Response to consultations on guidelines on payment commitments

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Question 2: Do you agree with these provisions to be included in Payment Commitment Arrangements? Do you think other provisions should be provided?

We believe that the requirements for the elements of payment commitment arrangements are, in principle, appropriate. However, we have fundamental reservations about the unconditional right for a DGS to claim payments on demand. Such power to call up funds on an ad hoc basis is unnecessary and has a highly adverse effect on the accounting treatment for DGS members. An unconditional right to claim payments upon simple and unconditional demand would unquestionably lead to accounting affecting the P&L statement. In our opinion it is reasonable to clarify that a payment by a credit institution can only be required following a pre-defined default event introducing contingency upon a future determinable event for which the likelihood of its occurrence can be assessed. As each payment commitment is secured by securities the proposed amendment would not result in an increase of funding risk for the DGS and will still be in line with the Directive’s objectives.

We have also to remember that payment commitments are collateralized, so cash coming from them can be generally delivered for DGS purpose within 2 working days from the call day. This should be included in analyzes concerning the right to claim payment.

Question 3: Do you agree that a credit institution should pay in cash the Payment Commitment Amount, when its obligation becomes due, within 2 working days at the latest?

Looking only at the availability period, a period of up to 2 days for honoring payment commitments appears reasonable.

Question 4: Do you agree with the option left to the DGS to enter into a Security Financial Collateral Arrangement (full ownership remains with the credit institution) or a Title Transfer Financial Collateral Arrangement (full transfer of ownership)?

The provisions of Part 3 of the EBA guidelines should be revised to clarify that the existence of a payment commitments is linked to the risk a credit institution contributes to the respective DGS. In other words, in the situation when the bank does not continue its deposit activity or joins the other DGS the payment commitment should terminate without settlement.

This example shows that the termination of a payment commitment appears to be justifiable. Where a credit institutions switches to other DGS, this leads to a reduced exposure for the earlier DGS and an increased exposure for the new one. Hence, the new DGS has to increase funding to cover the higher exposure either by means of increased general contributions or a specific contribution on the new member. However, having to settle the payment commitment with the old DGS as well leads to a double payment for the same exposure in this situation.

In this context, the requirement to annually amend or supplement payment commitments should be clarified so that it also allows for adjustment to reflect the actual current exposure contribution of a credit institution. In other words, the payment commitments can be reduced or even terminated given that this is in line with the contribution of the credit institution to the overall exposure of the DGS.

Question 5: Do you think other requirements about the choice of the custodians should be provided under these guidelines?

We agree that the default or insolvency of a custodian should not lead to losses to the credit institution or to the DGS. We agree that there should be full segregation in the books of the custodian.

Question 6: Do you agree on the requirements suggested for the eligibility of collateral? Would you suggest other limits on concentration in exposures?

We do not agree with stated criteria on the eligibility of collateral. Criteria should be those defined by the central bank for REPO transactions. We have expressed broader our position in this area in general comments.

Question 7: Do you consider appropriate not to consider the currency of issuance when determining whether debt instruments are correlated to an event of DGS pay-out, be it inside or outside the euro area?

We believe that is not appropriate to consider the currency of issuance when determining whether debt instruments are correlated to an event of DGS pay-out. As we expressed above we are convinced that the Guidelines should refer to the haircuts adopted by the respective central bank for purpose of transaction with banks.

Question 8: Do you consider that the proposed wording correctly applies the concept of proportionality, or whether some limits to concentration should be envisaged also for smaller, locally operating banks?

Above we expressed our serious confusion concerning the application of the proposed system in small local banks as in bigger ones.

Question 9: Do you agree with the criteria on the eligibility of the collateral provided in this Part 6? Do you think other requirements should be provided in these guidelines on this issue?

Please refer to our general comments in this area.

Question 10: Do you agree with the criteria on the haircut provided in this Part 7? Do you think there are other requirements which should be provided under these guidelines about this issue?

Please refer to the general comments section. We can repeat that we are not convinced to give the DGS power to establish the haircuts. We can use in this area the central bank standards.

Question 11: Do you agree with the prudential approach suggested? Would you suggest further details on the methodology to be applied, and if so which ones?

We expressed in the general comments our problem concerning the neutrality of cash payments and payments commitments. We understand however the general idea that the regulator does not want to create any advantage for payment commitments in comparison to cash payments.

We agree with the provision of paragraph concerning the different treatment of payment commitments for accounting purpose.

We agree also with the suggested approach but not on the last part of the last sentence of paragraph 33. We agree that the competent authorities should assess within the supervisory review and evaluation process, the risks to which the capital and liquidity positions of the credit institution would be exposed should the DGS called upon it to pay the commitment. The prudential treatment should reflect this assessment. The treatment should reflect the probability that the DGS is called upon and the potential losses stemming from a DGS intervention.

As a measure of simplification, we propose the payment commitments to be risk-weighted as an unrated institution under the standardized approach (i.e. 100%) with a credit conversion factor of 20%.

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Name of organisation

Polish Bank Association