ESBG The Voice of Savings and Retail Banking in Europe POSITIONS

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1 ESBG The Voice of Savings and Retail Banking in Europe POSITIONS Brussels, 25 June 2015

2 CONTENTS LIQUIDITY... 3 LEVERAGE RATIO... 4 OWN FUNDS INTERNATIONAL DEVELOPMENTS... 4 BANKING STRUCTURE REFORM... 6 FINANCIAL TRANSACTION TAX (FTT)... 7 MARKETS IN FINANCIAL INSTRUMENTS DIRECTIVE REVIEW... 8 DATA PROTECTION REGULATION PROPOSAL... 8 CAPITAL MARKETS UNION... 9 SHAREHOLDER RIGHTS DIRECTIVE BETTER REGULATION AND PROPORTIONALITY BRRD-LEVEL 2: MREL AND TLAC DIGITAL SINGLE MARKET STRATEGY CSR... 14

3 LIQUIDITY Key messages The introduction of liquidity rules is already affecting SME lending in Europe and could similarly affect lending to households. SME loans could be an easy target for banks seeking to match the maturities of assets and liabilities. Banks are likely to comply with the Liquidity Coverage Ratio (LCR) partially by replacing short-term funding with long-term funding sources, which will ultimately make credit provision more expensive for SMEs. Although ESBG welcomes the final approach taken with regards to the LCR, it is still concerned about its potential impact on special business models, for instance the decentralised institutions under Institutional Protection Schemes, as well as the overly priced Committed Liquidity Facilities. The Net Stable Funding Ratio (NSFR) should be calibrated in a way that is not detrimental to the "everyday" banking business that finances the real economy. Furthermore, the implementation of the LCR and the definition of the NSFR must find the right balance: between improving the resilience of the banking sector to liquidity shocks and avoiding excessive restrictions on maturity transformations that discourage long-term financing. LCR: After receiving two EBA reports on the impact of the LCR, on 10 October 2014 the European Commission made public a provisional version of the final delegated act on LCR. The LCR rules will come into force on 1 October 2015, beginning at 60% from 2015 and rising in equal annual steps of 10 percentage points to reach 100% from NSFR: The NSFR is included in the Capital Requirements Regulation (CRR) only as a reporting requirement. By 31 December 2015, the EBA will report to the European Commission on the appropriateness of introducing the NSFR in Europe. In particular it will analyse the impact of the NSFR on the refinancing structures of different banking models. By 31 December 2016, the European Commission will submit a legislative proposal implementing the NSFR. This will be based on the EBA report and the Basel Committee s (BCBS s) ongoing work on Banking Supervision. The BCBS published in January 2014 its revised proposal, which seeks to reduce cliff effects in measuring funding stability, improve alignment with the LCR, and focus more attention on short-term volatile funding sources. LCR: After submitting the delegated act to the European Parliament on 10 October 2014, the Parliament and the Council had the right to object for a period of three months. This expired on 12 January 2015, with neither Parliament nor Council presenting objections. The final text is less stringent than initially foreseen, having been adapted in response to requests from the industry, Member States (in particular Denmark), and the ECB. Covered bonds are included as Level 1 with a lower haircut (7%), and banks will be free to use the bonds for as much as 70% of their liquidity buffers as opposed to the 40% of Level 1 under the Basel III rules. The requirements for asset-backed securities (ABS) are also eased; the BCBS s limit of 15% of its required liquidity buffer in Level 2A has been retained, while it expands the range of such debt that can be used given that under the latest Basel text this category is limited to residential mortgage-backed securities (RMBS). Collective investment undertakings (CIUs) have finally been included into the HQLA. Committed liquidity facilities (CLF) are recognised as Level 2B as suggested by the Basel Committee. Restricted committed liquidity facilities (R-CLF) are more restrictive and subject to a price. A bank s debt granted by sovereigns is now considered as HQLA, as it could be recognised as debt issued by promotional banks. NSFR: On 31 October 2014, the Basel Committee published the final NSFR rules, establishing that the NSFR will stick to the calendar and will be a mandatory requirement for banks as of These final rules include a few changes with regards to the last NSFR consultative document published in January These changes will toughen the treatment of short-term interbank loans, derivatives, and assets posted as an initial margin on derivatives contracts. They have also provided some room for discretion, with regulators able to make exemptions if the asset is clearly linked to a particular funding source. For short-term exposures to banks (interbank loans) with residual maturities of less than six months, the Basel Committee has toughened the January NSFR draft approach by requiring banks to have at least 10% (from a previous 5%) of such lending in stable funding if the asset is secured with a Level 1 HQLA, and at 15% if the loan is secured by a Level 2 or lower HQLA. Compared with the January consultative document, the final rules will reduce banks ability to hedge derivative liabilities and assets when calculating the NSFR ratio. The final NSFR document also clarifies the treatment for an initial margin on derivative contracts, requiring them to have at least 85% of stable funds. The same rule will apply to bank contributions to clearinghouse default funds. National supervisors will be given discretion to exempt assets from the stable funding requirement if they, on the basis of contractual arrangements, are interdependent in such a way that the liability cannot fall due while the asset remains on the balance sheet. LCR: The delegated act has headed towards a less strict approach than the Basel text. It now includes instruments related to private sector lending and to SMEs in the HQLA, such as covered bonds and ABS. ESBG firmly supports the recognition of covered bonds and ABS as HQLA of the best quality, in particular SME loans-based ABS. This measure would help to build an ABS market in the EU that helps SMEs to fund themselves while easing the

