ESBG responds to the EBA consultation on IRRBB supervisory reporting
ESBG submitted its response to the consultation launched by the European Banking Authority (EBA) on 2 May 2023 on its draft Implementing Technical Standards (ITS) on supervisory reporting with respect to interest rate risk in the banking book (IRRBB). The consultation paper proposes new, harmonised reporting requirements for the assessment and monitoring of institutions’ IRRBB across the EU. This new reporting will provide supervisors the necessary data to monitor IRRBB risks in credit institutions, taking into careful consideration the concept of proportionality.
Since ESBG supports the introduction of more proportionality in reporting, we pointed out that the proposed the design of templates does not properly embrace this principle. In our view, the foreseen proportionality applied in practice does not really reduce the complexity of populating the templates, bearing in mind especially banking groups with large number of banking subsidiaries.
What is more, ESBG believes the level of detail in the data requests provides limited additional information about the IRRBB exposure of a bank, and it doesn’t improve the quality of internal management of IRRBB. The rationale and added value of requesting additional calculations besides supervisory outlier test (SOT) on economic value of equity (EVE), net interest income (NII) and standard repricing schedule is not clear.
Some examples of additional calculations whose purpose is unclear, especially for small entities, and which need to be provided on a quarterly basis are: i) the repricing schedule with contractual features; ii) PV01 with eliminating optionality; or iii) EVE and NII according to contractual features. ESBG also supports that some metrics should be reported at group level only and with lower frequency
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ESBG submits its response to ESAs on the exchange of information relevant to fit and proper assessment
On 28 April, ESBG submitted its response to the European Supervisory Authorities’ (ESAs’) consultation on joint draft Guidelines concerning the system established by the ESAs for the exchange of information relevant to the assessment of the fitness and propriety of holders of qualifying holdings, directors and key function holders of financial institutions and financial market participants by competent authorities.
In its response, ESBG expressed its concern about proposed guidelines that could interfere with the distribution of responsibilities between ESAs and the national competent authorities in some Member States. ESBG members argue that the envisaged obligation to query a centrally organised database violates the competence of national competent authority and that the database is not necessary for efficient supervision. They also raise concerns about using data from the database by the ESAs and suggest that the purpose for accessing and evaluating data should be specified in the guidelines.
ESBG proposes essential modifications that should be made if the ESA’s guidelines on information exchange are introduced.
ESBG proposes including a general obligation that queries of the database must have a legitimate reason and be logged, informing the data subject when a query is made and establishing minimum standards for data security.
ESBG also suggests specific clarifications and attention to statutory deadlines, as well as ensuring that the exchange of information does not alter, suspend or elongate the deadlines applicable to the assessment at stake.
Finally, ESBG also highlights the importance of data protection when competent authorities exchange information on members of the management body.
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ESBG sends a letter to the EBA and EC to address the proposed changes to the EBA RTS on IRRBB SOT
On 25 April, ESBG sent a letter to the European Banking Authority (EBA) and the European Commission (EC) regarding the EC proposed changes to the EBA RTS on interest rate risk in the banking book (IRRBB) supervisory outlier test (SOT), specifically for the net interest income (NII) metric. A first ESBG letter on this topic had already been submitted to these institutions in December 2022 to signal the problems with the proposed 2,5% SOT for NII threshold in light of the evolving interest rates environment.
During the adoption period, the Commission suggested introducing a new definition of “large decline” (which triggers the identification of a bank as outlier) based on two elements: 1) a ranking of banks elaborated by competent authorities, and 2) a NII decline higher than 2.5% of a bank’s Tier 1 capital.
ESBG’s letter stressed that the Commission’s suggested approach would not remediate the concerns raised by the industry regarding the calibration of the SOT NII threshold, and it would instead add more complexity, uncertainty and a lack of clarity. Instead, we recommended postponing the calibration of the SOT NII threshold to allow for a thorough analysis of the sensitivity and structural aspects of banks’ interest rate risk management and of the monetary policy developments. As an alternative, the letter recommended that the EBA sets a higher threshold to a more consistent level of 7,5% in combination with a transition period of at least 18 months.
