For transparent and efficient NPLs secondary markets

The additional disclosure requirements will not necessarily increase the efficiency of secondary markets for Non-Performing Loans (NPLs). The proposed solutions, such as the mandatory NPLs templates and the establishment of an EU Data Hub, bring additional complexity, costs and efforts to all market participants.

BRUSSELS, 9 September 2021 – The European Savings and Retail Banking Group (ESBG) replied yesterday to the European Commission’s targeted consultation on improving transparency and efficiency in secondary markets for Non-Performing Loans (NPLs).

With this consultation, the Commission wants to be informed on the remaining obstacles to the proper functioning of secondary markets for NPLs as well as actions that it could take to foster these markets by improving the quantity, quality and comparability of NPL data. The consultation will also enable the Commission to decide on whether EU coordinated action and/or policy measures would be taken. This in order to limit market failures in terms of information asymmetries, to increase market liquidity, to lower bid/ask spreads and hence to enable more efficient NPL markets.

From ESBG’s perspective, the statement that an increase of market transparency would have a positive impact on the efficiency of NPL secondary markets is not necessarily true. The proposed data structure of the revised NPL templates is in fact too wide, including a lot of non-essential data. This would make it more time consuming for investors to conduct operations on the NPLs market.

For those reasons, ESBG does not support the obligation to provide data on NPLs, especially not for low NPL banks (with an NPL ratio lower than 5%) who have no or little need to sell NPLs. It would make neither economic sense (the costs will surpass the benefits), nor would it materially support the build-up of an NPL trading market (as low NPL banks would not contribute to it). Furthermore, it would be against any proportionality consideration with regards to NPL size.

About the proposal for the establishment of an EU Data Hub for NPLs, ESBG would like to highlight that the information disclosure via Pillar 3 has been reinforced recently with heightened requirements for high-level NPL entities. These entities already provide all the relevant information they have, to get the best possible price. EBA NPL templates will further increase standardisation of NPL data.

ESBG believes that the risks of leaks of information largely outweighs the potential benefits of increased transparency. Even if data is anonymised, names of distressed companies could be identified, which could have very serious consequences, notably for firms that are still viable but whose debt one bank wants to sell, while other banks may not have recognised it as a non-performing counterpart.

Furthermore, there are many intangible parameters that have an impact on the price and purchase/sales volumes that cannot be collected in a Data Hub. Therefore, a partial analysis of the information provided could lead to infer wrong and undesirable conclusions.

In this context, the obligation to provide data on NPLs would not consider the role of all involved market participants and thus may have a negative impact for some of them – like the templates provide huge administrative burdens on the seller side but do not provide any incentive for buyers.

What must be pointed out is that the lack of a single NPL market is evident, amongst other factors, due to the differences in national insolvency laws and in jurisdictional systems. NPL markets work very differently across EU countries and the creation of a pan-EU Data Hub would not help NPL markets function any better.

ESBG members have a high level of operational readiness to deal with the increase in NPLs, when (and if) the need emerges. Accordingly, ESBG firmly believes that banks – or at least low level NPL banks – should rather be given the discretion to decide on the use of the NPL data templates even in their revised format in case of a sale. As sellers of NPLs, it is in the interest of banks to disclose relevant information in line with the characteristics of the product. Establishing a data hub with standardized data for all market participants could even reduce the liquidity and depth of the NPL secondary markets.

In conclusion, while understanding the rationality of aiming at increasing market transparency, ESBG believes that a solution should be implemented without bringing any additional complexity, investments and effort to all involved, using existing regulatory and legal framework and IT infrastructure.

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ESBG response to consultation on Pillar 3 disclosure of IRRBB

ESBG proposes to further delay the disclosure of the net interest income (NII) risk measures until the EBA requirements for these NII risk measures are specified.

BRUSSELS, 3 September 2021 – The European Savings and Retail Banking Group (ESBG) replied on 30 August to the European Banking Authority (EBA) consultation on draft implementing technical standards (ITS) on Pillar 3 disclosures regarding exposures to interest rate risk on positions not held in the trading book (IRRBB).