4 refinancing of banks. With regards to ABS, ESBG also supports the softening of capital requirements when measuring risk-weighted assets for these instruments. These measures would complete the ECB programme of purchases of covered bonds and ABS instruments. ESBG supports this as it would help to provide credit to the economy, and particularly address the SME lending shortage in Europe. The ECB is giving great importance to the development of an ABS infrastructure in Europe. Furthermore, we believe that recognising collateral assets eligible for ECB refinancing operations as HQLA would also be a positive step towards promoting SME lending and economic recovery. A remaining issue is the use of minimum deposits held at central institutions as HQLA. The liquid level of these assets held by the institutions will depend on what type of assets the central institutions invest, otherwise they could be considered as Level 2B (so for the time being, these deposits are not fully recognised as Level 1). NSFR: ESBG still believes that the NSFR is an unnecessary ratio that if finally applied would most likely deepen the current lending shortage trends. ESBG supports the BCBS s policy goals of limiting banks overreliance on short-term wholesale funding, encouraging banks to better assess funding risk across all on- and offbalance sheet items, and promoting funding stability within the banking sector. However, ESBG remains concerned about potential imbalances that could lead to deleveraging in the short term, as well as the treatment of covered bonds, reverse repos, derivatives, central counterparties, and nonfinancial deposits. The NSFR will most likely have a negative impact on the way credit institutions structure their refinancing, especially regarding products with longterm horizons, such as mortgage loans. LEVERAGE RATIO The Leverage Ratio is widely considered as a backstop measure that is completely insensitive to risk. In its crudest form it is defined as the proportion of equity to assets or as an institution s tier 1 capital divided by its average total consolidated assets. The Leverage Ratio indicates the proportion of assets that would be covered by equity in case of default. The BCBS and the EBA offer different definitions of the Leverage Ratio calculation, with the key difference being that the EBA requires the Leverage Ratio to be reported at an entity level, whereas the BCBS only requires a Leverage Ratio at the consolidated level. There is currently no binding standard for the Leverage Ratio at European level as it is under observation. Implementation of the leverage ratio requirement began with bank-level reporting to supervisors of the leverage ratio and its components from 1 January 2013, and public disclosure started on 1 January Any final adjustments to the definition and calibration of the leverage ratio will be made by 2017, with a view to migrating to a Pillar 1 treatment on 1 January Basic lending products provide a lower return than more advanced structured and higher-risk products. Financial institutions that operate mainly according to a business model that focuses on these products must supply higher volumes of products. This is in order to achieve the same profitability as competitors that supply products with greater margins. The increased volume of low-risk products will inflate the asset-base, requiring these institutions to hold a higher proportion of tier 1 capital. A risk-neutral capital ratio, such as the leverage ratio, would be a significant drawback in this situation, as in practice it would not be risk-neutral at all. It would make it more profitable for financial institutions to operate a business model in which they supply higher-risk structured products that provide a greater return, as fewer assets would be required to obtain the same level of profitability. ESBG has therefore actively and successfully lobbied for the removal of intracompany transactions from the entitylevel calculation of the leverage ratio, in order to avoid a punitive treatment of de-centralised banks compared to their more centralised competitors. ESBG believes that the Leverage Ratio level should not be set above three percent and should apply equally to all banks. This would ensure that it remains a backstop measure and does not unfairly punish low risk and high volume business models. OWN FUNDS INTERNATIONAL DEVELOPMENTS Interest Rate Risk in the Banking Book (IRRBB) The Basel Committee launched an initiative in 2014 to strengthen the regulatory framework of the trading book through the Fundamental Review. It is now considering to apply a parallel extra capital surcharge to the interest rate risk within the banking book in order to avoid regulatory arbitrage. For the time being, the possibility of applying further capital surcharges for interest risk in the banking book exists under Pillar II. The BCBS is particularly wary of two risks: the risk of an interest rate rise, and the risk that low- or non-interest bearing deposits shift to higher interest bearing products (on or off the balance sheet). To assess the different policy options the Basel Committee has set up a Task Force on Interest Risk (TFIR). The TFIR is charged with delivering policy options to deal with IRRBB and CSRBB (Credit Spread Risk in the Banking Book), and has been given a mandate to deliver at least one Pillar I capital charge. ESBG Positions 4

5 On 8 June the Basel Committee issued a consultative document on the risk management, capital treatment, and supervision of interest rate risk in the banking book (IRRBB). The Basel Committee has presented two options, indicating that the Committee is still split in this debate. Option 1 A Pillar 1, minimum capital requirements approach. The adoption of a uniformly applied Pillar 1 measure for calculating minimum capital requirements for this risk would have, aiming to promote greater consistency, transparency and comparability. Based on an economic value of equity (EVE) approach, interest rate risk exposure would be measured against several interest rate shock scenarios (i.e. parallel upwards and downwards shifts in the yield curve, steepening, flattening, as well as short term up and down interest rate shocks); alternatively, Option 2 An enhanced Pillar 2 approach. This includes quantitative disclosure of IRRBB, qualitative and quantitative assessment of IRRBB levels, and quantitative disclosure of IRRBB metrics, including the standardised calculation framework. Under this approach, banks would be allowed to use their internal measurement systems (IMS) subject to supervisory approval. The standardised approach would serve as a fallback to a bank s IMS. On 26 September 2014, ESBG raised concerns with the Basel Committee on Banking Supervision (BCBS) about the potential impact of introducing further capital charges sensitive to the IRRBB in which the BCBS could replicate the approach of the trading book interest rate risk. This eventual capital charge would be detrimental to traditional retail banking activities that offer fixed-rate banking products, such as mortgages and deposits, which may become so expensive that banks stop providing them. ESBG agrees on the necessity of upholding the Pillar II solution and not the Pillar I, as we consider that this will remove the individual specificities of markets, and we consider that a standardised solution to all markets and all banks will not reflect the specific circumstances of different markets and customers. There is no need for a standardised model to be imposed; it would be better to keep the internal model approaches while strengthening harmonisation, if possible, through a set of common principles and limits. These should be further studied and proposed to the Basel Committee. These common principles would be an alternative to the Basel Committee s intention of proposing a standardised approach, and would put forward caps and floors on the different banking products, particularly nonmaturing deposits, for the purpose of the calculation. On the metrics debate, members agreed the importance of both the earnings and the economic value approach should be recognised. The regulatory approach to IRRBB should reflect this perspective. ESBG will continue its work in this area. Operational Risk In its paper (open to consultation until 6 January 2015) on the revision of the Operational risk framework for simpler approaches, the Basel Committee suggested that the gross income indicator (GI) based on asset-liability size should be replaced by another based on business activity income (BI). This follows the idea that the current indicator is flawed due to valuation and accounting practices, and that it fails to capture the operational risk associated with off-balance sheet or fee-based business. The GI indicator shows that a reduction of income due to systemic or bank-specific events, as happened during the financial crisis, leads to a reduction in the operational risk measurement. On 3 June 2015, the EBA published its final draft Regulatory Technical Standards (RTS) on assessment methodologies to use Advanced Measurement Approaches for operational risk. These RTS specify the criteria that Competent Authorities need to take into account before granting institutions permission to use advanced measurement approaches (AMA) for calculating their capital requirements for operational risk. These RTS are part of the overall review of internal models undertaken by the EBA. They are also part of the efforts to harmonise practices for the approval of internal models in the area of credit, market, and operational risk models across the EU banking sector. Although ESBG agrees that a proxy for operational risk should not decrease due to systemic or bank specific events, it deems that the revised approach is overly simplistic and flawed. First, financial statements-based proxies for operational risk based on income and expenditure are also affected by valuation and accounting practices. Second, the application of the BI may also entail that a bank with higher interest expense should have higher operational risk. Furthermore, it does not encourage the industry to improve its operational risk management. In ESBG s view, the most effective approach to promoting rigorous operations risk management should include incentives as haircuts in capital consumption. Capital floors At the end of 2014, the Basel Committee published a consultative paper on the design of a capital floor framework based on standardised, non-internal modelled approaches. The new floor should allow for a more coherent and integrated capital framework. It aims to ensure that the level of capital across the banking system would not fall below a certain level. The floor is also intended to mitigate model risk and measurement error stemming from internally modelled approaches, and it aims to enhance the comparability of capital outcomes across banks. The proposed floor should replace the existing transitional capital floor based on the Basel I framework, and should be ESBG Positions 5

