels75.  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.  

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,  insurance  and  securities  markets 
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. A limited series of open interviews also took 
place with a few financial analysts, asset managers, and statutory auditors.  

75 

See,  for  instance,  OECD  (June  2009);  Walker,  D.,  (November  2009);  IIF  (December  2009);  De 
Larosière report (2009). 

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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 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  Commission  services  received  214  replies.  The  comments  were  taken 
into account in this impact assessment. The analysis of the results of the consultation is 
annexed to this report (see Annex V). Non-confidential contributions can be consulted on 
the Commission website: 

http://ec.europa.eu/internal_market/company/modern/corporate_governance_in_financial
_institutions_en.htm#consultation2010 

The respondents agree with the analysis in the Green Paper regarding the weaknesses in 
corporate  governance  in  financial  institutions.  They  support  the  Commission's  goal  of 
promoting  effective  corporate  governance  as  well  as  the  policy  intent  underlying  the 
principles articulated in the Green Paper. The respondents also support a more effective 
supervision of the implementation by credit institutions of principles on good corporate 
governance.  Although  many  respondents  highlight  that  certain  failures  in  corporate 
governance  in  financial  institutions  were  to  a  large  extent  due  to  a  lack  of  effective 
implementation  of  existing  rules,  a  number  of  respondents  think  that  regulatory 
framework could be improved further. A number of respondents think that any future 
proposals of the Commission should be principle-based and proportionate in order to 
take  account  the  differences  in  business  models  of  financial  institutions,  the  nature  of 
their  activity,  their  size,  complexity,  legal  form  and  different  corporate  governance 
systems  and  arrangements.  Many  respondents  are  of  the  opinion  that  future  action  at 
European level should focus on desired outcomes and the detailed implementation of the 
principles  could  be  dealt  with  at  national  level  through  legislation,  supervisory  review, 
increased transparency or codes of best practice with "comply or explain" approach. The 
views of the respondents have been taken account of in this impact assessment. 

The Green Paper received support from different public authorities and Member States. 
European  Parliament  has  also  recognised  the  importance  of  strengthening  corporate 
governance standards and practices in financial institutions76. 

76 

Report on remuneration of directors of listed companies and remuneration policies in the financial 
services sector (2010/2009(INI) calls on the Commission to investigate strengthening the roles of 
non-executive directors, including ensuring that firms provide on-going training and independent 
remuneration  packages  that  reflect  the  independent  role  of  non-executive  directors,  as  well  as 
providing the powers to supervisors to conduct ‘approved persons’ interviews. 

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3. 

POLICY CONTEXT AND PROBLEM DEFINITION  

3.1. 

Background and context 

3.1.1.  Nature and size of the market concerned 

The  reform  of  the  corporate  governance  is  aimed  at  credit  institutions  and  investment 
firms.  At  the  end  of  2009,  the  number  of  credit  institutions  in  27  Member  States, 
amounted to 8,358 and their total number of assets exceeded 350% of GDP. 

Figure 1: total assets of the European 
banking sector 

Figure 2: total number of credit 
institutions 

EU27: European Union (27 countries after enlargements in 2004 and 2007 
EU15: European Union (15 countries before enlargement on 1 May 2004) 
MU16: Monetary Union (16 countries participating in the euro area as at 31 December 2009) 
NMS: New Member States (12 new countries of 1 May 2004 enlargement) 

The total amount of loans to non-credit institutions in 2009 neared €20,000 billion, credit 
institutions  being  the  remained  the  dominant  suppliers  of  financing.  This  shows  the 
importance of the banking sector in the European economy and the impact any failures 
may on the other sectors of economy. 

3.1.2.  Overview of legislative framework  

The  following  table  summarises  the  existing  legislative  framework  on  corporate 
governance. 

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Binding 

Article 22 CRD, paragraph 1 

Article 11 CRD, paragraph 1 

National company laws 

Non-binding 

Revised Basel Principles 

EBA  guidelines  on  internal 
governance 

Corporate governance codes 

"Home  Member  State  competent  authorities  shall  require  that 
every  credit  institution  have  robust  governance  arrangements, 
which  include  a  clear  organisational  structure  with  well 
defined,  transparent  and  consistent  lines  of  responsibility, 
effective processes to identify, manage, monitor and report the 
risks it is or might be exposed to, and adequate internal control 
mechanisms,  including  sound  administrative  and  accounting 
procedures,  and  remuneration  policies  that  are  consistent  with 
and promote sound and effective risk management". 

"The  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  experience  to 
perform such duties". 

National company laws define the rules for the setting up and 
the  functioning  of  a  company, 
the 
functioning and the composition of Boards 

including  rules  on 

Revised  Basel  Principles  provide  guidance  at  international 
level  to  credit  institutions  and  supervisors  on  sound  corporate 
governance in credit institutions.  

EBA  guidelines  on  internal  governance  provide  guidance  to 
European 
the 
implementation of principles on internal governance contained 
in CRD 

supervisors  and  credit 

institutions  on 

Corporate  governance  codes  are  focused  on  best  practices  for 
listed  companies, 
listed  credit 
institutions only. 

they  apply 

therefore 

to 

As showed in the table, CRD contains very general principles in EU legislation which do 
not  define  roles  and  responsibilities  of  different  actors  within  credit  institutions, 
especially  of  Board  and  management,  or  specify  what  the  governance  arrangements 
should look like. This is left to national supervisors, guidelines, national legislation, non-
to  auto-regulation.  National 
binding  domestic  corporate  governance  codes  and 
supervisors  monitor  the  compliance  of  credit  institutions  with  national  legislation 
implementing CRD  rules  and can sanction non-compliance.  EBA is  currently  preparing 
guidelines  for  credit  institutions  and  national  supervisors  on  internal  governance  which 
would provide credit institutions with supervisory expectations on the implementation of 
Article 22 and Article 11. National corporate governance codes are non-binding in nature 
and are focused on "comply or explain" principle: companies should either comply with 
the recommendations of  a code  or explain why  they  do  not  comply.  The  monitoring  of 
the "comply or explain" principle is usually left to the market and investors. 

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3.2. 

Problem definition 

The  financial  crisis  triggered  by  the  bankruptcy  of  Lehman  Brothers  in  autumn  2008 
necessitated  a  massive  injection  of public funding into credit institutions in the US and 
Europe – up to 25% of GDP. The resulting credit contraction and increasing public debt 
had a strong negative impact on the real economy. Banking stock prices soured. 

The financial crisis was caused largely by accumulation of excessive risk in the financial 
system.  The  De  Larosière  Report77  notes  that  there  were  fundamental  failures  in 
assessment of risk, both by financial firms and those who regulated and supervised them. 
These  failures  were  due  to  misunderstandings  about  the  interaction  between  credit  and 
liquidity, weaknesses in model-based risk assessments, which led to an overestimation of 
the  ability  of  financial  firms  as  a  whole  to  manage  their  risk  and  a  corresponding 
underestimation  of  the  capital  they  should  hold.  As  showed  in  the  Commission  Green 
Paper  and  its  accompanying  Staff  Working  Document,  the  failures  were  also  due  to 
weaknesses in the governance aspects of risk management.  

Credit  institutions  that  failed  or  encountered  difficulties  and  had  to  be  bailed  out  by 
governments  were  generally  lacking  an  appropriate  risk  culture.  To  illustrate,  in  many 
cases,  credit  institutions  were  not  able  to  identify  and  control  risk  internally  due  to 
inefficient risk oversight by Boards of directors and ineffective internal risk management 
as  well  as  the  consequences  of  the  unsound  remuneration  structures  that  encouraged 
excessive risk-taking which had been put in place.  

These weaknesses were also due in part to the lack of effectiveness of the existing rules 
on  corporate  governance  and  the  failure  of  shareholders  and  supervisors  to  effectively 
monitor risk. Statutory auditors had a limited role with regard to risk issues. In fact, the 
general  consensus78  is  that  the  principles  on  corporate  governance  existing  prior  to  the 
crisis, namely the OECD principles, the recommendations of the Basel Committee, and 
European legislation, already covered to a certain extent the problems highlighted by the 
financial  crisis.  However,  the  financial  crisis  revealed  the  lack  of  genuine  effectiveness 
and  implementation  of  the  corporate  governance  principles  and  mechanisms  in  the 
financial  services  sector,  particularly  with  regard  to  banks.  This  was  due  to  different 
factors.  

First, it seems that the existing principles were too general, too broad in scope and were 
not  sufficiently  precise.  As  a  result,  they  do  not  seem  to  have  been  well  understood  in 
practice  and  they  left  a  wide  margin  of  appreciation  for  financial  institutions.  In  most 
cases,  this  seems  to  have  led  to  a  purely  formal  application  of  corporate  governance 
principles (i.e., a box-ticking exercise), with no real qualitative assessment. Existing rules 
on  governance  of  credit  institutions  were  not  sufficient  to  prevent  behavioural  excesses 
that contributed to the crisis because Boards failed to challenge management.  

77 
78 

De Larosière Report (2009), pp. 8 to 9. 
See the OECD's public consultation Corporate governance and the financial crisis of 18 March 
2009 and in particular the section entitled 'Implementation gap'.  

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Second, the non-binding nature of most of the corporate governance principles in Europe 
and  the  fact  that  there  was  no  legal  obligation  to  comply  with  recommendations  by 
international organisations or the provisions of corporate governance codes contributed to 
the lack of effective compliance by  financial institutions  with  the corporate  governance 
principles79.  

Finally,  in  the  absence  of  legal  requirements,  there  are  three  principal  drivers  in  the 
banking  sector  towards  compliance  with  the  codes  of  corporate  governance:  voluntary 
self-regulation, investor pressures and regulatory oversight. However, as showed below, 
neither of these mechanisms worked in practice. In particular, there was a clear lack of 
effective  monitoring  of 
implementation  of  corporate  governance  principles  by 
shareholders  and  supervisory  authorities,  partly  due  to  insufficient  information  from 
credit institutions.  

The detailed problem analysis which follows is based on the findings of the Commission 
Green  Paper  on  Corporate  Governance  in  Financial  Institutions  and  Remuneration 
policies (COM(2010) 284 final) and its accompanying staff working document Corporate 
Governance  in  Financial  Institutions:  Lessons  to  be  drawn  from  the  current  financial 
crisis, best practices (SEC(2010) 669).  

3.2.1.  Weaknesses in internal oversight of risk strategies 

The  Board  and  senior  management  are  primarily  responsible  and  accountable  for  the 
governance  and  performance  of  credit  institutions.  Notwithstanding  the  differences  in 
Boards'  structures  across  Europe,  part  of  the  Board’s  responsibility  is  to  monitor  the 
performance of the company, supervise the management and, as a consequence, to act as 
a counter-weight to the often risk-laden growth aspirations of some management teams80. 
Boards of a credit institution have explicit and implicit obligation to safeguard the monies 
credit institution receives from the public (deposits, investments etc.) and consequently to 
ensure that credit institution is managed in a safe and sound manner81. However, in many 
instances  this  responsible  oversight  did  not  occur  due  Board  failures  but  also  to 
inappropriate standing and authority of the risk management and control function. As a 
consequence,  government  intervention  was  required  to  protect  stakeholders  and  the 
stability of the financial system.  

3.2.1.1.  Inadequate risk oversight by Boards 

The current financial crisis revealed serious flaws and shortcomings in risk oversight by 
Boards  at  a  number  of  financial  institutions.  According  to  the  Basel  Committee,  these 

79 

80 

81 

Directive  2006/46/EC  obliges  financial  institutions  listed  on  regulated  markets  to  draw  up  a 
corporate governance code to which they are subject, and to indicate any parts of the code from 
which they have departed and the reasons for doing so. 
See Comparative study on corporate governance codes relevant to the EU and its Member States, 
Weil, Gotshal & Manges LLP, on behalf of the European Commission, March 2002. 
See, for instance, J. Palmer, C.S. Hoong, How can financial supervisors improve the effectiveness 
of corporate governance?", October 2010. 

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shortcomings  were  mainly  attributable,  to  insufficient  Board  oversight  of  executive 
management82.  In  addition,  Board  was  not  adequately  involved  in  strategy  and 
consequently gave low priority to risk issues as compared to other topics. Finally, Boards 
did  not  receive  adequate  and  timely  information  on  risk.  As  a  result  of  these  failures, 
credit institutions were allowed and, in some cases, even encouraged, by their Boards to 
take excessive risks that included unprecedented levels of leverage and high-risk business 
strategies83.  

A) Lack of effective challenge of senior management decisions by Boards 

Credit institutions are, by definition, complex entities with different types of risks linked 
to  their  activity.  In  order  for  the  Board  to  fulfil  its  duties  and  to  be  able  to  understand 
fully all relevant risks and constructively challenge management decisions,  members of 
the  Board  should  devote  sufficient  time  to  their  duties  and  possess  the  appropriate 
expertise.  

However, in many cases, non-executive Board members did not devote sufficient time to 
fulfil  their  duties,  mainly  due  to  the  accumulation  of  a  large  number  of  mandates  in 
different  companies.  For  instance,  a  non-executive  director  without  any  committee 
membership would, until recently, typically expect to work about fifteen days per annum 
in a credit institution84, whereas it is now recognised that a board member should spend 
from 30 to 60 days per annum, depending on the complexity of the financial institution. 
For example, at Bear Stearns, in the seven-member audit committee, three directors held 
among them 18 board seats on listed companies. The audit committee chairman served on 
the boards of five listed companies in addition to Bear Stearns. Two members of the audit 
committee  served  on  the  audit  committees  of  11  public  companies  between  them.  This 
model  of  part-time  Boards  with  Board  members  combining  a  number  of  mandates  in 
different  companies  has  proved  unworkable,  particularly  in  large  complex  financial 
institutions.  The  crisis  has  revealed  the  difficulties  which  non-executive  directors  face 
understanding all dimensions of risks being taken by financial institutions within the time 
commitments typically required from them. 

As shown by different studies85, the presence of a sufficient number of experienced and 
informed non-executives encourages challenge, as opposed to Boards whose members do 
not  question  management  decisions  because  the  subject  is  too  technical  for  them. 
However,  the  crisis  showed  that  many  non-executive  Board  members  lacked  relevant 
expertise and skills to be able to perform their duties and efficiently challenge dominant 
chief  executives  pursuing  aggressive  growth  strategies.  As  an  example,  at  Lehman 
Brothers, there was a notable absence of financial services expertise on the board. There 

82 
83 
84 

85 

BCBS, October 2010. 
J. Palmer, C.S. Hoong. 
See  for  instance,  report  was  prepared  for  the  OECD  by  R.  C.  Anderson,  Risk  management  and 
Corporate governance, where it results from the interviews conducted with that few non-executive 
directors have more than an absolute maximum of 20% of their year to devote to any given Board, 
and in many cases their attendance at meetings may be as little as fifteen days a year. 
See, for instance, Walker, D. (November 2009). 

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was also an absence of current business experience. The chairman of the audit and of the 
risk  committees  was  a  trustee  of  a  non-profit  foundation86.  In  many  cases,  lack  of 
expertise of non-executive Board members prevented them from carrying out checks on 
the plausibility of information presented to them and explains in part the over-reliance on 
ratings. In addition, the nomination process for non-executives often did not sufficiently 
assess  their  capacity  to  carry  out  non-executive  functions,  including  the  ability  to 
challenge the management.  

Although  insufficient  time commitment and inadequate expertise were the main drivers 
of  the  lack  of  effective  challenge  by  Boards  of  management  decisions,  other  factors 
contributed to this situation. Several reports87 have clearly demonstrated that, faced with 
a  chief  executive  officer  who  is  omnipresent  and  in  some  cases  authoritarian,  non-
executive  directors  felt  unable  to  raise  objections  to,  or  even  question,  the  proposed 
guidelines or conclusions of the management due to a lack of technical expertise and/or 
confidence (management dominance). The results of the public consultation show that 
combining  functions  of  Chairman  and  Chief  Executive  Officer  in  the  same  financial 
institution  disregards  the  divergence  of  duties  and  capacities  and  concentrates  an 
unwarranted  amount  of  power  and  dominance  in  the  hands of  one  person.  Also,  due  to 
the  amount  of  work,  especially  in  systemically  important  financial  institutions, 
cumulating both functions does not allow for sufficient time-commitment. 

Finally,  the  selection  of  candidates  for  non-executive  positions  in  financial  institutions 
has drawn on a too narrow pool of people, non-executive directors being often recruited 
through  an  “old  boy  network”  from  among  business  and  personal  contacts  of  current 
board  members.  For  instance,  the  Higgs  Review  in  the  UK  of  2003  found  that  the 
majority  of  non-executive  directors  in  UK  companies,  including  financial  institutions, 
were  white,  middle-aged  males  of  British  origin  with  previous  plc  director  experience. 
Non-British  nationals  accounted  for  only  7%  of  non-executive  positions,  while  British 
citizens from ethnic minority backgrounds accounted for only 1% of such positions. The 
survey also found that although about 30% of managers in the UK corporate sector were 
female, women held only 6% of non-executive positions. Recent research shows that this 
situation  has  not  evolved.  This  lack  of  diversity  in  the  composition  of  Boards  with 
regard to cultural, educational, professional and legal background and also with regard to 
age  and  gender  resulted  in  Boards  being  dominated  by  a  narrow  group-think  which,  in 
many  cases,  contributed  to  the  failure  of  non-executive  Board  members  to  effectively 
challenge management decisions88.  

86 

87 

88 

For  a  detailed  analysis  of  Lehman  Brothers  Board  composition,  see  Lehman  Bothers:  Peaking 
under the Board Façade, Stanford Graduate School of Business, CGRP-03, April 2010. 
See for instance, report by R. C. Anderson where many interviewees have referred to CEO’s as 
dominant, persuasive individuals who are used to getting their own way within their organisations. 
Some  have  been  described  as  “imperial”,  others  have  been  described  as  “bullying”.  See  also 
Walker D. (2009). 
For  instance,  the  British  Treasury  Select  Committee  report  Women  in  the  City,  July  2010,  said 
that: "We believe the lack of diversity on the Boards of many, if not most, of our major financial 

EN 

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Whilst it is not exclusive to credit institutions, lack of diversity and, in particular, gender 
gap, on Boards of credit institutions is particularly acute, as showed in the charter below.  

Figure 3: Women representation on Boards in corporate sector in Europe 

An  increasing  number  of  reports  indicate,  however,  that  there  is  a  positive  correlation 
between diverse Boards and the companies’ performance89. Agency theory suggests that 
a  more  diverse  Board  is  a  better  monitor  of  management  because  Board  diversity 
increases Board independence. People with different gender, cultural background might 
ask questions that would not be asked by directors with more traditional backgrounds. A 
report commissioned by the California Public Employees' Retirement System (CalPERS) 
for example, found that companies that have diverse Boards perform better than Boards 
without  diversity90.  The  report  stated  that  companies  without  ethnic  minorities  and 
women  on  their  Boards  eventually  may  be  at  a  competitive  disadvantage  and  have  an 
under-performing  share  value.  A  plethora  of  European  studies  came  up  with  the  same 

89 

90 

institutions may have heightened the problems of ’group think’ and made effective challenge and 
scrutiny of executive decisions less effective". 
Baumgarten,  P.,  Desvaux,  G.,  &  Devillard-Hoeillinger,  Women  Matter  1:  Gender  diversity,  a 
corporate  performance  driver,  McKinsey  &  Company,  2007;  The  Bottom  Line:  Connecting 
Corporate Performance and Gender Diversity’, by Catalyst, 2004; ‘Women to the Top!’, 2007, by 
EVA.  
Deborah L. Rhode and Amanda K. Packel, Diversity on Corporate Boards, Stanford Centre on the 
Legal Profession, September 2009. 

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   EN 

 
 
                                                                                                                                                 
result  no  matter  the  number  of  companies  surveyed  in  each  report91.  For  example, 
research conducted by McKinsey in 2007 of over 500 European companies with a market 
cap  over  150  million  euros,  found  greater  profitability  of  companies  with  a  higher 
proportion of women executives and Board directors92. 

In addition, there is substantial economics literature on the effect of gender on attitudes 
toward risk, and most of it appears to support the idea that men are less risk averse than 
women in their financial decision making93.  

Nevertheless,  this  positive  correlation  between  gender  balance  and  performance  of 
companies has not led to an improved situation as regards diversity on Boards of credit 
institutions. Competitive pressure apparently does not suffice to bring change through the 
relative advantages offered by gender diversity with regard to profitability and economic 
growth.  This  seems  to  be  undermined  in  particular  by  co-optation  in  the  process  for 
selection of Board members, i.e. when candidates for Board membership are selected by 
existing Board members. This perpetuates selection of candidates of similar profile and 
background. 

B) Lack of ownership by Boards of risk strategy 

In  addition  to  the  lack  of  effective  challenge  by  Boards  of  management  decisions, 
excessive risk-taking in credit institutions has been partly due to lack of adequate Board 
involvement  in  approving  and  overseeing  the  risk  strategy  (risk  appetite)  and  risk 
management structure. Board members did not feel themselves sufficiently concerned by 
risk  issues  which  resulted  in  lack  of  ownership  of  risk  matters  by  Boards.  Often,  there 
were no  clear lines of responsibility with regard to risk identification  and  management. 
The  evidence  gathered94  shows  that  in  several  credit  institutions,  there  was  a  lack  of 
acknowledgement  at  the  Board  level  of  the  risk  certain  transactions  implied,  while  the 
risk  appetite  was  either  not  properly  defined  or  not  defined  at  all.  There  was  also  no 
effective  monitoring  of  whether  the  limits  set  by  the  risk  strategy  and  the  risk  appetite 
were respected. This can be illustrated by the example of UBS, where there were no clear 
guidance  on  front  desk  on  the  limits  of  risk  exposure  and  lack  of  coordination  of  risk 
strategy. 

C) Low priority given by Boards to consideration of risk issues 

91 

92 

93 

94 

See, for instance, S. Nielsen and M. Huse, The Contribution of Women on Boards of Directors: 
Going  beyond  the  Surface,  Corporate  Governance:  An  International  Review,  2010,  18(2):  136–
148. 
McKinsey  and  Company,  Women  Matter:  Gender  Diversity,  A  Corporate  Performance  Driver, 
October 2007. 
See,  for  instance,  Powell,  M.  and  Ansic,  D,  Gender  difference  in  risk  behaviour  in  financial 
decision making: an experimental analysis, Journal of Economic Psychology, 1997; Jianakopolos, 
N. A. and Bernasek, A., Are women more risk-averse?, Economic Enquiry 1998.  
See, for instance, evidence of former Chairmen and Chief Executives to the Treasury Select of the 
House of Commons. 

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In credit institutions, risk is at the core of the company business models. Many banks run 
complex  businesses  with  many  different  business  lines.  It  takes  both  skill  and  time  to 
understand all the risks to which these institutions are exposed, how these risks interrelate 
and  how  they  could  expose  the  banks  to  losses  beyond  the  risk  tolerance.  Without  this 
awareness and understanding it is difficult for the Board to provide effective checks and 
balances to the bank's management. However, it was reported that Boards did not spend 
sufficient  time  in  meetings  discussing  issues  related  to  risk95.  For  instance,  at  Lehman 
Brothers, the finance and risk committee met only two times during the course of 2008. 
This  was  partly  a  consequence  of  the  lack  of  a  clear  role  of  the  Board  in  overseeing  a 
company’s  risk  management,  insufficient  time  commitment  and  inadequate  expertise. 
Also,  during  the  market  boom,  risk  was  generally  not  considered  as  an  issue  of  high 
relevance  to  the  Board,  and  low  priority  was  given  to  discussion  of  risk  matters  as 
compared  to  other  subjects,  such  as  growth  strategy  or  mergers  and  acquisitions.  In 
addition,  due  to  internal  organisation  structure,  Boards  tended  to  focus  mainly  on 
financial reporting risk (i.e. risk linked to accounting misstatements) and tasked the audit 
committees  to  handle  most  of  the  risk  management  activities,  thereby  failing  to  see  the 
need  for  a  separate  risk  committee  to  manage  risks  on  an  enterprise-wide  level96.  This 
insufficient attention by Boards to risk issues prevented them from efficiently overseeing 
risk on the broad company level. 

D) Inadequate information of Boards on risk issues 

Even where all necessary systems to oversee risk are in place, it is essential that Boards 
receive  timely  and  accurate  information  in  order  to  be  able  to  take  informed  decisions. 
However,  the  crisis  revealed  that  Boards  did  not  always  have  a  clear  understanding  of 
what  information  on  risk  they  actually  needed.  Reporting  on  risk  has  not  been  in  all 
situations  timely,  comprehensive  and  understandable  for  decision-making  or  control 
bodies,  limiting  thereby  the  capacity  of  analysis  and  critical  review  of  executive 
management and/or the Board97.  

According  to  corporate  governance  professionals,  “Boards  tend  to  live  in  a  partial 
assurance  vacuum.  The  risks  are  known  by  management  but  the  Board  does  not  get  to 
hear  about  them.  The  Board  only  gets  the  assurance  that  management  chooses  to  give 

95 

96 

97 

See,  for  instance,  the  Beyond  box-ticking:  A  new  era  for  risk  governance,  a  report  from  the 
Economist Intelligence Unit Sponsored by ACE and KPMG, 2009, where many respondents to the 
survey – across geographies and company sizes – admit that their companies do not spend enough 
time at Board level discussing risk issues. 
See,  for  instance,  General  Counsel  Roundtable,  Chief  Risk  Officers  and  Risk  Committees,  Key 
Findings, August 2007. 
According  to  report  the  Economist  Intelligence  Unit  Beyond  box-ticking:  A  new  era  for  risk 
governance, the communication of risk information to the Board is seen as a problem area, with 
only 40% believing that their organisation is good at ensuring clear lines of reporting to allow risk 
information to be escalated. 

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them.  It  is  relatively  rare  that  managers  report  candidly  to  the  audit  committee  and  the 
Board because of the disincentives of doing so.98” 

There  was  a  lack  of  direct  lines  of  reporting  of  the  risk  management  function  to  the 
Board.  For  instance,  the  Senior  Supervisors  Group  (SSG)  found  that  "in  some  cases, 
hierarchical  structures  tended  to  serve  as  filters  when  information  was  sent  up  the 
management chain, leading to delays or distortion in sharing important data with senior 
management".  

Moreover, in a number of cases there has been a general lack of appropriate presentation 
of  information  on  risks  to  the  Board.  Management  rarely  compiled  for  their  Boards 
relevant  measures  of  risk,  a  view  of  how  risk  levels  compare  with  limits,  the  level  of 
capital  that  the  firm  would  need  to  maintain  after  sustaining  a  loss  and  the  actions  that 
management could take to restore capital after sustaining a loss. 

3.2.1.2.  Inappropriate standing of the risk management function 

The  risk  management  and  control  functions  together  with  the  Board  play  an  important 
role  in  efficient  risk  oversight.  However,  many  banks  saw  the  corporate  governance 
aspects  of  risk  management  as  "a  paper  pushing  exercise  that  adds  little  value"  and 
institutions  were  reported  to  lack  fundamental  risk  culture99.  In  many  cases,  the  risk 
management function in credit institutions has not been given proper weight in decision-
making  process.  Moreover,  the  risk  function  as  such  has  often  not  been  respected  and 
regarded at the same level as the operational/trade function.  

The highest representative, generally the Chief Risk Officer (CRO), was not always in a 
position to speak up or raise concerns due to hierarchical constraints100 and did not have 
sufficient  levers  to  either  sanction  or  veto  investment  decisions.  As  a  result,  risk  issues 
were  often  not  given  appropriate  consideration  in  major  management  decisions. 
Furthermore, there was a lack of existing structures at Board level, within which the CRO 
was  able  to  interact  and  to  ensure  that  the  all  dimensions  of  risk  were  appropriately 
considered.  

As described in the report of the OECD101, at a number of banks, the lower prestige and 
status of risk management staff vis-à-vis traders played an important role. For example, 
Société Générale noted that "the general environment did not encourage the development 
of a strong support function able to assume the full breadth of its responsibilities in terms 
of  transaction  security  and  operational  risk  management.  An  imbalance  therefore 
emerged  between  the  front  office,  focused  on  expanding  its  activities,  and  the  control 

98 

99 
100 
101 

See, for instance the interview of Andrew Chambers, head of the corporate governance committee 
at  the  Association  of  Chartered  Certified  Accountants  in  the  Beyond  box-ticking:  A  new  era  for 
risk governance.  
See, for instance, the report from by R. C. Anderson to OECD. 
For example, the CRO was placed under rather than at equal level to the CFO. 
OECD, February 2009. 

EN 

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   EN 

 
                                                 
 
functions which were unable to develop the critical scrutiny necessary for their role”102. 
The  inability  of  risk  management  staff  to  impose  effective  controls  was  also  noted  at 
Credit Suisse103.  

3.2.2.  Lack of effective external control 

Until  now,  very  general  and/or  non-binding  nature  of  most  existing  principles  on 
corporate governance has meant that external control of effective implementation of these 
principles  has  been  crucial.  However,  the  financial  crisis  has  shown  that  neither  the 
shareholders nor the supervisory authorities were effectively monitoring and controlling 
the implementation by credit institution of these principles.  

Shareholders  did  not  fulfil  their  role  of  "responsible  owners",  which  entails  actively 
monitoring companies and using shareholder rights to ensure long-term value creation of 
companies  and  improve  their  corporate  governance  and  strategy.  Consequently,  market 
discipline  which  is  essential  for  effective  implementation  of  corporate  governance 
principles did not work properly.  

In  additional,  in  many  instances,  the  serious  difficulties  and  failures  of  banks  occurred 
only  a  few  months  after  their  accounts  had  been  issued  without  any  qualification, 
emphasis of matter or even indication in the auditors' reports regarding such risks in the 
financial statements. 

Whilst  lack  of  shareholders  engagement  and  auditor's  involvement  were  one  of  the 
drivers  of  the  corporate  governance  failures  in  credit  institutions,  they  are  out  of  the 
scope  of  this  impact  assessment  and  will  be  dealt  with  in  other  Commission  initiatives 
(See  Section  6.4.).  Inadequate  supervisory  review  of  internal  governance  is  analysed 
below. 

3.2.2.1.  Inadequate supervisory review of internal governance 

The financial crisis revealed a lack of sufficient dialogue between Boards and supervisors 
regarding corporate governance issues. This lack of supervisory oversight did not allow 
the timely identification of the financial institutions that were experiencing weaknesses in 
their corporate governance practices.  

Inadequate supervisory control of governance practices in credit institutions was mainly 
due to the lack of clear role for supervisors in overseeing corporate governance structures 
and no clear guidance on the methodology. National supervisors took varying degrees of 
interest  in  the  governance  of  credit  institutions.  While  some  supervisors  took  steps  to 
assess compliance with the exiting national principles and guidelines, the majority were 
too  much  focused  on  formal  compliance  by  financial  institutions  with  some  limited 

102 

103 

Société  Générale,  Report  of  the  Board  of  Directors  to  the  General  Shareholders  Meeting,  2008, 
company website. 
Financial Services Authority, Final notice to Credit Suisse First Boston, 13 August 2008, London 

EN 

107 

   EN 

 
                                                 
requirements  rather  than  on  the  proper  functioning  of  the  Boards  and  on  effective 
implementation by financial institutions of sound corporate governance principles104.  

In many cases, supervisors did not monitor whether the risk governance frameworks and 
internal organisation could easily adapt to changes in the business model or risk profile of 
the  credit  institution.  They  also  failed  to  ensure  appropriate  expertise  of  Boards  and  to 
apply  "fit  and  proper"  test,  focusing  essentially  on  probity  test105.  In  addition,  the 
majority  of  supervisors  had  few  interactions  with  Boards  and  Board  committees, 
preferring to deal directly with management106.  

Moreover, due to the lack of clarity in their role in overseeing corporate governance  in 
credit  institutions  and  to  the  non-binding  nature  of  a  significant  part  of  corporate 
governance  principles,  most  supervisors  were  unable  to  apply  sanctions  for  corporate 
governance  failures  in  financial  institutions  or  their  Boards  on  grounds  of  lack  of 
appropriate  risk  oversight.  They  also  did  not  possess  adequate  tools  to  monitor  the 
functioning  of  Boards  (e.g.  no  access  to  performance  evaluation,  no  competence  with 
regard to diversity). 

Finally,  the  financial  crisis  revealed  serious  limitations  in  the  existing  supervisory 
framework globally, both in a national and cross-border context. Supervisors did not have 
sufficient resources nor did they have an adequate mix of skills. The consequence was a 
lack of understanding of and proper monitoring of financial institutions' activities. Also, 
the  existence  of  different  national  systems  of  supervision  has  led  to  inconsistent 
supervisory  powers  across  Member  States,  regulatory  competition  and  supervisory 
capture.  This  prevented  the  authorities  from  exercising  efficient  supervision  in  the 
context  of  expansion  of  investment  bank  business  model107.  In  general,  the  evidence 
tends to show that the crisis prevention function of supervisors has not been performed 
well. However, these problems are of a more general nature and are out of the scope of 
the  analysis  of  this  document.  This  document  will  only  focus  on  the  role  of  the 
supervisors in risk governance of credit institutions. 

104 

105 
106 
107 

For  instance,  under  the  UK  FSA  supervisory  approach  before  the  crisis,  governance  of  credit 
institutions was evaluated according to a set of criteria, compliance with which could be assessed 
using  a  box-ticking  approach.  See  The  FSA's  Risk-based  approach:  guidance  for  non-executive 
directors, November 2006.  
See, for example, OECD (November 2009), p.27. 
See J. Palmer, C.S. Hoong 
See De Larosière report (2009), pp. 41 to 42; Guido Tabellini, Why did bank supervision fail? in 
The First Global Financial Crisis of the 21st Century, June 2008;  

EN 

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MACROECONOMIC EFFECTS: 

Systemic risk and damage to the real 
economy due to credit contraction; 
taxpayers money might be used to support 
credit institutions 

CONSEQUENCE: 
FAILURE OF CREDIT INSTITUTION 

MICROECONOMIC EFFECTS: 

Negative impact on stakeholders: 
depositors, employees, shareholders, etc.  

PROBLEM: 
Credit institutions implement short-term, excessively risky strategies and are unprepared to weather crisis situations  

Inadequate risk oversight by Boards 

Inappropriate standing of risk management function 

Lack of ownership by 
Boards of risk 
strategy 

Lack of challenge of 
senior management 
decisions by the 
Boards 

Low priority given 
by Boards to 
discussion of risk 
issues  

Inadequate 
information 
of Boards 
on risk 
issues 

The risk 
management 
function does 
not have 
direct access 
to the Board  

The risk management 
function lacks 
appropriate authority 
over and 
independence from 
operational units 

Insufficient 
time 
commitment 
of Board 
members 

Lack of 
diversity of 
views  within 
Boards 

Poor 
expertise 
of Board 
members 

Management 
dominance of 
Boards  

INTERNAL DRIVERS 
(CREDIT INSTITUTION)

Wrong 
incentives for 
management 
and 
employees, 
mainly within 
remuneration 
policies  

EXTERNAL DRIVERS 

Out of scope 

Inadequate voluntary and binding 
rules/principles on corporate 
governance: too high level, non-
binding and lack of penalties 

Ineffective supervisory guidance and 
monitoring of internal corporate 
governance

Limited role of 
external auditors on 
risk issues 

Shareholder inaction 
with regard to 
excessive risky 
strategies

EN 

109 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
4. 

BASELINE SCENARIO AND SUBSIDIARITY 

The  issue  of  corporate  governance  is  currently  being  addressed  both  at  an  international 
and European level, and by Member States and credit institutions. However, the existing 
initiatives risk not being sufficient to change the behaviours.  

4.1. 

Baseline scenario: expected development if no EU action is taken 

Excessive risk-taking by credit institutions has been or is in process of being addressed 
by different reforms at EU level, in particular the new capital adequacy requirements and 
the past and future amendments to the Capital Requirements Directive. These measures 
will  contribute  to  avoiding  excessive  risk  exposures  and  strengthen  the  European 
financial system. However, these new capital requirements rules should be complemented 
by  reforms  to  corporate  governance  practices  within  credit  institutions  and  change  in 
corporate behaviour. Credit institutions are in the process of changing their risk oversight 
and  management  practices,  demonstrating  recognition  of  the  importance  of  improving 
governance  standards  as  a  consequence  of  the  financial  crisis.108  Moody’s  report  of 
March  2010109  which  reviewed  board  composition  at  20  large global  banks  in  North 
America  and  Europe  since  the  beginning of the crisis in July 2007 shows, for instance, 
that experience in the financial industry is now more prominent factor in building bank 
boards as compared to pre-crisis situation: 46% of the banks’ outside directors now have 
financial backgrounds, as opposed to 32% pre-crisis, on average; and 13 banks had split 
the  roles  of  chairman  and  CEO.  However,  the  same  report  also  recognises  that  there  is 
still need for improvement and that the changes are far from complete: financial industry 
experience  among  outside  directors  remains  weak  at  some  banks,  such  as  the  BNP 
Paribas,  Deutsche  Bank  or  KBC  where  20%  or  fewer  of  the  outside  directors  possess 
relevant  experience.  A  number  of  banks  do  not  have  any  form  of  independent  board 
leadership  (either  via  an  independent  chairman  or  independent  lead  director  /  senior 
independent  director  role),  such  as  BNP  Paribas,  Credit  Suisse,  Deutsche  Bank,  KBC, 
Santander  Group  and  Société  Générale.  Also,  this  report  only  analyses  the  situation  of 
large institutions that have by definition strong capacities to rapidly respond to corporate 
governance  challenges  and  shareholders'  expectations.  The  progress  of  small  banks  in 
changing their corporate governance practices has not been subject to a detailed survey.  

Additionally, as demonstrated by past experience, corporate governance practices tend to 
be subject to procyclicality. Immediately after the crisis, companies focus their attention 
on enhancing corporate governance standards but when the market recovers and there is a 
new  economic  boom,  sound  risk  governance  often  gives  way  to  profit-maximising 
strategies  driven  by  investor's  appetite  and  herd  effect110.  Boards  tend  to  become 

108 

109 
110 

See  IIF  Report  Final  Report  of  the  IIF  Committee  on  Market  Best  Practices:  Principles  of 
Conduct and Best Practice Recommendations, July 2008. 
Moody's, Bank Boards in the Aftermath of the Financial Crisis, March 2010. 
As  Alan  Greenspan  has  admitted,  "the  innate  human  responses  […]  result  in  swings  between 
euphoria  and  fear  that  repeat  themselves  generation  after  generation  with  little  evidence  of  a 

EN 

110 

   EN 

 
                                                 
"cheerleaders of […] unlimited liquidity, low interest rates, perpetual growth, and rapidly 
growing  profits,  bonuses  and  stock-option  benefits."111  People  generally  underestimate 
risks  that  have  not  materialised  for  a  long  time—a  phenomenon  known  as  disaster 
myopia—and are biased towards information that is in line with their a priori beliefs112.  