The draft ITS puts forward comparable disclosures for stakeholders to assess institutions’ IRRBB risk management framework as well as the sensitivity of institutions’ economic value of equity and net interest income to changes in interest rates. The proposed standards will amend the comprehensive ITS on institutions’ public disclosures, in line with the strategic objective of developing a single and comprehensive Pillar 3 package that should facilitate implementation and further promote market discipline.

ESBG believes that the approach chosen by the EBA for the development of the draft ITS is quite problematic due to the lack of a definition for net interest income (NII) metrics.

The disclosed NII metrics may not be comparable as long as the EBA does not define what it understands by these NII metrics. Moreover, it is very likely that future disclosed NII metrics will be based on different methodologies. Optimally, the methodological requirements for the calculations would be clarified by the EBA before the banks would be forced to disclose the calculated results. If this is not feasible, a clarification that banks may use internal metrics for disclosure until further notice would help.

In other words, the current chronological order of the published standards shows potential for conflict. We understand the EBA’s efforts to create as much clarity as possible for disclosure in a timely manner. However, for understandable reasons, the EBA has not yet defined the requirements under Article 98(5a) CRD to be applied to the metrics to be disclosed. That is why we strongly oppose the EBA’s expectations of institutions to apply the present draft before it enters into force.

Instead, ESBG proposes to further delay the disclosure of NII risk measures until the EBA requirements for these are specified.

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Call for all lenders to be equally supervised under Consumer Credits Directive

BRUSSELS, 3 September 2021 – ESBG responded to the European Commission’s public consultation on its proposal for a Directive on Consumer Credits on 30 August. In their response, ESBG members call on the Commission to broaden the scope of the definition of ‘lender’ to any kind of lender (including platforms) to ensure all are supervised at the same level for the same lending activities (including non-banks).

ESBG also calls for keeping the 200 EUR threshold for the lower limit of the scope, as a smaller amount would incur high processing costs disproportionate to the return (and the same can be said for short-term loans of less than three months).

The Commission announced the draft text of the proposal on 30 June. The previous Consumer Credit Directive (CCD), dating from 2008, does not consider recent developments which have a wide impact on credit loans, such as digitalisation. It also overlaps with other legislative texts which have since been updated. These changes should be reflected in the CCD text.

On the required information, ESBG members welcome the Commission’s proposal to provide consumers with simplified, streamlined pre-contractual information. They are concerned, however, that the newly proposed one-pager (SECCO) might actually be in addition to the existing SECCI. If so, this would go against the goal of reducing the information overload on the consumer. As a solution, ESBG believes that the SECCO should be an alternative to the SECCI, and not an addition. We also call on the Commission to embrace digitalisation by allowing information to be provided via a computer or tablet, and not interpret ‘durable medium’ to mean strictly printed paper.

In addition, regarding the creditworthiness assessment, ESBG considers that it should be proportional to the type of credit. The creditworthiness assessment should not be the same, for example, for short-term overdrafts and a considerable loan. In the case of payment in few instalments, the consultation of a database of unpaid credits could be sufficient to grant credits of small amounts and of a duration of less than three months, and this consultation should become compulsory.

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Revised NPL data templates are overly detailed

The revised NPLs data templates are overly detailed and impose more costs than benefits to banks and investors.
They should not be mandatory, at least not for banks with low levels of NPLs.

BRUSSELS, 3 September 2021 – The European Savings and Retail Banking Group (ESBG) replied to the European Banking Authority (EBA) consultation on the review of the standardised data templates for Non-Performing Loans (NPLs) on 31 August.

The current revision of the templates is based on the user experience and feedback from various market participants. The revision responds to the European Commission’s Communication on tackling NPLs in the aftermath of the Covid-19 pandemic (December 2020) that, amongst others, requests the EBA to review the templates based on a consultation with market participants. The objective of this revision is to make the voluntary data templates simpler, more proportional and effective. It also aims to make them available to all market participants by the end of 2021. According to the authorities, this should play an important role in providing a common basis for data exchange in secondary markets.

