fte Banking Regulation Review
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ftis article was first published in fte Banking Regulation Review – Edition 6 (published in May 2015 – editor Jan Putnis).
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The Banking Regulation Review
Sixth Edition Editor
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fte publisher acknowledges and thanks the following law firms for their learned assistance throughout the preparation of this book:
ADVOKATFIRMAET BA-HR DA ADVOKATFIRMAN VINGE AFRIDI & ANGELL
ALI BUDIARDJO, NUGROHO, REKSODIPUTRO ALLEN & GLEDHILL LLP
AMARCHAND & MANGALDAS & SURESH A SHROFF & CO ANDERSON MŌRI & TOMOTSUNE
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BUN & ASSOCIATES
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DE BRAUW BLACKSTONE WESTBROEK ELVINGER, HOSS & PRUSSEN
ESTUDIO JURÍDICO USTÁRIZ & ABOGADOS FERRERE ABOGADOS
GIDE LOYRETTE NOUEL GILBERT + TOBIN GORRISSEN FEDERSPIEL
HENGELER MUELLER PARTNERSCHAFT VON RECHTSANWÄLTEN MBB KBH KAANUUN
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SYCIP SALAZAR HERNANDEZ & GATMAITAN
T STUDNICKI, K PŁESZKA, Z ĆWIĄKALSKI, J GÓRSKI SPK URÍA MENÉNDEZ ABOGADOS, SLP
VASIL KISIL & PARTNERS VIEIRA DE ALMEIDA & ASSOCIADOS
Editor’s Preface xi
Chapter 1 INTERNATIONAL INITIATIVES 1
Jan Putnis and Tolek Petch
Chapter 2 ANGOLA 25
Mafalda Oliveira Monteiro and Bruno Sampaio Santos
Chapter 3 ARGENTINA 36
Santiago Carregal and Diego A Chighizola
Chapter 4 AUSTRALIA 48
Jennifer Barron, Hanh Chau, Peter Feros, Paula Gilardoni, Deborah Johns and Peter Reeves
Chapter 5 BARBADOS 62
Sir Trevor Carmichael QC
Chapter 6 BELGIUM 71
Anne Fontaine and Pierre De Pauw
Chapter 7 BOLIVIA 83
Carlos Pinto-Meyer and Lindsay Sykes
Chapter 8 BRAZIL 91
José Eduardo Carneiro Queiroz
Chapter 9 CAMBODIA 96
Chapter 10 CANADA 113
Scott Hyman, Carol Pennycook, Derek Vesey and Nicholas Williams
Chapter 11 COLOMBIA 129
Luis Humberto Ustáriz
Chapter 12 DENMARK 143
Morten Nybom Bethe
Chapter 13 EGYPT 154
Aly El Shalakany
Chapter 14 EUROPEAN UNION 163
Jan Putnis, Timothy Fosh and Helen McGrath
Chapter 15 FINLAND 186
Janne Lauha and Hannu Huotilainen
Chapter 16 FRANCE 197
Olivier Saba, Samuel Pariente, Jessica Chartier, Mathieu Françon and Béna Mara
Chapter 17 GERMANY 218
Thomas Paul and Sven H Schneider
Chapter 18 GREECE 232
Vassilis Saliaris and Eva Galigali
Chapter 19 HONG KONG 253
Laurence Rudge and Peter Lake
Chapter 20 HUNGARY 270
Péter Köves and Szabolcs Mestyán
Chapter 21 INDIA 278
Cyril Shroff and Ipsita Dutta
Chapter 22 INDONESIA 293
Yanny M Suryaretina
Chapter 23 IRELAND 316
William Johnston, Robert Cain, Aimée McCumiskey and Sarah Lee
Chapter 24 ITALY 331
Giuseppe Rumi and Andrea Savigliano
Chapter 25 JAPAN 345
Hirohito Akagami and Wataru Ishii
Chapter 26 KOREA 356
Sang Hwan Lee, Chan Moon Park and Hoin Lee
Chapter 27 KUWAIT 368
Haifa Khunji and Basem Al Muthafer
Chapter 28 LATVIA 381
Chapter 29 LUXEMBOURG 391
Chapter 30 MOZAMBIQUE 411
Paulo Pimenta and João Leite
Chapter 31 NETHERLANDS 421
Joost Schutte, Annick Houben and Mariken van Loopik
Chapter 32 NEW ZEALAND 435
Guy Lethbridge and Debbie Booth
Chapter 33 NORWAY 450
Terje Sommer, Richard Sjøqvist and Markus Nilssen
Chapter 34 PHILIPPINES 462
Rafael A Morales
Chapter 35 POLAND 478
Tomasz Gizbert-Studnicki, Tomasz Spyra and Michał Bobrzyński
Chapter 36 PORTUGAL 493
Pedro Cassiano Santos
Chapter 37 ROMANIA 511
Alexandru Birsan, Carmen Peli and Alexandra Manciulea
Chapter 38 RUSSIA 525
Vladislav Skvortsov and Stefan Wolfgang Weber
Chapter 39 SINGAPORE 539
Francis Mok and Wong Sook Ping
Chapter 40 SOUTH AFRICA 551
Chapter 41 SPAIN 563
Juan Carlos Machuca and Tomás Acosta
Chapter 42 SWEDEN 583
Fredrik Wilkens and Helena Håkansson
Chapter 43 SWITZERLAND 594
Shelby R du Pasquier, Patrick Hünerwadel, Marcel Tranchet, Maria Chiriaeva and David Violi
Chapter 44 TANZANIA 614
Wilbert B Kapinga, Rehema A Khalid and Kamanga W Kapinga
Chapter 45 UKRAINE 624
Alexander Borodkin, Anna Sisetska and Olena Nikolenko
Chapter 46 UNITED ARAB EMIRATES 636
Amjad Ali Khan and Stuart Walker
Chapter 47 UNITED KINGDOM 644
Jan Putnis and Nick Bonsall
Chapter 48 UNITED STATES 668
Luigi L De Ghenghi
Chapter 49 VENEZUELA 720
Pedro Planchart Pocaterra and Andrés Guevara Basurco
Chapter 50 VIETNAM 730
Nasir PKM Abdul and Pham Bach Duong
Appendix 1 ABOUT THE AUTHORS 751
Appendix 2 CONTRIBUTING LAW FIRMS’ CONTACT DETAILS 783
While the pace of new rulemaking affecting banking groups has slowed somewhat in Europe and the United States in the past year, the debate about the future of global banking rages on, not least because implementation of the vast body of rules made since the financial crisis continues. If anything, the debate has become a more complex one, with a number of new fronts opening. Implementing complex new rules is, of course, generally more difficult than making them, and in many areas of activity rules that took shape some time ago are only now exhibiting their shortcomings and unintended consequences.
