Response to consultation for institutions and resolution authorities on improving resolvability
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Please clarify – in the context of Section 4, Point 22 – what exactly is expected to be documented (documentation governance arrangements) for internal (in-house) services?
In addition, and when differentiating between group shared service providers and providers acting solely within a country, the requirement for financial resilience of providers acting solely within a country and within the same resolution group is not transparent and not seen as necessary, as in case of resolution of a member entity of the resolution group, the losses are upstreamed and separation and deconsolidation is neither foreseen nor possible in short time.
In Section 4, Point 13. the term essential services is expressed as designated services for the effective execution of the resolution strategy and any consequent restructuring. The term “essential” was in already published documents referred to as “underpin core business lines” (SRB’s Draft/Final Expectations for Banks, Operational Guidance on Operational Continuity, etc.) which is now changing again. A clear guidance on definition of service types would be necessary in order to perform proper and stable IT implementation and set up of service catalogues. Furthermore, the EBA minimum list of services is used for EBA reporting, hence the list of services are by far not complete for the purpose of OCIR (e.g. marketing services, retail services etc.).
Section 4, Point 15 and 16 – within the EBA CIR template and to follow the request of this guideline, a mapping of Critical Function to Core Business Line is only possible if the business line where majority of CF belongs to, is identified as core. As the definition of Core Business Line is up to the bank, it might happen that a CF specific in one business line cannot be mapped to a CBL. CBL are based on self-identified quantitative and qualitative criteria and should rather focus on Profitability of Bank (internal) and not on external market (which is the case for CFR).
Referring to Section 4, Point 20 “In case the institution is not able to put in place credible alternative measures, for third-country outsourced contracts the institution should pre-fund the contracts for six months”. Liabilities to critical service providers are excluded from bail-in and hence challenge in resolution might be payment suspension of 2 days (i.a. foreseen in Art 33a and following BRRD 2). By requiring to pre-fund the contracts it has to be assumed that the contractual relationship cannot be trusted although payment is ensured.
Regarding section 4, point 61f), a clarification regarding the statement to “ensure that the provision of relevant services within the group is structured to avoid preferential treatment upon the failure or resolution of any group entity” is needed. Considering the fact that the critical services require preferential treatment, our understanding of the provision is not to prefer or disrupt the provision of services to an entity in the run up to the resolution phase.
Furthermore, the level of FOLTF point, at which competent authority decides on FOLTF needs to be specified (e.g. FOLTF on Group Consolidated level does not automatically result in breaching minimum requirements on individual entity levels and hence resolution tools cannot be notified on individual level).
Moreover we have one important remark:
According to point 70 (a) of the draft guidelines when estimating the liquidity and funding needed for the implementation of the resolution strategy, institutions should pay particular attention the legal, regulatory and operational obstacles to liquidity transferability, especially intra-group.
This provision is designed in a too general and undifferentiated way in the context of identifying financial resources for the assessment of the feasibility of a resolution strategy pursuant to Article 26(3)(b) in conjunction with Article 28 Commission Delegated Regulation (EU) 2016/1075 due to the following reasons:
In decentralized banking groups it makes a great difference if the central institution has chosen to apply an SPE- or an MPE approach in its resolution strategy. In case a SPE approach shall be applicable, the parent institution (central institution) is responsible as a sole resolution entity for the absorption of losses incurred within the group as the subsidiaries do not constitute separate resolution entities. If an MPE approach was chosen, things are different. In this case, the resolution plan of the central institution allows the resolution of the subsidiaries by the local resolution authorities without a financial contribution of the parent company as the subsidiaries constitute separate resolution entities.
This fact should be borne in mind when evaluating the financial resources for the assessment of resolution impediments of institutions and therefore explicitly enshrined in the final version of the guidelines, too.
Moreover, in decentralized banking groups a higher ranking of the liquidity reserve – that the associated institutions must permanently hold at the central institution in order to ensure financial stability (for Austria please see Article 27a of the Austrian Banking Act) – in the creditor hierarchy on the basis of the national implementation of Article 108 BRRD should be recognised in this respect in the final guidelines in the course of assessing liquidity and funding in resolution.
In addition, the ex-ante and ex-post loss absorbing capacity of an institutional protection scheme (IPS) according to Article 113 (7) CRR as contractual or statutory liability arrangement between the IPS member banks which protects those institutions and in particular ensures their liquidity and solvency to avoid bankruptcy has to be taken into account and appropriately enshrined in the guidelines with regard to the assessment of financial resources.