From ESBG’s perspective, the data templates are overly detailed and require information that either is not critical for purposes of loan valuations or is not currently or readily available. Some data fields go beyond what is relevant for portfolio valuation.

Furthermore, the potential mandatory implementation of NPL data templates does not consider the role of all market participants and thus may have a negative impact on some of them.

The proposal to require that the preparation of these templates shall be mandatory for low NPL banks (NPL ratio lower than 5%) is detrimental, in ESBG’s view. It would be neither necessary (low NPL banks have no or little need to sell NPLs) nor would it make economic sense (the costs will surpass the benefits), nor would it materially support the build-up of a NPL trading market (as low NPL banks would not contribute to it). Such measure would also go against any proportionality considerations.

Content wise, the templates have also several downsides. Despite a significant decrease of the data fields compared to the original 2017 templates, the remaining number is still high, and contains significantly more information than the current market standard. An additional difficulty is related to the availability of information and to the existing barriers imposed by confidentiality rules. All these, if made obligatory, will put additional pressure that would outweigh benefits from the bank´s perspective due to the need for increased engagement of resources.

In addition, it is also worth considering whether the revised templates (which are still too detailed and granular) would actually make it more time consuming for investors, particularly those new to the market, to conduct the valuation process, and whether this might have a detrimental rather than stimulating impact on the NPLs market.

In light of the above, ESBG firmly believes that banks (or at least low level NPL banks) should be given a discretion to decide on the use of the NPL data templates even in this revised format, rather than being obliged. ESBG members have in fact the required levels of operational readiness to deal with the increase in NPLs, when (and if) the need emerges.

In conclusion, while we understand the rationality of aiming to increase the market transparency by making available the NPL secondary market data, we recommend that the implementation solution should be done without bringing any additional complexity, investments and effort for all players, and using existing regulatory and legal framework and IT infrastructure. If the initiative will be continued, we propose to use the already existing Credit Bureaus EU infrastructure, at least for the retail segment, as an alternative solution which may fulfil the original objective and does not require new reporting requirements for the banks.

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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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Assessment of SMEs’ Post-COVID Financial Health

Small and medium sized businesses (SMEs) have been hard hit by the ongoing COVID pandemic. This is especially the case in high employment sectors, such as tourism, hospitality, and leisure.

National governments and the EU have stepped in with unparalleled levels of support to help struggling SMEs[1]. Banks have put in place a variety of solutions to help their clients, both in cooperation with and as a complement to public authorities’ measures. Guarantee institutions have also played a key role in supporting corporate lending dynamics by setting up extensive support measures[2]. In addition, accountants have helped SMEs adjust to the COVID circumstances based on their skills and capabilities around financial distress and business planning.

On top of their individual efforts, these sectors have also worked together at national and EU levels. In some cases, this has already led to initiatives aiming to reduce uncertainties and difficulties for SMEs. We also acknowledge the impact of the Roundtables organised by the European Commission in reinforcing these cooperative efforts and laud the efforts of national partners who have reached out to other sectors.

Altogether, these measures have probably helped to prevent thousands of bankruptcies and insolvencies, as pointed out by Bruegel; however, in some cases, they may have also deferred solvency problems into the future.

Accountancy Europe, the European Association of Co-operative Banks (EACB), the European Association of Guarantee Institutions (AECM), the European Banking Federation (EBF), the European Savings and Retail Banking Group, SMEunited and the five supporting organisations of this joint statement believe that it is time to start preparing for that future now!

Our organisations concur that SMEs, accountants, financial and guarantee institutions, and other key actors in the SME ecosystem need to get together to discuss SMEs’ overall post-COVID business outlook. Therefore, we announce the following:

  1. We will organise pan-European discussions involving our sectors and the relevant public authorities at the EU level in order to ensure a common understanding of the challenges and solutions.
  2. We will support initiatives by our national members when and where they deem it useful to organise cross-sectoral national meetings, reflecting country specificities and needs.

What would these discussions consist of?