6 based on revised Basel II/III standardised approaches for credit, market, and operational risk. The floor's calibration as such is outside the scope of this Basel Committee consultation. The Basel Committee intends to publish the final standard, including its calibration and implementation arrangements, around the end of and activities On 27 March 2015 ESBG replied to the consultation. ESBG emphasised the importance of continuing to allow banks to use internal models as they provide a more risk-sensitive result when calibrating risks. We are concerned that the introduction of new, binding capital floors could reduce risk sensitivity. Indeed, we believe that the Basel Committee should be careful when aiming to "enhance the comparability of the capital outcomes across banks" through new capital floors. We have doubts whether such floors are able to be sufficiently sensitive to the specific risk profiles of different institutions and the specificities of the various national jurisdictions. It is therefore doubtful whether the results would actually make capital outcomes more comparable vs. making them more similar, while actually masking the real underlying differences in risk profiles. Diversity of the models is also desirable from a banking supervision point of view as it will reduce the systemic risk that otherwise could occur if all banks are affected simultaneously by the same measurement error, because they use similar models. Moreover, ESBG recommended Basel Committee should not overlook the close links with the existing prudential framework, in particular Basel III, which already contains a backstop on capital through the leverage ratio. Credit Risk in Standardised Approach The Basel Committee Task Force on Standardised Approaches (TFSA) issued on 22 December 2014 its proposal of revisions to the standardised approach (SA) framework for credit risk, on which it ran a consultation until 27 March The proposal encompasses a set of measures to reduce the reliance on external credit rating, replacing them with a set of drivers (2) in every risk sector of credit risks, such as real state, banks exposure, corporate, and retail. The revision of the standardised approach will also have an impact on the Internal Risk Based models. ESBG submitted a comprehensive reply to the aforementioned consultation. We consider that the proposal seems to be leading towards an unintended increase in costs and capital requirements. The revision of the standardised approach will also affect the IRB approach; the proposed two-risk drivers approach does not seem to improve in many aspects the external rating agencies model (as they look at many other factors and not just two); and applying similar standards and risk drivers to different jurisdictions and markets may be detrimental. The revision will create a significant administrative burden, especially for small banks, in an already competitive environment. National discretion, or at least national calibration (which would consider the specific nature of every jurisdiction and market), needs to be considered. BANKING STRUCTURE REFORM On 29 January 2014, the European Commission released its final proposal for regulation on banking structure reform. The final text suggests a stronger model than first thought. As with the Liikanen Report, the proposal will solely apply to the 29 largest financial institutions in Europe, according to the Commission s plans. These banks will be banned from engaging in proprietary trading activities. Other trading activities, such as market-making activities, could be separated if they exceed some metrics. The proposal included a derogation clause for the UK. State of Play The Commission proposal has been significantly softened by the Council. After several meetings and relevant progress the Latvian Presidency sent a final compromise proposal for discussion to the COREPER meeting on 17 June in view of the ECOFIN meeting on 19 June. The latest proposal contemplates the main changes highlighted in the latest versions with regards to the change of separation instead of a ban on proprietary trading. It also examines the automatic zoning into two tiers, with the second tier for institutions with trading activities in excess of 100bn, which would fall under the scrutiny of the supervisor, with the negative scope set at 3% or 35bn in deposits the narrow definition of the derogation clause. The revision of the exclusion for sovereign risk may be reviewed if further revisions at European or International level are pursued. The discussions at the European Parliament at the ECON Committee have been tough and no agreement has been reached. The main obstacle is the question of automatic separation, in which the Left is in favour of an automatic response, while the Centre-Right parties are in favour of greater supervisory discretion. A vote was held on 26 May on the amendments put forward by EPP, ALDE, and ECR. However, they did not gather a majority and the proposals were rejected. Discussions will continue and the former rapporteurs and shadow rapporteurs have been confirmed. ESBG Positions 6

