15 - We think that a better harmonisation should be sought with other frameworks already promoted by the European authorities. For example:
- the EBA publishes a quarterly risk assessment of the European banking system, whose risk drivers are not perfectly aligned with those indicated in SREP document and the risk factors requiring capital as per Pillar 1;
- the ECB recently issued methodological documents in the perspective of the Asset Quality Review, and the Comprehensive Assessment Stress Test, which also suggest various metrics to assess the resilience of banking institutions.
To ensure appropriate analysis and synergies between the exercises and publications, we think more coherence can be achieved in this field.
16 - Generally speaking, we think that if the objective is to make the SREP more transparent and comparable, more could be done to define risk levels which would trigger supervisory examination. For instance:
- Which level of credit risk concentration would be considered too high? Would it be the same for larger and smaller institutions? Additional guidance would be welcome. Same point for instance for paragraph 377: how would the “excessive level of asset encumbrance”, or “acceptable boundaries for maturity mismatches” be defined?
- Which thresholds may trigger a move from a category to another? The complexity of a given product is linked to the size and sophistication of an institution: blind thresholds should not be used to categorize institutions.
17 - We appreciate the definition of risk drivers set out in the guidelines. However, we think additional details should be given regarding the combination and weighting techniques of the various scores and criteria, as pointed out in the general comment sections. We are indeed concerned that subjectivity may still reign when aggregating grades, which would cast a shadow on the objective of transparency and comparability of the process and its outcomes to the detriment of the level playing field. Paragraph 124 states that “Under the national implementation of these guidelines, different methods may be used by competent authorities to derive individual risks scores.” We think that further harmonisation in this field would also be desirable. As an example, paragraph 144 shows that the EBA is ready and able to suggest common methodologies ensuring good coordination and comparability of practices across the European Union.
18 - It is our view that supervisors should refrain from judging the ICAAP reliability based on supervisory benchmarks only (or predominantly on such benchmarks), as suggested at paragraphs 322 and 329. The ICAAP control and governance frameworks implemented by a supervised institution as well as the rationale behind the methods and assumptions used by an institution should have prominent roles in that judgment. The internal capital requirement calculated by peers might not always be relevant to another bank and therefore benchmarks should be cautiously used. It is our view that this should be clearly stated at paragraphs 326 or 327. Indeed it would be useful if supervisors shared their methodology and the data sources used in building benchmarks: banks would welcome an open dialogue and more transparency.
As part of the ECB’s Comprehensive Assessment stress tests, supervisory benchmarks have been imposed to banks with limited scope for discussion and for amendments to identified shortcomings. Mindful of this experience and in order to ensure consistency and usefulness of benchmarks, dialogue and transparency are critical to banks.
19- It appears to us that the proposed guidelines provide supervisors with discretionary assessment with respect to liquidity and funding. We think that the SREP liquidity guidelines need to be put in perspective with recent regulatory developments and ensuing enhanced supervisory requirements (Pillar 1) as well as increased mandatory reporting for liquidity and funding. Given the lack of perspective we have on the EU liquidity supervisory tools and metrics, we are concerned that the proposed guidelines tend to establish an unnecessary parallel between approaches to capital and to liquidity/funding in the Pillar 2 context. In addition, liquidity supervisory reporting includes funding plans and various liquidity monitoring tools with a forward-looking perspective. At the current early stage of the EU-wide liquidity supervisory framework, we have limited experience of the combined effects of supervisory metrics, tools and reporting requirements. The LCR itself already factors in significant stressed assumptions; it is therefore questionable whether an additional layer of stressed assumptions should be applied as part of Pillar 2. We are of the view that the liquidity/funding risk assessment should rely on indicators and reports already available to supervisors. Furthermore, the idea to impose capital add-ons against a possible increase in funding spreads, as stated at paragraph 332, is questionable since capital is not the primary effective approach to protect a bank against such a risk, which should rather be measured through the liquidity assessment. Further comments on liquidity and funding risk assessment are set out in the annex.
As mentioned in the general comments section, we would like to point out that the ILAAP is mentioned in various parts of the consultation in spite of not being yet defined nor mandated by regulatory requirements.
