The new Banking Act

Spotlights - June 2014
The new Banking Act
The Act of 25 April 2014 on the status and supervision of credit institutions replaces the Act of 22 March 1993
with the same name. It updates Belgian legislation in accordance with the new EU regulatory framework (CRD
IV, single supervisory mechanism) and anticipates future rules by implementing the principles for banking
resolution in accordance with the directive approved by the European Parliament on 15 April 2014 ("BRRD" –
see Eubelius Spotlights March 2014 ) and by adopting a principle of prohibition of proprietary trading, subject to
some exceptions. The new rules will enter into force gradually, and mostly according to an EU timetable.
New legal framework
Four new Acts were published in the Official Gazette on 7 May 2014: (i) the Act of 25 April 2014 on the status and
supervision of credit institutions (the "Banking Act"); (ii) an Act of 25 April 2014 containing various provisions; (iii) an Act of
25 April 2014 establishing mechanisms for a macro-prudential policy and outlining the specific tasks assigned to the
National Bank of Belgium as part of its missions to contribute to the stability of the financial system; and (iv) an act of 8
May 2014 on appeals against macro-prudential recommendations of the NBB (insertion of article 36/45 in the act of 22
February 1998 on the organic statute of the National Bank of Belgium; an erratum rectifying the date was published in the
Official Gazette of 21 May 2014).
In addition, some royal decrees have been adopted, approving NBB regulations on, among other things, (i) the assets
encumbered under the recovery plan (the future "asset encumbrance ratio"), (ii) proprietary trading, and (iii) the
implementation of EU Regulation 575/2013 of 26 June 2013 on, among other things, prudential requirements applicable to
credit institutions.
Single supervisory mechanism
The Banking Act cannot be understood without EU Regulation 1024/2013 of 15 October 2013 which establishes a "single
supervisory mechanism" composed of the ECB and the national competent authorities of the Eurozone and which covers
the supervision of all credit institutions within the Eurozone.
As of 4 November 2014, banking supervision will become truly European. In practice, our "significant" credit institutions
(Article 6 of Regulation 1024/2013) will be directly controlled by the ECB, which will apply the European rules (e.g.
Regulation 575/2013) but also the Belgian rules applicable to these institutions under Belgian regulations implementing the
banking directives. Any new credit institution, regardless of its size, will be approved by the ECB itself. The ECB will also be
competent, among other things, for prudential intervention in the case of a transfer of a qualified stock participation in a
credit institution.
Prohibition of proprietary trading
As of 1 January 2015, in principle it will be forbidden for any credit institution that collects deposits or issues securities
within the scope of the Belgian system of deposit protection to perform, directly or via subsidiaries, any proprietary trading
activity under its trading book, as defined in Article 4(1)(86) of Regulation 575/2013.
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However, this prohibition will not apply to investment services provided to clients in order to meet their "financing, hedging
or investment needs", to "market making activities", to "hedging activities" regarding own risks for the credit institution or
its subsidiaries, to the "sound and prudent" management of cash nor to acquisitions of a financial instrument with the
"intent to keep it on a long-term basis".
An NBB Regulation of 23 December 2013 (approved by a Royal Decree of 26 December 2013) had already adapted the
Regulation on capital requirements of credit institutions with regard to the weighting of the trading book. An NBB
Regulation of 1 April 2014 (approved by a Royal Decree of 25 April 2014) governs permitted proprietary trading operations.
It is generally accepted that one of the causes of the 2008 crisis was founded on serious governance failures within credit
institutions, both in the management of (often highly complex) risks and in remuneration schemes.
The Banking Act (i) requires that the members of the board, the actual managers and the holders of "independent control
functions" are individuals (article 19), (ii) requires that directors and managers "devote enough time to their function within
the institution" (article 62), and (iii) limits the external functions they may perform. The board has a key function of control
and orientation, in particular regarding determination of and compliance with the risk appetite (article 57) and the
adequacy of the internal control systems (article 58). The board is also the ultimate point of contact for the compliance
officer (article 38) and is thus in charge of the compliance of the institution with the legal framework. It is also responsible,
among other things, for the adoption of the recovery plan (article 114).
Capital requirements and liquidity
The Banking Act follows the equity structure divided into "core equity tier 1", "tier 1" and "tier 2", and plans to add by 2019
a "capital conservation buffer", a "countercyclical capital buffer" and an equity buffer for credit institutions of worldwide or
domestic systemic importance.
The "tier 2" equity, composed of hybrid instruments (e.g. subordinated debts) must have a loss-absorbing character: it
should be used in the event that the credit institution experiences difficulties, contrary to what happened generally in 2008.
The capital requirements will increase progressively, especially depending on the risks retained in case of securitisation,
risks arising from the trading book and the counterparty risk. A new ratio will take into account the leverage on the balance
sheet of the credit institution.
An important lesson from the 2008 crisis is the paramount importance of the liquidity of assets to enable the banks to face
stress situations on the market. These new rules had been implemented as from 2010. In particular, the Banking Act
enshrines, quantitatively, a "Liquidity Coverage Ratio" and a "Net Stable Funding Ratio" and the monitoring of these ratios.
Recovery and resolution plans
The Banking Act requires the legal administrative bodies of all credit institutions to implement a recovery plan considering
different scenarios. Such a plan should enable the institution, in case of any difficulty, to recover, quickly and without
negative effects on the financial system, its viability or its financial positions (article 115). This plan is assessed by the
supervisory authority, which may take binding measures if it considers that the plan is inadequate (article 116). The first
plan must be established within 15 months of the entry into force of the Banking Act.
The Act of 25 April 2014 with various provisions creates a "resolution authority" within the NBB, composed of heads of the
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NBB, the president of the FSMA, heads of the Department of Finance, a magistrate and four other persons designated by
the King. This authority is in charge of adopting a resolution plan for every credit institution (subject to an exception, which
will be provided for by a Royal Decree, for credit institutions that are part of a group for which a resolution plan has been
By 2016 (upon entry into force of the implementing measure for the BRR Directive), bank failures will be required to be
resolved, by a decision of the resolution authorities, by contributions from the shareholders and creditors of the troubled
bank (bail-in), without public intervention (bail-out). This new system was created during the resolution of the Cyprus crisis
in March 2013, whereas the bail-out was used systematically during the crisis of October 2008. For more details, please
consult Eubelius Spotlights March 2014.
To conclude: The Banking Act will require considerable work to assimilate the new rules. It is a significant step forward for
banking activity, with decreased exposure of taxpayers and depositors to the risks of bank failure.
Jean-Marc Gollier
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