Against this background point 70 (a) of the EBA draft guidelines should be amended as follows:
“a. legal, regulatory and operational obstacles to liquidity transferability, especially intra-group; in decentralized banking groups taking into account the resolution strategy of the central institution, the ranking of the liquidity reserve in the creditor hierarchy and the ex-ante and ex-post loss absorbing capacity of an institutional protections scheme as defined in Article 113(7) CRR.”
The Business Reorganisation Plan is under the power of the bank itself and is not foreseen as resolution power/does not fall under the resolution decision. In what sense does the BRP differ from Recovery Planning that aims to restore financial stability (when bank is again viable)?
A linkage from BRP to MREL target calibration should be considered (reduction of RWAs), if the BRP has to be set up in advance, to be approved and to be followed in resolution. Hence proper incorporation of RWA reduction should be considered.
Q1. Do you have any comments on the scope of application of these guidelines?
Please clarify what is meant with the “resolution group level” scope of application referred to in Section 2, point 11. Does it mean that the resolution entity should comply with the guidance on the resolution group level or does it affect also subsidiaries on solo level? If so, what is the scope of subsidiaries – does it concern only subsidiaries that are CRR – CIs with internal MREL or broader scope of subsidiaries?Q2. Do you have any comments with the proposed requirements to improve resolvability with regard to operational continuity in resolution?
General: It should be specified, if operational continuity requirements refer to the own resolution group or if the service provider needs to ensure operational continuity and identify staff, assets and contracts for services to other resolution groups as well. This would require to know all local resolution groups’ critical functions and core business lines as without these information the identification of relevant services is not possible. Furthermore, this would lead to violation of level playing field as such requirements do not exist for outsourced services, where the critical staff, critical contracts, critical assets and services to Core Business Lines of e.g. Oracle, IBM, SAP etc. are not addressed and identified.Please clarify – in the context of Section 4, Point 22 – what exactly is expected to be documented (documentation governance arrangements) for internal (in-house) services?
In addition, and when differentiating between group shared service providers and providers acting solely within a country, the requirement for financial resilience of providers acting solely within a country and within the same resolution group is not transparent and not seen as necessary, as in case of resolution of a member entity of the resolution group, the losses are upstreamed and separation and deconsolidation is neither foreseen nor possible in short time.
In Section 4, Point 13. the term essential services is expressed as designated services for the effective execution of the resolution strategy and any consequent restructuring. The term “essential” was in already published documents referred to as “underpin core business lines” (SRB’s Draft/Final Expectations for Banks, Operational Guidance on Operational Continuity, etc.) which is now changing again. A clear guidance on definition of service types would be necessary in order to perform proper and stable IT implementation and set up of service catalogues. Furthermore, the EBA minimum list of services is used for EBA reporting, hence the list of services are by far not complete for the purpose of OCIR (e.g. marketing services, retail services etc.).
Section 4, Point 15 and 16 – within the EBA CIR template and to follow the request of this guideline, a mapping of Critical Function to Core Business Line is only possible if the business line where majority of CF belongs to, is identified as core. As the definition of Core Business Line is up to the bank, it might happen that a CF specific in one business line cannot be mapped to a CBL. CBL are based on self-identified quantitative and qualitative criteria and should rather focus on Profitability of Bank (internal) and not on external market (which is the case for CFR).
Referring to Section 4, Point 20 “In case the institution is not able to put in place credible alternative measures, for third-country outsourced contracts the institution should pre-fund the contracts for six months”. Liabilities to critical service providers are excluded from bail-in and hence challenge in resolution might be payment suspension of 2 days (i.a. foreseen in Art 33a and following BRRD 2). By requiring to pre-fund the contracts it has to be assumed that the contractual relationship cannot be trusted although payment is ensured.
Q3. Do you have any comments on the proposed requirements to improve resolvability with regard to access to FMIs in case of resolution?
When it comes to contractual arrangements with the FMIs, which are generally the same for all institutions within the scope of these Guidelines, it would be appreciated and more effective if the resolution authorities centrally provide guidance for the FMIs, thus saving many bilateral discussions on one hand and ensuring harmonization on the other.Q4. Do you have any comments on the proposed requirements to improve resolvability with regard to management information systems and information system testing?
