European Banking Federation

The permission regime would limit banks’ freedom to choose their refinancing if certain instruments (eligible deposits, preferred senior) became subject to it.
Article 8/Article 9 RTS: even if the banking industry is aware of the mandate the EBA is subject to, we would welcome, when implementing it, a higher degree of consideration of the structural differences between eligible liabilities and own funds instruments, in particular in terms of number of issuances, but also in terms of investors and denomination. More specifically, we consider the regulations affecting the bank's customers as particularly problematic. It is difficult to explain to the customer that the bonds of third institutions (with corresponding default risks) are eligible as collateral for securities loans, but not the banks’ own bonds. We consider it necessary to exempt from the direct financing rules such situations where the focus is on customer's investment (and not the bank's financing). At the very least, a de minimis rule should be introduced for such circumstances, according to which exchange-traded bonds held by customers who have received a securities loan at the same time, up to an amount of e.g. EUR 500,000 per customer, should not be regarded as direct financing.
From the explanatory box for consultation purposes on Article 28 we understand that, concerning remuneration, the EBA did not want to change the content of the current RTS (Article 29 (4)). On p.31, the EBA accordingly states “(…) have only been moved here from the former Article 29(4) in order to bundle provisions related to deductions in Article 28”. In particular, the proposed new RTS still says “deduct these instruments from own funds on a corresponding deduction approach for the time they are held” (Article 28(4)). However, since the proposed new Article 28(4) combines the remuneration topic with “When applying for a general prior permission (…)” (beginning of the first sentence of the proposed new Article 28(4)), it becomes confusing. For a general prior permission, the proposed Article 28(3) clearly specifies that the approved amount has to be deducted once the permission has been obtained. For the remuneration case the proposed new Article 28(4) leads to the impression that the instruments held for this purpose have to be deducted in addition to the general deduction of the predetermined amount for the general prior permission, and that the remuneration buybacks also have to be included in and monitored against the limit of the predetermined amount of the general prior permission. Therefore, we invite the EBA to clarify that for the remuneration topic (currently under Article 29(4)), under which only the instruments actually held need to be deducted, does not change.
Finally, please note that it is possible that employees receive an award of e.g. a number of shares, and not of an EUR-amount as share-equivalent, in order to participate in risks and chances of the bank. As a consequence, the bank has a delivery obligation of a certain number of shares, and hence a purchase requirement in this number of shares. Therefore, in these cases, it would be preferable that permission for share buybacks with respect to remuneration could continue to be approved for a maximum number of shares instead of an EUR-amount. This would avoid seeking approval of an uncertain projection relying on a future share price assumption.
Yes, we agree with the proposed rationale.
Article 30: we consider the information required to be too extensive. Supervisory and resolution authorities already have a large amount of the requested information on the existing COREP or MREL reporting. We invite the EBA to consider the excessive burden banks will be subject to, also because the validity of the granted prior permission is limited to one year, meaning that the requested information must be submitted on an annual basis. The repeated provision of this data would be an obvious case of double collection of existing information.
It seems to us that the wording of Article 30(1)(e) - Article 30a(2)(a) and 30a(3) RTS, could be interpreted as meaning that prior permission would no longer be granted for a single liability class; instead, all the issuances concerned would have to be listed individually in the application and the authority must be informed at each issuance if this is likely to be repurchased within the envelope. This does not fit with secondary activities. As a general principle, all issuances need a liquid market and are included in the prior permission scope. At the present time, ECB does not request banks to disclose the details of capital instruments held at quarter end, and this should remain the rule. Additionally, it is simply the total amount of repurchased instruments that impacts the capital/MREL/TLAC position of the bank, and not which specific issuances are repurchased. Hence, we ask for the possibility of requesting prior permission for an entire capital class be retained; it should be clear in the RTS that the competent authority shall grant institutions permission to reduce instruments up to a certain amount corresponding to a specific proportion of its total own funds and eligible liabilities instruments, instead of controlling deductions of specific individual instruments.
Article 30(1)(g) specifies the required information of the replacement instrument when institutions seek permission under Article 78(1)(a), such as the maturity and cost of the replacing instrument. However, this information can be provided only when the replacement instrument has already been issued at the time of the submission of the application. For planned issuances, especially as the application may be sent several months before a planned issuance, only estimates of such detailed information will be available. E.g. both the cost and to some extent also the choice of maturity will depend on market conditions at the time of issuance.
Referring to Art. 28 (2) RTS, we believe that “sufficient certainty” exists only where the redemption is publicly announced. In this regard, we point out that there are situations where a prior permission of the competent authority has been obtained but it is still uncertain whether the institution will exercise the permission or not. In the cases where a quarterly report is published in-between, a deduction of the own funds instrument would lead to misleading information on the capital situation, and infringe the market rules (because investor will infer that the redemption will happen before it is announced publicly). In our opinion, the capital deduction should occur only when, along with the prior permission of the competent authority, a sufficient degree of certainty is deemed to exist (i.e. a public announcement has been made).