This  issue  could  be  addressed  through  the  introduction  of  new  corporate  governance 
framework at national, international or European level.  

At national level, some Member States are undertaking their own initiatives to improve 
corporate  governance  in  financial  institutions.  A  major  initiative  to  improve  corporate 
governance  in  the  German  banking  sector  was  the  introduction  of  new  Minimum 
Requirements for Risk Management, which required banks to develop a risk strategy for 
the entire group, regulated executive remuneration and aimed at further professionalizing 
the supervisory  board (the supervisory board  must now include at least one person that 
has  the  required  knowledge,  abilities  and  expert  experience  to  properly  fulfil  his 
monitoring  task).  However,  the  new  regulation  is  limited  and  does  not,  for  example, 
encompass explicit criteria to assess the competence and experience of supervisory board 
members. Other reforms focused on listed companies only. This suggests that the recent 
changes  would  be  unlikely  to  address  all  weaknesses  of  the  German  corporate 
governance system. 

In UK, FSA has strengthened its requirements with regard to selection of candidates for 
Board  membership  and  other  key  persons,  improved  their  selection  procedure  and 
published  guidance  with  regard  to  Risk  Committees  and  Chief  Risk  Officers.  Financial 
Reporting  Council  (FRC)  has  published  a  Stewardship  Code  for  institutional  investors 
and introduced changes to the UK Corporate Governance Code to help company boards 
become more effective and more accountable to their shareholders. These measures could 
help ensuring shareholders' engagement and thus contribute to improved external control 
of corporate governance. However, they remain limited to listed companies. 

At  international  level,  the  revised  Basel  Principles  aim  at  addressing  fundamental 
deficiencies  in  bank  corporate  governance  which  became  apparent  during  the  financial 
crisis.  At  a  European  level,  the  European  Banking  Authority  (EBA)  is  in  process  of 
revising  its  principles  on  Internal  Governance  with  a  view  to  enhance  and  consolidate 
supervisory  expectations  in  order  to  improve  the  sound  implementation  of  internal 
governance arrangements in financial institutions. These revisions may contribute to the 
avoidance  of  excessive  risk-taking  by  credit  institutions  in  the  future,  help  them  better 
withstand  financial  turmoil  and  finally  lower  the  risk  of  future  crises.  However,  the 
change is neither far from complete nor is it clear whether it will remain embedded so far 
as to guarantee the necessary changes in the culture towards sound corporate governance.  

111111 
112 

learning curve." , We will never have a perfect model of risk- FT - By Alan Greenspan, 16 March 
2008. 
See J. Palmer, S.C. Hoong. 
See  A.  Houben  and  J.  Kakes,  Risk  identification  and  mitigation:  lessons  from  the  crisis, 
September 2010. 

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In fact, the existing international standards and future EBA guidelines are non-binding in 
nature.  Although  they  should  usefully  elaborate  on  existing  high-level  principles  in 
European  legislation  and  provide  detailed  guidance  to  financial  institutions  as  regards 
supervisory expectations, their implementation will depend on each financial institution 
and on the effective supervision by competent authorities. These guidelines will not solve 
the  problems  outlined  in  Part  3,  that  stem  from  the  ineffective  implementation  by 
financial institutions of existing rules due to the non-binding nature of the principles in 
EU  legislation  themselves,  which  left  corporate  governance  issues  to  non-binding 
domestic codes, auto regulation and failed to clearly define the roles and responsibilities 
of different actors.  

If  no  action  is  taken,  the  problems  related  to  the  lack  of  effective  control  of  risk  will 
remain.  In  addition,  unclear  and  open-ended  rules  will  continue  to  generate  legal 
uncertainty, which might find only temporary and partial clarification through guidelines, 
coordination  and  convergent  application  by  national  competent  authorities  within  the 
European Banking Authority. 

4.2. 

The EU's right to act and subsidiarity 

The  EU  has  the  right  to  act  in  the  field  of  corporate  in  credit  institutions  according  to 
Article 53(1) TFEU and to Article 114 TFEU. 

Although,  as  described  above,  some  Member  States  have  taken  some  actions  to  reform 
corporate  governance  of  credit  intuitions,  these  actions  fall  short  of  introducing  a 
comprehensive  reform  of  corporate  governance  throughout  the  European  Union. 
However, due to integrated capital markets and interrelatedness of the European financial 
sector, no reform could be successful unless adopted by the majority of EU jurisdictions. 
Whilst  some  Member  States  are  taking  specific  measures  to  improve  corporate 
governance  in  their  credit  institutions,  these  actions  remain  limited,  as  described  in 
paragraph  4.1.  above.  Member  States  are  hesitant  to  act  at  national  level  and  adopt 
stricter  rules  due  to  the  first  mover  disadvantage  which  could  jeopardize  a  country’s 
competitive  position  as  a  financial  centre.  This  ‘level  playing  field’  argument  is 
frequently  used  to  resist  regulatory  reform.  Credit  institutions  will  threaten  to  move  to 
other, more lenient, countries. Moreover, they will use their influence on politicians and 
the media to dilute reform efforts and protect their freedom to manage credit institutions 
as  they  want.  Certain  shareholders  will  join  in  these  efforts,  as  they  aim  at  inducing 
management to maximize shareholder wealth through increased risk taking. This would 
result  in  regulatory  arbitrage  and  undermine  or  create  new  obstacles  to  the  good 
functioning of the internal market.  

In addition, unilateral reforms would not prevent contagion from other countries choosing 
not  to  regulate  corporate  governance  in  credit  institutions.  Assuming  that  failures  in 
corporate  governance  would  be  possible  in  one  Member  States  and  would  lead  to  the 
failure  of  a  large  credit  institution  as  a  result  of  excessive  risk  taking,  the  negative 
externalities from such a failure would easily impact on other countries, including those 
that have reformed corporate governance in their own institutions. 

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Finally,  it  results  from  the  contributions  to  the  public  consultation  that  a  uniform  and 
consistent  approach  at  European  level  is  crucial  to  effectively  deal  with  corporate 
governance  weaknesses  in  credit  institutions.  Common  standards  at  EU  level  are 
necessary  to  promote  a  well  functioning  internal  market  and  avoid  the  development  of 
different rules and practices in the Member States. 

5. 

OBJECTIVES 

The general, specific and operational objectives of the reform of corporate governance in 
credit institutions are presented in the following table. 

Figure 5: Objectives 

General 

Specific 

Operational 

Prevent 
excessive 
risk-
taking  by  credit 
by 
institutions 
the 
remedying 
weaknesses 
in 
risk  governance 
system. 

Prevent  failure  of 
credit institutions 

Reduce 
risk  

systemic 

Increase the 
effectiveness 
of risk 
oversight by 
Boards 

Improve time-commitment of 
Board members 

Improve  expertise  of  Board 
members 

Counterbalance  management 
dominance 

Improve  diversity  of  Board 
composition 

Improve effective 
challenge by Board 
of management 
decisions 

Improve  ownership  by  Board  members  of  risk 
strategy 

Increase the priority given by Board members to 
consideration of risk issues 

Improve the information flows to Board on risk 

Improve the standing of the risk management function 

Ensure efficient monitoring of risk governance by supervisors 

6. 

POLICY OPTIONS, ANALYSIS OF IMPACTS AND COMPARISON  

In  this  part,  options  will  be  identified  and  analysed  for  policies  which  could  target  the 
problems described in Part 3 and could realise the objectives set out in Part 5. Then the 
choice of instrument will be discussed. 

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6.1. 

Substantive policy options: description, analysis of impacts and comparison 

The substantive policy options that will be discussed are: A (baseline scenario), B (better 
implementation  of  existing  EU  framework)  and  C  (new  provisions  on  corporate 
governance).  The  options  are  discussed  and  measured  against  the  general  and  specific 
objectives set out in Part 5. In the first section, option A, option B and option C will be 
discussed  and  compared.  The  second  section  will  examine  different  sub-options  under 
option C. 

6.1.1.  Discussion and comparison of options A, B and C 

6.1.1.1.  Option A - No action at EU level (baseline scenario) 

This option implies a do-nothing policy which leaves the existing EU-measures as they 
are,  without  introducing  new  measures  to  remedy  the  identified  weaknesses  in  risk 
governance  in  credit  institutions.  This  option leaves  a  very  high  degree  of  flexibility  to 
credit  intuitions  and  to  national  supervisors  which  result  in  insufficient  and  diverging 
implementation  of  existing  requirements.  This  option  seems  unlikely  to  achieve  the 
underlying  objective  to  improve  the  effectiveness  of  the  risk  governance  and  prevent 
excessive risk-taking by credit institutions and therefore reduce systemic risk.  

6.1.1.2.  Option B - Better implementation of existing EU framework 

This option implies the better implementation of the existing EU legislative framework, 
i.e.  the  Directive  2006/46/EC,  the  Capital  Requirements  Directive  and  the  new  EBA 
guidelines  on  internal  governance,  as  well  as  national  corporate  governance  codes  by 
credit institutions and supervisory authorities. This option would leave as similar degree 
of  flexibility  to  credit  institutions  and  to  supervisory  authorities  as  compared  to  the 
baseline scenario. 

One  method  to  incentivise  credit  institutions  to  put  in  place  adequate  risk  governance 
arrangements  is  the  possibility  of  credit  institutions'  arrangements  being  benchmarked 
and  the  results  being  put  into  the  public  domain.  Another  option  would  be  to  organise 
training  seminars  for  banking  supervisors  in  order  to  ensure  uniform  and  effective 
supervisory review of the exiting corporate governance practices. 

However, most existing risk governance provisions are part of corporate governance and 
are,  for  the  time  being,  part  of  national  corporate  governance  codes  which  are  non-
binding  in  nature.  Future  EBA  guidelines  would  not  be  binding  either.  Therefore,  the 
effectiveness  of  this  option  relies  solely  on  market  discipline  and  the  effectiveness  of 
supervisory monitoring, which, as shown in Part 3, do not work sufficiently.  

Market discipline does not appear to have worked as shareholders tend to be passive with 
regards  to  excessive  risk-taking  by  credit  institutions  or  encourage  short-term  risk 
strategies.  Supervisors  do  not  necessarily  have  appropriate  tools  to  effectively  monitor 
the  implementation  of  corporate  governance  principles  by  credit  institutions,  in  many 
cases because their role is not specified in a legal instrument. Competent authorities can 

EN 

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also be subject to regulatory capture, applying their supervisory powers in order to favour 
their national financial centre. This could result in regulatory arbitrage, credit institutions 
choosing Member Sates with more lenient requirements as their headquarters. 

The  respondents  to  the  public  consultation,  whereas  recognising  the  importance  of  and 
the  scope  for  improved  implementation  of  existing  principles,  thought  that  this  option 
will  not  be  sufficient  to  achieve  the  underlying  objective  of  sound  risk  governance.  In 
their opinion, the existing rules need to be further specified and clarified in order to avoid 
future corporate governance failures. 

Option B is therefore not the preferred option to achieve the objective of improved risk 
governance. 

6.1.1.3.  Option C - New provisions on risk governance 

This  option  goes  beyond  the  existing  framework  on  corporate  governance  in  credit 
institutions  and  implies  the  development  of  additional  and  enhanced  provisions  and 
guidelines to improve risk governance. These additional provisions will contain measures 
to  achieve  the  underlying  operational  objectives,  i.e.  increase  the  effectiveness  of  risk 
oversight  by  Boards,  improve  the  standing  and  independence  of  the  risk  management 
function and ensure efficient monitoring of risk governance by supervisors. The detailed 
sub-options under option C are further examined in Section 2 below and in Annex I. 

This  option  will  consist  of  measures  which  enhance  transparency  of  corporate 
governance  practices,  principles-based,  outcome-focused  rules  and  more  specific 
organisational  requirements.  It  will  leave  less  flexibility  to  credit  institutions  and 
supervisory  authorities  and  thus  avoid  regulatory  arbitrage.  This  option  seems  the  most 
likely to achieve the specific objective of improved risk governance in credit institutions 
and  therefore  contribute  to  achieve  the  more  general  objective  of  preventing  failures  of 
credit  institutions  and  reduce  systemic  risk.  It  will  enshrine  best  practice  in  hard 
requirements, set minimum standards, and give clear guidance to credit institutions and to 
supervisors on what is expected with regard to sound risk governance. At the same time, 
this  option  will  still  leave  enough  flexibility  to  credit  institutions  and  supervisory 
authorities to take apply new requirements in proportionate manner, taking into account, 
the nature, scale and complexity of activities of a credit intuition. The level playing field 
will  be  ensured  by  EBA  guidelines  which  will  provide  for  a  common  approach  on  the 
application of the proportionality principle and specify the detailed application of the new 
principles to ensure their uniform implementation. The results of the public consultation 
show  a  general  support  for  the  reform  of  the  existing  corporate  governance  framework 
and the introduction of new principles at European level, provided that future proposals 
of the Commission are sufficiently flexible and proportionate in order to take account the 
differences in business models of financial institutions, the nature of their activity, their 
size,  complexity, 
legal  form  and  different  corporate  governance  systems  and 
arrangements, and avoid box-ticking exercise. . 

Option C is therefore the preferred option as compared to options A and B. 

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6.1.2.  Discussion and analysis of sub-options under option C 

Option  C  contains  sub-options  that  relate  to  the  operational  objectives  as  identified  in 
Part  5.  This  section  shortly  describes  and  analyses  these  sub-options.  A  detailed 
description, analysis and comparison of the sub-options are provided in Annex I.  

The  different  sub-options  have  been  chosen  following  the  results  of  the  public 
consultation  on  the  Commission  Green  Paper  as  most  likely  to  achieve  the  underlying 
operational  objectives:  I.  Increase  the  effectiveness  of  risk  oversight  by  Boards;  II. 
Improve  the  standing  and  independence  of  the  risk  management  function;  III.  Ensure 
efficient monitoring of risk governance by supervisors.  

For the purposes of the discussion, the sub-options will be grouped according to the three 
operational objectives. Within each group, the sub-options will be measured against the 
corresponding  more  specific  operational  objectives  set  out  in  Part  5  and  also,  where 
relevant, the following criteria will be used: 

Impact on effectiveness 

The sub-options should achieve the operational objectives 

Impact on flexibility 

Impact on enforceability 

Credit institutions should be able to adapt the principles to their 
structures and the specific nature of their activities 

The  transposition  and  implementation  of  the  principle  should 
be easy to monitor 

Impact on the level playing field 

Regulatory  arbitrage  between  Member  States  and  at 
international level should be avoided. 

The  different  sub-options  could  be  further  classified  into  the  following  types:  (i) 
measures  which  enhance  transparency  of  corporate  governance  practices  to  the  market 
and  to  the  supervisors,  (ii)  principles-based,  outcome-focused  rules,  leaving  to  credit 
institutions high degree of flexibility to achieve the underlying objective and (iii) specific 
and organisational rules, leaving credit institutions a limited degree of flexibility. In fact, 
given  the  nature  of  the  problems  identified  in  Part  3,  a  combination  between  measures 
enhancing transparency, outcome-focused principles and more specific rules establishing 
minimum standards will be mutually reinforcing and present an appropriate combination. 
For further details, see section on methodology in Annex I.  

6.1.2.1.  Sub-options to increase the effectiveness of risk oversight by Boards 

The  following  table  shows  the  sub-options  under  option  C  aimed  at  improving  risk 
oversight  by  Boards  of  credit  institutions.  These sub-options are classified  according  to 
different  specific  operational  objectives  they  aim  to  achieve.  A  detailed  description, 
analysis  and  comparison  of  the  sub-options  are  provided  in  Annex  I  together  with  the 
reasons why some of the sub-options have been rejected. 

EN 

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Figure 6: Sub-options to increase the effectiveness of risk oversight by Boards 

Operational objectives  Retained sub-options 

Rejected sub-options 

Improve challenge by 
Board of management 
decisions 

Improve  time  commitment 
of Board members 

Improve 
Board members 

expertise 

of 

Counterbalance 
management dominance 

Improve diversity in Board 
composition 

Improve  ownership  by 
Boards of risk strategy 

- disclose the number of mandates of Board members in 
the annual report* 
- Board members must spend sufficient time to exercise 
their duties ** 
-  limit  the  number  of  mandates  a  Board  member  may 
hold in different companies at the same time*** 

-  disclose  in  the  annual  report  the  actual 
time  spent  by  each  Board  member 
annually to exercise his/her function* 
-  specify  the  minimum  number  of  days 
that a Board member must spend per year 
to exercise its function*** 

- disclose recruitment policy and the actual expertise of 
Board members in the annual report* 
- Board members shall be subject to an enhanced "fit 
and proper" test ** 
- Board members should receive appropriate induction 
and continuous training** 
- Nomination Committee at Board level*** 
- prohibit cumulating mandates of Chairman and Chief 
Executive Officer in the same credit institution*** 

- disclose policy on diversity in annual report* 
- benchmarking of different practices at national and 
European level* 
- diversity must be one of the criteria of Board 
composition** 
-  credit  institutions  shall  establish  a  policy  with  regard 
to diversity** 
-  put 
balance*** 
- Boards must produce a declaration on the adequacy of 
risk management systems* 
- Boards must publish on an annual basis a risk 
statement* 

in  place  a  quantitative 

target  for  gender 

- Board members must possess 
individually and collectively appropriate 
expertise** 
- set up detailed requirements with regard 
to the expertise of Board members*** 

behave 

- disclosure of the existing practice* 
-  Board  members  must 
independently from management** 
- minimum number of non-executive 
directors*** 
- positive discrimination*** 
- increase employee participation*** 

- Board must determine or approve the 
risk profile and strategy and any 
changes** 
- Board must approve new financial 
products*** 
- minimum time that Board must be 
spend to discuss risk issues*** 

Improve  priority  given 
by Boards to risk issues 

- disclose policy and practice with regard to discussion 
and analysis of risk issues during Board meetings* 
- Boards must devote sufficient time to risk issues** 
- Risk Committee at Board level*** 

Improve  the  information 
flows to Board on risk 

- disclose policy and practice with regard to the 
information flow on risk to the Board* 
-  Board  must  determine  the  content,  format  and 
frequency of risk information it should receive ** 
-  risk  management  function  must  be  able  to  report 
directly to the Board or risk committee ** 
* measures which enhance transparency, ** principles-based, outcome-focused rules, *** specific rules 

- specific structures and formats for 
information flows to the Board and 
specific escalation procedures*** 

The  following  table  shows  the  different  impacts  of  the  retained  sub-options  to  improve 
risk  oversight  by  Boards  as  compared  to  the  baseline  scenario.  For  detailed  analysis  of 
the impacts, see Annex I. 

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Figure 7: Analysis of impacts of retained sub-options: risk oversight by Boards 

Sub-options 

Effectiveness 

Enforceability  Flexibility 

Impact on 
level playing 
field 

Estimation of related costs 
per credit institution 

+ 

+ 

Improve time-commitment of Board members 
Disclosure of number of mandates 
Board members must spend 
sufficient time to exercise their 
duties  
Limit  the  number  of  mandates, 
with  exceptions  on  proportionality 
grounds 
Improve expertise of Board members 
Disclosure of existing practice 
Appropriate expertise 

++ 

+ 
+ 

Enhanced "fit and proper" test  

++ 

on 

++ 

++ 
+ 

exceptions 

Committee  with 
proportionality 

Induction and continuous training 
Nomination 
exceptions 
grounds 
Counterbalancing management dominance 
Prohibit  cumulating  mandates  of 
Chairman  and  Chief  Executive 
Officer  with 
on 
proportionality grounds 
Improve diversity of Board composition 
Disclosure and benchmarking  
Diversity as one of the criteria of 
Board composition 
Policy with regard to diversity 
Quantitative 
balance 
Improve ownership of Board for risk strategy 
Declaration on the adequacy of risk 
management systems 

for  gender 

+ 
++ 

target 

+ 
+ 

++ 

+ 

= 

++ 

+ 
+ 

++ 

+ 
++ 

++ 

+ 
= 

+ 
++ 

+ 

+ 

++ 

+ 
+ 

+ 
= 

Risk statement  
Improve priority given to consideration of risk issues 
Disclosure of existing practice 
Board  shall  devote  sufficient  time 
to risk issues 
Risk committee at Board level with 
exceptions 
proportionality 
grounds 
Improve the information flow to Boards on risk  
Disclosure of existing practice 
+ 
Board  must  determine  the  content, 
+ 
format  and 
risk 
information  

frequency  of 

+ 
+ 

++ 

++ 

on 

= 

= 

- 

= 
= 

- 

= 
- 

- 

= 
= 

- 
-- 

- 

- 

= 
= 

- 

= 
= 

= 

= 

++ 

= 
= 

++ 

+ 
++ 

++ 

= 
= 

+ 
++ 

= 

= 

= 
= 

++ 

= 
+ 

€ 600 - € 1,000 
? linked to the process of 
recruitment and possible 
increase in remuneration 

and 

€ 600 - € 1,000 
?  linked  to  the  process  of 
recruitment 
possible 
increase in remuneration 
?  linked  to  the  process  of 
possible 
recruitment 
increase in remuneration 
€ 20,000 - 30,000  
€ 8,000 - 15,000  

and 

0 

€ 600 - € 1,000 
0 

?  linked  to  the  process  of 
recruitment 
possible 
increase of Board members 

and 

to 

?  could  be  significant  and 
the  underlying 
linked 
internal process  
€ 600 - € 1,000  

€ 600 - € 1,000 
? should not be significant 

? should not be significant 

€ 600 - € 1,000 
0 

Risk management function must be 
able to report directly the Board or 
risk committee  
Magnitude of impact as compared with the baseline scenario: ++ strongly positive; + positive; – – strongly negative; – 
negative; = marginal/neutral; ? uncertain; n.a. not applicable 

++ 

++ 

+ 

0 

- 

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The retained sub-options aim at implementing at European level the recommendation of 
the  revised  Basel  Principles  that  "the  Board  has  overall  responsibility  for  the  bank, 
including  approving  and  overseeing  the  implementation  of  the  bank’s  strategic 
objectives,  risk  strategy,  corporate  governance  and  corporate  values.  The  Board  is  also 
responsible  for  providing  oversight  of  senior  management".  They  have  been  chosen  as 
most  effective,  proportionate,  enforceable  and  efficient  to  achieve  the  underlying 
operational objective.  

In order to increase effectiveness of risk oversight by Boards, the combination between 
different sub-options (measures enhancing transparency, outcome-focused principles and 
more  detailed  rules  establishing  minimum  standards)  seems  necessary.  These  different 
sub-options  will  be  mutually  reinforcing  and  will  not  entail  disproportional  costs  for 
credit institutions and supervisory authorities.  

Sub-options  with  regard  to  disclosure  will  allow  the  market  and  the  supervisors,  at 
limited  costs  to  credit  institutions,  to  easily  evaluate  whether  the  existing  practice  is 
adequate  taking  into  account  the  size,  the  nature  and  the  complexity  of  activities  of  a 
credit institution. Disclosure of the number of mandates of Board members will allow the 
market  and  the  supervisors,  at  limited  cost  to  credit  institutions,  to  easily  evaluate 
whether  a  Board  member  has  too  many  mandates,  hampering  his/her  ability  to  devote 
sufficient time to the credit institution, thus facilitating supervisory review. Disclosure of 
recruitment policies and of expertise of Board members will inform the market and the 
supervisors  on  the  required  and  actual  expertise  of  Board  members  and  allow  them  to 
verify that this expertise is adequate. Disclosure of exiting diversity and benchmarking of 
practices will make public credit institutions which do not have an appropriate diversity 
policy  and  thus  will  have  a  positive  impact  on  the  improved  diversity  in  Boards. 
Disclosure  of  existing  practice  with  regard  to  time  devoted  by  Boards  to  risk  will  help 
supervisors  to  easily  evaluate  whether  the  Boards  devote  sufficient  time  to  risk  issues. 
Disclosure of the exiting policy (with regard to information flows will help supervisors to 
easily  check  what  kind  of  information  Board  receives  and  on  the  timeliness  of  that 
information  and  asses  whether  this  information  flow  is  adequate.  This  facilitates 
supervisory  review  and  contributes  to  reduce  costs  of  supervision  because  competent 
authorities do not have to sear for information. 

The  sub-option  limiting  the  number  of  mandates  of  Board  members  seems  the  most 
effective to achieve the underlying objective as compared to the sub-option specifying the 
minimum number of days a Board member must spend per year to exercise its function, 
which would be difficult to monitor and enforce .Limiting the number of mandates sets a 
minimum standard and provides clear guidance to credit institutions and supervisors on 
the number of mandates which would exceed the reasonable capacity of a Board member 
to spent sufficient time on the Board of a credit institution. It is therefore easy to monitor 
and  facilitates  supervision.  On  the  other  hand,  providing  exceptions  to  this  limitation 
allows to take account of the different types of credit institutions and different situations 
of Board members. However, to avoid box-ticking, the sub-option limiting the number of 
mandates  need  to  be  combined  with  a  general  principle  that  a  Board  member  should 
spend  sufficient  time  to  exercise  his/her  duties,  which  will  allow  supervisors  to  check 

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whether  a  Board  member  does  in  fact  spend  sufficed  time,  although  the  number  of 
directorship he/she holds does not exceed the maximum.  

The  enhanced  "fit  and  proper"  test  with  minimum  criteria  although  less  flexible  than  a 
general  principle  that  Boards  should  possess  appropriate  expertise,  without  minimum 
criteria, is effective and easily enforceable and ensures a level playing field. Although the 
two  sub-options  would  have  similar  impacts  and  costs,  enhanced  "fit  and  proper"  test 
seems  to  better  achieve  the  underlying  objective,  provides  more  guidance  to  credit 
institutions and supervisors, and therefore reduces the risk of different national practices, 
whilst  still  remaining  proportioned  compared.  This  sub-option  will  be  usefully 
complemented  by  induction  and  continuous  training  of  Board  members.  In  addition, 
setting  a  Nomination  Committee  at  Board  level  will  help  prepare  the  decisions  of  the 
Board as  regards  the selection of candidates for  Board membership and will  ensure  the 
independence of the selection process from management dominance. The proportionality 
of this requirements will be ensured by possible exceptions where establishing a separate 
Nomination Committee would not be appropriate. 

As regards management dominance, the most effective way to ensure the independence 
of the Board in its oversight function and which is most easy to monitor and enforce is 
the separation of the function of the Chairman and the CEO, with possible exceptions in 
order  to  take  into  account  particular  circumstances.  Sub-options  requiring  disclosure  of 
the existing practice in the credit institutions as regards independence of Board members, 
that  Board  members  must  behave  independently  from  management  and  to  have  a 
minimum number of non-executive directors on a Board of a credit institution, seem in 
fact either difficult to monitor, unenforceable or unduly inflexible and disproportionate. 

improved  gender  diversity  as  compared 

Quantitative  target  for  gender  balance  seems  the  most  effective  option  to  achieve  the 
underlying  objective  of 
to  positive 
discrimination.  The  latter  sub-option  seems  in  fact  to  be  very  difficult  to  monitor  and 
enforce  and  would  discriminate  against  men.  Increasing  employee  participation  in 
Boards, whilst contributing to enhance diversity would be difficult to implement, giving 
the  existing  differences  in  Member  States  regarding  co-determination  and  employee 
participation  regimes,  which  are  subject  to  company  law  rules.  However,  quantitative 
targets for gender diversity are not flexible and cannot be adopted to particular situations 
of  instituions  of  different  types  and  sizes.  It  would  also  be  inconsistent  with  the  more 
general strategy of the Commission with regard to gender equality which forsees a two 
step  approach,  first  encouraging  self-regulation  and  eventually  imposing  hard  quotas  if 
the  results  of  this  self-regulation  do  not  prove  sufficient.  A  more  principle-based  sub-
options  on  diversity  policy  and  diversity  as  a  criteria  of  Board  composition  would 
therefore  be  more  appropriate.  Although  less  effective  than  quantitative  targets,  these 
sub-options are more flexible, less costly and  would help avoiding box-ticking and allow 
supervisors  to  ensure  that  credit  institutions  include  diversity  of  views  as  one  of  the 
criteria of board composition, at the same level as time-commitment and expertise. This 
latter sub-option will also cover types of diversity other than gender balance for which a 
quantitative target is very difficult to foresee.  

EN 

120 

   EN 

 
As regards risk ownership by Boards, only sub-option on risk statement and declaration 
on  the  adequacy  of  internal  control  systems  seem  to  effectively  achieve  the  underlying 
objective and remain proportionate. In fact, sub-option requiring systematic approval by 
the Board of all new products would be disproportionate, as it would entail involvement 
of  Boards  in  operational  issues,  which  is  the  responsibility  of  executive  management. 
Sub-option requiring that Board must determine or approve the risk profile and strategy 
and any changes is superfluous as the existing EU legislative framework already prides 
for such duty.  

The sub-option establishing a mandatory risk committee at Board level accompanied by 
exceptions to  take account of different  types of credit institutions seems to be the most 
effective,  easily  enforceable  and  proportionate  to  achieve  the  underlying  objective  of 
improved  priority  given  to  the  consideration  of  risk  issues.  Alternative  sub-option 
requiring minimum time that Board must be spend to discuss risk issues, although equally 
effective,  would  be  disproportionate  and  difficult  to  put  in  place  in  practice  as  the 
minimum number of days necessary to fully cover all risk matters will vary enormously 
according to different types of credit institutions. However, in order to avoid box-ticking, 
the sub-option requiring a mandatory risk committee will be usefully complemented by 
the  general  principle  that  Board  devote  sufficient  time  to  risk  issues,  which  will  allow 
supervisors to check that, even if there is a stand-alone risk committee, Boards of credit 
institutions spend adequate time to discuss risk issue taking into account the nature of the 
activities of the credit institution.  

As  regards  information  on  risk,  requiring  specific  templates  and  procedures  for  the 
information flow seems unduly inflexible and will not necessarily be effective. However, 
general principles that Board must determine the content of the information and that the 
risk  management  function  should  be  able  to  report  directly  to  the  Board  seem  to  be 
effective, flexible and efficient in order to achieve the underlying objective.  

Most requirements should be immediately applicable except for limitation of mandates of 
Board members and separation of functions Chairman/CEO, where a transitional period 
could  be  appropriate  to  leave  credit  institutions  sufficient  time  to  implement  these 
requirements.  

The costs for credit institutions of the combined sub-options to increase the effectiveness 
of  risk  oversight  by  Boards  should  mainly  be  linked  to  the  publication  of  required 
information,  recruitment  of  suitable  Board  members  and  updating  internal  processes  to 
take  account  of  new  requirements.  Whilst  costs  linked  to  the  publication  of  the 
information are easy to estimate and do not appear to be significant, other costs, such as 
those linked to recruitment and selection of Board members and eventual increase in their 
remuneration,  are  more  difficult  to  quantify.  However,  it  results  from  the  questionnaire 
on  costs  sent  to  credit  institutions  that  these  costs  would  remain  proportionate  to  the 
underlying objectives. For small credit institutions, any potential increase in costs could 
be further mitigated by applying the exceptions provided for by different sub-options and 
by the general principle of proportionality which already exists in the EU legislation. 

EN 

121 

   EN 

 
The costs and impacts are further analysed in detail in Annex I and in Annex II.  

6.1.2.2.  Sub-options to improve the standing of the risk management function 

The  following  table  shows  the  sub-options  under  option  C  aimed  at  improving  the 
standing of the risk management function. A detailed description and analysis of the sub-
options  is  provided  in  Annex  I  together  with  the  reasons  why  some  of  the  sub-options 
have been rejected.  

Figure 8: Sub-options to improve the standing of the risk management function 

Operational objective  Retained sub-options 

Rejected sub-options 

Improve 
the  standing 
and  the  authority  of  the 
management 
risk 
function 

to 

-  disclose  in  the  annual  report  their  policy  with 
regard 
the  standing  and  authority  of  risk 
management function* 
-  head  of  risk  management  function  must  have  an 
appropriate  status  and  authority  to  influence  risk 
strategy and risk-relevant management decisions** 
-  risk  management  function  must  be  created  and 
have  an  appropriate  status  and  authority  and  be 
independent  from  the  operational  and  business 
units** 
- appoint an independent Chief Risk Officer *** 
- removal of the Chief Risk Officer must be subject 
to prior approval by the Board*** 

- head of risk management function must 
be  member  of  executive  management  or 
Board*** 

* measures which enhance transparency, ** principles-based, outcome-focused rules, *** specific and organisational 
rules 

The retained sub-options aim at implementing at European level the recommendation of 
the revised Basel Principles that "banks should have an effective internal controls system 
and  a  risk  management  function  (including  a  chief  risk  officer  or  equivalent)  with 
sufficient authority, stature, independence, resources and access to the Board." They have 
been  chosen  as  most  effective,  enforceable,  proportionate  and  efficient  to  achieve  the 
underlying operational objective. The following table shows the different impacts of the 
retained sub-options to improve the standing of the risk management function. For further 
analysis of the impacts, see Annex I. 

Figure  9:  Analysis  of  impacts  of  retained  sub-options:  standing  of  the  risk  management 
function 

Sub-options 

Effectiveness 

Enforceability 

Flexibility 

+ 

Disclose  in  the  annual  report  their 
policy  with  regard  to  the  standing 
and  authority  of  risk  management 
function 
Head  of  risk  management  function 
must have an appropriate status and 
authority  to  influence  risk  strategy 
and 
risk-relevant  management 
decisions 
Risk management function must be 
created  and  have  an  appropriate 
status 
and  be 
independent  from  the  operational 
and business units 
Appoint an independent Chief Risk  ++ 

authority 

and 

++ 

++ 

+ 

= 

= 

++ 

= 

= 

= 

- 

Impact on 
level playing 
field 

Estimation of 
related costs per 
credit institution 

= 

= 

= 

€ 600 - € 1,000

0 

0 

++ 

? limited cost 

EN 

122 

   EN 

 
 
Officer 
Removal  of  the  Chief  Risk  Officer 
must  be  subject  to  prior  approval 
by the Board 
Magnitude of impact as compared with the baseline scenario: ++ strongly positive; + positive; – – strongly negative; – 
negative; = marginal/neutral; ? uncertain; n.a. not applicable 

++ 

++ 

+ 

0 

- 

It  results  from  the  analysis  of  the  sub-options  that  a  combination  between  measures 
enhancing  transparency,  outcome-focused  principles  and  minimum  standards  is  an 
appropriate combination. Different sub-options will be mutually reinforcing.  

The  disclosure  of  existing  practice  with  regard  to  the  status  of  the  risk  management 
function will allow supervisors to easily evaluate whether this stature is appropriate. This 
option  could  incentivise  credit  institutions  to  give  the  appropriate  status  to  the  risk 
management function as public disclosure allows for benchmarking of different practices 
in different credit institutions and for having a public view on whether a credit institution 
gives sufficient independence and authority to its risk management function as compared 
to its peers.  

The  sub-option  regarding  the  establishment  of  a  risk  management  function  and  its 
independence  seems  very  effective  to  achieve  the  underlying  objective  and  flexible 
enough.  Sub-options  requiring  credit  institutions  to  appoint  a  chief  risk  officer  (with 
possible  exemptions)  with  appropriate  status  and  authority  to  be  able  to  influence  risk 
strategy and which should not be removed without prior approval of the Board, are very 
effective  to  achieve  the  underlying  objective  of  having  a  strong  and  independent  risk 
management function. In addition, these sub-options would contribute to a consolidated 
approach  to  risk  management  and  minimize  potential  for  compliance  failures.  At  the 
same  time  these  sub-options  remain  flexible  enough  to  allow  credit  institutions  to 
determine the appropriate position of the CRO according to their size and the nature of 
their  activities.  In  comparison,  sub-option  requiring  CRO  to  be  part  of  the  executive 
management or Board seems unduly inflexible and disproportionate. . 

As regards different potential costs related to these sub-options, they seem to be marginal 
according  to  the  responses  to  the  questionnaire  on  costs  sent  to  credit  institutions  and 
should mainly be linked to the setting up of the necessary internal processes. This is due 
to the fact that most credit institutions, especially the largest one, do already have a risk 
management function or equivalent and therefore should not recruit a significant number 
of  additional  staff  to  perform  this  function.  For  small  credit  institutions,  any  additional 
costs  should  be  mitigated  due  to  proportionality  principle  which  aligns  the  necessary 
structures with the nature and complexity of the activities of the credit institution. . The 
costs and impacts are analysed in detail in Annex I and in Annex II.  

6.1.2.3.  Sub-options to ensure efficient monitoring of risk governance by supervisors 

The following table shows the retained sub-options under option C aimed at improving 
supervisory  review  of  corporate  governance  practices.  A  detailed  description,  analysis 
and comparison of the sub-options are provided in Annex I together with the reasons why 
some of the sub-options have been rejected. 

EN 

123 

   EN 

 
Figure 10: Sub-options to ensure efficient monitoring of risk governance by supervisors 

Operational objective 

Retained sub-options 

Rejected sub-options 

Ensure efficient 
monitoring of risk 
governance by 
supervisors 

-  corporate  governance  issues  must  be  part  of  a 
dialogue  with  supervisors  and 
the  adequacy  of 
corporate  governance  structures  must  be  part  of 
supervisory review** 

- extensive supervisory review which must examine the 
ability  of  Board  members  to  exercise  their  oversight 
function** 

-  supervisors  must  review  agendas  and  supporting 
documents  for  meetings  of  the  Board  and  Board 
committees*** 

-  supervisors  must  attend  Board 
meetings*** 

-  supervisors  must  review  the  evaluation  of  the  Board 
performance*** 
** principles-based, outcome-focused rules, *** specific and organisational rules 

The retained sub-options aim at implementing at European level the recommendation of 
the revised Basel Principles that "supervisors should regularly perform a comprehensive 
evaluation of  a  bank’s overall corporate governance policies and  practices  and  evaluate 
the bank’s implementation of the principles." They have been chosen as most effective, 
proportionate and efficient to achieve the underlying operational objective.  

