Response to consultations on guidelines on payment commitments
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Payment commitments should benefit from a specific prudential treatment or, otherwise, there will be no point or advantage in using them to pay up contributions to the DGS. In Portugal, a country that established the payment commitments system years ago, the need for a specific prudential treatment was recognised early on, and, therefore, payment commitments are registered off-balance sheet.
A revision is needed to clarify that a payment by a credit institution can only be required following a pre-defined 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 suggest to define the event as follows in Part 2 paragraph 11 b):
11. the Payment Commitment Arrangement should at least include the following elements:
a) …
b) The irrevocable obligation for the credit institution to make the promised cash payment of the Payment Commitment Amount following a predefined trigger event, similar to a financial guarantee . In this case, the payment obligation would be contingent upon a future event that is determinable and for which the likelihood of its occurrence can be assessed in order to assure that payment commitments are accounted for as off-balance sheet contingencies. time, upon simple and unconditional request of the DGS, without undue delay and at any rate no later than 2 working days from the receipt of the notice pursuant to letter (c) below. The credit institution is obliged to make the promised cash payment in the following circumstances:
i) When the DGS recognises the need for an adjustment of the amount of payment commitments in relation to cash contributions, caused for example by a transfer of deposits and contributions to another DGS according to Article 14 (3) DGSD or any other event that results in an exceedance of the 30% limit of payment commitments.
ii) The assumption of an increased probability of liquidity needs due to where an institution infringes or, due, inter alia, to a rapidly deteriorating financial condition, including deteriorating liquidity situation, increasing level of leverage, non-performing loans or concentration of exposures, as assessed on the basis of a set of triggers, which may include the institution’s own funds requirement plus 1,5 percentage points, is likely in the near future to infringe the requirements of Regulation (EU) No 575/2013, Directive 2013/36/EU, Title II of Directive 2014/65/EU or any of Articles 3 to 7, 14 to 17, and 24, 25 and 26 of Regulation (EU) No 600/2014
In the above circumstance the payment must be made without undue delay and at any rate no later than 2 working days. The payment period is reduced to 1 working day in case early intervention or crisis management measures are applied on the credit institution by the competent or resolution authority. The arrangement should preclude any reduction in the Payment Commitment Amount, or any termination of the Payment Commitment Arrangement, without the consent of the DGS.
The described provision would still be in line with the overall idea behind the DGSD. As each payment commitment is secured by appropriate collateral, the proposed provision would not result in any increase in funding risk for the DGS. Alternatively, the rules could be amended in order to state that the provisions allow for limitation in national implementation, i.e. that the regulations of a national DGS allow for the above mentioned specifications regarding payment requests.
Having in mind that DGSs are public authorities, we also have serious doubts whether the unconditional and irrevocable right to claim payments on demand is in line with the generally accepted prohibition of arbitrary public administrative action. In this context, two levels need to be distinguished in our opinion. The first level is the provision and availability of payment commitments as such. This level is unquestionably given thanks to the provision of collateral and the collateral management requirements. The second level is, however, the legality of the right to call up the available funds on demand. DGSs are usually public institutions or comparable bodies. The way these institutions act must be guided by the rule-of-law principle. This means in the present context that the guidelines should define objective criteria stipulating when drawing on payment commitments is possible and justifiable. Such criteria need not only be a compensation event but could also, for example, be the further specification of risks in general in the banking sector.
Please note also our general comments in the attached document.
However, a requirement to pay payment commitment amounts in cash ignores the funding character of payment commitments and the collateral that has to be provided for these. Payment in cash of the equivalent amount is therefore only one way of honouring payment commitments. Alternatively, the DGS can realise the collateral provided under the payment commitment and liquidate it by, for example, borrowing against it accordingly. This may well be beneficial for the DGS. The guidelines should therefore stipulate liquidation timeframe, though the manner of liquidation should be left to the DGS.
Please also note our general comments in the attached document.
Furthermore, the provisions of Part 3 of the EBA guidelines should be revised to clarify that the existence of a payment commitment is linked to the risk that a credit institution contributes to the respective DGS. In other words, in the case where the credit institution discontinues its deposit business or joins a different DGS, the payment commitments made during the 12 months preceding the end of the membership should terminate without settlement.
