COMMISSION STAFF WORKING PAPER EXECUTIVE SUMMARY OF THE IMPACT ASSESSMENT
Date: 2011-07-20
Institutions: European Commission
Subjects: banking, credit control, credit institution, investment company

EUROPEAN COMMISSION 

Brussels, 20.7.2011 
SEC(2011) 953 final 

COMMISSION STAFF WORKING PAPER 

EXECUTIVE SUMMARY OF THE IMPACT ASSESSMENT 

Accompanying the document 

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) 952 final} 

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1. 

INTRODUCTION 

In  its  Communication  of  9  December  20101  the  Commission  has  envisaged  EU  legislative 
action to approximate and reinforce sanctioning regimes in the financial.  

In its Communication of 4 March 20092, the European Commission announced that it would 
(i) examine corporate governance rules and practice within financial institutions in the light of 
the financial crisis, and (ii) where appropriate, make recommendations or propose regulatory 
measures.  

This Impact Assessment provides an analysis of the possible measures that may be taken in 
the  area  covered  by  the  Capital  Requirements  Directive  (CRD).  It  is  a  complement  to  the 
Impact Assessment for the “CRD IV” proposal. 

2. 

PROBLEM DEFINITION  

Sanctioning regimes 

National sanctioning regimes currently in place for key violations of the CRD are divergent 
and  not  always  appropriate  to  ensure  effective  enforcement.  Certain  important  sanctioning 
powers  are  not  available  to  all  national  authorities  and  sanctions  are  not  published  on  a 
systematic  basis.  In  some  Member  States  the  levels  of  administrative  pecuniary  sanctions 
(fines) are too low and thus insufficiently deterrent; and sanctions cannot be imposed on both 
credit  institutions  and  individuals  responsible  for  violations.  When  determining  the  level  of 
sanctions to be imposed, some national authorities do not take into account criteria which are 
important to ensure proportionality and dissuasiveness of sanctions. 

Moreover, the actual application of sanctions differs in Member States, including those with 
banking sectors of similar size. 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. 

This  situation  may  result  in  a  lack  of  compliance  with  the  EU  rules,  create  distortions  of 
competition  in  the  Internal  Market  and  have  a  negative  impact  on  financial  supervision, 
undermining  proper  functioning  of  banking  markets,  which  can  be  detrimental  to  the 
protection of deposit-holders and investors and to the confidence in the financial sector. 

Corporate governance  

In June 2010 the Commission published a Green Paper on corporate governance in financial 
institutions and remuneration policies3 and an accompanying staff working document4 which 
analysed  the  deficiencies  in  corporate  governance  arrangements  in  the  financial  services 
industry revealed by the financial crisis which contributed to excessive risk-taking.  

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2 
3 
4 

COM (2010)716 final. 
COM (2009) 114 final 
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 

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Inadequate risk oversight by Boards  

In many cases, Boards were either unable or reluctant to challenge executive management on 
their strategic business decisions. This was often the result of insufficient time commitment 
and  inadequate  technical  knowledge  on  the  Boards  of  credit  institutions.  In  some  cases, 
management  dominance  and  insufficient  diversity  in  Board  composition  undermined  the 
objectivity of Boards.  

In addition, Boards were often not sufficiently involved in the overall risk strategy and, as a 
result, executive management's strategic approach to risk was not monitored, excessive risk-
taking  incentives  were  established  and  proper  systems  to  ensure  effective  risk  management 
were  not  implemented.  Also,  Boards  did  not  spend  sufficient  time  discussing  risk  issues  as 
risk management was regarded as a low priority compared to other subjects, such as growth 
strategy.  Reporting  on  risk  has  not  been  in  all  situations  timely  and  comprehensive,  due  in 
particular to a lack of direct lines of reporting of the risk management function to the Board. 

Finally,  in  many  cases,  the  risk  management  function  has  not  been  given  proper  weight  in 
decision-making process. 

Non-binding nature of the principles – inadequate supervisory review of corporate governance 

The non-binding nature of most of the corporate governance principles contributed to the lack 
of  effective  compliance  by  credit 
the 
implementation  mostly  to  self  regulation  and  external  monitoring  by  shareholders.  The 
shortcomings  identified  by  the  crisis,  demonstrated  that  these  mechanisms  did  not  work  in 
practice.  In  particular,  in  the  absence  of  a  clear  corporate  governance  framework  and  a 
defined supervisory role, supervisory authorities were unable to adequately monitor or control 
the implementation of the corporate governance standards by credit institutions.  

these  principles, 

institutions  with 

leaving 

3. 

ANALYSIS OF SUBSIDIARITY  

Convergence  of  national  sanctioning  regimes  is  necessary  to  promote  dissuasiveness  and 
create a level playing field to ensure a uniform application of the CRD and full cooperation 
and mutual trust between banking supervisors across the EU. Better application of the existing 
sanctioning  powers  by  national  authorities  would  not  be  sufficient  to  achieve  such 
convergence. 

