FRENCH BANKING FEDERATION

While we would agree with the proposed FINREP representation of “Contributions to resolution funds and deposit guarantee schemes” as part of “other operating expenses”, we question the rationale for this classification.

In fact, contributions to resolution funds and deposit guarantee schemes are presented as part of tax expenses in French banks’ financial statements;

Indeed, the interpretation IFRIC 21 “Levies” includes in its scope obligations that are not always described as taxes. IFRIC 21 considers as taxes obligations that are imposed by the government by virtue of law or regulation and that represent net outflow of resources embodying economic benefits. Accordingly we believe that contributions to resolution funds meet the definition of taxes as defined by IFRIC 21. Moreover, banks do not benefit from any direct compensation resulting from contributions to the resolution funds (only in case of resolution).

We believe that attention should be put on coherence between representation in financial statements and representation within FINREP templates. Consequently, to take account of the different accounting rules, these specified lines should be located under “Profit or Loss before tax from continuing operations”.

Other comments on particular tables:
 FR 4.3.1 “Financial assets at fair value through other comprehensive income” and 4.4.1 “Financial assets at amortised cost”
The detail of SME inserted both in table FR_4.3.1 and in table FR_4.4.1 seems to add little information to the whole FINREP framework. In fact, this information in already included in table 18.00 where both (i) the breakdown by assets at amortized cost and assets at FVOCI and (ii) the detail by stage is provided (new detail required in DMP 2.9). This leaves with the only additional information to be the detail of Write off for SME which is costly to determine from an operational point of view.
Furthermore, in FINREP evolution the field “Accumulated write-off” would be represented net of debt forgiveness (as already in place in all other FINREP tables where this detail is already collected) in alignment with Pillar III, but differently from what is currently foreseen in NPE Quarterly reporting.
We suggest aligning NPL quarterly to FINREP and Pillar III.
 FR 13.1 “Breakdown of collateral and guarantees by loans and advances other than held for trading”
We believe that row 060 “of which: Credit for consumption” is only applicable for columns 031 “Movable property”, 032 “Equity and debt instruments”, 041 “Rest” and 050 “Financial guarantees received”. Therefore, we ask to close column 010 and 030 in this row.
The definition of the information to collect seems to be clear.

However, the issue is rather an operational issue. The collection of this information is operationally complex at the reference date in respect of the number of cases – cases where the value of the collateral decreased since it was obtained by the institution - that could occur.
The definition for commercial real estate is not the same which is used currently in COREP. The EBA definition (stemming from the ESRB recommendation) defines CRE as “income producing” real estate. However, “income producing” is not a criterion used currently in COREP. This will create confusion among data users and will add unnecessary complexity to reporting institutions. This notion is introduced in ‘Basel IV’ agreements and would be probably included in the European transposition. We thus highly recommend EBA to keep the current definition stick to the COREP (CRR) definition of CRE and not define a new one. The EBA definition (stemming from the ESRB recommendation) defines CRE as “income producing” real estate. However, “income producing” is not a criterion used in COREP. This will create confusion among data users and will add unnecessary complexity to reporting institutions.

Furthermore, since COREP data already includes information on exposures secured by commercial real estate, we recommend not to include this data requirement into FINREP. The same rationale refers to RRE loans as well.

Moreover, we suggest deleting rows 132 and 135 as their content are mainly overlapping with those of table “23.3 Loans and advances: Commercial Real Estate loans by counterparty sector”.
In many jurisdictions in Europe, especially for corporates (inc SME) and residential real estate, loans are granted according to the value of the expected cash flow (cash flow banking) rather than the value of the collateral (pawn broking). When banks have recourse on their debtors (which is the case for the majority of loans granted in Europe), collateral should first be seen as an essential lever to incentivise debtors to pay. Therefore, the Loan to Value (LTV) is disconnected from the approach adopted in “Loan-to-Income” banks. The LTV is not a relevant indicator for these exposures and we suggest removing the breakdown by LTV for instrument secured by immovable property.

We refer to:
• New rows in templates F18 and F19 on on loans by LTV ratio
• Information on loans by LTV ratio in new templates F23.1 to F23.3

We believe that it is important to improve the consistency between the reporting and disclosure requirements as it is acknowledged in the Consultation Paper. Consequently, to avoid discrepancies with current Pillar 3 requirements (cf EBA Final guidelines on disclosure requirements under Part Eight of Regulation (EU) No 575/2013), we would suggest that disclosure required only for institutions with elevated levels of NPE in EBA guidelines on disclosure requirements should be only present in Module 2 templates.