7 The idea is to meet between all the rapporteurs to gather a large majority. and activities ESBG members consider that there is no need for further banking regulation as it would be better to wait until the upcoming rules come fully into operation. An eventual structural reform should carefully assess the interaction and overlaps with ongoing and upcoming banking rules, as well as the economic situation and the difficulties some SMEs to access funding. Indeed, we are missing an impact assessment that takes into account the potential cumulative impact of the mentioned reforms. Furthermore, we are seriously concerned about the potential negative effects for bank lending and the economy that could come as a result of this proposal. This is because a future separation of market-making activities, securitisation, and derivatives trading executed on behalf of clients would significantly reduce liquidity in the markets and increase the cost of lending, and subsequently lead to further concentration in the banking sector the opposite effects to those sought by the Commission. The thresholds put forward by the European Commission proposal are extremely low, and the role of the savings and retail banks in Europe should be carefully considered. They provide a full set of banking services to their customers both individuals and SMEs. Risk-based thresholds should remain as indicators in the supervisory toolbox rather than triggers. We are also concerned by the lack of clarity of the proposal, which could increase uncertainty in the markets. Moreover, we are especially concerned about how the separation could be applied to the savings banks business model, particularly for entities that have an Institutional Protection Scheme (IPS) system. We believe that the proposals and laws that already exist at national level are a good way forward and that viable alternatives need to be thoroughly taken into consideration for legislative work. Most of them focus on addressing the risk arising from proprietary trading activities, without separating market-making activities. The Joint Office has contributed to the debate through various actions and meetings with MEPs offices. Some of the ideas put forward by ESBG are reflected in the final amendments presented by MEPs, in particular with regards to the consideration of thresholds and the treatment of IPS. ESBG is, generally speaking, in favour of the latest progress at the Council level, which includes enlarging the negative scope, reducing the number of banks affected, and replacing the ban for the separation of proprietary trading. We also believe that instead of a structural mandatory separation, it would be more valuable to focus on the implementation of the existing regulatory proposals and on strengthening supervision and risk management. The diversity of European banking business models has proved to be an asset during the crisis; it is key for the European economy to preserve the capacity of savings and retail banking to foster growth through financing households and SMEs. FINANCIAL TRANSACTION TAX (FTT) Key messages ESBG s main concern with the current FTT proposal is that in efficient fixed income markets such as the markets for government and covered bonds, which are characterised by low spreads between bid and offer prices the tax will be far higher than what can be earned on marketmaking, especially on instruments with short remaining time to maturity. The consequence of the tax will be that market-making will almost cease and the current liquid markets are likely to be transformed into buy and hold markets. As a result, market liquidity will disappear or be significantly reduced. September 2011: the European Commission proposed an FTT to be implemented in all Member States. Autumn 2012: 11 Member States requested enhanced cooperation on the FTT. February 2013: the Commission set out the details of the FTT to be implemented under enhanced cooperation in Council Directive COM (2013)71. Spring 2015: French President François Hollande called for the FTT to be based on the largest scope possible with low rates thus aligning the French position with the Austrian and German position. The EU-11 decided at the January 2015 meeting that the political coordination of the work on the FTT will be done by Austria and the technical coordination of the work on the FTT will be done by Portugal. May 2015: FTT (EU-11) Ministers discussion. The negotiations regarding the FTT primarily involve the 11 Member States that form part of the enhanced cooperation mechanism. The negotiations take place behind closed doors, and Member States that are not included in the so-called EU-11 have repeatedly voiced their concern regarding the very non-transparent nature of these negotiations. Member States are divided into two camps. Latvia, who is currently presiding in the European Council, is not a member of the enhanced cooperation. ESBG Positions 7

8 ESBG members support the aim to curb short-term speculation and to encourage the prohibition of undesirable market behaviour. However, they do not support a Financial Transaction Tax at EU-level. The impact on financial activities essential to the functioning of financial markets and to the real economy could be extremely negative. We believe that the following activities will be affected negatively by the proposed tax: The issuance and secondary markets for sovereign bonds The use of derivatives contract for hedging purposes The use of repurchase agreements to provide secured liquidity to the market Market-making activities The use of intra-group transactions for liquidity management and efficient capital allocation within a group. MARKETS IN FINANCIAL INSTRUMENTS DIRECTIVE REVIEW Key messages It is essential to acknowledge the fact that legislators decided to preserve the existing continental model in which investment advice infrastructures are financed by inducements received from third parties. A ban on inducements would have a direct detrimental effect for the retail investor, as would have been witnessed in the UK following the implementation of the Retail Distribution Review fully banning inducements. Most retail banks no longer offer basic investment advice. Instead, they offer private banking services accessible to a small share of the population. Level II of MiFID should not create a situation that goes against the spirit of MiFID II by overly restricting the continental model of remuneration until it struggles to exist. In this context, special attention should be paid to the content of the delegated acts that the European Commission should adopt before July The Markets in Financial Instruments Directive Review was the occasion to tighten the rules protecting retail investors when seeking advice from an advisor. In particular, it introduces the concept of independent and non-independent advice, depending on the remuneration model. There was an underlying question of the legitimacy of the inducement model in which advisors are remunerated by the manufacturers of the investment products throughout the discussions within the European Parliament and the Council. Ultimately, the presumption that inducements create conflicts of interest has led to a ban on inducements in the case of portfolio management, but the current continental model of remunerating financial advice through inducements was ultimately conserved. The legislators acknowledged that the possible conflict of interest it creates can be managed while still allowing for high-quality advice and because of the enormous drawbacks that would result from a full banning as it is witnessed in the United Kingdom. Following the adoption of the final version of the MiFID by the European Parliament on 15 April 2014, the European Securities and Markets Authority (ESMA) issued technical advice to the European Commission for possible delegated acts. In this technical advice, the ESMA defines the inducements that can qualify as enhancing the quality of the advice, the only ones allowed under MiFID II. ESBG considers that the outcome of the legislative process on MiFID II is clear: the legislators decided to give credit institutions a choice on their remuneration model. They can keep their continental model in which the infrastructure is financed by inducements, or decide to provide independent advice and remunerate the advisor with client fees. ESBG is concerned that level II may threaten this decision as it may inappropriately restrict the number of inducements that respect the criteria of "quality enhancing" in such a way that it would jeopardise the whole inducement model and prevent institutions from providing the service that they used to provide to their clients. In other words, credit institutions should have a real choice when considering whether to provide independent or non-independent advice, rather than having a choice between a direct ban model and an indirect ban model. It should be explicitly clear that, besides access to a wider product range or the provision of advice on an ongoing basis, the access to and support of a wide distribution net should be recognised as a relevant quality enhancement criterion in itself. Although the technical advice provided by ESMA is an improvement on the drafts subject to consultations, it allows too much room for interpretation by National Competent Authorities, allowing them to indirectly ban inducements. DATA PROTECTION REGULATION PROPOSAL Key messages The General Data Protection Regulation should address the risks arising from digitalisation, while at same time ESBG Positions 8

