Critical Functions Report

 

Background

According to the EU Commission Delegated Regulation 2016/778 (OJ L 131, 20.5.2016, p.41), a function shall be considered critical, when it meets both of the following criteria:

  1. the function is provided by an institution to third parties not affiliated to the institution or group; and
  2. the sudden disruption of that function would likely have a material negative impact on the third parties, give rise to contagion or undermine the general confidence of market participants due to the systemic relevance of the function for the third parties and the systemic relevance of the institution or group in providing the function.

 

The EU Commission Delegated Regulation defines a two-step approach for defining critical functions. First, institutions are required to perform a self-assessment when drawing-up recovery plans. Second, resolution authorities shall critically review the recovery plans to ensure consistency and coherence across approaches used by individual institutions. The Critical Functions report aims at guiding institutions through this self-assessment, and at providing essential information for Internal Resolution Teams (IRTs) to perform the critical review.

 

The Critical Functions Report

The template is structured as follows:

 

Part 1. Select applicable economic functions.  Institutions can indicate which sub-functions are applicable for the reporting entity. A sub-function is not applicable if the entity is not providing the function to third parties. This impacts the scope of the exercise: the criticality assessment needs to be done for each applicable sub-function.

 

Part 2. Complete data input cells. For each applicable function, quantitative data should be reported. To facilitate reporting and comparability, the guidance refers to definitions used in other regulatory reporting where possible and appropriate. However, in contrast to other data collection exercises, quantitative data may be provided as a best estimate since the purpose is to have a clear idea of orders of magnitude.

 

Part 3. Conduct impact & supply-side assessment. Institutions should assess the impact of discontinuation and substitutability of each applicable function, by conducting an impact and a supply-side analysis.

  • The impact analysis assesses the impact of a sudden discontinuation of the function on third parties, financial markets and the real economy, taking into account the size, market share, external and internal interconnectedness, complexity, and cross-border activities of the institution.
  • The supply-side analysis assesses the market for providing the function in terms of substitutability. A function shall be considered substitutable where it can be replaced in an acceptable manner and within a reasonable timeframe.

 

Part 4. Conduct criticality assessment. Based on the impact and supply-side analyses, institutions conclude on the criticality of each sub-function.

 

Timing

In respect of timing, the deadline for submission of the reports is 30 April 2018.

 

Frequently Asked Questions

Questions relating to the report can be submitted to the National Resolution Authorities. A preliminary FAQ is included in the guidance note.

 

13/03/18 update: the drop-down list in optional cell I72 has been enabled. This is only relevant for institutions wishing to report EU or global market shares for wholesale funding.

 

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