Response to consultation on Report on the appropriate target level basis for resolution financing arrangements under BRRD
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- The report does not, in our view, sufficiently consider and recognise when the relevant metrics are available.
- Delegated Regulation (EU) No 2015/63 of 21 October 2014 supplements the BRRD by setting out the arrangements for the collection of contributions for resolution funds. In order to fix the annual contributions by 1 May of any year at the latest, the resolution authorities set the target level. This is currently based on the covered deposits of the preceding year, which the deposit guarantee schemes are required to determine and report by no later than 31 January. The metric for calculating the target level is therefore available to the resolution authorities within one month after the relevant cut-off date.
- Should the basis for calculation be changed – to the “total liabilities” metric, for example – this sequence of steps cannot be adhered to in practice. In this case, institutions need more time to complete preparation of their annual financial statements and, if necessary, to make any additional manual calculations to cancel out accounting differences. Calculation of the target level for the contributions for a year can thus no longer be performed on the basis of data for the preceding year but only on the basis of data for the year before that. This time lag in calculation of the target level is inappropriate, in our view.
- At the EBA hearing on 16 August 2016, the EBA countered this argument by stating that in some Member States data on covered deposits cannot be delivered in time, so that data for the year before the preceding year already has to be used in these cases. This argument does not stand up, in our view. Where individual Member States fail to apply directly applicable EU Regulations in full or on schedule, this cannot be allowed to result in legislation being abolished or amended. Instead, efforts should be made to ensure that legislation is implemented equally in all Member States.
2. Correlation of the basis for calculation with State aid approved
- The EBA cites as the main reason for the proposed change that the level of deposits correlates less with the level of State aid than with the other bases for calculation proposed by the EBA. This is shown in Table 1 in paragraph 28, and the significance of this correlation cannot be denied.
- However, the development of the different bases for assessing how constant metrics are over time, presented in paragraph 30 (chart 1) is, in our view, not recognised sufficiently in the further EBA analysis.
- A look at correlations between State aid and different bases for calculating the EU bank levy shows that deposits display the lowest correlation with State aid. Yet altering the basis for calculation would – at least during the transition phase – imply distribution effects: institutions in countries with a low proportion of covered deposits to aggregated deposits could benefit from a changed basis for calculation (e.g. total liabilities) if these institutions’ proportion of total liabilities to aggregated total liabilities is higher. Any change to the basis for calculation could mean a higher burden for retail banks, which – as shown in the correlations chart – have used less State aid. For these reasons, a quantitative impact analysis is essential before any change is made to the basis for calculating the EU bank levy.
- The message of chart 1 in paragraph 30 is that the only constant metric in recent years has been deposits, so that only this metric leads to a constant target level. The other metrics would lead to higher target level volatility that would then have to be offset by adjusting the annual distribution rates. In view of the fact that paragraph 7 says that the target level should remain constant, the evaluation criteria “Dynamic and smoothness of contributions” and “Simplicity and transparency” should be assigned more importance or more weight in further analysis.
3. Option 2: Total liabilities/differences in accounting
- The report rightly says that, because of different accounting rules, the term “total liabilities” is not a harmonised definition. The existing differences between national GAAP and IFRS within Member States are, in our view, so substantial that no level playing field could be ensured for calculation of the target level.
- The differences in accounting are, in our view, a considerable obstacle to harmonised requirements. The EBA draws attention to this problem in its Report – starting at the page 33 - on Implementation and Design of the MREL Framework (EBA/Op/2016/12), published on 19 July 2016. In principle, both national accounting rules (in Germany, the Commercial Code (HGB)) and international accounting rules (IFRS) serve to make a company’s financial situation transparent. There are, however, serious differences when it comes to valuation methods and many points of detail. In our view, these can only be partly offset through adjustment.
- When calculating individual contributions for institutions, total liabilities are the starting point for determining the volume of contributions. To offset differences in accounting – particularly when it comes to the inclusion of derivatives – comprehensive, complex revaluation is, however, required. Should – as proposed by the EBA – total liabilities be taken as the new target level basis, such complex revaluation would be additionally required from all institutions also for calculating the target level. We reject this. This means failure to achieve the aim of having a simple and transparent metric.
- The data that would have to be used to ensure a level playing field for the target level for resolution funds is thus not the generally available and published data on total liabilities. Instead, adjustments of this data to offset differences in accounting would be needed solely for calculating the target level. Though these have not yet been specified in detail, it can be assumed in view of the experience made with adjustment of derivatives to calculate individual contributions that they will be complex and time-consuming. We believe this is inappropriate, given that the adjustments are not in principle to be accompanied by any changes to the overall target level.
