Interview Questions.

Q1. How Does The Single Supervisory Mechanism Operate?

The Supervisory Board, supported by a Steering Committee, pl and consists of out the ECB’s supervisory duties. These consist of assignment preparatory work and presenting draft choices to the Governing Council of the ECB. If the Governing Council, the ECB’s essential decision-making frame, does not object to the draft decisions proposed with the aid of the Supervisory Board, they're considered followed. The every day supervision of big credit score establishments is carried out by way of Joint Supervisory Teams (JSTs). 

Q2. Where Does Bank Of Uganda Derive Its Mandate To Supervise Financial Institutions?

The mandate of supervising monetary institutions is derived from the Financial Institutions Act 2004, the Micro-Deposit Taking Institutions Act 2003 and the Bank of Uganda Act 1993.

Q3. When Did The Single Supervisory Mechanism Become Operational?

The Single Supervisory Mechanism (SSM) have become operational on four 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 got here into pressure after publication within the Official Journal of the EU. Under the SSM Regulation, the SSM had to be completely operational no later than three hundred and sixty five days after the Regulation entered into pressure.

Q4. What Is The Role Of Bank Supervision?

The position of Banks Supervision is to make certain a safe and sound financial device for protection of depositors budget and conducive for macro-financial balance.

Q5. What Was The Comprehensive Assessment?

The complete assessment changed into the "financial health test" of giant banks in the euro location and of participating countries. It consisted of two complementary pillars:

an asset best review (AQR)

a strain test: The assessment, which began in October 2013 and lasted twelve months, covered the a hundred thirty biggest banks in the euro region. It changed into an important step inside the training of the Single Supervisory Mechanism and had 3 predominant dreams:

trparency – all stakeholders need to be able to get admission to facts at the situation in their banks

repair – diagnosed problems have to be repaired if and where needed

self belief constructing – all stakeholders have to be assured that banks are basically sound and trustworthy

Q6. What Is The Role Of The National Supervisors?

National supervisory government, also called national able authorities (NCAs), paintings together carefully with the ECB. They put together and put into effect the ECB’s adopted choices. They also directly supervise less big banks in the participating countries, around 3,500 inside the euro area on my own, which are not without delay supervised through the ECB. However, the ECB can determine at any time to take over the direct supervision of anybody of those banks if you want to make sure that excessive supervisory standards are implemented always. 

The NCAs are also responsible for patron safety and for combatting money laundering, which might be outside the scope of the ECB’s supervisory duties.

Q7. What Is The Ssm Framework Regulation And Why Is It Necessary? To Whom Does It Apply?

The SSM Framework Regulation sets out the prison shape for cooperation with countrywide supervisors, also called countrywide in a position government (NCAs), within the Single Supervisory Mechanism (SSM). It governs members of the family among the ECB and countrywide supervisors and includes rules that apply without delay to banks.

Q8. Do You Expect Capital Demand In The System To Increase On Average Due To The Stress Test Exercise?

ECB Banking Supervision announced already last yr that it perceives the modern-day degree of capital within the banking device of the euro area to be nice and intends to keep the supervisory capital demand stable – all matters being identical. The strain test consequences are therefore now not predicted to lead to an growth of the general stage of capital demand inside the system. In the 2015 SREP decisions the capital demand turned into defined by way of Pillar 1 plus Pillar 2 requirements plus mixed buffers. In view of this 12 months’s new introduction of the element of Pillar 2 steering, the capital necessities of a bank in terms of Pillar 1 plus Pillar 2 requirements may be decreased – all matters being equal. As a result, the cause for the Maximum Distributable Amount (MDA) will go down – additionally all matters being identical. At the same time, the overall capital demand, together with Pillar 2 guidance, will remain approximately the same.

The MDA is the maximum quantity a financial institution is authorized to pay out, as an example for bonuses or dividends. A bank whose capital ratio falls below the MDA cause factor faces restrictions on the quantity of distributable earnings. Pillar 2 steering is not relevant for the MDA cause.

Q9. What Is The Single Supervisory Mechanism?

