Question 1. What Is The Role Of Bank Supervision?
The position of Banks Supervision is to make certain a safe and sound financial machine for protection of depositors price range and conducive for macro-economic stability.
Question 2. Where Does Bank Of Uganda Derive Its Mandate To Supervise Financial Institutions?
The mandate of supervising financial institutions is derived from the Financial Institutions Act 2004, the Micro-Deposit Taking Institutions Act 2003 and the Bank of Uganda Act 1993.
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Question three. How Is Banks Supervision Structured?
Banks Supervision is structured into departments; Commercial Banking Department and Non-Bank Financial Institutions (NBFI) Department. Commercial Banking Department is charged with the supervision of commercial banks while NBFI supervises credit score institutions, Micro Deposit Taking Institutions and other non-bank economic establishments underneath the mandate of Bank of Uganda.
Question 4. Can Banks Supervision Stop A Bank From Failing?
Bank Supervision can not entirely stop financial establishments from failing. Reasons for failure are various along with amongst others internal weaknesses in monetary establishments and systemic/external factors that are past the manage of financial institutions. However, on every occasion, an organization is envisaged to fail, Bank of Uganda endeavours as a whole lot as possible to minimize the value of loss through proactively winding up the operations of the distressed economic institution.
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Question five. What Is The 2016 Eu-wide Stress Test About?
The 2016 EU-huge stress check consists of 51 banks protecting 70% of total banking belongings inside the European Union. It is led by way of the European Banking Authority (EBA), which develops the methodology for the exercising. The purpose of the exercising is to examine how a financial institution’s capital position develops on the basis of quit-2015 facts over a length of 3 years until 2018, below both a baseline and an adverse state of affairs.
The European Commission presents the baseline state of affairs at the same time as the European Systemic Risk Board (ESRB) provides the common detrimental situation. ECB Banking Supervision is responsible within the euro area for coordinating commands to banks, receiving the ensuing information and performing the satisfactory guarantee, i.E. Validating banks’ statistics and stress take a look at results.
Of the 51 banks challenge to the EBA-led pressure test 37 are directly supervised by using ECB Banking Supervision, overlaying 70% of banking assets inside the euro vicinity. Individual effects for all banks problem to the EBA-led strain take a look at, along side unique balance sheets and exposure information as of give up-2015, might be posted by way of the EBA on Friday, 29 July 2016.
Separately, the ECB conducts in parallel a stress test of a further fifty six banks under its direct supervision, the use of the same methodology. This is an inner supervisory exercising carried out by way of the ECB. Therefore, the consequences aren't published by way of the ECB. However, if a bank chooses to post its very own outcomes it can achieve this however the publication does not suggest ECB endorsement.
There may be no banks “failing” or “passing”. The Pillar 2 capital cannot be mechanistically computed from the pressure test results as these are one, however not the best factor taken into consideration. The Pillar 2 capital will be decided within the SREP choices later this 12 months.
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Question 6. What Is This Exercise Really Testing?
The exercising is analysing how a financial institution’s capital role develops assuming a static balance sheet over a duration of 3 years till 2018, below each a baseline and an unfavorable situation. The unfavourable state of affairs displays the 4 systemic risks that had been considered by means of the ESRB to constitute the maximum cloth threats to the steadiness of the EU banking sector: (i) an abrupt rise in currently low global bond yields, amplified by way of low secondary market liquidity; (ii) vulnerable profitability possibilities for banks in a low nominal growth surroundings amid incomplete balance sheet changes; (iii) growing debt sustainability worries in the public and non-monetary private sectors amid low nominal increase; (iv) prospective pressure in a rapidly growing shadow banking zone, amplified by way of spillover and liquidity risk.
Compared to 2014 this 12 months’s damaging scenario is stricter as it includes more conservative elements. Moreover, shocks had been frontloaded, in order that the unfavourable effect materialises in advance for the duration of the pressure test horizon. As financial institution losses comply with macroeconomic strain with a lag, this selection will increase the predicted impact of the situation. The methodology has also further developed. The inclusion, for the first time, of a committed operational and behavior threat pressure test technique in the 2016 exercise is a great example on this regard.
The pressure test has a three-yr horizon and makes use of static stability sheets. This method that, for the purpose of the pressure test, it's miles assumed that belongings and liabilities that mature at some stage in the strain take a look at horizon are replaced with similar financial units in terms of authentic maturity, credit score best, geographical exposure, and so forth. As a result, the commercial enterprise mix and version remains unchanged and any countermeasures that a financial institution would take in opposition to the pressured assumptions over the three-yr duration are not taken into account. For this motive, banks might sincerely fare better in fact than in the strain check’s unfavorable state of affairs.
