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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Reducing the scope of the EBA NPLs data templates

On 5 September 2022, ESBG responded to the EBA consultation on the draft non-performing loans (NPL) transaction data templates, which seek to improve the functioning of secondary markets for NPLs.

The number of data fields in the proposed templates (especially those marked as “mandatory”) is significantly higher than what has historically been proven necessary to close voluntary NPL deals from a market standards perspective and it should therefore be reduced. Such a high number of data fields would in fact bring a significant costs increase for sellers and may jeopardise the development of NPL secondary markets.

In addition to the fact that most of the required information is too detailed and not relevant for the purposes of loan valuations, the data is also not always available within the banking system. This could lead to a counter-productive effect where sellers could renounce to sales they could execute due to constraining mandatory fields.

Another main impediment for this template to be useful is the issue of data consistency. The template would mainly be populated with management data and internal methodologies that can use different calculations and logics leading to incomparable information among portfolios.

Furthermore, it makes no sense to have common templates for single names or reduced portfolios of single names and massive portfolios of NPLs. Exposures to one single debtor or to a reduced number of corporates or SMEs have historically needed a different set of information, as their potential purchasers perform a deeper financial and legal analysis of the exposures rather than a statistical analysis, which is more adequate for massive portfolios.

Overall, the remaining fields compared to the original templates from 2017 still contain significantly more information than market standards require. For a well-functioning secondary market it is currently possible to sell NPLs by providing mainly 20 data fields.

Against this background, we request that the EBA further streamlines the templates, aiming at simpler, more balanced and effective design in order to achieve a broader application and increase transparency in the NPL market, without having a detrimental impact on EU NPL deals.

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Developing a proportionate, fair and efficient IRRBB framework in the EU

On 4 April 2022, ESBG responded to the EBA consultation specifying technical aspects of the revised framework capturing interest rate risks for banking book (IRRBB) positions.

Our response stresses that the current framework is too complex and challenging to implement for smaller institutions with non-complex operations and limited market risk exposure. Although we need a sufficiently prudent management of interest rate risk amongst all EU/EEA banks, the framework should also consider the peculiarities of national banking models and the interest risk inherent in national markets.

As regards the definition of large decline for the purpose of the net interest income (NII) supervisory outlier test, the proposed “Option B” referring to a cost related metric seems more aligned with established internal interest rate risk management methodologies. Yet, the removal of the administrative expenses term, which generates volatility and complexity, is pivotal to favouring this option.

Considering the limited ability of the standardised approach to capture adequately the exposure of each entity to IRRBB, any obligation to use it should be conditional on the competent authority having demonstrated that it would be more relevant than the internal model approach (IMA) it would replace.

In the area of credit spread risk arising from non-trading book (CSRBB), the scope of the framework is too extensive as it includes all instruments. On the contrary, credit spreads, which are based on a market perception, should not apply to illiquid and non-market instruments whose value does not change according to these market spreads. The scope should thus be restricted to instruments that have a clear market price transparency andare easily tradable on a large and deep enough market, because only these assets are subject to the market perception. Moreover, a clear definition of the terms “market credit spread” and “market price of credit risk” is needed.

To avoid different interpretations and ensure a level playing field, it should be stated explicitly in the Guidelines, that non-marketable instruments, such as loans to customers, should be generally exempted from CRSBB as they are covered by the bank’s credit risk management framework.

Finally, the new IRRBB standardised methods for the economic value of equity (EVE) and NII seem to be very calculation intensive but, at the same time, less granular than many banks’ internal models. We therefore stress that both banks and supervisors may lose interest rate risk management insights if banks are required to apply them by their national authorities. ​

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Considerations on the BCBS principles for the management & supervision of climate-related financial risks

The Basel Committee on Banking Supervision (BCBS) has published a public consultation on principles for the effective management and supervision of climate-related financial risks. The document forms part of the Committee’s holistic approach to address climate-related financial risks to the global banking system and aims to promote a principles-based approach to improving both banks’ risk management and supervisors’ practices in this area. This new position paper based on our response to the consultation.

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Considerations on the BCBS principles for the management & supervision of climate-related financial risks

The Basel Committee on Banking Supervision (BCBS) has published a public consultation on principles for the effective management and supervision of climate-related financial risks. The document forms part of the Committee’s holistic approach to address climate-related financial risks to the global banking system and aims to promote a principles-based approach to improving both banks’ risk management and supervisors’ practices in this area. This new position paper based on our response to the consultation.