The Single Supervisory Mechanism (SSM) is a new framework for banking supervision in Europe. It accommodates the ECB and countrywide supervisory authorities of participating EU nations. Its primary goals are to: 

ensure the protection and soundness of the European banking gadget

increase economic integration and stability in Europe

The SSM is an important milestone toward a banking union inside the EU.

Q10. Why Do We Need The Single Supervisory Mechanism?

A truly European supervision mechanism weakens the link between banks and national sovereigns. This enables to rebuild consider in Europe's banking sector. 

The current monetary disaster has proven how quickly and forcefully issues inside the financial region of 1 us of a can spread to every other, especially in a economic union, and the way these troubles can immediately have an effect on residents throughout the euro vicinity.

Q11. What Are The Joint Supervisory Teams?

Composition: The Joint Supervisory Teams (JSTs) are one of the predominant kinds of cooperation between the ECB and national supervisors. For every vast bank, a crew has been fashioned of body of workers contributors of the country wide supervisors concerned in supervising that bank and staff members of the ECB; the group is coordinated by means of the ECB with the assistance of sub-coordinators from each national manager. 

Tasks: The JSTs carry out ongoing supervision of the full-size banks. Their fundamental obligations are to perform the chance analysis of the supervised entity or organization and endorse the supervisory programme and the precise supervisory actions.

Q12. How Is The Single Supervisory Mechanism Organised?

Supervisory Board: To make sure the separation of supervisory and financial coverage tasks, the Supervisory Board pl and carries out the ECB’s supervisory responsibilities. This includes presenting draft supervisory decisions, which might be positioned earlier than the Governing Council of the ECB for adoption.

New enterprise regions: Building the Single Supervisory Mechanism (SSM) has required modifications to the ECB’s organisational shape, consisting of the introduction of recent enterprise areas. Four new Directorates General and a Secretariat are totally committed to banking supervision.

Shared services: Existing ECB capabilities and services are providing additional support to the SSM. These consist of IT, HR, budget, statistics, communications, prison offerings and management. 

Q13. How Will The Stress Test Results Be Factored Into The Srep?

The qualitative results of the pressure test could be incorporated into the definition of supervisory measures and can even have an effect on Pillar 2 necessities.

The quantitative results of the pressure take a look at, particularly the fall within the Common Equity Tier 1 (CET1) ratio a bank faces between its place to begin at cease of 2015 and 2018 within the destructive pressure take a look at situation, may be one input thing for Pillar 2 steering.

In defining Pillar 2 steerage, the ECB will use a wide variety of information. One benchmark will be a bank’s put up-negative scenario bring about relation to a capital ratio of 5.5% — or, inside the case of global systemically critical banks (G-SIBs), five.Five% plus the G-SIB buffer. This end result is in addition adjusted up or down, deliberating other elements which includes the precise danger profile of the man or woman institution and its sensitivity closer to the stress situations; intervening time changes in its threat profile after the reduce-off date of the stress check (31 December 2015); results of the static stability sheet assumption of the pressure exams and measures taken with the aid of the financial institution to mitigate hazard sensitivities, such as relevant asset income. Consequently, the strain check results will feed into Pillar 2 guidance in a non-mechanistic manner.

Q14. Can Banks Supervision Stop A Bank From Failing?

Bank Supervision can not absolutely stop monetary institutions from failing. Reasons for failure are various including amongst others inner weaknesses in economic establishments and systemic/outside elements which might be past the control of economic institutions. However, whenever, an institution is envisaged to fail, Bank of Uganda endeavours as plenty as possible to limit the importance of loss by using proactively polishing off the operations of the distressed economic organization.

Q15. What Is This Exercise Really Testing?

