Critical functions play an important role in the real economy and/or in the financial system. They are not only important for the institutions providing the services, but also for the broader economy of a particular region or Member State (MS). This distinguishes such functions from critical services, which are the “underlying operations, activities and services performed for one (dedicated services) or more business units or legal entities (shared services) within the group which are needed to provide one or more critical functions”.
Critical functions are defined in the BRRD as “activities, services or operations the discontinuance of which is likely in one or more Member States, to lead to the disruption of services that are essential to the real economy or to disrupt financial stability due to the size, market share, external and internal interconnectedness, complexity or cross-border activities of an institution or group, with particular regard to the substitutability of those activities, services or operations”.
Critical functions are therefore important in carrying out the Public Interest Assessments and for selecting the preferred resolution strategy, which will aim to preserve those functions.
In the EU, institutions are required to self-assess critical functions when drawing-up their recovery plans (“bottom-up approach”). This self-assessment is also reported to and reviewed by RAs (“top-down approach”), with a view to achieving an appropriate and consistent identification of critical functions. The conclusions of this review feed into the resolution plan.
The SRB assesses the criticality of each economic function, based on reported data, comparisons with peers and expert judgement, taking into account available institution-specific and market-wide information. In 2017, the SRB collected data from all institutions under its remit, at individual legal entity or at (sub-) consolidated level, depending on the structure of the banking group. The SRB also developed a benchmarking tool to enable IRTs to compare the reported data by country and by function. In 2018, the SRB is collecting data at country level, aggregating all the activities of entities within that country. In addition, Critical Functions Reports continue to be required at the level of the EU ultimate parent undertaking as well as at sub-consolidated and individual level, as appropriate.
Steps in the Criticality Assessment
When assessing the impact, the SRB makes the following assumptions, among others:
- The critical functions analysis should focus on the impact (on the real economy and/or on financial stability) of a sudden disruption of a specific function (e.g. lending to SMEs) and not of the whole bank.
- For deposits, the value on covered deposits and the Deposit Guarantee Scheme (DGS) are not considered relevant.
- For lending, determining the impact of potential new lending is more important than the current stock of outstanding loans.
- For capital markets, the SRB mostly focuses on the role of institutions as liquidity providers to the market at national and/or EU level. In the same vein, when assessing wholesale funding, the SRB considers the importance of institutions for the smooth functioning of interbank funding markets.