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ESBG welcomes EBA's greater emphasis on proportionality

ESBG welcomes that the EBA is placing greater emphasis on proportionality in regulation, and hopes that this will pave the way for more proportionality in future regulations. However, more can be done to improve the proposed classifications, increasing granularity and have a paper which better explains how the ideas could be implemented.

We welcome the EBA’s commitment to using, primarily and as far as possible, already existing data from its database of supervisory reporting. However, if more data is required from financial institutions, we urge the EBA to deliver on the promise that these collections are proportionate to the complexity of the underlying requirements itself and to the burden of institutions and supervisors to deliver such data.

We consider the step-by-step approach to be suitable in principle. However, the procedure in step 2 is not clear. In our view, the proposals for the metrics are not yet fully developed. It is not sufficiently clear how on this basis – without concrete benchmarks – the decisions of a political expert can be better supported.

ESBG very much appreciates the inclusion of a classification for co-operative and savings banks. These banks are by nature local, rather small banks with a low-risk profile and a focus on core banking business. We urge the EBA should ensure that the proportionality considerations are also applied to small and non-complex institutions that are part of a consolidated group, particularly credit institutions that are only locally/regionally active and therefore do not have a systemic impact.

We would like to point out that Classification III has clear disadvantages compared to Classifications I and II. Institutions that are to be subject to the strictest regulation are to be delimited by means of a size criterion (€ 30 billion balance sheet total; point 31 lit. d of the EBA discussion paper). A delimitation on the basis of the balance sheet total would contradict the basic idea of a sufficiently differentiated regulation on the basis of the pro-portionality principle.

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The EU Commission’s proposed ‘single-stack’ approach for Basel III finalisation would harm European banks

ESBG also calls for a proportionate implementation of the Basel III framework in the EU banking system to ensure that Europe’s diversified banking sector continues to foster economic growth.

BRUSSELS, 27 October 2021 – The European Savings and Retail Banking Group (ESBG) calls on the European Parliament and the Council of the EU to reconsider the output floor implementation on a ‘single-stack’ approach included in the European Commission’s proposal for the finalisation of the Basel III standards in the EU, announced today.

The ‘single-stack’ approach would mean applying the output floor to EU-specific capital requirements, on top of internationally agreed ones. ESBG calls for the use of the ‘backstop approach’, meaning applying the floor only to internationally agreed capital requirements. The ‘backstop approach’ would help preserve and strengthen the EU’s diverse banking system. Otherwise, the ability of Europe’s diversified banking sector to provide finance to the real economy and foster economic growth could be hampered.

“ESBG and its members believe that the Co-legislators should implement the Basel III framework adapting it to the specificities of the European banking market, where needed. This includes an application of the output floor that does not exceed what is explicitly laid down in the agreement on the finalisation of Basel III”, said Johanna Orth, Chair of ESBG’s Task Force on Basel.

The package of reforms to finalise the Basel III framework is designed for internationally active banks. Therefore, when implemented within the EU regulatory framework the EU special features should be considered, including those which are already enshrined in the banking regulation. In particular, the so-called SME supporting factor should be retained, as it provides the right incentive to stimulate real economic growth.

“The implementation of the Basel standards within the EU regulatory framework should reflect the proportionality principle, taking into consideration the risk nature, scale and complexity of the activities of European credit institutions”, said ESBG Managing Director, Peter Simon.

This would allow financial institutions to carry out their activities under a non-detrimental regulatory framework which strengthens the European banking sector – the backbone of the EU’s ‘real economy’. A disproportionate regulatory weight also would negatively impact banks, which would be overburdened with regulatory requirements that could even push resources away from customer service.

The EU banking sector’s diversity ensures that a full range of services is offered to customers at competitive prices, in particular by banks that focus on SMEs, households and local communities.

In this context, ESBG is looking forward to bringing the voice of its members to the upcoming legislative process. We believe that close cooperation among all stakeholders will be indispensable for the successful implementation of the finalised Basel III standards. We encourage the EU decision-makers to make full use of the discretions envisaged in the Basel III text, including those on operational risk, which will be crucial for continuous and solid credit provisions to the real economy after the implementation phase.

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Banking sector calls for participation in development of EU e-ID Toolbox

BRUSSELS, 2 September 2021 – The European Credit Sector Associations (ECSAs), submitted joint feedback on 30 August to the European Commission’s initiative for an EU digital ID scheme for online transactions across the Member States.

The ECSAs include the European Banking Federation (EBF), the European Savings and Retail Banking Group (ESBG) and the European Association of Co-operative Banks (EACB).