9 enhancing and enabling innovation such as big data, which in turn brings advantages to consumers. Current common business practices throughout Europe, such as scoring in the banking sector, should still comply with the new rules. The European Commission presented in January 2012 a proposal for a Regulation to protect individuals with regard to the processing and free movement of their personal data (General Data Protection Regulation - GDPR). The Commission also presented a data protection directive in the law enforcement area. On 12 March 2014, the European Parliament formally adopted its compromise text of the proposed regulation and the directive. On 15 June 2015, the Council reached an agreement on its General Approach regarding the GDPR. The first trialogue with Parliament, Council, and Commission was scheduled in June The parties aim to reach an agreement on the final legislation by the end of The regulation will then apply in every EU Member State after a transition period of two years. The incoming Luxembourg Presidency indicated that, in parallel to the negotiations on the regulation, work on the data protection directive in the law enforcement area would be accelerated, with the aim of finding a general approach in October. Due to long negotiations (especially in the Council) and rather controversial positions of the European powers the trialogue is likely to be rather difficult. ESBG is concerned about a number of topics, including intra-group exemptions that will include smaller savings banks institutes, and that the right to be forgotten will include a right to erasure but not the deletion itself. ESBG members are of particularly concerned about the three following points: Consent of the data subject (Art. 6): ESBG is in favour of the Council s proposition to replace "explicit" consent of the data subject on data processing with "unambiguous" consent as supposed by the Council. In practice, the requirement of "unambiguous" consent is much more practical than "explicit" consent. Profiling (Art. 20): While the Commission did not explicitly mention profiling in its proposal, the Parliament has considerably tightened the rules by banning profiling with discriminatory effect, and by adding that profiling that leads to measures producing legal effects shall not be based solely or predominantly on automated processing; it should include a human assessment. The Parliament proposal is problematic for the European savings and retail banks as it would prohibit/hinder the use of scoring procedures. Scoring is a common procedure in Member States to calculate the default risk in lending, prevent fraud and moneylaundering, and support the development of tailor-made products and services for customers. It should continue to be possible to use this procedure throughout Europe. ESBG supports the opt-out concept, as proposed in the European Parliament s final Report. This gives the data subject a right to object to profiling (opt-out), instead of "a right not to be subject to profiling" (opt-in), following the Commission s/council s proposal. This solution enables future developments regarding big data while offering the necessary consumer protection. Data breach notification (Art. 31) and impact assessment (Art. 33): The notification requirement to the supervisory authority should be limited to serious breaches as in the Council s proposal. If every minor breach would need to be reported (as in the Commission s and Parliament proposal), this could lead to an administrative standstill. Furthermore, the Commission s proposal imposes an overall obligation of an impact assessment on controllers to seek the views of data subjects, regardless of the sector, before any data processing takes place. This regulation is problematic in view of the principle of proportionality. The proposals of Council and Parliament, which require a data protection impact assessment only in cases of a high impact for the data subject, are more balanced and therefore preferable. CAPITAL MARKETS UNION In its Political Guidelines for the new European Commission, Jean-Claude Juncker presented the idea of putting in place a Capital Markets Union (CMU) alongside the Banking Union. This aims to improve the financing of the European economy by further developing and integrating capital markets. It would also cut the cost of raising capital (notably for SMEs) and seeks to reduce Europe s "very high dependence on bank funding." In the mission letter addressed to Jonathan Hill, Commissioner Designate for Financial Stability, Financial Services and Capital Markets Union, Jean-Claude Juncker charges Lord Hill with developing and integrating capital markets as a source of financing for innovative projects and long-term investment. He sets a deadline for 2019 to achieve a wellregulated and integrated Capital Markets Union, encompassing all Member States. On 18 February 2015, Lord Hill revealed his plan "Building a Capital Markets Union" in the form of a Green Paper, which aims to: unlock more investment for infrastructure projects and companies, especially SMEs ESBG Positions 9