The  following  table  shows  the  different  impacts  of  the  retained  sub-options  to  ensure 
effective  monitoring  by  supervisors  of  risk  governance.  For  further  analysis  of  the 
impacts, see Annex I. 

Figure 11: Analysis of impacts of retained sub-options: Ensure efficient monitoring of risk 
governance by supervisors 

Sub-options 

Effectiv
eness 

Enforceability  Flexibility 

Impact on 
level playing 
field 

Estimation of related 
costs for a supervisory 
authority 

governance 

Corporate 
issues 
must  be  part  of  a  dialogue  with 
supervisors  and  the  adequacy  of 
corporate  governance  structures 
must  be  part  of  supervisory 
review 

supervisory 

Extensive 
review 
which must examine the ability of 
Board  members  to  exercise  their 
oversight function 
Supervisors  must  review  agendas 
and  supporting  documents  for 
meetings of the Board and Board 
committees 
Supervisors  must 
evaluation 
performance 

review 
the 

the 
Board 

of 

++ 

= 

++ 

+ 

+ 

+ 

++ 

++ 

= 

= 

- 

- 

= 

+ 

++ 

++ 

0,000 € - 1,500,000 €

40,000 € - 12,000,000 €

? no precise estimation, 
costs are part of the general 
cost of corporate 
governance review 
? no precise estimation, 
costs are part of the general 
cost of corporate 
governance review 

Magnitude of impact as compared with the baseline scenario: ++ strongly positive; + positive; – – strongly negative; – 
negative; = marginal/neutral; ? uncertain; n.a. not applicable 

EN 

124 

   EN 

 
 
 
 
 
The  combination  of  retained  sub-options  seems  effective  to  achieve  the  underlying 
objective of effective monitoring by supervisors of risk governance. The overall impact 
on  the  level  playing  field  and  enforceability  is  positive.  Some  sub-options  are  less 
flexible  for  supervisory  authority  but  this  negative  impact  is  mitigated  by  enhanced 
enforceability  and  positive  impact  on  the  level  playing  field.  In  addition,  requiring 
supervisors  to  monitor  corporate  governance  practices  for  compliance  with  new 
principles will allow supervisors to apply the whole range of sanctions available to them 
under the Capital Requirements Directive, such as requiring credit institutions to modify 
their practices or, in more extreme cases, withdraw the license of the institution or impose 
capital add-ons. 

As  regards  different  costs  related  to  the  sub-options,  they  appear  to  be  relatively  more 
important for some financial supervisors with large banking sectors with a big number of 
credit institutions to supervise, such as Germany, and that will have to put in place new 
internal  processes  and  devote  staff  to  the  new  tasks.  These  costs  should  remain  limited 
for other financial supervisors with small banking sectors, such as Greece or Lithuania. 
However,  those  costs  are  inherent  to  improved  supervision  of  corporate  governance  of 
credit  institutions  and  thus  could  not  be  avoided  if  the  underlying  objective  is  to  be 
achieved. Effective supervision of risk governance in credit institution which is followed 
by  effective  enforcement  is  crucial  for  the  correct  implementation  of  new  principles. 
Furthermore, the potential costs could be mitigated by the future guidelines of EBA on 
internal governance which will give concrete guidance to supervisory authorities on their 
role in the monitoring of the implementation of the new principles, how to simplify the 
work  for  supervisors  and  methods  to  reduce  unnecessary  costs.  Consequently,  it  seems 
that  the  potential  increase  in  administrative  burden  for  supervisors  is  justified  by  the 
underlying objective. 

The costs and impacts are analysed in detail in Annex I and in Annex II.  

6.1.3.  Cumulative impact of sub-options under Option C 

6.1.3.1.  Impact on effectiveness to achieve the specific objective of preventing excessive 
risk-taking  by  credit  institutions  by  remedying  the  weaknesses  in  risk 
governance system 

The different sub-options under Option C are mutually reinforcing and present synergies 
which are most likely to contribute to improve risk governance of credit institutions with 
a view to efficiently controlling risk within credit institutions and prevent excessive risk-
taking.  They  effectively  respond  to  the  underlying  specific  objectives  and  aim  and 
changing  the  risk  culture  within  credit  institutions.  Improved  oversight  by  Boards  of 
management  decisions  and  risk  strategies  will  not  be  sufficient  without  improved 
authority  of  the  risk  management  function  which  monitors  risk-taking  on  day-to-day 
basis and is the first barrier to excessive risk exposures. Internal control of risk will not 
be  efficient  without  appropriate  external  oversight  and  eventual  sanctioning  of  non-
compliance by supervisors.  Therefore, Option C seems to be the most likely to address 
the problems described in Part 3 o this document. 

EN 

125 

   EN 

 
6.1.3.2.  Impact on the available pool of suitable candidates for Board membership 

The  following  policy  options  under  Option  C  could  have  a  potential  impact  on  the 
availability of suitable candidates for Board membership: 

- limiting the number of mandates of Board members; 

- enhanced "fit and proper" test; 

- quantitative target with regard to gender diversity; 

Limiting the number of mandates and introducing a quantitative target for gender balance 
on  Boards  could  potentially  have  a  negative  impact  on  the  pool  of  experiences  people 
available  for  Board  membership,  and  thus  on  the  objective  of  Board  expertise.  On  the 
other  hand,  as  a  result  of  enhanced  standards  for  selection  of  potential  candidates 
(enhanced  "fit  and  proper"  test),  the  number  of  suitable  candidates  may  also  decrease 
accordingly.  However,  this  would  only  be  true  if  there  were  not  enough  experienced 
women and men to populate the Board rooms of credit institutions. But there is evidence 
of  sufficient  expertise  within  credit  institutions,  and  the  pool  of  selection  of  candidates 
for  Board  membership  is  currently  artificially  reduced  as  a  consequence  of  networking 
and glass ceilings. According to a study113, in Europe it is becoming considerably easier 
to recruit high-quality directors. In 2005, 54 % of respondents said that they were having 
difficulty recruiting, but by 2007 that figure had fallen to 42 %. In addition, opening the 
Board  to  more  diverse  candidates  within  credit  institutions  might  give  opportunity  to 
people who were for the time being absent from Board rooms for many different reasons 
to  become  members  of  the  Board.  It  would  enlarge  the  pool  of  suitable  candidates  for 
board  membership  and  improve  expertise.  In  addition,  induction  and  training  of  Board 
members  would  contribute  to  form  more  experienced  pool  of  candidates.  There  is  also 
evidence of a growing market of professional Board members with appropriate skills to 
populate  Board  rooms.  Therefore,  the  potential  negative  impact  on  the  pool  of  suitable 
candidates of the preferred policy options should not be significant.  

6.1.3.3.  Impact on costs for credit institutions and supervisors 

As regards different costs for credit institutions linked to the sub-options under Option C, 
they mainly relate to the possible increase of administrative burden due to the preparation 
and  publication  of  related  information,  to  establishing  the  necessary  internal  processes 
and to a possible increase in remuneration of Board members. With regard to information 
disclosure,  actual  costs  seem  to  be  rather  limited  and  would  depend  on  whether  the 
publication is on group or subsidiary level. Costs will be lower for publication at group 
level and higher for publication at subsidiary level for groups with a significant number 
of  subsidiaries.  According  to  the  responses  to  the  questionnaire  on  costs  sent  to  credit 
institutions, recurrent disclosure costs and costs linked to internal processes are estimated 
at € 33,000 - 55,000 per annum and one-off cost s at € 65,000 - 100,000. Other costs are 
difficult  to  estimate  and  their  actual  amount  would  depend  on  the  way  each  individual 

113 

Korn/Ferry Institute, 3rd Annual Board of Directors Study, 2007 

EN 

126 

   EN 

 
                                                 
financial  institution  chooses  to  ensure  the  implementation  of  the  policy  options.  These 
costs could be linked to the need to recruit additional Board members or to remunerate 
HR specialists or head hunters that will search for Board members with adequate time-
commitment and expertise. Additional costs could result from a possible need to increase 
remuneration  of  the  Board  members  with  specific  expertise  and  because  the  Board 
members  will  be  able  to  cumulate  a  lower  number  of  mandates.  The  average  Board  in 
Europe  consists  of  12  directors,  the  majority  being  non-executive  directors  with  an 
average annual remuneration of €77,000. This m eans that recruitment of additional Board 
members or any potential increase in remuneration should not be significant. It cannot be 
excluded  that  there  could  be  a  potential  impact  of  Option  C  on  profitability  of  credit 
institutions and therefore on lending activities. 

However,  all  these  potential  costs  seem  to  be  insignificant  compared  to  the  annual 
operational  expenses  for  credit  institutions'  in  EU  which  reached  €454  billion  for  the 
whole European banking sector in 2009114. 

For national supervisors, the policy options under Option C could entail additional costs. 
These costs are linked to additional time spent to review corporate governance practices 
of  credit  institutions  and  to  check  that  candidates  for  Board  membership  are  fit  and 
proper.  

Compliance  costs  related  to  extensive  supervisory  review  of  board’s  fitness  and 
propriety:  according  to  the  questionnaire  on  costs  sent  to  supervisors,  17  out  of  the  18 
responding supervisors indicate that the measure would lead to adaptations of the existing 
practice and thus involve additional costs for the supervisors, notably being the recurring 
costs of having to conduct a review more detailed than the current one and doing it more 
frequently than at present, and in some cases that the potential new measure targets non-
executive  board  members,  whereas  the  current  review  is  focused  on  executive  board 
members (/management board members). 

Compliance  costs  related  to  benchmarking  of  practices  on  diversity  of  board 
composition: 16 out of the 17 supervisors that responded to this question indicate that the 
measure  would  involve  additional  costs  for  the  supervisors,  since  no  such  measure 
currently exists. The sources of the additional costs are related to the setting up of a data 
base  (investments  in  IT  and  data  collection  from  all  banks)  and  updating  it  (data 
consolidation. 

Compliance costs related to the requirement that risk governance issues to be part of the 
dialogue with supervisors and the adequacy of risk governance structures to be part of the 
supervisory review: 11 of the 17 supervisors that responded to this question indicate that 
this measure would lead to no additional costs or no material additional costs. The reason 
is that the requirement of the measure is already in place (or largely so). In addition some 
mention that they also already carry out reviews of the corporate governance structures, 
but that there might be room for improvement: some additional effort for the review of 

114 

ECB, EU banking Sector Stability Report, September 2010. 

EN 

127 

   EN 

 
                                                 
corporate governance issues that go beyond risk management, or an annual review on top 
of the current review at authorisation. 

The  one-off  costs  are  estimated  between  €120,000  -  €1,100,000  and 
recurrent  costs 
ll  for  competent  authorities  with  a 
between  €20,000  -  €1,630,000.  They  should  be  sma
limited  number  of  credit  intuitions  under  supervision  and  higher  for  some  financial 
supervisors  with  large  banking  sectors  that  will  have  to  put  in  place  new  internal 
processes and devote staff to the new tasks.  

6.2. 

Summary of the impacts of Options A, B and C 

6.2.1. 

Impacts on stakeholders 

The  following  table  summarises  the  impact  of  Options  A,  B  and  C  on  different 
stakeholders. 

Figure 12: Comparison between options by categories of affected stakeholder groups 

Stakeholders 

Credit 
institutions 

Supervisors 

Shareholders 

Depositors 

Taxpayers 

Options 

Option A 

Option B 

Option C 

to 

Sub-options 
of 
effectiveness 
oversight by boards 

improve 
risk 

to 

Sub-options 
the 
standing 
management function 

improve 
risk 
of 

to 

Sub-options 
ensure 
efficient  monitoring  by 
risk 
supervisors 
governance 

of 

0 

? 

+ 

+ 

+ 

+ 

0 

? 

+ 

+ 

+ 

- 

0 

? 

++ 

++ 

++ 

++ 

0 

? 

++ 

++ 

++ 

++ 

0 

? 

++ 

++ 

++ 

++ 

Magnitude of impact as compared with the baseline scenario (the baseline is indicated as 0): ++ strongly positive; + 
positive; – – strongly negative; – negative; = marginal/neutral; ? uncertain; n.a. not applicable 

Option C is likely to have a positive impact on different stakeholders and the society as a 
whole115.  

115 

From  a  generic  perspective,  credit  institutions  are  viewed  as  any  firm  with  a  broad  range  of 
stakeholders. In the case of banks, the stakeholder groups includes shareholders, who contribute 
to  the  formation  of  capital,  as  well  as  other  categories  who  have  a  direct  interest,  such  as: 
governments and regulators, staff, depositors, creditors and the general public 

EN 

128 

   EN 

 
                                                 
Improved risk governance will help avoid excessive risk-taking by credit institutions. The 
risk of failure of credit institutions due to excessive risk could also be lowered. Therefore, 
the  impact  on  credit  institutions  should  be  positive.  Option  C  will  however  entail 
additional  administrative  burden  for  credit  institutions.  In  addition,  more  stringent 
requirements at European level could have a negative impact on the competitiveness of 
European credit institutions at international level. Contrary to capital requirements rules, 
G20  member  did  not  engage  to  implement  revised  Basel  Principles  in  their  national 
legislation.  For  instance,  the  financial  crisis  has  not  led  to  widespread  changes  in  US, 
although  the  Dodd-Frank  Act  did  introduce  corporate  transparency  rules,  including 
provisions  to  force  companies  to  disclose  information  on  executive  pay  and  measures 
designed to give investors greater say in nominating directors. Nor has the financial crisis 
triggered  a  corporate  governance  reform  across  Asia.  It  has  been  argued  therefore  that 
banks could leave European markets for markets with less regulation.  

However,  the  possible  decrease  in  competitiveness  due  to  more  stringent  requirements 
could be mitigated by a positive impact on investors, depositors and other stakeholders. 
Improved  risk  governance  would  contribute  to  the  resilience  of  the  banking  sector  and 
improve  investor  confidence.  The  need  for  additional  capital  to  cover  excessive  risk 
exposures could be reduced. Therefore, shareholder value will be preserved, moneys of 
depositors will be safely kept (and therefore no recourse to the deposit guarantee schemes 
will be needed), other creditors will not lose their moneys and ultimately Member States 
will not have to bail out credit institutions.  

In  addition,  EU  is  encouraging  G20  to  undertake  a  review  of  corporate  governance  in 
credit  institutions  at  international  level,  therefore  working  towards  for  a  level  playing 
field between European banking sector and credit institutions from third countries. 
At  a  macroeconomic  level,  sound  risk  governance  system  of  credit  institutions  would 
contribute  to  avoid  future  crises,  increase  confidence  in  the  banking  system  and  the 
efficiency  of  credit  institutions’  funding  mechanisms,  which  accelerates  economic 
growth.  

As  regards  supervisors,  option  C  would  entail  additional  administrative  burden  to 
supervise  risk  governance  of  credit  institutions.  However,  the  implementation  of  new 
principles is the responsibility of credit institutions at first place. Clear and more specific 
rules will facilitate supervisory review of existing practice.  

If  risk  governance  in  credit  institutions  is  not  improved,  credit  institutions  may  in  the 
future encounter the same problems as described in Part 3, that is excessive risk-taking 
which  may  result  in  need  for  recapitalisation116  and  loss  of  shareholder  value117,  credit 
institutions’  failures,  financial  system  instability  and  the  need  for  Member  States  to 
intervene and bail out credit institutions118. This will have a negative impact on different 

116 

117 
118 

64 For instance, in 2008 Royal Bank of Scotland had to raise £12 bn and Dexia €6 bn; and BNP 
Paribas had to rise in 2009 €4.3bn  in capital. 
For instance, Dexia share lost 90% of its value in from 2008 to 2009. 
See Annex IV on the detail of financial crisis measures adopted by Member States until 31 March 
2010. 

EN 

129 

   EN 

 
 
                                                 
stakeholders.  When  the  social  costs  of  an  outcome  exceed  the  private  costs  of  an 
outcome, there is a negative externality effect. 

Consequently,  the  benefits  linked  to  this  option  C  for  different  stakeholders  seem  to 
outweigh the underlying costs. 

6.2.2. 

Impacts on the environment, employment and third countries 

It  is  not  expected  that  the  new  principles  on  corporate  governance  in  credit  institutions 
are going to have any direct impact on the natural environment or on third countries.  
Measures enhancing disclosures could have an indirect impact on the issuance of paper 
documents  and  thus  on  the  environment.  However,  compared  to  the  general  volume  of 
paper  documentation  already  published  by  credit  institutions,  this  impact  should  not  be 
significant.  Branches  of  third  country  credit  institutions  are  not  as  such  subject  to  the 
European  requirements.  Consequently,  there  should  be  no  significant  impact  on  third 
countries of new provisions on corporate governance, unless Member States impose the 
same obligations to these branches as for other EU subsidiaries. In this case the impact on 
the third countries will be the same as for EU Member States. 
As  explained  in  Annex  I,  the  introduction  of  measures  on  diversity  in  Boards' 
composition is likely to have a positive impact on the gender policy of the EU, breaching 
glass ceilings and helping women to access leadership positions in companies and could 
have a positive impact on women employment. 

6.3. 

Choice of instrument 

The new EU principles on corporate governance in credit institutions could be included 
in  a  Commission  Recommendation  or  in  a  legislative  instrument  (a  Directive  or  a 
Regulation). 

6.3.1.  Recommendation 

A  Commission  Recommendation  could  be  envisaged  to  implement  new  principles  on 
corporate  governance  in  credit  institutions.  Such  a  Recommendation  would  have  the 
advantages  of  flexibility  that  hard  law  lack.  Soft  laws  have  been  described  as  "rules  of 
conduct  which,  in  principle,  have  no  legally  binding  force  but  which  nevertheless  may 
have practical effects"119. Although credit institutions may choose to conform to soft law, 
there  is  an  assumption  that  behaviour  is  more  likely  to  be  consistent  with  codified 
guidance and statements of best practice than with binding legislation. It has been argued 
that non-binding rules can have the same political and social effects and benefits as hard 
law120.  But,  because  soft  law  is  not  legally  binding,  implementation  rests  solely  on  the 
goodwill of credit institutions and where such goodwill is absent, soft law could result in 
non-compliance.  

119 

120 

See  Snyder,  F.,  Soft  Law  and  Institutional  Practice  in  the  European  Community,  Law  Working 
Paper 93/5. Florence, European University Institute, 1993 
Borchardt,  G.  M.  and  Wellens,  K.  C.,  Soft  Law  in  European  Community  Law,  European  Law 
Review, 1989 

EN 

130 

   EN 

 
                                                 
The  question  thus  is  whether  organisations  would  voluntarily  pay  the  price  for 
implementing  adequate  governance 
frameworks  based  on  best  practice  and 
recommendations or whether more prescriptive rules are needed. The financial crisis has 
shown the limitations of the current self-regulating system of largely voluntary codes and 
high-level,  principle-based  legislation.  As  shown  by  the  financial  crisis,  concerns  for 
reputation alone are unlikely to deter each and every credit institution from misconduct. 
Risk-taking  managers  can  depend  on  barriers  to  information,  and  information 
asymmetries, which will allow them to engage in unethical behaviour, for a considerable 
time, before being detected121. Even where detection takes place, this may have a limited 
effect on senior managers as they may simply switch jobs.  

External pressures in the form of market forces and shareholder scrutiny can play a role 
in  ensuring  adequate  governance  structures.  Market  discipline  could  force  credit 
institutions  to  implement  adequate  structures  without  necessarily  having  a  binding 
legislative  framework.  However,  as  described  in  Part  3,  the  financial  crisis  has  also 
shown the limitations of market and shareholders' control of corporate governance.  

6.3.2.  Legislative instrument  

It  could  be  argued  that  more  rigid,  prescriptive  regulation  would  result  in  “form  over 
substance” compliance while failing to achieve better risk governance and more effective 
Board and oversight structures. However, more detailed, prescriptive legislation could be 
seen as the only means of ensuring proper corporate conduct.  

A  Regulation  does  not  seem  to  be  an  appropriate  instrument  for  the  implementation  of 
principles on corporate governance. Although the objective of the Commission is to set 
up  a  comprehensible  and  sufficiently  detailed  framework  for  corporate  governance,  the 
diversity  of  corporate  governance  structures  and  company  laws  in  Member  States  does 
not  allow  for  a  directly  applicable  "one  size  fits  all"  approach.  There  is  a  need  for  a 
degree  of  flexibility  for  the  Member  States  as  to  the  manner  to  implement  the  new 
legislation  according  to  their  national  company  law  and  corporate  governance 
environment. 

The  Capital  Requirements  Directive  already  contains  some  high-level  principles  with 
regard  to  organisation  of  internal  governance  of  credit  institutions  and  gives  the 
Commission the power to adopt delegated acts. This Directive also has the advantage of 
being a legally binding instrument which at the same time leaves to Member States the 
flexibility  to  adapt  measures  on  corporate  governance  to  their  national  legislative 
framework. It is also a suitable instrument to reinforce the role of the supervisors with a 
view  to  empower  them  to  assess  the  corporate  governance  practices  of  financial 
institutions  in  a  broader  context  of  sound  risk  management.  It  also  allows  for  effective 
application  of  the  proportionality  principle  under  the  supervisory  review.  It  seems 
therefore to be a suitable instrument for the new provisions on corporate governance. 

121 

See, for example, Kerviel case at Société Générale. 

EN 

131 

   EN 

 
                                                 
Commission could either amend this Directive in order to specify existing principles and 
give supervisory authorities the power to oversee more effectively corporate governance 
practices  in  credit  institutions  or  adopt  implementing  measures.  It  seems  appropriate  to 
amend  this  Directive  rather  than  introduce  new  measures  by  a  delegated  act,  as  new 
provisions touch on some sensitive aspects of national company law, such as limitation of 
number of mandates and quantitative targets on gender balance. 

6.4. 

Consistency  

New principles on corporate governance will apply to all institutions which are covered 
by  the  requirements  of  the  Capital  Requirements  Directive  (credit  institutions  and 
investments  firms).  Although  good  corporate  governance  is  essential  for  any  type  of 
financial  institution,  the  main  weaknesses  in  corporate  governance  revealed  by  the 
financial crisis  were primarily witnessed in  the banking and investment banking sector, 
rather  than  the  insurance  and  fund  management  industry.  This  is  why  in  the  first 
instance it is proposed to limit the new provisions on corporate governance to financial 
institutions  covered  by  the  CRD.  Furthermore,  insurance  and  fund  management  have 
recently been subject to a legislative reform122 which introduced, inter alia, detailed rules 
on internal governance arrangements for these types of financial institutions. These new 
rules were not introduced as a reaction to particular weaknesses in corporate governance 
in  these  institutions  but  were  part  of  a  more  general  reform  of  these  sectors.  The 
Commission  will  examine  these  rules  and  their  practical  appreciation  in  order  to  judge 
whether  they  provide  an  appropriate  framework  and,  if  so,  whether,  they  need  to  be 
adjusted to ensure consistency amongst the financial services industry.  

The  engagement  of  shareholders  is  an  issue  of  relevance  not  just  for  financial 
institutions, but also for companies more generally. On the basis of the evidence gathered 
during  the  preparation  of  the  Green  Paper  on  corporate  governance  in  financial 
institutions,  the  findings  regarding  the  lack  of  shareholder  engagement  and  the  reasons 
for this are, to a large extent, also relevant as regards shareholder behaviour in listed and 
non-listed  companies  generally.  In  this  context,  the  Commission  decided  to  publish  a 
Green  Paper  on  corporate  governance  framework  which  will  consult  specifically,  inter 
alia,  on  different  possible  ways  forward  to  improve  shareholders  involvement  in 
companies  and  incentivise  shareholders  to  act  with  regard  to  long-term  interest  of  their 
companies. Consequently, the problem  of  shareholder inaction with  regard  to excessive 
risk-taking by credit institutions will be dealt with as a follow-up to that Green Paper. In 
addition, in its Communication on a possible regime for reorganising and resolving cross-
border banking groups under a coordinated or integrated resolution framework envisages 
modifying  existing  EU  rules  in  order  to  ensure  that  national  authorities  will  be  able  to 

122 

Directive 2009/138/EC of the European Parliament and of the Council of 25 November 2009 on 
the taking-up and pursuit of the business of Insurance and Reinsurance (Solvency II), OJ L 335, 
17.12.2009, p. 1–155; Directive 2009/65/EC of the European Parliament and of the Council of 13 
July  2009  on  the  coordination  of  laws,  regulations  and  administrative  provisions  relating  to 
undertakings for collective investment in transferable securities (UCITS), OJ L 302, 17.11.2009, 
p. 32–96. 

EN 

132 

   EN 

 
                                                 
carry out certain operations (as e.g. capital increases) without having to seek shareholder 
approval.  

7. 

MONITORING AND EVALUATION  

The Commission is the guardian  of the Treaty and therefore will monitor how Member 
States  have  implemented  the  changes  of  the  Capital  Requirements  Directive.  Where 
needed,  the  Commission  services  will  offer  assistance  to  Member  States  for  the 
implementation of the legislative changes in the form of transposition workshops with all 
the Member States or bilateral meetings at the request of any of them. When necessary, 
the Commission will pursue the procedure set out in Article 258 of the Treaty in case any 
Member State fails to respect its duties concerning the implementation and application of 
Community Law. 

The  evaluation  of  the  consequences  of  the  application  of  the  legislative  measure  could 
take place three years after the entry into force of the legislative measure in the form of a 
Commission report to the Council and the European Parliament. The Commission will be 
monitoring  the  application  of  the  Capital  Requirements  Directive,  as  amended,  through 
EBA  and  an  extensive  and  continuous  dialogue  with  all  major  stakeholders,  including 
market  participants  (credit  institutions,  investors).  It  may  also  use  of  the  findings  of 
studies carried out by stakeholders.  

EN 

133 

   EN 

 
 
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ANNEX I  

DESCRIPTION, ANALYSIS AND COMPARISON OF SUB-OPTIONS UNDER  
OPTION C 

Methodology 

This Annex describes in more detail the sub-options under the substantive option C (New 
provisions on risk governance), includes a screening of the sub-options and performs an 
assessment  of  their  impacts.  Sub-options  will  be  grouped  according  the  underlying 
objectives: I) Increase effectiveness of risk oversight by Boards; II) Improve standing of 
the  risk  management  function;  and  III)  Ensure  effective  supervisory  review  of  risk 
governance.  

Within each group, the sub-options will be presented and discussed separately according 
to  each  more  specific  operational  objective  as  described  in  Part  5  of  the  impact 
assessment.  The  sub-options  for  each  operational  objective  are  complementary  and  not 
mutually  exclusive,  so  the  preferred  policy  option  to  achieve  an  objective  could  be 
composed of a combination of different sub-options. 

The  sub-options  will  be  further  classified  in  three  types:  (i)  measures  which  enhance 
transparency  of  corporate  governance  practices,  (ii)  principles-based,  outcome-focused 
rules with high degree of flexibility and (iii) strict rules with limited degree of flexibility.  

The  sub-options  are  discussed  and  measured  against  the  relevant  operational  objectives 
set out in Part 5 of the impact assessment and also, where relevant, the following criteria 
will be used: 

Impact  on  the  supply  of  candidates  for  Board 
membership and for risk management function 

The  pool  of  suitable  candidates  for  Board  membership 
and  for  risk  management  function  should  not  be 
significantly reduced 

Impact on the clear division of responsibilities 

In  order  to  avoid  moral  hazard,  there  should  be  a  clear 
division 
executive 
management,  operational  units  and  the  risk  management 
function 

responsibilities 

between 

of 

Impact on the enforceability 

Flexibility 

The  implementation  of  the  principle  should  be  easy  to 
monitor 

Credit  institutions  should  be  able  to  adapt  the  principles 
to  their  structures  and  the  specific  nature  of    their 
activities 

Impact on the level playing field 

Regulatory  arbitrage  between  Member  States  and  at 
international level should be avoided. 

Efficiency 

A measure of cost/benefit comparing the effectiveness to 
reach the objectives with the costs of reaching them 

EN 

137 

   EN 

 
 
 
The  sub-option  improving  disclosures  are  useful  and  efficient  but  their  effectiveness 
depends to a large extent on implementation and supervision. Transparency requirements 
contribute to market discipline, facilitate monitoring and enforcement and reduce the cost 
of financial supervision as supervisors will not need to search for information. However, 
market discipline presupposes that a firm has private sector stakeholders who are at risk 
of financial loss from the firm’s decisions and who can take actions to ‘‘discipline’’ the 
firm,  that  is,  to  influence  its  behaviour.  But,  as  described  in  Part  3  of  the  impact 
assessment,  the  financial  crisis  has  shown  the  limits  of  shareholders'  and  other 
stakeholders'  control  of  credit  institutions  and  their  incapacity  to  effectively  influence 
management behaviour. Supervisors also must be able to enforce the implementation of 
sound risk governance. If they do not have the necessary powers, transparency of existing 
practices  will  not  serve  its  purpose.  Therefore,  transparency  could  be  a  useful  tool  to 
inform the market and the supervisors of the credit institutions practices but it would not 
be sufficient on its own to remedy the weaknesses in the corporate governance in credit 
institutions.  Consequently,  it  seems  appropriate  to  combine  enhanced  disclosure  with 
substantive rules and improved supervisory review.  

Sub-options which consist in more specific and organisation rules have a positive impact 
on enforceability and on the level playing field as they provide minimum standards, allow 
for  a  consistent  approach  by  credit  institutions,  Member  States  and  supervisory 
authorities,  give  clear  guidance  of  what  is  expected  and  facilitate  supervision  and 
enforcement. Supervisors can easily verify that the minimum rules have been  complied 
with. Although these  sub-options could have a negative impact on the flexibility left to 
credit  institutions,  this  negative  impact  could  be  mitigated  by  the  application  of  the 
proportionality  principle  according  to  which  credit  institutions  should  comply  with  the 
rules according to their size, the nature and the complexity of their activities. 

As  corporate  governance  is  about  behaviour,  the  cultural  change  is  essential. 
Consequently, there is a need to accompany specific rules which set minimum standards 
by principles which focus on the desired outcome that is on the underlying objectives. In 
that  way,  credit  institutions  will  have  to  implement  the  principles  in  their  spirit  and 
supervisors  will  be  able  to  verify  that  even  in  the  situation  where  a  credit  institution 
complies  with  minimum  requirements,  its  practice  is  adequate  with  regard  to  the 
complexity  and  the  nature  of  its  the  activities.  The  sub-options  which  are  outcome-
focused  may  not  have  a  positive  impact  on  the  enforceability  and  on  the  level  playing 
field between different credit institutions and Member States as compared to the baseline 
scenario. However, these principles leave the necessary flexibility to credit institutions to 
adapt their practices to their specific structures and avoid box-ticking.  

EN 

138 

   EN 

 
I. 

OPTIONS TO INCREASE EFFECTIVE RISK OVERSIGHT BY BOARDS 

Section 1:   Lack of effective challenge of senior management decisions by Boards  

A)  

Board time-commitment 

1) Measures to improve transparency of corporate governance practices 

1. a. Disclose the number of mandates of Board members in the annual report. This sub-
option would entail a public disclosure in the annual report of the number of mandates a 
Board member holds in different companies. 

1. b. Disclose in the annual report the actual time spent by each Board member annually 
to exercise his/her function in the credit institution. It could also be foreseen to disclose 
the time each Board member commits per year to the credit institution (Board meetings 
attendance, time spent to prepare the Board meetings, etc.)  

For  the  time  being,  there  is  no  disclosure  requirement  in  CRD  regarding  the  time 
commitment  of  Board  members.  Greater  transparency  is  aimed  at  fostering  market 
discipline  through  public  disclosure  and  at  the  same  time  providing  supervisory 
authorities  with  the  information  required  for  effective,  risk-based  and  proportionate 
supervision. Consequently, both sub-options could be envisaged to encourage Board time 
commitment  in  credit institutions.  However, to achieve the underlying objective and be 
truly  informative,  the  information  provided  needs  to  be  accurate.  With  this  respect,  the 
second  sub-option  (1.b.)  seems  to  be  less  easy  to  put  in  place  in  practice.  Obtaining 
information  on  exact  time  spent  by  each  Board  member  to  exercise  its  functions  and 
verifying its accuracy could be time-consuming. Whereas the number of Boards meetings 
per annum and the minutes of those meetings could be an indication, the declaration of 
Board  members  themselves  is  the  main  source  of  such  information.  Consequently,  the 
accuracy  of  those  declarations  needs  to  be  checked  externally  which  entails  additional 
costs.  By  comparison,  information  on  the  number  of  mandates  of  Board  members  is 
much easier to obtain and to verify. At the same time it gives useful information on the 
time available to Board members and provides valuable insight into the internal structure 
and  management  policies  of  a  firm.  Consequently, option  1.a. is a preferred option and 
option 1.b. should be discarded. 

The primary costs of increased disclosure are the cost of preparing and disseminating the 
information. As credit institutions do already have to publish a lot of periodic information 
for  public  use  but  also  for  supervisory  review,  the  additional  cost  of  preparation  and 
dissemination of information under option 1.a. will not be very high. This cost could be 
relatively higher for small companies as compared to larger ones, but they remain low in 
any  case.  It  results  from  the  responses  to  the  questionnaire  on  costs  sent  to  credit 
institutions  that  annual  cost  of  option  1.a.  per  legal  unit  could  vary  between  600  and 
1,000 euros, which does not seem disproportionate compared to the expected benefits, i.e. 
facilitated monitoring by supervisors who do not have to search for information and thus 
reduced  cost  of  supervision.  Moreover,  for  listed  credit  institutions  which  already 

EN 

139 

   EN 

 
disclose such information under a corporate governance code, there will be no additional 
cost linked to this sub-option. For detailed description of costs, see Annex II. 

2) Principles-based, outcome-focused rules with high degree of flexibility 

2.  a.  Require  that  Board  members  spend  sufficient  time  to  exercise  their  duties  as  a 
criterion for recruitment and on an ongoing basis.  

This  sub-option  would  include  requiring  the  ability  of  a  Board  member  to  devote 
sufficient  time  to  his/her  duties  as  a  criterion  for  selection  of  the  candidate  by  credit 
institutions.  In  addition,  Board  members  would  be  required  to  devote  sufficient  time  to 
their duties on an ongoing basis.  

This  sub-option  implements  the  revised  Basel  Principles  recommendation  that  in 
identifying  potential  Board  members,  the  Board  should  ensure  that  the  candidates  are 
able  to  commit  the  necessary  time  and  effort  to  fulfil  their  responsibilities.  There  is 
currently  no  such  requirement  in  CRD.  According  to  the  results  of  the  public 
consultation,  such  a  principle  focused  on  the  desired  outcome  will  avoid  box-ticking, 
provide different credit institutions with enough flexibility to adapt their practices to their 
particular  situation  and  at  the  same  time  is  likely  to  achieve  its  underlying  objective  of 
improved time-commitment of Board members.  

Compared to the baseline scenario, candidate Board members would in a flexible way be 
encouraged not to accept additional Board memberships if they do not have the sufficient 
time to devote, and incumbent Boards would be encouraged to implement the principle. 
Moreover,  the  principle  would  encourage  that  Board  members  actually  spend  the 
necessary time on the Boards where they have a seat.   

However,  such  general  principle,  to  be  really  effective  to  achieve  the  underlying 
objective, needs to be correctly implemented by credit institutions and therefore it would 
seem  that  there  is  also  a  need  to  have  its  implementation  monitored  by  financial 
supervisors.  It  could  be  subject  to  different  interpretations  and  practices  in  credit 
institutions but also by different Member States and thus allow for regulatory arbitrage. 
To  mitigate  this,  there  will  be  a  need  for  coordination  at  European  level  but,  as  further 
explained below (see 4. Combination of different sub-options), some supplementing sub-
options establishing minimum standards for Board members to commit sufficient time to 
their duties could also be envisaged. 

Depending  on  the  way  the  individual  financial  institution  chooses  to  ensure  the 
implementation  of  the  principle,  there  could  be  costs  both  for  the  company  and  for  the 
candidate Board member, but we have no cost estimates available. 

The requirement for Board members to devote sufficient time to their duties in a credit 
institution  may  also  result  in  the  decrease  in  the  number  of  Board  positions  a  Board 
member can hold at the same time in different credit institutions. Consequently, there can 
be  a  negative  impact  on  the  number  of  people  available  for  Board  memberships. 
However,  this  negative  impact  can  be  mitigated  by  enlarged  criteria  for  selection  of 

EN 

140 

   EN 

 
Board  members  breaking  some  glass  ceilings,  in  particular  with  regard  to  the  gender 
balance  on  Boards  (see  sub-options  under  point  C  below).  Procedures  to  promote 
candidates within credit institutions could also mitigate this impact. Finally, the eventual 
negative impact on the pool of available candidates seems to be acceptable with regard to 
the overall objective which needs to be achieved.  

The possible decrease in the number of Board positions a Board member can hold at the 
same  time  can  also  result  in  the  need  for  credit  institutions  to  pay  more  to  its  Board 
members. In fact, if a Board member cannot cumulate a large number of positions at the 
same time, he/she may need to be remunerated better for the reduced number of positions 
he/she can hold. However, the exact amount of this costs is difficult to measure and will 
depend on the market practice.  

3) Strict rules with limited degree of flexibility 

3. a. Limit the number of mandates a Board member of a credit institution may hold in 
different companies at the same time, subject to proportionality.  This sub-option would 
set this limit at one executive mandate to be cumulated with maximum two non-executive 
mandates or maximum four non-executive mandates to be cumulated at the same time in 
different companies. Different mandates within the same group should be counted as one 
mandate.  In  order  to  take  into  account  the  size  and  the  nature  and  the  complexity  of 
activities of a credit institution and specific situations which may occur during the life of 
the credit institution where this limit would not appear appropriate, a boar member could 
cumulate more mandates, subject to the control of supervisory authorities. 

In  fact,  it  results  from  the  interviews  with  credit  institutions  that  non-executive  Board 
members are expected to spend at least two days a month to prepare Board meetings in 
addition to six Board meetings in average per annum. More time commitment is expected 
from directors which are members of different committees. It seems reasonable therefore 
to set a limit of four non-executive mandates, subject to proportionality. 

Currently, a limit on the number of mandates of members of the Board is not foreseen in 
the CRD or in draft EBA guidelines. Such a limit would, however, effectively contribute 
to achieving the objective of improved time-commitment of Board members as it would 
avoid cumulating too many functions at the same time, where that would otherwise be the 
case123.  Also,  limiting  the  number  of  seats  one  person  could  be  on  would  give  more 
people the opportunity to get Board experience, including more women and other under-
represented groups, and thus have a positive spill-over effect on the objective to increase 
Board diversity.  