Thus, we would suggest to delete following information of templates F18 and F19:

- Columns “inflows to non-performing exposures” and “outflows to non-performing exposures “of template FIN18 (F18c215and220) as their implementation in term of breakdowns by all counterparty categories and additional “of which” would be significantly burdensome. Moreover, a comprehensive view on the flows of non-performing exposures is already requested in table “24.1 Inflows and outflows of non-performing exposures - loans and advances”.

- Information on loans by LTV ratio (F18r142&143; r161&162; r904&905; r911&912; r924&925; r931&932 - F19r141&142; r161&162; r904&905; r911&912; r924&925; r931&932)
Banks are already required to inform and notify their authorities, at national or European level, of any changes in their group structures when changes occur. We do not believe that a collection of group structures’ information on a quarterly basis would improve awareness of such changes.
Moreover, the two templates are costly and burdensome to provide due to the type and granularity of data to collect.

Accordingly, we believe that the frequency of these templates should remain annual as the costs/ benefits analysis is disadvantageous.
The data required on salaries and number of staff are not accounting information but rather human resources or statistical information.

We refer to:

• Information on salaries and on number of staff by category (human resources information)
o IT staff wages and salaries (F44.3r031)
o Fixed and variable remuneration (F44.4r010and020)
o Fixed and variable remuneration of Management body (in its management function) and senior management", "Management body (in its supervisory function)" and "other identified staff" (F44.4c020to040)
o Number of staff : Total, "Management body (in its management function) and senior management", "Management body (in its supervisory function)" and "other identified staff" (F48r010to040)
• Information on management data
o Average number of staff at retail branches (F48r060)

We question the rationale to collect such information within the financial reporting framework as defined by the article 99 of Regulation (EU) No 575/2013. The article refers only to financial information to be reported by credit institutions, excluding, de facto, other nature of information such as statistical information. Accordingly, FINREP should only be designed for application by banks when preparing their consolidated supervisory financial reporting under IFRS standards to meet article 99 requirements, without adding any other nature of information.

If the proposed requirement would be maintained, it should be noted that it would imply additional IT developments and operational burden to meet these requirements because data are not directly available in accounting general ledgers."
Revision to the reporting on non-performing and forborne exposures raise the following concerns:

• Generally speaking, we believe that there is a strong need to align disclosures requirements and the FINREP templates, on the same items, regarding non-performing and forborne exposures. A strict alignment would provide clarity of the definitions used, it would limit the burden of collecting information and it would avoid overlapping of collecting and reporting similar information.

Several Guidelines with regard to non-performing and forborne exposures or topics related to have been issued or will be issued. We refer to the EBA guidelines on the application of the definition of default and Commission Delegated Regulation (EU) 2018/171 on materiality threshold, EBA guidelines on disclosure of non-performing and forborne exposures and the Consultation Paper related to amended FINREP templates.
We would like to stress that alignment of definitions and concepts which are highly correlated is important, so to reduce redundancies between the different reporting as far as possible and to allow smooth implementation of these various reporting requirements.

• Request to distinguish between loans and advances that are in pre-litigation status or litigation status. This is a risk nature information which adds to the existing supervisory requests and which creates a new concept. As the information that is highly granular is not native in the financial system and not requested by accounting standards, it would imply additional IT development to be collected. Besides, we question the rationale to collect information on pre-litigation situations that will not result in disputes.

We refer to:
Information on loans in pre-litigations and litigation status (legal information) (F23.1to23.3r010and030 and c080 and 089 ; F47r020to040)

• As already expressed in previous comments to consultation papers, we believe that the proposed threshold of 5% NPL ratio should only be calculated at the consolidated level. A bank can have a portfolio with a NPL ratio >5% because this portfolio is related to a business activity where defaults are more frequent (consumer finance, for instance) and at the same time, its consolidated NPL ratio be <5% because the other business activities are less risky. Moreover, some activities have “by definition” a business model that demands high rates of gross NPS without necessarily bearing high losses: loan restructuring department, consumer finance, social housing, etc. Therefore, the realized loss, i.e. the net amount loss, should be considered to really assess the risks at stake and to take into account specific features of the credit institution or the loan portfolios.

At the EBA’s public hearing on 3 October 2018, it was mentioned by EBA officials that the 5% threshold is to be calculated at the consolidated level. This statement should be made public for clarity. Furthermore, taking account of interactions between subsidiaries in a group, this ratio would have to be evaluated at the highest level of consolidation.

• The inclusion of cash balances at central banks and other demand deposits and the total alignment with criteria used in the draft EBA Guidelines on management of non-performing and forborne exposures is not clear for us. It seems that EBA is aiming to modify the calculation methodology of the NPL ratio and to amend EU regulation n° 680/ 2014, by excluding central banks deposits and demand deposits:

• The Article 1(2) that would amend Implementing Regulation n°680/2014 indicates that “cash balances at central banks and other demand deposits shall be excluded both from the denominator and the numerator”. The footnote 1 of paragraph 27 of the consultation paper recalls the Article 1(2) disposals.

