Response to consultation on draft guidelines on recovery plans indicators
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This is mainly the case for the macroeconomic or asset quality indicators, none of which is directly relevant to us, from a recovery planning perspective. The same is true for the specific indicators covered in question 3 (this is explained in annex I). Rather than be subject to a rebuttable presumption – which may force us to put, at least temporarily, indicators and monitoring processes in place for indicators that are not at all relevant– we would rather favour a more principles-based approach. This would be more appropriate for single-purpose banks like Euroclear Bank.
More fundamentally, the list of recovery plan indicators should focus on indicators that may convey the information that the institution may possibly need to take extraordinary measures (i.e. implement recovery options) to stave off failure. Including other risk indicators blurs the distinction between the ‘normal’ risk management framework and the recovery plan. Where should the boundaries be drawn?
We do not see other types of indicators that would warrant inclusion in the list.
Forcing the inclusion of such indicators in our recovery plan would risk conveying inadequate information: if a breach of these indicators was communicated, this would lead to reputational impacts and create risks of its own. Furthermore, leaving counter-productive indicators in the list would make it useless, as it may lead to a re-questioning of all indicators in the list.
It seems to us that the minimum list of indicators is too long. It is based on the profile of a commercial bank, with publicly traded shares. To make it appropriate to special banks like Euroclear Bank, it would need to be stripped down heavily (as explained above) and complemented by other, tailor-made indicators, not found in the list. We do not propose such indicators here as they are probably not appropriate for “normal” banks.
We fear that the “rebuttal presumption” process would unnecessarily create a heavy burden for institutions like Euroclear Bank.
We would like to note a few points and/or ask a few clarification questions with regards to your points:
- 16. A “traffic light approach” is not appropriate for all types of quantitative indicators (not binary ones).
- 20. How frequent is “continuous”? This should depend on the indicator.
- 25. Setting capital indicators at a “sufficient distance to a breach the minimum capital requirements” is not always relevant, and certainly not for a “simple” bank like Euroclear. For example: in case of a one-of loss, not combined with any other impacts likely to erode capital, capital may drop, but as long as it remains above regulatory requirements, the situation would not necessitate taking recovery measures. It is only if the shock is combined with a negative P&L (due to e.g. reputational stress leading to business loss) that a buffer above capital requirements may be useful.
However, in our view, the analysis could be improved, by taking into account the following:
- The cost of the rebuttable presumption process is not factored into the EBA’s analysis.
- The possibility to limit the ‘obligatory’ list to the lowest common denominator to all institutions, irrespective of their type, has not been considered. Or create obligatory lists per type of institution. We understand that this would leave harmonisation issues – though we are not convinced that harmonisation is really desirable in this area.
Question 2: Do you consider that there are other categories of indicators apart from those reflected in the draft Guidelines which should be included in the minimum list of recovery plan indicators?
We believe that the minimum list of categories to be included should cover capital indicators, liquidity indicators and profitability indicators, as those would be relevant to all institutions, irrespective of their type or activity. The proposed list is too long for some institutions. In particular, for Euroclear Bank, some of the proposed indicator categories are not appropriate.This is mainly the case for the macroeconomic or asset quality indicators, none of which is directly relevant to us, from a recovery planning perspective. The same is true for the specific indicators covered in question 3 (this is explained in annex I). Rather than be subject to a rebuttable presumption – which may force us to put, at least temporarily, indicators and monitoring processes in place for indicators that are not at all relevant– we would rather favour a more principles-based approach. This would be more appropriate for single-purpose banks like Euroclear Bank.
More fundamentally, the list of recovery plan indicators should focus on indicators that may convey the information that the institution may possibly need to take extraordinary measures (i.e. implement recovery options) to stave off failure. Including other risk indicators blurs the distinction between the ‘normal’ risk management framework and the recovery plan. Where should the boundaries be drawn?
We do not see other types of indicators that would warrant inclusion in the list.
Question 3: Do you agree with the list of specific recovery plan indicators included in Annex I, Section C, or would you propose to add other indicators to this Section?
The reply given under question 2 also applies to this section. Some indicators that are essential for normal banks would not be meaningful to us (see annex I for the list of such indicators, as well as an explanation as to why they would not be relevant).Forcing the inclusion of such indicators in our recovery plan would risk conveying inadequate information: if a breach of these indicators was communicated, this would lead to reputational impacts and create risks of its own. Furthermore, leaving counter-productive indicators in the list would make it useless, as it may lead to a re-questioning of all indicators in the list.
It seems to us that the minimum list of indicators is too long. It is based on the profile of a commercial bank, with publicly traded shares. To make it appropriate to special banks like Euroclear Bank, it would need to be stripped down heavily (as explained above) and complemented by other, tailor-made indicators, not found in the list. We do not propose such indicators here as they are probably not appropriate for “normal” banks.
We fear that the “rebuttal presumption” process would unnecessarily create a heavy burden for institutions like Euroclear Bank.
Question 4: Do you consider that these Guidelines should establish the threshold for each quantitative recovery plan indicator to define the point at which the institution may need to take recovery measures to restore its financial position?
No, quantitative thresholds are institution-specific. In particular, appropriate levels for Euroclear Bank are likely to be very different from levels that other banks would consider as life-threatening.We would like to note a few points and/or ask a few clarification questions with regards to your points:
- 16. A “traffic light approach” is not appropriate for all types of quantitative indicators (not binary ones).
- 20. How frequent is “continuous”? This should depend on the indicator.
- 25. Setting capital indicators at a “sufficient distance to a breach the minimum capital requirements” is not always relevant, and certainly not for a “simple” bank like Euroclear. For example: in case of a one-of loss, not combined with any other impacts likely to erode capital, capital may drop, but as long as it remains above regulatory requirements, the situation would not necessitate taking recovery measures. It is only if the shock is combined with a negative P&L (due to e.g. reputational stress leading to business loss) that a buffer above capital requirements may be useful.
Question 5: Do you agree with our analysis of the impact of the proposals in this Consultation Paper? If not, can you provide any evidence or data that would explain why you disagree or might further inform our analysis of the likely impacts of the proposals?
Given the options included in the table on p.20-21, we appreciate the fact that the EBA has not chosen the most restrictive option, which would create a risk of “one-size does not fit all”.However, in our view, the analysis could be improved, by taking into account the following:
- The cost of the rebuttable presumption process is not factored into the EBA’s analysis.
- The possibility to limit the ‘obligatory’ list to the lowest common denominator to all institutions, irrespective of their type, has not been considered. Or create obligatory lists per type of institution. We understand that this would leave harmonisation issues – though we are not convinced that harmonisation is really desirable in this area.