ESBG keeps a close eye on prudential treatment of crypto assets

On 30 September 2022, ESBG responded to the second public consultation of the Basel Committee on Banking Supervision (BCBS) on the prudential treatment of banks' crypto asset exposures, which is built on the proposals in the first consultation issued in June 2021.

The basic structure of the proposal in the first consultation is maintained, with crypto assets divided into two broad groups: Group 1 includes those that are eligible for treatment under the existing Basel Framework with some modifications. Group 2, on the other hand, includes unbacked crypto asset and stable coins with ineffective stabilisation mechanisms, which are subject to a new conservative prudential treatment.

In the response to the second consultation in 2022, we advocated for the removal of the technological risk add-on from the proposed prudential framework.

The first reason for this would be the principle of technological neutrality. The regulation should focus on regulating the services but not the applicable technology in order not to prevent the adoption of a specific technology and to neither prefer nor prejudice a specific business model or service provider. Secondly, technological risk already exists in all asset classes. If persistent technological risks are detected, the supervisor could require actions for their mitigation or apply a Pillar 2 Requirement (P2R) surcharge. Finally, a common surcharge of capital would reduce institutions’ incentives to mitigate inherent risk.

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OCTOBER 2022 | TOPICS: Prudential, Supervision and Resolution | Public Consultation | Crypto Assests | Basel Framework | Technology Neutrality

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Digital euro: ESBG’s response to the European Commission targeted consultation

ESBG stated the need to further assess exactly what gaps in the payments system could be filled by the introduction of a digital euro, and to analyse how the existing solutions could be adjusted to enhance their value to the customer. This in its response to the European Commission targeted consultation on June 15. We highlighted the financial education challenges ahead, which will be key to address in order to continue building the customers’ confidence in the financial sector.

The response also stated that ESBG and its members are in favour of limits to individual holdings of digital euro – ideally in the form of €1,500 cap. It elaborated that a higher limit might cause a deposit outflow that would not be manageable for most banking business models in the EU and would likely force banks to de-leverage massively. The negative impact of this on balance sheet would be particularly severe for savings and retail banks that currently have little to no access to market funding. The deposit outflow would not only impact liquidity, but also the volume of credit provision of deposit-intense banks, which in the past kept the lending stable even in crisis times.

For a digital euro to be successful, it must provide a user-friendly onboarding process and it should be secure, easy to access and use, and adapted to the public. It would also require the acceptance of both the consumers and merchants. Finally, However, any measure aimed at introducing mandatory acceptance – and any eventual exemption – should be carefully assessed and designed at EU level to avoid affecting the level playing field between different means of payment and crowd-out the existing solutions.

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ESBG welcomes horizontal cybersecurity requirements for digital products

The European Commission launched a public consultation in March to gather views from a wide range of stakeholders to help shaping the Cyber Resilience Act, a regulation on horizontal cybersecurity requirements for digital products and ancillary services. As a response to this public consultation on the Cyber Resilience Act, ESBG submitted its position to the European Commission on 18 May. The ESBG position focuses on the following aspects: I) Cybersecurity of digital products and the users of digital products; II) Improving the cybersecurity of digital products; and III) Stakeholder impact of potential regulatory measures.

Digital products and ancillary services create opportunities for EU economies and societies but they also lead to new challenges because when everything is connected a cybersecurity incident can affect an entire system, and thus disrupt economic and social activities. The initiative for a Cyber Resilience Act aims to address market needs and protect consumers from insecure products by introducing common cybersecurity rules for manufacturers and vendors of tangible and intangible digital products and ancillary services.

On the whole, ESBG welcomes the European Commission’s Cyber Resilience Act as the level of risk of cybersecurity incidents affecting digital products has increased during the last five years. The overall level of cybersecurity of digital products marketed in the European Union could be improved. Subjecting certain products marketed in the Union to cybersecurity requirements would be effective (e.g. hardware or software products subject to higher cybersecurity risks).

