5.1 What requirements apply with regard to the supervision of banking groups in your jurisdiction?
The Law of 5 April 1993 on the financial sector, as amended ('Banking Act') – which implements, among others, Directive 2013/36/EU of the European Parliament and of the Council of 26 June 2013 on access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms (CRD IV) and Directive 2002/87/EC of the European Parliament and of the Council of 16 December 2002 on the supplementary supervision of credit institutions, insurance undertakings and investment firms in a financial conglomerate, as amended – contains provisions on:
- the supervision of credit institutions carrying on business in more than one EU member state;
- the supervision of credit institutions subject to Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms, as amended (CRR) on a consolidated basis; and
- the supplementary supervision of credit institutions in a financial conglomerate.
The CRR also includes provisions with respect to prudential consolidation to which credit institutions may be subject.
The prudential supervision of Luxembourg credit institutions by the Commission de Surveillance du Secteur Financier (CSSF) covers the activities performed by such credit institution in other EU member states via the establishment of branches or the cross-border provision of services. The Banking Act also sets out the CSSF's powers with respect to Luxembourg branches of credit institutions from other EU member states, and the respective rights and competence of the CSSF and other competent authorities.
There are certain cases where the CSSF is required to exercise prudential supervision on a consolidated basis, meaning on the basis of the situation that results from applying the CRR requirements to a credit institution as if that credit institution formed, together with one or more other entities, a single institution. Such consolidated supervision applies, for instance:
- to Luxembourg parent credit institutions;
- to Luxembourg parent financial holding companies having as a subsidiary a Luxembourg credit institution; and
- under certain conditions, where the relevant group includes a Luxembourg credit institution and such credit institution shows the largest balance-sheet total.
The consolidated supervision covers, for instance, the items referred to in Article 11 of the CRR (eg, requirements with respect to own funds and eligible liabilities, capital requirements, large exposures and leverage), capital adequacy, internal governance requirements, certain intra-group transactions, risk management processes and internal control mechanisms, and the professional repute, experience, knowledge and skills of the members of the management body of a financial holding company or mixed financial holding company.
The CSSF must identify any group of companies that constitutes a financial conglomerate as defined in the Banking Act. The CSSF exercises supplementary supervision over Luxembourg credit institutions that belong to a financial conglomerate if the CSSF assumes the role of 'coordinator' for the supervision of regulated entities in that financial conglomerate. The Banking Act sets out the different scenarios in which the CSSF may act as coordinator; this is the case, for instance, where:
- the financial conglomerate is headed by a credit institution or an investment firm authorised in Luxembourg;
- it is headed by a mixed financial holding company which is the parent of a credit institution or investment firm authorised in Luxembourg; or
- a Luxembourg credit institution or investment firm belongs to a financial conglomerate, subject to certain specific conditions.
All the financial sector entities within a financial conglomerate - whether regulated or not and whether established in an EU member state or in a third country - fall within the scope of the supplementary supervision of the CSSF. The supplementary supervision to be carried out by the CSSF covers the financial position of the financial conglomerate, and in particular the capital adequacy, risk concentration, intra-group transactions, internal control mechanisms and risk management processes.
The Banking Act contains rules on:
- cooperation, coordination and exchange of information between competent authorities;
- access to and verification of information;
- the powers and enforcement measures of competent authorities; and
- the measures at the disposal of the CSSF in order to effectively exercise its supervision.
5.2 How are systemically important banks supervised in your jurisdiction?
'Systemically important' banks must be distinguished from 'significant' banks, as these concepts entail different consequences.
Significant and less significant institutions: The European Central Bank (ECB) directly supervises 'significant' credit institutions; whereas 'less significant' credit institutions are supervised by their national supervisory authorities in cooperation with the ECB. A credit institution will be considered as significant if it fulfils at least one of the significance criteria set out in Regulation (EU) No 468/2014 of the European Central Bank of 16 April 2014 establishing the framework for cooperation within the Single Supervisory Mechanism between the European Central Bank and national competent authorities and with national designated authorities and Council Regulation (EU) No 1024/2013 of 15 October 2013 conferring specific tasks on the European Central Bank concerning policies relating to the prudential supervision of credit institutions. These criteria include:
- the credit institution's size;
- its economic importance for the European Union as a whole or a specific EU member state;
- the significance of its cross-border activities;
- whether it has requested direct public financial assistance from the European Stability Mechanism or the European Financial Stability Facility; and
- whether the credit institution is one of the three most significant credit institutions established in an EU member state.
The ECB maintains a list of significant credit institutions.
Systemically important institutions: CRD IV defines 'globally systemically important institutions' (G-SIIs) and 'other systemically important institutions' (O-SIIs). The CSSF is the authority designated to identify the systemically important institutions authorised in Luxembourg, which include G-SIIs and O-SIIs. The CSSF takes its decisions in this respect after consultation with the Banque Centrale du Luxembourg (BCL) and the Luxembourg Systemic Risk Committee.
G-SIIs and O-SIIs are subject to additional capital requirements. G-SIIs must maintain an additional capital buffer (the G-SII buffer) that consists of Common Equity Tier 1 capital and varies between 1% and 3.5%, depending on the degree of systemic importance of the bank. O-SIIs may, subject to certain conditions, be required by the CSSF to maintain an additional capital buffer (the O-SII buffer) that consists of Common Equity Tier 1 capital. According to CSSF Regulation 19-09 of 29 October 2019 concerning systemically important institutions authorised in Luxembourg, there are as at the date of this publication no G-SIIs in Luxembourg. Eight O-SIIs have been identified, which are subject to O-SII buffers between 0.5% and 1% (depending on the institution) as of 1 January 2020.
5.3 What is the role of the central bank?
See question 1.3(c) above for the role of the BCL in general. As mentioned under question 5.2, the BCL also has a consultation role with respect to the supervision of systemically important institutions.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.