ESBG submits its response to the EBA consultation on its data collection for the benchmarking exercise in 2024
On 28 February, the ESBG submitted its response to the European Banking Authority (EBA) consultation on its data collection for the benchmarking exercise in 2024. The aim of this supervisory benchmarking exercise to monitor and to assess the variability of institutions’ internal approaches used for the calculation of own funds requirements for market and credit risk as well as the usage of their IFRS 9 models, as well as on the impact of the several different supervisory and regulatory measures, which influence the capital requirements and solvency ratios in the EU.
In relation to the IFRS 9 models benchmarking, the ESBG expressed its support with the EBA approach to collect the whole set of information (“full data collection”) only for a limited number of HDPs asset classes and to use only the more relevant characteristics – i.e., “split” – for defining the homogenous portfolios in scope. Moreover, with respect to the materiality thresholds to be implemented in this case, the ESBG believes that these thresholds should not focus on exposures only, but on allocated provisions as well.
Furthermore, with respect to the EBA template on “Details on exposures to High Default Portfolios” (Template 115), the ESBG requests additional clarity on the probability of default (PD) used to compute the 12-month expected credit loss (ECL) (the ECL represents the weighted average credit loss with the PD as the weight). The ESBG ask for confirmation that if the facility expires before the year considered for a specific data point, the facility’s PD will not be included in the exposure weighted average PD.
Moreover, with respect to the EBA template on “Details on exposures in High Default Portfolios by economic scenarios” (Template 116), the ESBG notes that the guidance provided by the EBA states that the ECL amount associated with the economic scenario 0 shall be the weighted average of the ECL reported for the economic scenarios 1 to 5, while the SICR assessment is done based on weighted average PDs.
As such, the ESBG expects that there will be material differences between the booked ECL amount based on the Significant Increase in Credit Risk (SICR) assessment based on probability weighted PD, and the amount calculated as the weighted average of the ECL reported for the economic scenario 1 to 5 (SICR assessment based on scenario PD). The ESBG will continue this important topic for its members and stands ready to become involved with regulators in this respect.
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International Sustainability Standards Board consultation on Sustainability Disclosures
The International Sustainability Standards Board (ISSB) has been established at COP26 with the purpose of developing a comprehensive global baseline of sustainability disclosures for the capital markets. The purpose of the consultation is to develop a comprehensive global baseline of sustainability disclosures designed to meet the information needs of investors in assessing enterprise value.
To this end, the consultation includes proposed standards on general sustainability-related disclosure requirements as well as on climate-related disclosure requirements |Position – Executive summary | August 2022 |
CONSISTENCY BETWEEN ISSB STANDARDS AND EFRAG ESRSs
WSBI-ESBG believe that it is crucial to achieve consistency of sustainability reporting at global level and especially a full alignment of reporting requirements between ISSB standards and EFRAG European Sustainability Reporting Standards (ESRSs) to ensure a global playing field in terms of sustainability reporting. This convergence between both standards will address the risk of additional disclosures.
DOUBLE MATERIALITY
WSBI-ESBG highlight that the IFRS sustainability standards are based on an ‘enterprise value creation’ or financial materiality approach, in which sustainability impacts are measured in terms of impacts on the financial position and prospects of the company itself. On the other hand, the EFRAG ESRSs are being developed based on the ‘double materiality’ principle, where disclosure is required both from the point of view of financial impact on the company and on the impact of the company on society and the environment.
TRANSITION PLANS
WSBI-ESBG notes that the EFRAG ESRSs make a clearer reference to alignment with limiting global warming to 1.5°C in line with the Paris Agreement. On the other hand, IFRS sustainability standards allow the entity to choose its own target. By way of consequence, WSBI – ESBG requests that the ISSB takes into consideration including a clear reference to the 1.5°C target of the Paris Agreement in order to ensure comparability between the two standards.
BOUNDARIES AND VALUE CHAIN
Although, WSBI – ESBG considers it essential that sustainability reporting should capture the entire value chain, we ask for clearer and more defined boundaries as it is considered difficult and complicated to obtain information from companies that are not under the control of a financial institution, especially regarding scope 3 GHG emissions.
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ESBG submits its position to the International Accounting Standards Board on IFRS 17
On 23 May, ESBG submitted its position paper to the International Accounting Standards Board (IASB) Interpretations Committee (IC)’s on IFRS 17 (standard for insurance contracts).
The IC is the interpretative body of the IASB. Its agenda decisions include explanatory material on how the applicable principles and requirements in IFRS Standards apply to the transaction or fact pattern described in the agenda decision.
The IFRS IC received a request in March about a group of annuity contracts, i.e. written agreement between an insurance company and a customer outlining each party’s obligations. The request questioned how an entity determines the amount of the contractual service margin (unearned profit that an entity expects to earn as it provides services) to recognise in the profit or loss statement in a period in case of survival of the policyholder at the end of the insurance policy term.
The Committee concluded that a method based on the amount of the annuity payment the policyholder is able to validly claim meets the principles of IFRS 17. Consequently, the Committee decided not to add a standard-setting project to the work plan.
On our part, ESBG believes that this does not correctly portray the insurance service provided under these contracts. We are of the opinion that an alternative approach based on the present value of expected future annuity payments would more accurately determine the quantity of insurance contract services provided by their contracts. As the policyholder has exchanged an insurance premium to get protection against the risk of surviving for an unexpected period of time, the value the policyholder obtains from the insurance contract is continuous over time.
In addition to this, IFRS 17 is a principle-based standard and should not prescribe a method for determining the quantity of the benefits provided under a group of insurance contracts. Finally, ESBG questions the timing of bringing a TAD less than one year before the date of first application of IFRS 17. ESBG would recommend this issue to be addressed in a post-implementation review together with other issues that were pending to be addressed as well as others that may arise in the future.
