Guidelines on methods for calculating contributions to dgs
Part IV (Optional elements of
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Part IV (Optional elements of
the calculation methods) is amended as follows : Previous text of paragraph 70 is replaced by paragraphs 70- 73:
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’. 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.
GUIDELINES ON METHODS FOR CALCULATING CONTRIBUTIONS TO DGS
71 Comments Summary of responses received EBA analysis Amendments to the proposals 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. GUIDELINES ON METHODS FOR CALCULATING CONTRIBUTIONS TO DGS
72 Comments Summary of responses received EBA analysis Amendments to the proposals (v) Use of DGS funds for failure prevention 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, such DGS may include in its own risk-based calculation an additional factor based on the risk-weighted assets of the institution. In this case, the formula is as follows: C i
i × (CD
i + A ) × µ Where A is the amount of risk-weighted assets in institution ‘i’ . 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.
GUIDELINES ON METHODS FOR CALCULATING CONTRIBUTIONS TO DGS
73 Comments Summary of responses received EBA analysis Amendments to the proposals
One respondent requests that the guidelines should take into account every risk mitigating mechanism of an IPS that can be quantified an examined by the national competent authority. The EBA considers that the guidelines already include sufficient flexibility to take these items into account. No amendment
Practical application of the guidelines: One respondent stated that fundamental principles based on CAMEL approach and practical experience from the work of established guarantee schemes have been taken on board. Two respondents wrote that the guidelines should be as simple and as practical as possible.
The EBA welcomes this positive feedback. N/A
Three respondents expressed concerns that the concepts underlying the guidelines are insufficiently solid and lack empirical validation (see also answers to Q.2.) The EBA considers that the guidelines benefited from the expert know-how and practical experiences in Member States. For this purpose, the EBA conducted a test exercise addressed to competent authorities across the EU with the cooperation of national DGSs. The responses to the test exercise and further views of various stakeholders, informed the current shape of the guidelines. In addition, Article 13(3) of Directive 2014/49/EU envisages further review of these guidelines once more empirical evidence is available. No amendment
One respondent stated that the risk classification of an institution should only be disclosed to the institution
Principle 7 of the guidelines already addresses the issue of protection of
No amendment GUIDELINES ON METHODS FOR CALCULATING CONTRIBUTIONS TO DGS
74 Comments Summary of responses received EBA analysis Amendments to the proposals itself and not to the public. confidential information.
Two respondents stated that the proposed contribution calculation only takes into account the objective of building up sufficient funds.
Paragraph 17 states that the objective of a contribution scheme is not only to reach the target level, but also to ensure that the cost of financing DGSs is borne by credit institutions and to provide risk minimising incentives. Core indicators were chosen with setting the right incentives in mind. No amendment
Minimum contribution is only an optional element of the calculation method. No amendment
One respondent stated that the methodology should not be sensitive to the risk profile of banks. Article 13(1) of Directive 2014/49/EU stipulates that the calculation of contributions to DGSs shall be based on the amount of covered deposits and the degree of incurred risk by the respective member. No amendment
Two respondents stated that EBA should explore synergies between DGS evaluation and SREP and that DGSs should preferably rely on SREP. The guidelines allow the use of SREP score as an additional indicator, if this score is available to the DGS.
No amendment Question 2. Do you consider the level of detail of these draft guidelines to be appropriate? Eight respondents stated that the overall level of detail is acceptable.
The EBA welcomes this positive feedback. N/A
GUIDELINES ON METHODS FOR CALCULATING CONTRIBUTIONS TO DGS
75 Comments Summary of responses received EBA analysis Amendments to the proposals
One respondent pointed out that the level of detail could be especially helpful when designing a new risk- based system of contributions. However, the same respondent stated that the guidelines are too detailed for well-established and accepted systems, as they require significant modifications. The EBA is convinced that not only new but also established systems can benefit from these guidelines. The EBA’s mandate is to outline a method applicable to all Member States.
No amendment
Two respondents are not satisfied with the level of detail due to lack of statistical data to empirically validate the proposed methods.
The EBA considers that the guidelines benefited from the expert know-how and practical experiences in Member States. For this purpose, the EBA conducted a test exercise addressed to competent authorities across the EU with the cooperation of national DGSs. The responses to the test exercise and further views of various stakeholders informed the final shape of the guidelines. In addition, Article 13(3) of Directive 2014/49/EU envisages further review of these guidelines once more empirical evidence is available. No amendment
licences in a single DGS a report on a consolidated basis should be possible. The scope of protection under Directive 2014/49/EU is the solo institution. Therefore, the EBA thinks that the indicators should be calculated on solo basis to ensure calculation of contributions is as institution-specific as possible. No amendment
One respondent noted that the guidelines could benefit from more detailed explanation of the ‘sliding scale’ and The EBA has introduced minor changes to make the text clearer and thinks that the No amendment GUIDELINES ON METHODS FOR CALCULATING CONTRIBUTIONS TO DGS
76 Comments Summary of responses received EBA analysis Amendments to the proposals the ‘bucket’ method. guidance provided in Annex 1 is sufficient.
