Austrian Economic Chamber, Division Bank and Insurance
Overall, the amendments go in the right direction, although further alignments and clarifications will be necessary. The revised guidelines confirm many practices already applied and develop concepts where there have been no clear guidelines so far.
However, considering the currently ongoing review of the CRD/CRR we believe that the review of the Guidelines should be postponed until the review of these acts is finalised to avoid any necessary alignments to the final results from the review and any unnecessary additional implementation burden for institutions. E.g.: Implementation deadline: If the P2G will be introduced in the EBA GL, the introduction should be conditional upon implementation of the CRD V instead of using a fix deadline of 1.1.2019. In the CRDIV there is no guidance mentioned and there is no option to implement one. The P2G part – and any other part which is conditional on the final CRD V - should come into force upon implementation of the CRD V and it has to be ensured that the wording should be in line with the final wording of the CRD V.
Moreover it is necessary to include a sufficient implementation period of at least 1.5 years.
The connections between the risk management framework, the recovery and the resolution framework are described in a very general manner in the draft EBA GL SREP, especially with regards to the interconnections between the expected threshold levels. However, this may hinder the establishment of a consistent structure of the resolution, recovery and risk thresholds, which meets all of the requirements set out in the EBA GL SREP as well as is in line with the purpose of the elements according to the CRD and the CRR. Based on the current proposal of the EBA GL SREP an institution may be subject to requirements more stringent than those laid down in CRD [alternatively: goes beyond the requirements laid down in CRD].
In particular, this would lead to a limitation of access to the buffers and would further result in an earlier distribution limit (see the details in the response to Question 4). The section in its current form mirrors the existing EU-legislation and leaves room for different interpretations.
Against this backdrop, we would appreciate a more explicit explanation on the interaction between supervisory and early intervention taking into account the consistency requirements between the ICAAP/SREP, the P2G, the recovery requirements and the early intervention (see our point 6 above and the responses to question 4 below).
With regards to page 16 we would like to add: If the assessment of recovery plans and market conduct leads to a capital add-on, it must be determined to which extent the capital add-on results from weaknesses of the recovery plans. This need especially arises from the MREL-regime. When setting the MREL quota the resolution authority must assess the capital need for the business which may remain after the resolution action has been taken. Depending on the preferred resolution action of the resolution authority the remaining business will regularly differ significantly from the current institution’s business. The identified weaknesses in the recovery plan will regularly not exist anymore after the resolution action has been taken and therefore any additional need for own funds resulting from the recovery plan should not be included in the MREL recapitalisation amount. In this light, it is necessary to demonstrate which amount of the additional own funds requirement results from the weaknesses of recovery plans.
Further, consumer protection should not be part of the SREP since this issue differs among Member States significantly and would lead to disproportionate market disadvantages for institution’s in Member States where the consumer protection is stricter than in other ones. Additionally, risks resulting from consumer protection are covered through accruals to the legally required extent. As accruals, these positions have already reduced the CET 1 of the institution. Therefore, these risks which have already been covered through accruals should be subject to any additional capital requirements since they would lead to a legally not justified double consideration of the same risks. In the light of the above mentioned, we believe that institutions should be provided with the amount of capital needs which the authority considers as not being covered through accruals and the corresponding reasoning. The reasoning is necessary to enable the institution’s assessment wether any needs of dedicating an additional amount to the accrual may arise (be possible and/or even necessary) concerning the relevant risk for accounting and perhaps tax purposes too.
In our opinion the revised guidelines, similarly to other existing EBA guidelines, impose a wide range of operative tasks on the management body. The involvement of the management body as a requirement and an assessment factor in practically all areas of a bank is too detailed. We propose to consider the fact that the more the top management is required to be involved in the details, the less time the management body has to focus on the tasks of a management body: on the strategy and on the business model. In our view, the governance structure of the institution has to ensure that the decisions of the management body are implemented and monitored properly. We would appreciate a balanced approach here.