20 - We note that peer comparison only implies that with European institutions. We understand that peer review of European institutions with those belonging to other economic areas (US or Asia for example) is not foreseen (such as impact of Regulation and competitive advantage). While this may be relevant for most European banks, it is not appropriate for international banking groups that are also active outside Europe.
21 - In the same vein, the application of SREP to cross-border groups (Part 11.1) seems to ignore the non-EU component of cross-border groups by focusing primarily on EU processes and requirements.
22 – As pointed out in the general comments section, we strongly advise that the SREP dialogue, process and outcomes, including bank scores, be entirely covered by legal confidentiality provisions and arrangements.
23 - For sake of clarity and consistency, we think that a clear separation must be established between matters within the scope of the SREP as described by Directive 2013/36/EU, and matters relating to the implementation of BRRD directive.
In particular, we consider that the orientation of the Overall SREP assessment is not entirely adequate; as a matter of fact, by introducing an F" score (defined as "the institution is considered as "failing or likely" to fail), the consultation exceeds the remit of SREP analysis, while it gears SREP analysis towards the question of the "viability" of the institution, therefore departing from a going-concern approach to focus on a gone-concern probability assessment.
We consider that an "F" score is neither appropriate nor relevant in the context of the SREP.
The SREP approach only allows to determine circumstance (a) describe in article 32(4) of Directive 2014/59/EU, as specified in the "Draft guidelines on the interpretation of the different circumstances when an institution shall be considered as failing or likely to fail under Article 32(6) of Directive 2014/59/EU" (EBA/CP/2014/22); in addition, determination of an institution being failing or likely to fail must be made after consultation between the competent authority and the resolution authority. Such process is not provided for in the SREP approach nor suggested in the proposed guidelines. As a result, we consider that the "F" score is inappropriate. We would thus suggest that EBA revisits the articulation of the Overall SREP assessment scorecard, with a view to removing the "F" score.
24- As far as level of application, when considering a banking group, the following three principles should apply:
- SREP should always be considered at the highest level of consolidation,
- analysis at sub-levels should be done with reference to this highest level, including in the case of cross-border groups,
- in all instances, a subsidiary must not be considered as a solo entity if it is itself head of a subgroup. The concept of group and subgroups must prevail in all situations as part of SREP.
We would thus suggest that EBA clarifies the recommended approach for treatment of groups, including some specific “proportionality” considerations which could be granted to subsidiaries within consolidated groups in the context of the SREP.
It should also be emphasized that for subsidiaries with minority interests, given the haircut calculations, the minimum requirements of Pillar 2 (if any) should always be produced on the three levels: CET1, Tier 1 and Tier 2."
25 – For a banking group, if the SREP process has to be implemented at the subsidiary level (as contemplated in title 11), we also suggest a rotation of periodic examinations conducted at the subsidiary level (some of them being conducted every three years, according to § 35) to smooth operational requirements over time, and obtain a continuous update of the consolidated group profile, instead of one-off updates which may result in abrupt jumps in the consolidated risk profile.
26 - The text does not mention any information about how
• the SREP elements will be updated when assessments are performed on a multi-annual basis,
• the overall SREP will then be updated (as well as articulation with the SREP elements).
27 – It seems that the definitions of institutions categories are mainly driven by considerations on systemic importance / total asset size / types of businesses conducted by the supervised institution. It is our view that category I institutions should include both institutions that pose systemic risks, which is not exclusively a question of having been categorised as a G-SII or as an O-SII, and institutions for which significant weaknesses or risks are identified.
28 - A thorough follow-up of the indicators is a key element in the proposed categorisation process: it is the starting point to identify deteriorations and anomalies or changes in institutions risk profile and financial conditions. Therefore, such a system could allow a fair monitoring of all the institutions, provided that the key indicators are relevant and well adapted to institutions.
29 – Some bank analysts take into account the following drivers when assessing bank robustness. After careful examination of the EBA text we are unsure whether they have been included in the other risk drivers. We therefore suggest considering the following:
- The extent to which pension liabilities may materially impact the resilience of the institution (presence of Defined Contribution / Defined Benefit schemes, etc.): even if deficits are already deducted from capital, assessments of the likely deviation from expected risk profile, or volatility of the surplus/ shortfall, may beneficially be taken into account.
