Response to consultation on amending Guidelines on the appropriate subsets of exposures in the application of the systemic risk buffer
Q1. Do you agree that the proposed use of more granular economic activity classifications (including NACE level 2 or more granular levels where necessary) is appropriate and suffi-cient to enable authorities to effectively target exposures subject to climate transition risk while limiting unintended consequences for transition financing? If not, please explain and suggest alternative approaches or safeguards.
Generally, Nordea stresses that when a designated authority sets a systemic risk buffer, there should be firmer and more transparent technical requirements as to the justification for why the systemic risk buffer is considered likely to be effective and proportionate to mitigate the risk. Such justification should always at a minimum include a detailed economic analysis as to overlaps with other buffers and other applicable risk measures as well as consequence analysis in terms of impact on financial system. Also, it should be borne in mind that primarily climate and nature-related risks should be addressed by Pillar 1 (primarily via collateral valuations) and Pillar 2 measures, not macroprudential buffers and, accordingly, the systemic risk buffer justification by the designated authority should thus always include an analysis as to why the relevant risks are not, and cannot be, covered by Pillar 1 and 2 requirements or measures.
Our proposal is to use NACE level 2 and would avoid going to more granular levels. As customers might operate in multiple industries but they only get allocated to one NACE, more granularity can lead to more erroneous data.
Q2. Do you consider that introducing an additional subdimension related to Energy Perfor-mance Certificates (EPCs) or energy consumption buckets within the risk profile would be appropriate to better capture climate-related risks? If so, please comment on its relevance and potential implementation challenges, as well as data availability and possible proxies that relevant authorities could consider.
NA
Q3. Do you consider the proposed extension of geographical granularity (including the use of LAU level) appropriate for identifying exposures subject to climate physical risks? Please comment on the relevance of the proposal and potential implementation challenges, as well as data availability and possible proxies that relevant authorities could consider.
NA
Q4. Do you agree with the proposed flexibility to combine different dimensions (e.g. type of counterparty, economic activity, geographic area, type of collateral) when defining subsets of sectoral exposures for SyRB purposes? In your view, does this flexibility sufficiently sup-port risk sensitivity while preserving transparency and comparability across jurisdictions?
Nordea disagrees with the proposed flexibility to combine different dimensions when defining subsets of sectoral exposures for SyRB purposes, and considers that this proposal runs counter to EBA’s publicly stated efforts to reduce unnecessary complexity. Under paragraph 15 of the existing EBA/GL/2020/13, “[w]hen identifying a subset of sectoral exposures to which relevant authorities may apply an SyRB, relevant authorities should consider whether it is justified to activate a sectoral SyRB on the basis of the systemic relevance of the risks stemming from the subset of sectoral exposures they want to target, taking into account the different sources from which these risks can arise from a national financial stability perspective, and avoid an excessively granular application of the sectoral SyRB.”
Based on our experience, designated authorities of the Member States have nevertheless set sectoral SyRBs that are both very granular and also apply to subsets of sectoral exposures that are inappropriate under EBA/GL/2020/13. For example, Denmark has set a sectoral SyRB that is extraordinarily granular (e.g. it applies to parts of certain exposures secured by real property leaving out the lower LTV band). Furthermore, it applies to both secured/collateralized and unsecured exposures, despite that they should be mutually exclusive under paragraph 29 of EBA/GL/2020/13. Nevertheless, the EBA has issued a positive opinion on the setting of such sectoral SyRB despite the significant granularity. We find it problematic that such a granular decision has been made by the home designated authority, and endorsed by several reciprocating authorities, all of whom report being compliant with the existing guidelines, as well as the EBA. Our preference would be for the EBA to rather more strongly endorse the existing limitation on excessive granularity and the provisions on mutual exclusivity of secured and unsecured exposures.
Q5. Do you consider the strengthened provisions on information sharing and the use of harmonised data sources adequate to facilitate the assessment and reciprocation of SyRB measures across Member States? Please indicate any remaining obstacles to effective reciprocity and how they could be addressed.
The legal framework on reciprocation of a SyRB set by another member state needs thorough clarification in relation to both sectoral and general SyRBs. Based on Nordea’s understanding and experience, national authorities of a member state setting a (general or sectoral) SyRB do not generally consider its effects on foreign institutions operating in their jurisdiction (incl. whether the SyRB overlaps with capital requirements that already applicable to the foreign institutions). Therefore, it is the duty of the national authority considering reciprocation of a foreign SyRB rate to assess its suitability to the affected institutions domiciled in its jurisdiction, and remove possible overlaps with other capital requirements already applicable to those institutions.
In order to meet this duty, national authority of the reciprocating member state should exercise a discretionary judgment and conduct its own analysis, i.e. it must not solely rely on the factual and legal basis of another member state’s decision to set a SyRB. If a macroprudential supervisor cannot set a specific (general or sectoral) SyRB, it cannot introduce such a buffer through reciprocation. Neither can the reciprocating authority solely rely on the opinion of the ESRB and the EBA as they do not have the appropriate information, or duty, to analyse overlaps with requirements applicable to each institution.
Due to the foregoing, effective reciprocity that is consistent with the regulatory objectives and does not excessively burden the regulated institutions cannot be achieved solely by means of strengthened provisions on information sharing. Such strengthened information sharing can naturally facilitate the reciprocation decisions, but it should not operate as a relief from the reciprocating authorities’ duty to make their own assessment on assess whether the risks addressed by the foreign SyRB are also inadequately addressed in their domestic regulatory system. The aforesaid matters should primarily be clarified in level 1 legal text, but it would be beneficial to have a paragraph in the guidelines at hand addressing this.
Q6. Do you have any additional comments on these draft Guidelines amending EBA/GL/2020/13 on the appropriate subsets of sectoral exposures to which competent or designated authorities may apply a systemic risk buffer?
Nordea considers that in practice sectoral systemic risk buffers highly overlap with other risk mitigants set by banks and their supervisors. This is in particular the case with commercial real estate, which as an industry is cyclical by nature. To mitigate these risks, banks carefully manage these risks, and the portfolio is subject to substantial supervisory activities by the SSM. It is highly problematic that macroprudential authorities independently set additional requirements on these risks without a full consideration of the extent to which these risks are already covered.
Nordea therefore views that the criteria for setting sectoral systemic risk buffers should be tightened so that they could only be set if there is a residual risk not already fully mitigated by microprudential measures and/or other macroprudential measures that have already been effected, including effective credit risk management. The designated authority, when setting or reciprocating the buffer, should be responsible for analysing, assessing, and evidencing that such residual risk exists and that the sectoral systemic risk buffer does not overlap with any other requirement applicable to the institution.