Examples of obstacles in prudential regulation and legislation for a cross-border group

1. Examples of obstacles in prudential regulation and legislationfor a cross-border group Institutional and Regulatory Strategic Advisory Regulatory Affairs 14 October, 2008

2. AGENDA • Introduction • Examples of obstacles in prudential regulation and legislation • Conclusion

3. 21.3 THERE IS SIGNIFICANT VALUE FOR THE ECONOMY IN PURSUING AN INTEGRATED EUROPEAN BANKING MARKET A level European playing field… …would significantly benefit the system European Banking Market Efficiency Possibility for a cross-border banking group to exploit leverage economies of scale and scope Financial stability Improved effectiveness for a cross-border banking group to enhance the sustainability of its business and to manage credit, liquidity, operational and other risks

4. 21.3 POSSIBLE IMPEDIMENTS FOR CROSS-BORDER BANKING GROUPS REFER TO LEGAL AND REGULATORY OBSTACLES Sources of obstacles Loopholes in EU legislation In subjects not regulated by the EU legislation, autonomy of local authorities applies, with minority rights prevailing on parent company EU level European legislation National level Different implementation/transposition of EU Directives Different supervisory requirements Different supervisory practices, instructions and enforcement, also deriving from different interpretations of EU Directives, are possible de Jure and de facto National Legislation/regulation Supervision Consequences of the regulatory obstacles for cross-border groups: They may hamper capability to achieve economies of scale and scope as well as business sustainability and financial stability

5. AGENDA • Introduction • Examples of obstacles in prudential regulation and legislation - Supervisory requirements and practices • Legislation • Conclusion

6. SUPERVISORY ACTIVITY CAN BE A POSSIBLE SOURCE OF OBSTACLES, MAINLY DUE TO LACK OF HARMONIZATION IN REGULATION AND LEVEL PLAYING IN PRACTICES Impact on cross-border group Authorization rules Example Impact Activities to be approved by the national supervisor in order to identify the entities allowed to perform banking operations and their perimeter of action High Authorization for cross border M&A Low Prudential rules Example Example Impact Impact 5) Capital Requirements Directive • a) Capital: transitional floor; hybrid instruments; goodwill • b) Credit risk: e.g. Internal Rating Based approach application • c) Operational risk • d) Liquidity risk • e) business risk • f) reputational risk • 1) Separation credit origination and underwriting • 2) Compliance Role and Structure • 3) MiFID national implementation • 4) UCITS national implementation Organizational requirements Financialrequirements E.g. rules concerning the segregation of duties in the organization and the prevention of conflicts of interest within the bank Specific financial requirements that banks should respect in order to guarantee their financial stability Example Impact Reporting/transparency and controlling Control on banks regarding the application of laws and rules through ordinary reporting requirements and ad-hoc control activities • 6) Reporting information requirement

7. 21.3 Impact on the banking system 1) SEPARATION OF CREDIT ORIGINATION AND UNDERWRITING ACTIVITIES Example of different regulation Italy Description • Country A regulator doesn’t require a specific separation between originating and underwriting activities • Banks are required to keep separated underwriting activity from credit monitoring and controlling through the creation of two dedicated organizational units • National regulators define specific rules in term of organizational requirement within a banking institution to comply with the financial stability objectives • Differences arise when comparing the national regulations regarding separation of role and responsibilities within credit related activities Implications • Inefficiencies for cross-border banking group arise due to the need to maintain separated structure for activities that in country A could be centralized • Different country regulation show that there is a sub-optimal situation of financial stability for cross-country banking group that need to be compliant to the different national legislations Germany • A separation up to board level is required between commercial business division (originating activity) and CRO (underwriting activity) function • Business divisions perform credit origination and develop rating system only for non-risk relevant business* (rating system needs CRO approval) • CRO is in charge of credit approval, monitoring and developing of rating systems** CEBS to be involved * Non-risk relevant business can be defined in line with Basel II up to a maximum limit of EUR 1mn ** In case of Non-risk relevant business credit approval is automated and rating system can be developed by business divisions