Moreover, ESBG members believe that leaving it to hardware manufacturers and software developers to demonstrate compliance with security requirements is insufficient. It would be more valuable to have the opinion of a third party based on a control framework.

All feedback received will be taken into account as the Commission further develops and fine-tunes this initiative, that is tentatively scheduled for the third quarter of 2022. Input will help the Commission analyse cybersecurity-related problems associated with the digital products markets, explore possible ways forward and assess the impact of different types of interventions.

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An open data economy should be multilateral and cross-sectoral

ESBG submitted its position to the European Commission on the proposed Data Act on 12 May. ESBG welcomed the Commission’s data strategy and its commitment to create a single market for data that will constitute a potential source of growth and innovation.

We believe that a European approach to data is essential to ensure competitiveness, avoid fragmentation of national regulations, and benefit from a scale effect. Moreover, ESBG members stressed that the horizontal regulatory approach is crucial to establish the key rules and principles for all sectors as, in our view, an open data economy should be multilateral and cross-sectoral.

The European Commission published its proposal for the Data Act in February and opened this call for feedback in March. The proposal clarifies who can use, access, and share data generated in the EU across all economic sectors, and on what terms. The Data Act aims to provide a harmonised framework for data sharing, conditions for access by public bodies, international data transfers, cloud switching, and interoperability.

The Data Act is based on the results of an open public consultation that the European Commission carried out in 2021, to which ESBG responded in September. It is the second main legislative initiative directly related to data, following the recent adoption of the Data Governance Act, which aimed to increase trust and facilitate data sharing across the EU and between sectors.

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Access to better technology for (Supervisory) Reporting

On 18 February 2022, the four European banking associations (EACB, EAPB, EBF and ESBG) co-hosted the “Access to better technology for (Supervisory) Reporting” workshop that brought together the entire European banking industry, the European Banking Authority and the international RegTech community to openly exchange views and learn from each other on how RegTech solutions could help banks reduce their reporting costs and what are the hurdles to clear along the way.

300 participants across Europe participated in this half-day, targeted workshop. The presentations delivered by the banking industry clearly revealed the many challenges and complexities the industry has been facing for about 15 years due to the flood of additional data reporting requirements to banks. Data has never been as important as it is now with regulatory reporting having shifted from a simple administrative task in the past to a strategic objective high in the agenda of banks and a steering tool, with supervisors placing increasing focus on data quality. The current situation is the result of a layering of successive regulations, by different authorities at national and EU level, with the added complexities of different definitions and shorter delivery times demanding substantial investment by banks in systems, processes, and specialized staff. Banks have been mastering these challenges very well, generally speaking, but there is always room to become even more efficient.

While there are existing cases where banks are already benefitting from the use of technology either from in-house solutions or by creating a shared utility as result of a joint venture or other forms of pooling of resources by a number of banking groups in a country, the discussion revealed there is still ample room to explore and lot of work ahead to benefit from technology at a large scale.

A dedicated panel composed by RegTechs based across Europe confirmed that technology is available or is being developed to support banks with a wide range of services offering from end-to-end to targeted solutions. RegTechs also confirmed complexity is the most challenging aspect in the current reporting environment identifying standardization, infrastructure, and automation as tools to decrease the complexity.

The different ways regulatory reporting is done in Europe also adds complexity. Creating a more functional and interconnected ecosystem is key to start moving towards a much-needed standardization where RegTechs can play a key role. Replying to questions raised by the banking industry, RegTechs stressed that technology should be seen as innovation that could help banks reach beyond the 15-24% cost reduction as estimated by an EBA study last year, rather than a black box that brings its own complexity. RegTechs are also trying to remove barriers by intensively promoting their services for which forums like the workshop organized by the trade banking associations was an ideal setting to bridge the gaps between RegTech and the banking industry.