10 attract more investment into the EU from the rest of the world make the financial system more stable by opening up a wider range of funding sources. This long-term project will deal with topics such as insolvency and securities laws, and tax treatments. In the coming months, it will prioritise steps to: develop proposals to encourage high-quality securitisation and free up bank balance sheets to lend review the Prospectus Directive to make it easier for firms, particularly smaller ones, to raise funding and reach investors across borders start work on improving the availability of credit information on SMEs so that it is easier for investors to invest in them work with the industry to put into place a pan-european private placement regime to encourage direct investment into smaller businesses support the adoption of new European long-term investment funds to channel investment in infrastructure and other long-term projects. The Commission released a consultation document on an EU framework for simple, transparent, and standardised securitisation, as well as another consultation on a Review of the Prospectus Directive. ESBG does not agree with the approach of encouraging one model against another capital market funding vs. bank funding to address the issue of the decrease in bank lending. The role of banks is to provide long-term financing and to protect depositors. The role of other intermediaries (such as asset managers) is not to protect depositors but to provide returns. If the banks are not taking the risk for the transformation of deposits into long-term investments, then the saver is directly taking the risks. The banks role is to assess the risks, while institutional investors are not currently able to do so. With regards to access to finance for SMEs, these companies are not a good target for capital markets. These SMEs are best served by banks as they have contact with local communities and deposits that can be transformed into adequate lending. In this context, ESBG is calling for the removal of the impediments to bank lending to SMEs such as certain aspects of capital and liquidity requirements. However, ESBG welcomes the Commission s intention to support high-quality securitisation products. Exploring a preferential treatment for these products is as an important work stream in the short term, and the industry stands ready to work with the authorities on it. In response to the consultation launched by the European Commission in the form of the aforementioned Green Paper, ESBG is in the process of exploring the tools and initiatives that could foster SMEs access to finance and infrastructure financing. Tax barriers, treaty relief at source, and harmonising national insolvency laws will also be carefully scrutinised as crucial elements to help the CMU succeed. ESBG would like to contribute further to provide access to the Capital Markets for retail investors by continuing to offer financial advice to all retail clients. For this purpose a consistent and appropriate investor protection framework should be established. SHAREHOLDER RIGHTS DIRECTIVE Key messages In the trialogue, it would be desirable that the legislator increases the practicality and feasibility of the proposed directive. ESBG welcomes the modification of Article 3a and 3b in a way that complies with practical needs, such as involvement of CSD, longer storing periods for data on shareholders, and easier transmission of information. Art. 3d should allow intermediaries to charge fees for their service. At least, the term "cost" in the Parliament proposal should be replaced by "price." Regarding Article 9a, it is essential that the provisions allow Member States to create a legal framework that complies with existing national legislation and is in line with national needs. In April 2014, the European Commission presented a proposal for the revision of the Shareholder Rights Directive, which was transposed into Member States law in The background for the revision of this directive is that the crisis has shown the risk of shareholders supporting managers excessive short-term risk-taking and not monitoring closely the companies they invest in. With this proposal the Commission now wants to tackle corporate governance shortcomings relating to listed companies and their boards, shareholders (institutional investors and asset managers), intermediaries, and proxy advisors (that is, firms providing services, such as voting advice, to shareholders). The Council obtained a COREPER mandate by 25 March The leading Committee on Legal Affairs adopted its final report on 7 May Three political groups initiated a procedure pursuant to Art. 74 of the Rules of Procedure, meaning that the Conference of Presidents will have to decide upon the further proceedings (either "simple" trialogue mandate or report being sent to plenary for adoption by Parliament as a whole). This decision has already been delayed twice and is now supposed to take place in one of the next plenary meetings. The trialogue will to all appearances only start after the summer break. ESBG Positions 10

11 Identification of shareholders (Art. 3a): ESBG supports the Council s position that Member States may establish that companies having a registered office on their territory can only request identification with respect to shareholders holding more than 0.5% of shares or voting rights. For practical reasons and to protect privacy, at least for minority shareholders, such a threshold should to be added to the regulation. This is also much more feasible in view of rapidly changing share portfolios. Furthermore, following the Parliament s suggestion Member States should be able to assign the collection of data to central securities depository (CSD) to ensure a centralised data collection process. For reasons of practicality, longer storing periods for companies regarding information on shareholder identity should be included as foreseen in the proposals of Council and Parliament. Transmission of information (Art. 3b): Direct transmission of information from an intermediary to a company as included in the Council and Parliament proposal should be added to the directive to make the transmission process more efficient. Transparency on costs (Art. 3d): The Commission s clarification that intermediaries are allowed to charge non-discriminatory and proportionate charges for their service has been replaced in the proposal of Parliament and Council, by a provision that leaves the decision of whether companies can charge costs/fees to Members States. ESBG thinks that intermediaries should be allowed to charge reasonable fees for their services as those services can be significant and are carried out on behalf of third parties. Right to vote on the remuneration policy (Art. 9a): Member States should be able to provide that the general meeting s vote on the remuneration policy is advisory (and not binding). Therefore, ESBG supports the Council s position regarding the remuneration policy, which allows Member States to take into account national differences such as the key role of the supervisory board in dualistic systems. Transparency and approval of related party transactions (Art. 9c): The scope of the regulation should be limited as it has been taken into account in the Council and Parliament proposal. Transactions entered into in the ordinary course of business and concluded on normal market terms should be out of scope to not hinder small-scale transactions. BETTER REGULATION AND PROPORTIONALITY Better Regulation On 19 May 2015, the European Commission adopted and presented its Better Regulation Package. This package of reforms covers the entire policy cycle (the creation, implementation, and revision of legislation). It will boost openness and transparency in the EU decision-making process, improve the quality of new laws, and promote constant and consistent review of existing EU laws. One of the main elements will be the establishment of a Regulatory Scrutiny Board (RSB). The RSB will have an expanded role in checking the quality of impact assessments of new proposals as well as fitness checks and evaluations of existing legislation. Within the Better Regulation Package, the Commission presented a new draft inter-institutional agreement that is expected to be concluded between the Commission, the European Parliament, and the Council. This agreement proposes continuous monitoring of the performance of EU regulation and more thorough evaluations, as well as coordinated annual and multiannual planning, greater transparency on trilateral negotiations, and joint efforts to reduce unjustified "gold-plating" of EU legislation by Member States. The Commission aims to strengthen the Regulatory Fitness and Performance Programme (REFIT), which assesses the existing stock of EU legislation to make it more effective and efficient without compromising policy objectives. In addition to this, the draft texts of delegated acts and important implementing acts will be open for public comments on the Commission's website for four weeks. As a next step, the Better Regulation Package will be considered in the European Parliament as well as the Council. Commissioner Timmermans stated that he expects an agreement on the package by the end of Furthermore, sectorial initiatives (sanity checks) on better regulation are expected to be launched in the coming weeks. EBIC s Working Group on Banking Supervisory Practices, of which ESBG is a member, contributed to the European discussion on better/simplified regulation with regard to prudential topics. Having elaborated on the need for simplified, less complex regulation in Europe in the first part of the letter, the group then presented some helpful and concrete suggestions. For instance, EBIC reflected on how to reduce regulatory overlaps and asked for a consideration of the interaction with other legislation keeping proportionality, materiality, and the principle-based approach in mind. Any further increase in complexity should be avoided, and more extensive impact ESBG Positions 11