Questions about ‘too big to fail’ remain, but with gradually increasing realism among regulators, some governments and banks ask themselves about how this issue might best be managed in the long term. ftere is now greater recognition that painstaking recovery and resolution planning was not just an urgent post-crisis task but must remain a critical feature of banking supervision in perpetuity. Indeed, the list of points on which regulators should improve cross-border coordination on recovery and resolution matters remains formidably long. ftere is also a risk that while ‘too big to fail’ was the most well known and eye-catching phrase to emerge from the financial crisis, any attempt by governments to force or catalyse the break-up of large banking groups would risk neglecting the importance of the ‘too inter-connected to fail’ problem, which is, of course, far less a function of the size of banks.
fte past year has seen further large fines for banks from conduct regulators, most notably in the context of the spot FX markets. Many bank prudential regulators are, sensibly, thinking more seriously now about the implications of these fines (and associated litigation) for the prudential supervision of the banks affected and, potentially, for financial stability itself. fte ‘conduct agenda’, as it is now frequently called, has moved on in other ways in some countries, including increasing discussion among regulators about competition (antitrust) aspects of wholesale as well as retail financial markets. ftis will begin to create new and, in many cases, unwelcome challenges for large banks.
Return on equity continues to be a significant challenge in the banking sector, with signs of increasing shareholder pressure on some banks. ftis may add a further
dimension to structural reform in addition to the existing regulatory one. In some cases, particularly where activist investors are concerned, all involved would do well to remember that shareholder activism lay behind some of the more disastrous mergers and acquisitions in the banking sector before the financial crisis. While it can be expected that regulators in most important financial jurisdictions will be more vigilant in assessing the viability of major transactions in the sector now than they were before the crisis, boards of directors of banks will also need to avoid the temptation to give in to short termism in the face of poor shareholder returns. ftis is arguably particularly the case in an environment where market restructuring and new technology present long-term opportunities for some banks as well as threats.
Governance of banking groups continues to be high on the agendas of many regulators around the world. Directors of banks in the UK, many other European countries and the US rightly focus increasingly on whether they are discharging their regulatory obligations properly when taking significant decisions, and whether their knowledge (and their ability to oversee) the businesses for which they are responsible is sufficient. A cynical bystander would, however, continue to say that in a global bank with tens of thousands of employees worldwide, good governance structures will only ever play a limited role in reducing the risk of a calamity on, for example, a trading desk, and that good luck (or bad luck) is more likely to determine success or failure in global compliance. ftat is surely too cynical a view in light of the significant strides that many banks have made to improve their governance and oversight in recent years. However, it remains a view with some validity in relation to emerging threats that are not yet generally well understood. ftese include many cyber-related risks, not just the possibility of the use of banks’ IT systems by criminals but also the threat to financial stability posed by vulnerabilities (and in some cases unreliability) in systems used to settle payments and securities transactions. Bank governance in the context of the use of banks for criminal purposes, including tax evasion, has continued to have a very high profile over the past year.
Important developments in prudential regulation in the past year include further advances in the EU towards implementation of the Recovery and Resolution Directive and the Financial Stability Board’s proposals on Total Loss-Absorbing Capacity (TLAC). TLAC looks set to continue to dominate debates on capital structure and funding in the banking sector this year, particularly on the difficult question of where and how TLAC should be ‘positioned’ within groups of companies in order to facilitate their chosen resolution strategy.
ftis sixth edition of The Banking Regulation Review contains submissions provided by authors in 48 countries and territories in March and April 2015, as well as the customary chapters on International Initiatives and the European Union. It is a great privilege to share space in this book with such a distinguished and interesting group of banking and regulatory lawyers from around the world, and I would like to thank them all again for their participation (and those authors who have joined the book for the first time this year).
My thanks also to Shani Bans, Nick Barette and Gideon Roberton at Law Business Research Ltd for their further unusual levels of patience and skill in compiling this edition and for continuing to encourage the participation of the authors.
fte partners and staff of Slaughter and May continue to inspire and innovate in the area of banking regulation, and to tolerate the time that I spend on chapters of this book. Particular thanks go to Ben Kingsley, Peter Lake, Laurence Rudge, Lucy Bennett, Nick Bonsall, Edward Burrows, Tim Fosh, Helen McGrath and Tolek Petch.
Jan Putnis Slaughter and May London
Alexandru Birsan, Carmen Peli and Alexandra Manciulea1
fte majority of the Romanian banking industry is private and foreign-owned,2 generally by financial institutions from other EU countries. fte main actors in the Romanian banking system are the 28 locally licensed banks and nine branches of EU financial institutions.