8. 21.3 2) COMPLIANCE FUNCTION Example of different regulation Impact on the banking system Italy Description • Banks must have a compliance unit to verify that all internal procedures are compliant with the set of normative rules applied to the bank • The perimeter of competence of compliance unit is extended on all external normative rules and internal auto-discipline regulations • In case of banking group Compliance unit activity must be extended to subsidiaries through adequate organizational solution (e.g., compliance officer) Implications • Several countries in order to enhance the financial market stability bind banking institution to create specific compliance unit • Compliance unit must ensure that the activities performed by the banking institutions are compliant with the laws and rules applied in the competent country • The legislative differences in compliance unit requirements can have an impact in term of efficiency: In particular Cross-border banking groups subject to compliance unit requirement will face higher cost to coordinate compliance activity across different countries • Significant local regulation peculiarities requiring local Compliance management • Local regulatory standards sometimes lower than EU/Italian regulatory standards leading to higher Compliance and Reputational risks on key issues (e.g. Antimoney laundering) Germany • regulator does not bind banks to set-up compliance unit • The perimeter of competence of compliance unit is focused on AML/antiterrorism, market abuse, MiFID, privacy CEBS to be involved

9. 21.3 3) MiFID: APPLICATION OF INVESTMENT ADVICE REQUIREMENTS Example of different regulation Impact on the banking system Italy Description • Both appropriateness and suitability tests are mandatory for all, whether complex or not, investment products when offered through direct personal interaction (e.g., branches, family banker) • The application of “investment advice” at branch level does not make any distinction between complex and non complex products Implications • MiFID aims to ensure convergence towards a single market in the field of financial instrument services, by removing existing national regulatory barriers and increasing transparency and protection of the customer • The concept of “investment advice” service, one of the MiFID keypillars, has been differently interpreted across EU countries • Inefficiencies arise for banks subject to stricter “investment advice” interpretation that must incur in increased level of responsibilities and higher costs due to the increased time spent in “investment advice” activities, especially for “non-complex products” Austria/Germany Time for investment advice (MiFID compliance*) • Appropriateness test is performed on retail clients for all investment products regardless of the distribution channel • Suitability test is optional and can be offered after explicit request of the client Minutes Country A 30 Country B 15 CESR to be involved * Calculated as advice offered to“non profiled“ client in case of governement bond placement

10. 21.3 4a) UCITS: NATIONAL IMPLEMENTATION Description • UCITS Authorisation (by the Home Member State) and Notification (to the Host Member State) procedures are often long and cumbersome. • Restriction of the ability of the fund manager/fund as to the location of key core functions; requirement that the depositary is based in the same country as the fund; possibility for the management company to offer its services across borders is restricted in practice. • 3) The definition of the product imposed by the Directive is perceived as limiting the investment and business opportunities for both investors and industry offered by the financial innovation. • 4) Impediment on the exploitation of economies of scale and increases costs. 1)Uncertainty and long delays seriously handicap the fund industry in competing with other investment products (e.g. unit-linked insurance contracts, certificates…) 2) Limited capacity of the industry to achieve economies of scale and specialisation; Duplication of resources that raises costs. 3) Risk that investment propositions would be repackaged in more convenient regulatory forms offering lower levels of investor protection. 4) Total Expenses Ratio of a typical cross-border European fund is much higher than that of an American fund. Regulatory obstacles to effectiveness Implications • Barriers in getting funds into the market; • Lack of flexibility in organising the industry value-chain • Strict investment restrictions • Proliferation of funds of a sub-optimal size EU Commission and CESR are working on it

11. 21.3 4b) UCITS: NATIONAL IMPLEMENTATION Description • This is too long and complex • Limited competition and openness have led to sizeable distribution costs (these can amount to up to 75% of total costs in some Member States); Distribution networks are gradually becoming more complex and the number of intermediaries is increasing. • Divergent approaches and priorities resulting form national regulatory regimes have given rise to a patchwork of incoherent legislation. 1) Of limited value to the investors; It entails considerable cost overhead for the fund industry 2) This may exacerbate concerns about the loss of transparency and higher costs. 3) For the industry, this translates into an important hurdle to the expansion across borders of their business. Regulatory obstacles to effectiveness Implications • Ineffective simplified prospectus • High costs and low transparency at the distributor's end. • Development of non-harmonised investment funds EU Commission and CESR are working on it

