We consider contributions to resolution and deposit guarantee schemes to be transaction costs directly attributable to the origination of a deposit per IFRS 9. Such contributions are expenses on a financial instrument, not on a tangible or intangible asset.
Our preferred option is to report such expenses as a standalone item under row 120 “Financial liabilities measured at amortised cost” on template 2 [Statement of profit and loss].
The definition itself is clear.
However, sourcing the information requested from the financial reporting systems is not straightforward and would require burdensome instrument-by-instrument assessment. Segregating negative changes in value at asset level will be very cost intensive and these costs may not be commensurate with the benefits of collecting this information.
We suggest removing the additional columns for “value at initial recognition” and “accumulated negative changes” in template 13 “Collateral and guarantees received” and template 25 “Collateral obtained by taking possession and execution processes”.
Moreover, the instructions for these templates are not clear. Specifically, to what extent rows 030, 040 [residential and commercial immovable property] and 050 [movable property] differ from row 010 [property, plant and equipment (PP&E)]. We recommend moving rows 030, 040 and 050 up under row 010 as subsets of PP&E.
Overall, the definition is clear. However, we would prefer the use of consistent terminologies and definitions within and across templates.
We anticipate challenges in the practical application as the proposed definition based on the ESRB recommendation differs from the definition used in CRR and COREP. The latter definition does not contain conditions on “income producing” which might lead to different classifications in certain scenarios.
For the purposes of CRR, “commercial immovable property” incudes any immovable property that are not defined as “residential”. This definition does not change under current CRR II proposals.
Residential immovable property is defined as residence which is occupied by the owner or the lessee of the residence. Aside from speculative immovable property financing and other types of specialised lending the condition of “income producing” does not feature in the CRR definition. This could lead to divergence in the classification of loans backed by commercial real estate between COREP and FINREP. We suggest using the COREP definition of commercial immovable property to determine CRE loans to provide consistency between COREP and FINREP.
We also note the mixed use of ESRB and COREP definitions in template 13.1 “Breakdown of collateral and guarantees by loans and advances other than held for trading”. Rows 036 and 037 use the ESRB definition for CRE loans whilst columns 010 and 020 use the COREP definition of residential and commercial immovable property. The purpose and use of both definitions on the same reporting lines is unclear and confusing. We propose removing rows 036 and 037, CRE loans, from the template.
The definition is clear and we do not expect any challenges in applying this definition.
We believe that the cost of quarterly reporting outweighs the benefits it provides to the regulator.
The template contains large volume of information that is not subject to frequent changes and as mentioned, firms are already required to notify local regulators when restructuring, setting up new entities and/or change the core activities of their entities.
We suggest limiting reporting to semi-annual frequency at most, in line with the COREP C 06.01 Group Solvency, which similarly breaks down capital requirements by individual entities within the scope of group consolidation. In between reporting periods, the EBA could utilise the information obtained by national regulators via the notification processes.
We strongly disagree with the inclusion of non-financial information such as the data collected in accordance with the GL on remuneration benchmarking exercise in a framework designed for financial reporting. We highly recommend to the EBA to keep the FINREP reporting framework limited to information governed by accounting standards and data that can directly be retrieved from financial reporting systems.
As the EBA has pointed out above, information included in these FINREP templates are already provided by banks via the benchmarking exercise annually. Including the same information as part of FINREP will deliver no additional information to the regulator while inappropriately mixing different reporting frameworks.
The scope and the instructions to the templates are largely clear. However, we have the following observations:
In templates 25-26:
• The detailed forbearance measures as described in template 26 row 020-130 do not provide much insight into the types of forbearance contractually entered into, a distinction between temporary and permanent contractual forbearance may be of more use to stakeholders. Further these measures are often grouped together. A net present value (NPV) exercise and the work required to determine these splits would be time consuming and offer little in the way of cost versus benefit for stakeholders. Furthermore, the forbearance measures applied to exposures vary and are designed to suit each individual situation. It will not always be possible to label them according to the prescribed categories. We suggest restricting the types of forbearance measures to broader but more meaningful categories, such as changes in contractual terms, whether interest reduction or reduction in principal, and another containing exposures with new contractual agreements combining several debt contracts into one with economic benefit to the client under credit stress.
• Columns “of which: having been granted forbearance measures during the period” are defined for this template as exposures to which forbearance measures have been granted since the end of last financial year. Similarly, in template 25, rows for inflows/outflows during the period are defined as collateral obtained since the beginning of the financial year. These are inconsistent with other quarterly reporting templates that define “in period” as since the last reporting date. We would welcome a consistent approach to terminologies used across the templates to ensure comparability and to avoid erroneous reporting. If the intention is to show accumulated balances during a financial year, we suggest renaming columns and rows as “in the financial year” instead of “during the period”.