Bottom-up, cross-sectoral voluntary discussions at the level of the national markets could be useful in leading to a common understanding among the participating stakeholders on the up-to-date situation of SMEs, which is vital for the effective monitoring and assessment of companies’ financial health and prospects.

The signatories will support possible new or continued national discussions around these issues by providing relevant analyses and promote an exchange of best practices that could serve as an inspiration for these discussions[3].

We also emphasise the overall need to foster the green and digital transition of the economy, as well as reporting and data sharing systems to meet changing business and market demands. Digitalisation can enable a better and more secure data exchange and provide more valuable insights through forward looking data and big data analytics. This will support the objectives of the twin transition of the EU economy.

Finally, in these discussions, there are two important balances to strike:

  • While addressing what is different or unique about this crisis, we should also not overlook our best standard tool in getting out of a crisis: financiers working in a competitive market who use hard and soft data available to them about the creditworthiness of the borrowers. The market-based, time-tested risk assessment mechanisms should be allowed to function.
  • While there is diversity in starting positions, impact of the crisis, structure of economies and characteristics of restructuring and insolvency frameworks, there is also a strong EU interest in ensuring consistency and synergies across national approaches. This means striking the right balance that gives an EU-wide steer to discussions that reflect national priorities.

Why is viability assessment important?

National dialogues to improve the availability of data and the assessment of viability can enable a better monitoring of businesses’ post-COVID health, and therefore:

  • Help develop a sectoral view of SME debtors at a particular risk of financial problems post-COVID;
  • Help governments better target any additional post-COVID measures, such as national measures (such as tax forbearance measures) or the EU Recovery Fund allocations toward uses that can make the most difference, i.e., in support of businesses and sectors most in need and which have the best chances of contributing to a sustainable recovery[4];
  • Facilitate debt and loan restructuring for viable borrowers; and
  • Help identify what additional measures are needed to help “near-viable” SMEs survive post-COVID, i.e., businesses that would otherwise be healthy were it not for (for example) the debt overhang caused by COVID, which might still need additional temporary help to prevent them from going out of business.

In this context we note the recent paper of the ESRB focusing on preventing and managing a (potentially) large number of insolvencies. In particular, we agree with the following observations:

  • ‘The rise in insolvencies that normally accompanies a contraction in economic activity has so far not materialised, but a major wave of insolvencies may yet happen if crisis management measures are withdrawn too quickly.’
  • As we enter the post-COVID phase, the goal should be to avoid insolvencies of fundamentally viable firms and to deal with insolvencies of fundamentally unviable firms efficiently. This phase will require ‘a transition from broad-based, system-wide measures to a more targeted approach’.
  • ‘Policies must be geared towards rebuilding the economy, fostering adaptation to structural change, rather than trying to preserve, or return to, the pre-pandemic economy.’
  • Strategies to address solvency issues should include, where needed, ‘improved restructuring frameworks and debt relief or equity injections to repair balance sheets of corporates with viable business models.’
  • Slow or overly complex restructuring proceedings ‘could damage in particular SMEs.’
  • For companies found to be ‘unviable in the post-COVID-19 economy, efficient insolvency procedures should be developed to facilitate the swift redeployment of resources to more efficient uses.’
  • A key challenge will be distinguishing between viable and non-viable firms, which cannot realistically be performed on the required massive scale by public administrations or courts. The information and expertise held by informed lenders, such as banks, and by guarantee institutions[5], will be critical for the survival of viable companies. In our view, the better/earlier the information provided by SMEs/accountants, the easier it is for the banks and guarantee institutions to evaluate.A clear implication of this report and the broader discussion is the need for pan-European and national cooperation among companies, lenders, guarantee institutions, the public sector, and providers of financial services. As a first step, public authorities, accountants, financial institutions, guarantee institutions, and SMEs themselves should join efforts in the assessment of the post-COVID solvency and prospects of SMEs. This would in turn support the design of more targeted and effective follow-up COVID aid measures, as well as a progressive transition to a stable, green, and digital economy.

