Warsaw, 16 June 2008
Public consultation
on possible changes to the Capital Requirements Directive
Position presented by the experts of the Ministry of Finance
and the Polish Financial Supervision Authority
- Summation of proposals made at CRDWG meetings
As indicated in the Commission’s consultation document, “CRD potential changes. Co-decision. Comitology”, the changes on which views of stakeholders are being sought, in part, reflect a response to the credit market turmoil that emerged mid-2007 and the “Roadmap” of responses agreed by the ECOFIN Council in October 2007, and confirmed by the European Council on
14 March 2008. In this context, Poland would like to reiterate its general position – stated several times in various EU forums – that all works related to the CRD should appropriately reflect competences and responsibilities of home and host supervisory authorities. Finally, it was accepted by the European Council on 14 March 2008 and included to the Presidency Conclusions (revised in May 2008).[1]
Moreover, Poland would like to recall that the agreed objective of the CRD review of not changing fundamentally the current allocation of competences and responsibilities of home and host supervisory authorities. In general, any changes in this respect must be made very carefully and they should be balanced. Poland does not accept any potential increases in supervisory competences of a home authority and, at the same time, leaving full responsibility of a host authority for the stability of the financial system in a host country. If competences of a home supervisory authority are to be increased, it would mean an analogous increase in its responsibilities for financial stability in a host country, including financial responsibility, i.e. proportional to competences participation in potential financial burdens in case of a financial crisis.
In this context, there has been a proposal of the Polish delegation (expressed at some CRDWG meetings this year) that Article 129.2 could be enhanced by bringing somewhat lost balance between home and host decision making powers and ensuring that local advanced risk models (A-IRB) in foreign subsidiaries operating in host jurisdiction are subject of joint, collegial process with final word of host supervisor. In our opinion, any further changes, like transferring more decision making powers to a consolidating supervisor without allocating to such an authority more responsibility, would be counterproductive and not balanced.
More detailed comments have been presented below.
I. SUPERVISORY ARRANGEMENTS
Article 40(3)
The need of supervisors to take into account the financial stability in other Member States when taking decisions in emergency situations
Poland states that the text of the proposed paragraph 40(3) is too general. Therefore, the provision should specify further in details what facts and considerations should be taken into account by the supervisors when they act in emergency situations.
Doubts concerning abovementioned provision was pointed to the Commission in April 2008 as the common position of the Czech Republic, Poland and Slovakia regarding changes to the supervision arrangements.
Article 42(2)
The determination of a systemically relevant branch
Poland supports the proposed provision that the supervisory authorities of the home and host Member State, and the consolidating supervisor, are to reach a joint decision on the designation of branches as being systemically relevant (the first paragraph). And, in particular, Poland strongly supports the proposed wording of the third paragraph stipulating that “in the absence of a joint decision, the competent authority of the host Member State may make its own decision”. This text should be maintained.
As far as the definition of a systemically relevant branch is concerned, we generally support the definition in the second paragraph of Article 42(2). However, in our opinion, taking into account that Poland is predominantly host country, any quantitative (numerical) threshold seems to be too rigid and mechanicand not tailored to all possible local market conditions. Such quantitative criteria would limit room for flexible adjustment of decision making process to specific circumstances that might call for different thresholds due to specific factors like knock-on effect on other institutions due to reputation channel effect related to that particular segment where ailing institution operates. In our opinion, the 2% threshold, even if indicative, seems to be too high. For this purpose, 1% seems to be more realistic benchmark. In the view of the relatively recent events in Northern Rock (August 2007), which covered 1,7% of UK banking system and, until the crisis, it was not considered to have a high or systemic impact, the 2% threshold would not allow to classify (per analogy) a branch covering 1,7% of the banking system assets as systemic. Therefore, in our view, a branch should not be assessed only on the basis of quantitative criteria; we are in favour of a more flexible approach, based on a case-by case-analysis.