With a forward-looking perspective, the EBA provided an overview of how the different recently launched initiatives such as the Integrated Reporting System and the Commission’s supervisory data strategy aim to shape the future of supervisory reporting. The challenge is big, but the benefits are worth. The banking industry, RegTech community and supervisory authority agreed events like the workshop are key to foster collaboration and they will stay in close contact.

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Joint declaration on remote work and new technologies

On 7 December 2021, the European Banking Social Partners signed a Joint Declaration on Remote Work and New Technologies. The spread of the Covid-19 pandemic and the constantly increasing use of digitalised systems and processes led the Social Partners to reassess and appropriately update our approach to remote work in the European Banking sector.

In adaptable pattern of remote work, which allows for both higher productivity and an improved work-life balance, is a key aspect of the current and future ways of working. Therefore, UNI Europa Finance together with the EBF’s Banking Committee for European Social Affairs (EBF-BCESA), the European Savings and Retail Banking Group (ESBG) and the European Association of Co-operative Banks (EACB), worked together to ensure that employees’ and employers’ interests are safeguarded in these continuously changing working environments.

UNI Europa Finance President Michael Budolfsen said: “With remote work increasing at a rapid pace during Covid and beyond, it is opportune for the European Social Partners to come together to ensure this new way of working will stimulate a good work-life balance and not have a negative impact on the sector and its workers”.

UNI Europa Finance Director Maureen Hick added: “UNI Europa Finance welcomes the signing of this Joint Declaration and the commitment made today that remote work will not lead to any significant changes to bank employees’ rights and conditions and should be a topic of collective bargaining at all levels”.

Jens Thau, Chairman of EBF-BCESA, pointed out: “Banks and its employees have a strong track record of embracing new developments and putting them to work for their clients. The new Joint Declaration underscores the social partners’ commitment to responsibly shape this process of transformation.”

Michael Kammas, Vice-Chairman of EBF-BCESA highlighted: “The expertise of the Social Partners is pivotal when it comes to address new ways of working. This new Joint Declaration not only comes in the most appropriate time due to the pandemic and the continuous technological advancement, but it also shows the Social Partners’ ability to work together and agree on common approach encompassing all the significant aspects of Remote Work to ensure banks’ competitiveness and adaptability to the digitalized world of work.”

Peter Simon, Managing Director said for ESBG: “The Social Partners continuously strive for stable working conditions in accordance with the greater working situation. The Covid-19 crisis has escalated the need to establish good teleworking practices and adapt many roles to remote work. This Joint Declaration strengthens our commitment to employees to provide a secure environment”.

Nina Schindler, CEO of EACB explained: “The Social Partners’ agreement on the Joint Declaration on Remote Work is an effective and timely response to changes in working conditions. By signing this Joint Declaration, we demonstrate as the EACB our intent to safeguard the interests of European co-operative banks’ employees.”

The Social Partners have always proactively engaged with the effects of digitalisation. This new Joint Declaration builds on our previous commitments on Telework (2017) and on the Impact of Digitalisation on Employment (2018) by focusing on remote work as a specific type of adaptation to the way of working in the digitalised era. Understanding, shaping and keeping up with technological developments are very much at the heart of the European Social Partners’ approach in order to contribute to a strong and resilient banking industry.

To this end, the Social Partners have agreed to a common understanding regarding key aspects of remote work. These include collective trade union rights, health and safety, work-life balance, working hours and the right to disconnect, digital rights, resource and equipment costs, and access to training and career development.

This Joint Declaration on Remote Work and New Technologies is another significant achievement for the European Banking Social Partners, showing our continued commitment to engage together in current issues of common interest and adding our unique knowledge and contribution to the general debate on digitalisation.

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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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ESBG welcomes announcement of harmonised European Digital Identity

The European Savings and Retail Banking Group (ESBG) welcomes the intention to remove fragmentation and to build a harmonised legal framework across Europe, recognising the role of Member States as providers of the European Digital Identity Wallet.

