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ESBG Summary of Comments on CEBS Consultation Paper CP16

Core Content

The European Savings Banks Group (ESBG) has provided detailed comments on the CEBS Consultation Paper CP16, which outlines the second part of CEBS' advice to the European Commission on large exposures (LE) regulation. The ESBG generally supports the CEBS approach but highlights several areas where modifications are necessary to ensure the LE regime is effective, proportionate, and aligned with the CRD (Capital Requirements Directive).

Main Views and Key Points

1. General Remarks

• ESBG appreciates CEBS' efforts to improve the EU LE regime and commends the structured methodology and clear proposals.
• They believe the advice should be aligned with the Better Regulation principles.
• ESBG urges caution against rushed regulatory responses, especially in light of recent financial market turmoil, and calls for further analysis of the root causes.

2. Question 1 - Impact Assessment of Policy Options

• ESBG supports Option 6 (amended limit-based backstop regime) as the most suitable approach for the LE regime.
• They oppose Option 2 (Pillar 2 approach), arguing that it is premature and would create complexity.
• ESBG suggests that the review of the current LE regime should not be biased by recent events and that the focus should remain on the regime's original objective: to prevent disruption from single-name risks.

3. Question 2 - Control and Interconnectedness

• ESBG supports the interpretation of 'control' as an important criterion.
• They are concerned about the proposed 'interconnectedness' criteria, arguing that it would create practical challenges, uncertainties, and additional reporting burdens.
• They recommend removing the interconnectedness criterion from the final advice, as it is not appropriate for a backstop regime and may contradict the principles of simplicity and proportionality.

4. Question 3 - Exposure Calculation (Gross vs. Net)

• ESBG believes that exposures should be calculated net of accounting provisions and value adjustments.

5. Question 5 - Conversion Factors

• ESBG supports the use of conversion factors between 0% and 100% in the LE regime.
• They argue that the current CRD conversion factors are conservative and appropriate for the LE regime, especially considering the sudden nature of unforeseen events.

6. Question 7 - Principles-Based Exposure Calculation

• ESBG supports the use of principles-based approaches for exposure calculations.
• They believe that such an approach would allow for harmonisation of risk monitoring and reporting, reducing costs and improving efficiency.

7. Question 8 - Structured Transactions and Underlying Assets

• ESBG agrees with the principles-based approach for identifying credit risk in structured transactions.
• They object to Example 3 in Annex 3 of CP16, as it is limited in scope and not useful for the industry or supervisors.

8. Question 9 - Mitigation Techniques

• ESBG opposes the idea of treating mitigation techniques differently from the capital requirements framework.
• They argue that such a distinction would lead to disproportionate costs for institutions and should be aligned with the CRD.

9. Question 10 - Recognition of CRM Techniques

• ESBG supports Proposal 1 and opposes Proposals 2 and 3, which they believe would lead to high implementation and operational costs.

10. Question 12 - Collateral Treatment

• ESBG supports the substitution approach for institutions using the simple method, aligning with the CRD.
• They believe that physical collateral should not be treated differently from other types if liquid markets can be proven.

11. Question 13 - Intra-Group Exposures

• ESBG supports the exemption of intra-group exposures from the LE regime, as outlined in Article 113.2 of Directive 2006/48/EC.
• They argue that imposing limits on intra-group exposures would undermine liquidity management and create competitive distortions, especially for smaller Member States.

12. Question 15 - Different Rules for Trading and Non-Trading Books

• ESBG supports different rules for trading book exposures, given their short-term and profit-oriented nature.
• They believe the current rules are well-implemented and do not require changes.

13. Question 21 - Scope of Application

• ESBG supports exemptions for intra-group exposures and sovereigns and international organizations from the LE regime.
• They oppose case-by-case exemptions, as they may lead to competitive distortions and hinder convergence.

14. Question 22 - Treatment of Intra-Group Exposures

• ESBG supports national discretion in defining intra-group limits, as per Article 113 of Directive 2006/48/EC.
• They suggest no limits should apply to:
  • Intra-group exposures within the same Member State
  • Intra-group exposures within the EEA
  • Intra-group exposures in non-EEA jurisdictions

15. Question 25 - General Agreement

• ESBG agrees in general with CEBS' proposal but stresses the need for proportionality and consistency across institutions.

16. Question 26 - Exemption of Sovereigns and International Organizations

• ESBG supports the automatic exemption of exposures to sovereigns and international organizations from the LE regime.

17. Question 30 - Cost-Benefit Analysis

• ESBG objects to the proposed differentiation between large and small banks, arguing it could lead to competitive distortions and complexity.
• They emphasize that the 25% limit on interbank exposures provides market confidence and should be maintained.

18. Question 31 - Interbank Exposures

• ESBG opposes a 25% limit on all interbank exposures, arguing that it would increase operational costs and liquidity risk.
• They suggest exempting short-term interbank exposures (up to 1 year) and recommend supervisory reporting to monitor such exposures.

19. Question 34 - Non-Trading Book Breaches

• ESBG supports the principle of not breaching limits, except in exceptional circumstances.
• They advocate for transitional measures and deduction of excess exposures from own funds, but not the full amount.

20. Question 35 - Reporting Options

• ESBG supports supervisory reporting with immediate indication of breaches.
• They oppose Pillar III reporting, citing confidentiality concerns and the inability of the market to monitor compliance effectively.

21. Question 36 - Predefined Reporting Templates

• ESBG supports predefined reporting templates as long as they do not increase administrative burden.
• They recommend maintaining current exclusions under Article 110(2) of the CRD.

22. Question 37 - Elements to be Reported

• ESBG believes that most of the proposed elements are already applied in different Member States.
• They encourage consultation on the reporting elements to ensure consistency and efficiency.

23. Question 38 - Good Credit Management

• ESBG supports the recognition of good credit management in the LE regime.
• They believe that further development of this concept could introduce unwanted complexity and that exemptions for advanced institutions are not justified.

Conclusion

The ESBG emphasizes the need for a limit-based backstop regime that is simple, proportionate, and aligned with the CRD. They advocate for exemptions for intra-group exposures, sovereigns, and short-term interbank exposures, while supporting principles-based approaches for risk assessment and reporting. The group also highlights the importance of maintaining national discretion and avoiding competitive distortions.