Regarding Section 4, point 61d), a clear guidance on the form and threshold for identifying material changes should be established. Furthermore, duplications with regards to information requirements towards competent authorities should be eliminated in order to avoid unnecessary administrative efforts.Regarding section 4, point 61f), a clarification regarding the statement to “ensure that the provision of relevant services within the group is structured to avoid preferential treatment upon the failure or resolution of any group entity” is needed. Considering the fact that the critical services require preferential treatment, our understanding of the provision is not to prefer or disrupt the provision of services to an entity in the run up to the resolution phase.
Q5. Do you have any comments on the proposed requirements to improve resolvability with regard to funding and liquidity in resolution?
In general, similar to recovery scenarios and respective EBA guideline, the key characteristics and assumptions of the scenario should be specified. E.g. it has to be clarified if the FOLTF point needs to be triggered by liquidity or by solvency ratios.Furthermore, the level of FOLTF point, at which competent authority decides on FOLTF needs to be specified (e.g. FOLTF on Group Consolidated level does not automatically result in breaching minimum requirements on individual entity levels and hence resolution tools cannot be notified on individual level).
Moreover we have one important remark:
According to point 70 (a) of the draft guidelines when estimating the liquidity and funding needed for the implementation of the resolution strategy, institutions should pay particular attention the legal, regulatory and operational obstacles to liquidity transferability, especially intra-group.
This provision is designed in a too general and undifferentiated way in the context of identifying financial resources for the assessment of the feasibility of a resolution strategy pursuant to Article 26(3)(b) in conjunction with Article 28 Commission Delegated Regulation (EU) 2016/1075 due to the following reasons:
In decentralized banking groups it makes a great difference if the central institution has chosen to apply an SPE- or an MPE approach in its resolution strategy. In case a SPE approach shall be applicable, the parent institution (central institution) is responsible as a sole resolution entity for the absorption of losses incurred within the group as the subsidiaries do not constitute separate resolution entities. If an MPE approach was chosen, things are different. In this case, the resolution plan of the central institution allows the resolution of the subsidiaries by the local resolution authorities without a financial contribution of the parent company as the subsidiaries constitute separate resolution entities.
This fact should be borne in mind when evaluating the financial resources for the assessment of resolution impediments of institutions and therefore explicitly enshrined in the final version of the guidelines, too.
Moreover, in decentralized banking groups a higher ranking of the liquidity reserve – that the associated institutions must permanently hold at the central institution in order to ensure financial stability (for Austria please see Article 27a of the Austrian Banking Act) – in the creditor hierarchy on the basis of the national implementation of Article 108 BRRD should be recognised in this respect in the final guidelines in the course of assessing liquidity and funding in resolution.
In addition, the ex-ante and ex-post loss absorbing capacity of an institutional protection scheme (IPS) according to Article 113 (7) CRR as contractual or statutory liability arrangement between the IPS member banks which protects those institutions and in particular ensures their liquidity and solvency to avoid bankruptcy has to be taken into account and appropriately enshrined in the guidelines with regard to the assessment of financial resources.
Against this background point 70 (a) of the EBA draft guidelines should be amended as follows:
“a. legal, regulatory and operational obstacles to liquidity transferability, especially intra-group; in decentralized banking groups taking into account the resolution strategy of the central institution, the ranking of the liquidity reserve in the creditor hierarchy and the ex-ante and ex-post loss absorbing capacity of an institutional protections scheme as defined in Article 113(7) CRR.”
Q6. Do you have any comments on the proposed requirements to improve resolution implementation?
Referring to section 4, point 87g), the procedure before receipt of notification, but in the run up to the resolution phase and preparation of resolution weekend is regulated in MAR as not ad-hoc related. However, it needs to be specified, how exchange with FMIs, freezing of stock-exchanges and trading is performed over weekend when stock exchanges are still open, but no ad-hoc and official resolution was published.The Business Reorganisation Plan is under the power of the bank itself and is not foreseen as resolution power/does not fall under the resolution decision. In what sense does the BRP differ from Recovery Planning that aims to restore financial stability (when bank is again viable)?
A linkage from BRP to MREL target calibration should be considered (reduction of RWAs), if the BRP has to be set up in advance, to be approved and to be followed in resolution. Hence proper incorporation of RWA reduction should be considered.