As a result of the advocacy efforts undertaken by ESBG and other banking associations, the EBA issued an Opinion on 28 April rejecting the Commission’s approach. In particular, the Opinion proposed to retain the methodology for a large decline, as originally designed by the EBA, but to amend the level of what constitutes a large decline, replacing the original level of 2,5% of Tier 1 Capital with a level of 5% of Tier 1 Capital in view of the current rate conditions. Compared to the Commission’s proposal, the EBA solution is more realistic and in line with the industry concerns.
The new version of the RTS will still need to be adopted by the Commission, approximatively in mid-2023. The EBA current scrutiny plans on IRRBB will continue, encompassing a reconsideration in the short term of the level of the threshold, which might need regular updates through time
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ESBG responds to SRB consultation on its future strategic review
ESBG has recently shared its feedback with the Single Resolution Board (SRB) on its future strategic review which aims to enter into a new era after the completion of the construction phase. This phase was marked by the build-up of the Single Resolution Fund (SRF) and by the introduction of tools improving the resolvability. As part of the second phase, priority will be given on operationalisation with a focus on the resolution plans.
In its consultation response, ESBG has focused on two main elements. Regarding the first part which focuses on how the SRB consultation process can be enhanced, ESBG is of the opinion that both the banking sector and the Resolution Authorities would benefit from a wider framework for SRB consultation. Currently, the number of consultations does not cover the wide spectrum of expectations. It will also be desirable to promote an active participation of the banking industry in advance of implementing modifications on regulations they are subject to. ESBG also believes that banking associations are insufficiently involved in some consultations (e.g. SRB consultation on SRF contributions). A bundling of feedback by associations would be more expedient, as this would avoid receiving hundreds of identical comments for the SRB. Finally, considering the too-short consultation periods in the past (e.g. for MREL Policy), ESBG recommends to extend the deadlines.
On the second part, ESBG commented on how SRB could improve transparency and interactions with the banking industry. ESBG confirms that, in terms of transparency, a great progress has been made over the years; however, a balance must be struck between transparency and over-information. The latter makes reaching the knowledge more difficult; hence ESBG recommends the SRB to add a summary of the most important key points in front. In terms of interactions, ESBG members really appreciate the participation in the industry dialogue meetings initiated by Dr. König which should continue to take place physically. Also, the SRB should, similar to the ECB banking supervision, gradually translate the contents of the website into all official languages and also make important documents, such as policies, expectations or guidelines, available in these languages. Finally, with regards to formal communication on resolution cases, ESBG advocates that confidential information sessions for banks’ head of resolution planning and IRTs could be helpful for knowledge sharing amongst peers.
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ESBG submits its response to the EBA consultation on the overall recovery capacity in recovery planning.
Prudential, Supervision and Resolution
On 14 March, ESBG submitted its response to the consultation launched by the European Banking Authority (EBA) during mid-December on its draft guidelines which aim to harmonise the observed practices on the overall recovery capacity (ORC) determination and assessment, so as to improve the usability of recovery plans and make crisis preparedness more effective.
The objective of the ORC is to provide a summary of the overall capability of the institution to restore its financial position after a significant deterioration by implementing suitable recovery options.
In its response, ESBG firstly wanted the EBA to specify the requirements regarding the impact assessment of the recovery options and also to clarify the scenario severity. Scenarios are considered severe if they would lead institutions to the ‘near-default point’ in case no recovery options are implemented. Does this ‘near-default point’ refer simultaneously to Total SREP Capital Requirement (TSCR) and Total SREP Leverage Ratio (TSLRR) or alternatively either TSCR or TSLRR? ESBG wanted also to know whether breaching the near-default point corresponds to the Failing or Likely To Fail (FOLTF) point declared by the supervisor and the National Resolution Authorities (NRA) leading to resolution proceedings.