- In our view, the EBA’s assessment of the three options based on total liabilities in the “Summary of options for the target level basis” is thus incorrect. As regards the criterion “Simplicity and transparency”, the EBA’s [++] should be replaced by [-]. The positive assessment of the criterion “Consistency with the contributions methodology” is incorrect since, in particular, small institutions subject to flat-rate contributions do not, due to their flat-rate contribution burden, have to adjust their data because of accounting rules. Should total liabilities be used as the target level basis, however, these institutions would be additionally burdened.
4. Extent to which metrics can be influenced by institutions
- In our view, the qualitative assessment of the possible options/metrics for the target level basis fails to take adequate account of the extent to which the metrics can be influenced by institutions.
- We believe that the level of contributions to the resolution funds creates incentives for institutions to design the relevant individual metrics for collection of contributions in such a way that they have as small an ex-ante contribution burden as possible. This is in principle understandable and in no way reprehensible. However, the target level basis should be exposed to as little influence as possible from institutions. Otherwise the result may be more volatile.
- As already explained above, various valuation rules provide a number of ways of calculating the “total liabilities” metric as low as possible. As total liabilities is, in addition, the starting point for individual calculation of contributions, there would be a double incentive for optimising it (basis for calculating the target level and individual contributions).
- By contrast, “covered deposits” is, in our view, a transparent and practicable metric that is largely uninfluenced by possible valuation measures. Institutions could merely optimise it in the medium to long term within the scope of a change to their business model. In addition, covered deposits are a deductible item in calculation of individual institution contributions, so that there is little incentive to calculate this metric as low as possible.
- An assessment of the options in question calls for a quantitative impact analysis that would also have to examine the impact on the SRF.
- With this in mind, and in view of the above-mentioned challenges if the target level basis is altered, a change would not be appropriate. We would therefore strongly recommend keeping covered deposits as the basis.
Question 1: Do you think the report is missing any crucial criteria or arguments in favour or against a particular option?
1. Availability of data- The report does not, in our view, sufficiently consider and recognise when the relevant metrics are available.
- Delegated Regulation (EU) No 2015/63 of 21 October 2014 supplements the BRRD by setting out the arrangements for the collection of contributions for resolution funds. In order to fix the annual contributions by 1 May of any year at the latest, the resolution authorities set the target level. This is currently based on the covered deposits of the preceding year, which the deposit guarantee schemes are required to determine and report by no later than 31 January. The metric for calculating the target level is therefore available to the resolution authorities within one month after the relevant cut-off date.
- Should the basis for calculation be changed – to the “total liabilities” metric, for example – this sequence of steps cannot be adhered to in practice. In this case, institutions need more time to complete preparation of their annual financial statements and, if necessary, to make any additional manual calculations to cancel out accounting differences. Calculation of the target level for the contributions for a year can thus no longer be performed on the basis of data for the preceding year but only on the basis of data for the year before that. This time lag in calculation of the target level is inappropriate, in our view.
- At the EBA hearing on 16 August 2016, the EBA countered this argument by stating that in some Member States data on covered deposits cannot be delivered in time, so that data for the year before the preceding year already has to be used in these cases. This argument does not stand up, in our view. Where individual Member States fail to apply directly applicable EU Regulations in full or on schedule, this cannot be allowed to result in legislation being abolished or amended. Instead, efforts should be made to ensure that legislation is implemented equally in all Member States.
2. Correlation of the basis for calculation with State aid approved
- The EBA cites as the main reason for the proposed change that the level of deposits correlates less with the level of State aid than with the other bases for calculation proposed by the EBA. This is shown in Table 1 in paragraph 28, and the significance of this correlation cannot be denied.
- However, the development of the different bases for assessing how constant metrics are over time, presented in paragraph 30 (chart 1) is, in our view, not recognised sufficiently in the further EBA analysis.
- A look at correlations between State aid and different bases for calculating the EU bank levy shows that deposits display the lowest correlation with State aid. Yet altering the basis for calculation would – at least during the transition phase – imply distribution effects: institutions in countries with a low proportion of covered deposits to aggregated deposits could benefit from a changed basis for calculation (e.g. total liabilities) if these institutions’ proportion of total liabilities to aggregated total liabilities is higher. Any change to the basis for calculation could mean a higher burden for retail banks, which – as shown in the correlations chart – have used less State aid. For these reasons, a quantitative impact analysis is essential before any change is made to the basis for calculating the EU bank levy.