In addition, EU banks without a local presence and operating directly in Romania on the basis of the free circulation of services and EU banking passports (as of 25 February 2015, 270 such entities were registered with the National Bank of Romania (NBR)) play an important role, especially in the corporate credit sector. Alongside banks, credit is also provided by a relatively large number of non-banking financial institutions. ftese entities cannot attract deposits and are subject to less regulation, although they are supervised by the NBR.
A characteristic of the Romanian financial industry is that debt financing through capital markets is very limited, which further increases the economic role of financial institutions as the main providers of credit for the Romanian economy.
fte Romanian financial sector was badly affected by the world economic crisis, both directly as a result of the proliferation of bad loans on the balance sheets of the lenders, and indirectly through the weakening of the parent financial institutions of Romanian banks. For the past six years, including 2014, the Romanian banking sector has dealt, on an ongoing basis, with the restructuring of bad loans as well as the restructuring of the operations of the banks. Nevertheless, there were no bank failures in 2014, and the shareholders continued to provide support for their Romanian businesses, although
1 Alexandru Birsan and Carmen Peli are partners and Alexandra Manciulea is a senior associate at PeliFilip SCA.
2 NBR Financial Stability Report for 2014, www.bnr.ro/files/d/Pubs_en/RSF/eRSF2014.pdf.
the exposure of parent undertakings to their subsidiaries in Romania declined by 28 per cent during the period from December 2012 to August 2014 (reaching €12.6 billion) as part of the deleveraging process that is expected to continue in the forthcoming period.3 Between June 2013 and June 2014, the market share of locally owned banks increased significantly (from 9.4 per cent in June 2013 to 19.8 per cent in June 2014), exceeding the share of banks with majority French and Greek capital, whereas banks with majority Austrian capital continued to hold the largest market share in the Romanian banking system (36.1 per cent in June 2014). ftese changes were due almost entirely to changes in the ownership of credit institutions in Romania leading to the reclassification of foreign-owned banks to locally owned banks (e.g., ATE Bank, renamed Banca Romana pentru Credit si investii, in December 2013, and Banca Transilvania SA in April 2014).4 fte most significant mergers and acquisitions transactions in the financial
sector during 2014 and up to the beginning of 2015 included the conclusion of a firm commitment for the acquisition of the entire share package of Volksbank Romania SA by Banca Transilvania SA in December 2014, the acquisition of Millennium Bank Romania by OTP Bank Romania at the beginning of January 2015, and the transfer of the corporate portfolio of Royal Bank of Scotland, Romania branch, to Unicredit Tiriac SA. fte target banks in these transactions are not among the largest banks in Romania, and the rankings by net asset value continue to be dominated by Banca Comerciala Romana SA, controlled by the Austrian Erste Group, BRD – Groupe Société Générale SA, Banca Transilvania SA (a publicly listed company), and Raiffeisen Bank SA, controlled by Raiffeisen International AG.
II THE REGULATORY REGIME APPLICABLE TO BANKS
i Regulatory authorities
fte main regulator in the banking sector is the NBR, which is the Romanian central bank. fte NBR exercises licensing and prudential oversight and issues regulations in the banking sector. At the end of 2012, the government decided to merge the National Securities Commission, which previously had regulatory authority in relation to capital markets, with the supervisors in the pensions and insurance sectors into the Financial Supervisory Authority (FSA), which plays a secondary regulatory role.
fte NBR and the FSA are independent public institutions with legal personality, and are managed by boards appointed by the Parliament. fte executive management of the NBR is exercised by the governor, the senior vice-governor and the two vice-governors, accordingly with the internal rules. fte FSA has a similar management structure.
fte NBR’s main objectives are to ensure and maintain price stability. Furthermore, it is tasked with defining and implementing monetary policy and the exchange rate policy. It authorises and supervises credit institutions and is competent to regulate the sector.
fte FSA has, inter alia, authorisation, supervising and regulatory competence in relation to capital markets. ftis implies that it has supervisory authority over the relevant
activities of credit institutions, but also that it supervises banks as issuers where their securities are publicly listed in Romania.
ii Legal structure of banks
Romanian credit institutions are organised as joint-stock companies and must be licensed by the NBR. fteir management structure and the main rules applicable to the conduct of their business, risk management, monitoring and reporting, internal control mechanisms and compensation policies and practices are set out in their articles of association and their internal regulations.
EU and EEA credit institutions can ‘passport’ into Romania to establish a branch or provide services directly. ftus, Romanian branches of banks established in other EU states may operate in Romania on the basis of a notification to the NBR made by the home Member State supervisory authority and registration of the branch with the Romanian Trade Registry. Credit institutions authorised and supervised in another EU or EEA Member State may provide services in Romania directly and immediately, without the establishment of a local presence, on the basis of a notification sent to the NBR by their home supervisory authority.
After ‘passporting’, foreign credit institutions must comply with Romanian law. Although the home Member State authority continues to be the main regulatory authority, Romanian branches of EU and EEA credit institutions must also comply with Romanian regulations that aim to protect general interests, regulations regarding statistics and monetary policy and NBR liquidity supervision requirements. fte branch must also publish certain statements and accounting documents in Romanian.
A credit institution established in a non-EU or EEA country can provide financial services on the Romanian market only if:
a it has a branch established in Romania and supervised by the NBR;
b the supervisory authority from the home non-EU or EEA country does not oppose the establishment of the branch;
c the services to be provided in Romania do not exceed the bank’s authorised business object in its home jurisdiction; and
d the credit institution complies with Romanian law.