Finally, we would welcome also if the re-submission of the multiannual planning were to be waived when the application is submitted. Alternatively, if a resubmission is necessary, it must be made clear in the RTS that this is the bank's multi-year planning, which is updated annually, and that no update to the time of application is necessary.
In general, we consider a four-month submission period to be disproportionately long for a permission with a validity of one year.
The three-month period has proven to be workable for own funds so far and we see no reason to increase it. Data can be shared with the resolution authority at inception to avoid extending the examination timeline.
In detail, the three-months period would be a better choice especially for individual permissions since, in case the four-months deadline were to be adopted, a so wide period would make the actual management of early redemptions and LMEs very difficult: in such a wide time period market conditions can vary, considerably changing the rationale of the actions to be performed.
Additionally, we signal that institutions generally prefer to pre-finance an upcoming call of an instrument to be able to ensure a sufficient level of capital is maintained also after the call. Extending the deadline by one month would therefore in practice mean that institutions would need to issue one month earlier, which in turn would imply one additional month of double instrument cost to maintain a certain level of capital.
In any case, we consider that for renewals of previously authorized operations there should be a reduction in notice periods. Moreover, for operations were there is going to be a replacement of own funds or eligible liabilities, we believe the process should be streamlined.
We welcome the efforts to shorten the submission period for follow-up applications.
Copying the mechanism for own funds to eligible liabilities creates a disproportionate burden for banks as eligible liabilities, unlike own funds, do not absorb losses in a businessas-usual or crisis situation but only in the extreme case of a resolution. Thus, mandating RAs to assess any reduction with a view on the long-term profitability seems excessive. In addition, the assessment by the RA is not well defined and leaves room for interpretation.
We would also point out that the greatest threat to the sustainability of institutions income capacity is the possibility of excessive and unnecessary MREL requirements, exacerbated by an inappropriate deduction regime being imposed on institutions. This is a far greater threat to sustainability than the possibility that the marginal cost of a given tranche of eligible liabilities may increase when replaced by a new liability.
Deducting eligible liabilities when the general permission is granted would be inappropriate and disproportionate.
The purpose of MREL is to set a sufficient amount of own funds and eligible liabilities, for which a complex calculation is applied and a dedicated regime for handling breaches is in place. In addition, the introduction of an M-MDA and the ineligibility of own funds used for buffer requirements (CBR) both act as safeguards and buffers above MREL, with the aim to ensure that sufficient capacity for loss-absorption and recapitalization is available at all times. The extension of the deduction regime envisaged by the EBA for own funds, not only ignores the different qualities and riskiness of the instruments in question (CET1, AT1 and T2 instruments as the first instruments classes to bear losses while eligible liabilities are senior in nature and rank above all own funds), but also reduces the complex bank-specific calculation of MREL with its complex add-ons, buffers and group-specific adjustments.
It is a core task of resolution authorities to set an appropriate MREL level. This is the very nature of MREL, governed by the specific laws and policies for MREL. Thus, there is neither a need nor a mandate for EBA to go beyond this and interfere by means of an automatic deduction.
By means of not granting a permission, the resolution authorities already have the ability to prevent connected risks. Yet the automatic deduction of the general prior permission would: 1. violate proportionality 2. unduly interfere with the existing MREL requirements by effectively increasing them through the back door, and 3. unduly limit banks’ flexibility in managing their stock of issuances according to changing market conditions. We would also like to point out that, for the transitory time between the entry into force of the revised CRR provisions and the publication of the RTS, the SRB refrained from demanding automatic deduction.
Another practical case that would be relevant would occur in case an instrument were to be replaced with a similar instrument: in this case, the MREL contribution would have to be deducted when the permission is granted (irrespective of whether it would concern a general prior permission or an individual application), while the replacement could only be executed with a certain delay (of at least several days) after the approval (due to administrative and processing reasons). Thus, timewise there would inevitably be a gap during which a bank’s apparent MREL capacity is effectively reduced, ultimately exacerbating risk, despite the fact that it is the goal of the regime to prevent this.
From a resolution and bail-in perspective, the motivations for, and the impacts of market-making and liability management, are different. Market-making aims to provide investor flexibility that reinforces the attractivity of the eligible liability as an investment. Eligible liabilities subject to market making are bought by the bank and will not serve the purpose of resolution and bail-in until they are re-sold into the market. Hence, some limits are understandable, both in terms of amount allowed and deduction of the amount held in the market-making book. On the other hand, eligible liabilities subject to liability management are the liabilities that meet the regulatory criteria for resolution and bail-in purposes. The purpose of liability management exercises is to replace shorter-term liabilities with longer-term liabilities since doing so improves the maturity of the eligible liabilities stock, which is positive from a resolution and bail-in perspective. Consequently, we believe that the general prior permissions should not be confined only to market making. Particularly, the amount allowed should be increased and the timing for deductions should be aligned with ad hoc prior permissions. However, if this is accompanied by a demanding deductions rule, prior permission rules will not be fit for purpose.
