Prudential Supervision
What is Prudential Supervision?
Prudential supervision is the part of government involvement in financial institutions that is primarily focused on maintaining – or ensuring the return to – the financial health and solidity of individual institutions. Prudential supervision aims to keep financial institutions as healthy as possible, as such healthy banks, insurers and other financial institutions can help fund economic activities, serve as tools for monetary and other governmental purposes, and are able to honour their commitments to for instance repay the deposits entrusted to them, to pay out profits to investors, or compensate policyholders for insured risks. Though run largely for profit by their owners, they provide a variety of services that are essential for most western societies.
Finance and organization in order
In order to remain healthy, prudentially supervised entities have to keep their finances and organisation in order. For instance, for banks, prudential supervision is built into the regimes for licensing institutions; a set of quantitative requirements and qualitative requirements such as control and checks and balances; into a regime on recovery, resolution or alternatively bankruptcy of a bank. These apply both per legal entity and on a group wide basis.
Prudential supervision requirements bind the financial institutions, but simultaneously are also given into the care of a supervisory authority and a resolution authority. For this purpose, these authorities have rights to information from the banks; a limited set of powers to intervene in banks; and are allowed and sometimes bound to cooperate across borders, and with other public authorities. Larger banks tend to want to operate both in their domestic markets and across borders, as do insurers and payment institutions. In the EU (and in other market economies) this is stimulated in order to create a common market with better and cheaper services and opportunities for both banks and their clients. Though prudential supervision and resolution can be more stringent for banks and the groups to which they belong, they are also applied in a sometimes less intensive and extensive manner to insurers, entities that provide key services to trading venues, investment firms, collective investment funds and even to some monoline financial service providers such as e-money issuers.
Relevant provisions
In the EU, relevant provisions for banks and their group-companies are contained primarily in the CRD IV, CRR, BRRD, SRMR, SSM Regulation, Deposit and investor guarantee directives, and delegated regulations of the ECB and European Commission, all as based on the relevant EU Treaty and EHRM provisions.
In the Netherlands, the directives and all national provisions implementing or goldplating the regulations have been implemented in the Wft, Fw and Awb. For insurers, Solvency II and its delegated regulation are key. Similar (or cross-referring) rules are applicable to investment firms through IFR/IFD, and in the payment services directive.