III PRUDENTIAL REGULATION
i Relationship with the prudential regulator
Romanian banking regulations closely follow EU legislation in the field, without national exceptions or carveouts. It is expected that this will continue to be the case, as the NBR and the government have always been favourable to deeper integration with the EU.
fte NBR is a strong, well-respected regulator that generally takes a close look, both formally and informally, into the business activities of the entities it supervises. It is generally seen to be moving towards a risk-based approach to regulation and supervision.5
5 International Monetary Fund (IMF), IMF Country Report No. 10/47 February 2010, Romania: Financial Sector Stability Assessment, completed based on the information
Disclosure obligations towards the NBR refer to a variety of aspects, including:
a any changes in the share capital of the bank, its management or in the situation of the shareholders;
b information on the bank’s regulatory capital compliance;
c the level and composition of the bank’s own funds;
d the bank’s liquidity levels;
e any changes in the activity of the bank, such as, for instance, the opening of branches, the pursuit of a new activities or, on the contrary, the restriction of its activity;
f any amendments to the general business conditions and general conditions of saving–lending agreements; and
g information regarding any high-level remuneration or compensation of employees.
An important development in this respect is the fact that, since 2012, credit institutions are required to prepare IFRS-compliant financial statements.
ii Management of banks
As joint-stock companies, Romanian credit institutions may adopt either a one-tier or a two-tier system. fte two-tier management system, favoured by a majority of the banks, implies management by a management board of at least three members, under the control of a supervisory board made up of non-executives. A one-tier system implies a board of directors the majority of which are non-executives, and the delegation of executive powers to at least two executives.
Bank managers and directors are required to meet reputational and professional experience standards to ensure the prudent and sound management of the bank. Senior and middle management must be authorised by the NBR, and their authorisation may be withdrawn if they no longer meet the required standards or have violated relevant legal provisions.
Romanian banks must set up their own management framework, clearly detailing the management structure, the allocation of responsibilities and the flow of information between these structures. To ensure a clear and transparent decision-making process, a bank’s management must create an efficient internal control system based on three fundamental functions: risk management, compliance and internal audit. ftese functions may be centralised at the level of the parent company, but they may not be outsourced to other entities.
fte management is generally responsible for establishing and approving strategies and policies regarding risk management, capital adequacy, know-your-customer and other matters at a bank’s level, for ensuring that the management strategies and policies are documented in manuals and guides that are made available to the bank’s personnel, and for organising the internal control system. fte management duties must be clearly
available until 28 April 2009; IMF, Publication Services, Washington, DC.
set out in writing, as must be their working procedures and policies for achieving the business objectives.
Romanian subsidiary banks are allowed to establish their management framework in line with the business objectives, risk profile, principles and policies applicable at the group level. ftey must analyse any decision or practice applicable at the group level to ensure compliance with the Romanian regulatory and prudential requirements applicable to the subsidiary at a local level. However, Romanian subsidiaries are also required to act independently and actively in the interest of the subsidiary, and must be able to conform to NBR supervision.
When a Romanian bank is the parent company of a group, its management structure is responsible for determining the general management strategy, business objectives, risk profile, principles and policies at the group and subsidiary levels, subject to compliance with the laws of country where each subsidiary is located.
No specific approval of the holding company is needed for implementing the decisions taken by the management of the Romanian bank, unless such approval is required under the corporate governance of the holding company.
Remuneration of management and employees
Romanian regulation of remuneration in the financial system transposes Directive 2010/76/EU. ftus, staff members that perform activities with a material impact on the risk profile of the bank, such as managers, directors, risk-taking staff, staff in supervisory functions and staff with equivalent remuneration to these categories, are subject to the requirement that their level of compensation must be consistent with the business strategy and long-term objectives of the bank, to address conflict of interests issues.
ftis is meant to discourage excessive risk taking and to encourage long-term soundness in the banking sector. To further this objective, the fixed and variable components of the remuneration need to be appropriately balanced, and the fixed component should represent a sufficiently high proportion of the total remuneration to allow the operation of a fully flexible policy on variable remuneration components, including the possibility to pay no variable remuneration component.
At least 50 per cent of any variable remuneration must consist of an appropriate balance between shares or equivalent ownership interest subject to the legal structure of the credit institution concerned, or share-linked instruments or equivalent non-cash instruments in the case of a non-listed credit institution, and, where appropriate, other instruments that adequately reflect the credit quality of the bank as a going concern. Additionally, at least 40 per cent or, in the case of a variable remuneration component of a particularly high amount, at least 60 per cent of the variable remuneration component is deferred over a period of not less than three to five years, and is correctly aligned with the nature of the business, its risks and the activities of the member of staff in question. In any case, the variable remuneration must be paid only if it is sustainable according to the financial situation of the bank, and justified according to the performance of the bank, the business unit and the individual concerned, and if, when assessing individual performance, financial and non-financial criteria are taken into account. Performance is assessed in a multi-year framework to ensure that the assessment process is based on longer-term performance, and that the actual payment of performance-based components of remuneration is spread over a period that takes into account the underlying business
cycle of the credit institution and its business risks. Guaranteed variable remuneration is only allowed in the first year of employment of new staff.
Remuneration policies must be reported to the NBR. fte authority enjoys the power to reduce the variable component of remuneration if this is incompatible with a healthy capital base.
iii Regulatory capital and liquidity
In terms of regulatory capital and liquidity requirements starting from 1 January 2014, the Capital Requirements Regulation (CRR)6 became directly applicable in Romania and the national execution measures implementing the Capital Requirements Directive (CRD IV)7 entered into force.
Composition of regulatory capital
Since 1 January 2014, the structure of own funds is regulated by the CRR. Romanian legislation also implements the risk buffers regulated by Directive 2013/36. For the moment, however, the NBR has announced that the capital conservation buffer and the countercyclical capital buffer will not be applicable, and has established a level of zero for the systemic risk buffer.