The workout is analysing how a financial institution’s capital role develops assuming a static stability sheet over a duration of three years until 2018, underneath each a baseline and an unfavorable state of affairs. The unfavourable scenario reflects the 4 systemic dangers that had been considered with the aid of the ESRB to constitute the most material threats to the steadiness of the EU banking sector: (i) an abrupt upward push in presently low worldwide bond yields, amplified by way of low secondary marketplace liquidity; (ii) weak profitability possibilities for banks in a low nominal boom surroundings amid incomplete balance sheet changes; (iii) growing debt sustainability concerns within the public and non-economic non-public sectors amid low nominal boom; (iv) prospective pressure in a hastily growing shadow banking quarter, amplified by way of spillover and liquidity risk.

Compared to 2014 this 12 months’s detrimental situation is stricter because it carries greater conservative elements. Moreover, shocks were frontloaded, so that the destructive impact materialises in advance all through the stress check horizon. As financial institution losses comply with macroeconomic stress with a lag, this selection increases the expected impact of the state of affairs. The technique has additionally in addition advanced. The inclusion, for the first time, of a committed operational and behavior hazard pressure check technique inside the 2016 workout is a superb example in this regard.

The stress check has a three-yr horizon and makes use of static stability sheets. This me that, for the cause of the stress check, it's miles assumed that property and liabilities that mature for the duration of the strain check horizon are replaced with comparable financial gadgets in terms of original adulthood, credit score satisfactory, geographical exposure, etc. As a end result, the enterprise mix and version stays unchanged and any countermeasures that a bank might take against the harassed assumptions over the 3-yr length are not taken into account. For this cause, banks would possibly actually fare higher in truth than inside the strain test’s unfavourable situation.

Q16. Does The Stress Test Account For The Impact Of The Outcome Of The Referendum In The United Kingdom On Eu Membership?

The destructive scenario is considerably harsher than analysts’ forecasts of the poor impact of Brexit on the economy. Although no singular event along with Brexit is thought, the projections for the gross domestic product (GDP) of the euro location under the destructive situation are greater intense for each yr of the stress test horizon than the poor impact on GDP increase foreseen by way of analysts as a result of Brexit.

Q17. How Does The 2016 Stress Test Compare To Stress Tests In Other Jurisdictions?

The stress check physical activities of the EBA, the UK Prudential Regulation Authority (PRA) and the Comprehensive Capital Analysis and Review (CCAR) of the Federal Reserve Bank are not at once similar as the methodology, situations and time horizons differ notably. Disregarding the differences, the general impact of the EBA pressure check is in step with the PRA 2015 exercising. Compared with the CCAR 2016 exercising, the EBA pressure take a look at is stricter than the CCAR damaging scenario, but less excessive than the critically destructive scenario of the CCAR.

Q18. What Is The 2016 Eu-extensive Stress Test About?

The 2016 EU-wide pressure take a look at includes 51 banks overlaying 70% of general banking belongings inside the European Union. It is led with the aid of the European Banking Authority (EBA), which develops the technique for the exercising. The intention of the exercising is to examine how a bank’s capital function develops on the basis of stop-2015 records over a period of three years until 2018, underneath both a baseline and an negative situation.

The European Commission provides the baseline scenario at the same time as the European Systemic Risk Board (ESRB) affords the common detrimental state of affairs. ECB Banking Supervision is accountable within the euro area for coordinating instructions to banks, receiving the resulting statistics and appearing the nice guarantee, i.E. Validating banks’ statistics and strain test consequences.

Of the fifty one banks issue to the EBA-led strain test 37 are at once supervised through ECB Banking Supervision, masking 70% of banking property within the euro location. Individual consequences for all banks situation to the EBA-led stress check, along with certain balance sheets and exposure facts as of quit-2015, will be posted via the EBA on Friday, 29 July 2016.

Separately, the ECB conducts in parallel a pressure take a look at of a further 56 banks below its direct supervision, the usage of the identical technique. This is an inner supervisory exercise conducted through the ECB. Therefore, the outcomes are not posted by means of the ECB. However, if a bank chooses to post its personal consequences it may do so but the guide does no longer suggest ECB endorsement.

There may be no banks “failing” or “passing”. The Pillar 2 capital can not be mechanistically computed from the strain take a look at consequences as these are one, however now not the most effective aspect taken into account. The Pillar 2 capital will be decided in the SREP decisions later this year.