Question 7. Does The Stress Test Account For The Impact Of The Outcome Of The Referendum In The United Kingdom On Eu Membership?
The unfavorable state of affairs is extensively harsher than analysts’ forecasts of the terrible impact of Brexit on the economy. Although no singular occasion including Brexit is thought, the projections for the gross domestic product (GDP) of the euro region below the adverse situation are greater extreme for every yr of the stress check horizon than the poor effect on GDP increase foreseen with the aid of analysts due to Brexit.
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Question eight. How Does The Stress Test Account For Non-performing Loans?
EU-wide pressure checks are solvency physical activities to test if the banks stay solvent after incurring losses related to a alternate of the monetary situations. The EBA stress test of 2016 takes the state of affairs of a bank as at 31 December 2015 as a starting point and simulates the effects of various eventualities defined by the European Commission and the ESRB, making use of the technique advanced by using the EBA. The strain take a look at methodology bills for the non-acting mortgage (NPL) stock, as banks are required to model the impact of the negative scenario on the NPL quantity. In specific, the exercising places further stress on a bank’s defaulted loans, resulting in additional loan losses within the detrimental scenario.
Question nine. Is There A Pass/fail Threshold? What Supervisory Actions Are Taken If Banks Do Not Meet The Capital Demand?
The stress test isn't a pass/fail workout. No hurdle rates or capital thresholds are described for the cause of the workout. However, the findings of the pressure take a look at can be part of the ongoing supervisory talk. As such, the ECB will use the stress take a look at as critical input for the overall 2016 Supervisory Review and Evaluation Process (SREP), so one can close later this yr. In this context, it'll also be used as one input factor for the supervisory capital call for for banks.
The supervisory capital demand is based totally at the individual hazard profile of a financial institution. In the 2016 SREP manner, it'll for the primary time encompass components: Pillar 2 necessities and Pillar 2 steering. Pillar 2 requirements are binding and breaches could have direct prison results for banks. Pillar 2 guidance isn't always directly binding and a failure to meet Pillar 2 guidance does not robotically cause legal motion. Nonetheless, the ECB expects banks to fulfill Pillar 2 steering.
The “stacking order” of the extraordinary capital components in line with the EBA guidance is defined in Figure 1. Under the stacking order, banks facing losses will first fail to fulfil their Pillar 2 guidance. In case of in addition losses, they would next breach the blended buffers, then Pillar 2 requirements, and in the end Pillar 1 requirements.
If a financial institution does not meet its Pillar 2 steerage, supervisors will cautiously recall the reasons and occasions and might outline first-class-tuned supervisory measures. Should the capital deliver of a financial institution be in addition decreased, leading to a breach of the blended buffers, automated measures proscribing the distributable amounts of banks (e.G. Dividends or bonuses) are activated. A in addition depletion of the capital supply would cause a breach of Pillar 2 requirements, ensuing in a wide set of extra supervisory movements.
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Question 10. Do You Expect Capital Demand In The System To Increase On Average Due To The Stress Test Exercise?
ECB Banking Supervision announced already last 12 months that it perceives the modern degree of capital inside the banking device of the euro region to be great and intends to hold the supervisory capital demand stable – all matters being equal. The pressure check outcomes are consequently not anticipated to cause an increase of the general stage of capital call for in the gadget. In the 2015 SREP decisions the capital demand turned into described by means of Pillar 1 plus Pillar 2 necessities plus mixed buffers. In view of this yr’s new introduction of the component of Pillar 2 steerage, the capital requirements of a bank in phrases of Pillar 1 plus Pillar 2 necessities could be reduced – all things being equal. As a result, the cause for the Maximum Distributable Amount (MDA) will pass down – additionally all matters being equal. At the same time, the overall capital call for, inclusive of Pillar 2 steerage, will continue to be approximately the same.
The MDA is the most quantity a financial institution is allowed to pay out, for example for bonuses or dividends. A financial institution whose capital ratio falls under the MDA trigger point faces regulations on the amount of distributable profits. Pillar 2 guidance is not applicable for the MDA trigger.
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Question eleven. How Will The Stress Test Results Be Factored Into The Srep?
The qualitative consequences of the pressure take a look at will be incorporated into the definition of supervisory measures and might actually have an effect on Pillar 2 necessities.
