Guidelines on methods for calculating contributions to dgs
Table 2. Minimum weights for risk categories and core risk indicators
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Table 2. Minimum weights for risk categories and core risk indicators Risk categories and core risk indicators Minimum weights
1. Capital 18% 1.1.
Leverage ratio 9% 1.2.
Capital coverage ratio or CET1 ratio 9%
2.1. LCR 9% 2.2. NSFR 9% 3. Asset quality 13% 3.1 NPL ratio 13%
4.1. RWA / Total assets
6.5% 4.2. RoA 6.5%
5.1. Unencumbered assets / Covered deposits 13%
57. The sum of the minimum weights specified in these guidelines for risk categories and core risk indicators amounts to 75% of total weights. DGSs should distribute the remaining 25% among the risk categories laid down in Table 1. 58.
risk indicators and/or by increasing the minimum weights of the core risk indicators provided that the following conditions are met: -
-
where only core risk indicators are used in the calculation method, the flexible 25% weight should be allocated among the risk categories in the following way: ‘Capital’ - 24%; ‘Liquidity and funding’ - 24%; ‘Asset quality’ - 18%; ‘Business model and management’ - 17%; and ‘Potential use of DGS funds’ - 17%; -
the weight of any additional indicator, or the increase in the weight of a core risk indicator, should not be higher than 15%, except for additional qualitative risk indicators representing the outcome of a comprehensive assessment of the member institution’s risk profile and management (included in the risk category ‘Business model and management’) and cases specified in paragraph C1 59. O 59.
Where a core indicator is not used, the minimum weight of the remaining core indicator from the same risk category should amount to the full minimum weight for this risk category.
GUIDELINES ON METHODS FOR CALCULATING CONTRIBUTIONS TO DGS
24 60.
Where there is only one core indicator in a category, and this core indicator is not used, it should be replaced by a proxy with the same minimum weight as the core indicator.
GUIDELINES ON METHODS FOR CALCULATING CONTRIBUTIONS TO DGS
25 Box 3 – Example of using the flexibility in assigning 25% weights among risk categories and core risk indicators Scenario 1 All core risk indicators are used and no additional indicators are included in the calculation method. The flexible 25% of weights is distributed among core risk indicators in such a way that the proportions between minimum weights for risk categories and core risk indicators are retained (for example, additional weight for capital amounts to 6% = 25% × (18%/75%). Risk indicator Minimum
weights (1)
Flexible weights
(2) Final
weights (1) + (2) 1. Capital 18% + 6% 24% 1.1.
Leverage ratio 9% + 3%
12% 1.2.
Capital coverage ratio or CET1 ratio 9% + 3%
12% 2. Liquidity and funding 18% + 6% 24% 2.1. LCR 9% + 3%
12% 2.2. NSFR 9% + 3%
12% 3. Asset quality 13% + 5% 18% 3.1 NPL ratio 13% + 5%
18% 4. Business model and management 13% + 4% 17% 4.1. RWA / Total assets
6.5% + 2%
8.5% 4.2. RoA 6.5% + 2%
8.5% 5. Potential losses for the DGS 13% + 4% 17% 5.1. Unencumbered assets / Covered deposits 13% + 4%
17% Sum 75% + 25% 100% Scenario 2 One of the core risk indicators is not available (NSFR) during a transitional period and no additional risk indicators are included in the calculation method. The minimum weight assigned to the LCR ratio would amount to 18% - the total weight for the risk category ‘Liquidity and funding’ (9% + 9%) increased by further 6% up to 24% - the maximum weight for this category as per paragraph 57. The other weights would be distributed among the risk indicators in a similar way as under Scenario 1. Risk indicator Minimum
weights (1)
Flexible weights
(2) Final
weights (1) + (2) 1. Capital 18% + 6% 24% 1.1.
Leverage ratio 9% + 3%
12% 1.2.
Capital coverage ratio or CET1 ratio 9% + 3%
12% 2. Liquidity and funding 18% + 6% 24% 2.1. LCR 9% + (6% + 9%) 24% GUIDELINES ON METHODS FOR CALCULATING CONTRIBUTIONS TO DGS
26 2.2. NSFR 9% - 9%
N/A 3. Asset quality 13% + 5% 18% 3.1 NPL ratio 13% + 5%
18% 4. Business model and management 13% + 4% 17% 4.1. RWA / Total assets
6.5% + 2%
8.5% 4.2. RoA 6.5% + 2%
8.5% 5. Potential losses for the DGS 13% + 4% 17% 5.1. Unencumbered assets / Covered deposits 13% + 4%
17% Sum 75% + 25% 100% Scenario 3 All core risk indicators are used in the calculation method but the DGS would like to increase (by 5%) the weight of one core indicator (‘Leverage ratio’) because it considers this indicator to be highly effective in predicting distress among its member institutions. Moreover, the DGS intends to include two additional risk indicators (one with a weight of 3% in the risk category ‘Asset quality’, and the second one with a weight of 5% in the risk category ‘Business model and management’). The remaining 12% of flexible weights will be distributed among all the other core risk indicators in such a way that preserves the relationship of the minimum weights assigned to these indicators.
