British Bankers’ Association response to the EBA’s Consultation Paper on Review of Draft Implementing Technical Standards amending Implementing Regulation (EU) No 680/2014 with regard to operational risk and sovereign exposures
5th of January 2017
The BBA is pleased to respond to the European Banking Authority’s (EBA) Consultation document on Draft Implementing Technical Standards (ITS) with regard to operational risk and sovereign exposures .
The BBA is the leading association for UK banking and financial services representing members on the full range of UK and international banking issues. It has over 200 banking members active in the UK, which are headquartered in 50 countries and have operations in 180 countries worldwide. Eighty per cent of global systemically important banks are members of the BBA. As the representative of the world’s largest international banking cluster the BBA is the voice of UK banking.
All the major banking groups in the UK are members of our association as are large international EU banks, US and Canadian banks operating in the UK as well as a range of other banks from Asia, including China, the Middle East, Africa and South America. The integrated nature of banking means that our members are engaged in activities ranging widely across the financial spectrum from deposit taking and other more conventional forms of retail and commercial banking to products and services as diverse as trade and project finance, primary and secondary securities trading, insurance, investment banking and wealth management.
Our members manage more than £7 trillion in UK banking assets, employ nearly half a million individuals nationally, contribute over £60 billion to the UK economy each year and lend over £150 billion to UK businesses.
The BBA has considered the consultation document and subsequent questions and has obtained further input from its members. We would like to open by acknowledging that removal of duplication, simplification and alignment between various regular (e.g. Pillar 3, COREP, FINREP, etc) and ad-hoc (e.g. used for Stress testing) reporting is a welcome development. However, we would like to highlight that change has to factor in the overall cost, including implementation and that some further enhancements and clarifications would be needed to allow for a more efficient (and pertinent) reporting to the regulators.
Overall we found that the proposed ITS:
- Standardises the approach allowing for greater automation of production of Sovereign and Operational risk reports, removing additional costs of ad-hoc provision of data including for stress testing
- Applies appropriate level of proportionality which limits proposed enhanced reporting to significant institutions as defined in EU regulation 575/2013
However, we observe that:
1.0 Timeframe for implementation
The timeframe proposed for implementation will be at the same point of adoption as IFRS 9, GSIB Phase III Reporting and elements of Structural Reform Reporting/Implementation (in the UK) together with the culmination and associated activities required for the implementation of other highly significant banking reforms across the Basel Framework. All of these draw upon limited resource pools in our members (and the wider market) and the change proposed in this consultation will require additional project resource to implement. We therefore conclude, on balance, that early 2019 would be the most optimal time for the introduction of these requirements.
2.0 Sovereigns templates (C33.01 and C33.02)
• Template C33.01 implies a harmonisation between COREP and FINREP which is not true in practice. As noted in the BBA’s response to EBA CP 2016/07, this proposed combination of accounting information (columns 10-310) and regulatory approaches / exposure classes (rows) will present significant challenges, including the potential for accounting adjustments to have to be disaggregated across regulatory data sets. As such we propose that any request for accounting information on sovereigns is entirely segregated from request for more granular regulatory information on sovereigns. We believe this would most easily be achieved by requesting two distinct templates, one containing only accounting information on General Governments in total by country (i.e., not by rows 20 to 260 as proposed); and the other containing RWAs (and potentially other COREP information) on General governments, analysed as proposed in rows 20 to 150 of template C33.01, again by country.
• Template C33.02 requires a maturity analysis which is not currently available in FINREP ( or other reported) templates and would require a significant change to processes and reporting systems, which would need material financial investment (implementation and ongoing basis). Such a change may potentially exceed the benefit of information requested and would, if still implemented, require a longer implementation period than the one envisaged. We therefore recommend that this requirement is either removed, or that a more feasible implementation timeline is proposed by the EBA.
• A key driver for the Sovereign disclosures is the EBA Transparency exercises (publication of certain COREP/FINREP data). As such, we propose that reporting of templates C33.01 and C33.02 is required only at consolidated group level, and solo level reporting is required only for those entities which are not part of a consolidated group report.
• Market risk (proposed table C33.01, rows 160-260, and to the extent included in column 320 of template C33.02) is not easily or naturally reported in this format. Market risk is managed at a portfolio level, and those banks that calculate RWAs under an internal model permission do so because it better reflects the risks faced by their institutions to market moves. An institution’s Market Risk does not exist in isolation, but as the result of considering all positions held by an institution holistically. By seeking to measure RWAs against specific exposures it is our opinion this will not provide relevant or useful information for the purposes of risk management or monitoring, and indeed could prove misleading.
Furthermore, the columns in the sovereigns templates are more aligned to gathering information on credit or counterparty credit risk exposures than they are to gathering information on Market Risk approach, which will inevitably lead to confusion and inconsistency regarding the information to be included here. As noted above it is unclear whether the Market Risk risk weighted exposure amount (RWA) to sovereigns should be calculated as an exposure in isolation (even though Market Risk on sovereigns is not calculated in isolation), or as the contribution of the exposure to the institutions market risk internal model RWAs, which could potentially be negative.
