Response to consultation Paper on Draft Regulatory Technical Standards on own funds and eligible liabilities
Go backWhat is the percentage of senior non-preferred and senior preferred liabilities in relation to total liabilities for the institution(s) you represent? Within the senior-preferred layer, what is the percentage of eligible to non-eligible liabilities for this/these institution(s)?
Unfortunately MuniFin (Municipality Finance Plc) is not able to provide this information at this stage but to understand materiality of the matter for us please note that MuniFin is a Finnish public sector SSM bank, with following key figures (as of 30 June 2020):
- balance sheet total EUR 41.3 billion
- total funding EUR 35.8 billion
MuniFin's total funding consists of bonds issued on capital markets only as MuniFin's license as a credit society (as defined in the Finnish Act on Credit Institutions) does not allow deposit taking.Do you consider the four months deadline appropriate? Would you consider making a difference between the individual permissions pursuant to Article 78(1) points (a) or (b) CRR and the general prior permission pursuant to the 2nd subparagraph of Article 78(1) CRR? In case the four months deadline was kept for first time applications for general prior permission, would you see merit in: a) shortening the deadline for applications for the renewal of the permission? b) adjusting the content of the application to be submitted to the competent authority?
N/A
Senior preferred liabilities to the extent these are grandfathered are in scope of the the proposed ad-hoc permissions. Time schedule of 4 months for these Ad-hoc permissions cannot be considered appropriate for such instruments for which buybacks are often driven by market conditions requiring a short lead time. As described under Q1 MuniFin is an active issuer on capital markets and actions necessary to be taken depend on the market conditions where 4 months supervisory process does not fit with the nature of the instruments and the market needs.
Another very important example is callable funding. MuniFin's funding transactions include call structures that are kicked-in based on the market conditions. By imposing ad-hoc permissions with a lead time of 4 months, the market risk, operational burden and the cost will effectively be increased.
Illustration: a callable funding transaction gives an issuer a right but not an obligation to redeem the outstanding instrument at par at a specific future moment. A bank typically manages callable funding as instrument with a maturity equal to the first call date. The call option is then viewed as an option to extend the funding. The main drivers of this decision are the prevailing interest rates at the time of the call. To align the management of these instruments and to achieve efficient cost, a bank typically sells this right in the swap market. This means that the exercise of the call is fully controlled by a rational agent (a counterpart in the swap market) and not by the bank itself. The notice period is usually 2 weeks, which does not align with the period of ad-hoc permission. Moreover, if there is a possibility that ad-hoc permission for these instruments is not timely given, this will imply that our existing positions are not fully hedged anymore for the market risk. This implication will force a bank to ask ad-hoc permission for all callable instruments on continuous basis, introducing a huge operational burden on the bank and the regulator. Moreover, a possibility to not receive a timely permission will probably place issuance of new callable funding outside of risk appetite of the banks due to unmanageable market risks, which leads to marginal increase of the funding cost. Finally and most importantly, the existing callable instruments will have a position of unmanageable risk since we can no longer conclude that a bank can always call the funding if the associated swaps are called. Note that each instance of failure in this scenario will lead to a loss for the bank.
The urgency for more flexibility in liability management operations coincides with the decision to exempt certain entities from the prior permission regime.
We also argue that the permission regime should not apply to instruments with a remaining maturity of less than 1 year. Although these instruments could be eligible instruments, they do no contribute to the MREL requirement.
Do you consider the four months deadline in Article 32f appropriate? Would you consider making a difference between the individual prior permission pursuant to Article 78a(1) points (a), (b) or (c) CRR and the general prior permission pursuant to the 2nd subparagraph of Article 78a(1) CRR? In case the four months deadline was kept for first time applications for general prior permission, would you see merit in: a) shortening the deadline for applications for the renewal of the permission? b) adjusting the content of the application to be submitted to the competent authority?
We consider the 4 months application deadline as disproportionately long for permission with a validity period of one year. Therefore, we welcome the efforts to shorten the application period for renewal of permissions.
What is the percentage of senior non-preferred and senior preferred liabilities in relation to total liabilities for the institution(s) you represent? Within the senior-preferred layer, what is the percentage of eligible to non-eligible liabilities for this/these institution(s)?
The CRR2 introduces new granular eligibility criteria for eligible liabilities related, inter alia, to acceleration, set-off and netting, reference to write down and conversion etc. and the requirement that the instrument be subject to permission. However, some of these criteria are grandfathered indefinitely for existing instruments (legacy instruments) under Article 72b(2)(n) or Article 494b(3) CRR.
Unfortunately MuniFin (Municipality Finance Plc) is not able to provide this information at this stage but to understand materiality of the matter for us please note that MuniFin is a Finnish public sector SSM bank, with following key figures (as of 30 June 2020):- balance sheet total EUR 41.3 billion
- total funding EUR 35.8 billion
MuniFin's total funding consists of bonds issued on capital markets only as MuniFin's license as a credit society (as defined in the Finnish Act on Credit Institutions) does not allow deposit taking.
What is the quantitative significance and maturity distribution, for the institution(s) you represent, of unsubordinated instruments that are eligible liabilities solely as a result of the grandfathering provisions under Article 72b(2)(n) or Article 494b(3) of the CRR, compared to unsubordinated instruments qualifying under their own right as MREL, total MREL eligible liabilities and total liabilities? Do these instruments contain call options?
See our answer under Question 1Once the stock of legacy instruments described above is exhausted, instruments will only be eligible to MREL if they meet all eligibility criteria, including the new criteria. Do you expect that, as a result, going forward the amount of eligible liabilities as a share of senior instruments, would be narrowed concomitantly with the scope of the permission requirement?