A  uniform  and  consistent  approach  at  EU  level  is  crucial  to  deal  effectively  with  corporate 
governance  weaknesses  in  credit  institutions.  Integrated  capital  markets  and  the  inter-
relatedness of the European financial sector mean that the diverging rules in Member States 
could  result  in  regulatory  arbitrage,  which  could  undermine  or  create  new  obstacles  to  the 
proper functioning of the internal market.  

4. 

OBJECTIVES  

The  proposal  aims  at  ensuring  proper  functioning  of  banking  markets  and  restoring 
confidence in the banking sector, through: 

• 

Effective, proportionate and deterrent sanctions which better ensure compliance with 
CRD rules, 

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• 

• 

• 

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

Effective supervision of banking service providers, 

Effective corporate governance within credit institutions which should contribute to 
avoid excessive risk taking. 

This requires:  

• 

• 

– 

– 

– 

The  reinforcement  and  approximation  of  the  legal  framework  concerning  sanctions 
and the mechanisms facilitating detection of violations and  

Strengthening corporate governance framework: 

increasing the effectiveness of risk oversight by Boards; 

improving the status of the risk management function; and 

ensuring effective monitoring by supervisors of risk governance.   

5. 

POLICY OPTIONS, IMPACT ANALYSIS AND COMPARISON 

5.1. 

Options on sanctioning regimes  

5.1.1.  Options concerning appropriate administrative sanctions  

Options 

1: no EU action 

2. Uniform rules on types and level of administrative sanctions  

3. Minimum common rules on types of administrative sanctions  

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

5. Minimum common rules on maximum level of administrative fines  

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

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

Option 1 would preserve the problems identified: although the European Banking Authority 
could promote further convergence of national regimes, 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 would 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 
but would permit to adapt sanctions to the specificities of the different national legal systems. 
Option 4 would be more effective than option 5 in reducing divergences in the levels of fines 
and ensure deterrence but Option 5 will better ensure proportionality. 

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Options  2,  3  and  4  would  be  similarly  effective  in  ensuring  deterrence.  However,  Option  3 
would  allow  for  the  provision  of  additional  types  of  sanctions,  which  can  increase 
dissuasiveness  in  some  Member  States.  Option  5  will  be  less  effective  in  ensuring  that 
sufficiently  high  fines  are  actually  applied  but  could  better  ensure  they  are  proportionate. 
Options  6  and  7  can  be  considered  equally  effective  to  the  extent  they  include  the  same 
factors  but  Option  7  could  better  ensure  appropriateness  of  sanctions  actually  applied,  as  it 
would not prevent competent authorities from taking into account other factors. 

Options 2 and 7 are the less efficient in terms of changes required in national legislations and 
Option 5 is more efficient than Option 4. 

5.1.2.  Options concerning the personal scope of administrative sanctions  

Options 

1: no EU action 

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

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

Option  3  would  be  more  effective  than  option  2  in  ensuring  level  playing  field  and  better 
cross-border  supervision,  but  the  difference  on  the  dissuasive  effect  of  those  options  is 
considered to be minor. Option 3 is much less efficient than option 2, as it would require more 
changes in national legislations and may oblige Member States to adapt their general liability 
regimes. 

5.1.3.  Options concerning the publication of sanctions 

Options 

1. Do nothing 

2. publication of sanctions as general rule 

3. publication of sanctions decided by competent authorities 

Option 2 would be much more effective than option 3 in increasing deterrence of sanctions. 
Option 3 is slightly more efficient than option 2. 

5.1.4.  Options concerning the actual application of sanctions 

Options 

1: no EU action 

2. Internal whistle blowing procedure in credit institutions 

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

4. Detailed EU requirements for whistle blowing programmes 

Options 2, 3 and 4 are all effective in pursuing the objective of better detection of violations 
leading to a higher level of enforcement in all Member States. Option 4 is considered slightly 
more effective in this  regard.  All  three options  have impacts  on  fundamental  rights (respect 

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for private and family life, protection of personal data, presumption of innocence and right of 
defence) but they can be mitigated and, given the importance of the objectives to be achieved, 
their impact is necessary and proportionate. 

Options 2 and 3 are equally efficient in terms changes required in national legislation. Option 
4  is  considered  to  be  inefficient  as  it  would  require  more  radical  changes,  probably  also  in 
Member  States  which  already  provide  for  whistleblowing  mechanisms.  Compliance  costs 
could also be higher than those required by Options 2 and 3 as Member States will have less 
flexibility.  

5.2. 

Options on corporate governance 

Options 

1. no EU action 

2. Improve the implementation of the existing EU framework 

3. Enhance and develop the Capital Requirements Directive framework 

Option 3 will be the most effective to achieve the underlying objective compared to Options 1 
and 2. Option 1 will keep the regulatory framework open-ended and continue to generate lack 
of  compliance  and  legal  uncertainty.  Option  2  relies  on  market  discipline  and  better 
monitoring of the implementation of existing principles by supervisors. However, supervisors 
will have no clearer legal framework within which to exercise their supervisory oversight and 
self-regulation has shown its limits. 

Option 3 goes beyond the existing framework on corporate governance and would involve the 
development of additional and enhanced provisions. It will contain measures to 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. 
These new requirements will create a set of minimum standards providing credit institutions 
and  supervisors  with  clear  benchmarks  within  which  to  develop  and  assess  corporate 
governance structures. 