Minimum capital requirements
fte minimum capital requirements for the risks determined under Article 92 of the CRR became applicable on 1 January 2014. fte total capital/own funds ratio (the equivalent of the former minimum solvency ratio that was applicable until the end of 2013), which shows the degree of capital adequacy required by the CRR, is 8 per cent. fte aggregate capital/own funds ratio of the Romanian banking system was 17 per cent in June 2014, registering an increase from 14.7 per cent in June 2013 that was mainly due to a 20 per cent reduction in the volume of the deductible prudential filter.8
Romanian legislation requires a minimum level of the initial capital of credit institutions, which varies depending on the type of institution. Starting from 1 January 2014, the initial capital must contain the elements at Article 26(1)(a) to (e) of the CRR. At the time of their authorisation, Romanian banks and local branches of foreign banks must hold an initial capital of 37 million lei, while for mortgage banks and savings and loan banks the minimum amount is 25 million lei.
fte consolidated supervision of banking groups in Romania is exercised by the NBR, which has the following general responsibilities: coordinating the collection and distribution of relevant and essential information; planning and coordinating the supervision activities during the normal conduct of business; and planning and coordinating the supervision
6 Regulation 575/2013.
7 Directive 2013/36.
8 NBR Financial Stability Report for 2014; see footnote 2.
activities by cooperating with the other competent authorities involved in preparing for and during crisis situations.
fte Romanian secondary legislation determines the level of application of other prudential requirements, including regarding the internal process of capital adequacy and large exposures, the area of consolidation, etc. Since 1 January 2014, the method of calculation of own funds on a consolidated level and the methods of consolidation have been regulated by the CRR.
Regulation of the liquidity of banks
fte liquidity of credit institutions is regulated through NBR secondary legislation, which has been maintained in force since 1 January 2014 as permitted by Article 412(5) of the CRR, and it applies to entities incorporated in Romania, as well as to branches of foreign credit institutions. Credit institutions must maintain at all times a liquidity ratio for their entire operations expressed in lei of at least 1 for each maturity band, calculated as a ratio between effective liquidity and necessary liquidity. Credit institutions must report to the NBR on a monthly basis their liquidity ratio, as well the liquidity ratios of all their local and foreign branches. Although not implemented, the NBR has been monitoring the liquidity requirement of 100 per cent, regulated by Article 460(2)(d) of the CRR. Based on the reports received for March 2014, the introduction of the liquidity requirement will not have a significant impact on the Romanian banking system, given that most of the Romanian credit institutions would meet this requirement, and that only some credit institutions that are not of systemic importance would not be in compliance with it.9
iv Recovery and resolution
When banks are in a difficult financial situation, the NBR may take certain measures, which include requiring the preparation of a plan for the re-establishment of compliance with supervision requirements, placing the credit institution under special supervision or special administration, or taking stabilisation measures.
fte plan for the re-establishment of compliance with supervision requirements may include measures such as requiring the credit institution to hold a level of own funds higher than regulated, limiting participation in other entities (thus forcing the credit institution to sell its shares), or limiting or restricting the operations of the bank or its network.
Special supervision implies setting up a special supervision committee that must ensure the NBR’s recommendations are properly applied, suspend the enforcement of acts that breach sound and prudent banking practices, limit or suspend some activities for a certain period, or formulate propositions regarding strategies and sanctions.
Special administration implies the termination of the mandate of the board of directors or of the managers and the appointment of a special administrator, as well as the suspension of the general meeting of the shareholders. fte special administrator may take measures such as increasing or decreasing share capital, sale of assets, mergers or demergers.
9 Article 57(a), (c) and (ca) of Directive 2006/48.
Stabilisation measures may be taken in respect of credit institutions in distress that threaten financial stability. ftese measures include the transfer of business from the affected banks to eligible banks or to specially created bridge banks; or the involvement of the Bank Deposits Guarantee Fund (BDGF) as a delegated administrator of the credit institution, or even as a shareholder by subscribing newly issued shares in a share capital increase.
fte bridge bank is a credit institution authorised by the NBR that has the BDGF as a sole shareholder. Its purpose is to take over the assets and liabilities of a failing bank to ensure that banking services continue to be offered, and then to sell them to an eligible third party. fte bridge bank must comply with legal provisions applicable to credit institutions and is subject to prudential supervision. It is managed in a two-tier system, with the NBR appointing the board members and the BDGF acting as the supervisory board. fte bridge bank is established and operates for a period of up to two years, which can be extended.
fte financing of the bridge bank is ensured by the BDGF. Additional funding may be obtained from government loans via the Ministry of Public Finance. Since the outbreak of the global financial crisis, no public funds have been used to support banks. All changes in the banking system were based on market solutions (mergers and takeovers of assets), as well as through significant recapitalisations made by shareholders.10
Although the term for the transposition of Directive 2014/59/EU of the European Parliament and of the Council of 15 May 2014 establishing a framework for the recovery and resolution of credit institutions and investment firms was 31 December 2014, Romania has not implemented it to date.
IV CONDUCT OF BUSINESS
Banking is a regulated business supervised by the NBR. fte NBR authorises the set-up of credit institutions, their management, changes to their ownership structure and other corporate changes, monitors compliance with regulations, and is entitled to apply sanctions and enforce remedies in cases of non-compliance. Credit institutions must file various reports with the NBR on a continual basis on, inter alia, credit exposure, capital adequacy, liquidity, portfolios and minimum reserves.
Credit institutions are required to implement strict know-your-customer policies aimed at preventing money laundering and terrorism funding, and to report to the National Office for Prevention and Control of Money Laundering any suspicious operation and generally any operations of a minimum of €15,000. Banks are further subject to publicity and transparency requirements the purpose of which is to inform clients of their business and to allow an adequate assessment of their risk profile. Retail clients are further protected by consumer protection legislation that grants to them certain additional rights.
