European Banking Federation (EBF)

The EBF would like to firstly highlight its overarching concern that, similar to the BCBS Consultation on the Pillar 3 Review, this EBA Consultation appears to indicate that the regulatory community is determined to introduce a divide in the area of banks’ risk disclosures between accounting and Pillar 3 frameworks, resulting in both frameworks ultimately moving into a different direction. We strongly challenge that the EBA has been given a legal mandate to make proposals to that effect. We strongly oppose such a move as it is likely to bring confusion to preparers and users of risk disclosures alike. It is essential that both risk disclosure frameworks would not merely co-exist but interact between each other with a view of presenting an integrated view to the users on the basis of identical policies and processes.

Our answer to Q 1 is as follows:
In principle we welcome formal technical standards, considering that they will be likely to support a clearer dialogue with supervisors. They should also help promote across European institutions both transparency and uniformity in their application of waivers and approaches to frequency.

We also agree that it is important for institutions to have in place suitable policies and processes with regard to disclosure waivers and assessments of frequency, and to maintain records of the application of these policies/processes in order to be able to demonstrate that they are being carried out.

We disagree, however, that a dedicated process should be framed for Pillar 3. Article 431 does not call for such a process to be ‘dedicated’, in the sense of separate, and banks already manage policies and processes suitable to frame the decisions referred to in the consultation paper and to achieve the outcomes it seeks. There is no reason for the policies and processes for Pillar 3 disclosures to be designed to exceed those for others, e.g. financial accounting disclosures. Where proven structures exist within banks to govern disclosure, these should be deployed also for Pillar 3. References to ‘managing body’ should be clarified to include its formally delegated committees.
Assessing all potential disclosures for materiality, or whether proprietary or confidential, would be onerous. An alternative, more pragmatic approach which we would like to recommend would be for institutions to consider how the institution’s position has changed, compared with the prior period’s disclosures, and scope and define the current year disclosures based on this analysis.

Paragraph 8e) we think is problematic, as it is not practical to define in advance, other than generally, the reasoning that waiver decisions might require. There is also a risk that, if the bar for putting in place a waiver is set too high, institutions will avoid them and reports become increasingly obscured by superfluous material.

Similarly, we question whether it is appropriate or indeed necessary to mandate the involvement of Internal Audit as a matter of course. Systematically calling on Internal Audit to perform routine monitoring duties can impede their ability to identify emerging threats and avert major breaches. In practice, the definition of policy and process for Pillar 3 automatically brings these within internal audit’s risk-based programmes.
If by the term “is assessed as material” the EBA means “has been assessed as material”, we do not think it would be appropriate for the guidelines to spell this out, as it will be laid down in each bank’s disclosure waiver policy. If the term means “is being assessed for materiality”, we think paragraphs 12-14 provide sufficient guidance on relevant considerations and criteria. A flexible approach is essential to enable institutions to take account of specificities within their organisation.

There appears to be some misalignment between the guidelines and CRR. On the one hand, the guidelines state that “…….materiality in these guidelines is defined and applied solely in relation to the Pillar 3 disclosure requirements…… it could be that material information for the annual report may be immaterial for the Pillar 3 report and conversely.” However, CRR Article 434(2) provides that equivalent disclosures made by institutions under accounting, listing or other requirements may be deemed to constitute compliance with this Part. We believe that assessing materiality under Pillar 3 should not be more onerous than provided for under current financial reporting standards.
We believe the principles and indicators are adequate for assessing materiality and would not envisage additional ones.

We recommend that assessing materiality should not be, as the opening line to paragraph 14 suggests, the preserve of Risk functions alone. We appreciate that the present wording may reflect concern to ensure that assessments are not purely numeric, variance-driven exercises in Finance functions, but also apply broader, qualitative considerations,. However, we consider best practice to lie in collaboration between Finance, Risk and other relevant, specialist functions, as indeed the various criteria a) to g) indicate.
We agree that assessment as proprietary should be exceptional, but we find the qualifying criteria of “drastically impact” and “fundamentally negatively affect” too onerous. We do not feel that this strikes the right balance between the legitimate interests of Pillar 3 users in gaining a comprehensive view of an institution’s risk profile and the interests of the institution itself and its stakeholders overall. Against these tests, the benefit to users of having access to some items of information could be far outweighed by the damage to the institution through revealing these - which would in turn damage the interests of those same users, investors and customers. Moreover, it is not practical to try to “identify specifically to what extent disclosure would weaken … competitiveness, etc.” (paragraph 15b).

Similarly, regarding confidentiality, we agree the principle that this should be exceptional, but we feel that the proposed legal analysis is both impractical and unnecessary. There is a general legal presumption of a duty of confidentiality toward customers, but in our view the matter of assessing whether a particular disclosure might breach that obligation is not a legal judgment but one of common sense on the part of the risk and finance functions in conjunction with the relevant business area of the bank, which understands the market, the bank’s business, the client base and the exposure in question.

We understand the wish to ‘legislate’ comprehensively in these guidelines, even for what we suppose indeed to be exceptional cases, since we doubt that institutions routinely and abusively withhold information under a cloak of claimed confidentiality or proprietary nature. However, we do feel that the requirements set out here, as it were, ‘take a sledgehammer to crack a nut’. We suggest that:
- in 15a), the adjectives “drastically” and “fundamentally” be dropped;
- in 15b), the last two lines of five should be dropped;
- in 16b), the first line only should be retained.