12. 21.3 5) THE CAPITAL REQUIREMENT DIRECTIVE AIMS TO REGULATE AND HARMONIZE BANKS’ CAPITAL REQUIREMENTS, IN ORDER TO IMPROVE THEIR FINANCIAL STABILITY, BUT ITS APPLICATION WIDELY DIFFERS ACROSS EU COUNTRIES… Main focus Minimum capital requirement: CRD gives EU recognition to the Basel II framework regarding minimum capital requirement regulation and the possibility of implementing an Internal rating based model to calculate capital requirement based on: • Market risk • Credit risk • Operational risk Objectives CRD’s original intent is to ensure a sound and prudential framework while guaranteeing a level playing field for credit institutions from the point of view of both the freedom of establishment and the freedom to provide financial services across the EU internal market Supervisory activity: CRD defines principles for the coordinated activity of national supervisors aiming at the “close and regular cooperation and significantly enhanced convergence of regulatory and supervisory practices between the competent authorities of the Member States” In some cases, there may be scope for improvement for the local competent authorities in achieving CRD objectives CEBS is working on it

13. 21.3 5a) CAPITAL: FOR EXAMPLE THE TRANSITIONAL PERIOD FLOORS APPLICATION RULES CAN BE AT GROUP OR AT LEGAL ENTITY LEVEL WITH BIG IMPACT ON THE POSSIBLE CAPITAL RELIEF Impact on the banking system Example of differences in supervision Italy Description • At present, the regulator does not explicitly rule the transitional floors in the case of banking groups • Banks, in common practice, apply the floors at both consolidated and legal entity levels Implications • According to the Capital Requirements Directive (CRD), during a three-year transitional period towards the full implementation of Basel II Internal rating models - banks are subject to “transitional floors” that limit the risk-based capital relief to 5% in 2007, 10% in 2008 and 20% in 2009 • CRD does not give a specific recommendation whether, in the case of banking groups, the transitional floor has to be applied at group level or at legal entity level • In countries where the supervision does not allow banks to apply the transitional floors at consolidated group level only, banking groups will be disadvantaged compared to other cases Average* capital relief under Basel II Austria • The supervisory authority allows banks, in the case of banking groups, to apply the minimum risk based capital at consolidated group level only Percent -0,4 Legal entities Consolidated group only CEBS to be involved * Estimated applying QIS-5-reductions with 90% floor to 7 European leading banking groups and using segments as proxy of legal entities Source: McKinsey Basel II calculation teams, annual reports 2006

14. 0% 5a) CAPITAL: ANOTHER EXAMPLE IS THE QUANTITATIVE LIMIT ON HYBRID INSTRUMENTS AS PART OF REGULATORY CAPITAL GOING FROM 0% TO 50%, WITH IMPACT ON THE OVERALL COST OF CAPITAL Example of different supervision Impact on the banking system Description Maximum supervisory limit on hybrid* use Country Implications • CRD does not explicitly refer to hybrid instruments eligible for the calculation of regulatory capital • Across EU countries, the quantitative maximum limit on the use of hybrid instruments in the calculation of regulatory capital range from 15%-50% Percent In countries where the limit on the use of hybrid instruments is higher, banks will profit from a reduced cost of capital Poland 0% Denmark, Norway, Sweden Average cost** of capital (maximum use of hybrids) Percentage 15% PL (0%) Italy, Portugal 20% 8,4 IT-PT (20%) Germany, Netherlands, UK 7,7 50% GE-UK-NL (50%) 6,6 +28% CEBS is working on it * Calculated as percentage on original own funds ** Hypotheses: average cost of hybrid funds 4,76%; average cost of own capital 8,43%

15. 21.3 5a) CAPITAL: DIFFERENT SUPERVISORY TREATMENT OF CONSOLIDATED GOODWILL Impact on the banking system Example of differences in supervision Italy Description Implications • The regulator imposes a full deduction of goodwill from Tier 1 capital • The deduction of goodwill from Tier 1 capital must be done immediately and entirely, with no different application ratio during subsequent years • Different treatments of goodwill* in the calculation of the Capital Requirement arise when comparing regulations across different EU countries • In countries where the deduction may be “amortized” over a period of 10 years and there is a lower tier 1 capital requirement, banks will face a lower cost of capital due to: • Lower needs of Tier 1 capital to cover goodwill (half can be deducted from Tier 2) • Diluted impact of capital needs over a ten year period • An example in the following page indicates that the cost of capital can raise of 168% Germany • Country B regulator allows banks to deduct goodwill half from Tier 1 capital and half from the Tier 2 ratio • The deduction of goodwill from the calculation of Tier 1 capital can be spread for a proportional increasing amount over a period of ten years CEBS to be involved * Goodwill defined as difference between book value of a participating interest and pro rata share of the capital and the reserves of the subordinated enterprise of the same investment