The quantitative outcomes of the stress take a look at, specifically the fall within the Common Equity Tier 1 (CET1) ratio a financial institution faces among its starting point at end of 2015 and 2018 in the negative stress take a look at state of affairs, can be one input thing for Pillar 2 guidance.
In defining Pillar 2 steerage, the ECB will use a wide variety of facts. One benchmark could be a bank’s publish-detrimental scenario bring about relation to a capital ratio of five.Five% — or, inside the case of worldwide systemically critical banks (G-SIBs), five.5% plus the G-SIB buffer. This result is similarly adjusted up or down, considering other factors which includes the specific danger profile of the character organization and its sensitivity in the direction of the stress scenarios; meantime modifications in its hazard profile after the reduce-off date of the strain test (31 December 2015); effects of the static stability sheet assumption of the pressure assessments and measures taken by way of the bank to mitigate threat sensitivities, which includes relevant asset sales. Consequently, the pressure take a look at results will feed into Pillar 2 guidance in a non-mechanistic manner.
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Question 12. How Is The Capital Conservation Buffer Accounted For In The 2016 Srep?
ECB Banking Supervision is taking a specific technique within the 2016 Supervisory Review and Evaluation Process (SREP) regarding the capital conservation buffer (CCB). The CCB will no longer be blanketed on a completely-loaded foundation.
Some Member States (Cyprus, Estonia, Finland, Italy, Latvia, Lithuania, Luxembourg and Slovakia) determined to impose the overall CCB on their banks with none section-in as of 1 January 2016. Other Member States opted for a four-yr section-in. This difference led ECB Banking Supervision to set a SREP ratio based on a completely-loaded CCB for immediately supervised institutions as part of the 2015 SREP. This decision has been revised for the 2016 SREP. Countries can take a deliberate desire, whether or not they want to use tougher capital necessities or to adjust to the segment-in approach of many friends. Some international locations, which include Portugal, have already modified their section-in policies.
The CCB is a part of the Basel III capital regulations and is designed to make sure that banks increase capital buffers which can be drawn down as losses are incurred. The CCB is to attain 2.Five% of the chance-weighted belongings as of 1 January 2019 at the modern-day.
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Question thirteen. How Does The 2016 Stress Test Compare To Stress Tests In Other Jurisdictions?
The strain take a look at sporting events of the EBA, the United Kingdom Prudential Regulation Authority (PRA) and the Comprehensive Capital Analysis and Review (CCAR) of the Federal Reserve Bank are not at once comparable because the methodology, situations and time horizons vary significantly. Disregarding the variations, the overall impact of the EBA pressure check is in keeping with the PRA 2015 workout. Compared with the CCAR 2016 exercise, the EBA pressure take a look at is stricter than the CCAR damaging state of affairs, however much less severe than the significantly unfavorable scenario of the CCAR.
Question 14. How Does The 2016 Eba Stress Test Compare To The Comprehensive Assessment/strain Test Of 2014 (since The Latter Fed Into The 2015 Srep)? What If A Bank’s Capital Ratio In The 2016 Stress Test Is Lower Than The Pillar 2 Capital Demands In The 2015 Srep – Would It Be Fair To Deduce That This Bank Will Need To Raise Fresh Capital?
First, the 2014 pressure check, as part of the complete assessment, became a much broader workout than the contemporary one. In 2014, a hundred thirty banks took part inside the comprehensive evaluation, which consisted of an asset satisfactory evaluation and a strain take a look at. In coaching for the ECB’s takeover of its supervisory responsibilities, the workout aimed to identify viable capital shortfalls and ascertain if any banks required instant recapitalisation measures. As euro region banks have seeing that moved to more of a regular kingdom and feature emerge as higher capitalised average, the aim of the 2016 exercise is instead to evaluate closing vulnerabilities and recognize the impact of hypothetical adverse marketplace dynamics on banks. The pressure check as a part of the 2014 complete assessment and the 2016 pressure take a look at are hence pretty exceptional in nature.
In addition, the newly brought adjustments in the Pillar 2 shape (breakdown into necessities and steering) suggest that the SREP 2015 cannot be directly as compared with the findings of the 2016 pressure take a look at. It could accordingly be wrong to infer that a financial institution have to right away increase capital if its capital ratio inside the 2016 pressure test is decrease than the Pillar 2 capital demanded in the SREP 2015.
Question 15. What Is The Single Supervisory Mechanism?