Minimum weights
(1) Flexible weights (2)
Final weights
(1) + (2) 1. Capital 18% + 5% +3% 26% 1.1.
Leverage ratio 9% + 5%
14%
1.2.
Capital coverage ratio or CET1 ratio 9%
12% 2. Liquidity and funding 18% + 3% 21% 2.1. LCR 9%
10.5% 2.2. NSFR 9%
10.5% 3. Asset quality 13% + 3% + 2% 18% 3.1 NPL ratio 13%
15% 3.2. Additional risk indicator (1) N/A + 3%
3%
4. Business model and management 13% + 5% + 2% 20% 4.1. RWA / Total assets
6.5%
+ 1% 7.5% 4.2. RoA 6.5%
7.5% 4.3. Additional risk indicator (2) N/A + 5%
5%
5. Potential losses for the DGS 13% + 2% 15% 5.1. Unencumbered assets / Covered deposits 13%
15% Sum 75% + 13% + 12% 100%
GUIDELINES ON METHODS FOR CALCULATING CONTRIBUTIONS TO DGS
27 Scenario 4 All core risk indicators are used in the calculation method but the DGS would also like to include additional five indicators (one indicator in risk categories ‘Capital’, ‘Asset quality’ and ‘Potential losses for the DGS’, and two indicators in risk category ‘Business model and management’). The weights assigned to risk indicators are presented in the last column in the table below. Risk indicator Minimum
weights
Flexible weights
Final weights
1. Capital 18% + 5% 23% 1.1.
Leverage ratio 9%
1.2.
Capital coverage ratio or CET1 ratio 9%
1.3.
Additional risk indicator (1) N/A + 5%
5% 2. Liquidity and funding 18% 18% 2.1. LCR 9%
2.2. NSFR 9%
9%
3. Asset quality 13% + 5% 18% 3.1 NPL ratio 13%
3.2. Additional risk indicator (2) N/A
+ 5% 5%
4. Business model and management 13% + 10% 23% 4.1. RWA / Total assets
6.5%
6.5% 4.2. RoA 6.5%
6.5%
4.3. Additional risk indicator (3)
N/A + 5%
5% 4.4. Additional risk indicator (4)
N/A
+ 5%
5% 5. Potential losses for the DGS 13% + 5% 18% 5.1. Unencumbered assets / Covered deposits 13%
5.3. Additional risk indicator (5) N/A
+ 5% 5%
Sum 75% + 25% 100%
Requirements for risk indicators 61.
The risk indicators used in the calculation method should capture a sufficiently wide spectrum of sources of risk. 62.
The selection of the risk indicators should be aligned with the best practices in risk management and with the existing prudential requirements. 63.
For each member institution the values of risk indicators should be calculated on a solo basis. 64.
Member State exercises the option given in Article 13(1) of Directive 2014/49/EU to allow the central body and all credit institutions permanently affiliated to the central body, as referred GUIDELINES ON METHODS FOR CALCULATING CONTRIBUTIONS TO DGS
28 to in Article 10(1) of Regulation (EU) 575/2013, to be subject as a whole to the risk weight determined for the central body and its affiliated institutions on a consolidated basis. 65.
Where a member institution has received a waiver from meeting capital and/or liquidity requirements on a solo basis pursuant to Articles 7, 8 or 21 of Regulation (EU) 575/2013, the corresponding capital/liquidity indicators should be calculated at the consolidated or semi-consolidated level. 66.
To calculate values of risk indicators for a given period the DGS should use: -
for the annual income statement) for positions from the income statement; -
the average value between the beginning and the end of the reporting period (for example, average value of total assets from 1 January to 31 December in a given year) for positions from the balance sheet. Part IV - Optional elements of the calculation methods (i) Minimum contribution 67.
According to Article 13(1) of Directive 2014/49/EU, Member States may decide that credit institutions should pay a minimum contribution irrespective of the amount of their covered deposits. 68.
contribution (MC) irrespective of the amount of their covered deposits, the following modified calculation formula should be used to calculate the individual contributions: a.
addition to its risk-based contributions: C i = MC + (CR ×
ARW i ×
CD i × µ) b.