Similarly further clarity is needed on reporting risk weighted exposure amount to sovereigns by maturity in C33.02 where current guideline is unclear on whether banks should report the exposure by maturity in isolation or the contribution of each maturity bucket to the total exposure.
Thus we recommend that the Market Risk framework element of these proposals is removed entirely from the proposed reporting of sovereign exposures.
• The reporting of exposures which are subject to substitution effects is somewhat unclear. The guidance (paragraph 6.1) states:
o “The allocation of exposures to exposure classes or jurisdictions shall be made without considering credit mitigation techniques and in particular without considering substitution effects. However the calculation of risk exposure for each exposure class and each jurisdiction includes the incidence of credit risk mitigation techniques, including substitution effects.”
Similarly, the definition of what constitutes Indirect exposure (proposed tables C33.01 and C.33.02 columns 270 – 310) is unclear and leads us to query whether the proposed regulatory category rows in table C.33.01 should potentially include an additional “Other” row for exposures that may not fall in categories provided .
For the avoidance of doubt the inclusion by the EBA of one or more worked examples to confirm expected reporting in this regard would be helpful. In particular it would be helpful if these examples could clarify whether, and how, the following are intended to be reported:
o Regional authorities which do not benefit from an explicit/direct guarantee from a central government/Sovereign;
o Commercial entities which do benefit from an explicit/direct sovereign guarantee
Notwithstanding this request, we reiterate our recommendation that any request for accounting information on sovereigns should be entirely segregated from request for more granular regulatory information on sovereigns, to minimise the potential for confusion and/or misalignment between accounting information presented and risk weighted assets reported
3.0 Operational Risk Loss Reporting (templates C17.01 and C17.02)
• proposed Operational Reporting risk table (c.17.01) should provide:
o either a separate column for Conduct risk, or have a clear definition on how to allocate conduct risk between existing columns
o guidelines on how to allocate Clawbacks (that may be effected) against relevant columns
• With respect to the Operational Risk reporting template C17.02, some members have concerns about the event description in column 200, and in particular legal advice that they should not provide detail of events which are the subject of ongoing legal action. In addition concern has been raised around potential data privacy issues if information relating to customers is recorded. The EBA is also requiring the drivers or causes of the events to be reported, which members generally do not capture as a matter of course. As such we recommend that the guidance is amended to clearly stipulate that reporting should not be in breach of legal limitations or data privacy and any description detail provided is left to the discretion of each firm.
4.0 Costs of implementation
We further highlight that while savings would be achieved from removal of ad-hoc reporting exercises carried out today (for amongst others Stress Testing), which would in part compensate the set-up of the proposed report, the actual cost of system build/change and implementation may materially exceed any such savings. This would likely be compounded by the changing nature/scope of stress tests carried out which means that ad hoc requests (including related costs) are likely to continue in addition to and in spite of the work done to implement reporting changes under the proposal discussed here.
Finally, while welcoming the drive to replace current set of ad-hoc requests related to stress testing with a permanent solution, we urge the EBA to support the requested amendments, as listed above.
Answers to Specific Questions from the Consultation Document:
Q1: Could you please quantify both the implementation costs and recurring production costs (expressed in man days) that would arise when implementing the changed reporting requirements on OpRisk as part the regular reporting framework? How would these recurring production costs compare to a situation in which institutions were required to comply with ad-hoc data requests that are required to comply with current competent authorities’ requests on institutions’ OpRisk losses (e.g. SSM short-term exercise)? [see pg 16 of EBA/CP/2016/20]
While we cannot provide a detailed analysis, insights from members indicate that the proposed change will not be cost neutral as removal of current costs of ad-hoc reporting would be replaced by a higher total cost including additional “one-off” cost of build and implementation and higher ongoing production costs as resources to provide the proposed reports on permanent basis will have to be added to the cost of resources for other and/or new ad-hoc requests from either the EBA or the relevant national supervisor.
Please see response under Question 1. In addition, as noted above, template 33.02 requires a maturity analysis which is not currently available in FINREP (or other reported) templates and would require a significant change to processes and reporting systems, which would need material financial investment (implementation and ongoing basis). Such a change may potentially exceed the benefit of information requested and would, if still implemented, require a longer implementation period than the one envisaged. We therefore recommend that this requirement is either removed, or that a more feasible implementation timeline is proposed by the EBA.
While we consider the application of the EU regulation 575/2013 threshold for significance of institution as an appropriate threshold for proportionality (with smaller institutions not being subject to this proposed reporting), we find that the thresholds proposed for reporting by individual country are not sufficiently well defined and/or set at a too low level. While requiring country level splits starting from the point where non-domestic exposure exceeds 10% of overall sovereign exposure appears appropriate, requiring that every individual country exposure is split out and reported (regardless of its size as % of total) may lead to unwarranted costs in splitting reporting of exposures between countries that may individually have immaterial/minimal exposures. Thus we recommend that this is amended to state that instead reporting will be done on individual basis for each country that represents 1% or more of the overall exposure to sovereigns with exposures falling below this level reported in aggregate as “Other”.