Article 129(2)
Validation of local models in subsidiaries
We would also like to submit some comments on Article 129(2) to suggest a modification of Articles 84 and 129(2) in relation to the advanced approach used at the local level in foreign banks' subsidiaries in a host country. It seems to be relevant to draw the distinction between central and local models as part of the A-IRB approach. Such a distinction works in practice as shown by the recent wave of A-IRB assessments in the EU banks. The local models that represent A-IRB approach should be subject to the decision of the local (host)supervisor who works in coordination with consolidating supervisor. As practice shows so far under Article 129 in conjunction with Article 84, the assessment of local models, being part of the group application, is unnecessarily subject of the final decision of the consolidating supervisor. Such solution is burdensome and adds additional layer of bureaucracy to the decision process which concerns mostly or solely local subsidiary. Poland would like to reiterate that the local models applied only in a local subsidiary of foreign bank are assessed by the local supervisor who should be entitled to take decision on such local models. Such a decision, as in case of central models, would be taken after considering views of consolidating supervisor. In practice, following GL10 of CEBS – the division of the assessment of local vs. central models goes between host and home supervisor working in cooperation.
Article 129(3) paragraph 2
Colleges of supervisors – exchange of information
Poland supports the provision that the competent authorities of a host country where systemically relevant branches are established may participate in colleges of supervisors. We could also support the provision providing the consolidating supervisor with the right to decide which competent authority participates in a meeting or in an activity of the college – but if the consolidating supervisor decided that a given host country supervisor would not participate in the college, it should be ensured that this supervisor would be informed about decisions made by the college (especially those related to systemically relevant branches established in its country).
This would be in line with the conclusions of the European Council of 14 March 2008 which called for “clarification of the relationship between home and host authorities appropriately reflecting their competences and responsibilities, including balanced exchange of information”.
Article 129(3) paragraph 4
Colleges of supervisors – disclosures
Poland would like to highlight the fact that Article 129(3) paragraph 4 goes beyond the above-mentioned objective of not changing the allocation of competences and responsibilities. We suggest that the text stating that a college of supervisors is the appropriate place for dealing with disclosure and other specified issues should be deleted. This covers the notion of “reaching an agreement” with respect to:
a)specific national disclosure requirements, which are laid down in Article 72(2);
b)national reporting for the calculation of minimum capital requirements according to Article 74(2) and as specified and elaborated in the long run via FINREP and COREP;
c)specific national own funds requirement in excess of the minimum level laid down in Article 75, stipulated in some cases even as an obligation for the supervisory authority (Article 136 (2));
d)national treatment of intra-group exposures for large exposures purposes - Article 113(1)(f).
As mentioned above, in our opinion, Article 129(3) paragraph 4 goes beyond the above-mentioned objective of not changing the allocation of competences and responsibilities. At the same time, the last sentence of this paragraph states that“This shall not affect the rights and responsibilities of the competent authorities under this Directive”. This statement seems to be contradictory with some other provisions, i.e. “This covers the notion of “reaching an agreement” with respect to: (....)”. In our view, this does not clearly protect interests of host supervisors.
II. LARGE EXPOSURES
Article 110
Reporting requirements
This article should include a national discretion to expend the reporting requirements. For example, for the Polish supervisor, it would be useful to include exposures between 5% and 10% in reporting requirements.
Article 111(1)
Interbank exposures
Poland supports the wording proposed by the Commission, i.e. imposing a limit that represents the higher of 25% of a bank’s own funds or EUR “X” million. With regard to the latter, we agree with the Committee of European Banking Supervisors (CEBS) which suggested in its technical advice of 27 March 2008 that “X” should be set at EUR 150 million. We also agree with the CEBS that the limit of EUR 150 millionmight be a reasonable starting point, but further work is needed to ensure that this does not allow potentially systemic banks to have interbank exposures greater than 25% of own funds. Poland also supports the last sentence of Article 111(1) stipulating that “Member States may impose a lower amount than EUR [X] million”. That is quite important to have such local discretion,as in case of Poland EUR 150 million is relatively high and exceeds in many cases own funds of larger banks.
We would also like to recall our position on interbank exposures submitted to the Commission in January 2008. Potential introduction of large exposure limits on interbank market exposures/positions seems to be logical, however, any such change needs thorough impact analysis how such decision affects the interbank market. Small banks can find themselves in a difficult position to diversify risks and collateralise exposures. Take for example cooperative banks, when they operate within associations, and when they are obliged to deposit their disposable liquidity with associating banks, which may lead to a situation where a LE limit is breached. For that reason, we suggest a deeper analysis of any suggestions with respect to interbank large exposure limits. It may be useful to differentiate between short-term large interbank exposures (up to 3 months or up to 1 year) and longer-term ones (above 1 year or 3 months). Longer term exposures, by their nature – longer duration of the exposure – generate greater chance of loss that in case of short term. That is why in standardized method shorter tenor is perceived as less risky and granted with lower risk weights. In case of long-term interbank exposures there should be a limit as it exists now in many countries. For short term no limit would apply or a softened approach would be used.