16. 0 5a) CAPITAL DIFFERENT SUPERVISORY TREATMENT OF CONSOLIDATED GOODWILL Cost of reintegrated capital ‘000 euro Assumptions 80 80 80 Tier 1 Net present value of cost of capital ‘000 euro • Same bank financial structure (‘000 euro) • Risk Weighted Assets: 100,000 • Capital: 10,000 (10%) • Tier 1: 6,000 (6%) • Same acquisition: • Market price: 2,500 • Book value: 1,500 • Goodwill: 1,000 • Same cost of capital: • 8% tier 1 • 4% tier 2 Italy Tier 2 +168% 0 0 0 0 years 1 5 10 60 Tier 1 Germany Country B Country A 30 Differences in cost of capital due to lower Tier 1 capital require-ment and diluted impact of additional capital Tier 2 6 4 2 0years 1 5 10

17. 21.3 5b) CREDIT RISK: INTERNAL RATING BASED (IRB) APPLICATION: MIGRATION TO IRB AND PERMANENT PARTIAL USE OF STANDARDIZED APPROACH AT THE END OF THE ROLL-OUT PERIOD Impact on the banking system Example of differences in supervision Description Italy Implications • Entry barrier: to get AIRB** approval a bank must demonstrate to use the IRB approach for at least 75% of the RWA of that Asset Class • The maximum roll-out period is established at 5 years for the IRBF and 7 years for the IRBA • Immaterial parts of the portfolio can be excluded from IRB application (and subjected to permanent standard approach) up to 10% of RWA • The different rules for the temporary and permanent partial use lead to distortions of the level playing field among the European banks that result in differences in the capital requirement and consequently in the cost of capital between the competitors (impact of 1-2% on country A legal entities RWA) • Cross-border groups must manage the complexity of diverging and inconsistent local rules in their IRB rollout plans • Group-wide rating methodologies may not be easily and timely used for regulatory capital as subject to further authorisation procedures. • The EU Directive's for the rollout and implementation of the Internal Rating Based (IRB) approach has been differently interpreted by national supervisory authorities which set up different rules for the temporary and permanent partial use (allowed application of different method within a same bank) under the Basel II framework • Major differences arise in: • Entry barrier for AIRB* approval • Maximum roll-out period • Definition of immateriality Germany • Entry barrier: to get IRB approval a bank must demonstrate to use the IRB approach for at least 50% of its portfolio in terms of EAD*** and RWA • The maximum roll-out period is established at 5 years for the all the IRB approaches • Immaterial parts of the portfolio can be excluded from IRB application (and subjected to permanent standard approach) up to 8% of RWA * Advanced internal rating based ** The same rule is applied for the foundation IRB in case of exposure at default *** Exposure at default CEBS to be involved

18. 21.3 5b) CREDIT RISK: DIFFERENT TREATMENT OF FINANCIAL INSTRUMENTS MANAGING SUCH RISK Impact on the banking system • Accounting: potential differences in treatment of credit derivatives hedges (e.g. banking book vs trading book described in the next slide on market risk) • Securitisation: Differences in securitisation laws increase complexity and legal risks to the creation of securitized asset pools • Derivatives: Differences in national rules on derivatives disclosure, suitability, netting practices, etc. • Probability of Default (PD) concept: different PD regimes across supervisors complicate exposure management and the rollout of a consistent PD framework Regulatory obstacles to effectiveness Description • 4. Examples on derivatives • In Russia there is still no clear legal opinion that netting is enforceable • In Germany it is accepted • There is no standard on the type of disclosure (upfront and ongoing) that must be made for derivative clients. • Supervisors apply differentprobability of default considerations for regulatory capital implying that different types of credit derivatives are used for the same objective in different countries. • - Country A: the product of the probabilities of default of the debtor and of the counterparty. • - Country B: the minimum of the two probabilities. Differences in national rules on derivatives meaning need to adopt different behaviour in each jurisdiction: CEBS to be involved