• Finally, in template 25.2, the categories in rows 020, 040, 050, 060, 070, properties under construction or development, with or without planning permission are extremely detailed, do not follow accounting rules and terminologies, and as such not available in any accounting systems. Compilation of such information is likely to happen manually with high operational costs to banks. It is also unclear what risk it is trying to measure and what purpose such information could serve. We suggest removing these reporting lines from the template.
• In contrast to templates 25 and 26, the instructions to rows for increases/decreases in write-offs during the period does not define what “in period” means. Please clarify if we are to report accumulated movement balances since the beginning of the financial year or since the last reporting period i.e. since last quarter. Please refer to comment above for templates 25-26.
• Please refer to our answer to question 3 for columns 030, 060 and 070. Terminology used in column headings for households is consistent with the CRR “loans collateralised by residential immovable property”, whilst for non-financial corporations the template reverts to ESRB “Commercial Real Estate (CRE) loans”. We would prefer the use of consistent terminologies and definitions within and across templates. A similar observation can be made on template 47.
• Columns and rows for breakdown of pre-/in litigation status is not readily available in accounting systems. Collecting and mapping the required information to financial data is likely to be a manual process and potentially erroneous. The usefulness of pre-litigation status is also unclear. Most overdue exposures will attract a series of notifications to clients warning of possible legal proceedings without escalating further. It is therefore very difficult to determine what is pre-litigation and how this reconciles with past due or non-performing. We suggest removing reporting lines and columns with reference to pre-/in litigation.
Further to what we have pointed out in our response to question 6, that we strongly disagree with the inclusion of non-financial information, the instructions to the following reporting lines require additional clarification:
• “Average number of staff at retail branches”: It is not clear whether this means the total number of FTEs providing services and involved in transactions for retail customers over the number of retail branches reported in row 050 as at reporting date, or, the sum of average number of FTEs working over the reporting year in retail branches.
• “Number of online accounts”: Further guidance would be helpful whether this means any customer accounts accessible via the internet, or, whether this is limited to accounts that can only be accessed via online platforms with no physical presence.
We have identified the following challenges and concerns regarding these templates:
• There is no explicit disaggregation for assets and liabilities that will be created under IFRS 16.
o In absence of such a category, we would for example record right-of-use assets in Property, Plant and Equipment, but be unable to disaggregate fixed assets (which can be depreciated over as long as 50 years) from right-of-use assets (which could be depreciated over as short a period as under 2 years). This would affect templates 1.1, 2, 42 and any other related sub-templates.
o There may be mixed accounting policy practices on how to classify lease liabilities (e.g. ‘other liability’ or ‘other financial liability’). A separate line would help address this potential inconsistency between reporting entities. This would affect templates 1.2, 8 and any other related sub-templates.
• Similarly, depreciation of right-of-use assets and interest expense on lease liabilities are also not separately disaggregated.
• In absence of specific instructions, we would have to make assumptions on where to record balances during 2019 reporting since IFRS 16 is effective from 1 January 2019.
• Templates 16 and 45 also contain lines where entries could be required in respect of IFRS 16, but we expect this to be immaterial.
IFRS 9 – non-performing exposures:
• Template 18: column 109 and 950 “of which: Instruments with significant increase in credit risk since initial recognition but not credit-impaired (Stage 2)” are under non-performing exposures. In accordance with IFRS 9, only Stage 3 exposures are defined as credit-impaired and therefore non-performing. All Stage 2 exposures will be reported as performing exposures. We propose removing Stage 2 category from non-performing exposures.
Module 2 templates:
• There are two modules of templates: module 1 for all banks to complete and module 2 to be completed by banks with NPL ratio of 5% or above. Banks shall start reporting module 2 templates from the next reference date, when they have exceeded the 5% NPL threshold on two consecutive reporting reference dates, in line with Article 4 of Implementing Regulation (EU) No 680/2014.
• Module 2 templates are complex, the detailed information included within are not readily available in financial reporting systems. Please refer to our answer to question 7. Implementation necessary to meet the requirements is costly and is not justified for banks with low levels and effective management of NPL for which these reporting requirements may never become applicable. We therefore consider the six months implementation period to be not proportionate and suggest extending the implementation timeline for module 2 in cases when threshold is exceeded.