BRUSSELS, 15 June 2021 – ESBG welcomes the intention of the European Commission (EC) to end the current regulatory and technological fragmentation of electronic identification across EU Member States,  as announced on 3 June, with the creation of a regulatory framework for a European Digital Identity.

The proposed harmonisation would help correct some of the shortcomings of the current eIDAS Regulation, whose partial (only public services are included) and heterogeneous adoption by Member States resulted in a highly underutilised ecosystem in the Union, particularly for cross-border access to services.

“The ESBG and its members welcome the Commission’s proposal and believe that it can contribute to the further integration of the European Union. We look forward to the coming discussions in both Parliament and the Council”, said Andreas Widegren the Chair of the ESBG FinTech Regulation Committee and Swedbank’s Senior Manager.

ESBG also supports the EC’s aim to ensure that at least 80% of EU citizens get access to digital ID solutions by 2030. Today, only 59% of EU citizens have access to trusted and secure eID schemes across borders.

The new proposal not only extends the eIDAS but it also puts forward an ambitious, interoperable EU-wide scheme centered around Digital Identity Wallets, to be issued by Member States as providers of legal identity.

A key factor will be the involvement of the private sector in the creation of the Trust Scheme, in a “process for close and structured cooperation”, as referred in recital 36 of the Regulation proposed by the Commission.

ESBG calls for the specificities of the financial sector to be taken into account in this involvement. As relying parties, banks should be aware of the chain of trust in data sharing, including all the actors involved.

ESBG is also in close collaboration with the other European Credit Sector Associations, in the context of the Inter-ECSA eID Task Force, which brings together experts from 36 financial institutions with the goal of expressing a common position for the whole sector. ESBG, together with the ECSAs, stands ready to further engage on the strategic issue of digital identity with the Commission, EU co-legislators and a wide range of stakeholders both at European and national level.

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Digital tax: European Commission roadmap

​​​​​​​​​​​BRUSSELS 15 February 2021 – ESBG issued today comments on the European Commission's roadmap on the introduction of a digital levy.

In our opinion, it is most important that a precise distinction is made as to which companies are to be covered by the digital tax. Therefore, this differentiation should primarily be done based on the core business of a company and based on how the business is conducted. Secondly, any potential up-coming definition of digital activities might be used as a differentiation criterion. 

We are convinced that companies should be out of the scope of any digital levy if they have:

  • one or more branches with on-site sales personnel
  • ​face-to-face customer service and
  • whose core business is not based on the provision of digital services

Furthermore, it is completely unclear on which tax base the digital tax should be levied. It makes a big difference whether an income tax or a transfer tax is designed. At this point in time, without any draft legislative texts, the intention of the EU Commission cannot be assessed at all. We believe that a design based on income tax and a link to income taxable revenues make no sense. Because the income tax burden of companies exclusively active in digital business transactions is generally very low due to the lack of, and moreover, controversial definitions of a company’s presence, its permanent establishment.

Furthermore, the determination of the income tax base is completely different depending on the Member State where the companies have to be charged. Beyond that, in the case of internationally active companies the issue around the permanent establishment would be almost impossible to manage. Thus, it can be assumed that all Member States involved would claim a share of the tax revenue for themselves (see also below).

Similarly, after years of efforts to establish a Common Consolidated Corporate Tax Base (CCCTB), a “profit sharing method” is, in our opinion, doomed to fail. Therefore, a “top-up” on the current corporate income tax” has to be ruled out. A transfer tax would be conceivable, which would ultimately be linked to the turnover within the EU (and the location of the recipient of the service, regardless of whether it is B-2-B or B-2-C) and would have to be paid in a simple procedure, if possible at source by way of deduction – which would be the most efficient way – or by way of assessment by the digital company providing the service. The registration obligation of “platforms” for VAT purposes within the framework of the “e-commerce package” also goes in this direction.​