123 

For the time being, in Member States where legislation or a corporate governance code provide for 
a limitation in a number of mandates, this number is limited in average to five. 

EN 

141 

   EN 

 
 
                                                 
 
However,  a  large  majority  of  respondents  to  the  public  consultation  consider  a  general 
rule on limitation of the number of boards on which a director may sit as inappropriate. 
One argument expressed against such limitation is that there are not enough experienced 
women  and  men  to  populate  the  Board  rooms  of  credit  institutions.  Consequently, 
limiting  the  number  of  mandates  will  have  a  negative  impact  on  the  pool  of  people 
available  for  Board  membership,  and  possibly  on  the  objective  of  Board  expertise. 
However, as already mentioned above (see sub-option 2.a.), this negative impact can be 
mitigated. A  limitation of  mandates  might  give opportunity to people who were for the 
time  being  absent  from  Board  rooms  for  many  different  reasons,  including  exclusion 
from networks, to become members of the Board. It might help breaching existing glass 
ceilings and bring more diversity. In this respect, one of the solutions might be changing 
the ways of working of nomination committees, in order to widen their perspective.  

Another argument against such a measure would be that a strict limitation could be seen 
as  too  arbitrary  and  inflexible,  and  would  not  allow  taking  account  of  the  situation  of 
each particular financial institution and individual circumstances of each director. In fact, 
smaller  credit  institutions  or  those  in  smaller  markets  where  the  available  “pool”  of 
candidates  can  be  limited  may  not  be  able  to  avoid  cross-memberships  on  Boards  of 
directors.  Also,  given  the  local  focus  of  smaller  banks,  they  may  in  fact  find  it  most 
effective  to  have  local  businesspeople  or  customers  on  their  Boards.  Also,  some  Board 
members could be able to manage more mandates than the restriction allows. However, 
this  issue  may  be  easily  solved  by  the  proportionality  principle  which  would  allow  for 
exceptions  under  the  control  of  the  national  financial  supervisor  to  take  account  of 
different  situations  of  particular  individuals  and  particular  credit  institutions.  Also, 
limiting  the  number  of  mandates  still  leaves  enough  flexibility  to  Board  members  to 
divide their time between different memberships as needed and appropriate in particular 
circumstances. 

Finally,  some  respondents  to  the  public  consultation  were  of  the  opinion  that  such  a 
limitation would not in fact guarantee that a Board member will dedicate enough time for 
his/her  position  in  each  given  situation  and  could  result  in  a  box-ticking  exercise.  It  is 
true that the limitation would not directly target the time spent on each individual Board, 
but rather targets the situations where too many Board commitments in itself is a problem 
for  the  possibility  to  devote  sufficient  time  to  all  the  Boards.  However,  those  two 
perspectives are part of the same root problem. Therefore, if a restriction on the number 
of  mandates  is  combined  with  the  general  principle  of  sufficient  time  commitment 
described above, and both measures are made subject to effective supervisory review, it 
should effectively deal with this issue.  

There  would  not  be  any  material  direct  compliance  costs  for  credit  institutions 
implementing this sub-option, except, as mentioned in sub-option 2.a., that the limitation 
of  Board  memberships  may  result  in  the  need  for  credit  institutions  to  pay  more  to  its 
Board members. This possible additional cost seems, however, justified compared to the 
underlying objective. 

EN 

142 

   EN 

 
 
3. b. Specify the minimum number of days that a Board member must spend per year to 
exercise its function in a credit institution.  

This  option  seems  at  first  sight  also  to  be  able  to  contribute  effectively  to  achieve  the 
objective  of  improved  time-commitment  of  Board  members.  However,  such  measure 
would be difficult to put in place in practice. Whilst it is expected that Board members 
should spend at least 2 days per month in a credit institution, it would be difficult to for 
credit  institutions  and  supervisors  to  monitor  that  that  each  Board  member  actually 
commits  at  least  this  amount  of  time.  Time  commitment  does  not  only  consist  of 
attendance at Board meetings but also comprises time spend to prepare these meetings, to 
read  different  documents  and  to  understand  the  management  decisions.  However, 
whether  a  Board  member  performs  all  these  tasks  and  devotes  sufficient  time  to  them 
would  be  very  difficult  to  verify  in  practice,  as  opposed  to  the  maximum  number  of 
mandates  a  Board  member  may  hold  (sub-option  2.b.).      ..  This  sub-option  is  therefore 
discarded. 

4) Combination of different sub-options 

It  results  form  the  discussions  of  the  sub-options  that  a  combination  between  measures 
enhancing transparency, outcome-focused principles and more detailed rules establishing 
minimum standards is an appropriate combination. Each individual sub-option would not 
suffice alone to achieve the underlying objective of improved time commitment of Board 
members.  Different  sub-options  will  be  mutually  reinforcing  and  will  not  entail 
disproportional costs for credit institutions.  

Disclosure  of  the  number  of  mandates  (sub-option  1.a.)  will  allow  the  market  and  the 
supervisors,  at  limited  costs  to  credit  institutions,  to  easily  evaluate  whether  a  Board 
member  has  too  many  mandates  (including  in  cases  it  formally  respects  the  maximum 
number  of  mandates),  hampering  his/her  ability  to  devote  sufficient  time  to  the  credit 
institution,  thus  facilitating  supervisory  review.  Limiting  the  number  of  mandates  (sub-
option  3.a.),  although  not  supported  by  majority  of  the  respondents  to  the  public 
consultation, seem very effective to achieve the underlying objective as it sets a minimum 
standard and provides clear guidance to credit institutions and supervisors on the number 
of  mandates  which  would  exceed  the  reasonable  capacity  of  a  Board  member  to  spent 
sufficient  time  on  the  Board  of  a  credit  institution.  However,  to  avoid  box-ticking,  a 
general  principle  that  a  Board  member  should  spend  sufficient  time  (sub-option  2.a.) 
allows supervisors to check whether a Board member with the number of mandates that 
does not exceed the limit does in fact commits sufficient time to its functions.  

As a result, the following sub-options will be retained:  

Sub-option 1.a. Disclose the number of mandates of Board members in the annual report 

Sub-option  2.a.  Require  that  Board  members  spend  sufficient  time  to  exercise  their 
duties as a criterion for recruitment and on an ongoing basis 

EN 

143 

   EN 

 
Sub-option  3.a.  Limit  the  number  of  mandates  a  Board  member  of  a  credit  institution 
may hold in different companies at the same time 

Table 1: Comparison of the sub-options (time commitment)  

Effectiveness 

Impact 
supply 
candidates  

on 
of 

Flexibility 

Enforceability 

Efficiency 

Impact 
on 
level  playing 
field 

Sub-option 1a 

Sub-option 1b 

Sub-option 2a 

+ 

= 

+ 

Sub-option 3a 

++ 

Sub-option 3b 

++ 

= 

= 

- 

- 

- 

= 

= 

= 

- 

-- 

+ 

= 

= 

++ 

+ 

= 

+ 

- 

+ 

+ 

+ 

- 

+ 

++ 

- 

Magnitude  of  impact  as  compared  with  the  baseline  scenario:  ++  strongly  positive;  +  positive;  –  – 
strongly negative; – negative; = marginal/neutral; ? uncertain; n.a. not applicable 

B) 

Expertise of Board members 

1) Measures to improve transparency of corporate governance practices 

1. a. Disclosure of recruitment policy and of expertise and skills of Board members in the 
annual report. This sub-option entails a requirement to disclose in the annual report the 
recruitment  policies,  the  criteria  chosen  to  select  the  candidates  proposed  for  Board 
membership as well as the skills and expertise of current Board members. The results of 
the public consultation show a general support for such an enhanced disclosure. 101 out 
of  134  respondents  that  provided  an  answer  to  the  relevant  question  favoured  this  sub-
option. For the time being, there is not such disclosure requirement in the CRD. 

This  sub-option  could  incentivise  credit  institutions  to  set  up  a  policy  which  would 
promote  enhanced  expertise  of  Board  members  as  it  would  provide  the  public  with  the 
insight  on  the  practices  of  the  credit  institution  and  allow  for  the  benchmarking  of  the 
existing  practices  and  thus  compare  the  credit  institution  to  its  peers.  However,  as 
shareholders  have  the  final  say  on  the  nomination  of  Board  members,  the  recruitment 
policies  could  be  overridden  by  shareholders  will.  In  that  case,  this  sub-option  would 
have a limited impact on the increase in Board's expertise. 

In addition, as already mentioned above, measures to improve transparency are a useful 
tool to inform the market and the supervisors of corporate governance practices but they 
are not necessarily sufficient by themselves if not properly sanctioned by the market. To 
be  really  effective,  they  need  to  be  accompanied  effective  monitoring  of  their 
implementation  but  it  is  also  possible  to  complement  them  by  other  sub-options 
establishing  substantive  provisions  with  regard  to  expertise  requirements  for  Board 
members.  

EN 

144 

   EN 

 
 
 
The primary costs of increased disclosure are the cost of preparing and disseminating the 
information. As credit institutions do already have to publish a lot of periodic information 
for  public  use  but  also  for  supervisory  review,  the  additional  cost  of  preparation  and 
dissemination of information under option 1.a. will not be very high. This cost could be 
relatively higher for small companies as compared to larger ones, but they remain low in 
any  case.  It  results  from  the  responses  to  the  questionnaire  on  costs  sent  to  credit 
institutions  that  annual  cost  of  option  1.a.  per  legal  unit  could  vary  between  600  and 
1,000 euros, which does not seem disproportionate compared to the expected benefits, i.e. 
facilitated monitoring by supervisors who do not have to search for information and thus 
reduced cost of supervision.  

2) Principles-based, outcome-focused rules with high degree of flexibility 

2. a. Board members must possess individually and collectively appropriate expertise on 
recruitment  and  on  an  ongoing  basis.  This  sub-option  puts  in  place  a  general  principle 
without specific criteria as regards the required skills and therefore leaves a high degree 
of  flexibility  to  credit  institutions  and  to  supervisors  to  determine  what  the  appropriate 
level of expertise of Board members is.  

This  sub-option  would  mean  that  credit  institutions  should  select  their  candidates  for 
Board  membership  taking  into  account  their  skills  and  expertise  and  ensure  that  these 
skills  are  appropriate  to  the  nature  and  the  complexity  of  the  activities  of  the  credit 
institution.  Credit  institutions  should  also  ensure  that  once  the  Board  members  are 
appointed,  their  skills  remain  to  be  adequate  to  the  nature  and  the  complexity  of  the 
activities of the credit institution as it evolves over time. However, it leaves to the credit 
institution the responsibility to determine what the appropriate skills are. 

Such  a  requirement  seems  at  first  sight  likely  to  achieve  the  underlying  objective  of 
having a more experienced Board able to effectively challenge management decisions. At 
the  same  time,  such  a  principle  would  provide  different  credit  institutions  with  enough 
flexibility to adapt their practices to their particular situation.  

However,  as  already  mentioned  above,  such  general  principle  to  be  really  effective  to 
achieve  the  objective  of  having  experience  and  skilful  Board  needs  to  be  correctly 
implemented by credit institutions and therefore it would seem that there is also a need to 
have  it  monitored  by  financial  supervisors.  Also,  it  could  be  subject  to  different 
interpretations  and  practices  in  different  Member  States  and  thus  allow  for  regulatory 
arbitrage.  

In addition, the Capital Requirements Directive already contains a provision in its Article 
11  requiring  that  competent  authorities  shall  not  grant  authorisation  to  the  credit 
institution if the persons who effectively direct the business of the credit institution "are 
not of sufficiently good repute or lack sufficient experience to perform such duties".  As 
described  in  Part  3  of  the  impact  assessment,  this  provision  did  not  ensure  that  Board 
members  of  credit  institutions  possessed  sufficient  experience  and  skills  in  practice. 
Therefore,  there  is  a  doubt  that  such  a  general  principle  would  effectively  achieve  the 
underlined  objective.  Therefore,  there  is  a  need  to  examine  other  sub-options  to 

EN 

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determine which one would be most effective and proportionate to achieve the underlying 
objective. 

This  option  could  have  a  negative  impact  on  the  supply  of  candidates  for  Board 
membership. As a result of enhanced standards for selection of potential candidates, the 
number of suitable candidates may decrease accordingly. It could also result in the need 
for  credit  institutions  to  remunerate  better  experienced  and  skilful  Boards  (see  remarks 
under point A, sub-option 2.a.).  

2.  b.  Create  an  enhanced  "fit  and  proper"  test  for  Board  members  that  will  specify  the 
criteria  that  Board  members  must  possess  individually  and  collectively  with  regard  to 
appropriate skills and expertise on recruitment and on an ongoing basis.  

As  compared  to  the  previous  sub-option,  this  sub-option  would  set  general  minimum 
criteria with regard to expertise for recruitment of Board members and require that these 
criteria  should  also  be  fulfilled  during  the  duration  of  their  mandates  to  enable  Board 
members to effectively exercise their oversight function.  

As for the previous sub-option 2.a., credit institutions should select their candidates  for 
Board  membership  taking  into  account  their  skills  and  expertise  and  ensure  that  these 
skills match the minimum criteria of this sub-option and that they are appropriate to the 
nature  and  the  complexity  of  the  activities  of  the  credit  institution.  Credit  institutions 
should also ensure that once the Board members are appointed, their skills remain to be 
adequate  to  the  nature  and  the  complexity  of  the  activities  of  the  credit  institution  as  it 
evolves over time. 

In addition, the following criteria would be included in the sub-option: Board members 
should possess individual expertise and collective understanding of all material risks of 
the  credit  institution,  independence  of  mind,  honesty  and  integrity  and  be  able  to 
effectively and constructively challenge management decisions. As a supplement to this 
sub-option,  the  fulfilment  of  these  criteria  could  be  subject  to  extensive  supervisory 
review  which  should  examine  the  ability  of  Board  members  to  exercise  their  oversight 
function  on  recruitment  but  also  on  regular  basis.  The  sub-options  regarding  the 
supervisory review of Board expertise and skills are further described below (see chapter 
III). 

This  sub-option  would  align  EU  requirements  with  the  revised  Basel  Principles 
recommendation  that  Boards  should  possess,  both  as  individual  Board  members  and 
collectively,  appropriate  experience,  competencies  and  personal  qualities,  including 
professionalism and personal integrity. Currently, Article 11 of the CRD does not specify 
any criteria for suitability of Board members. 

The results of the public consultation show support for extending the fit and proper test to 
include technical and professional skills as well as individual qualities of future members 
of the Board. 68 respondents out of 127 that provided an answer to the relevant question 
favoured this sub-option. Some respondents think that Boards should have expertise and 
knowledge collectively and should be able to challenge management as a team, instead of 

EN 

146 

   EN 

 
each  candidate  possessing  all  set  of  specific  skills  and  qualities.  Some  respondents 
mention the difficulty to find an appropriate test for individual qualities, the appreciation 
of which would always be subjective. A number of respondents emphasise that increased 
competence should not be detrimental to independence and diversity of board members. 

This  sub-option  has  the  advantage  of  responding  to  the  above-mentioned  concerns, 
leaving  sufficient  flexibility  to  credit  institutions  to  adapt  the  required  skills  to  their 
particular  situation  while  at  the  same  time  defining  a  precise  framework  and  giving 
enough  guidance  to  credit  institutions  and  supervisors  regarding  the  required  profile  of 
Board members of credit institutions.  

However,  it  could  have  a  negative  impact  on  the  supply  of  candidates  for  Board 
membership. As a result of enhanced standards for selection of potential candidates, the 
number of suitable candidates may decrease accordingly. However, as mentioned under 
point  A,  this  negative  impact  can  be  mitigated  by  opening  the  Board  to  more  diverse 
candidates and promoting people internally within credit institutions. In any case, such a 
negative  impact  seems  proportionate  to  the  underlying  objective  of  having  an 
experienced Board able to effectively challenge management decisions. 

This sub-option  could  also  result in  the need for credit institutions to remunerate better 
experienced  and  skilful  Boards  (see  remarks  under  point  A,  sub-option  2.a.). 
Nevertheless,  these  possible  additional  costs  seem  proportionate  as  compared  to  the 
underlying objective. 

Also, some respondents to the public consultation were opposed to extending the fit and 
proper  test  to  professional  skills  and  individual  qualities  of  candidates  because 
supervisors  are  not  better  suited  than  shareholders  to  select  board  members  and  thus 
should not be excessively intrusive in the nomination process. One respondent considered 
that excessive intervention of supervisors could result in an undue transfer of liability to 
the  supervisor.  However,  this  sub-option  leaves  the  responsibility  to  select  board 
members  to  credit  institution  itself,  supervisors  checking  that  the  criteria  for  suitability 
have been respected. Therefore, supervisors will not substitute themselves to shareholders 
or the credit institution. 

2. c. Appropriate induction and continuous training of Board members. This sub-option 
would  require  credit  institutions  to  set  up  specific  training  programmes  for  Board 
members  depending  on  the  needs  of  the  credit  institution  and  to  devote  sufficient 
resources to this training. There is no such requirement currently in the CRD. 

Respondents to the public consultation that expressed their opinion on the subject (134) 
were  all  in  favour  of  this  sub-option.  While  this  sub-option  would  not  be  sufficient  in 
itself  to  achieve  the  objective  of  having  competent  Board  members  able  to  effectively 
challenge management, it could usefully complement the sub-option on enhanced "fit and 
proper  "test"  (sub-option  2.b.)  and  help  Board  members  acquire,  maintain  and  deepen 
their knowledge and skills and to fulfil their responsibilities. Therefore, it could be useful 
to ensure that Board members have access to programmes of tailored initial and ongoing 

EN 

147 

   EN 

 
education  on  relevant  issues  and  that  the  Board  dedicates  sufficient  time,  budget  and 
other resources for this purpose, in addition to the sub-option 2.b.  

The annual compliance costs related to this option would vary according to the size of the 
credit  intuition's  Board,  the  complexity  of  its  activities  and  the  extent  to  which  the 
individual  credit  institution  already  has  such  a  practice.  At  the  same  time,  it  could  be 
relatively higher for small banks than for big ones. Annual costs seem to range between 
20,000 and 30,000 €, whereas a one bank thinks that  it would incur significant additional 
costs. However, this sub-option seems to be proportionate as compared to the underlying 
objective. In particular, for small financial institutions with no complex activities and risk 
exposures it would be less costly to train their existing Board members in order for them 
to  attain  the  required  expertise  level  than  to  recruit  already  experienced  new  Board 
members.  

3) Strict rules with limited degree of flexibility 

3.  a.  Detailed  requirements  with  regard  to  the  expertise  of  Board  members.  This  sub-
option would entail to list all necessary skills Board members should have in order to be 
able to exercise his/her function in a credit institution.  

Whilst  this  option  at  first  sight  could  help  achieve  the  objective  of  having  competent 
Board  members,  it  seems  unduly  inflexible  and  difficult  to  put  in  place  in  practice.  In 
fact, credit institutions are very different throughout Member States and their size and the 
nature  of  their  activities  could  vary  enormously  form  a  big  investment  bank  to  a  small 
local  savings  bank.  It  seems  therefore  difficult  to  require  all  credit  institutions 
irrespective  of  their  size  and  the  nature  of  their  activity  to  have  Board  members  with 
identical skills. Either the criteria will be too high and impossible to meet for small banks 
which  will  be  unable  to  find  suitable  candidates  or  criteria  will  be  too  low  and 
inappropriate  for  sophisticated  credit  institutions.  In  addition,  excessive  emphasis  on 
specific  qualifications  (such  as  finance  or  risk  management  backgrounds  for  all  Board 
members)  could  lead  to  the  risk  of  "monoculture"  which  should  be  avoided.  This  sub-
option is therefore discarded. 

3.  b.  Require  the  creation  of  a  Nomination  Committee,  subject  to  proportionality.  This 
sub-option  entails  requiring  credit  institutions  to  create  a  nomination  committee 
composed of non-executive Board members that will advise the Board on the selection of 
suitable candidates for Board membership. The main purpose of such a committee is to 
ensure that there is a transparent appointment process which is not under the control of 
management  alone,  and  to  ensure  that  the  right  balance  of  skills  and  experience  is 
brought to the Board. For proportionality reasons, and to take account of different types 
of credit institutions, the size of their Boards and the complexity of their activities, this 
requirement  should  be  subject  to  exceptions  under  the  control  of  the  supervisory 
authority. There is currently no requirement to establish a nomination committee in the 
CRD. 

EN 

148 

   EN 

 
 
This  sub-option  was  suggested  by  many  respondents  to  the  public  consultation  who 
thought that such a committee is an efficient mechanism for examination of the selection 
and  appointment  practices  of  the  credit  institution  and  is  effective  to  evaluate  the 
cognitive capacity of each candidate to comply with his/her duties.  

This  sub-option  could  also  have  a  positive  impact  on  the  division  of  responsibilities 
within  financial  institutions.  As  Board  as  a  whole  would  not  necessarily  have  time  to 
examine in detail all the proposed candidates, a nomination committee would avoid over-
reliance on executives to assess the capacities of the candidates for Board membership, as 
is often the case in practice.  

According  to  the  responses  to  the  questionnaire  on  costs  sent  to  credit  institutions,  for 
credit institutions to set up a nomination committee, the additional annual costs would be 
between 8.000 and 15.000 euros per year, depending on how many times the nomination 
committee will meet. The related costs seem to be relatively low as compared to the time 
the whole Board would otherwise have to spend to search for the appropriate candidate. 
This  spared  time  would  be  reallocated  to  discuss  more  strategic  issues,  such  as  risk 
profile  and  risk  strategy.  Consequently,  this  sub-option  seems  to  be  proportionate  as 
compared to the underlying objective.  

4) Combination of different sub-options 

It  results  from  the  discussions  of  the  sub-options  that  a  combination  between  measures 
enhancing transparency, outcome-focused principles and more detailed rules establishing 
minimum standards is an appropriate combination. Each individual sub-option will not be 
sufficient to achieve the underlying objective of improved expertise on Boards. Different 
sub-options will be mutually reinforcing.  

Disclosure  of  recruitment  policies  (sub-option  1.a.)  will  inform  the  market  and  the 
supervisors, at limited costs to credit institutions, on the required and actual expertise of 
Board  members  and  allow  them  to  verify  that  this  expertise  is  adequate.  Therefore, 
supervision will be facilitated. 

The general principle that Boards should possess appropriate expertise (sub-option 2.a.) 
and  the  enhanced  "fit  and  proper"  test  with  minimum  criteria  (option  2.b.)  could  both 
effectively  achieve  the  underlying  objective.  The  two  sub-options  2.a.  and  2.b.  have 
similar  impacts  and  costs  but  sub-option  2.b.  seems  to  better  achieve  the  underlying 
objective,  provides  more  guidance  and  therefore  reduces  the  risk  of  different  practices, 
whilst still remains proportioned compared to sub-option 2.a. Therefore, sub-option 2.a. 
should be discarded and sub-option 2.b. will be the preferred option. This sub-option will 
be usefully complemented by induction and continuous training of Board members (sub-
option  2.c.)  which  will  help  to  achieve  the  adequate  level  of  skills  and  expertise.    In 
addition,  setting  a  Nomination  Committee  (sub-option  3.b.)  at  Board  level  will  help 
prepare  the  decisions  of  the  Board  as  regards  the  selection  of  candidates  for  Board 
membership and will ensure the independence of the selection process from management 
dominance. 

EN 

149 

   EN 

 
As a result, the following sub-options will be retained:  

Sub-option  1.a.  Disclosure  of  recruitment  policy  and  of  expertise  and  skills  of  Board 
members in the annual report. 

Sub-option  2.b.  Enhanced  "fit  and  proper"  test  for  Board  members  with  specific 
minimum  criteria  that  Board  members  must  possess  individually  and  collectively  with 
regard to appropriate skills and expertise on recruitment and on an ongoing basis, subject 
to supervisory review. 

Sub-option  2.c.  Require  appropriate  induction  and  continuous  training  of  Board 
members. 

Sub-option 3.b. Require the creation of a Nomination Committee, subject to exceptions. 

Table 2: Comparison of the sub-options (expertise of Board members)  

Effectiveness 

Impact 
supply 
candidates  

on 
of 

Flexibility 

Impact 
on 
level  playing 
field 

Enforceability 

Efficiency 

Sub-option 1a  + 

Sub-option 2a 

+ 

Sub-option 2b  ++ 

Sub-option 2c 

++ 

Sub-option 3a 

++ 

Sub-option 3b  + 

= 

- 

- 

= 

- 

= 

= 

++ 

- 

= 

-- 

- 

= 

= 

+ 

+ 

++ 

++ 

+ 

= 

++ 

+ 

++ 

++ 

+ 

- 

++ 

+ 

- 

+ 

Magnitude  of  impact  as  compared  with  the  baseline  scenario:  ++  strongly  positive;  +  positive;  –  – 
strongly negative; – negative; = marginal/neutral; ? uncertain; n.a. not applicable 

C)  

Counterbalancing management dominance 

1) Measures to improve transparency of corporate governance practices 

1. a. Disclosure of the existing practice in the credit institutions as regards independence 
of  Board  members.  As  mentioned  previously,  the  disclosure  of  existing  practice  is  a 
useful tool to inform market and supervisors of corporate governance practices but it is 
not  necessarily  sufficient  by  themselves.  Moreover,  what  is  an  independent  Board 
member is not easy to define. It is not enough that Boards are formally independent from 
management. To be able to effectively challenge management and reach an independent 
judgement,  Board  should  not  be  subject  in  practice  to  an  undue  influence  by  executive 
management.  Consequently,  it  seems  difficult  to  describe  in  an  annual  report  how  a 
Board member acts independent from management and to effectively monitor and verify 
such information. This sub-option should therefore be discarded.  

EN 

150 

   EN 

 
 
 
2) Principles-based, outcome-focused rules with high degree of flexibility 

2.  a.  Board  members  must  behave  independently  from  management.  Such  a  general 
principle could achieve its objective if effectively implemented in practice. However, it 
would be very difficult to monitor the correct implementation of such a principle. How 
Board members behave during Board meetings could be reflected in the minutes but how 
they  effectively  reach  their  decisions  and  whether  they  are  exempt  of  any  influence  of 
executives is impossible to objectively monitor. Consequently, this sub-option should be 
discarded.  

3) Strict rules with limited degree of flexibility 

3.  a.  Prohibit  cumulating  mandates  of  Chairman  and  Chief  Executive  Officer  (CEO)  in 
the  same  credit  institution,  subject  to  proportionality.  It  might  be  envisaged  to  prohibit 
cumulating the mandate of Chairman of the Board with a mandate of CEO in the same 
credit institution.  

Whilst most European governance codes124 suggest that CEO/Chairman separation is key 
for the maintenance of appropriate checks and balances within the institution, for the time 
being, in the majority of Member States, the law does not forbid appointing the chairman 
as CEO125. There is no such prohibition in the CRD either. 

A  majority  of  respondents  to  the  public  consultation  (75  out  of  140)  that  provided  an 
answer  to  the  relevant  question  favour  a  mandatory  prohibition  on  cumulating  the 
functions of Chairman and of CEO. In their view, the separation of the roles of CEO and 
Chairman reduces the power of the CEO and the potential for management to dominate 
the Board. Combining both functions disregards the divergence of duties and capacities 
and  concentrates  an  unwarranted  amount  of  power  and  dominance  in  the  hands  of  one 
person. Splitting the roles of Board chair and CEO promotes strong, independent Board 
leadership  and  operation.  Separating  the  roles  properly  reflects  the  differences  in  the 
positions  and  offers  a  better  balance  of  power  between  the  CEO  and  the  Board  than 
combining the positions. In addition, 26 respondents consider that the separation of both 
functions should be best practice on comply or explain basis to take account of specific 
situations. 

Therefore,  due  to  proportionality  considerations  and  taking  into  account  particular 
situations when cumulating both mandates would be necessary, this prohibition may be 
subject  to  exceptions  (certain  credit  institutions  may  cumulate  the  two  functions)  under 
the  control  of  supervisory  authorities.  The  results  of  the  public  consultation  show  that 
certain exceptions would be necessary to accommodate specific situations, especially for 

124 
125 

For example, in Spain, the Netherlands, Ireland, United Kingdom. 
Such  prohibition  exists  for  instance,  in  Austrian  and  German  laws  which  explicitly  require  the 
strict  separation  of  the  roles  of  the  management  Board  and  supervisory  Board.  In  France  the 
position of chairman is separated from the position of general manager in principle but the Board 
can  decide  to  give  the  two  functions  to  the  same  person.  In  other  countries,  such  as  Italy,  the 
Netherlands, United Kingdom, Greece, Spain and Portugal, such prohibition does not exist. 

EN 

151 

   EN 

 
                                                 
 
 
 
 
small financial institutions given the difficulty of securing top executive leadership and 
temporary cumulating of functions in particular circumstances..  

On  the  other  hand,  some  respondents  to  the  public  consultation  (26)  opposed  any 
prohibition  to  cumulate  both  functions.  They  considered  that  there  was  no  conclusive 
evidence  that  financial  institutions  where  the  functions  of  Chairman  and  CEO  were 
performed  by  different  individuals  performed  better  or  have  better  withstood  the  crisis 
than  those  financial  institutions  where  the  two  functions  were  performed  by  the  same 
person. It has also to be recognized that, when the CEO also serves as the chairman, in 
some cases his or her role-duality could provide unified firm leadership, build trust and 
stimulate the motivation to perform126. Also some of the respondents were of the opinion 
that  there  is  no  single  correct  method  of  structuring  the  leadership  of  a  bank  and 
cumulating the roles of chairman and chief executive officer may be the best solution, or 
simply unavoidable, for a particular bank. Moreover, there are policies, procedures, and 
internal controls that can be put in place at banks to avoid excessive domination of the 
governance  of  the  bank  by  the  dual  executive.  Also,  in  some  jurisdictions  and  in  some 
specific instances such separation is not advisable or even legally allowed. 

Nevertheless,  taking  into  account  the  particular  situation  of  credit  institutions  where 
executive management tends to adopt risky strategies in order to maximise profit, there is 
a  need  for  a  strong  control  by  the  Boards  of  the  executive  management  decisions  and 
hence  the  independence  of  the  Boards  members  from  management  influence.  The 
emerging  practice  in  Member  States  and  the  results  of  the  public  consultation  seem  to 
show  that,  for  credit  institutions,  separation  of  functions  of  Chairman  and  CEO  is 
desirable  and,  subject  to  some  exception,  should  be  mandated  by  law.  Most  European 
countries strongly recommend the separation of duty between the CEO and the chairman, 
and many make it mandatory. 

This  sub-option  should  have  a  strong  positive  impact  on  the  clear  division  of 
responsibilities.  This  sub-option  should  not  have  a  significant  impact  on  the  supply  of 
candidates  to  become  Board  members.  There  are  no  material  direct  compliance  costs 
associated with this option. 

3. b. Minimum number of non-executive directors. Whilst this sub-option seems at first 
sight to improve independence of Board oversight function, it seems to be too inflexible 
and does not take into account the different Board structures in Member States. While it 
could  make  sense  in  one-tier  structure,  it  does  not  make  sense  in  two-tier  structure  or 
mixed Boards with an independent supervisory Board. Furthermore, in a one-tier Board, 
the minimum number of non-executives will be too inflexible for small credit institutions 
with a limited number of Board members. Moreover, it is difficult to determine what the 
number  of  non-executives  should  be  as  compared  to  executives  present  on  Board.  This 
sub-option should therefore be discarded. 

126 

Muth,  M.  M.  and  Donaldson,  L.  Stewardship  Theory  and  Board  structure:  A  Contingency 
Approach, Corporate Governance An International Review, 1998, Vol 6, No1. 

EN 

152 

   EN 

 
                                                 
 
4) Combination of different sub-options 

It  results  form  the  discussion  of  the  different  sub-options  that,  whilst  less  flexible  than 
other sub-options, the most effective way to ensure the independence of the Board in its 
oversight function and which is most easy to monitor seems to separate the function of 
the Chairman and the CEO. As a result, the following sub-option will be retained:  

Sub-option 3.a. Prohibit cumulating mandates of Chairman and Chief Executive Officer 
(CEO) in the same credit institution 

Table 3: Comparison of sub-options (counterbalancing management dominance)  

Effectiveness 

Impact 
supply 
candidates  

on 
of 

Impact  on  clear 
division 
of 
responsibilities 

Flexibility 

on 

Impact 
level 
playing field 

Enforceability  Efficiency 

Sub-option 1a 

Sub-option 2a 

= 

= 

Sub-option 3a 

++ 

Sub-option 3b 

= 

= 

= 

= 

= 

= 

= 

++ 

= 

= 

= 

- 

-- 

= 

= 

++ 

+ 

= 

= 

++ 

+ 

n.a. 

n.a. 

++ 

n.a. 

Magnitude  of  impact  as  compared  with  the  baseline  scenario:  ++  strongly  positive;  +  positive;  –  – 
strongly negative; – negative; = marginal/neutral; ? uncertain; n.a. not applicable 

D)  

Diversity of Board composition 

1) Measures to improve transparency of corporate governance practices 

1.  a.  Disclosure  of  internal  policy  on  diversity  in  annual  report.  The  disclosure 
requirement could contain a requirement for credit institutions to disclose their diversity 
policy, objectives as to diversity and whether these objectives have been achieved. There 
is no such disclosure requirement in the CRD for the time being. 

The following information should be disclosed: age and gender balance, educational and 
professional  background  of  Board  members,  how  they  represent  different  regions  in  an 
international  group,  number  of  years  spent  in  foreign  countries  as  a  professional  or  a 
student, etc. 

The  benefit  of  transparency  with  regard  to  diversity  policy  is  that  it  allows  for  public 
insight and grows the perceived legitimacy of the actions of the credit institution which 
adopts a diversity policy and therefore the effectiveness of the efforts to address diversity 
challenges.  Credit  institutions  which  do  not  have  a  diversity  policy  or  do  not  make  the 
necessary  efforts  to  achieve  the  objectives  of  such  policy  should  be  subject  to  public 
criticism.  Therefore,  this  sub-option  should  encourage  credit  institutions  to  adopt 
ambitious diversity policies.  

EN 

153 

   EN 

 
 
 
 
This sub-option was favoured by some respondents to the public consultation (66) which 
considered that such a soft requirement would encourage diversity but in the same time 
would not impose specific choices to the credit institution.  

1.  b.  Benchmarking  of  different  practices.  Supervisory  authorities  could  be  required  to 
collect  information  on  the  diversity  policies  and  practices  in  the  different  credit 
institutions based on individual disclosures by credit institutions (see sub-option 1.a.) and 
to  assemble  (in  a  database)  and  disclose  this  information  at  national  level  annually.  In 
addition,  European  Banking  Authority  could  be  required  to  make  a  similar  disclosure 
annually at European level. There is no such requirement currently in the CRD. 

This sub-option was favoured by some respondents to the public consultation as a useful 
tool  to  promote  diversity  in  credit  institutions  as  such  a  "name  and  shame"  tool  would 
impact the reputation of credit institutions and give them an incentive to adopt ambitious 
diversity  policies.  Also,  benchmarking  provides  comparable  data  identifying  common 
standards  to  aspire  to  and  against  which  credit  institutions  can  assess  their  diversity 
policies. 

However, certain supervisors (ex: Belgium, Austria) in response to the questionnaire on 
costs commented that information on diversity in Boards is not relevant for supervisors as 
it is outside the scope of traditional prudential instruments.  

Nevertheless,  as  described  in  Part  3  of  the  impact  assessment,  Board  composition  and 
especially  the  lack  of  diversity,  could  have  an  impact  on  the  Board's  capacity  to 
effectively  challenge  management  decisions.  Therefore,  information  on  diversity  could 
be  a  useful  tool  for  supervisors  in  their  prudential  supervision  of  credit  institutions. 
Moreover, to encourage diversity at European level, EBA is the most suitable authority to 
benchmark the existing practices in different Member States and provide information to 
the public across Europe. 

It is estimated that the compliance cost associated with option 1.a. would be around € 600 
-  €  1,000  per  company 127,  whereas  compliance  with  option  1.b.  would  involve  some 
additional  costs  for  all  supervisory  authorities  involved.  The  additional  costs  for 
supervisors are related to the setting up of a data base (one-off cost) and the collection of 
data from all banks by copy-pasting the disclosures made in the annual reports (recurrent 
cost). The cost estimates for the one-off costs range from 1,600 € in Latvia to 191,000 € 
in Denmark. The cost estimates for the annual recurrent costs range from 600 € in Latvia 
to 130,000 in Germany.  

127 
Although  this  potential  sub-option  was  not  included  in  the  questionnaire,  the  cost  estimates 
provided  for  the  other  potential  measures  involving  a  similar  disclosure  requirement  in  the  annual  report 
can be used as an estimate. 

EN 

154 

   EN 

 
 
                                                 
Whilst  both  sub-options  1.a.  and  1.b.  to  improve  transparency  and  benchmarking 
exercises  are  useful  tools  to  inform  the  market  and  the  supervisors  of  corporate 
governance  practices  and  could  incentivise  credit  institutions  to  put  in  place  ambitious 
diversity  policies,  the  costs  related  to  option  1.b.  could  seem  to  be  rather  high  as 
compared  to  option  1.a.  However,  as  explained  above,  benchmarking  of  existing 
practices  complements  and  strengthens  transparency  requirements  as  such.  This 
additional  cost  could  be  mitigated  by  requiring  to  benchmark  different  policies  for  a 
limited  period  of  time  (e.g.  three-five  years),  until  credit  institutions  change  their 
practices  and  the  underlying  goal  in  achieved.  Therefore,  the  sub-option  2.b.  seems 
proportionate when comparing costs to the expected benefits.  

It could be argued that the two sub-options 1.a. and 1.b. could have a negative impact on 
the  pool  of  people  available  for  Board  membership,  and  possibly  on  the  objective  of 
Board  expertise  because  there  are  not  enough  experienced  women  or  men  from 
sufficiently  different  background  to  populate  the  Board  rooms  of  credit  institutions. 
However, as will be showed below (see sub-option 3.a.), there is evidence that, at least 
with  regard  gender  balance,  there  is  enough  qualified  women  which  cannot  not  for  the 
time being reach leading positions in companies. In addition, the disclosure requirements 
leave sufficient flexibility to credit institutions to justify why the targeted diversity could 
not be achieved. 