12 assessments and analyses of the interactions with other legislation need to be undertaken. EBIC held the view that it would be advantageous to consult all relevant stakeholders in good time, and to always keep an eye on the related costs before introducing more regulation. ESBG will continue to follow the file, in particular in the context of the announced REFiT review. Proportionality In June 2014, the European Banking Authority s Banking Stakeholder Group (BSG) started working on a common paper on the area of proportionality within the European Union. Work has also been carried out by the ESBG Task Force (TF) on Proportionality. The BSG paper is now in its final stages of drafting, and all members have been asked to signal their agreement. The final paper will be presented during the BSG meeting at the EBA on 23 June. In addition, ESBG Managing Director Chris De Noose has been invited to present the paper at the EBA s 2nd Proportionality workshop on 3 July ESBG Members have contributed, through the TF on Proportionality, to the "Application" section of the paper, providing concrete examples of where the principle of proportionality could be applied. The topics selected in this section are supervisory reporting, liquidity, external models, leverage ratio, corporate governance, and general retail banking. Remuneration On 4 March 2015, the EBA launched a public consultation on its draft Guidelines on sound remuneration policies, which set out the governance process for implementing sound, proportionate remuneration policies across the EU, and specific criteria for mapping all remuneration components into either fixed or variable pay. According to the current version of CRD IV, the latter allows for some flexibility to adapt the concrete manner and extent of the application of remuneration rules to the size, internal organisation, and nature, scope, and complexity of institutions activities. However, from a legal perspective, applying the principle of proportionality cannot lead to the non-application of these rules to less complex institutions. The starting point for the consultation and further discussions is the (rather strict) legal framework of CRD IV (Art are the relevant provisions of CRD IV). If supported by its analysis following the consultation period, the EBA s advice to the European Commission could eventually include suggestions for legislative amendments that would allow for exemptions from the CRD IV remuneration policies when certain criteria are met. ESBG replied to the EBA consultation on 3 June. Its main concern referred to the fact that the appropriate application of the principle of proportionality is not ensured. Despite strong arguments that lead to the opposite opinion (based on recital 66 CRD IV and the former CEBS Guidelines on remuneration), the EBA has taken the view that small and less complex institutions would also be obliged to comply with all CRD IV remuneration rules, just as large systemically important ones. ESBG believes that refraining from a proportionate approach would hit small institutions comparatively hard, demanding extraordinary organisational efforts from them (human resources for execution, purchasing and handling of remuneration software, and so on). A joint initiative between European associations is planned to provide European decision-makers with explanations and arguments on this topic. BRRD-LEVEL 2: MREL AND TLAC MREL On 28 November 2014, the European Banking Authority (EBA) launched a public consultation on Technical Standards that further specify the criteria to set the minimum requirement for own funds and eligible liabilities (MREL) laid down in the Bank Recovery and Resolution Directive (BRRD). The BRRD requires institutions to meet a robust MREL to avoid institutions structuring their liabilities in a way that hampers the effectiveness of bail-in or other resolution tools. MREL is not a fixed figure imposed by legislation, but rather needs to be set on a case-by-case basis by resolution authorities. The draft Standards clarify how the institution's capital requirements should be linked to the amount of MREL needed to absorb losses and, where necessary, recapitalise a firm after resolution. The EBA will soon submit its Standards to the European Commission (the original deadline is 3 July 2015). ESBG Positions 12

13 On 27 February, ESBG replied to the EBA consultation on MREL. ESBG expressed apprehension over the potentially overly conservative amounts determined for loss absorption and recapitalisation. More generally, ESBG is concerned that such an approach could lead to an excessive total MREL. ESBG holds that the principle of proportionality should be taken into consideration when determining the recapitalisation amount. TLAC On 10 November, the Financial Stability Board (FSB) published a consultation on its proposal to set a common framework for building a buffer of a total loss absorbing capacity (TLAC) for G-SIFIs. The proposals respond to the call by G20 leaders at the 2013 St. Petersburg Summit to develop proposals by the end of The TLAC will entail a common Pillar 1 minimum TLAC requirement set within the range of 16 20% of risk-weighted assets (RWAs), and at a minimum twice the Basel III leverage requirement. The topic of TLAC is very closely linked to the MREL requirement. The TLAC proposals could be finalised in the context of the G20 summit in November ESBG responded to this consultation on 2 March The main concern is that the TLAC requirement will end up applying to all banks, and not only to global systemic banks as originally foreseen. The rationale is that, due to market discipline, non G-SIFIs banks will be obliged to increase their capital requirements in order to meet market expectations. Furthermore, the TLAC framework should be flexible enough to adapt to the existing resolution framework at national level, taking into account that some jurisdictions have already developed frameworks for the recovery and resolution of credit institutions with similar requirements, as is the case for the MREL in the EU. DIGITAL SINGLE MARKET STRATEGY Key messages ESBG applauds the Digital Single Market Strategy as a coherent vision with the aim and ambition to propel Europe to the forefront of the world s digital economy which now is the economy. However, the Digital Single Market Strategy is no more than a vision at this stage. As the strategy acknowledges, Europe has fallen behind other regions in this field, and at least five Commission Directorates will be involved in its transposition. This will require a detailed roadmap to ensure that, contrary to experience, the issues are progressed in a coherent way. ESBG recommends the following guiding principles: Although the continuous creation of a single market is valued, the global, worldwide nature of the topics in scope and challenges must be acknowledged by policy makers and legislators. Any "fortress Europe" approach is doomed from the onset. Online customers and everyday internet users are at the heart of the Digital Single Market Strategy, but it must be acknowledged that a very powerful European consumer protection framework has been established over the past 15 years. The initiatives most in need of a legislative update because their rules predate the digital explosion are copyright, data protection, and the telecom rules. The initiatives pertaining to data are most likely to create significant value for the European economy. Significant time has elapsed since the proposal for a revision of the Data Protection rules was issued, and ESBG recommends that the Commission takes advantage of this delay to more forcefully connect the revision to the new environment. Citizen and consumer protection are of course important, but it is also critical to allow service providers to process such data, when agreed with their customers, on the basis of rules harmoniously implemented across the EU. Innovation is most likely to blossom outside incumbents and established channels and patterns. However, this does not provide grounds for policy makers and legislators to repeatedly jeopardize the potential for a level playing field for both incumbents and new entrants. The topics covered by the Strategy are interdependent. It is therefore essential that a transversal roadmap is formulated and implemented to ensure coherence throughout the deployment of the Strategy. The European Commission communicated the Digital Single Market Strategy on 6 May It heralds the beginning of the transposition of the Political Guidelines for the next Commission assigned by incoming President Juncker in July The Digital Single Market Strategy lists 16 actions that the Commission wants to progress by the end of The strategy rests on three pillars: better access for consumers and businesses to online goods and services across Europe; creating the right conditions for digital networks and services to flourish; and maximising the growth potential of the European digital economy. ESBG Positions 13