In cases where the minimum contributions are paid only by those member institutions for which their annual risk-based contributions calculated according to the standard formula (as specified in paragraph 35) would be lower than the amount of the minimum contribution: C i = Max {MC ; (CR ×
ARW i ×
CD i × µ)} Where: C i = Annual contribution for a member institution ‘i’ MC
Minimum contribution CR
= Contribution rate (applied for all member institutions in a given year) ARW i
Aggregate risk weight for a member institution ‘i’ CD i = Covered deposits for a member institution ‘i’ µ = Adjustment coefficient (applied for all institutions in a given year). GUIDELINES ON METHODS FOR CALCULATING CONTRIBUTIONS TO DGS
29
69. When setting a minimum contribution, competent authorities and designated authorities should take due care of the risk of moral hazard inherent in setting fixed contributions and the risk of creating barriers to entering the market for banking services. (ii) Reduced contributions for members of an IPS that is separate from the DGS
70. According to Article 13(1) of Directive 2014/49/EU, Members States may decide that members of an IPS pay lower contributions to the DGS. As reflected in recital 12 of Directive 2014/49/EU, this option has been introduced in order to recognise ‘schemes which protect the credit institution itself and which, in particular, ensure its liquidity and solvency’. 71.
Where a Member State avails itself of this option, the aggregated risk weight (ARW) of an institution which is also a member of a separate IPS may be reduced to take into account the additional safeguard provided by the IPS. In this case, the reduction should be implemented by including an additional risk indicator, related to IPS membership, in the risk category ‘Business model and management’ of the calculation method. The IPS membership indicator should reflect the additional solvency and liquidity protection provided by the scheme to the member, taking into account whether the amount of the IPS ex-ante funds, which are available without delay for both recapitalisation and liquidity funding purposes in order to support the affected entity if there are problems, is sufficiently large to allow for credible and effective support of that entity. Additional funding commitments callable upon request and backed by liquidity reserves held by IPS members in IPS central institutions may also be taken into account. The level of the IPS funding should be examined in relation to the total assets of the IPS member institution. (iii) Use of DGS funds for failure prevention 72.
Where a Member State allows a DGS, including an IPS officially recognised as a DGS, to use the available financial means for alternative measures in order to prevent the failure of a credit institution, this DGS may include an additional factor in its own risk-based calculation based on the risk-weighted assets of the institution. In this case, the formula is as follows: C i = CR ×
ARW i × ( CD i
) × µ Where A is the amount of risk-weighted assets in institution ‘i’.
73.
Before the implementation of this additional factor by a DGS, competent authorities should assess, as part of the approval procedure referred to in paragraph 14, whether its introduction is commensurate with the risk of having to intervene in order to prevent the failure of institutions beyond the protection of covered deposits.
74.
According to Article 13(1) of Directive 2014/49/EU, Member States may provide for lower contributions from institutions belonging to low-risk sectors which are regulated under national law. GUIDELINES ON METHODS FOR CALCULATING CONTRIBUTIONS TO DGS
30 75.
If a Member State has, through regulation, imposed restrictions on institutions within a certain subsector in a manner that substantially reduces the likelihood of failure, DGS contributions from these institutions may be proportionately reduced on the basis of adequate motivation. 76.
based on empirical evidence indicating that within these low-risk sectors the occurrence of failure has been consistently lower than in other sectors. Agreement on reduced contributions should be made by the competent authority in cooperation with the designated authority, after consulting the DGS. 77.
risk indicator into the risk category ‘Business model and management’.
Title III - Final Provisions and Implementation 78.
incorporating them in their supervisory processes and procedures by the end of 2015. From that date on, contributions to be raised by DGSs should comply with these guidelines. 79.
appropriate authorities establish that a DGS is not yet in a position to comply with Article 13 of Directive 2014/49/EU by 3 July 2015, these guidelines should be implemented by the new date set by these authorities, and in any case no later than by 31 May 2016.
GUIDELINES ON METHODS FOR CALCULATING CONTRIBUTIONS TO DGS
31 Annex 1 - Methods to calculate Aggregate Risk Weights (ARW) and determine risk classes
The ‘bucket’ method Individual risk indicators 1.
In the ‘bucket’ method, a fixed number of buckets should be defined for each risk indicator by setting upper and lower boundaries for each bucket. The number of buckets for each risk indicator should be at least two. The buckets should reflect different levels of risk posed by the member institutions (for example, high, medium, low risk) assessed on the basis of particular indicators. 2.
There should be an individual risk score (IRS) assigned to each bucket. If the value of the risk indicator is higher (lower) than the upper (lower) boundary of the highest (lowest) bucket, it should be assigned the IRS of the highest (lowest) bucket. 3.
The buckets’ boundaries should be determined either on a relative or absolute basis, where: - when using the relative basis, the IRSs of member institutions depends on their relative risk position vis-à-vis other institutions; in this case, institutions are distributed evenly between risk buckets, meaning that institutions with similar risk profiles may end up in different buckets; - when using the absolute basis, the buckets’ boundaries are determined to reflect the riskiness of a specific indicator; in this case, all institutions may end up in the same bucket if they all have a similar level of riskiness. 4.
ensure there is sufficient and meaningful differentiation of member institutions. The calibration of the boundaries should take into account, where available, the regulatory requirements applicable to the member institutions and historical data on the indicator’s values. The DGS should avoid calibrating the boundaries in such a way that all member institutions, despite representing significant differences in the area measured by a particular risk indicator, would be classified into the same bucket. 5.
indicates the lowest risk and 100 the highest risk.
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