10 NBR Financial Stability Report for 2014; see footnote 2.
ii Sources of liability
Banks and banks’ managers can he held liable under civil, administrative and criminal law, depending on the nature and seriousness of their unlawful actions. Liability may arise under regulatory banking legislation, related special legislation on subjects such as consumer protection, money laundering and data protection, or under general corporate, civil or criminal law.
fte NBR may apply administrative sanctions to banks generally for failure to comply with legislation or measures imposed by the NBR, for breach of restrictions imposed upon the bank’s authorisation or of reporting obligations, as well as for performing fictitious operations without real coverage with the aim of incorrectly presenting the financial status or exposure of the bank or for endangering the credibility of the bank due to inadequate management of funds.
Such administrative sanctions range from written warnings, fines applied to the bank amounting up to 10 per cent of the net value of the previous financial year’s turnover, fines applied to the bank’s management up to the equivalent in lei of €5 million (calculated at the exchange rate applicable on 17 July 2013) all the way up to withdrawal of the banking licence and withdrawal of the approval given to the bank’s managers.
Other authorities that intervene more often through administrative sanctions with respect to their fields of supervision are the National Authority of Consumer Protection, the National Supervisory Authority for Personal Data Protection and the National Office for Prevention and Control of Money Laundering. fte Competition Council also supervises, inter alia, banking businesses, and can apply fines of between
0.5 and 10 per cent of the previous year’s turnover of the offending entity.
Administrative liability does not exclude civil and criminal liability. Criminal liability can, for example, be triggered if lending or depositing activities are carried out without authorisation or for certain breaches of money laundering legislation. Civil liability would arise for breach of contract or in tort.
iii Bank secrecy and data protection
Banks must keep confidential all facts, data and information concerning their activity, as well as all facts, information or data at their disposal regarding their clients. Confidential information includes the property, activity, business, personal and business relations and the bank accounts of a client. Any person with whom the bank has entered into (even unsuccessful) negotiations is protected by banking confidentiality.
Exceptionally, disclosure of confidential information is permitted when the bank is able to justify a legitimate interest, when the express consent of the client is obtained, or when disclosure is made to authorities or institutions if such authority or institution is entitled by law to require and receive such information, and the relevant information is clearly identified, as well as disclosure to criminal investigation bodies or courts in relation to investigations concerning the bank’s clients. All entities to which banks disclose confidential information also have a confidentiality obligation themselves.
In addition to banking secrecy provisions, banks are also required to observe the data protection legislation. Banks should notify the data protection authority about their status as data controller, specifying the types of collected data. ftey must also provide
certain minimum information to the individuals whose data is processed, and protect the data against unauthorised access or disclosure.
Banks are mainly funded by deposits, capital contributions and loans. 2014 was generally characterised by a decline in foreign financing, offset by an increase in domestic financing. Deposits are attracted from residents and non-residents. Locally attracted deposits represent the main source of the financing of banks in Romania.11 fte favourable developments of deposits raised from residents in 2014 corresponded with a contraction in loans to the private sector contributing to the significant improvement of the loan-to- deposit ratio, which stood below par at the end of July 2014 (99.8 per cent) for the first
time since the outbreak of the financial crisis.
fte share of credit lines extended by parent banks to their Romanian subsidiaries continued to decline in 2014, resulting in foreign liabilities ranking lower in the financing structure of the banking sector: starting with 2014, foreign liabilities came in third for the first time, after capital and reserves, representing 18.9 per cent of the balance sheet in July 2014.
Banks’ capital remained robust, ensuring over 19.2 per cent of asset financing in July 2014. fte increase in capital holdings was achieved mainly by optimising risk-weighted assets, which was carried out through changes in the portfolio structure or a reduction in the balance sheets, since the capacity of banks to raise capital from private investors, including from parent banks, remained significantly lower than in the pre-crisis period.12 Transactions between banks on the monetary and foreign exchange interbank markets are another source of funding. On the monetary interbank market, the NBR enters into repurchase and reverse repurchase agreements, sale-purchase agreements of eligible assets (such as T-bills and deposit certificates issued by the NBR), loan agreements secured with eligible assets, currency swaps, deposit agreements with banks and issuance of deposit certificates operations.
In 2014, the lower currency mismatches between assets and liabilities caused the contraction in the foreign currency financing needs of credit institutions. Nonetheless, foreign exchange swaps with non-resident credit institutions remained particularly important for covering mismatches, given the still high loan-to-deposit ratio and the reduction in foreign financing sources. fte net daily balance of funds raised via leu currency swaps totalled about €6 billion in 2013 and the first half 2014, while the daily traded volume on the local market stood, on average, at around €1 billion.13 Short-term funding of banks can be ensured, under certain conditions, through overnight loans granted by the NBR under the ‘lombard facility’, which are collateralised with eligible assets such as T-bills or deposits certificates issued by the NBR.
Banks may also set up overnight deposits with the NBR for which they obtain a fixed interest rate from the NBR. fte NBR also pays interest for the minimum reserves that banks are duly required to deposit with the NBR.
VI CONTROL OF BANKS AND TRANSFERS OF BANKING BUSINESS
i Control regime
Changes of shareholding of credit institutions follow the EU Acquisition Directive, which Romania has implemented. fte acquisition of any direct or indirect qualified participation in a Romanian bank (i.e., 10, 20, 33, or 50 per cent of the share capital or voting rights of the respective regulated entity) must be approved by the NBR.
fte proposed acquirer must complete a standard form questionnaire, thus providing information regarding itself, the entities in its shareholding chain (up to the ultimate shareholders) and the proposed acquisition (including its financing), and must submit certain supporting documents to the NBR.