Question 3. Is the proposed formula for calculating contributions to DGS sufficiently clear and transparent? The majority of respondents (seventeen) find the formula to be sufficiently clear and transparent. Even though most respondents support the calculation formula as such, seven respondents asked for more guidance on when and how to apply the adjustment factor, µ. More specifically, they wonder who will be responsible for determining the state of the economic cycle. Each year DGSs must determine the annual target level with the (optional) guidance provided in paragraph 37. The determination of the annual target level should take into account the objectives stated in paragraph 19. Therefore, the annual target level should be set after considering macroprudential information. To avoid over- or undershooting of the annual target level, contributions shall be adjusted using the adjustment factor, µ. To clarify this issue, the EBA amended a paragraph discussing the adjustment of annual target level based on the business cycle and clarified that µ shall only be used to ensure the DGS does not over- or undershoots.
GUIDELINES ON METHODS FOR CALCULATING CONTRIBUTIONS TO DGS
77 Comments Summary of responses received EBA analysis Amendments to the proposals fund in economic upturns. The cyclical adjustment should take into account the risk analysis undertaken by the relevant designated macroprudential authorities and reflect current economic conditions as well as medium- term perspectives, as persistent economic difficulties may not justify low contributions indefinitely. Competent authorities that have approved an own risk- based method pursuant to Article 13(2) of Directive 2014/49/EC may require an amendment of the calculation method to properly reflect developments in the business cycle that have occurred since the initial approval of the method. The cyclical adjustment may also take into account the expected evolution in the covered deposits base. Paragraphs 43-44: According to Article 10(2) of Directive 2014/49/EU, the available financial means of a DGS must at least reach the GUIDELINES ON METHODS FOR CALCULATING CONTRIBUTIONS TO DGS
78 Comments Summary of responses received EBA analysis Amendments to the proposals target level specified in Directive 2014/49/EU within a 10-year period. In line with the principle laid down in paragraph 20, these contributions should be spread out as evenly as possible over time until the target level is reached, but with due account of the phase of the business cycle and the pro-cyclical impact of contributions on the institutions’ financial position. If the sum of annual contributions from all member institutions is based only on the CD i , the ARW i and the fixed contribution rate (CR), in a given year the amount of contributions might be higher or lower than the annual target level established for that year. In order to remedy this discrepancy, an adjustment coefficient (µ) should be used. The coefficient should adjust the amount of total contributions (C) with the goal of reaching the annual target level when otherwise the total contributions would be too GUIDELINES ON METHODS FOR CALCULATING CONTRIBUTIONS TO DGS
79 Comments Summary of responses received EBA analysis Amendments to the proposals high or too low.
One respondent is of the opinion that the formula is not sufficiently clear and transparent. They stated that the weighing methodology will not be transparent to institutions. The EBA acknowledge that the methodology is complex. Therefore, Annex 1 is provided to explain in detail each step of the methodology. No amendment
that by applying the adjustment factor contributions are not postponed into later periods. Principle 2 of the guidelines states that DGSs should aim to spread the contributions as evenly as possible over the build-up period. The authorities may set the annual target level higher or lower depending on the business cycle and expected evolution in the covered deposits base. No amendment
Respondents requested guidance on how to adjust contributions if there is a substantial pay-out during the build-up period.
Article 10(2) of Directive 2014/49/EU states that when there is a pay-out in the build-up period an extension of maximum 4 years is allowed. The EBA considers the guidance provided in Directive 2014/49/EU and in principle 2 of the guidelines to be sufficient. No amendment
In the view of the BSG, in order to ensure that deposits are protected, µ should only be used after the target level is reached. The adjustment factor µ should only be used to avoid over- or undershooting of the annual target level. Principle 2 of the guidelines states that DGSs should aim to spread the contributions as evenly as possible over the build-up period. No amendment
GUIDELINES ON METHODS FOR CALCULATING CONTRIBUTIONS TO DGS
80 Comments Summary of responses received EBA analysis Amendments to the proposals Question 4. Considering the need for sufficient risk differentiation and consistency across the EU, do you agree on the minimum risk interval (75%-150%) proposed in these guidelines? Fifteen respondents support the proposed minimum interval. Three of which (including BSG) support allowing wider intervals. Four respondents oppose allowing wider intervals.
