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Lokale Pengeinstitutter (The Association of Local Banks, Savings Banks and Cooperative Banks in Denmark)

We consider the two limits to be too restrictive.

If the ”105%-rule” and the ”125%-rule” were imposed on Danish NJS companies the consequence would be that the institutions would be financially weakened. Either the NJS companies would be forced to increase distributions to the class with the lowest distribution or alternatively the NJS companies would be forced to reduce distribution to the class with the highest distribution. In the former case there would be a drag on capital because of increased distributions to the total CET 1-capital and in the latter case there would be a drag on capital because the incentive to invest in high-yield classes would decrease significantly. If the existing terms of subscription cannot be maintained, there will be an imminent danger that the Danish savings banks capital base in the worst case scenario will erode and at best only remain stationary.

This is due to Danish NJS companies generally attracting capital up to a certain amount from the institution's customer base on very favorable terms. The distribution on this capital is around 3% per year. For higher amounts of capital distributions will be higher in order to attract the additional capital. The distribution on these major capital injections typically amount to factor 2-3 of the dividends paid to the capital receiving the minimum distributions.

All Danish NJS companies operate with differentiated distributions in excess of the 125 % rule and all NJS companies - except for one - operate with limits in excess of the 105 % rule.

In our view the two limits should be increased significantly bearing in mind that the capital base is already being protected by rules more suitably designed for such a purpose.
In our view only capital instruments which exceed the two thresholds, should be disqualified from CET 1 capital. Such an approach would be similar to the general principle for inclusion of capital instruments in CET 1 capital where, for example purchases financed by the institution disqualifies those capital instruments being financed from inclusion in CET 1 capital but do not lead to disqualification of other parts of CET 1 capital. In our view it is important to model the “disqualification rule” in accordance with the very basic principle for inclusion of capital instruments in own funds.
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Article 7b, paragraph 9(b) introduces compliance assessment and information requirements for institutions each time new Common Equity Tier 1 instruments with fewer or no voting rights are issued. However, NJS companies are characterized by issuing new capital instruments continuously throughout the year reflecting the subscription of new capital instruments by customers on a frequent basis for typically a small amount of money. Reporting to supervisors each time new CET 1 capital instruments with fewer or no voting rights are subscribed would not be operational for either the institution or the supervisor. Instead, we find that the information reported under paragraph 9 (a) will be fully sufficient for monitoring compliance with the conditions in paragraph 5 and 6. Accordingly, paragraph 9 needs redrafting to reflect this.
We find that the limit is too restrictive and should be removed or, alternatively, be raised significantly.

A limit of 30% imposes significant bindings on the opportunities for NJS companies to pay holders of capital instruments with a market standard return compared to JS companies. An investor in a NJS company receives distributions as the only return on the investment. An investor in a JS company receives distributions as well and in addition to that has an upside in form of a capital gain on the shares. Removing or raising the threshold of 30% significantly, would admit NJS companies ability to attract capital in fair competition with JS.

In Denmark, 10 NJS companies operate with differentiated distributions covering more than 80% of total assets in the Danish savings banks. A calculation for the last five year period 2012-2008 shows that all 10 NJS companies exceeded the 30% payout threshold with an average payout ratio of 65%.

Therefore, a payout limit of 30 per cent would lead all NJS companies operating with differentiated distributions to be included in the 105% rule" and "125% rule". However, all NJS companies operate with differentiated distribution in excess of 125 % rule as well, and all NJS companies - except for one - operate with limits in excess of 105 % rule.

It is noted that an average payout under 30% conversely implies that NJS companies must retain at least 70% of the accumulated profit over 5 years. We see no justification for such a rulemaking for NJS companies which would have a major impact on the institutions business model and limit the opportunities for raising capital in fair competition with JS companies.

If the requirement for a payout restriction is maintained in the final RTS, we shall emphasize that the proposed calculation of the payout ratio as the sum of distributions related to CET 1 capital over the previous five year periods, divided by the sum of profits related to the same five year periods in effect imposes legislation retroactively. An institution's ability to make distributions would according to the proposal be limited by its historical financial performance which has been challenged during the financial crisis. Moreover, when institutions decided upon distributions they could not in any way foresee the rules for maximum distribution, which are now being proposed by the EBA.

Therefore, it is in any case necessary with transitional provisions or rulemaking according to which the maximum distribution at the outset is linked to the institutions present earnings instead of past earnings and on a forward looking basis is linked to an increasing number of periods until data for a five year period is available. This can be achieved by linking distributions in 2015 to present earnings in 2014 and on a forward looking basis linking maximum distributions in 2016 to earnings for the years 2014-2015 and maximum distributions in 2017 to earnings for the years 2014-2016 etc.

In contrast, for Danish NJS companies it would not be possible to link the maximum distributions for the year 2014 to earnings in 2013 within the limits contained in the final RTS on own funds – part four – because once the RTS on own funds – part four – is finalized the NJS companies will already have paid out distributions without knowing the final rules in the RTS on own funds.

To support our view that the proposed 30% limit is too restrictive and should be removed or, alternatively, be raised significantly, we shall finally emphasize that the CRD IV and CRR already contain provisions which are modeled to protect capital, including the capital conservation buffer and the countercyclical buffer, both of which contain limits concerning maximum distributions."
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Henrik Ullersted
+ 45 33 41 84 17