While we approve the general principles enumerated in Part II and recognize the benefits of more common practices in the EU, we are of the opinion that new crisis management regulation, mutualisation of the Single Resolution Fund (hereafter “SRF”) and the variety of banking models in the EU should leave more room for manoeuvring to national discretion. This is why we believe that Part III of the Guidelines goes beyond the BRRD’s spirit, i.e. setting out guidelines implementing the general criteria quoted in the level 1 text: risks and business models.
The DGSD states in article 13-2 that “DGSs may use their own risk-based methods for determining and calculating the risk-based contributions by their members”; these methods are to be approved by the supervisory authority and transmitted to EBA.
As stated above, we understand and support the goal of a greater convergence; nevertheless the guidelines as currently drafted provide a list of mandatory indicators with associated weights, whereas we believe the guidelines should propose indicators to be adapted to national circumstances.
We believe that more leeway should be left to Member States to implement the principles within their national regime and adapt the criteria to the type of institutions and business models that are most represented in their respective countries. The share of criteria left to national authorities (25%) is much too low. Only a minimum of 50% would ensure that national DGSs can be tailored appropriately to the jurisdictions and markets they belong to.
We believe that the weighting method is complex and will not be transparent to institutions.
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%.
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.
We favour the use of Common Equity Tier 1 ratio as a measure of capital given its widespread availability and consistency of definition across Europe.
Some credit institutions benefit from a waiver of capital and/or liquidity ratios on a solo basis according to articles 7 and 8 of CRR. The guidelines should accommodate the rule to ensure that the indicators can be provided on a consolidated basis.
We suggest that risk indicators buckets or sliding scale approach result into linear impact and minimise any cliff effects.