- Business model diversification as aforementioned in the general comments section, including in terms of “bancassurance”: it has been proven that diversified and significant presence in both the insurance (life, non-life) and the banking industry can increase the overall resilience of the institution (owing to increased consumer retention and satisfaction, cross-selling opportunities, optimization of the liquidity profile, etc.).
- Historical perspective of the institution strategy. It can indicate whether the strategy continues along the same lines or how some strategic changes have taken place (under which constraints and with which results). This could be an indicator of its actual feasibility.
30 – With regards to the BMA, the guidelines provide that “areas for analysis by competent authorities should include… profit and loss, including trends… [relating to] the breakdown of income streams, the breakdown of costs… balance-sheet, including trends, …concentrations in the P&L and balance-sheet, including trends… related to customers, sectors and geographies”. Those provisions might pave the way to additional layers of reporting obligations that are not required by level 1 text and will lead institutions to modify significantly their budgetary processes and management control IT systems, so as to store detailed data that could potentially be required by supervisors but that are not necessarily used internally. It would be worth clarifying that only existing data will be used as part of the SREP and that institutions are not specifically required to implement new reporting and budgetary IT systems to respond to potential requests as part of the SREP.
31 – With regards to the analysis of the strategy and financial plans, the guidelines provide at paragraph 72 that “competent authorities should form or update their view on the sustainability of the institution’s strategy on the basis of its ability to generate acceptable returns… over a forward-looking period of at least three years based on its strategic plans and financial forecasts”. It should be clarified that those provisions apply when new strategic plans are adopted and consequently that they do not apply quarterly or yearly, as suggested in paragraph 47 (a).
32 - The BMA is not an end in itself for supervisors but a tool allowing them to have better understanding of the various risks and vulnerabilities faced by institutions. In this spirit, the findings resulting from this approach should be used to feed the analysis of other areas of SREP and contribute to the assessment of other scores. We therefore consider that the BMA component of the SREP should not be assigned a specific score; as a consequence, we request that the relevant scoring part (chapter 4.10) is removed from the guidelines.
33 – By way of introduction, we believe that Pillar 2 examination have to be comprehensive, and require a wide knowledge of the institution, its structure, business profile etc. We think that each and every risk driver cannot necessarily be quantified, and that NCAs should always offer the opportunity of a constructive dialogue with banks to discuss SREP results before potential actions be decided as already pointed out in the general comments section.
34 - We are concerned with operational requirements linked to the proposed risk categories breakdown. As mentioned in the general comments section, the envisaged quarterly computation and monitoring of key indicators is likely to require a significant investment in systems, without necessarily improving the quality of the evaluation. The indicators listed in paragraph 47 are numerous, and not necessarily readily available at the required frequency. Reducing the operational complexity of the evaluation process is paramount to us. For instance, we are concerned that the suggestion in paragraph 373a that “competent authorities may extend the scope of their assessment by exploring risks within 30 days as well as over 30 days, and altering the LCR assumptions to reflect risks not adequately covered in the LCR”, may lead to counterproductive results, hence should be removed.
35 - In terms of workflow, the industry favours the idea to start from existing regulatory procedures, reports and requirements (such as COREP, etc.) and then to identify which variables may be added in order to produce documents and data suggested by EBA. This would minimize the number of additional regulatory work, and leverage on previous developments (for instance the recently updated COREP). The industry would be willing to contribute to a mapping exercise (from existing formats to target SREP format), should EBA agree that such a gap analysis is a good starting point.
36 - The breakdown of risk categories, and their relative importance, is likely to differ between small institutions (or at the subsidiary level of a larger group) and a large consolidated group. We do not understand the need to implement a complete SREP approach at solo level for entities of consolidated groups (as contemplated in title 11). Indeed all risk drivers may not be available at solo level, and risk appetite / ICAAP / stress-testing processes may not be rolled out extensively in some subsidiaries; we doubt of the relevance of their conclusions at solo level since the resilience of a diversified group will be higher than the resilience of its subsidiaries thanks to diversification effects. More particularly, we have an issue with paragraph 100, which we read as the requirement to have stress-testing capabilities at the local subsidiary level. Within large financial groups, all individual entities do not have the same level of maturity on such topics: the proportionality principle has to remain key in this area. We would like to express our concerns with a recent growing interest from supervisors covering small subsidiaries and ICAAP approaches where the latter cannot be considered relevant at solo subsidiary level.