Considering the ambiguity in responses and the results of the test exercise, EBA deems that flexibility should be kept as it is. It will allow DGSs to use the interval in such a way that best fits national banking structures. No amendment
Three respondents stress that the interval should be wider and two that it should be narrower. One respondent claims that the arguments to increase contributions for institutions carrying more risk are not stronger than to reduce it for institutions with less risk and suggest a symmetric interval of 75-125%. The results of the EBA test exercise confirmed that the proposed minimum interval offers an appropriate balance between the need for harmonisation and providing institutions with risk-mitigating incentive. No amendment
Two respondents state that the amount of covered deposits should be the most prominent determinant of contributions rather than the risk-weighting. Article 13(1) of Directive 2014/49/EU states that contributions to DGSs shall be based on both the amount of covered deposits and the degree of risk incurred by each institution. No amendment
Three respondents put forward that it should not be compulsory to use the full interval each year. Paragraph 47 of the guidelines establishes that the full interval must not be used each year. No amendment
Question 5. Do you agree with the core risk indicators proposed in these guidelines? If not, please specify your reasons and suggest alternative indicators that can be applied to institutions in all Member The BSG agree to the proposed indicators but underline that it should be ensured that it will not lead to excessive reporting requirements for institutions.
Since the indicators are based on data that is already or will be reported to competent authorities it will not lead to additional reporting requirements. This is further reinforced in Principle 6 which states that the required data for the calculation of contributions should not lead to excessive additional reporting No amendment
GUIDELINES ON METHODS FOR CALCULATING CONTRIBUTIONS TO DGS
81 Comments Summary of responses received EBA analysis Amendments to the proposals States. Do you foresee any unintended consequences that could stem from the suggested indicators? requirements.
The NPL-ratio is questioned by eight respondents because there is no uniform EU-wide definition of non- performing loans. It is argued that it may cause unequal treatment of institutions. The results from the EBA test exercise showed that there was strong support to use the NPL-ratio even in the absence of a uniform definition. No amendment
One respondent wanted clarification as to whether the NPL-ratio should be net or gross of provisions. In order to avoid misunderstanding, the wording in Annex 2 is amended to clarify that when calculating the NPL-ratio, non- performing loans gross of provisions should be used. The following provision has been added to the table in Annex 2. ‘Non-performing loans’ should be reported gross of provisions.
Eight respondents state that the Return on Assets indicator should be excluded because it is not a good predictor of default and that it may disfavour credit unions. A couple of respondents suggest to replace it with a Return on Equity indicator instead as it would better reflect the institution’s ability to restore capital. Some suggest removing it entirely. EBA deems the Return on Assets indicator to be more universal than Return on Equity and other profitability measures. It is also a widely used measure of profitability.
No amendment Five respondents argued that the RWA-ratio should be excluded because it favours institutions using the IRB- approach in calculating RWA. Further, it is argued that it would disfavour smaller, less complex institutions that use the standardised approach. A dual-approach regarding RWA is suggested. The use of risk-weighted measures is well- established for regulatory capital purposes. Annex 2 of the guidelines states that different calibration approaches are allowed for institutions calculating minimum own funds requirements using advanced and standardised methods. No amendment
GUIDELINES ON METHODS FOR CALCULATING CONTRIBUTIONS TO DGS
82 Comments Summary of responses received EBA analysis Amendments to the proposals
Four stakeholders argued that leverage ratio should not constitute a core indicator as it is not risk-weighted and so is not a good measure of risk. Also, it is argued that it would disfavour institutions with low risk as they will have lower capital requirements. The purpose of including leverage ratio as a core indicator is to provide institutions with incentives to hold more capital irrespective of risk-weighted assets.
No amendment Although IPS membership is not a core indicator, the treatment of IPS members is raised by five respondents. Some argue that it should be included as a core indicator. IPSs only exist in a limited number of Member States and so should not be included as a core indicator. To ensure consistency with the Delegated Act on contributions to resolution funds, the IPS indicator will be kept as an additional indicator. No amendment
One respondent asked for more guidance on how to interpret the indicator values of return on assets, return on equity and cost-to-income ratio. Since the guidelines address DGSs covering a wide variety of institutions it may be counterproductive to give too detailed instructions on how to interpret high or low indicator values as the conclusions drawn from these values may differ depending on business model and/or banking structure in a given Member State. No amendment
Some general comments on the core indicators include: overreliance on balance sheet items arguing that indicators from the income statement are better indicators of risk, lack of qualitative indicators such as SREP scores, institution-specific risk should not be mixed with the risk to the DGS fund. The anticipated risk-mitigating incentives of the guidelines are, to a large extent, related to the structure of the balance sheet rather than to items in the income statement. As regards the stated lack of qualitative factors, the flexible 25% allows DGSs to add indicators of their choice, including No amendment GUIDELINES ON METHODS FOR CALCULATING CONTRIBUTIONS TO DGS
83 Comments Summary of responses received EBA analysis Amendments to the proposals qualitative ones. In addition to charging institutions for the risk that they pose to DGSs, the purpose of contributions is to provide DGSs with funds. Therefore, it is reasonable that the financial risk to the fund is an integrated factor of the overall risk weighting. Question 6. Do you agree with the option to use either capital coverage ratio or Common Equity Tier 1 ratio as a measure of capital? Would you favour one of these indicators rather than the other, and why? Fifteen respondents support the use of CET1 ratio. Fourteen respondents are silent on this issue. No one objected to keeping the option of using either CET1 ratio or capital coverage ratio.