However,  as  already  mentioned  above,  the  sub-options  1.a.  and  1.b.  are  not  necessarily 
sufficient by themselves if not properly sanctioned by the market. To be really effective, 
they  need  to  be  accompanied  by  effective  monitoring  of  their  implementation  but  also 
other sub-options providing for more substantive requirements could be envisaged. 

2) Principles-based, outcome-focused rules with high degree of flexibility 

2. a. Diversity must be one of the criteria of Board composition. This sub-option includes 
diversity as one of the criteria which should be taken into account by the credit institution 
when selecting a Board candidate and by the supervisory authority when approving such 
a  candidate.  Diversity  meaning  age  and  gender  balance,  different  educational,  social, 
geographical and professional background. Currently, diversity does not form part of the 
criteria for selection of candidates for Board membership in the CRD.  

This option was favoured by many respondents to the public consultation (131) as putting 
diversity  criteria  at  the  same  level  as  expertise  and  integrity.  This  option  has  the 
advantage of being highly flexible leaving the method to achieve the underlying objective 
of more diverse Boards to credit institutions. However, such general principle might not 
achieve  its  objective  in  practice,  as  it  relies  in  the  first  place  on  the  appreciation  by  a 
credit institution of what is the appropriate diversity, on the trade-off between diversity 
and  expertise  and  makes  it  difficult  for  supervisory  authorities  to  monitor  the  effective 
implementation  of  this  principle.  It  could  be  subject  to  different  interpretations  and 
practices  by  credit  institutions  but  also  in  different  Member  States  by  different 
supervisory authorities and thus allow for regulatory arbitrage. Consequently, this general 
principle needs to be accompanied either by detailed guidelines coordinated at European 

EN 

155 

   EN 

 
level  by  EBA  or  by  other  sub-options  which  provide  for  more  strict  requirements  in 
European legislation. However, for the time being, draft EBA guidelines do not foresee 
any detailed guidance on this. 

It could be argued that this sub-option could have a negative impact on the pool of people 
available  for  Board  membership,  and  possibly  on  the  objective  of  Board  expertise 
because  there  are  not  enough  experienced  women  or  men  form  sufficiently  different 
background  to  populate  the  Board  rooms  of  credit  institutions.  However,  as  will  be 
showed  below  (see  sub-option  3.a.),  there  is  evidence  that,  at  least  with  regard  gender 
balance,  there  is  enough  qualified  women  which  cannot  not  for  the  time  being  reach 
leading positions in companies. In addition, the disclosure requirements leave sufficient 
flexibility to credit institutions to justify why the targeted diversity could not be achieved. 

There  should  be  no  direct  additional  costs  for  credit  institutions.  Therefore,  this  option 
seems to be proportionate as compared to expected benefits and will be retained. 

2. b. Requirement to establish a policy with regard to diversity. It could be required that 
credit  institutions  should  establish  a  policy  concerning  diversity  which  should  include 
requirements  for  the  Board  to  establish  measurable  objectives  and  targets  for  achieving 
diversity and to assess annually both the objectives and the progress in achieving them. 
Credit institutions may also be required to introduce appropriate procedures to ensure that 
the  policy  is  implemented  properly  and  an  internal  review  mechanism  to  assess  the 
effectiveness of the policy.  

According to the interviews conducted with credit institutions, increasingly large number 
of  credit  institutions  is  implementing  diversity  programs  with  particular  emphasis  on 
gender  diversity  but  also  on  other  aspects  of  diversity.  Many  respondents  to  the  public 
consultation think therefore that this trend should be encouraged. This sub-option seems 
thus to be a useful tool to promote diversity in Board composition of credit institutions, 
leaving a sufficient degree of flexibility to adjust the diversity policy to different types of 
companies.  

However,  the  effective  implementation  of  this  principle  relies  mainly  on  the  credit 
institution  itself  and  on  the  external  scrutiny  by  shareholders.  If  the  monitoring  of  the 
implementation  is  deficient  or  credit  institutions  do  not  derive  any  economic  or  other 
benefit  from  having  in  place  an  ambitious  diversity  policy,  this  sub-option  may  not  be 
sufficiently  effective  to  achieve  its  objective.  Consequently,  this  sub-option  could  be 
combined with other sub-options setting more strict requirements with regard to diversity. 

It could be argued that this sub-option could have a negative impact on the pool of people 
available  for  Board  membership,  and  possibly  on  the  objective  of  Board  expertise 
because  there  are  not  enough  experienced  women  or  men  form  sufficiently  different 
background  to  populate  the  Board  rooms  of  credit  institutions.  However,  as  will  be 
showed  below  (see  sub-option  3.a.),  there  is  evidence  that,  at  least  with  regard  gender 
balance,  there  is  enough  qualified  women  which  cannot  not  for  the  time  being  reach 
leading positions in companies. In addition, the disclosure requirements leave sufficient 

EN 

156 

   EN 

 
flexibility to credit institutions to justify why the targeted diversity could not be achieved. 
Consequently, this sub-option will be retained. 

There are no significant  direct costs linked to this option. Three could be indirect costs 
linked  to  internal  processes  and  the  recruitment  and  remuneration  of  HR  specialists  or 
head hunters that will search for required diversity as specified in the policy. But these 
costs  are  hard  to  estimate  and  will  vary  from  one  credit  institution  to  another.  Also,  to 
achieve  the  objective  of  diversity,  some  credit  institutions  may  increase  the  number  of 
Board  members.  This  could  lead  to  additional  costs  linked  to  the  need  to  remuneration 
additional directors. However, it is difficult to estimate the exact amount of this cost, as 
credit  institutions  may  also  choose  to  replace  existing  Board  members  to  achieve  the 
diversity objective. In any case, additional costs should not be significant as the average 
annual  remuneration  of  non-executive  directors  in  credit  institutions  is  estimated  at 
€77,000.  

3) Strict rules with limited degree of flexibility 

3.  a.  Put  in  place  a  quantitative  target  for  gender  balance.  It  could  be  possible  to  set  a 
quantitative target of a certain percentage of Board  members of each  gender that credit 
institutions need to achieve in a certain period of time. 

This  option  aims  at  harmonising  the  different  rules  recently  adopted  by  Member  Sates. 
The adoption of such a quantitative target mandating greater diversity was tested in some 
Member States.  In 2003, Norway made a decision to enact legislation requiring 40% of 
Board  membership  of  publicly  owned  companies  to  be  female  by  2007.  State  owned 
companies were already required to do this and successfully complied. Although Norway 
has  been  fairly  progressive  in  gender  equality,  the  corporate  Board  room  remained  a 
man’s  domain.  In  the  years  since  Norway  enacted  the  legislation,  the  percentage  of 
women on the Board of directors climbed from 6% to 40.3% in 2010128. Spain followed 
Norway’s lead and enacted similar legislation requiring the 40% quota in 2007. There are 
already  signs  of  progress:  the  percentage  of  women  on  the  Boards  of  Spain’s  largest 
listed companies has more than doubled, rising from 4% in 2006 to 10% in 2010129. 

In France, legislation was adopted in January 2011. It gives businesses six years to ensure 
that 40% of Boardroom positions are taken by women. Within three years French firms 
must ensure that a figure of 20% is reached. The legislation will apply to companies in 
France  which  are  either  listed,  have  more  than  500  employees  or  revenues  over  50 
million  euros.    Netherlands  are  in  process  of  enacting  similar  quota  laws  with  at  least 
30% of seats to be held by each gender and Belgium, Sweden and Italy are considering 
their  own  versions.  Germany  is  also  envisaging  measure  to  promote  gender  balance  on 
corporate Boards but is for the time being considering voluntary quotas only. 

128 
129 

Norway Central Bureau of Statistics, Focus On Gender Equality: Key Figures, 2010 
Commission database: women and men in decision-making.  

EN 

157 

   EN 

 
 
                                                 
The table below summarises different measures which exist in different Member States:  

Table 4: Quota laws in Member States 

Country  

Status and applicability  

Minimum representation and penalties  

Belgium  

Federal 
discussed in parliament yet 

law  proposal  prepared  but  not 

Min.  33%  women  on  Boards  of  listed 
companies by 2016  

France  

Quota  law  passed  in  2011  applicable  to 
listed  companies  and  companies  with  more 
than  500  employees  or  turnover/asset  of 
more 
than 
companies.  

total  2000 

€  50  mln; 

in 

Iceland 

Quota law was passed in 2010. Applicable to 
publicly  owned 
limited 
companies with more than 50 employees 

and  publicly 

Netherlands   Dec  2009  proposal  for  soft  targets  accepted 
in  parliament  applicable  to  companies  with 
more  than  250  employees.  Needs  to  be 
passed by senate (unsure) 

At  least  20%  women  on  Board  in  3  years  
and  40%  in  6  years  from  the  first  Annual 
Meeting since implementation of the law 

Non-compliance  brings  annulment  of 
nominations and deliberations of the Board 

40% of each gender per September 2013 

Target of min. 30% of each gender at both 
Board levels (executive and supervisory) 
per 2016.  

Norway 

Quota incorporated into Companies’ Law (in 
2003).  Applicable 
listed  companies 
to 
(approx.400),  inter-municipal,  state-owned, 
municipal and cooperative companies. 

Min. representation of each gender of 40% 
per 2008. 

Penalties:  warnings, 
delisting 

fines,  ultimately 

Spain  

Quota law.  Applicable to public companies 
with more than 250 employees and IBEX-35 

Representation  of 40% of each gender by 
2015 

If the goal is to accelerate the numbers of women on Boards in a short period of time, the 
figures mentioned above tend to show the effectiveness of legislated quotas in increasing 
the numbers of women directors.   

Regardless of whether the targeted percentage of women directors is reached in a given 
period of time, the evidence in Member States which have or will impose quotas seem to 
show that numbers tend to increase, and far more swiftly than in past years. The proposal 
of a quota will come with a great deal of press attention that will place the whole issue of 
women  on  corporate  Boards  in  the  public  discourse.  In  addition,  companies  that  worry 
about appearing discriminatory may accelerate their appointment of women directors as a 
consequence.  In  France  percentage  of  women  directors,  for  example,  was  only  6.4%  in 
2007 until the lead-up to the passage of its quota law in 2010. In 2010 France had 14.4% 

EN 

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of its Board directors being women, doubling its earlier numbers within three years, even 
though the legislation was not yet passed in the Senate. Quota legislation seems to be the 
therefore  an  effective  tool  to  accelerate  Board  diversity  and  reach  meaningful  levels  of 
women’s representation on companies’ Boards. 

One argument frequently used against a women quota on Boards is the lack of qualified 
women that would be detrimental to the quality of the Board. The need to achieve a quota 
would  not  allow  for  selection  of  the  best  candidate  but  would  privilege  the  female 
candidate  even  if  such  candidate  would  not  be  the  most  suitable  one.  However,  recent 
statistics  show  that  more  than  half  of  the  students  (59%)130  graduating  from  Europe’s 
higher educational institutes are women. Furthermore, in 2009, the Statistical Bureau of 
Norway showed that because of the high educational level among female members of the 
Board,  the  general  level  of  education  rose  in  the  Boardrooms.  Consequently,  women’s 
talents  are  currently  being  underutilized  at  decision-making  levels,  in  particular  at  top 
level. While women have a higher level of tertiary educational attainment than men in the 
EU,  their  professional  careers  do  not  fully  reflect  their  skill  levels,  which  is  a  waste  of 
human resources and competencies.  

However,  introducing  a  quantitative  target  for  gender  balance  in  Boars  of  credit 
institution could have some negative aspects. First, such a quota is not flexible and does 
not allow taking into account different nature of credit institutions. Second, introducing 
gender quotas for credit institutions would not be coherent with the more general strategy 
of  the  Commission  with  regard  to  gender  equality  which  forsees  a  two  step  approach, 
first encouraging self-regulation and then eventually imposing hard quotas if the results 
of this self-regulation do not prove sufficient.  

In addition, gender quotas would not cover other diversity aspects, such as geographical, 
educational  and  professional  backgrounds.  There  is  no  experience  in  Member  States  or 
studies that show what specific percentage should be desired for each diversity category 
in  a  Board  for  it  to  function  properly.  Implementation  of  such  a  quantitative  target  by 
credit institutions seems also to be difficult. Therefore, a more general out-come focused 
principle with regard to these diversity aspects is more appropriate.  

Regarding the cost impact of this option, depending on the way the individual financial 
institution chooses to ensure the implementation of the principle (whether they choose to 
replace existing Board members or recruit additional ones), there could be costs for the 
company  but  there  are  no  cost  estimates  available.  If,  to  satisfy  the  target,  the  credit 
institution  recruits  additional  Board  members,  this  will  entail  additional  costs  linked  to 
the  need  to  remuneration  these  new  Board  members.    If  one  Board  member  is  simply 
replaced  by  another,  this  will  not  entail  additional  costs.  In  any  case,  additional  costs 
should not be significant as the average annual remuneration of non-executive directors 
in credit institutions is estimated at €77,000. 

130 

See Eurostat Labour Force Survey, annual averages. 

EN 

159 

   EN 

 
                                                 
Other  costs  could  be  linked  to  internal  processes  or  the  recruitment  or  remuneration  of 
HR specialists or head hunters that will search for required diversity.   

3. b. Positive discrimination. In might be envisaged to require that in case of equivalent 
skills,  candidates  which  contribute  to  improve  gender  balance  should  be  privileged  as 
compared to other candidates. This option is more flexible that a quantitative target and at 
the  same  time  would  achieve  its  objective  if  effectively  implemented  by  credit 
institutions. However, it is very difficult to monitor the implementation of such principle: 
whereas it is possible for the supervisor to objectively see whether a proposed candidate 
for Board membership satisfies required criteria, it much more difficult to monitor why 
one  candidate  has  been  preferred  to  another.  The  selection  of  the  candidates  is  the 
primary responsibility of the credit institution and the selection process itself is subjective 
and difficult to monitor. This sub-option should therefore be discarded. 

3.c.  Increase  employee  participation  on  Boards.  This  sub-option  should  effectively 
contribute  to  increase  diversity  on  Boards  of  credit  institutions,  especially  with  regard 
gender diversity. According to German experience, where the employee representation on 
supervisory  boards  of  companies  is  mandatory,  the  percentage  of  women  among 
employee representatives is significantly higher than the percentage among shareholder-
elected  board  members.  For  instance,  in  2010,  two-thirds  of  women  on  the  supervisory 
boards of banks and savings institutions were appointed to those positions  as employee 
representatives under employee co-determination legislation131. 

However, this sub-option would increase the number of Board members, slowing down 
the  decision-making  process.  Also,  this  sub-option  would  touch  on  company  law  of 
Member  States  which,  for  the  time  being,  have  very  different  regimes  with  regard  to 
employee representation and different roles of trade unions.  

4) Combination of different sub-options 

It  results  from  the  discussions  of  the  sub-options  that  a  combination  between  measures 
enhancing transparency, outcome-focused principles and more detailed rules establishing 
minimum standards is an appropriate combination. Each sub-option will not be sufficient 
on  its  own  to  achieve  the  underlying  objective  of  improved  diversity  in  Board 
composition. Different sub-options will be mutually reinforcing.  

Disclosure  of  exiting  diversity  policies  (sub-option  1.a.)  will  allow  the  market  and 
supervisors  to  monitor  whether  credit  institutions  have  appropriate  and  ambitious 
diversity  targets  and  whether  they  have  been  implemented.  Benchmarking  of  existing 
practice  during  the  transitional  period  for  achievement  of  quantitative  targets  will 
encourage credit institutions to rapidly improve diversity on Boards. However, these sub-
options  will  not  be  sufficient.  They  should  be  complemented  by      principle-based  sub-
options  (sub-options  2a  and  2b)  on  diversity  policy  and  diversity  as  a  criteria  of  Board 

131 

German Institute for Economic Research, Weekly Report : A squandered opportunity: Even after 
the financial crisis, top positions in large financial firms still largely occupied by men, March 2011 

EN 

160 

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composition, which e are flexible enough  help avoid box-ticking and allow supervisors 
to ensure that credit institutions include diversity of views as one of the criteria of board 
composition, at the same level as time-commitment and expertise.  

As a result, the following sub-options will be retained:  

Sub-option 1.a. Disclosure of internal policy on diversity in annual report. 

Sub-option 1.b. Benchmarking of different practices 

Sub-option 2.a. Diversity must be one of the criteria of Board composition 

Sub-option 2.b. Requirement to establish a policy with regard to diversity 

Sub-option 3.a. Put in place a quantitative target for gender balance  

Table 5: Comparison of sub-options (diversity of Board composition)  

Impact 
supply 
candidates  

on 
of 

Flexibility 

Impact 
on 
level  playing 
field 

Effectiveness 

Enforceability 

Efficiency 

Sub-option 1a 

Sub-option 1b 

Sub-option 2a 

Sub-option 2b 

+ 

+ 

+ 

+ 

Sub-option 3a 

++ 

Sub-option 3b 

Sub-option 3c 

- 

+ 

= 

= 

= 

= 

= 

= 

= 

= 

= 

= 

- 

-- 

- 

-- 

= 

= 

= 

+ 

++ 

++ 

+ 

+ 

+ 

= 

+ 

++ 

= 

+ 

+ 

+ 

+ 

+ 

++ 

n.a. 

-- 

Magnitude  of  impact  as  compared  with  the  baseline  scenario:  ++  strongly  positive;  +  positive;  –  – 
strongly negative; – negative; = marginal/neutral; ? uncertain; n.a. not applicable 

Section 2:   Ownership by Board of risk strategy 

A) Measures to improve transparency of corporate governance practices 

1.  a.  Boards  must  produce  a  declaration  on  an  annual  basis  on  the  adequacy  of  risk 
management systems.  

The  Board  could  be  required  to  publish  a  declaration  on  an  annual  basis  providing 
assurance  to  different  stakeholders  that  the  risk  management  systems  put  in  place  are 

EN 

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adequate  with  regard  to  credit  institution's  activities  and  that  the  Board  ensures  the 
effective risk oversight.  

Such a declaration could explain to investors how members collectively have reviewed, 
challenged  and  approved  management’s  information  on  company  risk  and  risk 
management in light of the company's strategy. Boards could disclose in such declaration 
risk  oversight  challenges  that  may  have  emerged  over  the  reporting  period,  including 
action taken or planned to address them and how on an ongoing basis it seeks to improve 
risk oversight. It could also explain how and how often strategy, level of risk tolerances, 
and risk oversight are assessed by the Board in connection to each other; how and how 
often  the  suitability  of  the  capital  structure,  the  capital  allocation  process,  the  risk 
management  framework  and  the  risk  management  process  are  assessed  with  respect  to 
strategy  and  risk  tolerance;  how  and  how  often  the  structure  of  information  flow  and 
levels  of  decision  making  regarding  actively  taken  risks  are  assessed  with  regard  to 
effective risk oversight. 

For the time being, Boards are not required to produce such a declaration under the CRD. 
Draft  EBA  guidelines  do  not  provide  for  it  either.  Capital  Requirement  Directive  in 
Article  22  only  requires  credit  institutions  as  such  to  have  robust  governance 
arrangement, including effective processes to identify, manage, monitor and report risks. 
However,  the  division  of  responsibilities  within  credit  institutions  with  regard  to  which 
body is responsible for putting in place such arrangements is not clearly defined.  

Many respondents to the public  consultation  supported  the  view  that such a declaration 
on  the  adequacy  of  risk  management  systems  would  make  Boards  effectively  aware  of 
their  role  in  risk  oversight  and  give  a  powerful  tool  to  shareholders  and  supervisors  to 
take Boards accountable for putting in place adequate procedures to oversee risk in credit 
institutions. In order for the Board to be responsible for the risk oversight and effectively 
own  the  risk  strategy  of  the  credit  institution,  the  Board  should  take  ownership  of 
improving risk management in the organization.  

Therefore, this sub-option seems to have a strongly positive impact on clear division of 
responsibilities  within  credit  institutions  and  effectively  achieve  the  objective  of 
improving Board's oversight of risk.  

On the other hand, some respondents thought that although such a declaration could be 
useful, approval by Boards would not have any added value compared to already existing 
requirements  in  different  national  or  European  legislations  or  corporate  governance 
codes, or would be too formalistic and disproportionate. In particular, a majority of the 
respondents  were  opposed  to  a  Sarbanes  -  Oxley132  type  declaration  as  they  thought  it 
was too burdensome and also did not prevent the crisis in US. 

132 

The Sarbanes-Oxley Act adopted in 2002 in US makes reporting on internal controls mandatory 
for  SEC  registrants  and  their  independent  auditors.  Section  302  of  the  Act  entitled  "Corporate 

EN 

162 

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However,  the  present  sub-option  will  be  different  from  Sarbanes-Oxley  requirements 
where the declaration should be audited, which makes it very costly to companies. Also, 
Sarbanes-Oxley  declaration  has  to  be  approved  by  executives  and  not  by  the  Board, 
which could partly explain why it did not prevent the crisis in US.  

This sub-option could also have an indirect impact on the supply of candidates to become 
Board  members  due  to  a  possible  increase  in  the  accountability  of  Boards.  It  could  be 
argued that potential candidates would be discouraged from becoming Board members if 
they know they will be held accountable if adequate risk management structures are not 
in place. It could also be argued that to motivate potential candidates and compensate the 
increase in accountability, the Board members would ask to be paid more and this would 
entail additional cost for credit institutions.  

Nevertheless,  the  objective  to  improve  risk  oversight  by  Boards  underlying  this  sub-
option would be difficult to achieve without increased accountability of the Board which 
is the governing body of the credit institution finally responsible for the sustainability of 
the credit institution's activity before shareholders.  

Moreover, in most Member States, Board are collectively and not individually (except in 
certain particular circumstances) accountable before the shareholders. Consequently, the 
sub-option should not have an impact on the individual accountability of Board members.  
Thus, the negative impact on the supply of candidates for Board membership should be 
limited.  Therefore,  this  sub-option  seems  to  be  proportionate  with  regard  to  the 
underlying objective. 

Like the other measures that foresee a disclosure in the annual report the compliance cost 
can be estimated to between 600 and 1,000 € p.a. per legal unit. There may be additional 
costs related to the internal processes, the legal advice or audit review of the declaration. 
However, these costs are difficult to estimate. For further details, see Annex II.  

1. b. Boards must publish on an annual basis a risk statement which would consist of a 
short and clearly understandable report on the credit institution's approach to risk.  

The Board could be required to publish in the annual report or in a separate document a 
risk  statement  which  would  describe  the  credit  institution  approach  to  risk,  main  risks, 
strategy  for  delivering  the  objectives  and  how  this  strategy  is  consistent  with  risk 
appetite,  and  explain  the  basis  on  which  credit  institution  generates  or  preserves  value 
over longer term. This risk statement to fulfil its objective, should be succinct, highlight 

Responsibility for Financial Reports" establishes management responsibility for internal controls 
and requires management to evaluate the effectiveness of internal controls. Section 404 of the Act 
directs  the  SEC  to  adopt  rules  requiring  annual  reports  of  public  companies  to  include  an 
assessment, as of the end of the fiscal year, of the effectiveness of internal controls and procedures 
for financial reporting. Section 404 also requires the company's independent auditors to attest to 
and report on management's assessment. 

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major issues, distil key issues in a thematic way and should be updated in case of material 
changes.  

For the time being, credit institutions are already required to publish information on risk 
according  to  different  provisions  in  the  Capital  Requirements  Directive.  However,  as 
described in Part 3 of the impact assessment, this information is dispersed throughout the 
annual accounts, is very technical and difficult to find and analyse. It does not provide the 
shareholders  and  the  market  with  a  clear  picture  of  what  is  the  credit  institution's 
approach to risk, what the risk strategy is and how the current risk exposures are aligned 
with this risk strategy. 

A  formal  statement  of  risk  appetite  could  contribute  to  create  a  transparent  risk 
mechanism and allow stakeholders to take a more considered view of the Board’s pursuit 
of objectives that are for or against stakeholders’ interests. Risk appetite statements can 
serve as a clear and objective tool for ensuring accountability, ensuring that stakeholders’ 
interests are adequately reflected in Board decision-making. 

Half of the respondents to the public consultation, especially institutional investors, that 
provided  an  answer  to  the  relevant  question  expressed  very  strong  views  that  the 
disclosure of risk management needs to be enhanced. They think that a short and clearly 
understandable  report  informing  shareholders  on  risk  exposures,  risk  strategy  and 
tolerance  would  help  investors  to  form  a  comprehensive  view  of  risk  appetite  of  the 
financial institution, if it would not become a boiler plate declaration. In their opinion, it 
would also contribute to raise Board's awareness of risk issues. In particular, the dynamic 
nature of risk management needs to be captured more effectively: where significant risks 
have  changed  over  the  reporting  period,  this  should  be  disclosed,  along  with  an 
explanation as to why. There also needs to be more effective disclosure of management 
and Board actions to manage and mitigate risks on a dynamic basis.  

Other  respondents  (mainly  financial  services  industry)  who  are  against  putting  in  place 
such  risk  statement  think  that  existing  European  legislation  on  credit  institutions  and 
insurance  companies  already  requires  financial  institutions  to  disclose  sufficient 
information  on  risk.  Furthermore,  French,  German  and  UK  respondents  indicated  that 
their  national  legislation  or  corporate  governance  codes  require  extensive  risk 
disclosures. However, this sub-option would not require additional information on risk to 
that  already  required  under  existing  legislation,  but  improves  the  presentation  of  this 
information  to  the  public  which  could  easily  for  a  view  of  main  risk  exposures  of  the 
credit institutions, which are now dispersed throughout the annual report. 

As  a  response  to  the  questionnaire  on  compliance  costs  an  Italian  bank  states  that  the 
information that would need to be included in the statement is already contained in other 
documents which the Board of Directors is responsible for, and on that basis assumes a 
cost of 2/3 man-days (between € 400 and € 600
) to collect and organize this information 
in  the  Annual  Report.  Based  on  general  knowledge  on  measurement  of  administrative 
burdens  the  Danish  Commerce  and  Companies  Agency  on  the  other  hand  estimate  the 
compliance costs to be around 4,300 € per comp any and explains that compliance with 

EN 

164 

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any  requirement  on  information  to  be  disclosed  in  the  Annual  Report  would  involve  a 
substantial  amount  of  time  consumption  because  the  information  normally  needs  to  be 
approved on several levels. The costs can also be higher if the risk statement is subject to 
external audit. 

However,  this  sub-option  leaves  to  the  credit  institution  the  choice  of  appropriate 
document to publish the risk statement. If the risk statement in the annual report is subject 
to  statutory  audit  under  the  national  law,  n  that  case  credit  institution  could  decide  to 
publish the risk statement as a separate document, avoiding costs linked to the external 
audit.  

This sub-option seems therefore to be proportionate to the underlying objective. 

2) Principles-based, outcome-focused rules with high degree of flexibility 

2. a. Board must determine or approve the risk profile and strategy and any changes.  

In  order  to  effectively  oversee  risk  in  a  credit  institution,  Boards  should  be  able  to 
directly  influence  its  risk  profile.  This  involves  making  key  decisions  such  as  setting 
boundaries outside which the management is not permitted to operate.  

However, Capital Requirements Directive already contains a provision that "management 
body (Board) shall approve and periodically review the strategies and policies for taking 
up,  managing  monitoring  and  mitigating  the  risks  the  credit  institution  is  or  might  be 
exposed to". This option should therefore be discarded and superfluous.  

3) Strict rules with limited degree of flexibility 

3. a. Board must approve new financial products.  

Board could be required to put in place the new product approval process and scrutinise 
product  development  and  new  business  activity  irrespective  of  the  size  of  the  capital 
commitments entailed, in order to identify risks from a forward looking perspective and 
ensure  that  the  risks  involved  are  consistent  with  the  risk  appetite  and  strategy  of  the 
financial institution.  

Such  product  approval  process  is  not  for  the  time  being  required  by  the  Capital 
Requirements  Directive  nor  is  it  the  case  in  practice.  The  results  of  the  public 
consultation show that a systematic approval by the Board of all new products would be 
disproportionate, as it would entail involvement of Boards in operational issues, which is 
the  responsibility  of  executive  management.  On  the  other  hand,  Board  could  approve 
products that have a significant impact on the strategy and the risk profile of the financial 
institution,  as  it  would  be  part  of  global  risk  strategy.  Therefore,  this  sub-option  seems 
superfluous with regard to the sub-option 2.a requiring Boards to approve risk profile and 
strategy  of  the  credit  institution  and  any  subsequent  changes.  It  should  therefore  be 
discarded. 

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4) Combination of different sub-options 

It  results  from  the  discussions  of  the  sub-options  that  only  measures  enhancing 
transparency  (sub-options  1and  1b)  will  effectively  achieve  the  underlying  objective. 
Whilst  sub-option  1a  could  entail  additional  administrative  burden,  it  seems  to  be  still 
proportionate and efficient. As a result, the following sub-options will be retained:  

Sub-option 1.a. Boards must produce a declaration on an annual basis on the adequacy 
of risk management systems 

Sub-option  1.b.  Boards  must  publish  on  an  annual  basis  a  risk  statement  which  would 
consist of a short and clearly understandable report on the credit institution's approach to 
risk 

Table 6: Comparison of the sub-options (Board ownership of risk strategy)  

Effectiveness 

Impact 
supply 
candidates  

on 
of 

Impact 
on 
clear  division 
of 
responsibilities 

Flexibility 

Impact 
on 
level  playing 
field 

Enforceability  Efficiency 

Sub-option 1a  ++ 

Sub-option 1b  ++ 

Sub-option 2a 

= 

Sub-option 3a 

++ 

= 

= 

= 

= 

++ 

++ 

= 

- 

- 

- 

= 

-- 

+ 

+ 

= 

++ 

++ 

++ 

= 

+ 

+ 

+ 

n.a. 

n.a. 

Magnitude  of  impact  as  compared  with  the  baseline  scenario:  ++  strongly  positive;  +  positive;  –  – 
strongly negative; – negative; = marginal/neutral; ? uncertain; n.a. not applicable 

Section 3: 

Time devoted by Boards to risk issues 

1) Measures to improve transparency of corporate governance practices 

1. a. Credit institution must disclose its policy and practice with regard to discussion and 
analysis of risk issues during Board meetings.  It could be envisaged to require the credit 
institution to disclose whether it has set up a standalone risk committee to deal with risk 
issues and/or how much time it devotes to discussing risk in Board meetings. There is no 
such disclosure requirement for the time being in CRD. 

This  sub-option  could  incentivise  credit  institutions  to  devote  sufficient  time  to 
discussion of risk matters as the public disclosure allows  for benchmarking of  different 
practices in different credit institutions and to have a public insight on whether a Board of 
a credit institution devotes enough time discussing risk as compared to its peers. 

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However,  as  already  mentioned  previously,  transparency  of  existing  practices  relies  on 
market discipline and could be a useful tool to inform the market and the supervisors of 
the  credit  institutions  practices.  But,  in  the  absence  of  effective  monitoring  and 
sanctioning by the market, it would not be sufficient on its own to improve time devoted 
by  Boards  to  risk.  Consequently,  it  seems  appropriate  to  combine  enhanced  disclosure 
with more stringent requirements and improved supervisory review. 

Like the other measures that foresee a disclosure in the annual report the compliance cost 
can be estimated to between 600 and 1,000 € p.a. per legal unit. 

2) Principles-based, outcome-focused rules with high degree of flexibility 

2. a. Board must devote sufficient time to risk issues.  

Currently,  there  is  not  requirement  in  CRD  that  Board  should  devote  sufficient  time  to 
discuss and analyse risk strategy. However, this sub-option could be effective to achieve 
the underlying objective if correctly implemented by credit institutions and would avoid 
box-ticking  exercise.  But  such  general  principle  could  be  subject  to  different 
interpretations and practices by credit institutions but also in different Member States by 
supervisory authorities and thus allow for regulatory arbitrage.  

It could entail costs for supervisors which will need to examine practices in each specific 
financial  institution  to  monitor  whether  each  the  Board  of  each  financial  institutions 
devotes sufficient time to examine risk issues. There should be no direct costs for credit 
institutions. 

Consequently,  this  general  principle  needs  to  be  accompanied  by  detailed  guidelines 
coordinated  at  European  level.  However,  other  sub-options  setting  more  detailed 
requirements in European legislation could also usefully complement this sub-option. 

3) Strict rules with limited degree of flexibility 

3.  a.  Mandatory  risk  committee  at  Board  level,  subject  to  exceptions.  It  could  be 
envisaged  to  require  credit  institutions  to  set  up  a  mandatory  risk  committee  at  Board 
level. 

For the time being, there is no legal requirement in the Capital Requirements Directive 
requirement to have a risk committee in credit institutions. However, whilst there is no 
‘one  size  fits  all’  approach  to  risk  management,  and  the  methods  by  which  a  company 
may choose to assess, manage, and provide oversight of its risks can differ from company 
to company, an emerging trend among credit institutions has been the formation of stand-
alone risk committees of the Board of directors133. Revised Basel Principles recommend 
the establishment of a risk committee at Board level, in order to increase efficiency and 
allow deeper focus on risk issues.  

133 

This results form the interviews conducted by the Commission with credit institutions. 

EN 

167 

   EN 

 
                                                 
Also, the majority of respondents to the public consultation (81 out of 141) that provided 
an  answer  to  this  question  think  that  separate  risk  committees  are  good  practice, 
especially  for  large,  systemically  important  financial  institutions.  It  could  be  therefore 
required  that  each  credit  institution  puts  in  place  a  self-standing  risk  committee  which 
will advise the whole Board on risk issues.  

Such  a  requirement  seems  to  effectively  meet  the  objective  of  improving  the  time 
devoted by Boards to discuss risk issues and therefore to the improved understanding of 
main risk exposures of the credit institution. Risk management will become the primary 
agenda  focus  of  the  committee,  not  simply  another  topic  on  the  list.  This  approach  is 
particularly important for credit institutions with complex risk management issues. Also, 
it will help maintaining a continuous view of risks. The nature of the credit institution's 
risk exposures frequently changes over time. Having a continuous risk dialogue can help 
the Board better understand subtle changes to the risk profile, as well as help the Board 
better identify emerging risks and risks that may be inherent in new or existing operations 

In addition, a stand-alone risk committee could provide other important benefits134: 

-  Setting  the  tone  on  the  top  for  a  corporate  culture  of  risk  management.  Creation  of  a 
stand-alone  risk  committee  can  help  inform  both  investors  and  supervisory  authorities 
that the credit institution is serious about risk management issues.  

-  Additional  expertise  in  managing  risks.  If  there  is  a  body  for  which  the  sole  focus  is 
risk, that body may be able to come to a more nuanced understanding of the operational 
and other risks facing the company and develop specific risk management expertise.  

- Improving communication processes regarding risks. A risk committee can serve as a 
singular unit to which management can report risk-taking activity and the emergence of 
new risks on a regular basis. In addition, the members of the committee can serve as an 
effective liaison between the company’s risk management coordinators and the Board as 
a whole.  

However,  this  sub-option  could  have  some  negative  impacts.  According  to  some 
respondents to the pubic consultation which were opposed to mandatory risk committees, 
some  organizations,  especially  those  with  smaller  Boards,  may  find  that  their  Board 
members  are  already  strained  for  time.  Adding  one  more  committee  means  that  the 
company will need to assign Board members to serve on that committee, which might not 
be  feasible  for  companies  whose  Board  members  are  already  serving  on  multiple 
committees.  However,  this  concern  may  be  mitigated  by  the  proportionality  principle 
which  allows  smaller  credit  institutions  not  to  establish  a  stand-alone  risk  committee 
under the control of supervisory authorities.  

134 

See,  for  instance,  John  C.  Partigan  and  Daniel  McAvoy,  The  role  and  construction  of  risk 
committees, August 2010  

EN 

168 

   EN 

 
                                                 
 
Also,  typically,  credit  institutions  will  pay  Board  members  for  attendance  at  Board  and 
committee  meetings.  An  additional  committee  and  committee  chair  means  additional 
compensation  to  the  Board  members  serving  on  that  committee.  This  would  entail 
additional costs for credit institutions.  

In  addition,  even  if  the  Board  establishes  a  stand-alone  risk  committee,  the  committee 
may  not  be  able  to  effectively  provide  oversight  of  enterprise  risks  if  processes  are  not 
put  in  place  to  ensure  that  the  committee  is  informed  of  risky  activities  and  other 
corporate  risks. Lines of  communication would  need to be established between the risk 
committee, the Board of directors as a whole, and the other committees of the Board to 
ensure that those other bodies are able to incorporate the analysis of the company’s risks 
into the performance of their duties.  This also could entail additional costs. 

It can be assumed that the additional annual costs for those institutions that do not already 
have a risk committee, all costs would be around the same as for setting up a nomination 
committee, i.e. between 8,000 and 15,000 € per year, depending on how many times the 
risk  committee  will  meet.  These  costs  seem  to  be  relatively  low  and  therefore 
proportionate  to  the  underlying  objective.  As  regards  smaller  credit  institutions,  these 
costs  will  be  mitigated  by  the  application  of  the  proportionality  principle,  as  described 
above. 

Finally, there could be a potential for the risk committee to duplicate duties of the audit 
committee and compensation committee where these committees exist. However, this can 
be  mitigated  by  a  well  defined  role  and  responsibilities  of  risk  committee  in  the 
legislation or in terms of reference of the risk committee itself.  

Consequently, this sub-option seems to be proportionate with the regard to the underlying 
objective. 

3.  b.  Minimum  time  that  Board  must  be  spend  to  discuss  risk  issues.  This  sub-option 
means that the number of days per year that Boards must spend discussing risk issues will 
be specified.  

At  first  sight,  this  option  seems  to  effectively  contribute  to  achieving  the  objective  to 
improve  time  devoted  by  Boards  to  risk  issues.  However,  such  measure  would  be 
disproportionate and difficult to put in place in practice as the minimum number of days 
necessary to fully cover all risk matters will vary enormously according to different types 
of  credit  institutions.  Also,  such  a  minimum  requirement  could  result  in  a  box-ticking 
approach  which  at  the  end  will  be  contrary  to  the  objective  of  the  Board  spending 
sufficient time on risk issues according to the needs of a specific credit institution. This 
option should therefore be discarded. 

4) Combination of different sub-options 

It  results  from  the  discussions  of  the  sub-options  that  a  combination  between  measures 
enhancing transparency, outcome-focused principles and more detailed rules establishing 
minimum standards is an appropriate combination. Each individual sub-option will not on 

EN 

169 

   EN 

 
itself  be  sufficient  to  achieve  improved  risk  oversight  by  Boards.  Different  sub-options 
will be mutually reinforcing.  