Please see response under Question 3
In addition to our comments on Market Risk under Overall Observations, and our comments on template 33.02 in our answer to Q2, note that:
• All references to FINREP templates are those as published on 1 December 2016.
• Several columns (as indicated in Appendix 1) indicate national GAAP (in addition to IFRS) reporting. We recommend that guidelines are amended to state that banks reporting under IFRS would only be completing the IFRS columns and that a separate reporting set is defined for banks reporting under their respective national GAAP, aligning to how banks currently report FINREP.
For detailed comment (by column) please see Appendix 1.
We consider that the table would benefit from a better definition of mapping of Conduct risk (and related recoveries) to existing risk types in table 17.01, with one current solution being the mapping applied by the UK’s PRA (mapped against “clients, Products and Business Practices” category).
We have no comments and could see no issues with proposed definitions.
We have no comments and could see no issues with proposed definitions.
We consider option A, with reporting of the largest event per category, followed by ten (10) other largest events. We would ask for a clear definition on how these events/losses are to be determined (in relation to paragraph 126 of the proposal) including:
- events “accounted for the first time” within the reporting period,
- events “accounted for the first time” within a previous reporting period (if the event was not included in any previous supervisory report), and,
- “loss adjustments” in the current reporting period to determine the overall size of the loss.
For further information on this submission please contact Nemanja Eckert, Policy Director, BBA.
We recommend that columns are clearly defined with following recommendations on their definition:
• 010 – Sum of columns 020 and 130.
• 020 – Total of columns 030 to 120.
• 030 – From FINREP table 4.1, rows 080 and 140.
• 040 – Out of scope for IFRS banks. Only for banks reporting on relevant national GAAP
• 050 – FINREP table 4.2.1, rows 070 and 130.
• 060 – FINREP table 4.2.2 rows 080 and 140.
• 070 – Out of scope for IFRS banks. Only for banks reporting on relevant national GAAP
• 080 – FINREP table 4.3.1 rows 070 and 130.
• 090 – Out of scope for IFRS banks. Only for banks reporting on relevant national GAAP
• 100 – FINREP table 4.4.1 rows 030 and 090.
• 110 – Out of scope for IFRS banks. Only for banks reporting on relevant national GAAP
• 120 – Out of scope for IFRS banks. Only for banks reporting on relevant national GAAP
• 130 – Relates to direct short positions for financial assets – from reviewing the FINREP templates we could only see references to short positions in relation to financial liabilities and recommend that this column is removed.
• 140 – Relates to direct short positions for financial assets – from reviewing the FINREP templates we could only see references to short positions in relation to financial liabilities and recommend that this column is removed.
• 150 – Sum of: FINREP tables 4.3.1 (cols 050, 060, 070; rows 070 and 130); 4.4.1 (cols 050, 060, 070; rows 030 and 090).
• 160 – This column refers to both FVOCI (IFRS) and ‘fair value to equity’ which is a National GAAP measurement. The IFRS element will come from FINREP table 4.3.1, cols 050, 060, 070 rows 030 and 090 but we are unclear as to why the two separate accounting regimes are merged in this column and recommend that it it is clearly defined that banks reporting under IFRS banks would report FVOCI (IFRS) and banks reporting under national GAAP the “fair value to equity”.
• 170 – FINREP tables 4.2.1, col 020 rows 070 and 130; and table 4.2.2 col 021 rows 080 and 140. It is worth noting that these columns in the FINREP tables now reference ‘Accumulated negative changes in fair value to credit risk on non-performing exposures’ (the bold text being an update on the draft templates) and we thus recommend that the EBA reflects this in column 170 in 33.01 and 33.02.
• 180 – Appears to be same as 170 above and we recommend that it is removed
• 190 – Out of scope for IFRS banks. Only for banks reporting on relevant national GAAP
• 200, 210, 220, 230 – We understand that these columns would require the total trading and hedging from FINREP tables 10 and 11. However, although it is possible to provide carrying values and notional values for both assets and liabilities, these do not currently show a sovereign split and amending reporting and underlying data warehouses would add a material build, implementation and ongoing cost which would be disproportionate to the achieved, limited, increase in transparency. We thus recommend that these columns are removed.
• 240 – FINREP table 9.1 columns 010, 020, 030, 100 and 120; rows 040, 120, and 200.
• 250 – FINREP table 9.1 columns 040, 050, 060, 110 and 130; rows 040, 120 and 200.
• 260 – FINREP table 9.1 column 130 refers to this however most of the rows are greyed out so it is difficult to extract data for General Governments and we recommend that this column is removed
• 270, 280, 290, 300, 310 – Indirect exposures – there are no FINREP tables which collect this data and amending reporting and underlying data warehouses would add a material build, implementation and ongoing cost which would be disproportionate to the achieved, limited, increase in transparency. We thus recommend that these columns are removed.
• 320 – Recommended to be split out as per our comment in main body of our response.