The CET1 ratio is a well-established capital measure and should stay as an optional core indicator.
No amendment Two respondents oppose the use of both risk-weighted capital indicators in favour of the leverage ratio. DGSs may increase the relative weight of the leverage ratio if they consider that it would better reflect the specific characteristics of their banking sectors. No amendment Question 7. Are there any particular types of institutions for which the core risk indicators specified in these guidelines are not available due to the legal characteristics or supervisory regime of these institutions? Please describe the reasons why these core indicators are not available. Two respondents mentioned the exemption from capital and liquidity requirements on solo basis in CRR (Article 7-8 and 21) as a possible problem. It is unclear whether in cases where institutions are subject to exemptions, they should report all indicators on a solo basis.
Where a member institution has received a waiver from meeting capital and/or liquidity requirements on a solo basis the corresponding capital/liquidity indicators should be calculated at consolidated or semi-consolidated level. Other indicators should be calculated on solo basis. Paragraphs 63-65 amended to make this issue clearer:
GUIDELINES ON METHODS FOR CALCULATING CONTRIBUTIONS TO DGS
84 Comments Summary of responses received EBA analysis Amendments to the proposals 2014/49/EU to allow the central body and all credit institutions permanently affiliated to the central body, as referred 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. 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. Question 8. Do you think that more guidance, or specific thresholds, should be provided in these guidelines with regard to calibration of buckets for The vast majority of respondents stated that no more guidance is needed. One respondent thinks the guidelines should give further guidance on a ‘standard approach’. If DGSs choose a more advanced approach, the guidelines should not give more guidance. Defining a ‘standard approach’ risks limiting the level of flexibility given to national authorities. The EBA considers that DGSs should be allowed a degree of flexibility to be able to accommodate national banking structures. No amendment GUIDELINES ON METHODS FOR CALCULATING CONTRIBUTIONS TO DGS
85 Comments Summary of responses received EBA analysis Amendments to the proposals risk indicators, or minimum and maximum values for a sliding scale approach? One respondent stressed that the EBA should seek to apply an evolutionary approach in the guidelines as both the EBA and Member States will gain experience from risk-based models. In line with Article 13(3) of Directive 2014/49/EU, the guidelines already state in paragraph 16 of the ‘Background’ section that they will be reviewed by the EBA in 2017 and at least every 5 years thereafter. No amendment Question 9. Do you agree with our analysis of the impact of the proposals in this Consultation Paper? If not, can you provide any evidence or data that would explain why you disagree or might further inform our analysis of the likely impacts of the proposals? Three respondents stated that they would benefit from more examples.
The EBA deems that the alternative approaches presented in the Impact Assessment are sufficient. No amendment Two respondents disagree on the wording of the Impact Assessment which states that using the ‘bucket’ approach would provide banks with true incentives, implicitly saying the ‘sliding scale’ approach would not. As stated in the guidelines, the EBA allows flexibility for DGSs to choose between the ‘bucket’ and the ‘sliding scale’ approach without preferring one or the other method.
The wording of Section D (Option 4a) was changed. RUNNING TITLE COMES HERE IN RUNNING TITLE STYLE CONFIDENTIAL 86 5.
Confirmation of compliance with guidelines and recommendations Date:
Member/EEA State:
Competent authority
Guidelines/recommendations:
Name:
Position:
Telephone number:
E-mail address:
competent authority: Yes
The competent authority complies or intends to comply with the guidelines and recommendations: Yes No
Partial compliance My competent authority does not, and does not intend to, comply with the guidelines and recommendations for the following reasons 26 : Details of the partial compliance and reasoning:
Please send this notification to compliance@eba.europa.eu 27
26 In cases of partial compliance, please include the extent of compliance and of non-compliance and provide the reasons for non-compliance for the respective subject matter areas. 27
different e-mail address from the above, or by e-mail that does not contain the required form, shall not be accepted as valid. Document Outline
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