37- With regards to supervisory expectations relating to the ICAAP, ILAAP, stress testing and risk appetite, we understand that there is a strong common ground based on existing practices. We would rather favour a precise list of references to regulatory texts in this area, which may avoid the risk of subtle incoherent requests; we would then advocate for an explicit list of texts, rules, guidelines etc. applicable to the whole perimeter, in order to promote a homogeneous approach by supervisors. Besides, the supervisory expectations towards the ICAAP and ILAAP should clarify how the proportionality principle applies to institutions of categories 1 to 4, as defined at paragraph 11. In particular, acceptable principles by risk categories should be stated in the guidelines. Those requiring internal modelling or, where appropriate, economic capital modelling should also be stated in the guidelines.
38 – The concepts of risk appetite / risk tolerance are extensively used in the EBA’s SREP guidelines. In particular the consultation provides that “competent authorities should consider whether the institution’s business model or strategy relies on a risk appetite, for individual risks (e.g. credit, market) or more generally, in order to generate sufficient returns that is considered high or is an outlier among the peer group” and, on p. 44, that “competent authorities should assess… at least… the risk appetite framework and strategy…”. However, risk appetite is defined in very broad terms at page 16. The tasks assigned to Supervisors at paragraphs 71, 88 and 91 could therefore prove to be quite challenging and might lead to heterogeneous approach and requests among supervisors, all the more since there might be various understandings in the industry and among supervisors of metrics to be used and monitored as part of an effective risk appetite framework. Prior to referring to risk appetite concepts in the SREP, it would therefore be worth harmonizing definitions and expectations in this area or providing effective and practical references.
39 - We are not clear on the treatment of model deficiencies: we understand the need to identify potential underestimation of own funds requirements, but do not see in the CP how compensation effects between models potentially underestimating risks, and others overestimating risks, would be treated. We do not understand the provisions in paragraph 111 which seems to introduce an alternative approach to the regulatory treatments of assets and risks. We think this opens the way to subjective assessments and to potential double-counting of capital requirements if risks were to be assessed both from a regulatory Pillar 1 perspective and from a different angle under the Pillar 2.
40 – In the consultative paper, market risk would be extended to cover certain risks factors in the banking-book (e.g. credit spread risk, equity exposures in the banking-book, etc.). Paragraph 214 states in particular that “the data, information systems and measurement techniques enable management to measure the market risk inherent… including both trading and banking portfolios”. As suggested in the guidelines, we agree that risk factors should be coherently assessed across the banking-book and the trading-book based on the applicable classification of instruments. At many banks, credit spread risk in the banking-book is dealt with as part of the credit risk management framework; equity risk arising from instruments classified in the banking-book is treated as a subcategory of credit risk. Failing to recognize this distinction will give rise to significant risk reporting and communication issues.
41 – Besides, clarification is needed in paragraph 190, where banking book sensitivities are discussed in connection with market risk variables. The scope and nature of such an assessment have to be discussed in detail in order to avoid duplication with other work already launched (for example FRTB) and double-counting of capital requirements (for example Pillar 1 RWA for equity exposures).
42 – We believe additional flexibility would be appropriate in the examination of the level of own funds expected in the analysis. We support the use of standard approach as well as internal models for the articulation of additional own funds requirements to be used by competent authorities.
43 – It is our view that adequate capitalization should not only rely on regulatory definitions of CET1 ratio, Tier-1 ratio, etc. (as described in title 7). External sources of risk appreciation may shed a different light on a bank’s profile, such as its market valuation, its CDS spread level, or other market indicators which give a consensus view on its ability to meet not only its regulatory obligations, but also future expectations.