Title 5 (Assessing internal governance and institution-wide controls)
Chapter 5.5. (Remuneration policies and practices)
The currently ongoing developments in the CRD IV regarding variable remuneration show that institutions may deviate from specific requirements where specific requirements are fulfilled. Therefore, paragraph 95 (d). should be amended as follows:
“the variable remuneration for identified staff is based on performance and where relevant the requirements on deferral, retention, pay out in instruments and the application of malus and claw back are respected and the institution does not use vehicles or practices to circumvent remuneration requirements.”
Interaction with recovery plans
Regarding the recovery plans it should be clarified that according to the EBA Guidelines on triggers for use of early intervention measures (EBA/GL/2015/03) the indicators for early intervention measures should consider minimum and additional requirements, i.e. minimum own funds requirements as specified in Article 92 of Regulation (EU) No 575/2013 and additional own funds requirements applied pursuant to Article 104(1)(a) of Directive 2013/36/EU but without taking into account any buffer requirements set out in Chapter 4 of Title VII of Directive 2013/36/EU.
In this light, a breach of capital buffers should not lead to a score of capital adequacy of 4 since such a score could initiate early intervention measures. Therefore, bullet point 2 of score 3 and score 4 in chapter 7.8. should be amended as follows:
Score 3: “The institution is using its capital buffers. There is potential for the institution to breach its TSCR if the situation deteriorates.”
Score 4: “The institution is breaching its TSCR.”
Article 27 BRRD stipulates that the set of triggers which should be set for the assessment of a need for early intervention measures may include the institution’s own funds requirement plus 1,5 %. The wording clearly says only the own funds requirement but not any non-binding guidance should be considered. The stacking order of own funds requirements and P2G on page 152 clarifies that the P2G is set on top of the buffers. Also, the SREP Guidelines define the P2G as a non-binding guidance which does not stipulate a legal requirement for the institution. Finally, since not even the buffers which are situated below the P2G are included in the own funds requirement according to Article 27 BRRD and the relevant Guidelines on triggers for use of early intervention measures (EBA/GL/2015/03), referring to the legal principle argumentum a maiore ad minus the P2G as an even less binding “guidance” should not be included in the early intervention triggers.
Therefore, we strongly call for an explicit alignment with the above-mentioned acts (BRRD, EBA GL), amending all relevant passages in the SREP Guidelines (e.g. paragraph 399) and including a clarification that the early intervention triggers should only contain the own funds requirements consisting of own funds according to Article 92 CRR and the additional own funds according to 104 (1) (a), but not the P2G and the capital buffers.
Allocation of additional own funds requirements and P2G
According to the current practice institutions are provided with the percentage of additional capital needs and the relevant weaknesses which are to be covered within the SREP decisions. The additional capital need is only demonstrated by a total number without any allocation of the add-ons resulting from the single risks/positions. Especially, considering that the assumptions of the competent authority as well as the resulting scores lead to significant consequences - which may in extreme cases even lead to an institution as being considered as “failing or likely to fail”- there is a strong legal need for more transparency for legal certainty reasons. Additionally, institutions should have the opportunity to address their weaknesses and should be informed to which extent their efforts would reduce their additional own funds requirements. Such information is essential to enable institutions to improve. Only those parts of the SREP can be considered within the recapitalization amount which address risks remaining after the resoluation action has been taken. It is necessary to provide resolution authorities with details regarding the risk allocation to allow for a comprehensive determination of the recapitalization amount as a part of the MREL. Therefore, we believe that the total number of additional own funds which is determined within the SREP decision should be allocated to the single risks or situations which are causing it.
Further, the overall SREP assessment as defined in Chapter 10 seems to be insufficiently transparent for institutions. It is not clear to which extent the findings and scorings of the single viability scores influence the overall SREP score. It is not evident if they are weighted or equivalent. As a result, the comprehensibility of the SREP decision is deeply constrained and as already pointed out in the previous paragraph the institution’s possibility to improve is compounded by this fact. Considering these reflections, we strongly ask for the introduction of detailed information regarding the influence of the single scores on the overall SREP score.
Regarding the P2G it is also necessary to demonstrate the allocation of risks covered by P2G for several reasons. Firstly, it is necessary to inform institutions to which extent macroprudential risks are addressed with the P2G to avoid any doubling of capital needs. It should be demonstrated within the SREP decision to which extent risks are addresses which are not covered by all the other macroprudential buffers.
