Transcript Bank Resolution and Resolution An European Framework

Proportionality
How did EU legislators address the need
for proportionality in the CRR / CRD text
and in the mandates of EBA in own funds ?
Erik Van Der Plaats
EBA Proportionality workshop – Own Funds session
22 October 2013
07/07/2015
Summary
Introduction
1/ Proportionality principle : elements of definition
2/ How did legislators address this principle in the
Regulation and the Directive ?
3/ How did legislators address this principle in the
mandates they gave EBA ?
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Introduction : scope of BASEL III vs scope of
CRR/CRD4
• Scope Basel: large, internationally active banks
– Measures proportionate for these banks
• EU: about 8.000 banks, only some of those large, internationally active
measure not proportionate for ALL banks
• Internal market
Need for level playing field
Single Rule book (CRR/CRD apply to all banks)
Basel III rules for large, internationally active
banks have to be adapted for smaller banks to
satisfy principle of proportionality
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1/ Proportionality principle : elements of definition
2/ How did legislators address this principle in the
Regulation and the Directive ?
3/ How did legislators address this principle in the
mandates they gave EBA ?
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4
1/ Elements of definition :
There are two aspects to consider when
defining the proportionality principle :
• Having regard to the aim pursued : Article 5(4) of the
Treaty on European Union
"Under the principle of proportionality, the content and form of Union action
shall not exceed what is necessary to achieve the objectives of the Treaties."
• Having regard to the types of institutions and activities
to which the rules will apply :recital 46 in CRR
"The provisions of this Regulation respect the principle of proportionality,
having regard in particular to the diversity in size and scale of operations
and to the range of activities of institutions. […] Member States should
ensure that the requirements laid down in this Regulation apply in a manner
proportionate to the nature, scale and complexity of the risks associated
with an institution's business model and activities. "
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Principle of Proportionality
Article 5(4) of Treaty on European Union
"Under the principle of proportionality, the content and form of
Union action shall not exceed what is necessary to achieve the
objectives of the Treaties."
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Who is responsible for the respect of this
principle according to recital 46 ?
• The legislators : when writing the Regulation and the
Directive;
• The Member States regarding the application of the
Regulation;
• The Commission : regarding the delegated and implementing
acts and the regulatory and implementing technical
standards;
• The EBA : in the drafting of regulatory and implementing
acts.
Besides, the ECJ would determine whether the principle has
been respected or not.
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1/ Proportionality principle : elements of definition
2/ How did legislators address this principle in the
Regulation and the Directive ?
3/ How did legislators address this principle in the
mandates they gave EBA ?
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2/ In the CRR / CRD :
The main aim of legislators : increasing
quality and quantity of own funds
They applied the principle of proportionality in few fields:
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Disclosure
Eligibility criteria of CET1 instruments
Grandfathering rules
Capital buffers definition
Waivers
Rules of consolidation
On what considerations?
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the diversity in size and scale of operations and the range of activities of
institutions
the nature, scale and complexity of the risks associated with an institution's
business model and activities
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Disclosure
• Article 13 CRR proportionates the disclosure requirements on
grounds of size and importance of the institutions, and states
that it is only required for :
• EU parent institutions on a consolidated basis
• Significant subsidiaries
• Subsidiaries of material significance for their local market
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Eligibility criteria of CET1 instruments
• Legislators took into consideration that mutual and
cooperative banks capital instruments have specific features
which stem directly from a set of national legislative
constraints they have to abide by.
• Article 29 CRR amends therefore CET1 eligibility criteria of
article 28 :
• Cap on distribution: is forbidden for CET1 instruments, but
accepted for mutuals;
• Redemption : should be at the initiative of the issuer, but for
mutuals it can be at the initiative of the investors (members);
• Differentiated rights to the net assets or to reserves : some
cooperative capital instruments do not give the same rights to
the rerserves or to the net asset.
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Grandfathering rules
• Legislators took into consideration the fact that some
European banks were just recovering from the financial crisis
and needed capital instruments held by Member States;
• Therefore, in Art 483, legislators set specific rules to
recognise temporarily (until Dec. 2017) state aid instruments
in CET1;
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Capital buffers definition
• CRD IV defines a set of capital buffers
• The level of the combined buffer requirement will
depend on specific risks or specific features of the
institutions and their activities :
• Countercyclical buffer
• Systemic risk buffer : "must not entail disproportionate
adverse effects on the […] financial system".
• G and O-SII buffers : depend on the some criteria :
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Size
Interconnectedness
Complexity
Significance of cross-border activity
Importance for the economy of the Union and the Member States
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Waivers
• Article 7 CRR : waiver of own funds requirements on an
individual basis under certain conditions.
• Article 79 CRR : temporary waivers to accomodate and allow
the application of financial assistance operation plans.
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Rules of consolidation
• CRR authorises specific rules for decentralised
banking structures :
• Networks in which banks are permanently affiliated to a
central body
• Banks connected via institutional protection schemes
• Banking groups with cross-guarantee schemes in place
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Proportionality & Business Model: The case
of mutuals, cooperatives and savings banks
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Definition of capital: cap, multiple, redemption
Special rules for decentralised banking structures:
• networks in which banks are permanent permanently affiliated to a central body
• banks connected via institutional protection schemes
• banking groups with cross-guarantee schemes in place
The rules on remuneration have been adapted to accommodate cooperatives which are
not able to pay part of their managers variable remuneration in shares, as foreseen by the
general rule
Basel has adopted specific rules for the liquidity systems of cooperative banks, which allow
for a preferential treatment for certain deposits. The rules on Liquidity in the CRR will
be recalibrated after a thorough review and monitoring by EBA, which will take different
business models into account.
The same applies to the introduction of a leverage ratio in 2018: The will be a thorough
review that is expected to capture the broadest range of impacts, including those on the
business model of cooperative banks. Only after this review the final calibration of the
leverage ratio will be carried out.
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1/ Proportionality principle : elements of definition
2/ How did legislators address this principle in the
Regulation and the Directive ?
3/ How did legislators address this principle in the
mandates they gave EBA ?
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3/ In the mandates given to EBA :
• Some mandates explicitly refer to proportionality :
• The meaning of operationally burdensome (art 76(3)) (RTS –
Part 1)
• The concept of minimal and insignificant for the purpose of
identifying qualifying AT1 and Tier 2 capital issued by a SPV
(RTS – Part 1)
• Some mandates give the opportunity to apply the rule
in a proportionate way :
• By introducing a hierarchy of ways to evaluate forseeable
dividends (RTS – Part 1)
• By introducing a structure-based approach to determine the
indirect holdings (RTS – Part 3)
• Use of broad market index : the correlation shall be avoided, but
EBA took into consideration the fact that in some Member States
there could be very few contributors to an index. (RTS – Part 3)
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