44 - Several regulatory measures have already been implemented in order to increase the resilience of banks, such as the need to hold capital conservation buffer. Adverse macroeconomic situation will be translated in terms of deteriorated earnings perspectives in the financial planning exercise, and ultimately result in lower capital generation. We would welcome clarification on the interaction between Pillar 2 capital requirements and macro-prudential frameworks in the context of SREP. Supervisors should be in a position to justify that Pillar 2 capital add-ons are needed to cover clearly identified institution-specific risks, which are not already covered by other existing capital requirements. Articulation between Pillar 2 capital add-ons and combined buffer requirement would also need to be clarified with respect to practical implementation of art. 141 of CRDIV (capital conservation measures, restrictions on distributions …).
45 – For example, paragraph 333 states that “competent authorities should reconcile the additional own funds requirements against the risks already covered by capital buffer requirements and / or additional macro-prudential requirements” and paragraph 484 that “where a macro prudential measure, due to its design specificities, does not capture a particular institution… the competent authorities may consider extending the effects of the measure directly to that institution…”. We are of the view that macro-prudential measures should be dealt with through arrangements and processes ensuring appropriate coordination between supervisory bodies both at national and EU levels and should not be remediated on case-by-case basis as part of the SREP, which would be detrimental to convergence of supervisory practices in the EU.
46- The guidelines set guidance on the composition requirement for additional own funds requirements under Pillar 2 (at least 56% CT1 and 75 % T1), on a risk by risk basis; articulation with overall requirement is not clearly made. This differs considerably with the practices of numerous jurisdictions, where only an overall level of capital ratio is assigned (frequently based on one type of ratio only, e.g. CET1, or total capital ratio). It would be advisable to confirm that all eligible capital under Pillar 1 (even on a transitional basis) will be recognized. We would also like some clarification regarding the extent to which alternative forms of capital may be admitted to cover other types of risks (such as control, governance and other deficiencies, funding risk).
47 – As mentioned in the general section, it is our view that the leverage ratio is not an appropriate tool for assessing a bank’s capital adequacy as it is not risk sensitive; the leverage ratio works as a back-stop indicator. It would be a paradox to introduce this element in the SREP approach which is supposed to be fully dedicated to a thorough understanding of risks borne by an institution. Considering that the Pillar 1 leverage ratio level is being calibrated (the CRR provides for a transitional period until 1 January 2018), we believe there is currently limited scope for considering the leverage risk within the SREP approach, in particular beyond this transitional period. In addition, we strongly doubt it is appropriate to consider the leverage ratio in a stressed scenario, as provided at paragraph 346: the leverage ratio should remain a back-stop measure and should not be dealt with as if it were a risk-sensitive one.
48 – Paragraph 330 provides that “competent authorities should set additional own funds to cover the risk posed by model deficiencies… while the deficiencies are addressed.” It should be clarified that this provision does not apply if conservative margins have already been required to address those deficiencies under Pillar 1.
49 - These guidelines should be implemented by January 1, 2016 except for points that are not specified and introduced in the CRR so far. Considering the regulatory adoption planning, the RTS should be applicable in August or September 2015 in all European Member States. Subsequently, there are 4 additional months left for preparing and refining guideline.
The following elements may have an impact on the implementation date:
• Drafting of practical guides if needed and if foreseen ;
• Defining the different scores, tools, and test them on a sample of banks ;
• Aligning the implementation of the joint decision process ;
• Recruitment by competent authorities of required additional staff to perform all the analyses;
• Setting out the required organisation and procedures to perform the analyses.
50 – We believe it would be necessary to clarify the implication of the transition period with respect to diversification assessment. Does the text in paragraph 502 imply that diversification benefits will be admitted by supervisors until 31/12/2018 but will suddenly cease to be accepted afterwards? Such “cliff effect” does not make sense, and is not supported by any Pillar 1 contemplated evolution. We would like to point out that reference in paragraph 502 to paragraph 320 is inaccurate: paragraph 319 deals with diversification.
51 - More generally, considering that the approach contemplated in the CP may represent a significant change in the relationship between banks and NCAs, and require significant works, we favour a long transition period, which would also help compile the data history expected by the EBA and help institutions to adapt to the new requirements included in the guidelines.