The Single Supervisory Mechanism (SSM) is a new framework for banking supervision in Europe. It comprises the ECB and countrywide supervisory government of collaborating EU international locations. Its most important ambitions are to:
ensure the protection and soundness of the European banking machine
growth monetary integration and balance in Europe
The SSM is an vital milestone closer to a banking union within the EU.
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Question 16. Why Do We Need The Single Supervisory Mechanism?
A honestly European supervision mechanism weakens the hyperlink between banks and national sovereigns. This enables to rebuild accept as true with in Europe's banking zone.
The latest economic crisis has proven how fast and forcefully issues within the economic region of one country can unfold to some other, mainly in a economic union, and how those problems can without delay affect citizens across the euro region.
Question 17. What Is The Ssm Framework Regulation And Why Is It Necessary? To Whom Does It Apply?
The SSM Framework Regulation units out the criminal shape for cooperation with countrywide supervisors, additionally known as country wide ready authorities (NCAs), inside the Single Supervisory Mechanism (SSM). It governs members of the family between the ECB and country wide supervisors and consists of guidelines that practice immediately to banks.
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Question 18. When Did The Single Supervisory Mechanism Become Operational?
The Single Supervisory Mechanism (SSM) became operational on 4 November 2014.
On 15 October 2013, the EU Council officially adopted the Regulation at the Single Supervisory Mechanism, after negotiations with the European Parliament. The SSM Regulation then came into pressure after book in the Official Journal of the EU. Under the SSM Regulation, the SSM needed to be absolutely operational no later than 12 months after the Regulation entered into pressure.
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Question 19. What Was The Comprehensive Assessment?
The comprehensive assessment become the "financial fitness take a look at" of great banks in the euro vicinity and of participating nations. It consisted of two complementary pillars:
an asset excellent assessment (AQR)
a stress check: The evaluation, which started in October 2013 and lasted three hundred and sixty five days, blanketed the 130 biggest banks in the euro region. It changed into an crucial step within the guidance of the Single Supervisory Mechanism and had three foremost desires:
transparency – all stakeholders need to be able to get admission to facts on the situation in their banks
repair – identified problems have to be repaired if and where needed
self assurance building – all stakeholders should be confident that banks are fundamentally sound and truthful
Question 20. How Is The Single Supervisory Mechanism Organised?
Supervisory Board: To make certain the separation of supervisory and monetary policy responsibilities, the Supervisory Board plans and contains out the ECB’s supervisory responsibilities. This includes offering draft supervisory choices, that are positioned before the Governing Council of the ECB for adoption.
New commercial enterprise regions: Building the Single Supervisory Mechanism (SSM) has required changes to the ECB’s organisational structure, inclusive of the advent of new commercial enterprise areas. Four new Directorates General and a Secretariat are solely committed to banking supervision.
Shared services: Existing ECB functions and services are offering extra help to the SSM. These include IT, HR, price range, records, communications, prison offerings and management.
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Question 21. How Does The Single Supervisory Mechanism Operate?
The Supervisory Board, supported by means of a Steering Committee, plans and incorporates out the ECB’s supervisory obligations. These encompass mission preparatory work and featuring draft choices to the Governing Council of the ECB. If the Governing Council, the ECB’s major decision-making frame, does not object to the draft choices proposed by using the Supervisory Board, they may be considered followed. The every day supervision of significant credit institutions is done by way of Joint Supervisory Teams (JSTs).
Question 22. What Are The Joint Supervisory Teams?
Composition: The Joint Supervisory Teams (JSTs) are one of the important sorts of cooperation among the ECB and countrywide supervisors. For each sizeable financial institution, a team has been shaped of staff individuals of the national supervisors involved in supervising that financial institution and staff contributors of the ECB; the team is coordinated by using the ECB with the help of sub-coordinators from each country wide supervisor.
Tasks: The JSTs carry out ongoing supervision of the huge banks. Their important responsibilities are to perform the danger analysis of the supervised entity or organization and advise the supervisory programme and the appropriate supervisory movements.
Question 23. What Is The Role Of The National Supervisors?
National supervisory government, also called national capable authorities (NCAs), paintings together intently with the ECB. They put together and implement the ECB’s followed selections. They additionally at once supervise less large banks inside the collaborating international locations, round three,500 inside the euro area on my own, which aren't without delay supervised by means of the ECB. However, the ECB can determine at any time to take over the direct supervision of anybody of these banks so that you can make sure that excessive supervisory standards are implemented continuously.
The NCAs are also liable for client protection and for combatting cash laundering, that are out of doors the scope of the ECB’s supervisory obligations.
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