Response to consultation on Guidelines on methods for calculating contributions to Deposit Guarantee Schemes (DGSs)
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We would like to comment further on the following criteria:
• MREL ratio
The criteria ultimately retained by the EBA should not only take into account the fact that an institution may fail, but also the fact that a DGS could be drawn on (in resolution or in liquidation). In particular, EBA’s RTS 41/2014 on MREL provide that systemic institutions will be required to maintain very significant levels of MREL to be used prior to recourse to the resolution fund. This implies that the probability of SIBs drawing on a DGS is very low.
Conversely, the draft MREL RTS leaves open the usage of the DGS for resolving small and medium-sized banks, when liquidation is not considered possible. Although we do not believe this provision may be appropriate, we understand it does reflect on the authorities’ view that on the low risk for a DGS to be called upon.
Therefore, a risk factors should, at the very least, take into consideration the amount of own funds and eligible debt owned by a bank in compliance with MREL requirements, and a ratio comparing the MREL and regulatory own funds, taking into account the shortfall to the 8% threshold as provided in article 44 of BRRD.
• NPL ratio
We do not believe that this ratio is appropriate due to lack of comparable definition (level playing field issue) and to the difficulty to assess it without the amount of specific and general provisions. In addition, the NLP ratio only partially covers the business mix of banking activities.
• Return on assets
We strongly oppose to the use of this ratio which does not reflect risks taken by banks. ROA reflects neither the institution’s probability of default, nor the loss given default of the fund as it ignores, for example, the business mix, the level of covered positions of the balance sheet (e.g. repos), etc…
As previously mentioned in other consultations, for example on the leverage ratio, total asset does not give any indication on the type of risks incurred by the bank, nor does it take into account different business models (for instance mortgage activities have low risk intensity).
Regarding the potential loss to the DGS, we believe that this factor is significantly underweighted in the draft EBA guidelines.
Question 2: Do you consider the level of detail of these draft Guidelines to be appropriate?
No commentQuestion 3: Is the proposed formula for calculating contributions to DGS sufficiently clear and transparent?
We believe that the weighting method is complex and will not be transparent to institutions.Question 4: Considering the need for sufficient risk differentiation and consistency across the EU, do you agree on the minimum risk interval (75%-150%) proposed in these Guidelines?
We understand the rationale of taking into account risk factors in contributions. Nevertheless we believe that the risk interval should not be higher than 75%-150%.Question 5: Do you agree with the core risk indicators proposed in these Guidelines? If not, please specify your reasons and suggest alternative indicators that can be applied to institutions in all Member States. Do you foresee any unintended consequences that could stem from the suggested indicators?
We support principle 1, stating that contributions must reflect the probability of default of an institution and the loss incurred by the fund in case of failure. Nevertheless, as stated in the introduction, we believe that EBA risk criteria are conceptually close to the Resolution Fund ones with respect to their definition as absolute criteria as opposed to criteria relative to a country’s banking sector risk profile.We would like to comment further on the following criteria:
• MREL ratio
The criteria ultimately retained by the EBA should not only take into account the fact that an institution may fail, but also the fact that a DGS could be drawn on (in resolution or in liquidation). In particular, EBA’s RTS 41/2014 on MREL provide that systemic institutions will be required to maintain very significant levels of MREL to be used prior to recourse to the resolution fund. This implies that the probability of SIBs drawing on a DGS is very low.
Conversely, the draft MREL RTS leaves open the usage of the DGS for resolving small and medium-sized banks, when liquidation is not considered possible. Although we do not believe this provision may be appropriate, we understand it does reflect on the authorities’ view that on the low risk for a DGS to be called upon.
Therefore, a risk factors should, at the very least, take into consideration the amount of own funds and eligible debt owned by a bank in compliance with MREL requirements, and a ratio comparing the MREL and regulatory own funds, taking into account the shortfall to the 8% threshold as provided in article 44 of BRRD.
• NPL ratio
We do not believe that this ratio is appropriate due to lack of comparable definition (level playing field issue) and to the difficulty to assess it without the amount of specific and general provisions. In addition, the NLP ratio only partially covers the business mix of banking activities.
• Return on assets
We strongly oppose to the use of this ratio which does not reflect risks taken by banks. ROA reflects neither the institution’s probability of default, nor the loss given default of the fund as it ignores, for example, the business mix, the level of covered positions of the balance sheet (e.g. repos), etc…
As previously mentioned in other consultations, for example on the leverage ratio, total asset does not give any indication on the type of risks incurred by the bank, nor does it take into account different business models (for instance mortgage activities have low risk intensity).
Regarding the potential loss to the DGS, we believe that this factor is significantly underweighted in the draft EBA guidelines.