Call for proportionality in ECB’s revisions to options and discretions policies

BRUSSELS, 30 August 2021 – The European Savings and Retail Banking Group (ESBG) submitted on 23 August its response to the European Central Bank (ECB) public consultation on updates to its harmonised policies for exercising the options and discretions allowed under EU law when supervising banks.

The ECB is proposing revisions to its policies primarily to account for legislative changes adopted since they were first published in 2016. Most of the revisions pertain to options and discretions in the application of liquidity requirements. The consultation relates to many aspects of supervision, including permissions for banks seeking to reduce their capital, the treatment of certain exposures in the calculation of the leverage ratio as well as some exemptions from the large exposures limit.

Call for proportionality

In the area of consolidation, ESBG considers that the ECB’s requirement for the application to use a consolidation method other than the equity method is disproportionate. Institutions would have to regularly determine the equivalence method (which they would rather avoid) in order to provide the evidence as required by the ECB. Institutions that have already received exemption approval for the old portfolio as of the reporting date of 31 December 2020 will hardly be able to prove the disproportionate effort of applying the equivalence method in the application for newly acquired participations that are immaterial in terms of amount. Hence, the ECB requirement should be deleted or limited to cases where the sum of the relevant book values reaches a size that is relevant for the banking group.

Also in the area of consolidation, under commercial law (National Generally Accepted Accounting Principles – nGAAP), insignificant participations are generally exempted from the consolidation requirement. In the case of larger institutions, these exemptions soon exceed the EUR 10 million mark, up to which non-inclusion would be allowed even without a case-by-case decision. However, the ECB requirements makes it necessary to apply for individual case decisions for a large number of participations with very low book values in each case. In this respect, we believe that the ECB should not generally classify the case-by-case decision under Article 19(2) CRR as an exceptional case, but should consider it as a regular process.

Regarding liquidity waivers, ESBG believes that when one is granted the respective liquidity reporting requirements should also be waived. The systematic denial of waiving individual liquidity reporting requirements would contradict the objective of the waiver itself and would continue to be a reporting burden for European banks.

In addition, we ask the SSM to allow the utilisation of the effective maturity for internal rating-based foundation (IRB-F). Considering the coming changes regarding the use of internal models, we in fact expect the IRB-F portfolio to expand, particularly for short-term intra-bank exposure. Finally, a narrow definition of cash clearing operations via the ECB Guidelines should be rejected

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On the European Commission's Artificial Intelligence Act

The Commission aims to turn Europe into the global hub for trustworthy Artificial Intelligence. If we share this idea on the principle, it should be recognised that this is a risky bet.

The European Commission published a proposal for an Artificial Intelligence (AI) Act at the end of April. In parallel, it has set up a public consultation for stakeholders to provide feedback on the draft text, which ended on 6 August.

AI technology has only slowly began arriving on the market and as applications become more sophisticated, they will likely often become very unpredictable in their development. To ensure legal certainty, a level playing field and no obstacles to innovation, a clear definition of artificial intelligence is needed. This would cover the Commission work, as well as national data protection authorities, the Council of Europe initiative, and the OECD framework on classifying AI systems. ESBG members very much welcome the proposed technology-neutral and future-proof definition of AI, and the Commission’s risk-based approach to enable a proportionate regulation.

The Commission aims to turn Europe into the global hub for trustworthy Artificial Intelligence. If we of course share this idea on the principle, it should be recognised that this is a risky bet. Indeed, if European values are not ultimately adopted on an international scale, non-European solutions are potentially more efficient because they have been developed in less restrictive regulatory environments and could compete with European solutions.

With regards to the acceptance of data usage, members would like to use real datasets instead of the Commission proposed ‘synthetic’ datasets. These would mimic real life situations and allow AI training in a realistic setting, without the risk of second order bias (e.g., ethnicity indication based on living area or income).

We also believe that there should be a provision in the draft text to protect European AI developers and users at international level. AI does not discriminate against physical locations, and many different countries across the world have different interpretations of copyright and liability when it comes to AI applications.

Finally, we call for clarity on the scope of the text when it comes to biometric identification of natural persons. It is not yet clear if financial services firms and their providers, who rely on biometric identification to onboard customers remotely (and comply with KYC – know your customer requirements) will be included in the scope of the full set of requirements in the AI regulation.

We support the Commission in its efforts to create a clear legal framework for artificial intelligence which does not inhibit innovation and at the same time provides security for all market participants. We are particularly pleased with the Commission’s philosophical approach to promoting “digitalisation with a human face”. We believe that trustworthy AI in cooperation with human expertise will be of great value to European society. We particularly emphasise the interaction between man and machine. We firmly believe that both humans and machines are irreplaceable. However, we must ensure that new regulation does not inadvertently cripple our markets, dampen innovation and opportunities.

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