In the event of a change of control, the proposed acquirer must provide a business plan and information about the impact of the acquisition on the bank’s management, and must forecast financial statements for the next three years. If the proposed acquisition does not lead to a change of control, a less complex strategy document is required.
A separate notification must be submitted to the NBR by a shareholder intending to reduce its qualified participation in the Romanian bank.
fte proposed acquisition can only be implemented after the NBR grants regulatory approval. After the transaction is completed, the Romanian bank must provide the NBR with evidence of the changes in its shareholding structure.
Evaluation of the proposed acquirer
For the evaluation of the notification filed by a proposed acquirer, the NBR takes the following into account:
a the reputation of the proposed acquirer;
b the reputation and professional experience of the managers appointed following the acquisition (if any);
c the financial solidity of the proposed acquirer;
d the ability of the Romanian bank to comply with the capital adequacy rules; and
e money laundering and terrorist financing risks.
A less stringent notification regime is available if the NBR already possesses the necessary information or may obtain it from another supervisory authority. fte approval process may be somewhat simplified if the proposed acquirer is a regulated entity in the financial field based in an EU or EEA Member State or, in certain cases, even if based in a non-EU or EEA Member State, if the NBR is able to cooperate with the competent regulators from the home jurisdiction of the proposed acquirer for the purposes of its assessment.
Once the complete documentation regarding the proposed acquisition is submitted to the NBR, the regulator has an assessment period of 60 business days to issue a decision regarding the proposed acquisition. Further information requests may lead to an extension of the term to 80 or to 90 business days (if the proposed acquirer is situated or regulated outside the EU or EEA, or even if it is situated in the EU or EEA, it is not subject to the supervision applicable to credit institutions, undertakings for collective investments in transferable securities, life insurance companies, general insurance companies, capital markets or insurance intermediaries).
Romanian banks are prohibited from granting loans, security interests, guarantees or any other kind of financial assistance for the purchase or subscription of its own shares by a third party.
i Transfers of banking business
fte business of a bank may be transferred to another bank through corporate restructuring operations such as mergers or spin-offs based on a merger or spin-off plan detailing the distribution of assets of debts to the beneficiary entities. Both mergers and spin-offs are subject to NBR approval, and do not require consent from the bank’s counterparties for the transfer of their agreements. fte acquiring bank needs to be registered with the public registries as creditor in relation to security interests that are being transferred to it as a result of the merger or spin-off.
fte transfer of a bank’s business structured as an asset deal generally implies the transfer of such business as a going concern, and involves the transfer of corporeal and incorporeal assets of various types, of agreements and relevant employees on the basis of a business transfer agreement. Separate agreements may need to be entered into in authentic form, for example in relation to the transfer of freehold property or for the registration of the new owner with certain public registries, which generally implies the payment of notary fees and registration fees. Depending on the assets held by the transferring bank, various other specific formalities may need to be observed.
To achieve a full transfer of obligations in an asset deal, the consent of a Romanian bank’s counterparties is needed. From a practical perspective, obtaining the individual express consent of each customer could prove to be a time-consuming and difficult process; therefore, alternative mechanisms for obtaining the tacit or implicit consent of customers may need to be considered on a case-by-case basis.
fte purchaser of the Romanian bank’s business would need authorisation (from a regulatory perspective) to carry out the relevant business in Romania, and the transaction should be approved by the NBR.
VII THE YEAR IN REVIEW
Similarly to 2013, 2014 was a relatively unexceptional year for the Romanian banking sector, which continues to work out the effects of the financial crisis against a background of modest domestic economic growth and a slowdown in the growth of Romania’s main trading partners (and home jurisdictions of the entities controlling the Romanian banks).
Loan portfolio quality remains a vulnerability of the Romanian banking system, with the non-performing loan ratio continuing its upward trend from 20.3 per cent in June 2013 to 22.3 per cent in March 2014. ftis led to the allocation of additional operational resources for their recovery, and enhanced prudence in granting new loans. In this respect, the 2014 NBR Financial Stability Report noted that a lag between the economic cycle and the financial cycle was manifest, given that the resumption of economic growth was not accompanied by the recovery of lending to the real sector, the continuing efforts to cover loan losses putting pressure on banks’ profitability. However, a characteristic of the Romanian banking system is that the credit risk is mitigated by high provisioning of non-performing exposures.
As a result, the NBR continued to impose prudential filters on the computation of banks’ own funds and banking prudential indicators in order to ensure that banks maintain an adequate level of provision corresponding to non-performing loans. ftese filters are expected to be gradually eliminated by the NBR during the implementation of the new prudential requirements introduced by the Basel III reforms (in the 2014 to 2018 period).
fte conflict between Russia and Ukraine did not have any significant effects on the financial sector in Romania, and it is not expected to produce any systemic imbalances because there are no Russian or Ukrainian-owned banks in Romania, and because the level of imports and exports with the two countries is rather small. However, an escalation of the Ukraine conflict may affect Romania through the common lender channel, as most foreign financial claims on Ukraine and Russia are held by Austria, Italy, and France, which own significant shares in the banking and real sectors in Romania.
Since the economic crisis has highlighted the need for adequate protection of the financial system, a series of measures has been implemented at the EU and national level to strengthen the regulation, supervision and risk management of the banking system. In particular, significant changes to the national prudential regulatory framework were made in the context of the implementation of Basel III international standards in EU Member States, as well as other non-Basel III reforms provided by Directive 2013/36/ EU on the access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms, and Regulation No. 575/2013 on prudential requirements for credit institutions and investment firms (CRD IV package). fte CRD IV package became applicable at a national level in January 2014 and is expected, in the long term, to consolidate the financial stability of the banking sector by increasing its resistance to financial shocks, as well as contribute to the sustainable economic growth of the country.