Additionally, the drafting of ad-hoc requests and the processing by the RAs would take far too long to handle matters flexibly. Take for instance the case of an individual investor who has bought an eligible instrument as a private placement and approaches the bank with a request for early redemption. This customer expects an instant reaction from the bank. However, preparing an application and receiving approval form the RA would take weeks, so that neither the creditor’s interest to receive a swift answer nor the bank’s interest to offer customer-centered solutions are met. Note that all of this does not affect or endanger MREL or loss-absorption capacity, as MREL has to be maintained at all times and a breach would have to be notified by the bank in any case.
General prior permissions are more efficient and more organized than ad hoc prior permissions. Banks submit the applications in relation to the yearly resolution planning process. SRB, in cooperation with ECB, assesses the application and makes the approval during the yearly resolution planning process. The decision for the approval is included as part of the resolution planning decision. This is more efficient and more organized compared to ad hoc permissions.
A maximum limit of 3% would, in our opinion, be insufficient to cover both market making and liability management exercises or the exercise of calls on callable issuances.
The question of the size of limits is inextricably linked to the deduction regime. If a general prior permission is to be systematically deducted from eligible instruments, then banks will have every motivation to limit the amount of general prior permission by applying every quarter, or even every month, for a quarterly or monthly limit, thus multiplying administrative work both for themselves and for the authorities, but with the advantage for institutions of minimizing undue deductions.
If the aim of a general prior permission regime is to alleviate administrative burdens at both the banks and the authorities, then higher limits can be considered but, in this case, the deduction regime must be appropriately designed and should not mandate deductions until ‘sufficient certainty’ (i.e. the announcement of a call or LME, or the actual repurchase of the liabilities) has occurred.
In details, we believe there are the following main fundamental issues with the imposition of a limit to the general prior permission for eligible liabilities:
a. market making volumes for eligible liabilities are much higher than own funds: The market making of eligible liabilities, in particular of senior vanilla or structured bonds sold to private investors, is featured by significant higher volumes if compared to own funds instruments. As such, the adoption of the same quantitative threshold in force for own funds (3%) also for eligible liabilities would be totally incompatible with the actual market volumes of these instruments. The proposed limit would therefore risk reducing liquidity in many of these outstanding instruments.
b. Unfair level playing field with non-EU banks: Non-EU banks do not have such a hard limit on market making. This would give them a strong competitive advantage both in funding cost terms (higher flexibility in increasing and decreasing their own liabilities) and in direct market making activity on issuances from European banks.
c. EBA went beyond his mandate in setting such a limit: More significantly, we note that the 3% cap proposed by the EBA is not required by the mandate to the EBA in the Level 1 text, nor are the limitations required to meet prudential objectives. The level 1 text also does not require alignment with the redemption rules that apply to own funds in this area. The question therefore arises as to why the EBA feels that it is appropriate to suggest this limitation, given Article 78a bestows the power to the relevant Resolution Authority to set the limit of the eligible liabilities in case of general prior permission.
We refer to our comments to Q8.
The information request under Art. 32d RTS is also far too detailed. The provision of a three-year prognosis is disproportionate, as institutions regularly provide such information as part of their capital trajectory and MREL reporting (at least in the banking union). Considering the small amounts of total MREL capacity in scope of the considerations, these requests would effectively set up a whole new reporting process, error-prone and duplicating existing MREL reporting, which seems unnecessary given the fact that MREL compliance is already ensured by regular reporting to RAs.
For internal MREL, a simplified information package should be considered.
With reference to Art. 32d 1 (f) (and correspondingly to Art. 30 1 (g) for own funds), it should be clarified that the detailed information on the replacement instruments should not be requested in case of general prior permissions (because also such permission is given under conditions at points (a) or (b) of CRR Art 78(1) or 78a(1)): as already mentioned for Q8, at the moment of the request for general prior permission, the bank has not yet detailed information on the replacement instrument features, which depend also on the market environment in which the transaction is performed.
Art. 32e RTS: This is not limited to market making. It is the very nature of a general prior permission to cover all kinds of liabilities, including those that may not even have been issued at the time of applying for said permission (e.g. private placements). Consequently, requesting a full list is simply not feasible. A list of outstanding liabilities is regularly provided to RAs through the annual resolution reporting (CIR, LDR for the banking union) and the published Pillar 3 reports.
We also refer to our comments to art. 30e RTS.
We refer to our comments to Q9.
In general, we consider a four-month submission period to be disproportionately long for a permission with a validity of one year.
The three-month period was already tested to be workable for own funds so far and we see no reason to increase it.
We welcome the efforts to shorten the submission period for follow-up applications.
Much more important, however, is the point in time when the bank is informed about the outcome of a decision. Resolution authorities must commit to providing feedback fast and inform the bank with sufficient leeway about the outcome of the permission so that there is sufficient time to adapt. There should be time in the process to check and grant a resubmission if problems had been identified in a first round.
Art. 32g - Process between RA and competent authority: We do see reasons here for unnecessary complications in the back and forth between authorities. Given the relatively low amounts and their removability from actual loss-absorption in comparison to own funds, such cumbersome processes stand in no proportion to the effort they require and the risks they cover.
Fabio Parola