[1] Including furlough schemes, tax deferrals, government-backed loans and guarantees, and loan moratoria. Many European countries have even temporarily suspended the enforcement of insolvency laws.

[2] cf. https://www.flipsnack.com/AECMeurope/aecm-covid-brochure/full-view.html

[3] We do not seek to be prescriptive or comprehensive. It should be up to our national members to decide to hold such discussions and what issues should be discussed.

[4] By which we mean ‘sustainability’ in its more comprehensive sense i.e. environmental, financial and economic, societal etc.

[5] cf. https://aecm.eu/publications/reports-and-studies/

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Digital Euro Quote

ECB and ESBG committed to a successful Digital Euro

BRUSSELS, 15 July 2021 – ESBG welcomes the decision of the Governing Council of the European Central Bank (ECB) to launch the investigation phase of the digital euro project as announced by the Eurosystem. The investigation phase will last 24 months and will aim at addressing key issues concerning design and distribution.

“ESBG and its members welcome the Eurosystem’s announcement and look forward to the coming interaction with the ECB”, said Sofia Lindh Possne, Chair of the ESBG Task Force on Central Bank Digital Currencies and Swedbank’s Senior Advisor Group Regulatory Affairs.

ESBG supports the ECB’s aim to ensure that in the digital age citizens and firms continue to have access to the safest form of money, central bank money. ESBG and its Members also support the efforts towards an environmentally friendly design of the core infrastructure of a future digital euro.

ESBG especially welcomes the involvement of different stakeholders via the creation of the Market Advisory Group. ESBG stands ready to engage with the Eurosystem and the other European Institutions during this investigation phase. In anticipation thereof, ESBG already drafted and issued a high-level position paper on the key challenges that the digital euro will face. The paper, published here, also suggests four possible use cases that could especially benefit from the issuance of a digital euro.

ESBG hopes this is a good starting base for a fruitful dialogue in the months to come and is looking forward to a further engagement on this important file with the ECB.

Notes to the editor

ESBG’s high-level position paper on a digital euro is available for download below in full and in summary format. It analyses five challenges for the issuance of a digital euro and presents four possible use cases that could especially benefit from the issuance of a digital euro.

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ESBG analyses digital euro’s main challenges

BRUSSELS, 6 July 2021 – Since the publication of the report on a digital euro in October 2020, ESBG and its members have been following closely and with great interest the developments made by the European Central Bank (ECB) in the project of a digital euro.

In this context, ESBG has recently finalised a high-level paper that analyses some of the main challenges that a digital euro will face. The paper touches upon five main topics: First, it describes the bank funding model and the challenges and risks that the introduction of a digital euro could bring about. Second, it discusses the topic of limits to individual holdings and finds that any envisaged limit should be based on a sound assessment of available data. Third, it focuses on the impact that a digital euro would have on intermediation and competition. Fourth, it describes the point of view of the customers. Fifth, it examines cross-border payments.

Finally, in suggesting four possible use cases that could especially benefit from the issuance of a digital euro, ESBG and its members stand ready to further engage with the ECB on the possible issuance of a digital euro.

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ESBG launches paper on social taxonomy

​BRUSSELS, 5 JULY-ESBG follows with great interest the work carried out by the European Commission and the Platform on Sustainable Finance in developing the EU Taxonomy, and especially its extension to social objectives.

Locally-focused savings and retail banks are built on traditional business models that are centred on being responsible and conscious of the needs of society. We play a crucial role in supporting inclusive and sustainable societies, as we provide fundamental banking services to our customers – primarily private households, SMEs and local/regional communities. We contribute to strengthening social cohesion and ensure that no one is excluded from basic access to financial services.

Due to their specific role, position, and social tradition, we believe that savings and retail banks should be part of any debate on sustainable finance. In light of this, ESBG launched today a white paper on the crucially important social taxonomy. The two-pager describes ESBG members’ socially-committed business model and we highlights what makes them different from other banks. It will be of utmost importance to get the future social taxonomy right in order to allow Europe’s savings and retail banks to continue exercising their customer-centric, socially-committed and responsible approach to business.

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