We consider both the duration of the relationship (a) and diversity of products (c) to be relevant criteria for assessing the strength of the relationship.
The long term borrowing (b) can also be a relevant criterion for determining relationship however we believe this point (b) can be extended in order to include additional factors. Basically the long term borrowing loan is a type of contractual agreement that creates the foundation for a long term relation with the bank. We believe the same effect can be achieved also in the case of other contractual agreements such as:
- employment contracts – established relationship with the employees of the bank
- salary/pension contracts – established relationship with clients that have a contractual agreement for regular payments of the salary/pension in the bank accounts (in our view the stability benefit of these contracts should be considered at client level).
Therefore, we propose the point b) to be extended to include all contractual agreements that create the basis for a medium to long term relationship with the client. The positive impact of specific contractual agreements should be evaluated by banks and reported to the national competent authorities.
In order to insure the proposed criteria (a-c) covers efficiently the diversity of bank practices at EU level, it is important to allow for a certain degree of flexibility at national level regarding the implementation details. This would allow the calibration of the relationship intensity based on specific characteristics of the local financial system and also insure a level playing field at national level.
Specific characteristics of the financial system that can influence the criteria for established relationship:
- minimum contractual duration can be influenced by the cost and time necessary for changing the bank, the intensity of competition, the banks’ focus on client versus product oriented strategies, etc;
- minimum number of products can be influenced by the diversity of products in the financial system, perceived importance of each product, specific contractual clauses (eg: possibility for early withdrawal of deposits can influence the relationship in stress conditions), etc.
- contractual agreements are influenced by national regulations, banking system specifics (eg: use of salary/pension payment agreements at system level)
In principle we agree that payment frequency at account level is a relevant criterion for identifying a transactional account. However, the accounts activity depend on country specific factors such as cost of payments, diversity of payment services, popularity of online banking, etc. Therefore implementation details should be calibrated at national level.
In our view, the details for the application of the proposed criteria should be determined based on bank level information of client and product behavior. The assessment should be done separately for natural persons and SME as their operational and saving profile is different and therefore it is difficult to generalize the contribution of the contractual agreements and products to the relationship intensity. The identification of active products should also consider the nature of the product as there is a significant difference in activity for transactional products compared to saving products.
In our view, the insurance scheme is one of the most efficient methods to decrease deposits outflows in a stress scenario therefore the maximum amount covered by the scheme in each country should be used for separating stable deposits from volatile deposits. Considering the CRR text already makes a distinction between insured and uninsured deposits we believe EBA methodology should focus only on very high value deposits and assign one level of risk for these deposits (high risk). In our view, the cutoff point for the very high value deposits should be determined by the national supervisor based on the characteristics of the retail deposits structure in the banking system and the relative size of the banks. The cutoff should be determined in absolute value (eg: 500.000 EUR) as a value relative to the bank size would create an unequal level playing field between banks by allowing a larger bank to consider less outflows for the same client.
The relationship between High Value and Rate Driven deposits is very strong as most of the High Value deposits have negotiated features, therefore can be assumed to be Rate driven. This overlap also leads to a double counting of risk factors in the scorecard (tired buckets given by the combination of risk factors) and should be avoided by clarifying that High value deposits should not be included also in the Rate driven category.
While we generally agree that depositor might generate outflows in search for yield, we believe the Rate driven and preferential conditions risk factor will be difficult to implement due to the diversity of products, policies and market conditions in the banking system.
Banks made efforts to change their strategy from product oriented to client oriented model. This change led to a design of customized services offered to clients that include both different interest rates, transaction fees and other services like credit cards with special features, online banking, investment advisory, etc. To access the customized services a client may pay a fee or fulfill a minimum set of conditions like turnover of liability balance with the bank. This development impacts both rate driven and preferential conditions proposed methodology because it is not sufficient to compare the interest rates of similar products in peer banks to determine if a deposit is rate driven. All the costs and benefits of the customized package a client receives have to be considered for this purpose. Generally, this cannot be done as most of the conditions are not publicly available.
In addition, banks developed products with attached options in order to provide better services to clients. For example, a product might allow the depositor to make an early withdrawal of a fixed amount without penalty during the lifetime of the deposit. This product will reflect the price of the option in the interest rate and cannot be used as a reference for peer banks unless adjustments are made to the interest rate.
Furthermore, in case the Rate driven criteria is applied in the current form there is a risk to incentivize banks to change their strategy and offer additional benefits to interest rates in order to attract clients. Also, there is a risk to encourage non-standard deposits that are hard to compare against a benchmark. This will have the negative effect of decreasing transparency in the market.
In conclusion we propose changing the criteria for the Rate driven risk factor in order to cover only products with negotiated features at client level. This will insure the risk factor will capture the deposits where the client made a personal effort to secure a higher rate, therefore sending a clear message of yield importance.
We agree that client residence can be a significant risk factor in stress conditions and the outflows associated with this risk factor should be considered.
We agree with the benefit of the more precise assessment of retail deposits behavior based on risk factors that are historically linked to high outflows in stress conditions. Our experience also suggests retail deposits are not homogenous from a behavior point of view and some of the risk factors proposed in the Guidelines are good indicators of higher outflows. However, we have some concerns regarding costs associated with the complexity of the methodology, the relevance of some factors and the potential negative impact in the retail deposits’ market generated by the incentives embedded in the proposal.
1. Complexity of methodology
Considering the objective to implement a standardized approach for retail deposits’ outflows we believe the proposed methodology is rather complex and will create difficulties both for calibrating the outflows associated with the scorecard (tired buckets given by the combination of risk factors) and negatively impact its utilization as a tool for liquidity risk management.
The scorecard can be significantly simplified by using a single risk level (high risk) for all risk factors and determine the associated outflows based depending on the number of risk factors present at deposit level.
2. Risk factor relevance
Currency of deposits risk factor
In our opinion, the EUR denominated deposits from EU countries that are not part of the Euro area should not be included in the risk factor as EUR is widely used by residents for savings, transactions and price reference. In addition, these countries are in the process of adopting EUR therefore the use of EUR currency is expected to increase as the transition date is closing. For EU emerging economies, the EUR deposits can even prove to be more stable in a stress scenario as the local currency might have a significant depreciation risk.
3. Incentives with negative impact
Fixed term deposits
Also, we are concerned with the costs associated with the incentives embedded in some risk factors. For example the fixed term maturity risk factor can encourage a migration of balances from short term deposits to saving accounts and current accounts. This might have a negative impact in the term structure of deposits and will change the behavior of saving accounts and current accounts in stress conditions. Since the balances will move from a product with maturity on a product without maturity, the volatility of these balances might actually increase in times of stress. The incentives affect both natural persons and SME deposits however for SME the impact is more significant since the term structure of deposits is focused on shorter tenors.
High risk distribution channels
We agree traditional branch driven banking creates a strong relationship with the client and can have a positive impact in deposit stability. However, technological advances increased the comfort of the client by allowing a part of the services to be accessed online. In order to benefit both from strong client relationship and improve customer comfort banks changed the business model to provide personal relationship for more complex services and provide the basic services trough online channels. As long as the services are not provided only on internet we believe the risk factor should not apply as it discourages the development of online services with a negative impact both on operational costs and organizations’ customer centricity.