5.3. 

Preferred policy options and instruments  

The  most  appropriate  to  achieve  the  objectives  of  the  proposal  is  a  combination  of  the 
following mutually reinforcing options: 

Options on sanctioning regimes  

• 

• 

• 

• 

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 

Obligation  to  provide  for  the  application  of  administrative  sanctions  to  both 
individuals and credit institutions 

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• 

• 

• 

Publication of sanctions as a general rule 

Internal whistle blowing procedure in credit institutions 

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

Options on corporate governance  

Improve time commitment 
of Board members 

Require credit institutions to disclose the number of mandates of Board members  

Require Board members to spend sufficient time to exercise their duties  

Improve 
Board members 

expertise 

of 

Counterbalance 
management dominance 

Improve 
diversity 
Boards' composition 

in 

Limit the maximum number of mandates a Board member may hold at the same time 

Require disclosure of the recruitment policy and the actual expertise and skills of Board members  

Specify criteria that Board members must possess individually and collectively with regard to appropriate 
skills and expertise  

Require that Board members should receive appropriate induction and continuous training  

Mandatory Nomination Committee 

Prohibit cumulating mandates of Chairman and Chief Executive Officer in the same credit institution 

Require disclose of internal policy on diversity  

Benchmarking different practices at national and European level 

Require diversity as one of the criteria of Boards' composition 

Require credit institutions to establish a diversity policy  

Improve  ownership  by 
Boards of risk strategy 

Require a declaration on the adequacy of risk management systems 

Require a risk statement stating credit institution's approach to risk 

Improve  priority  given  by 
Boards to risk issues 

Require disclosure of policy and practice with regard to discussion and analysis of risk issues during Board 
meetings 

Require that Boards devote sufficient time to risk issues 

Mandatory Risk committee at Board level 

Improve  the  information 
flows to Boards on risk 

Require disclosure of policy and practice with regard to the information flow on risk to the Board 

Require Boards to determine the content, format and frequency of risk information it should receive 

Require that risk management function can report directly to the Board 

Improve the standing and 
the authority of the risk 
management function 

Require disclosure of the standing and authority of risk management function 

Require an independent Risk management function  

Require an independent Chief Risk Officer  

Require Chief Risk Officer has an appropriate status and authority  

Require that removal of the Chief Risk Officer is subject to prior approval by the Board 

Ensure efficient 
monitoring of risk 
governance by 
supervisors 

Require that corporate governance is part of supervisory review 

Require that the suitability of Board members is subject to specific supervisory review 

Require supervisors to review agendas and supporting documents for meetings of the Board  

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5.3.1. 

Impacts of the preferred options: sanctioning regime 

The  options  on  sanctioning  regimes  are  expected  to  facilitate  detection  of  violations  ant  to 
empower  competent  authorities  to  apply  appropriate  sanctions.  This  is  expected  to  ensure 
better  enforcement  of  the  CRD  obligations  by  credit  institutions,  which  would  benefit  all 
stakeholders.  

These  options  will  not  create  administrative  burdens  on  financial  institutions,  or  non-
financial  companies,  including  SMEs,  except  a  limited  administrative  burden  on  credit 
institutions deriving from the obligation to provide for internal whistle-blowing systems.  

A positive social impact is expected, as the protection of deposit-holders and investors will 
be  reinforced  and  employees  of  credit  institutions  who  act  as  whistle  blowers  will  benefit 
from better protection.  

These options are in line with the common objectives of major jurisdictions within the G20 
Group to strengthen the regulation and supervision of the financial and are expected to have 
positive impact on the EU's global competitiveness. 

5.3.2. 

Impacts of the preferred options: corporate governance 

The preferred policy options improving corporate governance will help avoid excessive risk-
taking by credit institutions and lower the risk of failure. It would contribute to the resilience 
of  the  banking  sector  and  improve  investor  confidence  Therefore,  the  impact  on  credit 
institutions and all stakeholders (depositors, shareholders, creditors) should be positive.  

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.  

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. 

The preferred option could entail additional administrative burden for credit institutions and 
supervisors. However, these costs should be limited and proportionate to the overall objective. 
To reduce potential regulatory burden, the principle of proportionality should apply that takes 
into account the size and the complexity of the activities of credit institutions.  

6. 

MONITORING AND EVALUATION 

The Commission as guardian of the Treaty will monitor how the Member States implement 
the changes to the Capital Requirements Directive. The consequences of the application of the 
legislative  measures  regarding  sanctioning  regime  will  be  evaluated  on  the  basis  of  the 
following main indicators: 

•  Number of violations detected and the number of sanctions applied; 

•  Practice of the national competent authorities in the application of sanctions. 

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As regards corporate governance, the delivery of the expected benefits of new provisions may 
take  time  to  be  realised  and  the  degree  of  realisation  of  these  benefits  will  depend  on  how 
credit institutions implement the new requirements. The Commission will be monitoring the 
application of the relevant provisions of the Capital Requirements Directive 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.  

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