Especially the latter situation shows that the termination of a payment commitment appears to be justifiable. Where a credit institutions switches to a different DGS, this leads to a reduced exposure for the old 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.
This assumption would further aid the accounting treatment under the IFRS Framework to treat payment commitments under a “going concern” assumption. According to Directives 59 and 49, under a going concern situation the conditions mentioned in paragraph 12.d).(iii, iv, and v) do not have economic substance, i.e. they are not “genuine”. In other terms there are no instances where the reporting entity would be required to accelerate the payment commitment in order to re-fund the DGS for an intervention aimed at covering its own depositors.
To accommodate a more favourable accounting treatment we suggest the following changes to paragraph 12 d (iii-v):
• to add “reflecting a situation of a gone concern for the institution” at the end of paragraph 12d iii, 12div and 12d v or “following a predefined default event, similar to a financial guarantee. In this case, the payment obligation would be contingent upon a future event that is determinable and for which the likelihood of its occurrence can be assessed.”
• In addition, we suggest a revision to clarify that the existence of a payment commitment is linked to the risk that a credit institution contributes to the respective DGS. The payment commitment would therefore terminate without settlement when the credit institution does no longer have any deposits covered by the respective DGS. The payment commitment can be reduced or even terminated given that his is in line with the contribution of the credit institution to the overall exposure of the DGS.
• We suggest to amend paragraph 12 e as follows:
In case of (i) authorisation withdrawn and (ii) the institution ceasing to be member of DGS - other than reflecting a gone concern situation - the commitment is re-allocated to the other members of DGS, proportionally to their share of covered deposits on total deposits. The commitment of the institution is cancelled and the payment commitment amount is returned.
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 commitment 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.
Please note also our general comments in the attached document.
We suggest that the words “full segregation” be clarified to ensure that there is no risk that the words “full segregation” be interpreted to mean that there is an obligation for assets held as collateral for DGSs to be segregated in special “DGS collateral” accounts right up the custody chain. If this were to be the case, then this would very significantly impede the provision of collateral management services to DGSs, and would increase cost and risk in the provision of such services without leading to any increase in legal certainty.
Please also note our general comments in the attached document.
Please also note our general comments in the attached document.
Please also note our general comments in the attached document.
Please note also our general comments in the attached document.
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.
As DGS remain national, the treatment should reflect the probability that the DGS is called upon and the potential losses stemming from a DGS intervention, on a net basis after potential recoveries from the bankruptcy estate of the failed institution.
The contributions of the DGS to resolution are limited to the lesser of:
a) the amount of losses covered depositors would have borne in insolvency, or
b) 50% (or a higher percentage set by the member state) of the target level of the deposit guarantee fund.
Moreover DGS subrogating to the rights and obligations of covered depositors in insolvency have the same priority ranking which is higher than the ranking provided for the claims of ordinary unsecured, non-preferred creditors.
Generally speaking DGS payment commitments represent only a small part of the own funds requirements (2 or 3 %) or of the liquid assets and when they are called they will not jeopardise the capital and liquidity position of a bank.
These two elements should be assessed by the designated authority on a national basis and risk-weighted accordingly. 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%.
Please also note our general comments in the attached document.
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 a requirement is unnecessary and will, according to our reading of IFRS, have a highly adverse effect on the accounting treatment for DGS members. While there should be a right to claim for the DGS it should be conditional to a specific event that would require payment upon simple demand and would not unquestionably lead to accounting affecting the P&L statement.Payment commitments should benefit from a specific prudential treatment or, otherwise, there will be no point or advantage in using them to pay up contributions to the DGS. In Portugal, a country that established the payment commitments system years ago, the need for a specific prudential treatment was recognised early on, and, therefore, payment commitments are registered off-balance sheet.