- The message of chart 1 in paragraph 30 is that the only constant metric in recent years has been deposits, so that only this metric leads to a constant target level. The other metrics would lead to higher target level volatility that would then have to be offset by adjusting the annual distribution rates. In view of the fact that paragraph 7 says that the target level should remain constant, the evaluation criteria “Dynamic and smoothness of contributions” and “Simplicity and transparency” should be assigned more importance or more weight in further analysis.
3. Option 2: Total liabilities/differences in accounting
- The report rightly says that, because of different accounting rules, the term “total liabilities” is not a harmonised definition. The existing differences between national GAAP and IFRS within Member States are, in our view, so substantial that no level playing field could be ensured for calculation of the target level.
- The differences in accounting are, in our view, a considerable obstacle to harmonised requirements. The EBA draws attention to this problem in its Report – starting at the page 33 - on Implementation and Design of the MREL Framework (EBA/Op/2016/12), published on 19 July 2016. In principle, both national accounting rules (in Germany, the Commercial Code (HGB)) and international accounting rules (IFRS) serve to make a company’s financial situation transparent. There are, however, serious differences when it comes to valuation methods and many points of detail. In our view, these can only be partly offset through adjustment.
- When calculating individual contributions for institutions, total liabilities are the starting point for determining the volume of contributions. To offset differences in accounting – particularly when it comes to the inclusion of derivatives – comprehensive, complex revaluation is, however, required. Should – as proposed by the EBA – total liabilities be taken as the new target level basis, such complex revaluation would be additionally required from all institutions also for calculating the target level. We reject this. This means failure to achieve the aim of having a simple and transparent metric.
- The data that would have to be used to ensure a level playing field for the target level for resolution funds is thus not the generally available and published data on total liabilities. Instead, adjustments of this data to offset differences in accounting would be needed solely for calculating the target level. Though these have not yet been specified in detail, it can be assumed in view of the experience made with adjustment of derivatives to calculate individual contributions that they will be complex and time-consuming. We believe this is inappropriate, given that the adjustments are not in principle to be accompanied by any changes to the overall target level.
- In our view, the EBA’s assessment of the three options based on total liabilities in the “Summary of options for the target level basis” is thus incorrect. As regards the criterion “Simplicity and transparency”, the EBA’s [++] should be replaced by [-]. The positive assessment of the criterion “Consistency with the contributions methodology” is incorrect since, in particular, small institutions subject to flat-rate contributions do not, due to their flat-rate contribution burden, have to adjust their data because of accounting rules. Should total liabilities be used as the target level basis, however, these institutions would be additionally burdened.
4. Extent to which metrics can be influenced by institutions
- In our view, the qualitative assessment of the possible options/metrics for the target level basis fails to take adequate account of the extent to which the metrics can be influenced by institutions.
- We believe that the level of contributions to the resolution funds creates incentives for institutions to design the relevant individual metrics for collection of contributions in such a way that they have as small an ex-ante contribution burden as possible. This is in principle understandable and in no way reprehensible. However, the target level basis should be exposed to as little influence as possible from institutions. Otherwise the result may be more volatile.
- As already explained above, various valuation rules provide a number of ways of calculating the “total liabilities” metric as low as possible. As total liabilities is, in addition, the starting point for individual calculation of contributions, there would be a double incentive for optimising it (basis for calculating the target level and individual contributions).
- By contrast, “covered deposits” is, in our view, a transparent and practicable metric that is largely uninfluenced by possible valuation measures. Institutions could merely optimise it in the medium to long term within the scope of a change to their business model. In addition, covered deposits are a deductible item in calculation of individual institution contributions, so that there is little incentive to calculate this metric as low as possible.
Question 2: Do you have a preference for one of the following recommended options?: (a) total liabilities (including own funds), (b) total liabilities excluding own funds, (c) total liabilities excluding own funds less covered deposits.
- Given the constant level of covered deposits, and to avoid intransparency, legal/planning uncertainty and distortion of competition, we reject any change to the target level basis.- An assessment of the options in question calls for a quantitative impact analysis that would also have to examine the impact on the SRF.
Question 3: Is there any other option which would be preferable to those in the recommendation? Please provide the rationale supporting your view.
- As the EBA points out in paragraph 24, there is currently no reliable basis for estimating future funding needs for any resolution measures.- With this in mind, and in view of the above-mentioned challenges if the target level basis is altered, a change would not be appropriate. We would therefore strongly recommend keeping covered deposits as the basis.
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