About ESBG (European Savings and Retail Banking Group)

The European Savings and Retail Banking Group (ESBG) represents the locally focused European banking sector, helping savings and retail banks in 21 European countries strengthen their unique approach that focuses on providing service to local communities and boosting SMEs. An advocate for a proportionate approach to banking rules, ESBG unites at EU level some 885 banks, which together employ 656,000 people driven to innovate at 48,900 outlets. ESBG members have total assets of €5.3 trillion, provide €1 trillion in corporate loans, including to SMEs, and serve 150 million Europeans seeking retail banking services. ESBG members commit to further unleash the promise of sustainable, responsible 21st-century banking. Learn more at www.wsbi-esbg.org.

European Savings and Retail Banking Group – aisbl

Rue Marie-Thérèse, 11
B-1000 Brussels
Tel: +32 2 211 11 11
Fax : +32 2 211 11 99

info@wsbi-esbg.org ■ www.wsbi-esbg.org

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ESBG responds to ECB public consultation on digital euro

BRUSSELS, 13 January 2021 – ESBG submitted its response to the European Central Bank (ECB) public consultation on a digital euro.

The association representing some 900 savings and retail banks welcomed the opportunity to provide its views on the possible future issuance of a digital euro but at the same time highlighted the need for further information on key aspects of the project, such as the main purpose of a digital euro, its technical implementation and functionalities, the role for savings and retail banks and other Payment Service Providers, who would perform compliance checks, as well as the interplay with SCT Inst, just to name a few. The current ‘one-size-fits-all’ approach cannot be successful in the long run. In this respect, in its response, ESBG invited the ECB to publish a second report that could provide more concrete information on how a digital euro would work, and to run a second public consultation before deciding to proceed with an implementing phase.

The ESBG response to the consultation addresses the following key themes:

Impact on financial stability

Any new form of currency brings about fundamental challenges and the introduction of a digital euro could have severe impact on the entire functioning of the EU economy. Going forward, decisions need to be taken carefully and with a clear view on the main objectives. A digital euro could jeopardize financial and prudential balances of banks, by weighing on their solvency and profitability, and by increasing their risks and fostering more severe bank runs. In times of financial distress, the demand for a digital euro could increase dramatically, since it would constitute a risk-free asset. This could spur the crisis and even incentivise central bank runs. All these elements may threaten financial stability, to the detriment of customers and citizens. It follows that a digital euro must be designed as a means of payment only, thus avoiding its use as an investment tool. To do so, ESBG and its members recommend the use of limits to holding and a no remuneration policy.

Customer and data protection

A digital euro should not only be easy to use, but also easy to understand. Proper safeguards should be in place to ensure all players are protected. For instance, if offline transactions are implemented, there is the risk of loss of only locally stored digital euro in case the device used for storage is lost or damaged. Most importantly, ESBG stressed that under no circumstances a digital euro should undermine the trust in existing means of payments. Privacy should be safeguarded in any case, and some restrictions or enhanced consent requirements may be necessary to protect consumers from certain business models that may use data on transactions to target ads or offers.

Building on the existing payments infrastructures

Europe is at the forefront of innovation for retail payments, and especially banks and payments institutions, together with the Eurosystem and National Central Banks (NCBs), provide European citizens with the most efficient payments systems available, including via digital means. ESBG believes that allowing banks to maintain their role of intermediaries and distributors of money to the public – as this is currently the case with cash – by building on existing infrastructure will ensure a high level of consumer protection, user experience and trust, as well as financial stability. At the same time, this will ensure the efficiency of the retail payment system and transformation mechanism are preserved. Instead of building a brand-new payment system, the association recommends a digital euro be integrated in the current payment system. Finally, to ensure a level playing field, it is crucial to ensure the principle “same functionalities, same liabilities, same rules”.

ESBG and its member banks stand ready to further engage with the ECB on these strategic issues in the weeks and months to come.

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