The French Banking Federation (“FBF”) welcomes the opportunity to express the views of the French banking industry on the public consultation on revised guidelines on methods for calculating contributions to deposit guarantee schemes. In this context, we herewith provide you with our answers on the Consultation Paper. We would appreciate that you take our comments into consideration, and we remain at your disposal for further clarifications.
Any change to the Deposit Guarantee Schemes (DGSs) contributions calculation method has to be introduced in the national legislations and will necessarily have significant impacts on the costs of the banks. Consequently, it is essential that the banks management and stakeholders have in advance enough visibility on the upcoming costs to allow them to introduce the changes in its budget process and planification work. That is why we think there should be no change introduced without an 18-month previous notice.
Also, the changes in the legislation and the changes in DGSs IT systems need time to be introduced respecting all consultation and testing process which are part of good administration and sound management practices.
As a result, we think the changes should not be applicable before 2024. To avoid significant swing in banks accounts, we think it would be reasonable to introduce the changes after the end of the initial period.
Moreover, regarding the definition of DGS intervention, please refer to question 2 here below.
Regarding the allocation of responsibilities to the DGS, the guidelines give the impression that EBA wants to extend the role of DGSs to any intervention in the perspective of the CMDI framework review. The French banking industry is firmly opposed to an extensive role of DGSs. Use of public or mutualized funds needs to be minimized and limited to where these are critical to ensure financial stability.
The framework should impose market discipline and send the clear message that it is the primary responsibility of each bank to ensure that it has the loss-absorbing resources available to manage its failure in an orderly manner. The flexible use of DGS in resolution or insolvency proceedings to support transfers of insured deposits to a purchaser or bridge bank is already normally possible but only when this would result in a better outcome for the DGS fund than a liquidation pay-out to covered depositors.
Besides, the extensive use of deposit guarantee funds beyond their function of compensating depositors notably the capacity to intervene in a 'preventive' way to avoid liquidations goes beyond the spirit of the 2nd and the forthcoming 3rd Pillar of the banking Union which is primarily to protect the depositors. Therefore, if such preventive measures were to be maintained, they should be compulsory borne at national level only without any impact on future mutual resources at the European level even if the latter is limited to liquidity support.
Moreover, facilitating the use of DGSs’ under resolution would lead to the exhaustion of the funds in favor of the uninsured creditors of the institution experiencing difficulties, to the detriment of the protection of depositors covered by the guarantee under the DGSD. Such a perspective makes the objectives pursued by the BRRD and the DGSD converge, while they hold different objectives.
The protection of the institution’s depositors would be undermined if the DGS funds were not protected at the stage of the establishment of the DGS target level: their primary function, namely the repayment of deposits, would inevitably be compromised. If several institutions experience successive difficulties and that the DGS is involved for purposes other than the reimbursement of depositors, rebuilding the DGS’s resources could be problematic due to pro-cyclical issues.
If however a DGS in a member state intervenes for preventive measures before the FOLF decision is reached, the principles of burden sharing should be applied. Indeed, to ensure level playing field and to avoid moral hazard, a certain level of burden sharing must be imposed on shareholders and creditors. Plus, the involvement of DGSs in such a case should be limited to the amount that would have been necessary if the DGS was used to payout depositors (LCT).
Still, facilitating the involvement of DGS in resolution does not seem justified: at this stage, as the European Banking Authority (EBA) pointed out in its Opinion EBA/OP/2020/02, DGSs intervened only marginally in the context of a resolution and the analysis did not lead the Authority to ask for a relaxation of the conditions for the use of DGSs in resolution. Conversely, the EBA called for clarification of the LCT criteria.
Finally, it is important in our view that DGSs act in a consistent and consequent way across the different member states. The relationship between preventive action by DGSs and the European State aid framework remains uncertain and should be clarified. It is essential that the level playing field is not degraded between Member States where the DGS’ actions is imputable to the State and other Member States where this is not the case.
So, in conclusion, we do not think that the EBA guidelines should contradict the objectives of DGS interventions as primarily conceived by the legislator in the DGSD: indeed, their role is essentially to reimburse depositors and any other role should remain strictly conditioned as provided by the DGSD.
In paragraph 17 of the new EBA guidelines on contributions, it is mentioned that in the event of intervention by the Deposit Guarantee Schemes and recourse to borrowing, loan repayments will be limited in order to maintain the available resources at least 2/3 of the target level of resources. Such a proposal does not seem to be in line with the DGSD, which allows for the possibility for the DGS fund to freely repay any loans as long as the available resources are replenished no later than 6 years after the intervention.
In fact, the EBA should not go beyond the requirements of the Directive and constrain the raising of resources beyond what is necessary to maintain the 2/3 ratio within the 6-year period.
The DGSD most certainly provides for a certain degree of flexibility and has reached a level of balance regarding the building up of the Funds at national level during a period of stress or insufficient resources. Reducing this flexibility would have pro-cyclical effects.
Since EBA's objective is to have a better dispersion by risk category, we do not understand why EBA has not modified the weighting for the NPL ratio upwards, even though it indicates in its analysis that there is a strong correlation between the level of NPLs and the recourse to Deposit Guarantee Schemes, with an increase in the NPL ratio in the event of a crisis within the banking sector.
This aspect seems to us to be all the more important in the perspective of a potential mutualization of funds at the European level.
At this stage, the date of application has not been indicated but we understand that the EBA would like the application of the guidelines to be effective as soon as possible after their publication (i.e. application probably as early as 2023).
For the sake of good administration, the French banking industry would like the application date to be after June 2024 when the Deposit Guarantee Schemes will have reached their target size, given that the effects of these guidelines have not been quantified and that operational problems or legal changes will require time.
Once National Competent Authorities declare themselves compliant with EBA guidelines, they are bound by their own declaration which renders the EBA guidelines applicable to institutions, generating operational impacts. The French Banking Industry wishes to express its concerns as the implementation of these new calculations will indeed require time. As the DGSD itself will soon undergo a revision, the French Banking industry also wishes to recall that legal consistency issues might arise, which calls for a delay in the applicability of the guidelines and a loosening of their final publication date.