A revision is needed to clarify that a payment by a credit institution can only be required following a pre-defined 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 suggest to define the event as follows in Part 2 paragraph 11 b):
11. the Payment Commitment Arrangement should at least include the following elements:
a) …
b) The irrevocable obligation for the credit institution to make the promised cash payment of the Payment Commitment Amount following a predefined trigger event, similar to a financial guarantee . In this case, the payment obligation would be contingent upon a future event that is determinable and for which the likelihood of its occurrence can be assessed in order to assure that payment commitments are accounted for as off-balance sheet contingencies. time, upon simple and unconditional request of the DGS, without undue delay and at any rate no later than 2 working days from the receipt of the notice pursuant to letter (c) below. The credit institution is obliged to make the promised cash payment in the following circumstances:
i) When the DGS recognises the need for an adjustment of the amount of payment commitments in relation to cash contributions, caused for example by a transfer of deposits and contributions to another DGS according to Article 14 (3) DGSD or any other event that results in an exceedance of the 30% limit of payment commitments.
ii) The assumption of an increased probability of liquidity needs due to where an institution infringes or, due, inter alia, to a rapidly deteriorating financial condition, including deteriorating liquidity situation, increasing level of leverage, non-performing loans or concentration of exposures, as assessed on the basis of a set of triggers, which may include the institution’s own funds requirement plus 1,5 percentage points, is likely in the near future to infringe the requirements of Regulation (EU) No 575/2013, Directive 2013/36/EU, Title II of Directive 2014/65/EU or any of Articles 3 to 7, 14 to 17, and 24, 25 and 26 of Regulation (EU) No 600/2014
In the above circumstance the payment must be made without undue delay and at any rate no later than 2 working days. The payment period is reduced to 1 working day in case early intervention or crisis management measures are applied on the credit institution by the competent or resolution authority. The arrangement should preclude any reduction in the Payment Commitment Amount, or any termination of the Payment Commitment Arrangement, without the consent of the DGS.
The described provision would still be in line with the overall idea behind the DGSD. As each payment commitment is secured by appropriate collateral, the proposed provision would not result in any increase in funding risk for the DGS. Alternatively, the rules could be amended in order to state that the provisions allow for limitation in national implementation, i.e. that the regulations of a national DGS allow for the above mentioned specifications regarding payment requests.
Having in mind that DGSs are public authorities, we also have serious doubts whether the unconditional and irrevocable right to claim payments on demand is in line with the generally accepted prohibition of arbitrary public administrative action. In this context, two levels need to be distinguished in our opinion. The first level is the provision and availability of payment commitments as such. This level is unquestionably given thanks to the provision of collateral and the collateral management requirements. The second level is, however, the legality of the right to call up the available funds on demand. DGSs are usually public institutions or comparable bodies. The way these institutions act must be guided by the rule-of-law principle. This means in the present context that the guidelines should define objective criteria stipulating when drawing on payment commitments is possible and justifiable. Such criteria need not only be a compensation event but could also, for example, be the further specification of risks in general in the banking sector.
Please note also our general comments in the attached document.
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 honouring payment commitments appears reasonable. However, considering the new 7 day payout period, the timeframe for conversion of the payment commitments could also be closer aligned to the 7 payout period.However, a requirement to pay payment commitment amounts in cash ignores the funding character of payment commitments and the collateral that has to be provided for these. Payment in cash of the equivalent amount is therefore only one way of honouring payment commitments. Alternatively, the DGS can realise the collateral provided under the payment commitment and liquidate it by, for example, borrowing against it accordingly. This may well be beneficial for the DGS. The guidelines should therefore stipulate liquidation timeframe, though the manner of liquidation should be left to the DGS.
Please also note our general comments in the attached document.
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 EBF agrees with the option left to the DGS. The Title Transfer Financial Collateral Arrangement has the advantage to offer more direct access to the collateral for the DGS. On the other hand it is very demanding for the credit institution which loses the property of the collateral and the rights of gathering its proceeds. Therefore, a Title Transfer Financial Collateral Arrangement should be acceptable if the securities are held on securities accounts provided by a third party custodian. This way the proceeds of the collateral may be paid out to the credit institution. This solution would allow the DGSs to benefit from the advantages of direct access to the collateral and on the other hand this alternative would be less demanding from the credit institutions perspectives.Furthermore, the provisions of Part 3 of the EBA guidelines should be revised to clarify that the existence of a payment commitment is linked to the risk that a credit institution contributes to the respective DGS. In other words, in the case where the credit institution discontinues its deposit business or joins a different DGS, the payment commitments made during the 12 months preceding the end of the membership should terminate without settlement.