Disclosure of existing practice with regard to time devoted by Boards to risk (sub-option 
1a) will help supervisors to easily evaluate whether the Boards devote sufficient time to 
risk  issues  at  limited  costs  for  credit  institutions.  Supervisory  review  will  thus  be 
facilitated. Mandatory risk committee at Board level (sub-option 3a), whilst less flexible 
than  other  sub-options,  is  the  most  effective  to  achieve  the  underlying  objective. 
However, in order to avoid box-ticking, the sub-option 3a will be usefully complemented 
by the general principle that Board devote sufficient time to risk issues, even when there 
is a stand-alone risk committee at Board level.  

As a result, the following sub-options will be retained:  

Sub-option 1.a. Require credit institution to disclose its policy and practice with regard 
to discussion and analysis of risk issues during Board meetings. 

Sub-option 2.a. Set up a general requirement for Boards to devote sufficient time to risk 
issues, subject to supervisory review. 

Sub-option  3.a.  Mandatory  risk  committee  at  Board  level,  subject  to  exceptions  under 
the control of supervisory authorities 

Table  7:  Comparison  of  the  sub-options  (time  devoted  by  Boards  to  consideration  of  risk 
issues)  

Effectiveness 

Impact 
supply 
candidates  

on 
of 

Impact on clear 
of 
division 
responsibilities 

Flexibility 

Impact 
on 
level  playing 
field 

Enforceability  Efficiency 

Sub-option 1a  + 

Sub-option 2a  + 

Sub-option 3a  ++ 

= 

= 

= 

Sub-option 3b 

= 

n.a. 

= 

++ 

++ 

n.a. 

= 

= 

- 

-- 

= 

= 

++ 

= 

++ 

++ 

++ 

= 

+ 

+ 

++ 

n.a. 

Magnitude  of  impact  as  compared  with  the  baseline  scenario:  ++  strongly  positive;  +  positive;  –  – 
strongly negative; – negative; = marginal/neutral; ? uncertain; n.a. not applicable 

Section 4.  

Information on risk 

1) Measures to improve transparency of corporate governance practices 

EN 

170 

   EN 

 
 
 
 
 
1.  a.  Require  credit  institution  to  disclose  its  policy  and  practice  with  regard  to  the 
information flow on risk to the Board. 

This  sub-option  could  incentivise  credit  institutions  to  put  in  place  timely  and  accurate 
information flows on risk to the Board as the public disclosure allows for benchmarking 
of  different  practices  in  different  credit  institutions  and  for  having  a  public  insight  on 
whether a Board of a credit institution is sufficiently informed on risk issues as compared 
to its peers.  

However,  as  already  mentioned  previously,  transparency  of  existing  practices  relies  on 
market discipline and could be a useful tool to inform the market and the supervisors of 
the  credit  institutions  practices.  But,  in  the  absence  of  effective  monitoring  and 
sanctioning by the market, it would not be sufficient on its own to improve time devoted 
by  Boards  to  risk.  Consequently,  it  seems  appropriate  to  combine  enhanced  disclosure 
other sub-options with substantive requirements and improved supervisory review. 

It  is  estimated  that  this  sub-option  would  entail  no  or  very  small  additional  costs  for 
financial institutions. 

2) Principles-based, outcome-focused rules with high degree of flexibility 

2.  a.  Board  must  determine  the  content,  format  and  frequency  of  risk  information  it 
should receive from management to perform its risk oversight function. 

Accurate and timely information are important features as they allow Board members to 
incorporate  insightful  information  in  making  decisions.  If  the  Board  has  incomplete  or 
inaccurate  information,  its  decisions  may  magnify  risks  rather  than  mitigate  them. 
However,  currently  there  is  no  general  requirement  in  CRD  regarding  the  type  and 
timeliness of information to be provided to Boards.  

As described in Part 3 of the impact assessment, for the time being either Boards do not 
receive  sufficient  information  on  risk  or  they  receive  to  much  information  they  are  not 
able to analyse for Board meetings. 

Serious  consideration  should  therefore  be  given  by  the  Board  to  instituting  periodic 
reviews of the amount and quality of information the Board receives or should receive.  

All  respondents  to  the  public  consultation  that  provided  an  answer  to  the  relevant 
questions agree that the Board needs to receive timely and accurate information on risk  
and  that  correctly  identifying  the  type  of  information  the  Board  requires  to  adequately 
fulfil its duties and the capacity of the Board to understand the information provided to it 
are crucial.  

Information protocols within a company should allow for and anticipate the continually 
changing landscape in which credit institutions operate. Therefore, Boards should obtain 
assurance from management that the risk information provided to the Board is complete 
and  reliable  with  regard  to  identified  risks  and  that  the  management  has  undertaken  all 

EN 

171 

   EN 

 
reasonable endeavours to identify all material risks. To be truly effective, risk reporting 
to the Board requires careful design in order to ensure all relevant risks are conveyed in a 
concise and meaningful manner. 

This  sub-option  is  flexible  enough  to  allow  credit  institutions  to  adapt  the  information 
flow to the Board depending on the nature of its activities and its own particular needs. 
At the same time it makes the Board think about the information it needs and to ask for 
this  information.  Consequently,  it  seems  to  be  affective  to  achieve  the  underlying 
objective  be  objective  to  improve  information  of  the  Board  on  risk  and  at  the  end  risk 
oversight by Boards.  

Whilst it could result in different practices in credit institutions, such flexibility is crucial 
to  allow  Boards  to  adapt  the  information  they  receive  to  their  particular  needs.  What 
matters in this case, is the final outcome and not the process.  

This  sub-option  will  not  entail  significant  costs  for  credit  institutions  and  is  therefore 
proportionate with regard to the underlying objective. 

2.  b.  Risk  management  function  must  be  able  to  report  directly  to  the  Board  or  risk 
committee if necessary, independent from management. 

For the time being, there is no provision in the Capital Requirements Directive explicitly 
allowing  for  such  a  practice.  Direct  reporting  of  the  CRO  to  the  Board  exists  in  some 
credit institutions but not in others.  

This  sub-option  would  implement  at  European  level  the  revised  Basel  Principles 
recommendation that while the Chief Risk Officer (CRO) may report to the CEO or other 
senior management, the CRO should also report and have direct access to the Board and 
its risk committee without impediment.  

The majority of respondents to the public consultation consider that the chief risk officer 
should  be  able  to  report  directly  to  the  Board  or  to  the  risk  committee  in  order  to  alert 
boar  on  any  risk  issues  it  thinks  appropriate  and  which  were  not  reported  upon  by 
management.  This  mechanism  could  not  only  serve  as  an  important  way  to  inform  the 
Board on some specific issues, it will also incentivise management to provide Board with 
accurate information. In addition, it would help to achieve another objective of improved 
status, authority and independence of the risk management function. 

However,  some  respondents  from  jurisdictions  with  mandatory  two-tier  boards  indicate 
that in their system only the management board has the competence to report directly to 
the supervisory board, not the chief risk officer who can report to the management board 
only.  This  concern  could  be  mitigated  by  the  fact  that  direct  reporting  to  the  Board  by 
CRO  should  not  be  a  common  reporting  procedure  but  should  only  take  place  in 
exceptional  circumstances.  There  is  sufficient  flexibility  to  Member  States  to  adapt  the 
sub-option to their national Board structures. 

There should be no significant costs for credit institutions associated with this sub-option. 

EN 

172 

   EN 

 
This  sub-option  seems  therefore  to  effectively  achieve  the  underlying  objective  and  be 
proportionate. 

3) Strict rules with limited degree of flexibility 

3.  a.  Specific  structures  and  formats  for  information  flows  to  the  Board  and  specific 
escalation procedures 

It could be envisaged to require credit institutions to put in place specific procedures for 
information flows on risk as well as specific templates and formats for such information.  

Whilst  this  sub-option  seems  form  the  first  sight  likely  to  achieve  the  underlying 
objective  of  improving  information  flows  to  the  Board,  it  is  too  inflexible  and 
disproportionate as compared to the expected benefits. It would entail additional costs to 
put  in  place  all  required  minimum  procedures  and  templates  whilst  not  necessarily 
proving  more  adequate  information  to  the  Board  as  a  result,  given  the  very  different 
natures  of  risks  in  different  financial  institutions.  This  option  should  therefore  be 
discarded. 

4) Combination of different sub-options 

It  results  from  the  discussions  of  the  sub-options  that  a  combination  between  measures 
enhancing  transparency  and  outcome-focused  principles  is  an  appropriate  combination. 
Each sub-option taken alone will not be sufficient to improve information flow to Boards 
on risk. Different sub-options will be mutually reinforcing.  

Disclosure of the exiting policy (sub-option 1a) will help supervisors, at limited costs to 
credit  institutions,  to  easily  check  what  kind  of  information  Board  receives  and  on  the 
timeliness of that information and asses whether this information flow is adequate. This 
reduces  costs  for  the  supervision.  Requiring  specific  templates  and  procedures  for  the 
information flow seems unduly inflexible and will not necessarily be effective. However, 
general principles that Board must determine the content of the information (sub-option 
2a), and that the risk management function should be ale to report directly to the Board 
(sub-option  2b)  seem  to  be  effective,  flexible  and  efficient  in  order  to  achieve  the 
underlying objective.   

As a result, the following sub-options will be retained:  

Sub-option 1.a. Require credit institution to disclose its policy and practice with regard 
to the information flow on risk to the Board. 

Sub-option  2.a.  Board  must  determine  the  content,  format  and  frequency  of  risk 
information it should receive from management to perform its risk oversight function 

Sub-option 2.b. Risk management function must be able to report directly to the Board 
or risk committee if necessary, independent from management 

EN 

173 

   EN 

 
Table 8: Comparison of the sub-options (information flow to Board on risk)  

Effectiveness 

Impact on clear 
division 
of 
responsibilities 

Flexibility 

Impact 
on 
level  playing 
field 

Enforceability 

Efficiency 

Sub-option 1a 

+ 

Sub-option 2a 

++ 

Sub-option 2b 

++ 

= 

+ 

= 

Sub-option 3a 

= 

n.a. 

= 

= 

- 

-- 

= 

+ 

+ 

++ 

+ 

+ 

++ 

++ 

+ 

+ 

++ 

- 

Magnitude  of  impact  as  compared  with  the  baseline  scenario:  ++  strongly  positive;  +  positive;  –  – 
strongly negative; – negative; = marginal/neutral; ? uncertain; n.a. not applicable 

II. 

OPTIONS TO IMPROVE THE STANDING OF THE RISK MANAGEMENT FUNCTION 

To establish a risk culture in credit institutions, in addition to improved oversight of risk 
by Boards, the following options could be envisaged:   

1) Measures to improve transparency of corporate governance practices 

1.  a.  Credit  institution  must  disclose  in  the  annual  report  its  policy  with  regard  to  the 
standing and authority of risk management function.  

This option could incentivise credit institutions to give the appropriate status to the risk 
management function as public disclosure allows for benchmarking of different practices 
in  different  credit  institutions  and  for  having  a  public  insight  on  whether  a  credit 
institution gives sufficient independence and authority to its risk management function as 
compared to its peers.   

However,  as  already  mentioned  previously,  transparency  of  existing  practices  relies  on 
market  discipline  and,  whilst  it  could  be  a  useful  tool  to  inform  the  market  and  the 
supervisors of the credit institutions practices, in the absence of effective monitoring and 
sanctioning by the market, it would not be sufficient on its own to achieve the underlying 
objective. Consequently, it seems appropriate to combine enhanced disclosure with other 
sub-options establishing more detailed requirements and an improved supervisory review. 

Like the other measures that foresee a disclosure in the annual report the compliance cost 
can be estimated to between 600 and 1,000 € p.a. per legal unit. 

2) Principles-based, outcome-focused rules with high degree of flexibility  

2. a.  Head of risk management function must have an appropriate status and authority to 
influence risk strategy and risk-relevant management decisions. 

EN 

174 

   EN 

 
 
 
 
Many  credit  institutions  recognise  the  benefits  of  centralizing  the  risk  management 
function within an organization and giving a Chief Risk Officer (CRO) a prominent role 
in the company.  

All  respondents  to  the  public  consultation  that  provided  an  answer  to  the  relevant 
question (think that the CRO should be a catalyst for change in risk-related behaviours. 
They  also  agree  that  CRO  should  have  high  status  and  authority,  be  independent  from 
operational and business units and have close relationship with the Board. 

This  sub-option  will  implement  the  revised  Basel  Principles  recommendation  that  the 
CRO should have sufficient stature, authority and seniority within the organisation which 
will typically be reflected in the ability of the CRO to influence decisions that affect the 
bank’s exposure to risk. Currently, there is no provision in CRD regarding the stature of 
the head of the risk management function. 

This  sub-option  seems  likely  to  achieve  the  underlying  objective  of  improving  the 
standing  of  the  risk  management  function.  It  could  also  have  other  benefits,  such  as 
motivating talented staff to join the risk management function and to retain the existing 
staff  once  they  have  earned  in  experience  and  expertise.  It  has  been  showed  that  often 
risk  management  was  not  seen  as  prestigious  enough  and  operational  and  trading  units 
drained staff form risk management units. 

At  the  same  time,  this  sub-option  is  flexible  enough  to  allow  credit  institutions  to 
determine the appropriate position of the CRO according to their size and the nature of 
their activities. However, it could lead to different practices in different credit institutions 
and  in  different  Member  States.  It  could  also  be  difficult  for  supervisors  to  monitor 
whether in a specific credit institution CRO has the sufficient standing and authority. It 
seems  appropriate  therefore  to  accompany  this  sub-option  by  other  sub-options  with  a 
more detailed requirements. 

It  is  estimated  that  this  sub-option  would  entail  no  or  very  small  additional  costs  for 
financial institutions. 

3) Strict rules with limited degree of flexibility 

3. a. Credit institution should have a risk management function or equivalent, which must 
have  an  appropriate  status  and  authority  and  be  independent  from  the  operational  and 
business units. 

This sub-option would implement the revised Basel Principles recommendation that the 
risk management function should have sufficient stature within the bank such that issues 
raised  by  risk  managers  receive  the  necessary  attention  from  the  Board,  senior 
management  and  business  lines  and  should  be  sufficiently  independent  of  the  business 
units whose activities and exposures it reviews. 

For  the  time  being,  the  Capital  Requirements  Directive  provides  only  that  arrangement 
should  be  defined  concerning  the  segregation  of  duties  in  the  organisation  and  the 

EN 

175 

   EN 

 
prevention of conflicts of interest. However, nothing is mentioned regarding the authority 
and the independence of the risk management function. 

This sub-option seems likely to achieve the underlying objective to improve the status of 
the risk management function within credit institutions. It is also likely to have additional 
benefits as described in sub-option 2.a above. 

However,  it  is  likely  to  lead  to  different  practices  and  its  implementation  could  be 
difficult  to  monitor  by  supervisors.  It  leaves  a  large  amount  of  discretion  to  credit 
institutions to decide what the appropriate status of the risk management function should 
be.  This  could  also  lead  to  different  practices  in  different  Member  States  and  to 
regulatory arbitrage. It seems appropriate therefore to accompany this sub-option by other 
sub-options with a more detailed requirements. 

It  is  estimated  that  this  sub-option  would  entail  no  or  very  small  additional  costs  for 
financial institutions. 

 3. b. Credit institutions must appoint an independent Chief Risk Officer.  

This  sub-option  would  implement  the  revised  Basel  Principles  recommendation  that  at 
least  significant  credit  institutions  should  have  an  independent  senior  executive  with 
distinct  responsibility  for 
institution’s 
comprehensive risk management framework across the entire organisation. For the time 
being, there is no such requirement in the CRD. 

the  risk  management  function  and 

the 

It  results  from  the  interviews  conducted  with  credit  institutions  that  appointing  an 
independent  chief  risk  officer  without  any  management  or  financial  responsibility  in 
respect of any operational business lines or revenue-generating functions should be best 
practice.  This  sub-option  seems  likely  to  achieve  the  underlying  objective  of  having  an 
independent risk management function and would help to avoid conflict of interest with 
operation units. 

In addition to avoiding conflicts of interest regarding risk management, by appointing a 
single manager as the CRO, companies can take advantage of the benefits listed below:  

-  Consolidated  approach  to  risk  management:  Hiring  a  top-level  executive  with  sole 
responsibility over the risk function helps to ensure a more comprehensive assessment of 
company-wide risk. 

-  Minimized  potential  for  compliance  failures:  CEOs  and  CFOs,  the  traditional  risk 
owners, can now rarely devote enough time to the management of operational risk. The 
growing  importance  of  risk  management  warrants  a  dedicated  position  and  enables 
companies  to  fully  understand  risks  and  their  potential  outcomes,  to  make  a  more 
informed business decisions. 

EN 

176 

   EN 

 
 
This sub-option seems therefore to effectively achieve its underlying objective and have a 
positive impact on clear division of responsibilities within the credit institution. 

3.  c.  Head  of  risk  management  function  must  be  member  of  executive  management  or 
Board. 

Many respondents to the public consultation (52 out of 96) that provided an answer to the 
relevant  question  suggested  this  option  in  order  to  improve  the  standing  and  the 
independence of the  CRO.  This sub-option seems  to be an effective tool to achieve the 
underlying objective of having a strong and independent CRO.  It gives the guarantee that 
CRO will have sufficient status within the credit institution as compared to the CFO and 
thus by definition will be able to influence management decisions.  

On the other hand, prescribing the exact hierarchical status of the chief risk officer could 
appear  disproportionate.  It  has  been  argued  by  some  respondents  to  the  public 
consultation  (44  out  of  96)  that  it  should  be  better  left  to  each  financial  institution  to 
decide  upon.  Whilst  this  issue  may  be  easily  solved  by  the  proportionality  principle,  it 
still seems that this sub-option is unduly inflexible.  

In addition, requiring CRO to be member of the Board would interfere with the power of 
the  shareholders  to  nominate  Board  members.  It  could  also  entail  additional  costs  as 
being member of the Board will require remunerating CRO for additional responsibilities 
as  board  member.  It  could  also  have  a  negative  impact  on  the  clear  division  of 
responsibilities and on the independence of the CRO. Therefore, this sub-option seems to 
be disproportionate proportionate with regard to the underlying objective and should be 
discarded. 

3. d. Removal of the Head of risk management function must be subject to prior approval 
by Board. 

This sub-option would implement the revised Basel Principles recommendation that if the 
CRO  is  removed  from  his  or  her  position  for  any  reason,  this  should  be  done  with  the 
prior approval of the Board and generally should be disclosed publicly. The bank should 
also discuss the reasons for such removal with its supervisor. There is currently no such 
requirement in the CRD. 

Some  respondents  to  the  public  consultation  suggested  this  option  to  improve  the 
standing of the CRO and ensure its independence from management. This sub-option is 
seen as a guarantee that CRO cannot be sanctioned by the CEO in case of disagreement 
and  if  CRO  reports  directly  to  the  Board  on  specific  issues  on  which  there  is 
disagreement with management. 

This  sub-option  seems  therefore  to  effectively  achieve  the  objective  of  improving  the 
standing and the independence of the risk management function. 

EN 

177 

   EN 

 
 
There  would  be  marginal  opportunity  costs  for  the  Board,  but  as  the  relevant  incidents 
would presumably be very rare those costs are negligible. The costs of having to contact 
and  discuss  it  with  the  supervisor  would  on  the  other  hand  be  more  substantial  per 
incident,  but  again  since  the  incident  presumably  would  occur  very  seldom  and  could 
potentially be a cause of great concern the costs would not be disproportionate.  

4) Combination of different sub-options 

It  results  from  the  discussions  of  the  sub-options  that  a  combination  between  measures 
enhancing  transparency,  outcome-focused  principles  and  minimum  standards  is  an 
appropriate  combination.  Different  sub-options  taken  alone  will  not  suffice  to  improve 
the stature and authority of the risk management function. Different sub-options will be 
mutually reinforcing.  

The  disclosure  of  existing  practice  with  regard  to  the  status  of  the  risk  management 
function (sub-option 1.a.) will allow supervisor to easily evaluate whether this standing is 
appropriate.  Requiring credit institutions to appoint a chief risk officer (sub-option 3.a.) 
which  should  not  be  removed  without  prior  approval  of  the  Board  (sub-option  2.a.), 
whilst  less  flexible  that  other  sub-options,  are  very  effective  to  achieve  the  underlying 
objective of having a strong risk management function. Sub-option requiring CRO to be 
part of the executive management or Board seem however unduly inflexible. Sub-option 
2a,  requiring  that  CRO  should  have  an  appropriate  status  and  authority  to  be  able  to 
influence risk strategy, seems, on the contrary flexible enough and effective. Sub-option 
3a  regarding  the  risk  management  function  and  its  status  also  seems  very  effective  to 
achieve the underlying objective and flexible enough. 

As a result, the following sub-options will be retained:  

Sub-option 1.a. Require credit institution to disclose in the annual report its policy with 
regard to the standing and authority of risk management function. 

Sub-option 2.a. Head of risk management function must have an appropriate status and 
authority to influence risk strategy and risk-relevant management decisions 

Sub-option 3.a. Risk management function must have an appropriate status and authority 
and be independent from the operational and business units 

Sub-option 3.b. Credit institutions must appoint an independent Chief Risk Officer 

Sub-option  3.d.  Removal  of  the  Head  of  risk  management  function  must  be  subject  to 
prior approval by Board. 

Table 9: Comparison of the sub-options (status of risk management function)  

Effectiveness  

Impact 
supply 
candidates  

on 
of 

Impact on clear 
division 
of 
responsibilities 

Flexibility 

Impact 
on 
level  playing 
field 

Enforceability  Efficiency 

EN 

178 

   EN 

 
 
 
Sub-option 1a 

+ 

Sub-option 2a 

++ 

Sub-option 3a 

++ 

Sub-option 3b 

++ 

Sub-option 3c 

++ 

Sub-option 3d 

+ 

= 

+ 

++ 

++ 

++ 

= 

= 

+ 

+ 

+ 

- 

++ 

= 

= 

= 

- 

-- 

- 

= 

= 

= 

++ 

++ 

++ 

+ 

= 

= 

++ 

++ 

++ 

+ 

+ 

+ 

++ 

- 

++ 

Magnitude  of  impact  as  compared  with  the  baseline  scenario:  ++  strongly  positive;  +  positive;  –  – 
strongly negative; – negative; = marginal/neutral; ? uncertain; n.a. not applicable 

III.  

OPTIONS  TO  IMPROVE  SUPERVISORY  REVIEW  OF  CORPORATE  GOVERNANCE 
PRACTICES 

1) Measures to improve transparency of corporate governance practices 

There are no sub-options under this category. 

2) Principles-based, outcome-focused rules with high degree of flexibility  

2.a.  Corporate  Governance  issues  must  be  part  of  a  dialogue  with  supervisors  and  the 
adequacy of CG structures should be part of supervisory review.  

This  sub-option  entails  that  corporate  governance  arrangements  i.e.  Board  composition, 
performance,  role  in  risk  oversight,  status  of  the  risk  management  functions,  should  be 
part of the regular discussions between credit institution and the supervisory authority as 
part  of  the  prudential  supervision.  For  the  time  being,  some  supervisors  are  changing 
their  practices  to  include  specifically  these  issues  into  the  supervisory  review  (ex  : 
Belgium,  United  Kingdom)  but  it  is  not  the  case  in  each  Member  State.  For  the  time 
being, there is no empowerment in CRD for supervisor to evaluate and monitor internal 
culture and behaviour within credit institutions. 

As explained in the impact assessment, supervisory review and monitoring of corporate 
governance  arrangements  is  essential  for  effective  implementation  of  the  existing  and 
new principles. 

To  be  effective,  supervisors  must  go  beyond  box-ticking  and  formal  analysis  of 
compliance  and  find  ways  to  better  evaluate  Board  performance  and  corporate  culture. 
Previously,  supervisors  tended  to  focus  only  on  the  formal  compliance  by  credit 
institutions with the requirement of Article 22 of the Capital Requirements Directive. 

EN 

179 

   EN 

 
 
This  sub-option  would  implement  the  revised  Basel  Principles  recommendation  that 
supervisors  should  regularly  perform  a  comprehensive  evaluation  of  a  bank’s  overall 
corporate  governance  policies  and  practices  and  evaluate  the  bank’s  implementation  of 
the principles. 

Almost all respondents to the public consultation that provided an answer to the relevant 
question agree that supervisory authorities, in course of the periodic supervisory review, 
should be able to challenge the efficiency of internal governance structures and monitor 
whether these structures could have a negative impact on financial stability. A number of 
respondents (61 out of 136) think that supervisory authorities should have more powers 
to  control  the  performance  of  the  Boards  and  to  sanction  any  shortcomings  in  internal 
governance  of  financial  institutions.  In  particular,  many  respondents  (58)  were  of  the 
view that supervisors should give closer attention to the balance in the Board in relation 
to  risk  strategy  and  satisfy  themselves  that  the  Board  is  able  to  exercise  efficiently  its 
oversight function. 

Supervisors could in particular, on a regular basis, review the governance arrangements 
of  risk  management,  risk  profile  and  overall  business  strategy  of  the  FI.    They  could 
engage  proactively  with  Board  members,  report  on  supervisory  findings  and  seek  the 
responses  of  the  Boards  to  these  findings.  However,  some  respondents  to  the  public 
consultation (7) doubted that even the most sophisticated regulators have either the staff 
level  expertise  or  the  resources  to  engage  in  such  comprehensive  governance 
assessments. 

The costs of this sub-option seem to range from 50,000 € p.a. in DK (one day per institute 
or  3,000  hours  in  total),  103,700  €  p.a.  in  AT  (on  average  2  hours)  and  approximately 
1,500,000  €  in  DE  (assuming  that  it  will  corre spond  to  3%  for  both  on-site  inspections 
and off-site reviews).135 For the majority of supervisors, this sub-option does not seem to 
entail material additional costs. For a limited number of financial supervisors with a big 
number  of  credit  institutions  to  supervise  and  which  will  have  to  put  in  place  the 
necessary procedures and dedicate staff for the corresponding tasks these costs could be 
significant. However, these costs are inherent to improved supervision of risk governance 
in  credit  institutions  which  is  essential  for  the  correct  implementation  of  substantive 
principles  and  cannot  be  avoided  if  the  underlying  objective  is  to  be  achieved. 
Nevertheless,  these  costs  may  be  mitigated  by  the  risk-based  supervision  where 
supervisors  check  the  available  information  which  is  directly  disclosed  by  credit 
institutions  on  regular  basis  and,  if  this  information  or  the  regular  supervisory  review 
gives  indication  of  possible  infringements  to  sound  risk  governance,  perform  a  deep 
review of risk governance practices in this specific credit institution.  

2. b. Extensive supervisory review which must examine the ability of Board members to 
exercise their oversight function. This sub-option entails the examination by supervisors 
when giving their authorisation to the credit intuition, at the time of recruitment of new 

135 

See Annex II for details on the compliance costs for supervisors. 

EN 

180 

   EN 

 
                                                 
Board members and afterwards, the ability of Board members to exercise their function. 
This review should include the following criteria: 

- time commitment; 

- individual and collective understanding of all material risks of financial institutions; 

- independence of mind; 

- honesty, integrity; 

- effective and constructive challenge of management decisions. 

Supervisors  might  also  as  part  of  this  supervisory  review  ensure  that  Board  members 
continue to possess all necessary qualifications taking into account the risk profile of the 
credit institution. 

For the time being, Capital Requirements Directive provides that supervisory authorities 
shall not grant authorisation to the credit institution if the persons who effectively direct 
the business of the credit institution are not of sufficiently good repute or lack sufficient 
experience.  However,  what  is  meant  by  sufficient  experience  and  what  should 
supervisors exactly look upon, is not specified.  

Prior  to  the  crisis,  in  the  majority  of  Member  States  the  "fit  and  proper  test"  of  Board 
members performed by supervisors takes the form essentially of probity requirements. It 
does not include a review of technical and professional competence of candidates, such as 
general governance and risk management skills and behavioural and other qualities, and 
does not clarify their strategy and personal objectives as Board members. However, the 
financial crisis has revealed the need for Board members in credit institutions to possess 
sufficient  expertise  to  understand  all  material  risks  in  order  to  be  able  to  effectively 
control them.  

This  sub-option  seems  to  effectively  achieve  the  underlying  objective  of  having  Board 
members capable of effectively performing their oversight function. At the same time it 
remains flexible enough to allow supervisors to put in place relevant procedures in order 
to satisfy themselves that Board members satisfy the  necessary  requirements.  This  sub-
option also takes account of the risk-based approach of the financial supervision. 

This  sub-option  will  entail  additional  costs  for  supervisors.  According  to  the 
questionnaire  on  costs  sent  to  national  supervisory  authorities,  17  out  of  the  18 
responding  supervisors  indicate  that  this  sub-option  would  lead  to  adaptations  of  the 
existing practice and thus involve additional costs for the supervisors, notably being the 
recurring  costs  of  having  to  conduct  a  review  more  detailed  than  the  current  one  and 
doing it more frequently than at present, and in some cases that the potential new measure 
targets  non-executive  Board  members,  whereas  the  current  review  is  focused  on 

EN 

181 

   EN 

 
 
executive  Board  members  (/management  Board  members).  Those  responses  that 
quantitatively  estimate  the  additional  recurrent  costs  contain  estimates  ranging  from 
15,500  €  (in  Greece)  to  around  12  million  €  per  year  (in  Germany).  Other  estimates 
include 1,250 € per examination (in the UK),  500 hours every 3 years per bank (in Spain) 
and four to five full time equivalents per year (in Belgium).  

Some  respondents  also  give  a  quantitative  estimate  of  the  one-off  costs  ranging  from 
30,000  €  in  Latvia  (costs  of  m odifying  the  official  regulations  and  internal  assessment 
criteria,  etc.),  95,000  €  in  Slovenia  (costs   of  updating  the  internal  supervisory 
methodology and the thematic supervisory review) to 1,070,000 € in Denmark (the cost 
of interviewing all existing Board members). In Spain the one-time cost of adapting the 
supervisory  guidelines  is  estimated  to  500  hours.  The  FSA  in  the  UK  estimate  that  the 
additional  costs  per  interview  for  the  individual  banks  would  be  £1850  (€2,200).  See 
Annex II for details on the costs for supervisors. 

These  costs  will  be  significant  for  financial  supervisors  with  a  big  number  of  credit 
institutions to supervise and the number of Board members to authorise and which will 
have  to  put  in  place  the  necessary  procedures  and  dedicate  staff  for  the  corresponding 
tasks.  However,  these  costs  are  inherent  to  the  improved  authorisation  procedure  of 
executive  and  non-executive  Board  members  which  is  essential  to  ensure  that  Board 
members  of  a  credit  institution  are  able  to  challenge  management  decisions  and  thus 
effectively  control  risk  strategy  and  risk  profile.  These  costs  cannot  be  avoided  if  the 
underlying  objective  is  to  be  achieved.  The  UK  experience  (which  has  put  in  place  a 
procedure  for  authorisation  of  key  persons,  including  interviews)  shows  that  the 
importance  to  have  in  place  this  authorisation  procedure  and  the  ability  of  a  Member 
State to put it in place even in a time of public deficit. It should be kept in mind that in 
many  Member  States  financial  supervisors  have  their  own  budget  which  is  in  partly  or 
entirely financed by supervised financial institutions. 

3) Strict rules with limited degree of flexibility 

3.  a.  Supervisors  must  attend  Board  meetings.  In  order  to  ensure  that  Board  members 
actually  constructively  challenge  management  decisions,  supervisors  could  regularly 
attend Board meetings.   

Some supervisors already attend Board meetings, to assess if non-executive directors are 
sufficiently  challenging  vis-à-vis  management.  Feedback  from  supervisors  of  their 
assessments after participation in Board meetings is often seen as helpful with a view to 
improving the functioning of the Board. However, supervisors do not always have access 
to  these  meetings.  Moreover,  some  supervisors  do  not  make  use  of  the  right  to  attend 
Board meetings.  

Whilst  this  sub-option  seems  likely  to  achieve  the  underlying  objective  of  improving 
supervisory  review  of  corporate  governance  arrangements  and  the  effectiveness  of  the 
implementation  of  existing  and  new  principles,  the  sub-option  could  appear  as 
disproportionate. According to some supervisors, attending Board meetings would not be 
feasible given the large number of credit institutions in their jurisdiction and would not 

EN 

182 

   EN 

 
have  any  added  value.  Furthermore,  the  presence  of  supervisors  could  influence  the 
discussion  during  the  Board  meetings  and  Board  members  would  be  reluctant  to  speak 
freely. Moreover, the costs related to this sub-option would be too high with regard to the 
expected benefits. 

Consequently, this sub-option should be discarded. 

3.b.  Supervisors  must  review  agendas  and  supporting  documents  for  meetings  of  the 
Board and Board committees. Supervisors could look for agendas that address key areas 
and offer sufficient time for discussion, questions and critics; for supporting material that 
is  adequate  to  provide  Board  or  committee  members  with  good  understanding  of  the 
issues. Supervisors could satisfy themselves that supporting documents are sent in timely 
manner before the Board or committee meetings. Where these conditions do not exist, it 
will be difficult for Board members to perform effectively. 

This  sub-option  is  seen  by  many  supervisors  as  a  useful  tool  to  monitor  the  correct 
functioning of the Board of the credit institution. It is also seen as having an added value 
and  being  proportionate  with  regard  to  the  additional  administrative  burden  and  the 
relating costs. 

Therefore,  this  sub-option  seems  likely  to  achieve  the  underlying  objective  and  be 
proportionate. 

 3.c.  Supervisors  should  review  the  evaluation  of  the  Board  performance.  Supervisors 
could review the results of Board self-evaluation as part of their prudential supervision to 
ensure that Boards perform effectively and challenge management decisions. 

This sub-option was supported by a number of respondents to the public consultation. It 
seems  as  effectively  achieving  the  underlying  objective  to  improve  the  supervisory 
oversight of the Board's ability to effectively oversee management. It also seems that the 
related costs are proportionate to the expected benefits.  

4) Combination of different sub-options 

It  results  from  the  discussions  of  the  sub-options  that  a  combination  between  outcome-
focused principles and minimum standards is an appropriate combination. Different sub-
options will be mutually reinforcing.  

All  the  sub-options,  except  sub-option  3a,  are  effective  to  achieve  the  underlying 
objective of improved supervisory review of risk governance. Sub-options 2a and 2b are 
complementary to all other sub-option in option C examined in Chapters I and II of this 
Annex.  Without  supervisory  review  of  risk  governance  and  Board  member's  ability  to 
exercise their function, the implementation of other sub-option may not be effective. 

As  regards  sub-option  3b  and  3c,  although  less  flexible,  they  give  clear  guidance  and 
powers  to  superiors  which  seem  necessary  for  them  to  be  able  to  exercise  their 
supervisory  review.  The  relating  costs,  though  significant,  are  inherent  to  the  improved 

EN 

183 

   EN 

 
supervisory review of risk governance and seem proportionate with regard to the overall 
benefits. 

As a result, the following sub-options will be retained:  

Sub-option 2.a. Corporate Governance issues must be part of a dialogue with supervisors 
and the adequacy of CG structures should be part of supervisory review. 

Sub-option 2.b. Extensive supervisory review which must examine the ability of Board 
members to exercise their oversight function 

Sub-option  3.b.  Supervisors  must  review  agendas  and  supporting  documents  for 
meetings of the Board and Board committees 

Sub-option 3.c. Supervisors should review the evaluation of the Board performance 

Table 10: Comparison of the sub-options (supervisory review of risk governance)  

Effectiveness 

Flexibility 

Impact  on 
playing field 

level 

Enforceability   Efficiency 

Sub-option 2a 

++ 

Sub-option 2b 

++ 

Sub-option 3a 

+ 

Sub-option 3.b  + 

Sub-option 3c 

+ 

= 

= 

-- 

- 

- 

= 

+ 

+ 

++ 

++ 

= 

+ 

++ 

++ 

++ 

+ 

+ 

- 

+ 

+ 

Magnitude  of  impact  as  compared  with  the  baseline  scenario:  ++  strongly  positive;  +  positive;  –  – 
strongly negative; – negative; = marginal/neutral; ? uncertain; n.a. not applicable 

EN 

184 

   EN 

 
 
 
ANNEX II: ADMINISTRATIVE BURDEN FOR CREDIT INSTITUTIONS AND SUPERVISORS  

The cost estimates described in the table below are based on the available public data and 
on  the  responses  to  a  questionnaire  sent  by  DG  Internal  Market  and  Services  to  credit 
institutions  and  to  national  supervisory  authorities  in  the  Member  States.  In  a  few 
instances,  where  possible,  it  was  necessary  to  recalculate  the  figures  provided  by  the 
respondents to the questionnaire in order to adjust the estimate to the intended scope of 
the  potential  measure,  which  was  not  always  clear  to  the  respondents.  Several 
respondents have been unsure what would be the exact scope and detail of some of the 
potential  measures  described  in  the  questionnaire,  which  has  made  it  difficult  for  the 
respondents to assess exactly the need to adapt their current practices and thus assess the 
compliance costs precisely. Therefore, and due to the qualitative nature of the measures 
potentially  to  be  implemented,  a  fair  amount of uncertainty needs to be included in the 
numbers provided.  

Table 1: Additional costs for credit institutions of implementing necessary modifications of 
current policies resulting from the potential new requirements 

Costs in relation to 

One-off costs 

Recurrent  costs  per 
annum 

Remarks 

Board time commitment  

of 

Disclosure 
the  
number  of  mandates  of 
board members 

0 

€ 600 - € 1,000  

Actual costs would depend on whether the publication is on 
group or subsidiary level. Costs will be less for publication 
at group level and higher if publication at subsidiary level 
for groups with a significant number of subsidiaries. 

Board  members  must 
spend  sufficient  time  to 
exercise their duties  

Not available  

 Not available 

the  number  of 
Limit 
mandates  that  a  board 
member  may  hold  at  the 
same time 

Not available 

Not available 

Depending  on  the  way  the  individual  financial  institution 
chooses to ensure the implementation of the principle, there 
could  be  costs  for  the  company  but  there  are  no  cost 
estimates available. These costs could be linked to internal 
processes  or  the  recruitment  or  remuneration  of  HR 
specialists  or  head  hunters  that  will  search  for  board 
members with adequate time-commitment.  

The increase in time spent by board members as a result of 
this  principle  could  result  in  increase  in  remuneration  of 
these board members.  