19. 21.3 5c) OPERATIONAL RISK Example of differences in supervision Impact on the banking system Italy Description • Data collection perimeter: some specific events, previously excluded, have to be considered in the calculation dataset (e.g., timing impact* must be collected and included in capital calculation) • Data quality check: one by one check of loss database internal events with the accounting figures is required • Application of different approach: Self assessment** is required for Italian banks going for the standard approach Implications • The CRD requires banks to consider operational risk in the calculation of their minimum capital requirement • The application of CRD by local regulators exposes European cross-border banking groups to different requirements, in terms of activities, resources involved and capital calculation related to the operational risk management • Banking group subject to stricter regulation in term of operational risk calculation will face: • Increased capital requirement (7% of consolidated capital requirement for operational risks) • Higher cost due to the increase of FTEs needed to be compliant with the regulation (data-quality check) (6 FTEs) Germany • Data collection perimeter: calculation dataset is less restrictive (e.g., banks are not subject to specific regulation on timing impact* collection) • Data quality check: banks are not required to perform any one by one check of loss database • Application of different approach: application of the AMA at Group level implies the adoption of the standardised approach for the legal entities not meeting the AMA requirements CEBS to be involved * Timing impacts are defined as negative economic manifestations recorded in a given book year caused by operational events that impacted cash flow in the previous book year ** Self-assessment is an evaluation performed by the bank itself, reviewed by Internal Audit and approved by the BoD

20. 21.3 Impact on the banking system 5c) OPERATIONAL RISK: advantages and obstacles at parent company level Regulatory obstacles to group risk management Impact on the banking system Advantages of being cross-border • Diversification benefits at consolidated level • Use of Group wide insurance for capital reduction Legislative obstacles Implications • The legal (e.g. insurance law) and fiscal treatmentof insurance contracts is different between European countries and implies the necessity to different local contracts. • Examples of different taxation for insurance premia: ranging from 0% to 22.5% Differences in qualifying criteria interpretation complicate the efforts to obtain Group wide coverage accepted by all Regulators for capital reduction. Legal and fiscal differences complicate or make it impossible to obtain one Group wide insurance cover serving all countries in an efficient way; it also increases handling costs. Supervisory practices’ obstacles • Lack-of a common supervisory view in EU regarding the insurance consideration in the calculation • of capital at risk • Interpretation of the qualifying criteria for capital relief from insurance under Basel II can differ between Regulators CEBS to be involved

21. 21.3 5d) LIQUIDITY RISK Regulatory obstacles to group risk management Implications for banks and supervisors Advantages of being cross-border • - Lack of integrated approach in regulation • Regulators should seek to increase consistency of liquidity concerns, definitions and standards among regulators. Home and host supervisors should work together to evaluate a firm’s integrated liquidity positions as well as strategies, policies, procedures and practices related to the management of global liquidity. • - Qualitative risk-management • Liquidity regulations should be based on qualitative risk-management expectations and not specific quantitative requirements, with host regulators putting more uniform reliance on home regulators and regulation to ensure adequacy of enterprise-wide management of liquidity. • Internal models for liquidity risk • In some countries where the group is present, quantitative criteria are used by supervisors for subsidiaries. We support the effort of the CEBS that asks EU supervisors to consider the conditions for replacing those requirements with adequate internal methodologies, which should be consistent across the group. Liquidity risk management should be increasingly managed and supervised not only as a funding liquidity problem (micro prudential supervision) of a specific firm but also as a market-liquidity issue (macro-prudential supervision). With some vulnerabilities: Name and reputational risk may lead to a market run by institutional investors because the group is perceived as one, even if there is no bank run by the retail base in different countries. • 1) Intra-group flow-management: netting and internal market making • 2) Better ability to diversify short-, medium- and long-term funding and liquidity sources CEBS is working on it

22. 21.3 Impact on the banking system 5e) BUSINESS RISK Regulatory obstacles to group risk management Advantages of being cross-border • Diversification benefits at consolidated level and consequent profit stabilisation Supervisory practice obstacles Implications Lack-of a common supervisory view in EU with regard ICAAP (Pillar II) and therefore the full alignment amongst the home and host regulators is not ensured. That impacts the identification and measurement of relevant risks and therefore the whole ICAAP, for instance with regard the definition of Available Financial Resources that are consistent with the risks included in the risk profile. Business risk management should be increasingly measured and supervised not only as an earning control of a single legal entity but also as whole group issue. Impact of diversification on the banking system • Groups active in more countries and different business (e.g. asset management) may achieve a structural reduction of the profit volatility of around 20% CEBS to be involved