14 The Communication is a strong political statement of intent from policy, business, and legal perspectives. The Commission has identified a range of barriers that would currently hamper the realisation of the Digital Single Market. These include low trust among consumers and businesses in cross-border e-commerce rules, cross-border parcel delivery services that are costly and of disputable quality, and unjustified geo-blocking of consumers by online sellers. To further facilitate this Digital Single Market, the Commission sees a need for an up-to-date European copyright framework, the removal of a VAT burden and other obstacles when selling cross-border, fitfor-purpose telecom rules, a reassessed media framework, a fit-for-purpose regulatory environment for platforms and intermediaries, and greater trust and security in digital services and the handling of personal data. The growth potential of the digital economy will be realised by building a data economy, boosting competitiveness through interoperability and standardisation, and creating an inclusive e-society. The Commission posits that advancing the Digital Single Market calls for investment, the acknowledgement of its international dimension, and effective governance. A mix of legislative and other initiatives (some completely new, some recycling work already underway) will need to be undertaken. Pillar 1 Better access for consumers and businesses to online goods and services across Europe. This will be achieved through new legislative measures or through revising existing Directives, or following a competition authority s inquiry into the e-commerce area relating to the online trade of goods and provision of services. Legislative measures will be proposed in 2015/2016 for simple and effective cross-border rules for consumers and businesses, parcel delivery, reform of the copyright system, and a reduction of the administrative burden arising from different VAT regimes. Pillar 2 Creating the right conditions for digital networks and services to flourish. This will be achieved through legislative work, such as reform of current telecom rules, and reviews of the Audiovisual Media Services Directive and the e-privacy Directive. This will be aided by the setting up of a public-private partnership to increase cybersecurity, and through a comprehensive analysis of the role of "platforms." All these activities are to be undertaken in 2015 and Pillar 3 Maximising the growth potential of the European digital economy. This will be pursued in data ownership, free flow of data and European cloud services, a priority ICT Standards Plan to extend the Interoperability framework to public services, and an e-government action plan including the interconnection of businesses registers. The digitalization underway affects five business areas that are core to ESBG s activities. These are payments and account management, savings, insurance, SME services, and lending. Of the 16 initiatives The Digital Single Market Strategy, the most critical to ESBG s activities are platforms and intermediaries, trust and security, telecom rules, data ownership, free flow of data, cloud, copyright framework, business, and registers. The table below shows how these initiatives will affect ESBG s member s infrastructure, channels, and products. Initiatives Platforms Trust and security Telecom rules Data ownership Free flow of data Cloud Copyright framework Business registers CSR Key messages Activities Infrastructure Channel Product A sustainable banking model provided by embedded CSR practices is crucial to financing the real economy, leading the way to a competitive social market economy. The development of CSR should be led by enterprises themselves, as they are best placed to design a sustainable strategy according to their business model, their needs, and the expectations of their partners. In addition, ESBG believes that a level-playing field in the adoption of responsible practices is key, making it the responsibility of all entities rather than only that of the business community. In addition, prescriptive regulatory frameworks should be avoided when fostering CSR, as this would hamper social innovation a driver of CSR. Environmental, social, and governance initiatives need to be considered in the longer-term, as this is where they can fulfil their maximum potential. Longevity is necessary to create a sound basis for sustainable growth (as in the EU agenda 2020), and this should be instilled in reporting, investments, risk assessment, and so on. Governments should include environmental, social, and ESBG Positions 14

15 governance factors in their own policies. There is a growing understanding of the benefits that reporting on non-financial issues can have. However, reporting should remain flexible and a choice for each business to make according to its needs and strategy. ESBG members have an embedded social commitment to the communities and regions in which they operate. This is an integral part of their business and their identity and one of their distinctive features. Traditionally, ESBG members have contributed to the improvement of living conditions, supported local economic development, and built greater social cohesion in their local communities. In most countries today, this commitment to society is one of the pillars of a broader and comprehensive corporate social responsibility approach, which is reflected in banking activities and professional practices. ESBG members involvement includes supporting SMEs, providing projects for financial inclusion, financial education, and environmental action, preserving cultural heritage, promoting fair and clear relations with customers, and engaging with stakeholders. ESBG members embody a "stakeholder" model, bringing value and returns to the whole community of stakeholders that surrounds them, including investors, suppliers, customers, employees, and the local community in which they operate. ESBG members are driven by the conviction that alongside their banking and financial activities and traditional intermediation role, they also have a social responsibility. ESBG is involved in the debate on CSR and sustainable practices at European and international levels. For example, ESBG is closely involved in reviewing the European Commission CSR Strategy for In addition, ESBG supports all European Commission developments aimed at bringing responsible business practices into the mainstream. ESBG stands ready to contribute its expertise to aid the work of policymakers and standard setters. ESBG is firmly committed to promoting and improving welfare, raising awareness, identifying trends, creating opportunities for dialogue, engaging with other stakeholders, and advancing its members responsible banking model. ESBG is a co-signatory of the banking sector s CSR joint statement (focused on employment and social affairs aspects), together with the European Association of Co-operative Banks (EACB), the European Banking Federation (EBF), and Trade Union UNI Europa Finance. ESBG strives to participate in all relevant EU initiatives and fora, adding its value and longstanding experience in the field. ESBG Positions 15

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