There  are  no  cost estimates  available.  Limited  costs  could 
be  linked  to  internal  processes  or  the  recruitment  or 
remuneration  of  HR  specialists  or  head  hunters  that  will 
search  globally  for  more  board  members  with  adequate 
time-commitment.    Additional  costs  could  result  from  an 
increase in remuneration of the board members which will 
cumulate less mandates. 

EN 

185 

   EN 

 
 
 
 
Expertise of board members  

Disclosure of recruitment 
policy  and  of  expertise 
and 
skills  of  board 
members  in  the  annual 
report 

0 

€ 600 - € 1,000  

Actual costs would depend on whether the publication is on 
group or subsidiary level. Costs will be less for publication 
at group level and higher if publication at subsidiary level 
for groups with a significant number of subsidiaries. 

Minimum 
expertise 
requirements  for  board 
members 

Not available 

Not available 

Depending  on  the  way  the  individual  financial  institution 
chooses to ensure the implementation of the principle, there 
could  be  costs  for  the  company  but  there  are  no  cost 
estimates available. These costs could be linked to internal 
processes  or  the  recruitment  or  remuneration  of  HR 
specialists  or  head  hunters  that  will  search  for  board 
members  with  adequate  expertise.    Additional  costs  could 
result  from  an  increase  in  remuneration  of  the  board 
members with specific expertise. 

Continuous 
and training 

induction 

€ 20,000 - 30,000 

However the actual costs are difficult to estimate and  will 
depend on the size of the board and the expertise needs 

Nomination Committee  

0 

€ 8,000 - 15,000 

These  costs  are  linked  to  the  internal  organisational  costs 
and  to  the  additional  remuneration  of  board  members  that 
are members of Nomination Committee. 

Counterbalancing management dominance  

Disclosure of the existing 
practice 

0 

€ 600 - € 1,000 

Actual costs would depend on whether the publication is on 
group or subsidiary level. Costs will be less for publication 
at group level and higher if publication at subsidiary level 
for groups with a significant number of subsidiaries. 

Mandatory prohibition to 
cumulate the mandates of 
Chairman /CEO  

0 

0 

There should be no additional costs or the costs should be 
limited as the two compensations (for the Chairman and for 
the CEO) already exist but would be then dissociated.  

Diversity 

Disclosure 

0 

€ 600 - € 1,000 

Actual costs would depend on whether the publication is on 
group or subsidiary level. Costs will be less for publication 
at group level and higher if publication at subsidiary level 
for groups with a significant number of subsidiaries. 

Diversity  as  a  criteria  of 
board composition 

0 

0 

There  should  be  no  direct  additional  costs  for  credit 
institutions. 

Establishment of a policy 
on diversity 

Not available  

Not available  

Quantitative targets 

Not available  

Not available  

There are no cost estimates available. These costs could be 
linked  to  internal  processes  and  the  recruitment  and 
remuneration  of  HR  specialists  or  head  hunters  that  will 
search for required diversity.   

Depending  on  the  way  the  individual  financial  institution 
chooses to ensure the implementation of the principle, there 
could  be  costs  for  the  company  but  there  are  no  cost 
estimates  available.  If,  to  satisfy  the  target,  the  credit 
institution  recruits  additional  board  members,  this  will 
entail  additional  costs.    If  one  board  member  is  simply 
replaced  by  another,  this  will  not  entail  additional  costs. 
Other  costs  could  be  linked  to  internal  processes  or  the 
recruitment  or  remuneration  of  HR  specialists  or  head 
hunters that will search for required diversity.   

EN 

186 

   EN 

 
 
 
 
 
Responsibility of the board for risk strategy 

Board  is  responsible  for 
publication in the Annual 
Report 
risk 
of 
statement  

a 

0 

€ 600 - € 1,000 

Boards  to  disclose  in  the 
a 
Annual 
the 
declaration 
adequacy 
internal 
of 
control systems 

Report 
on 

Not available  

€ 600 - € 1,000 

Time devoted by boards to risk issues 

Disclosure  of  existing 
practice 

0 

€ 600 - € 1,000 

Boards  must 
time 
sufficient 
issues 

devote 
to  risk 

Not available  

Not available  

Risk Committee  

Not available  

Not available  

Actual costs would depend on whether the publication is on 
group or subsidiary level. Costs will be less for publication 
at group level and higher if publication at subsidiary level 
for groups with a significant number of subsidiaries. 

Costs  would  mainly  consist  in  publication  costs.  There 
should not be additional significant costs as the information 
to  be  disclosed  should  be  already  produced  by  the 
institution and part of its information system. 

There  are  no  cost  estimates  available.  Direct  costs  will  be 
linked  to  publication.  Indirect  costs  will  be  linked  to  the 
underlying  process  to  ensure  that  internal  control  systems 
are adequate.  

These  costs  should  not  be  significant  as  they  are  already 
part of the assurance process which is built by the Internal 
Auditors  and  External  Auditors  while  developing  their 
missions on a risk based approach. 

Actual costs would depend on whether the publication is on 
group or subsidiary level. Costs will be less for publication 
at group level and higher if publication at subsidiary level 
for groups with a significant number of subsidiaries 

Depending  on  the  way  the  individual  financial  institution 
chooses to ensure the implementation of the principle, there 
could be costs for the company linked to internal processes 
but there are no cost estimates available. Costs should not 
be significant. 

There are no cost estimates available, however they should 
not be significant.  

These  costs  are  linked  to  the  internal  organisational  costs 
and  to  the  additional  remuneration  of  board  members  that 
are  members  of  Risk  Committee.  Actual  costs  will  be 
linked  to  the  number  of  days  per  year  a  Risk  Committee 
will  have  to  meet.  On  average,  based  on  existing  practice 
of  credit  institutions  with  separate  Risk  Committees,  it  is 
expected that Risk Committee will be composed of at least 
three persons and will meet at least 4 times a year 

On the other side there is a moderate gain to expect on the 
Audit  Committee  side  which  will  not  have  to  cover  in 
depth risk issues.. 

Communication of information on risk   

Disclosure  of  existing 
policy 

0 

€ 600 - € 1,000 

Actual costs would depend on whether the publication is on 
group or subsidiary level. Costs will be less for publication 
at group level and higher if publication at subsidiary level 
for groups with a significant number of subsidiaries 

EN 

187 

   EN 

 
 
 
Board  to  determine  the 
and 
content, 
frequency 
risk 
information  

format 
of 

Risk 
Management 
Function  must  be  able to 
report  directly 
the 
Board or Risk Committee  

to 

0 

0 

0 

0 

Standing and independence of Risk Management Function  

To be integrated in  the already existing internal processes 

To be integrated in  the already existing internal processes 

Disclosure  of  existing 
practice 

0 

CRO  must  have 
appropriate 
status 
influence risk strategy  

an 
to 

0 

Management 
Risk 
Function  must 
have 
appropriate  status  and  be  
independent 
the 
operational  and  business 
units  

from 

0 

CRO must be appointed 

0 

Removal  of 
the  CRO 
must  be  appproved  by 
the board 

0 

€ 600 - € 1,000 

0 

0 

To be integrated in  the already existing internal processes 

However,  limited  costs  may  be  linked  to  put  in  place  the 
necessary processes 

200,000 

€ 
500,000  

- 

€ 

There  are  no  cost  estimates  available.  If  credit  institution 
recruits  a  new  person  as  a  CRO  there  will  be  a  additional 
cost. If an existing staff member is promoted as CRO, there 
should be no significant additional costs. 

0 

Some  marginal  costs  may  be  linked  to  the  set  up  of  the 
necessary internal process. 

EN 

188 

   EN 

 
 
 
 
 
 
 
 
 
 
 
 
 
Table  2:  Additional  costs  for  supervisors  of  implementing  necessary  modifications  of 
current policies resulting from the potential new requirements 

Costs in relation to 

One-off costs 

Recurrent 
annum 

costs  per 

Remarks 

Extensive 
supervisory 
review of board’s  fitness 
and propriety 

Benchmarking 
of 
practices  on  diversity  of 
board composition 

100,000€ - 1,000,000 € 40,000 € - 12,000,000 € 

20,000 € - 100,000 € 

20,000 € - 130,000 € 

lowest  numbers  were 

The 
reported  were 
supervisors  with  small  number  of  supervised 
credit  institutions  and  the  highest  numbers  for 
supervisors  with  a  big  number  of  supervised 
credit institutions 

lowest  numbers  were 

The 
reported  were 
supervisors  with  small  number  of  supervised 
credit  institutions  and  the  highest  numbers  for 
supervisors  with  a  big  number  of  supervised 
credit institutions 

supervisors 

Risk  governance  issues 
to be part of the dialogue 
+ 
with 
adequacy 
risk 
governance  structures  to 
be part of the supervisory 
review 

of 

Supervisors  must  review 
agendas  and  supporting 
documents  for  meetings 
of  the  board  and  board 
committees 

0 

? 

Supervisors  must  review 
the  evaluation  of 
the 
board performance 

? 

0,000 € - 1,500,000 € 

No  cost  for  supervisors  that  already  review 
corporate  governance  systems  and  significant 
additional  cost  for  supervisors  with  a  big 
number of supervised credit institutions. 

? 

? 

No  precise  estimation,  costs  are  part  of  the 
general cost of corporate governance review 

No  precise  estimation,  costs  are  part  of  the 
general cost of corporate governance review 

Detailed analysis of responses in Table 2:  

Compliance  costs  related  to  extensive  supervisory  review  of  board’s  fitness  and 
propriety: 

17  out  of  the  18  responding  supervisors  indicate  that  the  measure  would  lead  to 
adaptations of the existing practice and thus involve additional costs for the supervisors, 
notably  being  the  recurring  costs  of  having  to  conduct  a  review  more  detailed  than  the 
current  one  and  doing  it  more  frequently  than  at  present136,  and  in  some  cases  that  the 
potential new measure targets non-executive board members, whereas the current review 
is focused on executive board members (/management board members). Those responses 
that quantitatively estimate the additional recurrent costs contain estimates ranging from 

136 

From the response of the only respondent that did not indicate any additional costs (LT) it could 
however seem that there would in fact also be recurring new costs of conducting a review more 
often than presently required.  

EN 

189 

   EN 

 
 
                                                 
15,500 € (in EL) to around 12 million € per year (in DE). Other estimates include 1,250 € 
per examination (UK), 500 hours every 3 years per bank (ES) and four to five full time 
equivalents per year (BE).  

Some  respondents  also  give  a  quantitative  estimate  of  the  one-off  costs  ranging  from 
30,000  €  in  LV  (costs  of  modifying  the  offici al  regulations  and  internal  assessment 
criteria, etc.), 95,000 € in SI  (costs of updating the internal supervisory methodology and 
in  DK  (the  cost  of  interviewing  all 
the  thematic  supervisory  review)  to  1,070,000  € 
existing board members). In ES the one-time cost of adapting the supervisory guidelines 
is estimated to 500 hours.  

The reasons given by the respondents explaining why the potential new measure would 
requirement amendments in the existing review procedures are: 

• 

• 

the listed aspects of the qualifications' review are more detailed than the existing 
approach,  which  is  often  a  more  global  examination  of  the  qualifications  (e.g. 
mainly focused on expertise and experience) [BE, DK137, LV138, PT139, SE140] 

the  new  measure  targets  non-executive  board  members,  whereas  the  current 
review  is  focused  on  executive  board  members  (/management  board  members) 
[BE, DE, FR141].  

Compliance  costs  related  to  benchmarking  of  practices  on  diversity  of  board 
composition: 

16  out  of  the  17  supervisors  that  responded  to  this  question  indicate  that  the  measure 
would  involve  additional  costs  for  the  supervisors,  since  no  such  measure  currently 
exists.142 The sources of the additional costs are related to the setting up of a data base 
(investments  in  IT  and  data  collection  from  all  banks)  and  updating  it  (data 
consolidation).  One  supervisor  (FI)  envisages  extensive  manual  work  to  collect  the 
necessary  data,  including  time  for  contacts  with  the  supervised  entities  and  possible 
requests  for  resubmitting  data  in  a  more  detailed  way.  Another  supervisor  assumes  an 
effort  of  approx.  1  hour  per  bank  (DE).  The  cost  estimates  for  the  one-off  costs  range 
from at least 1,600 € in LV, 1000 hours in ES  to approximately 75,000 € in IE. The cost 

137 

138 
139 

140 

141 

142 

In  DK  the  additional  requirements  would  be  reviewing  the  understanding  all  material  risks,  the 
independence  of  mind  and  checking  honesty  and  integrity.  Would  require  interviews  of  new 
members and a report every three years. 
In LV "the criteria differ". 
PT: measure 1 would deserve particular attention to comply, especially to cover all criteria and do 
it periodically. 
SE:  The  laws  and  regulations  are  not  that  detailed  and  should  perhaps  be  modified  in  order  to 
enhance clarity. 
In FR a fit and proper process is already in place for certain senior managers (i.e. executives) of 
credit institutions. However, there is currently no requirement in the French regulatory framework 
for a fit and proper process concerning board members. 
Only LT inform that there will be no additional costs, but from the description of the legislation it 
seems there is no current requirement covering the potential new measure. 

EN 

190 

   EN 

 
                                                 
estimates for the recurrent costs range from at least 600 € in LV to 191,000 € in DK (and 
perhaps more in AT). 

Compliance costs related to the requirement that risk governance issues to be part of the 
dialogue with supervisors and the adequacy of risk governance structures to be part of the 
supervisory review: 

11 of the 17 supervisors that responded to this question indicate that this measure would 
lead  to  no  additional  costs  or  no  material  additional  costs.  The  reason  is  that  the 
requirement of the measure is already in place (or largely so). In addition AT, DE, DK 
and  LV  mention  that  they  also  already  carry  out  reviews  of  the  CG  structures,  but  that 
there might be room for improvement (AT), be some additional effort for the review of 
corporate  governance  issues  that  go  beyond  risk  management  (DE),  or  be  an  annual 
review  on  top  of  the  current  setup  (DK).  The  costs  of  these  possible  additional  efforts 
would  range  from  50,000  €  p.a.  in  DK  (one  day  per  institute  or  3,000  hours  in  total), 
103,700  €  p.a.  in  AT  (on  average  2  hours)  and  approximately  1,500,000  €  in  DE 
(assuming  that  there  will  be  some  additional  effort  for  the  review  of  corporate 
governance  issues  that  go  beyond  risk  management,  the  additional  effort  amounting  to 
3% for both on-site inspections and off-site review). LV also already carry out extensive 
review  of  the  corporate  governance  structures  but  expect  anyway  a  need  to  modify  the 
official  regulations  amounting  to  one-off  costs  of  approximately  1,200  €.  SI  expects 
recurrent annual costs of between 60,000 and 90,000 €.  

EN 

191 

   EN 

 
ANNEX III:   CORPORATE  GOVERNANCE  IN  CREDIT  INSTITUTUIONS: 

MECHANIMS AND CASE STUDY 

This Annex describes who corporate governance mechanisms work in credit institutions 
and provides the example of UBS to explain a case of bad governance. 

1. Corporate governance mechanism in credit institutions 

Corporate  governance  is  the  set  of  processes,  customs,  policies,  laws  and  institutions 
affecting  the  way  a  credit  institution  is  directed,  administered  or  controlled.  Corporate 
governance also includes the relationships among the many stakeholders involved and the 
goals  for  which  the  credit  institution  is  governed.  The  principal  stakeholders  are  the 
shareholders,  management  and  the  board  of  directors.  Other  stakeholders  include 
depositors,  employees,  customers,  regulators,  the  environment  and  the  community  at 
large. 

It is a system of structuring, operating and controlling a company with a view to achieve 
long  term  strategic  goals  to  satisfy  shareholders,  creditors,  employees,  customers  and 
depositors, and complying with the legal and regulatory requirements. 

The perceived quality of a company's corporate governance can influence its share price 
as well as the cost of raising capital. The positive effect of good corporate governance on 
different  stakeholders  ultimately  is  a  strengthened  economy,  and  hence  good  corporate 
governance is a tool for socio-economic development. 

Parties to corporate governance in credit institutions 

Parties  involved  in  corporate  governance  include  the  governing  bodies  (e.g.  the  Chief 
Executive  Officer,  the  board  of  directors,  management  and  shareholders  general 
assembly).  Other  stakeholders  include  financial  regulators,  depositors,  employees, 
creditors, customers and the community at large. 

In  companies,  shareholders  (the  principal)  delegate  management  decisions  to  the  board 
and senior management (the agent) who should act in the principal's best interests. This 
separation of ownership from control implies a loss of effective control by shareholders 
over managerial decisions. Partly as a result of this separation between the two parties, a 
system  of  corporate  governance  controls  is  implemented  to  assist  in  aligning  the 
incentives of managers with those of shareholders. 

A board of directors plays a key role in corporate governance. It is their responsibility to 
endorse the strategy, appoint, supervise and remunerate senior executives and to ensure 
accountability of the credit institution to its owners and supervisory authorities.  

Senior  executives,  under  the  direction  of  the  Chief  Executive  Officer,  implement  the 
strategy and perform the day-to-day management of the credit institution. 

EN 

192 

   EN 

 
 
Credit  institutions  also  generally  have  in  place  (i)  a  risk  management  function  which 
identifies,  measures,  monitors,  mitigates  and  reports  on  risks,  (ii)  an  internal  audit 
function which evaluates the effectiveness of internal controls and governance processes, 
and  (iii)  a  compliance  function  which  identifies,  measures  and  reports  on  compliance 
risks.  To  be  effective,  these  functions  should  be  organisationally  independent  from  the 
units they control. 

Internal governance mechanisms within credit institutions 

Internal  controls  monitor  activities  and  then  take  corrective  action  to  accomplish 
organisational goals of a credit institution.  

The  board  of  directors  is  finally  accountable  for  the  efficiency  of  internal  controls  and 
plays a crucial role in monitoring management.  

Regular board meetings allow potential problems to be identified, discussed and avoided. 
However,  the  ability  of  the  board  to  monitor  the  firm's  executives  is  function  of  its 
understanding  of  the  management  decisions  and  of  its  access  to  adequate  and  timely 
information.  

The board cannot monitor management on day-to-day basis. Therefore, credit institutions 
should have an appropriate internal control framework to develop and maintain systems 
that ensure effective and efficient operations; adequate control of risks; prudent conduct 
of  business;  reliability  of  financial  and  non-financial  information  reported  or  disclosed 
(both  internally  and  externally);  and  compliance  with  laws,  regulations,  supervisory 
requirements and the institution's internal policies and procedures.  

In assessing the efficiency of internal control within an institution, the board may rely on 
the  work  of  control  functions,  including  the  risk  management  function,  the  compliance 
function and the internal audit function.  

2. The case of UBS143 

In March 2006, the UBS decided, to close revenue gap compared to its competitors,  to 
expand  its  securitised  products  and  develop  trading  strategies  for  these  products. 
However,  these  activities  were  linked  to  a  significant  risk  which  afterwards  resulted  in 
huge write downs. 

Notwithstanding  the  fact  that  the  senior  management  and  the  board  identified  the 
subprime issue as a major risk in September 2006, the management did not adjust until 
July  2007.  The  Board  did  not  feel  strongly  enough  about  the  risk.  Growth  and  revenue 
were in the interests of the shareholders and the Board would not have been able to act 
forcefully.  

143 

Based on The Current Financial Crisis: Causes and Policy Issues Adrian Blundell-Wignall, Paul 
Atkinson and Se Hoon Lee , OECD 2008. 

EN 

193 

   EN 

 
                                                 
The  Shareholder  Report  (April  2008)  states that  senior  management  took  comfort  from 
the main exposures being AAA rated, and that they were prepared to rely on investment 
bank    assurances  that  the  risk  was  well  managed.  Revenue  growth  and  catching  up  to 
competitors  was  the  dominant  culture.  All  management  focus  within  the  investment 
banking  on  ‘processes’  for  new  business  initiatives  and  prior  approval  of  transactions 
were: “…on speeding up approvals as opposed to ensuring that the process achieved the 
goal  of  delivering  substantive  and  holistic  risk  assessment  of  the  proposals  presented”. 
Departing top risk managers were replaced by people from a sales background (consistent 
with growth), not a risk management background. 

The Shareholder Report also stated that internal reporting of risk positions was complex, 
even across the ‘silos’ within a business line. A holistic picture of the risk situation within 
investment  banking  business  lines  was  not  presented  to  management  or  the  board,  and 
there was no serious internal challenge to the overall strategy.  

The UBS example illustrates clearly that corporate governance, too, played a role in the 
crisis. The culture of investment banking is much harder to control from the board room 
and  needs  strong  internal  control  systems  with  an  independent  risk  management  which 
failed in the case of UBS. The business is more complex, and the products are inherently 
more  difficult  to  understand  than  simple  banking  products  so  that  risk  control  practices 
are much more difficult. Therefore, board members need to have minimum expertise to 
understand  the  underlying  risks  and  effectively  challenge  management  decision,  not 
relying on management assurance or external ratings, which was the case at UBS. 

EN 

194 

   EN 

 
 
ANNEX IV :   NATIONAL FINANCIAL CRISIS MEASURES 

Financial crisis measures approved until 31 March 2010 (approved amounts in € billion)  

Member State

Guarantee 
sch emes

Recapitalisation  
schemes

Liqu idity 
intervention 
schemes

Asset relief 
intervention 
schemes

Individu al 
cases

Belgium
Den mark
Germany
Ireland
Greece
Spain
France
Italy
Cyprus
Latvia
Lu xemb ourg
Hung ary
Netherlands
Au stria
Polan d
Portugal
Slovakia
Slovenia
Finlan d
Sweden
United Kingd om

T otal EU27**

580*
400
376
15
200
265
n.a
3
4.27

5.35
200
75
4.62
16
2.8
12
50
156
381.87
2746.9

13.4
80

5
99
23.95
20

1.07

15
4.62
4
0.66

4
4.71
62.79
338.2

x
54

0.04

x

8
30

3.87

x

41.9

54.0

274.5
6.3
107.6
25.6

62.2

3.3
7.32

56.2
0.5

0.5

n.a
0.5
405.6
950.1  

Source:  State  Aid  Scoreboard:  Commission  Report  on  recent  developments  on  crisis  aid  to  the  financial 
sector- Spring 2010 Update 

EN 

195 

   EN 

 
 
ANNEX V :   FEEDBACK STATEMENT  

EUROPEAN COMMISSION 
Directorate General Internal Market and Services 

FREE MOVEMENT OF CAPITAL, COMPANY LAW AND CORPORATE GOVERNANCE 
Company law, corporate governance and financial crime 

FEEDBACK STATEMENT  

SUMMARY OF RESPONSES TO COMMISSION GREEN 
PAPER  

ON  

CORPORATE GOVERNANCE IN FINANCIAL 
INSTITUTIONS 

EN 

196 

   EN 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
1. 

GENERAL  REMARKS  ON  CONSULTATION  PROCEDURE  AND 
FEEDBACK 

On  2nd  June  2010,  the  European  Commission  launched  a  wide-ranging  public 
consultation on corporate governance in financial institutions144. 

The scale of the recent financial crisis led governments around the world to question the 
effective  strength  of  financial  institutions  and  the  suitability  of  their  regulatory  and 
supervisory systems to deal with financial innovation in a globalised world. The massive 
injection of public funding in the US and Europe was accompanied by a strong political 
will  to  learn  the  lessons  of  the  financial  crisis  in  all  its  dimensions  to  prevent  such  a 
situation happening again in the future. 

Although  corporate  governance  did  not  directly  cause  the  crisis,  the  lack  of  effective 
control  mechanisms  contributed  to  excessive  risk-taking  on  the  part  of  financial 
institutions.  The  crisis  revealed  that  boards  of  directors,  like  supervisory  authorities, 
rarely  comprehended  either  the  nature  or  scale  of  the  risks  they  were  facing.  In  many 
cases, the shareholders did not properly perform their role as owners of the companies. 
Consequently, the Commission decided to address the fundamental question of whether 
the  existing  corporate  governance  regime  is  deficient  as  far  as  financial  institutions  are 
concerned and to seek views on possible ways to address the deficiencies. 

The issues on which the Commission invited views and evidence included: 

•  Functioning  of  boards  and  their  role  in  risk  oversight:  The  consultation  invited 
views  on  how  to  improve  time  commitment,  experience  and  diversity  of  board 
their  challenge  of  management  decisions,  risk  oversight  and 
members  and 
accountability of boards for risk issues, boards' cooperation with supervisors and how 
to encourage boards to take into account interests of depositors and other stakeholders 
of financial institutions. 

•  Governance of  risk management function: The consultation invited views on how 
to improve the standing and authority of the risk management functions and establish a 
risk culture at all levels of financial institutions and how to improve information flow 
on risk from risk management to the board. 

•  Supervisory  authorities:  The  consultation  invited  views  on  the  enhancement  of  the 
supervisory  role  with  regard  to  corporate  governance  mechanisms,  including  the 
eligibility criteria of board members and boards' performance. 

•  External auditors: The consultation asked whether the cooperation between external 
auditors and supervisory authorities should be enhanced and what should be the role of 
external auditors as regards information on risk. 

144 

Green  Paper  on  corporate  governance  in  financial  institutions  and  remuneration  policies, 
COM(2010) 284 final 

EN 

197 

   EN 

 
                                                 
•  Shareholders:  The  consultation  invited  views  on  shareholder  behaviour  as  regards 
risk-taking by financial institutions and on the possible ways to improve shareholder 
engagement. 

•  Enforcement:  The  consultation  asked  whether  accountability  and  civil  and  criminal 

liability of board members should be strengthened. 

•  Remuneration:  The  consultation  invited  views  on  the  need  for  possible  further 

regulation of remuneration in financial institutions and in listed companies.  

•  Conflicts  of  interest:  The  consultation  invited  views  on  whether  there  is  a  need  to 
address at European level the question of different rules on conflicts of interest and on 
possible content of these rules. 

The  deadline  for  responses  to  this  consultation  paper  was  1st  September  2010.  The 
following contributions have been received:  178 from organisations, 8 from citizens, and 
28 from public authorities. 

Responses to the consultation highlighted the following messages: 

•  The  respondents  agree  with  the  analysis  in  the  Green  Paper  of  the  weaknesses  in 
corporate governance in financial institutions. They support the Commission's goal of 
promoting effective corporate governance as well as the policy intent underlying the 
principles  articulated  in  the  Green  Paper.  The  respondents  also  support  a  more 
effective supervision of the implementation by financial institutions of principles on 
good corporate governance. 

•  Financial  institutions  recognise  that  effective  governance  makes  a  meaningful 
difference  in  corporate  performance  and  are  currently  reviewing  their  practices. 
Although many respondents highlight that certain failures in corporate governance in 
financial institutions were to a large extent due to a lack of effective implementation of 
existing  rules,  a  number  of  respondents  think  that  regulatory  framework  could  be 
improved further.  

•  Clear  definition  and  division  of  responsibilities  is  fundamental.  For  a  number  of 
respondents,  more  clarity  is  needed  as  regards  respective  duties  of  different  bodies 
within  the  financial  institution.  Multiplication  of  controls  and  procedures  should  not 
lead to a confusion of which body is finally responsible for the decision-making and 
the overall governance of the financial institution 

•  A number of respondents think that any future proposals of the Commission should be 
principle-based  and  proportionate  in  order  to  take  account  the  differences  in 
business  models  of  financial  institutions,  the  nature  of  their  activity,  their  size, 
complexity, legal form and different corporate governance systems and arrangements. 

•  Many respondents are of the opinion that future action at European level should focus 
on desired outcomes and the detailed implementation of the principles could be dealt 

EN 

198 

   EN 

 
with at national level through legislation, supervisory review, increased transparency 
or codes of best practice with "comply or explain" approach. 

•  Insurance  companies  and  UCITS145  managers  in  particular  mentioned  the  recent 
reform of internal governance in insurance and in asset management sectors and called 
on the Commission to take this into account in its reform of corporate governance in 
financial institutions. 

2. 

OVERVIEW OF RESPONSES TO THE CONSULTATION 

The  consultation  was  launched  on  2nd  June  2010  and  closed  on  1st  September  2010. 
Responses were invited from all interested parties including public authorities, financial 
services industry, investor community, law firms, audit and accounting firms, academics, 
trade unions, citizens and civil society in general. 214 answers were received from a wide 
range of professional representatives, citizens and public authorities. 

Figure  1  provides  a  general  presentation  of  the  spread  of  the  responses  received,  from 
organisations, public authorities and citizens. 

Figure 2 provides a more detailed presentation of the status of organisational respondents, 
broken  down  into  7  categories:  financial  services  industry,  investor  community 
(including  asset  managers),  audit  and  accounting  firms,  non-financial  and  cross-sector 
professional  organisations,  law  firms,  employee  representatives  and  civil  society 
(including bodies promoting good corporate governance). 

Figure 4 lists the 214 answers received according to their nationality: 202 responses were 
received  from  EU-domiciled  organisations  or  European  associations  representing 
members from different Member States, 6 answers were received from non-EU domiciled 
organisations (US, Norway and Ukraine) and 6 answers from international associations.  

A list of all the organisations, citizens and public authorities, who have accepted that their 
answers to the consultation be published, is attached in annex 1. 

Figure 1: 

Organisations 

Public Authorities 

Citizens 

Total Contributions 

178 

28 

8 

214 

83% 

13% 

4% 

100% 

145 

Undertakings for Collective Investment in Tradable Securities 

EN 

199 

   EN 

 
 
 
                                                 
Answer per type of respondents

Citizens
4%

Public Authorities
13%

Public Authorities

Organisations

Citizens

Organisations
83%

Figure 2:   

For  the  purposes  of  this  feedback  statement,  answers  from  respondents  have  been 
classified  into  8  categories:  financial  services  industry  (including  banks,  insurance 
companies and financial markets), investor community (including investors, proxy voting 
agencies,  asset  managers),  non-financial  and  cross-sector  organisations  (including 
professional  chambers  and  associations  and  one  pharmaceutical  company),  audit  and 
accounting  firms,  law  firms,  employee  representatives  and  civil  society  (including 
organisations promoting good corporate governance). 

FINANCIAL SERVICES INDUSTRY 

INVESTOR COMMUNITY 

NON-FINANCIAL AND CROSS-SECTOR ORGANISATIONS 

AUDIT AND ACCOUNTING FIRMS 

CIVIL SOCIETY  

LAW FIRMS 

EMPLOYEE REPRESENTATIVES 

TOTAL 

55 

45 

24 

22 

19 

7 

7 

31% 

25% 

14% 

12% 

10% 

4% 

4% 

178 

100% 

EN 

200 

   EN 

 
 
 
 
Answer from organisations per type of institutions

Financial 
industry 
services 

Audit and accounting
firms 

Law 
firms 
Investor community

Non-financial and 
cross-sector 
organisations 
Civil society 
representative
s 
Employee 
representative
s 

Civil society 
representatives
10% 

Employee 
representatives
4%

Financial services 
industry
31%

Non-financial and cross-
sector organisations 
 14%

Investor community 
25%

Law firms
4%

Audit and accounting 
firms
12%

Figure 3:  

List of the answers received according to their nationality.  

Country 

Country 

Country 

AT 

BE 

BG 

CZ 

DE 

DK 

EL 

ES 

ET 

7  FI 

9  FR 

1  HU 

2 

IE 

20 

IT 

5  LI 

1  LU 

6  MT 

1  NL 

5  SI 

26  SK 

1  UK 

5  Sub-total 

3  UKR 

1  US 

2  NO 

INT146 

1 

9 

1 

1 

58 

202 

1 

4 

1 

6 

EU147 

28  SE 

9  Total  

214 

146 
147 

Responses submitted by international associations 
Responses submitted by European associations 

EN 

201 

   EN 

 
 
 
 
 
 
 
 
 
                                                 
Answers per country

Number of responses

60

55

50

45

40

35

30

25

20

15

10

5

0
ATBEBGCZDEDK ELESEEEU FI

FRHU IE

INT IT LI

LUMTNL

NOSE SI

SKUK

UKRUS

3. 

DETAILED ANALYSIS OF RESPONSES 

The feedback statement presents a broad summary of responses to each of the 38 specific 
questions  raised  in  the  consultation  paper.  It  is  a  factual  document  which  presents  the 
results of the consultation and does not announce any policy options.  

During  the  analysis  of  the  responses,  opinions  have  been  categorized  into  'yes/no' 
categories of answers where possible. The majority of the respondents have also provided 
qualitative  commentaries 
'yes/no'  answers.  The 
explanations  have  been  grouped  under  a  number  of  sub-headings  to  enable  a  more 
detailed analysis of the respondents' views. 

to  supplement  or  nuance 

their 

Some  answers  were  unclear  as  to  the  allocation  of  a  "yes"  or  "no"  and  required 
interpretation.  This  interpretation  may  not  reflect  fully  or  effectively  the  opinion  of  the 
respondent. 

It  also  should  be  noted  that  during  the  analysis,  all  responses  were  given  equal  weight. 
Consequently,  any  individual  respondent  has  the  same  impact  on  the  result  of  the 
consultation as a public authority or an organisation.  In addition, some respondents that 

EN 

202 

   EN 

 
  
provided individual contributions indicated that they also contributed to a submission by 
a professional association in which they are members.  

Please  note  that  some  respondents  have  answered  only  a  limited  number  of  questions 
which  they  considered  to  be  of  particular  relevance  and  did  not  provide  a  response  to 
other questions. 

QUESTION 1.1 

Should  the  number  of  boards  on  which  a  director  may  sit  be  limited  (for  example,  no 
more than three at once)? 

Whilst almost all respondents that provided an answer to this question agree that directors 
should commit sufficient time to their duties, a large majority consider a general rule on 
limitation of the number of boards on which a director may sit as inappropriate. The main 
reason  for  this  being  that  such  a  limitation  would  be  too  arbitrary  and  inflexible,  and 
would  not  allow  to  take  account  of  the  situation  of  each  particular  financial  institution 
and individual circumstances of each director. Moreover, such a limitation would not in 
fact guarantee that director will dedicate enough time for his position. 

 The majority of respondents suggested the following alternatives:  

Instead  of  a  strict  limitation  of  the  number  of  mandates,  there  should  be  a  general 
principle that directors devote sufficient time to their duties in a financial institution. The 
implementation  of  this  general  principle  by  financial  institutions  should  be  subject  to 
monitoring by shareholders and supervisory authorities. A limitation of mandates may be 
envisaged as best practice with a "comply or explain" approach.  

The  expected  time  commitment  should  be  defined  in  a  letter  of  appointment  for  each 
director. All mandates held by each individual director should be publicly disclosed.  

QUESTION 1.2 

Should combining the functions of chairman of the board of directors and chief executive 
officer be prohibited in financial institutions? 

A majority of respondents that provided an answer to this question favour a mandatory 
prohibition  on  cumulating  the  functions  of  Chairman  and  of  chief  executive  officer.  In 
their  view,  combining  both  functions  disregards the divergence of duties and capacities 
and  concentrates  an  unwarranted  amount  of  power  and  dominance  in  the  hands  of  one 
person.  A  number  of  respondents  indicated  that  in  their  jurisdiction  it  was  already  not 
possible to cumulate both functions. Some respondents considered, however, that certain 
exceptions  would  be  necessary  to  accommodate  specific  situations,  especially  for  small 
financial institutions and temporary cumulation of functions in particular circumstances. 

EN 

203 

   EN 

 
 
Those respondents that opposed any prohibition considered that there was no conclusive 
evidence  that  financial  institutions  where  the  functions  of  Chairman  and  CEO  were 
performed  by  different  individuals  performed  better  or  have  better  withstood  the  crisis 
than  those  financial  institutions  where  the  two  functions  were  performed  by  the  same 
person.  

QUESTION 1.3 

Should  recruitment  policies  specify  the  duties  and  profile  of  directors,  including  the 
chairman, ensure that directors have adequate skills, and ensure that the composition of 
the board of directors is suitably diverse? If so, how? 

The  majority  of  the  respondents  that  provided  an  answer  to  this  question  consider  that 
recruitment policies should specify the duties and the profile of the directors and ensure 
that  directors  have  adequate  skills.  A  large  number  of  respondents  in  favour  of  this 
requirement  consider  however  that  the  specific  content  of  such  recruitment  policies 
should not be laid down in legislation but be left to financial institutions to decide upon 
according to their needs. It is also suggested by a number of respondents that a general 
profile for all board members should be defined in the recruitment policy and a specific 
profile should be drawn for each particular vacancy. 

Among those respondents who were not in favour of recruitment policies specifying the 
duties  and  the  profile  of  directors,  some  thought  that  it  was  not  possible  to  define  in 
advance the detailed profile required for each specific candidate. Others considered that 
shareholders' freedom to nominate board members should not be restricted. Cooperative 
banks  and  insurance  companies  in  particular  stressed  that  where  directors  were 
democratically elected by the general assembly of members, it was difficult to require in 
advance that candidates possess specific skills or profile.   

Almost all respondents agreed that induction and continuous training of board members 
are essential. 

QUESTION 1.4 

Do you agree that including more women and individuals with different backgrounds in 
the  board  of  directors  could  improve  the  functioning  and  efficiency  of  boards  of 
directors? 

The  vast  majority  of  respondents  that  provided  an  answer  to  this  question  agree  that 
increased  diversity  in  boards  avoids  "group  think"  and  strengthens  challenge  within 
boards. Some respondents are in favour of imposing quotas on the presence of women on 
boards. Many respondents consider, however, that diversity should not be pursued at the 
expense of knowledge and expertise. A board member should be selected taking account 
of  a  broad  set  of  criteria,  including  merit,  professional  qualifications,  experience, 
personal qualities of the candidate and diversity.  

EN 

204 

   EN 

 
Some  respondents  also  mentioned  that  diversity  should  not  be  limited  to  gender  but  it 
should also include age and cultural background and reflect geographical presence of the 
financial institution. 

Certain  respondents  consider  that  diversity  can  be  promoted  through  different  means: 
codes  of  best  practice  with  "comply  or  explain"  approach,  disclosure  of  board 
composition with regard to diversity criteria, benchmarking of existing practices. 

Respondents  who  disagreed  that  including  more  women  and  individuals  with  different 
backgrounds  in  the  board  of  directors  could  improve  the  functioning  and  efficiency  of 
boards  of  directors  considered  that  there  was  insufficient  evidence  that  more  diverse 
boards behaved better or that the different nationalities have different behaviours.  