Especially the latter situation shows that the termination of a payment commitment appears to be justifiable. Where a credit institutions switches to a different DGS, this leads to a reduced exposure for the old 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.
This assumption would further aid the accounting treatment under the IFRS Framework to treat payment commitments under a “going concern” assumption. According to Directives 59 and 49, under a going concern situation the conditions mentioned in paragraph 12.d).(iii, iv, and v) do not have economic substance, i.e. they are not “genuine”. In other terms there are no instances where the reporting entity would be required to accelerate the payment commitment in order to re-fund the DGS for an intervention aimed at covering its own depositors.
To accommodate a more favourable accounting treatment we suggest the following changes to paragraph 12 d (iii-v):
• to add “reflecting a situation of a gone concern for the institution” at the end of paragraph 12d iii, 12div and 12d v or “following a predefined default event, similar to a financial guarantee. In this case, the payment obligation would be contingent upon a future event that is determinable and for which the likelihood of its occurrence can be assessed.”
• In addition, we suggest a revision to clarify that the existence of a payment commitment is linked to the risk that a credit institution contributes to the respective DGS. The payment commitment would therefore terminate without settlement when the credit institution does no longer have any deposits covered by the respective DGS. The payment commitment can be reduced or even terminated given that his is in line with the contribution of the credit institution to the overall exposure of the DGS.
• We suggest to amend paragraph 12 e as follows:
In case of (i) authorisation withdrawn and (ii) the institution ceasing to be member of DGS - other than reflecting a gone concern situation - the commitment is re-allocated to the other members of DGS, proportionally to their share of covered deposits on total deposits. The commitment of the institution is cancelled and the payment commitment amount is returned.
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 commitment 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.
Please note also our general comments in the attached document.
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, and we agree that in the books of securities account providers higher up the custody chain there should be segregation between proprietary assets of the account holder and client assets of the account holder. We believe that this does create the conditions for collateral supplied to a DGS both to be bankruptcy-remote, and to be readily available in the event of bankruptcy of an intermediary.We suggest that the words “full segregation” be clarified to ensure that there is no risk that the words “full segregation” be interpreted to mean that there is an obligation for assets held as collateral for DGSs to be segregated in special “DGS collateral” accounts right up the custody chain. If this were to be the case, then this would very significantly impede the provision of collateral management services to DGSs, and would increase cost and risk in the provision of such services without leading to any increase in legal certainty.
Please also note our general comments in the attached document.
Question 6: Do you agree on the requirements suggested for the eligibility of collateral? Would you suggest other limits on concentration in exposures?
The EBF has not specific comment.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 it is appropriate not to consider the currency of issuance when determining whether a debt instrument´s value is correlated to an event of DGS pay-out, be it inside or outside the euro area.Please also note our general comments in the attached document.
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?
The EBF does consider that the proposed wording correctly applies the concept of proportionality.Please also note our general comments in the attached document.
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 the general comments section.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. EBF does not agree that haircut requirements should be detailed in the guidelines. The Guidelines should refer to the haircut schedule of the respective central bank for accepting collateral for central bank lending to banks.Please note also our general comments in the attached document.
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?
Yes. We agree on 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.
As DGS remain national, the treatment should reflect the probability that the DGS is called upon and the potential losses stemming from a DGS intervention, on a net basis after potential recoveries from the bankruptcy estate of the failed institution.
The contributions of the DGS to resolution are limited to the lesser of:
a) the amount of losses covered depositors would have borne in insolvency, or
b) 50% (or a higher percentage set by the member state) of the target level of the deposit guarantee fund.
Moreover DGS subrogating to the rights and obligations of covered depositors in insolvency have the same priority ranking which is higher than the ranking provided for the claims of ordinary unsecured, non-preferred creditors.
Generally speaking DGS payment commitments represent only a small part of the own funds requirements (2 or 3 %) or of the liquid assets and when they are called they will not jeopardise the capital and liquidity position of a bank.
These two elements should be assessed by the designated authority on a national basis and risk-weighted accordingly. 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%.
Please also note our general comments in the attached document.