EN Official Journal of the European Union C 228/62

Opinion of the European Economic and Social Committee on the Proposal for a Directive of the European Parliament and of the Council amending Directives 2006/48/EC and 2006/49/EC as regards banks affiliated to central institutions, certain own funds items, large exposures, supervisory arrangements, and crisis management

COM(2008) 602 final — 2008/0191 (COD)

2009/C 228/10

On 22 October 2008 the Council decided to consult the European Economic and Social Committee, under Article 47 of the Treaty establishing the European Community, on the

‘Proposal for a Directive of the European Parliament and of the Council amending Directives 2006/48/EC and 2006/49/EC as regards banks affiliated to central institutions, certain own funds items, large exposures, supervisory arrangements, and crisis management’

The Section for the Single Market, Production and Consumption, which was responsible for preparing the Committee’s work on the subject, adopted its opinion on 11 March 2009. The rapporteur was Mr BURANI.

At its 452nd plenary session, held on 24 and 25 March 2009 (meeting of 24 March 2009), the European Economic and Social Committee adopted the following opinion by 179 votes to four, with three abstentions.

1. Summary and conclusions

1.1 The Committee approves of the Commission’s initiative, which is in line with its ongoing work on modernising measures to improve and update the legislative framework of the Basel Agreement. It also agrees in general with the implementing provisions proposed, with the exception of certain individual aspects that do not alter the general framework.

1.2 Hybrid capital instruments, that contain features of both equity and debt, are currently subject to national rules that ought to be harmonised in order to achieve a reasonably level playing field at international level. The Commission does not give a precise definition for these instruments, as they take various forms and can evolve, but sets out the basic principles for them to be eligible. Their original maturity must be longer than 30 years, they must be fully paid up and they must be designed to absorb all losses. Furthermore, they must not grow excessively in relation to equity. National authorities are given the power to intervene to put a brake on abnormal growth.

1.3 On the subject of connected clients, the notion of risk arising from the difficulties of a company upon which another is financially dependent has been introduced and reporting requirements have been simplified, harmonised and restructured. In the area of significant risks, the main innovation is the introduction of a single limit of 25 %, also including inter-bank deposits. The EESC believes that this last rule, probably inspired by the catastrophic scenario of recent times, should be revised, given the important regulatory function of the liquidity of these deposits and their relatively minor risk levels, in normal periods, compared with other types of exposure.

1.4 The proposal introduces a rule whereby issuers, intermediaries and managers who directly negotiated, structured and documented the original agreement giving rise to obligations must undertake to maintain a minimum material economic interest of 5 %. This rule was seemingly inspired by the bad experience with American CDOs (collateralised-debt obligations), although their origins and characteristics differ from normal securitisations. The EESC wonders what the impact of this new measure might be on market liquidity.

1.5 Member States are given the possibility of excluding intra-group exposures from the calculation of exposure when the counterparties are established in the same Member State. The Committee is well aware of the legal reasons against extending the rule to counterparties resident in other Member States, but would argue that in normal conditions, the failure to include foreign counterparties could affect the overall evaluation of the exposure of the company in question. A reasonable solution might be to extend the exemption to the entire group on the basis of a case by case assessment, suspending that possibility in the event of signs of critical problems.

1.6 With reference to the rule in the previous point, and also more generally, the Committee would reiterate its opposition to the principle of giving Member States the choice of whether or not to adopt certain provisions. This is contrary to the principle of harmonisation and the need for a level playing field when it comes to competition.

1.7 The EESC thinks that special attention should be given to the risk posed by potential exposure from the use of as yet unused credit lines on credit cards. This exposure could rapidly become significant in times of restrictions on consumer and mortgage credit.

1.8 The draft directive introduces a series of new rules on supervisory mechanisms, designed to increase the efficiency of controls. First, consideration is given to ‘systemically relevant branches’, which are to be placed under supervision in the host country when the situation is recognised as being critical, subject to the agreement of the countries concerned. The EESC agrees, but would stress that measures are needed to deal with sudden, unforeseen events.

1.9 Lastly, the EESC is pleased to note the establishment of the colleges of supervisors established by the consolidating supervisor and including authorities of the countries where the companies of a certain group are based. This initiative will improve the efficiency of supervision over groups and speed up the adoption of appropriate measures when necessary.

2. Introduction

2.1 The financial markets crisis has prompted the Commission to speed up its work on strengthening and where necessary modifying provisions for the capital requirements framework for financial institutions, which was adopted under the Basel II agreement with Directives 2006/48/EC and 2006/49/EC. It should be noted that discussions on the new measures were already underway when the crisis emerged; structural market reform should be implemented after the publication of a white paper planned for June 2009. The present proposal includes a series of rules that: — regularise the position of those Member States that applied derogations to Article 3 of the previous directive in the area of derogations for bank networks from prudential requirements and extend this possibility to other Member States; the derogations now include bank networks with assets over EUR 311 billion and with more than 5 million members (cooperatives and credit institutions linked to central bodies); — establish principles and rules that had not been formalised by Community rules, in particular on hybrid capital instruments; — clarify the supervisory framework for crisis management and establish colleges of supervisors.