2014 was favourable for Romania’s governmental bonds due to the rating change by Moody’s Investors Service regarding Romania’s Baa3 government bond to stable from negative in April 2014; the upgrade in May 2014 by Standard & Poor’s of Romania’s sovereign rating, leading to the regaining of the investment grade (with stable outlook); and the inclusion in July 2014 of Romanian bonds in JP Morgan’s GBI-EM Global Diversified index.
VIII OUTLOOK AND CONCLUSIONS
Forecasts point to 2015 being a solid year from a macroeconomic perspective, with GDP still growing and the European Commission anticipating economic growth of 2.7 per cent and a drop in the unemployment rate to 6.9 per cent. Progress is not spectacular, however, and for the Romanian banking system, 2015 is likely to maintain the trends of 2014, as well as the same concerns with regard to non-performing loans and financial deleveraging.
fte Romanian macroeconomic environment (and implicitly the banking sector) will be influenced by the evolution of the country’s relationship with the IMF, an important source of economic stability for Romania. fte last standby agreement was approved by the IMF in September 2013, with a value of approximately €2 billion for two years. However, government officials have recently excluded the conclusion of a new standby agreement in 2015, mainly due to failed negotiations with IMF representatives in relation to restructuring measures for publicly owned companies, the budget deficit and the liberalisation of gas prices. fte NBR will maintain its prudential approach, with prompt responses regarding the implementation of European regulations. A decline in the annual inflation rate is expected given that the average annual inflation rate in Romania remained at 1.4 per cent (which is relevant for assessing convergence with the European Union), lower than previously forecast, due to the drop in volatile prices, subdued eurozone inflation, the persistence of the negative output gap, and the ongoing downward adjustment in inflation expectations. fte NBR will closely monitor domestic and global economic developments so that, via an adequate dosage of its instruments, it can ensure price stability over the medium term and financial stability.14 One of the challenges for the Romanian banking system remains the adoption
of the euro as the country’s currency, which, according to the Maastricht Treaty, should
have occurred on 1 January 2015, provided that several criteria related to the stability of the currency, the level of state debt, and the budget deficit, inflation and interests are met. However, according to recent political and NBR statements the new target date for the adoption of the euro will be no earlier than 2019.
An extensive assessment of the Romanian banking sector is expected in 2015 with stress test programmed for October in relation to the prospective joining of the Banking Union. ftis comprehensive assessment exercise will cover all significant credit institutions. Romania’s adhesion to the Banking Union will most likely result in an direct supervision by the BCE of the three largest Romanian banks (Banca Comerciala Romana SA, BRD
– Groupe Société Générale SA and Banca Transilvania).15
14 NBR board press release dated 7 January 2015, available at www.bnr.ro/page.aspx?prid=9817.
15 NBR Financial Stability Report for 2014; see footnote 2.
ABOUT THE AUTHORS
Alexandru Birsan is one of the founding partners of PeliFilip, and previously worked for seven years in the Bucharest, London and Paris offices of Linklaters. His main areas of expertise are M&A, finance and capital markets and corporate law.
Recent prominent work includes advising Raiffeisen Bank International and BNP Paribas as mandated lead arrangers in €930 million facility to OMV Petrom SA, the largest oil and gas producer in southern Europe; advising the Romanian Ministry of Finance on the Rule 144A upgrade of its €7 billion EMTN programme; advising CVC on the acquisition of the InBev operations in CEE (value US$2.2 billion) on both the acquisition and the associated financing, and then on the subsequent sale to Molson Coors (value US$3.5 billion); advising RCS&RDS, a leading regional communications and media company, on its €450 million high-yield bond offering and €300 million loan facility; advising GDF Suez Romania, a leading gas and electricity company, on the issuance of 250 million lei of corporate bonds to be listed in Bucharest; advising ING, BRD Société Générale, RBS, Raiffeisen and Unicredit in connection with complex inter- creditor and security sharing arrangements with other syndicated lenders in relation to facilities in an aggregate value exceeding US$550 million; and advising ING (as sole lead manager and sole book runner) on the initial public offering and London listing of A&D Pharma, the first IPO of a Romanian business on an international market.
Carmen Peli has wide experience in banking and finance matters. Over the past decade she has assisted various banks and financial institutions (e.g., IFC, EBRD, DEG, RBS, Citibank and Garanti) in relation to financing and regulatory matters, as well as debtors in relation to financing packages for their acquisitions or projects.
About the Authors
Prominent recent work includes assisting a leading US financial services group in relation to the joint venture restructuring of several financial services companies in Romania (a bank and three financial services institutions in the consumer finance sector), which implied, inter alia, the transfer of all assets and liabilities from a sizeable operating bank branch to a new bank; assisting a significant regional bank on various attempted acquisitions, and the reorganisation of its banking and financial services operations; assisting various debtors in relation to new facilities; and assisting in the restructuring of existing facilities, including standstill arrangements and bilateral negotiations.
Alexandra Manciulea is a senior associate of PeliFilip. Her primary practice area is finance, and her background also includes experience in other areas such as general corporate, employment, capital markets and environment-related matters. Prior to joining PeliFilip, Ms Manciulea worked with Linklaters Bucharest.
Her experience includes advising a syndicate of 16 domestic and international lenders in relation to a revolving credit facility amounting to €930 million granted to OMV Petrom SA, the largest oil and gas producer in southern Europe; advising CVC on the financing of the acquisition of the InBev operations in CEE (a transaction with an enterprise value of US$2.2 billion); advising Citibank Europe plc, Dublin–Romania branch, in relation to the sale of its consumer business in Romania to Raiffeisen Bank; and advising GE Capital in relation to the transfer of all assets and liabilities from an operating bank owned by Garanti to a new bank co-owned by GE and Garanti (the first transfer of business performed on the Romanian banking market).
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