23. 0% 5f) REPUTATIONAL RISK OBSTACLES TO ISSUE BINDING GUIDELINES TO LEGAL ENTITIES BY THE HOLDING COMPANY Implications for the banking system Reputational risk Due to the choice of the subsidiary structure, the parent company is not in a position to issue legally binding guidelines for the Legal Entities (LEs) established in other countries in order to ensure a single and effective policy affecting reputational risk. • The banking group reputation depends by the stakeholders perception; it may be hampered by misbehavior or misalignment of individual LEs. • This perception may differ country by country: being cross-border implies a higher reputational risk profile. • Difficulties in addressing risk management decision throughout the Group even due to lack of commitment of local entities / regulators • Local regulators may state specific requirements, not in line with the UCG self regulation (the Reputational Risk Framework) CEBS to be involved

24. 21.3 Impact on the banking system 6) REPORTING INFORMATION REQUIREMENTS Example of differences in supervision Italy Description • Accounting rules used for financial report are IFRS • Financial reporting: the supervisor is in charge of setting the rules for financial reporting requirements thus implying a set of very detailed data • Solvency ratio: thesupervisor requires a direct link between the solvency ratio and the balance sheet, thus implying a longer time (80 days) for the release of these data only after Board of Director approval • Supervisory authorities require banks to comply with a set of reporting rules in order to facilitate their monitoring activity and finally enhance the financial stability of the system • National supervisors set discretionary rules in term of accounting rules, financial and solvency ratio reporting Implications • Financial stability can be impacted differently according to the compliance requirement of national authorities • The compliance to national reporting regulation will impact on cross-border banking groups in terms of inefficiency (double effort in terms of FTEs for each country reporting compliance) Germany • Accounting rules: local GAAPs, in the case of individual banks and banking groups where the parent company is not listed and there is no issuance in the debt capital market • Financial reporting: is not regulated by the supervisory authority (self-regulated by banks, in the respect of the accounting standard) • Solvency ratio: a link is not required with the balance sheet, thus implying a shorter time to release the information (40 days) EU Commission is working on it

25. AGENDA • Introduction • Examples of obstacles in prudential regulation and legislation - Supervisory requirements and practices • Legislation • Conclusion

26. 21.3 A) LACK OF CLEAR DEFINITION OF THE BANKING GROUP IN EU LEGISLATION CREATES TO DIFFERENT INTERPRETATIONS OF THE ROLE OF THE PARENT COMPANY OF A CROSS-BORDER BANKING GROUP Example of different regulation or supervisory practices Description Impact on the banking system EU Directives • The EU legislation provides for consolidated accountability of the Holding Company for the group, in the field of consolidated accounts and capital requirements, in particular the parent company is obliged to: • draw up a consolidated balance sheet* • accomplish duties, for the banking group and its holding, in the field of consolidated supervision and capital requirements**, therefore it is possible to presume direction and coordination powers over the subsidiaries • Notwithstanding the above, there is still a lack of an explicit European discipline on groups, including a clear definition of direction and coordination activity of the Holding company • EU legislation does not provide for a clear and complete definition of “the banking group”. Some EU directives give the holding consolidated accountability for the group. • In some countries, the power of the parent company, with respect to group stability, is not clear when there is a conflict with minority rights Implications • Lack of an EU-wide banking group concept will impact financial stability and efficiency • Examples of negative impact for cross-border banking groups can be found in the: • Limitation of intra-group liquidity transfer • Restrictions on consumer data transfer flow • Separation of commercial and credit structures • Compliance Unit Implementation in the national • The leading concept of the local regulations that implemented the EU Directives is the control of the parent company on the stability of the Banking Group • In some countries, there are limitations due to different interpretation of local corporate law and supervisors, which may generate, among the others uncertainty on the allocation of responsibilities among competent authorities in the event of default of a subsidiary/parent company located in a foreign Member State EU Commission is working on it * Directives 83/349/CEE and 2003/51/CE ** Directives 2002/87/CE, 2006/48/CE and 2006/49/CE