2.2 The proposal was preceded by an on-line stakeholder consultation. The text drawn up took into account the recommendations made without, of course, departing from the basic principles which had underpinned the consultation: — inter-bank exposures are not risk-free and should therefore be subject to limits; — in credit securitisation, originators and sponsors (intermediaries) must be required to retain a share of the risks for the exposures that they securitise. In addition, a demonstrable measure of due diligence and rigour must be required in the case of the ‘originate to distribute’ business model; — ‘colleges’ of supervisors must be set up for all cross-border banks, and supervisors participating in those colleges required to agree on a mediation mechanism via the Committee of European Banking Supervisors (CEBS).

2.3 The EESC welcomes the basic tenor of the Commission’s proposals and endorses their main thrust. Recent events and, in particular, various incidents and misdeeds have seriously damaged public confidence in the financial system as a whole and appropriate measures are called for. The prudential rules must not however be so severe as to penalise the operators and their clients needlessly. As the crisis has demonstrated, prudential rules securing the stability and solidity of the markets also play an extremely important social role.

3. Hybrid capital

3.1 Hybrid capital instruments (hybrids) are securities that contain features of both equity (shares) and debt (corporate bonds); they yield higher returns than corporate bonds but do not provide voting entitlements – or provide more restricted voting entitlements than shares.

3.1.1 The lack of legislation at EU level has led to diverging national eligibility criteria. This has resulted in the lack of a level playing field and the possibility of ‘regulatory arbitrage’ for banks operating across borders. The Commission refrains from giving a precise definition of hybrids because it feels that it would quickly become outdated or incomplete because of innovation, but it has laid down basic principles for their eligibility.

3.1.2 As a general rule the instruments eligible as original own funds (‘tier 1 capital’) are all those which fully absorb losses; this includes hybrid instruments, which, in addition to meeting the above criteria must also be permanently available and be deeply subordinated during liquidation. These criteria were agreed on by the G10 in 1998 but were not transposed into European legislation.

3.1.3 Further terms and conditions state that either capital hybrids must be undated or at least their original maturity must be longer than 30 years. They absorb losses in normal conditions and are the most subordinate form of credit during liquidation. They therefore help the institution to continue operations on a going concern basis without hindering recapitalisation. The EESC endorses the measures that the Commission intends to adopt.

3.2 The Commission proposal also places a number of quantitative limits on hybrid instruments, which must not be developed excessively to the detriment of share capital – or equity capital in the case of institutions without share capital. Supervisory authorities may waive the limits in emergency situations.

3.2.1 There are particular provisions for banks without share capital, such as cooperatives: members’ certificates, defined as ‘the most subordinated instruments’, should be treated like convertible hybrids insofar as the respective capital has been fully paid up.

3.3 The new measures to be introduced on hybrids, whether qualitative or quantitative, may affect the financial industry’s future strategies, but drastic changes made over a short period of time would be in danger of upsetting the markets. The Commission proposes that the Directive lay down a transitional period of 30 years. The EESC feels that this is appropriate given the current situation and the way it is likely to evolve in the short to medium term. It may, perhaps, prove dangerous in the long term but there seem to be no viable alternatives.

4. Large exposures

4.1 The current large exposure regime dates back to 1992 and no changes have been made since. Recent events have highlighted the need for new rules. The Commission proposal gives greater consideration to the risk inherent in certain exposures while, at the same time, endeavouring to reduce the costs of data collection, increase transparency and create a more level playing field.

4.2 The concept of connected clients has changed. Hitherto the focus has been on the danger that an entity might experience difficulties because of the financial problems of another entity; events have shown that two or more undertakings can be placed at risk because of the problems of the entity on which they are financially dependent.

4.3 The expensive, complex reporting requirements, which are a source of high costs and complications for the sector, have also been harmonised and simplified. The most obvious change is the requirement to report the 20 largest exposures on a consolidated basis where the IRB approach is used. The various limits applicable have been replaced by a single limit of 25 %.

4.4 The numerous exemptions, which are often difficult to understand, have to a large extent been abolished; only those which do not seem to be a high risk continue to apply. The list is still quite long, however, but in general seems to meet carefully-determined prudence criteria.

