Page 38 - EBA 2013.2869 Risk Assesment Report final proof4

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E U R O P E A N B A N K I N G A U T H O R I T Y
36
reference rates. Besides, the Commission is
currently investigating several antitrust cas-
es which concern benchmark rates including
Libor/Tibor and Euribor and in relation to a
number of currencies including inter alia the
yen, the euro and the Swiss franc. The EBA
and the European Securities and Markets
Authority (ESMA) have carried out joint work
that has identified significant weaknesses
and insufficiencies in the governance of the
Euribor rate-setting mechanism and Eu-
ropean competent national authorities are
also conducting legal investigations. The
first outcomes of the investigations at na-
tional levels as well as a mounting number of
private litigation cases have highlighted the
scope and scale of possible manipulations of
reference rate-setting mechanisms. Conse-
quently, a number of initiatives to reform ref-
erence rate-setting mechanisms have been
launched across wide parts of the regulatory
and supervisory communities as well as the
financial markets.
These recommendations are made within
the current legislative setting, while the need
for broader structural changes is being as-
sessed by the European Commission.
In other cases European banks violated US
sanctions and regulatory law by handling
transactions involving companies in coun-
tries under US sanctions and allegedly ma-
nipulating the US electricity market. Further
investigations are currently going on, in sev-
eral countries, of banks having allegedly fa-
cilitated clients to evade taxation. Products
of the Madoff Ponzi scheme were being held
and sold by many banks to their clients. When
the fraudulent nature of these products be-
came evident, write-downs and compensa-
tion payments had to be made.
Recent major disruptions of IT-systems of
several banks occurred, where in some
cases customers did not have access to their
bank account up to several days.
Costs and prudential implications of
banks’ business conduct
As for aggregated costs stemming from mis-
selling and other unfair past business prac-
tices towards bank customers, 15 % of the
banks responding to the RAQ have each paid
to their customers amounts exceeding EUR 1
billion since the end of the financial year
2007/08. At the same time, 57 % of the re-
sponding banks have each paid to their cus-
tomers amounts between EUR 10 million and
EUR 1 billion in the form of compensation,
redress, litigation and similar payments.
The provisions in the ongoing financial year
set aside for costs of compensation, redress,
litigation and similar payments to consum-
ers amount to between EUR 10 million and
EUR 100 million in 38 % of banks in the RAQ
sample; in 12 % the amount is higher than
EUR 1 billion.
There are some challenges to quantify the
aggregated financial impact for European
banks stemming from already materialised
redress costs and further contingent liabili-
ties, not least since accounting treatment
of actual and potential redress costs is not
always consistent between institutions even
when they face similar risks: according to
International Accounting Standards (IAS) 37
provisions have to meet certain criteria in or-
der to be recognised and thus have an impact
on the income statement, notably that a reli-
able estimate can be made of the amount of
the obligations. If this is not the case, a con-
tingent liability is set aside, with no effect on
the income statement. However, information
on contingent liabilities disclosed often lacks
detail. Both the classification of a potential
financial obligation (provisions or contingent
THE EBA AND ESMA TAKE ACTION
TO STRENGTHEN EURIBOR AND THE
BENCHMARK RATE-SETTING PROCESSES
In January 2013, the EBA and ESMA published the results
of their joint work on Euribor and proposed principles for
benchmark rate-setting processes, namely:
• a review of Euribor’s administration and management
and clear recommendations to the Euribor-European
Banking Federation (EEBF) to improve the governance and
transparency of the rate-setting process;
• formal EBA Recommendations to national authorities on the
oversight of banks participating in the Euribor panel; and
• a joint ESMA–EBA consultation on principles for benchmark
setting processes in the EU which establish a framework for
the conduct of benchmark rate setting and the activities of
participants in the process.
The proposed principles, which are aligned with ongoing EU
and international work, will provide clarity to benchmark
providers and users, and are an immediate step to be taken
in advance of potential wider changes in the supervisory and
regulatory framework for financial benchmarks. The prompt
and full implementation of these recommendations is an
important step towards ensuring that Euribor represents a
transparent and reliable benchmark for financial transactions
within the EU.