• However, the Article 1(2) refers to “ … the definition of non-performing exposures as presented in section 17 Part 2 of Annex V to … Regulation” [ N°680/2014].
And, in section 17, §217 indicates that “for the purpose of template 18, ‘exposures’ shall include all debt instruments (debt securities and loans and advances, including also cash balances at central banks and other demand deposits) and off-balance sheet exposures, except those held for trading exposures”. This proposal is fully aligned with the current regulation.

• Finally, the Consultation Paper (§ 27) indicates that “the threshold of 5% aligns the reporting criteria with the criteria used in the draft EBA Guidelines on management of non-performing and forborne exposures”. § 21 of the EBA Consultation Paper on management of non-performing and forborne exposures Guidelines makes reference to rows 070, 191 and 221 of F18 that currently include cash balances at central banks and other demand deposits. It is worth to note that the inclusion has been confirmed in the §12 of the final guidelines on management of non-performing and forborne exposures.

Therefore, we strongly advocate EBA to maintain unchanged the NPL ratio definition (including cash balances at central banks and other demand deposits both on the denominator and the numerator) implemented by the banks, on which NPL ratio monitoring is based.

Thus, the last sentence of the Article 1(2) and the last sentence of the footnote 1 of paragraph 27 of the consultation paper – “For the purpose of this calculation, loans and advances classified as held for sale, cash balances at central banks and other demand deposits shall be excluded both from the denominator and the numerator.” - shall be deleted.

As any modification of the NPL ratio calculation methodology could be so impacting and important, because of its transversal nature to many EU regulations, including those still under negotiation, it should require an ex ante impact assessment, and open discussions with the industry. Threshold of 5% has been calibrated on empirical data corresponding to current definitions of default and should be rebased upon the application of the EBA new definition of default, bearing in mind that SSM banks applying the ECB 2 steps approach are expected to apply this definition as early as end of June 2019
As acknowledged in the CP, template F.48. will be used to report various items of statistical nature, with no link with financial reporting, namely number of ATMs, number of retail branches, number of online accounts, …

We refer to:
• Information on salaries and on number of staff by category (human resources information)
o Number of staff : Total, Management body (in its management function) and senior management", "Management body (in its supervisory function)" and "other identified staff" (F48r010to040)
• Information on management data
o Number of retail branches (F48r050)
o Average number of staff at retail branches (F48r060)
o Number of online accounts (F48r070)
o Number of ATMs (F48r080)


We see no benefits, to collect statistical information within financial templates with no link with accounting. On the contrary, we see great challenges resulting from the IT development costs needed to collect the information that would outweigh the benefits. Moreover, we are sceptical regarding the relevance of the information and the objective of FINREP to provide information on key aspects of the consolidated financial reporting for supervisors.

Finally, overlapping of reportings - similar information requested with regard to a different scope of consolidated entities and collected by different authorities – should be avoided. Hence, authorities should be attentive not to increase the number of reports and to rationalise all the reporting frameworks that are applicable to banks.

For these reasons, we would suggest to delete the template F.48."
Concerning changes to FINREP with regard to IFRS 16, we understand that lease liabilities are reported on a specific row under financial liabilities. It should be noted that these liabilities representing lease payments will be considered as leasehold debts rather than financial debts, and thus, classified as other liabilities in banks’ financial communication, causing differences in presentation between financial statements and FINREP templates.

In some cases, the very detailed level of information that corresponds to a detailed product type level or that consists of a number of items is not directly available in the accounting general ledgers. It can only be provided through database management systems. For these cases, as we do not believe that the role of FINREP templates is to follow up additional detailed statistical or management data we question the rationale to collect such information with regard to the aim of FINREP reporting as defined in article 99 of Regulation (EU) No 575/2013 (cf Question 6),

We refer to:

• Very detailed level of information that corresponds to a detailed product type level (management control information)
o IT outsourcing charges (F16.8r020)
o Fine granularity of payment service fee products : Current accounts, Credit cards, Debit cards and other card payments, Transfers and other payment orders (F22.1r131to135)
o Fee and commission expenses by activity : Payment services - Credit, Debit and other Cards (F22.1r256)
• Number of instruments concerned by some information (statistical information) (F23.1to23.3r010to030 ; F26r010)

Besides, the information should be reported at the highest level of the group consolidation. Thus, “IT sourcing” expenses are related to the use of external service providers. External service providers shall be understood as provided by external entities outside the scope of the entire group.
Isabelle Huard