Yes. This coincides with our lack of need for these instruments. Taking into account that MuniFin's resolution strategy is liquidation under normal insolvency producers, we deem that there is no need for these instruments.It is recalled that, as per the mandate to the EBA, the RTS on eligible liabilities for the purpose of indirect funding has to be fully aligned with the one on own funds. Are the interactions and consequences of the rules on direct and indirect funding appropriately described and captured for eligible liabilities and resolution groups?
N/AWould you agree that the existing percentage values for the thresholds are still suitable? If not please provide evidence and rationale for having different values.
N/ADo you consider that the general prior permission as per the 2nd subparagraph of Article 78(1) CRR, with the limits included therein, would be sufficient to cater for permissions to repurchase own funds instruments then to be passed on to employees as part of their remuneration (former Article 29(4) of the RTS), in addition to market making and other repurchase activities? Would you consider any derogations to be needed (in particular in terms of limits and one-year timeframe)?
N/ADo you agree that the provision regarding permission for immaterial amounts to be called, redeemed or repurchased (former Article 29(5) of the RTS) is no longer needed? If you disagree please provide a substantiated rationale.
N/AIs the information required appropriate? Please specify any change you would make and why. Please consider consistency with the prior permission regime for eligible liabilities instruments.
N/ADo you consider the four months deadline appropriate? Would you consider making a difference between the individual permissions pursuant to Article 78(1) points (a) or (b) CRR and the general prior permission pursuant to the 2nd subparagraph of Article 78(1) CRR? In case the four months deadline was kept for first time applications for general prior permission, would you see merit in: a) shortening the deadline for applications for the renewal of the permission? b) adjusting the content of the application to be submitted to the competent authority?
Please provide some rationale. Also, please consider consistency with the prior permission regime for eligible liabilities instruments.
N/AIt is recalled that, as per the mandate to the EBA, the RTS on eligible liabilities for the purpose of specifying the meaning of sustainable for the income capacity of the institution has to be fully aligned with the one on own funds. Do you see any unintended consequences stemming from the drafting of Article 32a?
N/ADo you consider the deduction rules appropriate for eligible liabilities? If not, what would be the rationale for departing from the rules applicable for own funds?
N/ADo you agree that general prior permissions should not be confined only to market making? Why would liability management operations not be sufficiently covered, as for own funds, via ad-hoc permissions? Please substantiate based on concrete experience.
We agree that this should not be confined only to market making.Senior preferred liabilities to the extent these are grandfathered are in scope of the the proposed ad-hoc permissions. Time schedule of 4 months for these Ad-hoc permissions cannot be considered appropriate for such instruments for which buybacks are often driven by market conditions requiring a short lead time. As described under Q1 MuniFin is an active issuer on capital markets and actions necessary to be taken depend on the market conditions where 4 months supervisory process does not fit with the nature of the instruments and the market needs.
Another very important example is callable funding. MuniFin's funding transactions include call structures that are kicked-in based on the market conditions. By imposing ad-hoc permissions with a lead time of 4 months, the market risk, operational burden and the cost will effectively be increased.
Illustration: a callable funding transaction gives an issuer a right but not an obligation to redeem the outstanding instrument at par at a specific future moment. A bank typically manages callable funding as instrument with a maturity equal to the first call date. The call option is then viewed as an option to extend the funding. The main drivers of this decision are the prevailing interest rates at the time of the call. To align the management of these instruments and to achieve efficient cost, a bank typically sells this right in the swap market. This means that the exercise of the call is fully controlled by a rational agent (a counterpart in the swap market) and not by the bank itself. The notice period is usually 2 weeks, which does not align with the period of ad-hoc permission. Moreover, if there is a possibility that ad-hoc permission for these instruments is not timely given, this will imply that our existing positions are not fully hedged anymore for the market risk. This implication will force a bank to ask ad-hoc permission for all callable instruments on continuous basis, introducing a huge operational burden on the bank and the regulator. Moreover, a possibility to not receive a timely permission will probably place issuance of new callable funding outside of risk appetite of the banks due to unmanageable market risks, which leads to marginal increase of the funding cost. Finally and most importantly, the existing callable instruments will have a position of unmanageable risk since we can no longer conclude that a bank can always call the funding if the associated swaps are called. Note that each instance of failure in this scenario will lead to a loss for the bank.
The urgency for more flexibility in liability management operations coincides with the decision to exempt certain entities from the prior permission regime.
Is the maximum limit of 3% of the total amount of outstanding eligible liabilities instruments sufficient? If not, please explain which percentage value of outstanding eligible liabilities instruments you would suggest and justify based on your experience.
We consider that the limit should not be applicable to entities subject to simplified obligations. Furthermore, for other instruments we suggest that the maximum limit should be increased at least to 5%. This would be necessary to allow banks to manage their liabilities more freely.Would you see some good rationale for exempting certain types of entities from the limits foreseen in Article 32c? Please describe cases and substantiate your rationale.
The intention is to apply the permission process to to all institutions in the same manner is not appropriate. It would mean that institutions where resolution measures have been set but will liquidated as part of normal insolvency proceedings were to be covered by the permission process. The MREL requirement for such entities is in principle equal to the own funds requirement. Therefore, the eligible liability instruments for which permission is required, will only consist of grandfathered senior preferred liabilities. These entities did not issue these instruments with the intention to meet the MREL requirement, but from a funding perspective.We also argue that the permission regime should not apply to instruments with a remaining maturity of less than 1 year. Although these instruments could be eligible instruments, they do no contribute to the MREL requirement.