In addition, for this Title IV overall, there should be a general provision that
a) banks should identify in their Pillar 3 reports, at the appropriate point, a non-disclosure on grounds of proprietary nature or confidentiality, and
b) national supervisors, who also know well the business of their supervised banks, would monitor the incidence of such cases of non-disclosure and take action case by case where they perceive inappropriate designation as part of their supervisory mission.
The indicators mentioned in Paragraph 18 are relevant to determining whether an institution is systematically important. Noting the alignment to the Basel Committee framework for determining a Global Systemically Important Bank, we feel that undue importance is ascribed here, as there, to the characteristic of size, by various measures, being relatively easy to quantify. This neglects, however, other important relevant factors, above all whether there is proven demand amongst users for a greater frequency of disclosure, related cost-benefit considerations, the nature and volatility of risks and their mitigation, and the extent of diversification of the organisation. We recommend that paragraph 18 acknowledge that such factors should also influence decisions on frequency.
We do not consider that it would be particularly useful in external disclosures to provide details of the bank’s internal materiality or frequency assessment process. It would be sufficient to state that those are aligned to the EBA’s Guidelines and to identify the individual instances of, and grounds for, non-disclosure at the appropriate point in the document. It is not clear how more than that could assist external stakeholders assess the risk profile of an institution.
It would seem more appropriate to us to disclose merely that the exposure is not material A balance has to be struck between transparency and the value of the information omitted/provided. In internal records, the information called for by 19a), b) would foster and evidence discipline of process, but we doubt its interest to the market.
We would not anticipate making extensive use of these waivers but the solution would depend on the information in question and may include to further aggregate and/or anonymise, or to provide it in a more discursive narrative rather than strictly numeric format. Please also see our answer to Q5 above.
This section of the guidelines promotes the use of standardised criteria and data with reference to specific CRR articles, and this is a helpful starting-point. The information sought is generally the right information, in terms of content, as we know users value this.

Nevertheless, the combined impact of the ‘catch-all’ paragraph 23e) (material changes during the reporting period), 26a)1 (quarterly basis) and 28 (published in conjunction with …. the interim financial statements or information) could be very problematic for producers of Pillar 3. It could entail determining, every quarter, through applying the more rigorous materiality criteria of these guidelines, what the material variances are across their entire business, and then publishing that information to the demanding timeline of the interim financial disclosure process.

However, we foresee considerable difficulty in disclosing more than summary information on capital requirements and material change at other than the financial year-end. This is because many institutions prefer to publish their interim financial updates and their quarterly/semi-annual regulatory disclosures on the same day. However, the considerably shorter timelines for interim financial updates pose potentially severe operational difficulties for the regulatory production process currently established for COREP - for example, if seeking to disclose capital requirements under paragraph 23b) using data collected for COREP return CA2 - depending on the granularity required of the accelerated regulatory disclosures.

We also need to bear in mind the principles that a) interim market disclosures are designed to be updates on the previous financial year-end, not full-blown disclosure packages, and b) that interim regulatory disclosures should not become disproportionate to the financial accounting disclosures for the same reporting period.

Finally, it is desirable that the EBA’s guidelines do not pre-empt the outcome of the concurrent Basel Committee consultation.

In our view, the right balance will have been struck if:
- the aim of paragraph 23b) is to provide summary level information on capital requirements;
- that of paragraph 23e) to identify highly material changes, and
- that of paragraph 28, that ‘in conjunction with’ does not mean necessarily on the same day as the interim financial statements.

Going forward, there should be reviews of whether, under conditions of increased frequency, the resulting period-on-period movements in various metrics are at all significant and can attract meaningful analysis by the producing banks or users. If they are not, the frequency should be re-considered. In the case of detailed disclosures that generate limited interest from stakeholders (as measured by the number of queries to investor relations departments, for instance) a statement that the risk position has not changed materially from the year-end position should be sufficient.
As indicated in our response to Question 6), we are not convinced that the paragraph 18 criteria should be the sole drivers of differentials in frequency. In addition, an assessment of whether quarterly disclosure is appropriate should take fully into account the principles and practicalities outlined in our response to Question 10), including the explicit demands of users.
The proposed date of 1/1/2015 does not seem to be a realistic option on the following grounds:

- The EBA Guidelines are not expected to be finalised before November 2014 at the earliest.
- Competent authorities will have to confirm whether or not they comply or intend to comply with the Guidelines. Institutions would start preparing for implementation only after competent authorities have formally confirmed their decision to comply and this is unlikely to have occurred by the end of December 2014.

We suggest that the implementation date would be linked to the end of the financial year starting in 01/2015 (i.e. 31 December 2015), meaning that the Guidelines would apply to disclosures published at the beginning of 2016.
We believe that the paper gives insufficient weight to the issues surrounding greater disclosure at quarters other than the financial year-end and half-year stages. Two key issues are:

- the operational investment required to generate additional disclosures within the accelerated timescales at those interim period-ends – disclosing information is dependent on having the right data in the right format/systems and right location. Changes will have to be made to information systems that are built to extract data normally on a twelve monthly cycle but that would now have to be produced every three months.

- the risk of imbalance between quarter-end regulatory disclosures and the existing quarterly financial accounting disclosures at those quarters.

Please see our answer to Question 10): we urge the EBA not to draw up guidelines which may inadvertently prove excessively demanding in relation to the user benefits they yield. The aim to identify material change is itself sensible, but in combination with the more stringent definition of material and a quarterly disclosure requirement would de facto require at short notice very significant operational re-engineering to generate an accelerated full suite of disclosures from the first quarter 2015 so that quarter-on-quarter variance can be assessed.
Wilfried WILMS