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AECM Position Paper Summary: CEBS Consultation on Article 57 (a) of Directive 2006/48/EC Recast

Core Content

AECM (European Association of Mutual Guarantee Societies) has provided its position on the CEBS consultation paper regarding the implementation of guidelines for instruments referred to in Article 57 (a) of the Directive 2006/48/EC recast. The paper is part of a broader review of the Basel II framework and the revision of the Capital Requirements Directive (CRD), with a deadline for comments set on 16 April.

AECM represents mutual and cooperative entities, as well as public institutions, that provide credit default guarantees for SMEs (Small and Medium-sized Enterprises) who lack sufficient collateral. These organizations play a crucial role in facilitating SME access to credit, as evidenced by the following statistics:

• In 2009, AECM members issued over 853,000 guarantees totaling more than €33 billion.
• By 31 December 2009, AECM members held over 2 million guarantees with a value of €70 billion for more than 1.8 million customers.
• These customers represent approximately 8% of all SMEs in the EU, with some countries (e.g., Italy) seeing this figure rise to 25%.

Main Views and Key Points

AECM emphasizes that guarantee societies possess extensive qualitative information about SMEs, which can complement the quantitative assessments made by banks based on balance sheets. This information enhances the ability to accurately evaluate SME creditworthiness.

Own Funds Instruments

AECM highlights that guarantee societies' own funds are sourced from two main categories:

• Shares: These can be issued by shareholders (such as the State, banks, industry associations, or companies) or by the loan beneficiaries themselves.
• Mutual Guarantee Funds: These are contributions made by shareholders or beneficiaries and are directly tied to individual loan guarantees.

Both types of instruments are specific to individual loan operations and are subject to strict reimbursement rules. Unlike traditional bank deposits, these funds cannot be freely withdrawn and are directly linked to the risk of the specific loan.

Tier 1 Capital Treatment

AECM argues that these own funds instruments should be treated as Tier 1 capital because they are directly loss-absorbent for the duration of the underlying risk. They are not general capital but are specifically tied to the risk of the loan they guarantee.

Specific Comments on CEBS CP33

• AECM welcomes the clarification in CEBS CP33 that recognizes cooperative and mutual shares as own funds instruments.
• The 10 criteria outlined in the consultation paper are generally considered measured and adequate for determining whether such shares qualify as own funds.
• However, AECM notes a concern regarding the conditionality of redemption (Criterion 4). In some countries, shareholders have the right to redeem their shares only under specific conditions, such as:
  • After the guarantee has matured at face value.
  • After pro-rata losses have been deducted.
  • With no rights to reserves or dividends.
  • After the beneficiary has withdrawn from the guarantee society.

AECM clarifies that this conditional redemption is not equivalent to unconditional redemption as defined in Criterion 4, and thus should not be considered a violation. The redemption process is intimately tied to the specific loan risk, making it a loss-absorbent mechanism.

Additional Consideration

AECM also points out that in some countries, shareholders have the right to cancel a limited company with a perennial period of termination, but this is not equivalent to a redemption or buy-back under the CRD framework. The process involves other shareholders deciding the continuation of the company, and the share may be transferred or collected by the company if needed.

Conclusion

AECM supports the CEBS consultation paper and encourages the Basel Committee and the European Commission to consider the specific treatment of cooperative and mutual shares in their ongoing work on the Basel own funds framework and the CRD revision. This treatment is aligned with the legal and operational reality of guarantee societies and is essential for accurately reflecting their role in the financial system.