The organisations welcome the Commission’s proposal, announced on 3 June, for a regulation establishing a framework for a European Digital Identity, as well as the high ambitions outlined in the initiative, which represent a positive development in the creation of a future-proof EU single digital market.

A European digital identity will make it possible to offer faster onboarding processes and improve customers’ user experience while ensuring the same level of security as face-to-face onboarding. The ECSAs believe that the proposal will ultimately contribute to facilitating the adoption of digital banking services.

The Commission proposal aims to provide an ecosystem of credentials leveraging a new wallet architecture of several ID solutions, which holds the potential to further increase innovation for the benefit of all European businesses and citizens. The proposed decentralised model fosters personal autonomy and increased personal data protection, giving users control over their identity attributes.

The ECSAs believe the proposal will incentivise the Member States to be more expedient in developing e-ID solutions with a wide scope of usage and potentially much higher adoption rates. It also provides grounds for some attributes to be validated against public sources. This is a welcome development, particularly in processes where a high level of assurance of these attributes is necessary, for example, the KYC process. When acting as relying parties, banks should be aware of the chain of trust in data sharing (including actors involved) and should be able to promptly check the validity of credentials.

Call for banking sector’s involvement in the Toolbox

The ECSAs appreciate the cooperation between the European Institutions, Member States and the private sector. Member States should cooperate in a coordinated manner towards a Common Toolbox. The European digital identity should build on existing (and upcoming) national notified e-ID solutions. The ECSAs believe that the banking sector should also be involved in the development of the Toolbox. Banks can be key partners in drafting a roadmap that ensures successful e-ID adoption given the wide scope of use cases and related implementation costs.

It will be key to establish a common technical architecture that enables the private sector to integrate any digital wallet developed within this regulatory framework without additional technical burden, regardless of where it is issued.

The ECSAs look forward to a Toolbox that is a common, openly available standard that enables the development of multiple, interoperable e-ID solutions and which incentivises private sector schemes to participate.

About the ECSAs e-ID Task Force

The ECSAs e-ID Task Force brings together experts from 36 financial institutions and national banking associations with the goal of expressing a common position for the whole sector on Digital Identity. The Task Force stands ready to further engage on the strategic issue of digital identity with the Commission, the EU co-legislators and a wide range of stakeholders both at European and national level.

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The European Credit Sector Associations’ joint response to the Commission’s digital identity consultation

READ THE FULL RESPONSE TO THE CONSULTATION

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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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ESBG welcomes EU Commission's anti-money laundering Package

BRUSSELS, 20 July 2021 – The European Savings and Retail Banking Group (ESBG) welcomes the ambitious AML-CFT package announced today by the European Commission. The ESBG is hopeful that the proposal will strengthen the fight against financial crime and calls for a clear regulation and efficient responsibility sharing between the new EU authority and the national ones.

“The consistent and integrated EU-wide supervision and the risk-based approach of the new AML-CFT regulation are steps in the right direction”, said Joseph Delhaye, Chair of ESBG’s Legal and Retail Committee.

“ESBG members are fully committed to continue fighting money laundering and believe that a clear and practical regulation will be key to make these efforts most effective”, he added.

The proposal for an EU-wide anti-money laundering authority, also part of the package, would be an extraordinary opportunity to ensure consistent supervisory practices and a comprehensive view of current and emerging risks. Nevertheless, overlaps with national authorities must be avoided and centralisation should not come at the cost of efficiency.

“ESBG fully supports harmonised guidance, better coordinated implementation and unified supervisory practices on AML-CFT across the EU”, said WSBI-ESBG Managing Director, Peter Simon.

ESBG is looking forward to strengthening the cooperation between supervisors, national Financial Intelligence Units and the private sector on AML-CFT. Particularly, ESBG members would truly value more feedback from authorities and supervisors regarding reporting activities. Close cooperation among all stakeholders is needed to jointly succeed in the fight against money laundering.

 

Press contact: Leticia Lozano
Senior Communications Adviser
leticialozano@wsbi-esbg.org

Tel. +32 2211 1196 l GSM. +32 (0) 476 42 09 53

 

About ESBG: The European Savings Banking Group (ESBG) has 23 members in 18 countries. As some of its members are national organisations, ESBG represents the interests of over 800 banks working responsibly and closely with their communities and SMEs. Together, ESBG members manage assets worth €5,700 billion, serve 162 million Europeans and employ nearly 660,000 people. ESBG is the regional arm of the WSBI. Both organisations are headquartered in Brussels.

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