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Daisy chain of internal MREL
The “daisy chain” deduction framework increases the necessity of legal certainty, predictability, and proportionality in the internal MREL (iMREL) regulation.
Resolution groups with entities in only one member state should be exempted from the “daisy chain” deduction framework. The transitional period for applying the requirements should also be extended to 1 January 2024. Moreover, ESBG warns that the introduction of the “daisy chain” proposed by the European Commission in late October should explicitly not increase other prudential requirements for banks. Finally, the scope of application of iMREL should be fixed at 5% of Total Risk Exposure Amount (TREA) for non-resolution entities in the level 1 text and not left at the discretion of the Single Resolution Board (SRB) as is currently the case.
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Call for evidence on the European Commission mandate regarding the PRIIPs Regulation
In Europe there are many PRIIPs that retail investors can purchase. In the area of structured products (PRIPs) alone, there are more than 1.5 million of them.
Regarding the use of the Key Information Documents (KIDs) to choose or compare between the products that banks offer to their clients, we believe that they do not play a role in product selection per se; there are other sources of information and the KIDs, which are designed for retail investors, are not suitable as a basis for product comparisons by the sales offices. For product approval purposes, the sales offices have designed separate technical solutions to obtain the required information. These tools allow, for example, the filtering of products according to certain product designs such as capital protection or certain underlings. However, there are individual contents of the KIDs that are used by the institutions for product selection. This includes, for example, the SRI, which is also used for the target market under MiFID II product governance.
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ESMA's review of the MiFID II best execution reports
The RTSs 27 (and 28) currently regulates the best execution reporting by execution venues and investment firms.
We understand that the crucial question for RTS 27 reports is if these reports should be re-instated. Based on the evidence we have with these reports so far, we do not think that they provide meaningful information which justifies the efforts of producing these reports. Neither have these reports been widely used by prospective recipients so far (measured by observed page views) nor are they helpful for investment firm’s own decisions to determine suitable best execution venues. We do not expect that the proposed modifications of RTS 27 reports would change that. Therefore, we welcome the European Commissions’s proposal to delete the Art. 27 (3) [RTS 27] as part of the Capital Markets Union package.
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Financial Transaction Tax (FTT)
Eight ESBG members support the aim to curb short-term speculation and to encourage the prohibition of undesirable market behaviour. However, they do not support a Financial Transaction Tax at EU-level.
The impact on financial activities essential to the functioning of financial markets and to the real economy could be extremely negative. We believe that the following activities will be affected negatively by the proposed tax:
- The issuance and secondary markets for sovereign bonds
- The use of derivatives contract for hedging purposes
- The use of repurchase agreements to provide secured liquidity to the market
- Market-making activities
- The use of intra-group transactions for liquidity management and efficient capital allocation within a group.
Concerns of savings and retails banks around EU financial transation tax (FTT)
ESBG’s main concern with the current EU FTT proposal is that – in efficient fixed income markets such as the markets for government and covered bonds, which are characterised by low spreads between bid and offer prices – the tax will be far higher than what can be earned on market-making, especially on instruments with short remaining time to maturity.
The consequence of the tax will be that market-making will almost cease and current liquid markets are likely to be transformed into buy and hold markets. As a result, market liquidity will disappear or be significantly reduced.
Background on the FTT
A Financial Transaction Tax (FTT) builds on the work of famous Nobel laureate James Tobin. An FTT is in theory applied to a financial transaction in a similar way to how VAT is applied to goods and services but due to the very narrow margins and the international character of finance the FTT, if incorrectly implemented, may have a severe distortive impact on the economy as a whole.
In September 2011 the European Commission proposed a FTT to be implemented in all EU member states but unanimity was not reached within the Council. Nonetheless, in autumn 2012, 11 member states (Belgium, Germany, Estonia, France, Greece, Spain, Italy, Austria, Portugal, Slovenia and Slovakia) requested and were permitted to continue the work on an FTT using the enhanced cooperation mechanism. After talks in December 2015, Estonia withdrew from the group of countries that requested enhanced cooperation, reducing the number of participating countries to 10, raising questions about the viability of the FTT.
Timeline of FTT legislation in the European Union
- September 2011: the European Commission proposed an FTT to be implemented in all Member States.
- Autumn 2012: 11 Member States requested enhanced cooperation on the FTT.
- February 2013: the Commission set out the details of the FTT to be implemented under enhanced cooperation in Council Directive COM (2013)71.
- Spring 2015: French President François Hollande called for the FTT to be based on the largest scope possible with low rates thus aligning the French position with the Austrian and German position. The EU-11 decided at the January 2015 meeting that the political coordination of the work on the FTT will be done by Austria and the technical coordination of the work on the FTT will be done by Portugal.
- May 2015: FTT (EU-11) Ministers’ discussion.
- June 2016 : Member States deciding to set up two task forces responsible for discussing issues regarding the possible effects on public borrowing costs of the proposed FTT and the efficiency of FTT collection.
- October 2016: The group of 10 Member States held a new meeting setting out the types of trades that would be covered, on the basis of a proposal put forward by Austria.
- March 2017: Based on the latest talks at the finance minister level, the group of Member States is pursuing an overall opt-out for the pension fund industry.
- Autumn 2018: The European Commission is preparing a new proposal, helped by the Austrian Presidency. The income from the new FTT is destined for the EU budget. Countries participating in the FTT would get to reduce the tax’s contribution for the EU budget. However, all tax initiatives need unanimity before they can become EU law.