QUESTION 1.5 

Should a compulsory evaluation of the functioning of the board of directors, carried out 
by an external evaluator, be put in place? Should the result of this evaluation be made 
available to supervisory authorities and shareholders? 

The  majority  of  the  respondents  that  provided  an  answer  to  this  question  consider  that 
evaluation  of  the  board  performance  carried  out  by  an  independent  expert  could  be  a 
useful tool to assess the board's performance. There is a general agreement that it should 
at least be best practice. However, a number of respondents mentioned that there are for 
the  time  being  too  few  external  evaluators  of  sufficiently  good  quality  to  make  the 
external evaluation mandatory for each financial institution. Some respondents suggested 
encouraging the professionalisation of external evaluation and the development of tools 
and methodologies for independent board evaluation. 

On the second part of the question, a slight majority of the respondents were in favour of 
disclosing the main conclusions of the evaluation to the supervisor, but not the full report. 
There is also a strong preference not to disclose the results to the shareholders. The main 
argument for this is that if the results of the evaluation were publicly disclosed, it would 
inhibit directors' openness to the evaluation process and significantly undermine its value. 

 QUESTIONS 1.6, 1.7 & 1.8 

Should  it  be  compulsory  to  set  up  a  risk  committee  within  the  board  of  directors  and 
establish rules regarding the composition and functioning of this committee? Should it be 
compulsory  for  one  or  more  members  of  the  audit  committee  to  be  part  of  the  risk 
committee  and  vice  versa?  Should  the  chairman  of  the  risk  committee  report  to  the 
general meeting? 

A number of respondents think that separate risk committees are good practice, especially 
for large, systemically important financial institutions. However, they consider that such 
requirement  should  be  proportionate  and  care  should  be  taken  to  avoid  diluting  the 
responsibilities of the whole board for risk oversight.    

EN 

205 

   EN 

 
 
On  the  membership  of  audit  and  risk  committees,  many  respondents  consider  cross-
participation  as  best  practice  where  two  different  committees  exist.  Some  respondents, 
however, consider this unnecessary, as both committees advise and report to the board as 
a  whole.  Others  see  the  cross-participation  as  one  of  different  tools  in  ensuring 
communication between the two committees and think that it should be left to board to 
decide on specific means to ensure such communication. . 

There is a strong opposition to the suggestion that chairman of the risk committee should 
report directly to the annual general meeting of shareholders. The majority of respondents 
consider that the board as a whole is accountable to shareholders and should report to the 
annual general meeting and not an individual director. However, respondents expressed 
general  agreement  that  the  chairman  of  risk  committee  should  be  available  to  answer 
questions.  Some  respondents  also  suggested  that  a  report  from  the  chairman  of  risk 
committee could be part of the annual report. 

QUESTIONS 1.9, 1.10 & 1.11 

What should be the role of the board of directors in a financial institution's risk profile 
and strategy? Should a risk control declaration be put in place and published? Should an 
approval  procedure  be  established  for  the  board  of  directors  to  approve  new  financial 
products?  

All  respondents  that  provided  an  answer  to  these  questions  agree  that  the  board  should 
approve the strategy of the financial institution and the nature and the extent of risks the 
company is willing to take with regard to its strategic objectives. The board should also 
be  responsible  for  the  oversight  of  the  implementation  of  risk  strategy  by  executive 
management. 

Regarding  risk  statement,  the  views  of  the  respondents  are  split.  Almost  half  of 
respondents  (mainly  investors)  that  provided  an  answer  think  that  a  short  and  clearly 
understandable  report  informing  shareholders  on  risk  exposures,  risk  strategy  and 
tolerance  would  help  investors  to  form  a  comprehensive  view  of  risk  appetite  of  the 
financial institution, if it would not become a boiler plate declaration. In their opinion it 
would also contribute to raise board's awareness of risk issues.  

The  respondents  (mainly  financial  services  industry)  who  are  against  putting  in  place 
such  risk  statement  think  that  existing  European  legislation  on  credit  institutions  and 
insurance  companies  already  requires  financial  institutions  to  disclose  sufficient 
information  on  risk.  Furthermore,  French,  German  and  UK  respondents  indicated  that 
their  national  legislation  or  corporate  governance  codes  require  extensive  risk 
disclosures. 

On  the  board's  approval  of  new  financial  products,  some  respondents  that  provided  an 
answer  consider  a  systematic  approval  by  board  of  new  products  as  inappropriate,  as  it 
would  entail  involvement  of  boards  in  operational  issues,  which  is  the  responsibility  of 
executive  management.  However,  other  respondents  consider  that  board  could  approve 
products that have a significant impact on the strategy and the risk profile of the financial 

EN 

206 

   EN 

 
institution, as it would be part of global risk strategy. There is also a consensus that there 
should be a procedure with financial institutions to approve new products and that boards 
should  be  responsible  for  ensuring  that  this  procedure  is  adequate  and  correctly 
implemented.  

QUESTION 1.12 

Should an obligation be established for the board of directors to inform the supervisory 
authorities of any material risks they are aware of?  

The majority of the respondents (almost all financial services industry and the majority of 
investors) that provided an answer to this question consider such additional obligation as 
unnecessary.  In  their  view,  existing  European  and  national  legislation  already  require  a 
high  degree  of  communication  between  supervisory  authorities  and  the  boards  or  the 
executive  management,  which  would  cover  information  about  material  risks.  However, 
some  investors,  audit  and  law  firms,  as  well  as  certain  public  authorities,  citizens  and 
civil society representatives are in favour of introducing a more specific obligation. 

QUESTION 1.13 

Should a specific duty be established for the board of directors to take into account the 
interests  of  depositors  and  other  stakeholders  during  the  decision-making  procedure 
('duty of care')? 

Large majority of respondents that provided an answer to this question are not in favour 
of creating a specific duty of care with regard to specific stakeholders. They consider that 
the primary fiduciary duty of boards is to their shareholders. However, there seems to be 
a general agreement among all respondents that the boards should act in the best interest 
of the financial institution, which includes interests of different stakeholders. A number 
of  respondents  indicated  that  such  duty  to  act  in  best  interests  of  the  company  already 
exits in their jurisdictions.  

QUESTION 2.1 

How can the status of the chief risk officer be enhanced? Should the status of the chief 
risk officer be at least equivalent to that of the chief financial officer? 

All  respondents  that  provided  an  answer  to  this  question  agree  that  chief  risk  officer 
should have high status and authority, be independent from operational and business units 
and have close relationship with the board. But, according to the majority of opinions, the 
exact hierarchical status of the chief risk officer should not be prescribed and should be 
left  to  each  financial  institution  to  decide,  taking  into  account  the  principle  of 
proportionality.  

The main suggestions as to different ways to enhance the status and the authority of the 
chief  risk  officer  include  the  following:  chief  risk  officer  should  be  a  member  of  the 
board or of the management board; chief risk officer should be able to report directly to 

EN 

207 

   EN 

 
the board or to the risk committee; remuneration and removal from office of the chief risk 
officer should be subject to the board's approval; chief risk officer should be approved by 
the supervisor.  

Some respondents,  in particular  cooperative banks,  mentioned  that the position of chief 
risk officer does not exist in all financial institutions. They stressed the importance of a 
proportionate  approach  that  would  allow  small  financial  institutions  not  to  have  a 
separate and independent position of the chief risk officer. 

Respondents from the insurance industry indicated that there was no need to strengthen 
further the status of the risk management for insurance companies as this issue is already 
dealt with in Solvency II148.  

QUESTION 2.2 & 2.3 

How can the communication system between the risk management function and the board 
of  directors  be  improved?  Should  a  procedure  for  referring  conflicts/problems  to  the 
hierarchy for resolution be set up? Should the chief risk officer be able to report directly 
to the board of directors, including the risk committee? 

Whilst  all  respondents  that  provided  an  answer  to  these  questions  agree  that  the  board 
needs  to  receive  timely  and  accurate  information  on  risk,  the  predominant  view  is  that 
setting up a formal escalation procedure for conflicts resolution is not necessary. But the 
majority consider that the chief risk officer should either have a duty to report directly to 
the board or to the risk committee on a regular basis or should be able to do so if needed. 
Some  of  the  respondents  also  think  that  the  position  of  the  chief  risk  officer  might  be 
strengthened by periodically attending board meetings or meetings of the risk committee.  

However,  some  respondents  from  jurisdictions  with  mandatory  two-tier  boards  indicate 
that in their system only the management board has the competence to report directly to 
the supervisory board, not the chief risk officer who can report to the management board 
only.  

Certain institutional investors indicated that shareholders were not sufficiently informed 
about  risk  issues  and  suggested  that  communication  on  risk  matters  should  also  be 
improved towards shareholders.  

Respondents  from  the  insurance  industry  indicated  that  the  communication  on  risk 
matters from risk management function to the board will be sufficiently dealt with under 
Solvency II, where the board has to have effective insight into risk management. 

148  

Directive 2009/138/EC of the European Parliament and of the Council of 25 November 2009 on 
the taking-up and pursuit of the business of Insurance and Reinsurance (Solvency II) 

EN 

208 

   EN 

 
 
                                                 
QUESTION 2.4 

Should  IT  tools  be  upgraded  in  order  to  improve  the  quality  and  speed  at  which 
information concerning significant risks is transmitted to the board of directors? 

Whilst  all  respondents  that  provided  an  answer  to  this  question  agree  that  information 
technologies  should  enable  boards  and  executive  management  to  receive  timely  and 
accurate  information  on  risk,  the  majority  consider  that  the  decision  to  upgrade  or  not 
these technologies should be left to each financial institution to decide upon. For many 
respondents,  correctly  identifying  the  type  of  information  the  board  requires  to 
adequately  fulfil  its  duties  and  the  capacity  of  the  board  to  understand  the  information 
provided to it are crucial.  

Some  respondents  also  indicated  that  systematic  upgrading  of  information  tools  would 
entail huge costs and would be disproportionate for small financial institutions.  

A number of  respondents suggest that  it  could be  a task for supervisors to  oversee  that 
information  tools  to  transmit  information  on  risk  are  appropriate  for  each  specific 
financial institution.  

QUESTION 2.5 

Should  executives  be  required  to  approve  a  report  on  the  adequacy  of  internal  control 
systems? 

Some respondents did not give a specific opinion on the subject because the content of 
the report on the adequacy of internal control system was not clear to them.  

But the majority of the respondents that provided an answer to this question are opposed 
to  the  requirement  for  executives  to  approve  such  a  report.  A  number  of  respondents 
consider  that  the  board  as  a  whole  should  approve  a  report  on  the  adequacy  of  internal 
control systems as opposed to the executive management.  

Others  think  that  such  approval  would  not  have  any  added  value  compared  to  already 
existing  requirements  in  different  national  or  European  legislations  or  corporate 
governance  codes,  or  would  be  too  formalistic  and  disproportionate.  In  particular,  a 
majority  of  the  respondents  were  opposed  to  a  Sarbanes  -  Oxley149  type  declaration  as 
they thought it was too burdensome and also did not prevent the crisis in US. 

149  

The Sarbanes-Oxley Act adopted in 2002 in US makes reporting on internal controls mandatory 
for  SEC  registrants  and  their  independent  auditors.  Section  302  of  the  Act  entitled  "Corporate 
Responsibility for Financial Reports" establishes management responsibility for internal controls 
and requires management to evaluate the effectiveness of internal controls. Section 404 of the Act 
directs  the  SEC  to  adopt  rules  requiring  annual  reports  of  public  companies  to  include  an 
assessment, as of the end of the fiscal year, of the effectiveness of internal controls and procedures 

EN 

209 

   EN 

 
                                                 
Among the respondents who were in favour of the executives approving a report on the 
adequacy  of  internal  control  systems,  certain  French,  German  and  Spanish  respondents 
indicated  that  such  an  obligation  already  existed  in  their  national  legislation  or  in  a 
corporate governance code and should become a standard at European level. Respondents 
from UK were particularly in favour of a Turnbull150 type declaration.   

QUESTION 3.1 

Should cooperation between external auditors and supervisory authorities be deepened? 
If so, how? 

The majority of respondents that provided an answer to this question, in particular nearly 
all  public  authorities,  think  that  there  is  a  need  to  deepen  the  cooperation  between 
auditors  and supervisors. In their view, this could  be achieved through a  more  frequent 
communication  and  a  two-way  dialogue,  for  example  on  macro-economic  issues; 
trilateral  meetings  between  supervisors,  auditors  and  financial  institutions;  regular 
meetings  at  national  or  at  European  level  of  professional  bodies  of  auditors  with 
supervisory authorities; additional reporting requirements on some specific issues. 

Those respondents which are opposed to enhanced cooperation between external auditors 
and  supervisory  authorities  consider  that  existing  national  and  European  requirements 
sufficiently regulate the duty of  auditors to report to supervisors. In their view, any the 
primary  duty  of  auditors  is  to  report  to  shareholders.  Any  additional  cooperation  could 
damage  the  relationship  of  trust  between  auditors  and  the  financial  institution.  Those 
respondents also warn against mixing the roles of supervisors and auditors as they have 
different missions. 

QUESTION 3.2 

Should  their  duty  of  information  towards  the  board  of  directors  and/or  supervisory 
authorities on possible serious matters discovered in the performance of their duties be 
increased? 

A  number  of  respondents  (including  financial  services  industry,  investors,  audit  and 
accounting firms and certain public authorities) that provided an answer to this question 
are not in favour of increasing the duty of information of external auditors. They consider 
that the existing rules at national or European level on reporting by external auditors of 
serious  matters  to  boards  and  supervisors  are  sufficient.  However,  other  respondents 
think  that  there  is  a  need  to  analyse  how  these  rules  were  applied  in  practice,  although 

150  

for financial reporting. Section 404 also requires the company's independent auditors to attest to 
and report on management's assessment. 
The Turnbull guidance sets out best practice on internal control for UK listed companies. It was 
initially  published  in  1999  and  subsequently  reviewed  in  2005.  Under  this  guidance,  the  board 
should  in  particular  provide  a  statement  on  internal  control  which  should,  inter  alia,  include  an 
acknowledgement by the board that it is responsible for the company's system of internal control 
and for reviewing its effectiveness. 

EN 

210 

   EN 

 
                                                                                                                                                 
there  is  not  evidence  showing  that  they  have  been  applied.  Several  respondents 
nevertheless  think  that  further  guidance  is  needed  as  to  the  circumstances  that  external 
auditor should report to supervisors, on the nature of information that should be provided 
and on the procedures. 

Those  respondents  in  favour  of  the  increased  duty  of  information  (mainly  public 
authorities,  certain  financial  institutions,  investors  and  audit  firms,  civil  society 
representatives and citizens), think that  the duty to report could be widened, for example 
to encompass weaknesses in internal control. 

QUESTION 3.3 

Should external auditors' control be extended to risk-related financial information? 

A majority of respondents that provided an answer to this question were strongly opposed 
to extending the duty of external auditors to control risk-related financial information. In 
their view, current audit requirements contained in their national legislation and in IFRS 
already encompass information related to risk where auditors need to be satisfied that this 
information  is  consistent  with  financial  and  accounting  information.  They  consider  that 
auditors'  control  should  not  be  further  extended.  Certain  respondents  also  think  that 
auditors do not have appropriate tools to audit non-financial information on risk and that 
the control of such information should be left to the board and to the supervisors.  

Other  respondents  (mainly  public  authorities,  certain  investors,  audit  and  accounting 
firms and civil society representatives) consider that it is desirable for auditors to validate 
a greater range of information which is relevant for shareholders. 

Some  respondents  were  not  opposed  to  extend  auditors'  control  to  risk-related 
information but considered that the scope of such audit should be defined first and further 
thought should be given to the ability of auditors to express a professional opinion on the 
internal control systems of banks and other risk-related issues.  

QUESTIONS 4.1 & 4.2 

Should  the  role  of  supervisory  authorities  in  the  internal  governance  of  financial 
institutions  be  redefined  and  strengthened?  Should  supervisory  authorities  be  given  the 
power  and  duty  to  check  the  correct  functioning  of  the  board  of  directors  and  the  risk 
management function? How can this be put into practice? 

Almost  all  respondents  that  provided  an  answer  to  this  question  agree  that  supervisory 
authorities, in course of the periodic supervisory review, should be able to challenge the 
efficiency  of  internal  governance  structures  and  monitor  whether  these  structures  could 
have a negative impact on financial stability. Only few respondents are opposed  to any 
role of supervisors in the internal governance.  

However, views are split as to the need to enhance the existing powers of the supervisors. 
A  slight  majority  of  the  respondents  that  provided  an  answer  consider  that  the  existing 

EN 

211 

   EN 

 
national and European rules are sufficient and that there is no need to strengthen further 
the role of supervisors in corporate governance.  

A number of respondents think, however, that supervisory authorities should have more 
powers  to  control  the  performance  of  the  boards  and  risk  management  and  to  sanction 
any  shortcomings  in  internal  governance  of  financial  institutions.  In  particular,  many 
respondents are of the view that supervisors should give closer attention to the balance in 
the  board  in  relation  to  risk  strategy  and  satisfy  themselves  that  the  board  is  able  to 
exercise  efficiently  its  oversight  function.  Some  respondents,  especially  from  UK, 
indicated that in their jurisdictions supervisors have recently been given increased powers 
to monitor internal governance of financial institutions.  

Nevertheless, there is a consensus that boards and shareholders of the financial institution 
should be primary responsible for internal governance arrangements. Cooperative banks 
in particular stressed that the general assembly of members should remain at the heart of 
governance  and  internal  control  mechanism.  Nearly  all  respondents  agree  that  any 
enhancement  of  supervisory  powers  should  not  result  in  supervisory  authorities  taking 
management decisions.   

QUESTION 4.3 

Should the eligibility criteria ('fit and proper test') be extended to cover the technical and 
professional skills, as well as the individual qualities, of future directors? How can this 
be achieved in practice? 

The majority of respondents that provided an answer to this question think that the fit and 
proper  test  should  be  extended  to  include  technical  and  professional  skills  as  well  as 
individual qualities of future members of the board.  

Many  respondents  think  that  boards  should  have  expertise  and  knowledge  collectively 
and  should  be  able  to  challenge  management  as  a  team,  instead  of  each  candidate 
possessing all set of specific skills and qualities. Some respondents mention the difficulty 
to  find  an  appropriate  test  for  individual  qualities,  the  appreciation  of  which  would 
always  be  subjective.  A  number  of  respondents  emphasise  that  increased  competence 
should not be detrimental to independence and diversity of board members. 

Regarding the ways to apply the enhanced fit  and  proper  test, a number of respondents 
suggest that supervisors should conduct periodic interviews with board members, attend 
as observers board and sub-committee meetings. They site as example the UK approved 
persons regime151.  

151  

In 2009 Financial Services Authority in UK tightened its approved persons regime for Significant 
Influence  controlled  functions.    FSA  increased  the  number  of  controlled  function  categories  for 
which approval is required. To approve a particular person, the FSA needs to be satisfied that he is 
a  fit  and proper  person  to perform  the  function  to which  the  application relates.  To  this  end  the 

EN 

212 

   EN 

 
                                                 
Those respondents that are opposed to extend the fit and proper test to professional skills 
and  individual  qualities  of  candidates  think  that  supervisors  already  have  sufficient 
powers to check the composition of the board, are not better suited than shareholders to 
set  the  board  members  and  thus  should  not  be  excessively  intrusive  in  the  nomination 
process.  One  respondent  considered  that  excessive  intervention  of  supervisors  could 
result in an undue transfer of liability to the supervisor. 

QUESTION 5.1 

Should  disclosure  of  institutional  investors152  voting  practices  and  policies  be 
compulsory? How often? 

The vast majority of respondents that provided an answer to this question are in favour of 
mandatory disclosure of voting policies and records by institutional investors  

They  consider  that  such  disclosure  would  have  a  positive  impact  on  the  awareness  of 
investors,  optimise investment  decision of  ultimate investors, facilitate issuers' dialogue 
with investors and encourage shareholder engagement. However, certain respondents are 
relatively  cautious  with  regard  to  public  disclosure  of  voting  records  for  confidentiality 
reasons. 

A number of respondents think that the disclosure should be done at least on an annual 
basis,  with  voting  records  being  disclosed  after  each  general  meeting  of  the  invested 
company.  There  are  also  some  voices  in  favour  of  half-yearly  or  even  quarterly 
disclosure. 

Those  respondents  which  are  opposed  to  disclosure  by  institutional  investors  of  their 
voting  policies  and  records  either  feared  that  such  disclosure  obligation  for  a  specific 
category of shareholders would be contrary to the principle of equal treatment or thought 
that it should be left for each institutional investor to decide on whether to disclose or not 
its voting policy. 

QUESTION 5.2 

Should institutional investors be obliged to adhere to a code of best practice (national or 
international) such as, for example, the code of the International Corporate Governance 
Network (ICGN)? This code requires signatories to develop and publish their investment 
and voting policies, to take measures to avoid conflicts of interest and to use their voting 
rights in a responsible way. 

152  

FSA  has  the  power  to  conduct  interviews  in  order  to  assess  competence  and  capability  of  the 
candidate for the role. 
Institutional investors are considered to be professional investors which invest on behalf of or for 
the  benefit  of  beneficiaries,  including  but  not  limited  to  pension  funds,  hedge  funds,  insurance 
companies and banks 

EN 

213 

   EN 

 
                                                                                                                                                 
The  majority  of  respondents  that  provided  an  answer  to  this  question  think  that 
institutional  investors  should  adhere  to  a  code  of  best  practice,  whether  to  national, 
European  or  international  code,  at  least  on  a  "comply  or  explain"  basis.  A  number  of 
respondents  consider  the  UK  Stewardship  Code  as  being  a  model  for  investor  codes  of 
best  practice.  Some  respondents  are  of  the  opinion  that  there  is  a  need  either  for  a 
European code of best practice or for a common standard at European level with mutual 
recognition of national stewardship codes. 

One  respondent  thinks  that  self-regulatory  codices  are  not  a  viable  means  to  assure  the 
quality of corporate governance. In his view, responsibility of external control should lie 
with the supervisory authorities and external auditors. 

QUESTION 5.3 

Should  the  identification  of  shareholders  be  facilitated  in  order  to  encourage  dialogue 
between  companies  and  their  shareholders  and  reduce  the  risk  of  abuse  connected  to 
'empty voting'? 

The majority of respondents that provided an answer to this question support mechanisms 
that  would  enable  investee  companies  to  identify  efficiently  their  shareholders.  Many 
respondents would be in favour of greater transparency of the shareholders' register and 
of  a  uniform  binding  rule  at  European  level  on  disclosure  of  nominees  and  beneficial 
owners  of  shares.  French  and  UK  respondents  cite  their  national  legislation  as  an 
example.  Those  respondents  that  are  not  in  favour  of  enhanced  identification  of 
shareholders  think  that  identification  of  shareholders  is  already  ensured  in  other 
instruments, such as the Transparency Directive153.  

With regard to empty voting, some respondents would be in favour of greater disclosure 
of stock lending practices. However, the majority of respondents do not think that empty 
voting  would  be  countered  by  better  identification  of  shareholders,  as,  in  their  view, 
empty voting is linked to the record date issue.   

QUESTION 5.4 

Which other measures could encourage shareholders to engage in financial institutions' 
corporate governance? 

There is a consensus among the respondents that provided an answer to this question that 
communication  and  dialogue  between  the  shareholders  and  the  invitee  companies  is 
essential.  For  that  purpose,  there  is  a  need  to  reduce  costs,  remove  legal  obstacles  and 
regulatory  barriers  that  preclude  shareholders  to  actively  engage  in  companies.  Many 
respondents  underline  the  necessity  to  facilitate  cross-border  voting  and  would  be  in 

153  

Directive 2004/109/EC of the European Parliament and of the Council of 15 December 2004 on 
the  harmonisation  of  transparency  requirements  in  relation  to  information  about  issuers  whose 
securities are admitted to trading on a regulated market and amending Directive 2001/34/EC. 

EN 

214 

   EN 

 
                                                 
favour of regulating proxy voting agencies. Effective implementation of the Shareholder 
Right Directive is also seen as a step towards better involvement of shareholders, as well 
as  improved  disclosure  of  information  on  risk,  strategy  and  other  non-financial 
information.  As  regards  sustainability  and  long-terms  focus  of  investments,  some 
respondents  suggest  greater  disclosure  of  remuneration  structures  of  asset  managers, 
increased  taxation  of  financial  transactions  to  limit  the  portfolio  turnover,  actions  to 
promote  the  awareness  of  shareholders  as  to  the  long-term  engagement,  incentives  for 
shareholders to vote and hold their participation at long term. 

QUESTIONS 6.1 & 6.2 

Is  it  necessary  to  increase  the  accountability  of  members  of  the  board  of  directors? 
Should the civil and criminal liability of directors be reinforced, bearing in mind that the 
rules governing criminal proceedings are not harmonised at European level? 

The vast majority of respondents that provided an answer to these questions are opposed 
to any increase in civil and criminal liability of directors. The general view is that current 
rules impose sufficient liability on directors and their effective implementation should be 
studied  first  before  any  harmonisation  is  decided  at  European  level.  Many  respondents 
underline  that  increased  liability  would  not  automatically  result  in  better  decisions  by 
directors, could be detrimental to sound initiative and directors would discourage talented 
individual  to  apply  for  boards'  membership.  A  number  of  respondents  think  that 
supervisors  need  to  apply  effectively  the  range  of  sanctions  they  already  dispose  of  to 
make  directors  more  accountable.  Certain  respondents  are  also  in  favour  of  annual  re-
election of board members, which in their view would contribute to enhance the directors' 
accountability to shareholders. 

QUESTION 7.1 

What  could  be  the  content  and  form,  binding  or  non-binding,  of  possible  additional 
measures at EU level on remuneration for directors of listed companies? 

Nearly all respondents that provided an answer to this question agree that incentives for 
directors  must  be  properly  structured  in  order  to  encourage  long-term  and  sustainable 
performance  of  companies.  However,  the  vast  majority  is  opposed  to  any  additional 
legislative measures in this field as regards the structure of remuneration. They think that 
recently  adopted  European  legislation,  such  as  the  amendment  to  the  Capital 
Requirements  Directive154  and  the  Commission  Recommendation  on  remuneration  of 
directors  in  listed  companies155,  sufficiently  deal  with  such  issues.  Certain  respondents 

154  

155  

Directive  of  the  European  Parliament  and  of  the  Council  amending  Directives  2006/48/EC  and 
2006/49/EC as regards capital requirements for the trading book and for re securitisations, and the 
supervisory review of remuneration policies. 
Commission Recommendation of 30 April 2009 complementing Recommendations 2004/913/EC 
and 2005/162/EC as regards the regime for the remuneration of directors of listed companies. 

EN 

215 

   EN 

 
                                                 
would nevertheless welcome more transparency of remuneration policies of directors in 
listed companies as well as an advisory shareholder vote.   

QUESTION 7.2 & 7.3 

Do you consider that problems related to directors' stock options should be addressed? If 
so, how? Is it necessary to regulate at Community level, or even prohibit the granting of 
stock options? Whilst  respecting  Member  States'  competence  where  relevant,  do  you 
think that the  favourable tax treatment of stock options and other  similar  remuneration 
existing  in  certain  Member  States  helps  encourage  excessive  risk-taking?  If  so,  should 
this issue be discussed at EU level? 

The  vast  majority  of  respondents  who  provided  an  answer  to  these  questions  think  that 
stock options are a useful tool to align interest of directors with those of shareholders and 
should  not  be  prohibited  if  properly  structured  in  accordance  with  existing  legislation. 
The  only  possible  field  for  action  at  European  level  for  some  respondents  could  be  the 
better disclosure of stock option payments and the shareholder advisory vote. 

As  regards  taxation  regime,  the  predominant  view  is  that  favourable  taxation  of  stock 
options,  where  it  exists,  does  not  have  any  major  impact  on  risk-taking  behaviour  of 
directors and thus should not be dealt with at European level. 

QUESTION 7.4 

Do  you  think  that  the  role  of  shareholders,  and  also  that  of  employees  and  their 
representatives, should be strengthened in establishing remuneration policy? 

The majority of respondents who provided an answer to this question do not see a need to 
further  strengthen  the  role  of  shareholders  or  employees  in  establishing  remuneration 
policies.  In  their  view,  the  existing  European  or  national  rules  give  already  sufficient 
weight to shareholders and employees on remuneration issues. 

Some  respondents,  predominantly  investors  and  audit  and  accounting  firms,  favour 
however,  an  advisory  or  a  binding  vote  of  shareholders  on  remuneration  of  directors, 
which they think should be set up at European level.  

Certain respondents, essentially employee representatives, would be in favour of a clear 
role of employees in remuneration committees and improved  information of employees 
about remuneration of directors. 

QUESTION 7.5 

What  is  your  opinion  of  severance  packages  (so-called  'golden  parachutes')?  Is  it 
necessary  to  regulate  at  Community  level,  or  even  prohibit  the  granting  of  such 
packages? If so, how? Should they be awarded only to remunerate effective performance 
of directors? 

EN 

216 

   EN 

 
Whilst  the  majority  of  respondents  that  provided  an  answer  to  this  question  agree  that 
pay,  including  severance  packages,  should  award  effective  performance  and  not  the 
failure,  the  majority  of  respondents  that  provided  an  answer  to  this  question  do  not 
consider  appropriate  to  prohibit  severance  packages  or  to  further  regulate  them  at 
European  level.  In  their  view,  the  award  of  severance  packages  should  be  the 
responsibility of boards and shareholders and should be decided on case by case basis.  

QUESTIONS 7a & 7.6 

Interested parties are also invited to express their views on whether additional measures 
are needed with regard to the structure and governance of remuneration policies in the 
financial services. If so, what could be the content of these measures? 

Do you think that the variable component of remuneration in financial institutions which 
have received public funding should be reduced or suspended? 

The vast majority of respondents that provided an answer to this question think that, in 
view of new rules on remuneration in credit institutions and investment firms introduced 
by CRD III, no additional measures are required at European level before the effects of 
the  implementation  of  these  new  rules  is  carefully  evaluated.  As  regards  financial 
institutions  having  received  public  funding,  the  general  view  is  that  it  should  be  left  to 
each national competent authority to decide on case y case basis whether there is a need 
to  reduce  or  suspend  the  variable  remuneration  for  each  specific  financial  institution. 
Many respondents indicate that in some cases it could be justified to pay some bonuses to 
attract new staff to rebuild the financial institution.  

QUESTIONS 8.1 & 8.2 

What  could  be  the  content  of  possible  additional  measures  at  EU  level  to  reinforce  the 
combating and prevention of conflicts of interest in the financial services sector? Do you 
agree  with  the  view  that,  while  taking  into  account  the  different  existing  legal  and 
economic models, it is necessary to harmonise the content and detail of Community rules 
on  conflicts  of  interest  to  ensure  that  the  various  financial  institutions  are  subject  to 
similar  rules,  in  accordance  with  which  they  must  apply  the  provisions  of  MiFID,  the 
CRD, the UCITS Directive or Solvency 2? 

Whilst some of the respondents think that no additional measure are needed at European 
level on prevention of conflicts of interest, the prevailing opinion is that there is a need 
for  greater  alignment  of  existing  rules  at  European  level.  But  the  majority  of  the 
respondents agree that the specificities of different types of financial institutions and their 
business models should be taken into account.  

The main suggestions as to the content of the possible measures are the following:  

- formal written conflicts policy which should be disclosed in the annual report; 

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217 

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- public disclosure of existing conflicts of interest; 

- harmonisation of the definition of "conflicts of interest"; 

- adherence to codes of ethics; 

- reduce complexity of financial institutions; 

- proper and documented division of responsibilities and segregation of duties; 

A number of respondents also indicated that in their view conflicts of interest could arise 
in all type of companies and therefore should be regulated in general. 

EN 

218 

   EN 

 
 
 
Annex 1. 

- List of the public authorities that have participated in the consultation.  

Austrian Financial Market Authority 

Austrian Ministry of Finance 

Autorité des marches financiers 

Banco de España 

CEIOPS 

Central Bank of Ireland 

Committee of European Banking Supervisors 

Czech National Bank 

Danish government 

Dutch Ministry Finance  

Financial Reporting Council  

Finnish Financial Supervisory Authority 

Finnish Ministry of Finance 

French Ministry of Finance 

German Bundesrat 

German Bundestag 

German Federal Government 

Malta Financial Services Authority  

Ministry of Finance of Estonia 

Ministry of Finance of the Czech Republic  

Secrétariat général de l’Autorité de contrôle prudentiel 

Slovak Republic Government 

Slovenian Ministry of Finance 

Spanish Government 

Swedish Ministry of Finance 

Swedish Riksdag 

UK Financial Supervisory Authority  

UK Government 

- List of the citizens which have participated in the consultation. 

Centre for Inclusive Leadership 

Nicolas Cuzacq, Katrin Deckert, Université Paris Est Créteil Val de Marne 

EN 

219 

   EN 

 
 
Daniel Ferreira, Tom Kirchmaier, Daniel Metzger 

Jim Stewart 

Lieve Lowet 

Miroslav Nedelchev 

Peter Schellinck 

Sabine de Bethune 

- List of the organisations which have participated in the consultation. 

AFG 

Allianz 

AMICE 

APG 

Association for Financial Markets in Europe 

Association française des entreprises privées 

Association française des marchés financiers 

Association of British Insurers 

Association of Chartered Certified Accountants 

Associaton of Swedish Institutional Owners  

Assogestioni 

Austrian Bundesarbeiterkammer 

Austrian Raiffeisenverband 

Aviva 

AXA Investment Managers 

Banco Santander 

Barclays 

BDO 

Belgian Financial Sector Federation 

BlackRock 

BNP Paribas 

BPCE  

British Bankers' Association 

Building Societies Association 

Bundessparte Bank und Versicherung 

Bundesverband Investment und Asset Management  

Bundesvereinigung der Deutschen Arbeitgeberverbände & Bundesverband der 

EN 

220 

   EN 

 
 
Deutschen Industrie 

Businesseurope 

Bvlaco 

California Public Employees' Retirement Systems  

CBI 

CD&V 

CEA 

Central Chamber of Commerce of Finland 

Centre for Corporate Governance, University College Dublin 

CFA Institute 

CFDT Banques 

Chambre de Commerce et de l'Industrie 

Chartered Accountants Ireland 

Chartered Accountants of Scotland 

CIPD 

Compagnie nationale des commissaires aux comptes 

Confederation of Finnish Industries 

Confederation of Swedish Enterprise 

Confederation of the Nordic Bank, Finance and Insurance Unions 

Conseil des barreaux européens 

Consejo General de Colegios de Economistas 

Consiglio Nazionale dei Dottori Commercialisti e degli Esperti Contabili 

Council of Institutional Investors 

Creative Investment Research, Inc. 

Crédit Agricole 

Crédit Mutuel 

Danish Bankers' Association 

Danish Financial Sector Associations 

Danish Shareholders Association 

Deloitte 

Deutsche Gewerkschaftsbund 

Deutsche Industrie- und Handelskammertag 

Deutsches Aktieninstitut 

Die Fürungskräfte  

DSW 

EN 

221 

   EN 

 
Dutch Investors’ Association  

EcoDa 

EFAMA 

Ernst and Young 

Ethical Investment Research Services  

Eumedion 

Euroclear 

EuroInvestors 

European Assocation of Co-operative Banks 

European Association of Public Banks 

European Banking Federation 

European Confederation of Institutes of Internal Auditing  

European Federation for Retirement Provision 

European Financial Services Round Table 

European Issuers 

European Network of Credit Unions 

European Private Equity and Venture Capital Association  

European Savings Bank Group 

European Trade Union Confederation 

European Union of Women 

European Women Lawyers’ Assocation  

European Womens' Lobby 

Eurosif 

F&C Investments 

Fair Pensions 

Fédération Bancaire Française 

Fédération Française des Sociétés d'Assurance Mutuelles 

Fédération Française des Sociétés d'Assurances 

Federation of European Accountants 

Federation of Finnish Financial Services 

Financial Services Consumer Panel 

Forsikring & Pension 

Forum of European Asset Managers 

GC100 

Genworth Financial 

German Insurance Association 

EN 

222 

   EN 

 
Glass Lewis  

GlaxoSmithKlein 

GOODCORP 

Governance for Owners 

Grant Thornton International 

Groupement des Entreprises Mutuelles d'Assurances 

Groupement National de la Coopération 

GUBERNA 

Hedge Fund Standards Board 

Hermes 

HQB partners 

HSBC 

Hungarian Banking Association 

ICAEW 

ICMA Asset Management and Investors Council  

ILAG 

ING 

Institut des Actuaires 

Institut Luxembourgeois des Administrateurs 

Institute for the Accountancy Profession in Sweden  

Institute of Chartered Secretaries and Administrators  

Institute of Directors 

Institute of International Finance 

Institute of Public Auditors in Germany 

Institute of Risk Management 

Institutional Shareholder Services 

Instituto de Censores Jurados de Cuentas de España 

International Bar Association 

International Research Center of Banking & Corporate Governance (Ukraine) 

International Underwriting Association 

Inverco 

Investment Management Association 

KEPKA 

KPMG Europe 

KPMG France 

Law Society of England and Wales and the City of London Law Society 

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223 

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Legal and General  

Legal and General Investment Management 

Linklaters 

Lithuanian Investors 

Local Authority Pension Fund Forum UK 

London Stock Exchange Group 

Mazars 

Medef 

NASDAQ OMX  

National Association of Pension Funds UK 

Nationwide Building Society 

Nederlandse Vereniging van Banken 

Nestor Advisors 

Nordea 

Norges Banks Investment Management 

OPF&VB 

Österreichischer Arbeitskreis für Corporate Governance 

Pan European Insurance Forum 

PIRC 

PricewaterhouseCoopers 

Proxinvest 

Railpen Investments and Universities Superannuation Scheme  

Regierungskommission Deutscher Corporate Governance Kodex 

Royal Dutch Institute of Registered Accountants 

RSA Insurance 

Share Plan Lawyers group 

SIFA 

Societé Générale 

Standard Chartered Bank 

Standard Life 

Swedish Bankers´ Association 

Swedish Corporate Governance Board  

The Association of Investment Companies 

The Co-operative Asset Management  

The Director´s Office 

Tomorrow's Company 

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Towers Watson 

Transparency International 

Uni Europa Finance 

Unicredit 

Vereinigung der Bayerischen Wirtshaft 

Wirtschaftskammer Österreich  

Wirtschaftsprüferkammer 

Wp net 

Zentraler Kreditausschuss 

EN 

225 

   EN