Secondly, ESBG underpinned a lack of level playing field for the determination of the ORC, although, setting a harmonized FOLTF point may appear fair. High reported capital/liquidity ratios of banks increase the starting point for the scenario calculation. Hence, the necessity to decrease from high capital/liquidity starting point to FOLTF point assumes a stronger degradation of the general economic conditions which leads to more severe haircuts on recovery options and a lower ORC. Therefore, this is a clear disadvantage for banks with high or increasing capital/liquidity ratios.
Finally, regarding the ORC score assessed by the competent authorities, ESBG considers that it is not realistic to fulfil all the buffers included into the recovery indicator levels after such severe crisis.
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ESBG submitted its response on resolvability testing to the EBA consultation
Prudential, Supervision and Resolution
On 14 February, ESBG submitted its response to the consultation launched by the European Banking Authority (EBA) in November on its amended guidelines, which aim to improve resolvability testing and to promote a deeper involvement of the institutions in the resolution planning process.
In this respect, they are requested to assess whether the arrangements in place are still fit for purpose to support the execution of the resolution strategy through a self-assessment and a master playbook for the most complex banks. The resolution authorities (RAs) will be asked to adopt a multi-annual resolvability testing programme for the institutions under their remit.
In its response, ESBG firstly warns against the risk of duplicated and overlapped requirements. The EBA consultation highlights several areas where the objective to be reached remains unclear. All the requirements that are already covered by the supervision authorities should not be duplicated in these guidelines. Given that the published EBA report on self-assessment is not expected to be complementary, proper, harmonized and stable reporting would be appreciated. Moreover, considering that the master playbook does not replace the other existing playbooks, ESBG also recommends maintaining only one set of documents to avoid unnecessary duplications, or overlaps in updating periods.
Secondly, a deeper cooperation needs to be encouraged between the institutions and the RAs. Such cooperation will lead to a better understanding of the resolvability expectations and thus will benefit financial stability. However, ESBG recalls that the institutions do not have full insight into the resolution plan and that the RAs share information on a ‘need-to-know basis’. The guidelines should be enhanced by the requirement for the RAs to present the authority’s assessment to the banks in order to identify areas for improvement and to avoid miscommunication. In addition, before asking banks to set up a master playbook, any guidance from the RAs on a successful resolution process would be welcome.
Finally, these new requirements should be better proportionated and time phased. The EBA Guidelines should not only provide proportionality for compliance but also for the possibility to adjust the scope of the self-assessment report based on individual requirements given by the group resolution authority. Provided that the non-resolution entities requirement is new, the deadline for the submission of their report should be set to 2025. Besides, keeping in mind the considerable effort required, ESBG deems that an every-two-year submission would be justified for both the self-assessment report and the master playbook.
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ESBG submitted its response to the EBA consultation on DGS contribution calculation
Prudential, Supervision and Resolution
The European Savings and Retail Banking Group (ESBG) welcomes the initiative of the European Banking Authority (EBA) to launch a consultation aiming at reviewing its guidelines, which specify the methods for calculating the contributions to the Deposit Guarantee Schemes (DGS), as requested in Art 13(3) directive 2014/49/EU. The EBA analysed whether the original guidelines’ approach to determine the riskiness of institutions is appropriate. In particular, the EBA analysed whether institutions that required DGS interventions were among the riskiest according to the guidelines’ methodology.
Enhancing the proportionality between the riskiness and the DGS contribution.
The EBA has identified elements that should be improved:
• setting minimum thresholds for the majority of core risk indicators and adjusting their minimum weights to better reflect the indicators’ performance in measuring the risk to
the DGSs,
• introducing an improved formula for determining the risk adjustment factor of each member institution that ensures a constant relationship between the riskiness of institutions and their DGS contributions,
• specifying how to account for deposits where the DGS coverage is subject to uncertainty, including in relation to client funds, thus ensuring closer alignment between the amount of covered deposits of a credit institution and its contributions.