4.5 The EESC endorses the proposed new rules in general, but it has some comments on a number of important points: 4.5.1 Article 111(1), referred to in point 4.3 above, lays down a single limit of 25 % and applies to inter-bank deposits as well. The reasoning behind this rule is perfectly understandable: banking institutions, including some thought to be among the most stable, have been seen to collapse with almost no warning. Nevertheless, while it is always wise to base rules on worst case scenarios, to use the ‘catastrophe scenario’ is to go too far. The application of too low a risk limit, as seems to be the case for inter-bank deposits, restricts liquidity at all times and especially at times of market tension. It would be advisable to revise this provision, laying down a higher limit for short-term inter-bank loans, particularly since the 25 % ceiling will be applied with no consideration for due dates. In the current period in particular, short-term inter-bank loans can be used as a factor to regulate market liquidity. In addition, they generally carry a lower risk than other types of exposure. The recent episodes arising from exceptional circumstances do not undermine this principle, but exceptional circumstances should be addressed with exceptional measures while normal circumstances should be governed by normal measures. 4.5.2 Article 113(d)(4) allows Member States to exempt certain exposures from application of Article 111(1). In line with the position it has taken consistently on similar cases, the EESC is firmly opposed to any measure which could distort the level playing field. Making this optional rather than compulsory will slow down harmonisation. The EESC is well aware that in the presence of divergent opinions it can be necessary to be pragmatic and give a choice rather than impose an obligation. It would also argue that every directive should present all provisions clearly as obligations or prohibitions, leaving it to parliamentary discussions and to Council to make them optional. Such debates would raise social partners’ awareness of the arguments for and against a given measure, thus furthering transparency. 4.5.3 This exemption would apply to exposures incurred by a credit institution to its parent undertaking or other undertakings in the group, provided (Article 80(7)(d)) that the counterparties are established in the same Member State. This restriction is detrimental to multinational groups while failing to increase market security. Centrally-managed intra-group risks incurred by entities subject to a single consolidating supervisor should be included in the exemptions. The proposed solution runs counter to the fact that national laws on liquidation and bankruptcy preclude the transfer of resources from one body to another should the first prove to be in a critical or pre-bankruptcy state. The aim of the directive, moreover, is to assess the overall exposure of the group, disregarding measures designed to address possible emergencies. 4.5.4 One possible solution might be to exempt exposures relating to the parent undertaking or other undertakings in the group based in other Member States, with case by case authorisation, providing the group as a whole gives no cause for concern regarding its solidity in the near future. Authorisation could be suspended with immediate effect should the supervisory authorities consider the company or group to be showing signs of difficulty.

4.6 ‘Exposures arising from undrawn credit facilities that are classified as low risk off-balance sheet items’ (Article 113) warrant particular attention. The overall limits on credit-card spending are high, particularly as regards certain types of institution. At times when there is a squeeze on credit the margin of undrawn credit can shrink rapidly. The EESC believes that potential exposures arising from undrawn credit on cards warrant careful, prudent assessment.

5. Securitisation

5.1 The new Article 122 a) requires a commitment from issuers, intermediaries and managers, vis à vis an investing credit institution that was not involved in concluding the original agreement giving rise to obligations, to maintain a minimum material economic interest of 5 %.

5.2 The inspiration for this rule was clearly the bad experience in America with CDOs (collateralised-debt obligations) and as such it would appear to be justified. It should however be noted that the situation originally arose not so much from the insolvency of the issuers as from the poor quality of the mortgage credit on which the CDOs were based, which was described by an American authority as ‘sloppy mortgage lending and lax regulation’. This was an isolated case but one that proved to have global implications. However, the case of CDOs cannot be extended to almost the entire securitisation technique, as this instrument contributes to market liquidity.

5.2.1 The introduction of the securitisation credit risk restricts the operational freedom of credit institutions. The EESC would ask that the scope of this measure be properly weighed up.

6. Supervisory arrangements

6.1 The crisis which has struck the global financial markets has revealed the need for supervisory methods and structures to be reviewed with a view to averting systemic crises and reacting to emergencies.

6.2 The rules on exchange of information and cooperation have been reviewed: Article 42a introduces the concept of ‘systemically relevant branches’, recognising that in specific cases the interests of the host country take precedence over the principle of the home Member State. The EESC fully endorses this approach, which is fundamentally important.

6.3 Basically, the new rules allow host authorities to make a request to the authorities of the home Member State, or the consolidating supervisor where appropriate, for a branch in their country to be considered systemically ‘relevant’ if its market share exceeds 2 % or it has a significant presence on the national market. The request must include a kind of ‘impact assessment’, anticipating possible suspension or closure of operations on the payment and clearing and settlement systems, and the impact on the market of measures of this kind.

6.4 There is a set timetable governing the procedure according to which a branch can be considered ‘relevant’. It would also be useful to lay down the rules to apply in real emergencies (Article 130), so that urgent measures can be adopted. The newly-established colleges of supervisors (Article 131(a) - see point 6.5) and, in any case, the existing Committee of European Banking Supervisors, should ensure simplified procedures with the necessary guarantees.

6.5 The creation of colleges of supervisors (Article 131(a)) is particularly useful. They are established by the consolidating supervisor, and the authorities of the Member States concerned participate in them. Their task is essentially to provide ongoing, effective monitoring of cross-border groups (and hopefully to adopt appropriate measures in times of emergency) by pooling information and jointly devising appropriate supervision methodologies. The EESC welcomes this decision and all the monitoring rules proposed, which are in line with the more efficient programmes announced earlier in the text and with the wishes of the Financial Services Forum.