Q19. How Is The Capital Conservation Buffer Accounted For In The 2016 Srep?

ECB Banking Supervision is taking a unique technique within the 2016 Supervisory Review and Evaluation Process (SREP) concerning the capital conservation buffer (CCB). The CCB will now not be included on a totally-loaded basis.

Some Member States (Cyprus, Estonia, Finland, Italy, Latvia, Lithuania, Luxembourg and Slovakia) determined to impose the full CCB on their banks with none phase-in as of one January 20@Other Member States opted for a four-12 months phase-in. This distinction led ECB Banking Supervision to set a SREP ratio based totally on a completely-loaded CCB for immediately supervised institutions as a part of the 2015 SREP. This decision has been revised for the 2016 SREP. Countries can take a planned preference, whether or not they need to use more difficult capital necessities or to regulate to the phase-in method of many friends. Some nations, consisting of Portugal, have already modified their section-in guidelines.

The CCB is a part of the Basel III capital policies and is designed to make sure that banks increase capital buffers which may be drawn down as losses are incurred. The CCB is to reach 2.5% of the risk-weighted property as of 1 January 2019 at the trendy.

Q20. Is There A Pass/fail Threshold? What Supervisory Actions Are Taken If Banks Do Not Meet The Capital Demand?

The strain check isn't a skip/fail exercising. No hurdle prices or capital thresholds are defined for the motive of the exercising. However, the findings of the stress take a look at will be part of the continued supervisory speak. As such, the ECB will use the pressure test as crucial input for the overall 2016 Supervisory Review and Evaluation Process (SREP), so as to close later this yr. In this context, it will also be used as one enter thing for the supervisory capital call for for banks.

The supervisory capital call for is based totally at the individual hazard profile of a financial institution. In the 2016 SREP process, it's going to for the primary time consist of two parts: Pillar 2 requirements and Pillar 2 steerage. Pillar 2 necessities are binding and breaches could have direct legal effects for banks. Pillar 2 guidance is not directly binding and a failure to meet Pillar 2 guidance does no longer automatically cause prison action. Nonetheless, the ECB expects banks to fulfill Pillar 2 steerage.

The “stacking order” of the distinct capital additives in line with the EBA guidance is explained in Figure @Under the stacking order, banks going through losses will first fail to fulfil their Pillar 2 guidance. In case of similarly losses, they could subsequent breach the mixed buffers, then Pillar 2 requirements, and eventually Pillar 1 requirements.

If a financial institution does now not meet its Pillar 2 steerage, supervisors will cautiously don't forget the motives and occasions and may outline high-quality-tuned supervisory measures. Should the capital supply of a financial institution be in addition decreased, main to a breach of the combined buffers, computerized measures limiting the distributable quantities of banks (e.G. Dividends or bonuses) are activated. A similarly depletion of the capital supply would lead to a breach of Pillar 2 necessities, resulting in a extensive set of extra supervisory actions.

Q21. How Does The Stress Test Account For Non-performing Lo?

EU-extensive strain assessments are solvency physical games to test if the banks continue to be solvent after incurring losses linked to a exchange of the monetary conditions. The EBA strain take a look at of 2016 takes the situation of a financial institution as at 31 December 2015 as a starting point and simulates the consequences of various situations defined via the European Commission and the ESRB, making use of the technique developed via the EBA. The strain test method debts for the non-performing mortgage (NPL) inventory, as banks are required to model the effect of the unfavourable state of affairs on the NPL amount. In unique, the exercising puts similarly pressure on a financial institution’s defaulted lo, resulting in additional loan losses in the adverse situation.

Q22. How Is Banks Supervision Structured?

Banks Supervision is established into two departments; Commercial Banking Department and Non-Bank Financial Institutions (NBFI) Department. Commercial Banking Department is charged with the supervision of business banks even as NBFI supervises credit establishments, Micro Deposit Taking Institutions and different non-financial institution economic institutions under the mandate of Bank of Uganda.