Further clarity is needed.
While ESBG members welcomed the EBA consultation, ESBG’s response introduced two main recommendations. First, the DGS should be requested to disclose a description of
the institution’s contribution to the DGS fund with the goal of enhancing the member institution’s understanding of their risk profile. Such communication could also encourage the institutions to lower their risk profile where necessary, which could contribute to financial stability.
A more balanced risk weight between indicators.
As a second point, ESBG advocates for a more balanced risk weight for the two following indicators: Return on Assets (RoA) and the Total Risk Exposure Amount/Total of Assets
(TREA/TA). According to the EBA analysis, the former provides a better indication of a potential DGS intervention than the latter. Consequently, the EBA proposes raising the weight of the RoA and lowering the weight of the TREA/TA. ESBG points out that this initiative is counterintuitive, as it benefits high-risk banks. Low risk remains the principal reason to avoid DGS intervention.
High-level position paper – Executive summary
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ESBG responds to the EBA consultation on the supervisory handbook for IRB systems validation
On 28 October, ESBG responded to the European Banking Authority (EBA) consultation on the supervisory handbook for Internal Rating Based (IRB) systems validation. The handbook aims to clarify the role of the validation function as part of corporate governance, in particular in terms of scope of work and interaction with the credit risk control unit.
As a general comment, we stressed that organizational suspension of the validation function should be independent of the size of the bank. In addition, it should be ensured that the validation manual is free of inconsistencies with existing supervisory regulations such as the ECB Guide on Internal Models.
ESBG stressed that it would be helpful to consider the aspect of proportionality more closely. The validation approach proposed by the EBA hardly differentiates between the materiality of models/portfolios and model changes. On the contrary, the intensity and scope of validation activities must always be based on the expected data situation, the importance of the rating procedure, and the scope and complexity of the changes made.
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TOPIC: Prudential regulation
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ESBG short paper on the bank crisis management and deposit insurance framework (CMDI)
Position Paper | Prudential, Supervision and Resolution
Prudential, Supervision and Resolution
The Banking Union is one the most relevant EU policy over the last decade. The financial crisis in 2008 and its subsequent sovereign debt crisis in the euro zone have revealed weaknesses inherent in the functioning of the banking industry and demonstrated the need to coordinate the supervision and to shape a common framework in Europe.
Created in 2014, the Banking Union was a powerful response aiming to ensure that the European banks are able to withstand the upcoming crisis in the future without recourse to taxpayers’ money. The Banking Union is based on three pillars:
i) the Single Supervisory Mechanism (SSM) set up rules on capital requirements mainly from the implementation of Basel agreement and gave to the European Central Bank the responsibility to coordinate this supervision;
ii) the Single Resolution Mechanism (SRM) established a Single Resolution Board (SRB) and a Single Resolution Fund (SRF) in order to ensure the orderly resolution of failing banks, while minimising their impact on the real economy and on public finances;
iii) , the Deposit Guarantee Schemes (DGS) aim to protect depositors in the case where their banks fail, and their deposits are not available anymore.
These new uncertain times worsened due to the high inflation and the war in Ukraine legitimates the ongoing implementation of Basel IV rules in the EU regulation. Indeed, a well-capitalised banking sector contributes to reinforce the resilience of the European economy. As regards the two other pillars of the Banking Union, the European Commission has been mandated by the Eurogroup to bring forward a legislative proposal for a strengthened Crisis Management and Deposit Insurance (CMDI) framework in June.
Without a political agreement between the Member States, the Eurogroup decided to postpone the introduction of a European Deposit Insurance Scheme (EDIS) which was included in the initial workplan drafted by the Eurogroup President Pascal Donohoe. Against this background and before the publication of the legislative package postponed at the beginning 2023, the European Savings and Retail Banks Group wishes to reiterate its supports to the current CMDI review and calls in the meantime for an evolution of the framework, not a revolution. Read our paper below:
ESBG’S PAPER
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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