27. 0% Italy Germany Poland B) LACK OF EU-WIDE BANKING GROUP CONCEPT MAY LEAD TO DIFFICULTIES IN TRANSFERRING/ MANAGING CUSTOMER DATA Example of different regulation Implications for the banking system • The legal constraint stems from the law on data processing: the cross-border transfer of data is permitted only when authorized by the person concerned • Data transfer concerning customers’ risk position across entities in the group is limited. A cross-border group is unable to gather the benefits in terms of more solid financial stability and growth • Parent company will face: • Financial stability issues as Data transfer constraints may hamper the capability of the parent company to i) enhance the stability of the group as a whole and ii) duly control the risks • Inefficiency: hinder the competitive advantage of the implementation of centralized customer service models, leading to duplications • Banks agree to stipulate banking secrecy in their General Business Conditions ruling that details of banking affairs concerning private customers and associations may be disclosed only with prior express consent • The national law does not allow processing data outside the national border. Ad-hoc cross-border data transmission may be authorized subject to certain regulatory requirements (e.g. Basel II) EU Commission is working on it

28. 0% C) LACK OF EU-WIDE BANKING GROUP CONCEPT MAY HAMPER INTRA-GROUP LIQUIDITY AND ASSET TRANSFER Example of different legislation and supervision Liquidity transfer rules Implications for the banking system • Countries do not have explicit rules for liquidity managed through ‘cash pooling’ systems and/or internal/cross-border transactions. • Due to this lack, the legal framework for free circulation of liquidity relies on interpretations issued by local courts. • In order to enhance financial stability of the financial system and of the banks themselves, clearer rules at EU level should be established. • Possible harm to the financial stability of the banking group due to sub-optimal risk management / capital resource allocation (e.g., impossible to counterbalance intra-group liquidity under disrupted market conditions) • Lower efficiency in liquidity management for the Group (e.g., duplication of access to markets for financial needs) Intra-group assets transferability In order to allow transferability under stress conditions, EU legislation has to be adapted to ensure legal certainty in respect to collateralised credit provided by central banks in a crisis situation to the group legal entities. EU Commission is working on it

29. 21.3 D) APPLICATION OF IAS/IFRS FOR ASSETS WHERE THE MARKET PRICE IS NOT AVAILABLE IS INTERPRETED DIFFERENTLY ACROSS EU COUNTRIES Example of differences in regulation Italy Impact on the banking system Description • All banks are required to apply IFRS both in in separate and in consolidated financial statement • The evaluation of assets (e.g. Asset Backed Securities) if held for trading or available for sale is done at fair value • The evaluation is at mark to market or, when market price is not available, with an independent price verification process • The application of International Financial Reporting Standards (IFRS) to banking institutions is interpreted differently across EU countries Implications • A different application of accounting standards will have an impact on the efficiency and effectiveness of cross-border banking group due to the: • Increased costs arising from a double reporting activity • The opportunity to catch unrealised profit or losses on the open positions in the case of local GAAPs to the extent the internal model is less accurate • Prociclicality of some rules Germany • Individual banks and banking groups where the parent company is not listed and with no issuance in the debt capital market, must use local accounting rules (GAAPs) • Banking groups where the parent company is listed / or with debt capital markets have to apply the IFRS • If included in the banking book, several securities (e.g. ABS) are evaluated at the minimum between market price and amortized cost • The evaluation model is internal when the market price is not available EU Commission is working on it

30. AGENDA • Introduction • Examples of obstacles in prudential regulation and legislation • Conclusion

31. Competent authorities that should first address the obstacles Supervisory requirements and practices Ex of financial prudential obstacles: Ex of orga. prudential obstacles: Solution and first competent authority? Solution and first competent authority? Banking regulation CEBS first, then EC 5) Capital Requirements Directive • a) Capital: transitional floor; hybrid instruments; goodwill • b) Credit risk: e.g. Internal Rating Based approach application • c) Operational risk • d) Liquidity risk • e) business risk • f) reputational risk 1) Separation credit origination and underwriting 2) Compliance Role and Structure 3) MiFID national implementation 4) UCITS national implementation Banking regulation CEBS first, then EC Banking regulation CEBS first, then EC Securities regulation CESR first Securities regulation CESR first, then EC Example 6) Reporting information requirement EU legislation EU Commission first Supervisory requirements and practices Ex of legislative obstacles: Solution and first competent authority? A, B, C) Definition of Group EU legislation EU Commission first D) Application of IAS/IFRS EC=EU Commission

32. CONCLUSION • Notwithstanding the efforts towards harmonisation and level playing field, there are some legal and regulatory barriers for efficient and effective group functioning • These obstacles constitute an impediment to meeting the parent company’s responsibilities toward the entire Group and to reducing prices for consumers. • EU legislation should recognise the role of cross-border banking groups and clarify the responsibilities of the parent company.