Article 111(2) and (3)
Limit on intra-group exposures and aggregate limit on large exposures
Taking into account the need to simplify the CRD (i.e. having the single percentage limit), Poland supports deleting both a limit of 20% own funds that currently applies to intra-group exposures (in Article 111.2) as well as an 800% aggregate limit on large exposures (in Article 111.3). However, the deleted 20% limit should be replaced by the single 25% limit (as in Article 111.1).
Article 115
Commercial real estate collaterals
Commercial real estate collaterals should not be eligible under the large exposures framework at the present stage of the Polish financial market development.
III. TECHNICAL AMENDMENTS TO DIRECTIVE 2006/49/EC
New Article 32a
Investment firms – exemptsome investment firms from large exposure regime
We suggest to insert new Article 32a as follows:
1. Article 28(2-3), Articles 29-32 and Appendix VI do not refer to:
a) investment firms referred to in Article 20(2);
b) investment firms that deal on own account only for the purpose of fulfilling or executing a client order or for the purpose of gaining entrance to a clearing and settlement system or a recognisedexchange when acting in an agency capacity or executing a client order;
c) investment firms:
(i) that do not hold client money or securities;
(ii) that undertake only dealing on own account;
(iii) that have no external customers;
(iv) the execution and settlement of whose transactions takes place under the responsibility of a clearing institution and are guaranteed by that clearing institution.
2. Investment firms enumerated in paragraph 1 shall report their overall exposures to individual clients and groups of connected clients in accordance with Article 110 of Directive 2006/48/EC.
Appropriate A&L management is one of the supervisor’s concerns. In case of inadequate risk management the supervisor is eligible (under Pillar 2) to impose additional capital requirements in case of particular investment firm. Proper information is indispensable in order to conduct an efficient supervision. It seems reasonable and more economical to keep reporting requirements on LE with respect to investment firms instead of forcing supervisors to gain and verify information on LE of every supervised investment firm on a day-to-day basis.
Every board of an investment firm should have knowledge on the company’s LE. Monitoring and controlling LE by an investment firm is part of the sound risk management and part of the business. If the board does not have such knowledge then it is a sign of inadequate risk management and it should be analysed by the supervisor. Since every board should have knowledge on company’s LE, exemption of these firms from LE regime will not eliminate completely compliance costs related to LE but will only reduce it.
Since knowledge on LE already is within investment firms, there is no reason for which the
supervisor should not have this information.
As a consequence and in connection with the proposal of exempting aforementioned firms from LE regime as regards capital requirements and limits, it seems however reasonable to maintain reporting requirements.
Annex I, point 8.B
Treatment of the protection buyer for first-to-default and nth-to-default credit derivatives
We propose to replace “the institution may off-set specific risk for the reference entities” with “the institution may off-set specific risk for the reference entity”.
CRD Transposition Group'sanswer to Question 171 (published at the CEBS website: is absolutely clear that in this case risk can be off-set for one entity only:
- where a credit institution obtains credit protection for a number of assets underlying a credit derivative under terms that the first default among the assets shall trigger payment and that this credit event shall terminate the contract, the institution may off-set specific risk for the asset to which the lowest specific risk percentage charge among the underlying assets would apply according to this Annex.
The answer to Question 171 also states that “an individual nth-to-default credit derivative bought should not offset more than one of the N names as it only provides protection for one out of the N names.”. In this context, the case of a first-to-default credit derivative (i.e. n=1) is just a specific case of this general statement.
This change is particularly important as the treatment for nth-to-default credit derivatives is specified by the proposed wording of Point 8.B only via a reference to the treatment for the first-to-default credit derivatives.
1
[1] The European Council invites the Council (ECOFIN) to swiftly and completely implement the programme of work agreed in Autumn 2007; this encompasses further progress in Spring 2008 on:
− (…) clarification of the relationship between home and host authorities appropriately reflecting their competences and responsibilities, including balanced exchange of information (…).
Presidency Conclusions – Brussels European Council 13-14 March 2008 (7652/1/08 REV1), Brussels, 20 May 2008, para. 33, p.17.