Chapter 5.11. (Summary of findings and scoring), Annex 2
1. Time commitment
The scoring tables lay down that the time commitment of the members of the management body is appropriate and they comply with the number of directorships. According to the wording regarding the relevant scores the calculation of directorships is considered as an additional criteria besides the general time commitment rule. We would like to point out that according to the EBA Suitability Guidelines (paragraph 49, EBA/GL 2017/12) the calculation of directorships is only relevant for significant institutions. Additionally, the qualification of an institution as significant depends on the national implementation of the CRD IV provisions. In this light, also the national framework must be considered, e.g. according to the Austrian Banking Act (BWG) in consolidated groups only the consolidating institution is considered as significant (§ 5 Abs 4 BWG). As a result, only the consolidating institution is subject to the limitation of directorships, whereas the affiliated institutions are only subject to the time commitment. Therefore, an amendment of the wording in score 1 is necessary as follows:
- Score 1: “The time commitment of the members of the management body is appropriate and where relevant they comply with the limitation of the number of directorships.”
- Score 2: “The time commitment of the members of the management body is largely appropriate and where relevant they comply with the limitation of the number of directorships.”
- Score 3: “There are doubts about the largely appropriate time commitment of the members of the management body or where relevant some members do not comply with the limitation of the number of directorships.”
- Score 4: “The time commitment of the members of the management body is insufficient or where relevant the majority of the members does not comply with the limitation of the number of directorships.”
The same applies to scores 2,3 and 4, where the supplement “where relevant” should be added.
Additionally, Annex 2, point 1 refers to relevant Articles of the CRD IV. Since the regulatory requirements do not arise from the CRD IV but from national implemented regulations point 1 in Annex 2 should be amended as follows: “National provisions implementing Articles 73-74, 88, 91-96 and 98 of Directive 2013/36/EU.”
2. Diversity policy
According to chapter 12 of the EBA Suitability Guidelines institutions should set (qualitative or quantitative) targets regarding diversity in the management body. If the targets are not met significant institutions should document the reasons why, the measures to be taken and the timeframe for the measures. The compliance with the targets is specified within the diversity policy. This means that the targets do not have to be achieved immediately but in the way it is described in the policy. If an institution complies with all the above-mentioned requirements of the Guidelines it should always be provided with a score 1. Any worse scoring of institutions which comply with the Guidelines is not justified and therefore goes beyond the legal basis.
Proposed amended wording for scores 1 and 2:
Score 1: “The institution has adopted a diversity policy that fosters a diverse board composition and complies with the targets or has set appropriate measures to achieve the targets.”
Score 2: “The institution has adopted a diversity policy that fosters a diverse board composition and largely complies with the targets but has not yet set appropriate measures to achieve the targets.”
The provisions need to be further clarified, especially in terms of:
Consistency with P2R: The approach according to which the P2G can or should „cover certain aspects of the same risks addressed by P2R” (paragraph 393 and other paragraphs of the draft EBA GL SREP) is questionable. In line with its purpose as prescribed by Article 104 of the CRD IV the P2R shall cover all material risks run by the institution due to its own activities and not covered under other legal requirements of the CRR/CRD (Pillar 1, buffers, large exposure, leverage ratio). These same risks should not be reflected in other requirements or guidances. This would increase the non-transparency of the P2G and the regulatory capital requirements.
The relationship between P2G and limitations on distributions: Under the draft EBA GL SREP, a potential P2G breach does not trigger automatic restrictions on distributions. However, in case of breach of the P2G level, the competent authority (CA) has the power to require an updated capital plan and if necessary, to take any supervisory measures, which means that it is possible, that the CA will restrict the distributions before reaching the combined buffer (CBR) level. This creates uncertainties and does not ensure transparency of the requirements – neither for the institution itself, nor for the investors.
The exact mechanics how buffer offsetting according to paragraph 397 is supposed to work: While it is clear that P2G should not be offset against the systemic risk buffer, it is unclear to what extent and based on which criteria P2G should/could be offset against the capital conservation buffer and the counter-cyclical buffer.
