Brussels, 24/07/2014 (Agence Europe) - Germany and Spain have published a “non-paper on alternatives to move forward on contributions to the Single Resolution Fund”. The European Commission will be publishing draft legislation on calculation of bank contributions in September.
The Commission wants technical work to be completed this month in order to decide how to share out among banks in the EU contributions to the €70 billion to be paid in ten years to the eurozone bank resolution fund, SRF, as part of banking union (see EUROPE 11126).
One of the most discussed aspects of this is how to deal with small banks under proportionality: “There is a general agreement that there should be a specific treatment recognising the situation of small banks, but without significant impact on the distribution of contributions between the banking sectors of different member states”, said Olivier Guersent, Deputy Director General at the European Commission, at a hearing at the European Parliament on Tuesday 22 July.
Small banks shall be deemed to be those with liabilities minus capital and covered deposits (under the BRRD directive) of below €300 million and whose total assets are below €1 billion. Half of banks in the EU28 fall into the first category, while the second will ensure that banks with large deposits are not listed as small banks. Once the list of small banks has been drawn up, these banks will pay an annual lump sum from 2015 onwards into the SRF. The size of the lump sum will depend on the scale of the bank's liabilities.
In a joint “non-paper” published on 15 July 2014, Germany and Spain say this approach is “proportionate” as long as it takes into account the following: - in order to avoid cliff effects, the two countries suggest “applying the lump-sum payment to the first €300 million BRRD base to all banks”; - “a solution must be found to ensure that small entities subject to the lump-sum payment do not contribute more than they should under the ordinary 'flat fee' formula”; - “all small banks applicable to the lump-sum treatment should be excluded from the risk adjustment (no exceptionality fallback)”; - a solution must be found to the problem of small investment firms contributing to the national fund “since they are very small and they do not pose any systemic risk to the financial system”.
Under the Commission's proposal, the financial contributions to the resolution funds will be calculated and paid bank-by-bank, even for big bank groups. In order to deal with the integrated nature of bank groups in the EU, the Commission is suggesting that intergroup liabilities be ignored in the calculations. Guersent explained the criteria to be met to allow exclusions of this type: “We are heading towards solo contribution taking into consideration the integrated nature of some banking groups. We consider extending specific treatment to intragroup liabilities between institutions that are part of same group. Each institution should be established in the EU; each institution should be subject to an appropriate centralised risk evaluation; no practical legal impediment of prepayment; intragroup liabilities that are not 'bail-in-able' should not be excluded from the calculation; NRAs or SR Board to verify that conditions are met”.
Berlin and Madrid say: “It has been proposed to exclude the intergroup liabilities (…). In a spirit of compromise, we are prepared to discuss double-counting issues along the following conditions: an explicit commitment” from a bank's shareholders and creditors to any bail-in detailed in the recovery and resolution plans that each bank must draw up; - “the definition of inter-group exposure must be consistent with existing European regulation (BRRD, EMIR Regulation). The solution must ensure equal treatment of banking structures”; - “some liabilities are excluded from bail-in and consequently cannot be bailed-in or cannot be deducted from the calculation of the financial contribution”; - “only those intergroup liabilities that are properly audited can be subject to deduction”.
Germany and Spain say that the idea mooted by some countries “to allow netting of derivatives beyond accounting rules is not acceptable to us because it would lead to significant redistributive effects and distortions between banking sector structures of the member states. However, we encourage the Commission to estimate the effects of different accounting treatments of derivatives to allow a level playing field across the participating member states”.
Risk-based component of the contribution. For banks deemed to be small, the Commission proposes that financial contributions to the resolution funds shall include a basic contribution based on size-related risks. This basic contribution would be determined from a bank's total liabilities minus capital and covered deposits, which reduce risk. It would be adjusted in line with other risks, divided into four categories.
The four recommended risk categories (and inherent indicators) used to decide whether the basic risk-related contribution should be increased or decreased are: - 1) exposure to certain assets (50% weighting): share of risk-weighted assets compared with total assets (RWA/total assets), funds covered by “bail-in” beyond a certain level, leverage ratio, optimum capital ratio (CET1); - 2) stability of sources of financing (20% weighting): ratio of LCR liquidity, NSFR ratio; - 3) a bank's importance to the stability of the financial system (10% weighting): proportion of total exposure to other financial institutions in the EU; - 4) additional risk factors (20% weighting) to be specified by the competent authority or the single resolution board: scale of market activity and exposure to off-balance sheet operations, complexity of legal structure, existence of public bailout, membership of a financial protection scheme.
Taking account of these four risk categories, the basic risk-related financial contribution may be reduced by up to 20% or increased by 50%.
Germany and Spain back this approach as making the calculations easier and more predictable. They say that “for very large and systemically important banks, the risk adjustment should have a floor”. The weighting under the first risk category (exposure to risks) should be reduced in order to increase the weighting of the other risk categories. For the second category (stability and variety of sources of funding), they call for the reintroduction of the total assets/national GDP ratio. Finally, the two countries “strongly object to leaving discretion about the application of risk factor 4 (additional risk factors) to the Single Resolution Board. All risk factors and their weightings should be clearly defined in the Delegated Act” to be drawn up by the Commission. (MB)