Transcript Diapositive 1

“Own Funds” and
Proportionality:
EBA Proportionality Workshop
Own Funds Session
22nd October 2013
Christian Lajoie
AGENDA

Proportionality: a challenge for regulation

The “own funds” case

Own funds requirements
• Pillar 1
• Pillar 2
• Pillar 3



Own funds definition
Proportionality: a natural component of supervision
Conclusions
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Proportionality : a challenge for regulation
A conceptual challenge…
 Multiplicity of angles: objectives, risk, size, business
models, group or standalone dimension…
 Antagonism between ready-to-wear and made to
measure, simplicity and adaptability, rule and flexibility
…with little playing ground
 Level 1 texts are already very prescriptive and detailed
 Few specific mandate or areas are explicitly left open to
EBA to introduce proportionality and / or materiality
concepts
 Major RTS on own funds and reporting have already been
issued
…and yet some expectations
 Proper calculation methodologies: risk exposure for
synthetic holdings, for example
 Reporting burden
 Group dimension (waivers, pillar 2 and 3)
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“Own funds” requirements: Pillar 1
•
1
RWA methodologies were set to meet the
proportionality principle with the adoption
of the graded approaches. Any move away
from internal modeling would reduce
appropriateness
Please, no change
•
2
Pillar 1 calculations should be kept at a
reasonable level of complexity
• Expanding standardized approaches is neither
leading towards more accuracy nor more
simplicity
• The lack of consistency will be corrected by the
“single rule book” and the “single supervisor”
• Marginal accuracy benefit derived from
increasingly complex calculation may be
annihilated by risk of errors
• Complex calculations applied to highly granular
elements do not always convey relevant
information
• Frequencies (e.g. bi-annual instead of
quarterly)
•
3
Pillar 1 framework gives rise to important
reporting challenges. Proportionality
could be found in adjustments of
reporting conditions
• Data granularity (e.g. some reports or portions
of reports may be waived)
• Depending on :
 institutions’ risk profile
Specific
session
 existence of consolidated supervision
“Own funds” requirements: Pillar 2

Pillar 2 is typically the chosen field for proportionality or appropriateness.
It has been construed as such

EBA should thus refrain to issue overly prescriptive “one size fits all”
standards or guidelines with respect to Pillar 2. Its role is rather to elaborate
tools and methodologies for the benefit of the supervisor community

The “Group” dimension should be accepted as a possible risk
mitigating factor, depending on the group’s own structure and business
organisation
Is it relevant to expect a subsidiary representing 0,06% of the RWA of a 1st tier banking
group to produce “reverse stress tests” as part of its usual Pillar 2 process ?

Group diversification as well as specific risk management are truly improving
the subsidiary risk profiles. A stand alone approach is not appropriate in
many case.

Group level ICAAPs should be taken into account by Supervisors when they
consider subsidiaries’ Pillar 2 approaches.
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.
“Own funds” definition

Level 1 texts are already very prescriptive

Mandates given to EBA are narrow, particularly as far as
proportionality is concerned

Definitive draft RTS have already been issued and
significant proportionality issues raised by stakeholders
were a level 1 text matter:


Proportionality should not be tackled by additional complexity. On the
contrary, proportionality to stakes should contribute to reduce this
complexity, for example deduction rule for own shares and
participations in financial institutions indirectly held in the banking book
(The contemplated structure based approach is a commendable
attempt but a simple threshold in % of own funds would be more
effective)
Q&A process is most probably the best way to address
remaining issues
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.
Proportionality: a naturel component of supervision

An efficient supervision should be able to use
information to identify material risk areas in order to
concentrate on relevant issues. Expert judgement and
qualitative analysis are key in such a process

A purely or mainly quantitative approach may be
detrimental to an effective supervision

The EBA should consider as a duty to assess the NCA’s
supervisory burden on institutions with the view to
maintain proportionality between means and results
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.
Conclusions
 Proportionality is already considered by the current regulation,
including “own funds”. Going further is just using common sense for
implementation and supervision
 Regulators have been working for more than 5 years to overhaul the
regulatory framework (which was not enforced when the crisis occurred).
It is time to stabilize, implement and supervise smartly.
 Stabilizing through a straightforward, unique and perfect single rule
book. This is the responsibility of the EBA on the basis of the CRD
 Implementing regulation in good faith and complying with its
intent. This is the duty of banks.
 Supervising with independence, courage, flexibility and
consistency. This is the responsibility of the BCE and BoE.
 There is no need nor efficiency to tackle with proportionality through
additional regulation, at least as far as “own funds” are concerned
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