Determining the levels of P2R and P2G: The supervisory approaches in terms of determining the levels of P2R and P2G, as well as the scoring rules, are not sufficiently transparent for the banks, which is an obstacle to efficient capital planning. We suggest explaining the exact methodology, so that banks are able to manage their P2R and P2G expectations in a forward-looking manner.
Reflecting stress test results: Consideration of stress test results for setting the P2G should have strong attention on the scenario used as a basis for the stress test. This refers to both, probability of occurrence and plausibility of the underlying scenario. Stress test results should be explicitly or implicitly weighted with the scenario occurrence probability to avoid unreasonable capital requirements derived from extremely low probability scenarios. In addition, forward looking view (including explicit assumptions on the monetary policy) should be a key in the assessment of scenario plausibility compared to mechanical extrapolation of historical developments.
Supervisory stress test methodology (EBA Stress Test in specific) prescribes a unique methodology to be used by all the institutions in a sample. As methodology is unique for the whole sample, it inevitably adapts a set of simplifying assumptions which, in case of some institutions, might introduce significant distortions to economic reality. If there is a potential for significant impact of such distortions on the stress results of certain institutions, their feedback in this respect should be considered in the process of setting Pillar 2G.
Paragraph 569: We seek for clarification in terms of purpose and background.
Title 7.7. (Meeting requirements in stressed conditions)
Chapter 7.7.2. (Using P2G to address quantitative outcomes of stress testing)
For legal certainty reasons paragraph 387 should be changed as follows:
“Where the quantitative outcomes of the supervisory stress test suggest that the institution is not expected to breach its TSCR under the adverse scenario competent authorities should not set P2G.
In terms of ensuring a level-playing-field and for proportionality reasons the P2G should (instead of “can”) be set every second year (paragraph 392).
Paragraph 393: For the avoidance of any disproportionate burden for institutions the P2R should only be set in situations where the P2G is not an appropriate tool for achieving the relevant goals.
Paragraph 397: According to the wording of the proposed CRD IV Review (Article 104b) the guidance is intended to cover cyclical economic fluctuations. Therefore, any overlapping of the P2G and the countercyclical buffer may occur and the need to offset P2G against the CCyB should be assessed in every case.
We have a sceptical view on the intention to use the P2G for the coverage of macroprudential risks. Recital 9 of the current CRD review proposal clarifies that own funds add-ons should not be used to address macroprudential risks. Also, all of the buffers are defined within a directive (CRD IV) which is not directly applicable but rather has to be implemented in national law. Imposing macroprudential buffers trough a directly applicable SREP decision of the competent authority would question the effectiveness of the buffers which are set on national level. Therefore, we believe that the P2G should not be an instrument for addressing macroprudential risks.
We consider the P2G as relevant information for the investors. Therefore, it should be published or at least it should be the decision of the institution to publish it or not. Publication of the P2G would increase the transparency significantly and would be in line with the disclosure principles formulated in the CRR.
We would appreciate any feedback on our relative position within the peer group in case this request cannot be embraced by the regulator.
It is unclear to us whether only the supervisory stress tests or also internal ICAAP stress tests will be relevant for the setting of P2G. While paragraph 388 refers solely to the results of the adverse scenario of relevant supervisory stress tests, paragraph 395 states that when determining the size of P2G, also “the outcome of reliable ICAAP stress test to assess severity of the results” should be considered. More precise rules for what the basis for P2G setting is would be welcome.
The draft EBA GL SREP states that “competent authorities should establish an effective programme for supervisory stress testing”. It should be recognized by the competent authorities that supervisory stress tests might be associated with significant pressure on the resources of participating institutions (especially in cases when new methodology is introduced). In this respect, the supervisory stress testing programme should be transparently disclosed to institutions in a timely and comprehensive manner.
Frequent changes in the scope and content of supervisory stress test methodologies result in a significant consumption of resources for institutions. For this reason, supervisory stress test methodologies should be stabilized over time and consistently applied across different supervisory stress testing exercises.
If opted for specific supervisory stress tests covering different categories of institutions, both complexity and type of a business model, should be considered in a stress test design. Less complex institutions should be stressed by adequately simplified version of a stress test. When it comes to the business model, specific focus should be on the portfolios associated with the particular business model, requiring lower granularity for the non-focus areas.