The Financial Stability Board (FSB) received the mandate from the G20 to develop more stringent supervisory rules for systemically important financial institutions (SIFIs). In an attempt to ensure a more effective Risk Appetite Framework (RAF), the FSB's draft principles contain comprehensive, detailed requirements applicable first and foremost to the frameworks that need to be implemented by SIFIs. WSBI welcomes these draft principles in the respect that we believe it is important to create a common global framework and, in particular, the creation of a common terminology.
On 9 November 2015, the FSB published the final Total Loss-Absorbing Capacity (TLAC) standard for global systemically important banks (G-SIBs), requiring them to meet a minimum TLAC of at least 16% of the resolution group's risk-weighted assets as from 2019 and at least 18% as from 2022. Minimum TLAC must also be at least 6% of the Basel III leverage ratio denominator as from 2019 and 6.75% as from 2022.
Generally speaking, it is WSBI's opinion that the TLAC implementation should be flexible enough to adapt to the already existing resolution framework at national level, taking into account that some jurisdictions have already developed frameworks with similar requirements for the recovery and resolution of credit institutions (this is, for instance, the case for the minimum requirement for own funds and eligible liabilities (MREL) in the EU). Furthermore, WSBI is very concerned about the potential extension of the TLAC framework to institutions that are not G-SIBs as it is likely that, due to market discipline, also non-G-SIBs might be obliged to apply these rules.
In Europe, lawmakers adopted the Bank Recovery and Resolution Directive (BRRD) and require banks to meet the MREL, capable of being bailed in if necessary. In fact, the MREL seems to be a more flexible and adaptable tool than the TLAC, which gives the impression of being rather rigid. Moreover, the latter appears to be to the particular benefit of the Anglo-Saxon banking model. Since the TLAC will become a binding law, WSBI is of the opinion that it is of utmost importance that the BRRD and the MREL are taken appropriately into account. In case the MREL does not receive appropriate consideration, affected banks would have two options: first, they could try to change their structures and adapt to the Anglo-Saxon banking model of "bank holding companies". However, this is simply not possible for a great number of banking groups, in particular European banking groups, with regard to their capital and organisational structure. The second option refers to the possible subordination of senior unsecured debt to make them TLAC-eligible. This could lead to the result that affected banks would have to massively issue a new type of subordinated debt, which would be very expensive and would not necessarily include the guarantee of finding investors (maybe except for some hedge funds).
Many assets could end up in the non-regulated markets. At any rate, banking institutions would have to reduce their lending activities to the economy, which would have detrimental effects to the current economic situation in many parts of the world. Therefore, it is crucial that the European MREL is recognised as an equivalent tool in the discussions of implementing TLAC and that the level playing field among banks at a global scale is ensured. If the European decision makers intend to combine TLAC and MREL, the framework must be as simple as possible. Additional burdens for the European banking sector need to be avoided (also in view of its competitiveness with other jurisdictions).
Furthermore, WSBI believes that disclosure requirements must be as simple as possible, in order to achieve transparent information to investors while avoiding further burden to financial institutions. They should not be in addition to Basel's Pillar III requirements already in place. Otherwise, banks, in particular small- and medium-sized financial institutions, would be obliged to face an unjustifiable administrative burden due to the implementation of different information disclosure reports for the same purpose. In this sense, it would be a good idea to integrate the TLAC disclosure in Basel's Pillar III.
The introduction of the obligation to submit separate recovery plans and to elaborate resolution planning can be considered, provided that the specific case of smaller institutions with a regional focus is adequately addressed by contemplating less detailed and less burdensome recovery plans/resolution planning for these institutions. Notably, there are supervisory rules in place which already require these types of financial institutions to regularly identify their core businesses, as well as the associated strategic risks, and to prepare action plans for stress situations. This situation has been acknowledged in the European Union in the BRRD when credit institutions are members of an IPS. In addition, WSBI doubts that preparing a recovery plan at every level – i.e. at solo level as well as at group level – is in fact necessary. Recovery plans need to be proportionate and should usually be made at group level.
Generally speaking, not just recovery and resolution schemes, but also prudential regulation in the widest possible range should take the principle of proportionality into account. It would be difficult to comprehend if small savings and retail banks were, for instance, required to apply the same macroeconomic modelling statistical techniques as large cross-border players.
Another way of mitigating the too-big-to-fail risk lies in the separation of activities. In the US, the Volcker Rule, which is now a part of the Dodd-Frank Act, came into force on 1 April 2014. The next step was foreseen for July 2015, where the end of the extended conformity period on the Volcker Rule was reached and the deadline to comply with the swaps push-out rules was set. In the US, WSBI's member ICBA has shown its satisfaction with regards to the Volcker Rule as it addresses the excessive risk-taking activities, proprietary trading and the too-big-to-fail problem.
In the European Union, different approaches are under discussion with regards to banking structure reform: In the EU institutions, the proposal for a bank structural reform (point of departure was the Liikanen Report) is being discussed, whereas some European countries are about to establish or consider establishing their own models (France, Germany, Belgium and the UK).
WSBI believes that there is actually no need for further banking regulation since it would be better to wait until the upcoming rules come fully into operation. An eventual structural reform should carefully assess the interaction and overlaps with on-going and upcoming banking rules, the economic situation and the current difficulties faced by some MSMEs to access funding. Indeed, we miss an impact assessment that takes into account the potential cumulative impact of the mentioned reforms.
Furthermore, we are seriously concerned by the negative effects for bank lending and for the economy that could come as a result of the application of this proposal, since a future separation of market making activities, securitisation and derivatives trading executed on behalf of clients would significantly reduce liquidity in the markets, increase the cost of lending and subsequently lead to further concentration in the banking sector. This would in fact lead to the opposite effects to those sought by the Commission. WSBI is also of the opinion that the thresholds put forward by the European Commission proposal are extremely low. Moreover, the role of the savings and retail banks in Europe should be carefully considered. They provide a full set of banking services to their customers: individuals and MSMEs.
Risk-based thresholds should remain as indicators in the supervisory toolbox rather than triggers. We are also concerned by the lack of clarity of the proposal which may lead to a further increase in uncertainty in the markets. Moreover, we are especially concerned with how the separation could be applied to the savings banks' business model, in particular, for entities that have an institutional protection scheme (IPS) system. Lastly, we believe that the proposals or laws that already exist at national level are a good way forward, and viable alternatives need to be thoroughly taken into consideration for legislative work. Most of them focus on addressing the risk arising from proprietary trading activities, without separating market-making activities.
Triggers should not only be defined by ratios, but they should also be combined with market data if applicable (e.g. credit spreads). In addition, a mixture of hard triggers and qualitative judgements, which would give the supervisory authority more flexibility in the means of soft triggers, would be welcome.
With regards to the bail-in-able instruments in connection with the potential resolution of institutions, the main objectives do not have to be missed, in particular the fact that the attractiveness of these instruments has to be considered in order to enable adequate funding for the banks. The effect on the interbank market would have to be carefully analysed, as well as the danger of increasing systemic risk, and the interaction with the liquidity requirements should not be neglected. Furthermore, to be implemented properly, bail-in-able instruments should also be adapted to institutions which are not joint stock companies, namely: institutions under public law, institutions without private equity, ownerless institutions, or cooperative groups.
Lastly, confidentiality is imperative especially concerning the recovery and resolution plans as it would undermine the efficiency of the framework put in place.
>> See the WSBI Intitutional Positions for G20 decision makers (.pdf)