How did EU legislators address the need for proportionality in the CRR / CRD text and in the mandates of EBA in own funds ? Proportionality Erik Van Der Plaats EBA Proportionality workshop – Own Funds session 22 October /06/2016

Summary Introduction 1/ Proportionality principle : elements of definition 2/ How did legislators address this principle in the Regulation and the Directive ? 3/ How did legislators address this principle in the mandates they gave EBA ? 30/06/20162

Introduction : scope of BASEL III vs scope of CRR/CRD4 Scope Basel: large, internationally active banks – Measures proportionate for these banks EU: about banks, only some of those large, inter- nationally active measure not proportionate for ALL banks Internal market Need for level playing field Single Rule book (CRR/CRD apply to all banks) Basel III rules for large, internationally active banks have to be adapted for smaller banks to satisfy principle of proportionality 30/06/2016

1/ Proportionality principle : elements of definition 2/ How did legislators address this principle in the Regulation and the Directive ? 3/ How did legislators address this principle in the mandates they gave EBA ? 30/06/20164

1/ Elements of definition : There are two aspects to consider when defining the proportionality principle : Having regard to the aim pursued : Article 5(4) of the Treaty on European Union "Under the principle of proportionality, the content and form of Union action shall not exceed what is necessary to achieve the objectives of the Treaties." Having regard to the types of institutions and activities to which the rules will apply :recital 46 in CRR "The provisions of this Regulation respect the principle of proportionality, having regard in particular to the diversity in size and scale of operations and to the range of activities of institutions. […] Member States should ensure that the requirements laid down in this Regulation apply in a manner proportionate to the nature, scale and complexity of the risks associated with an institution's business model and activities. " 30/06/20165

Principle of Proportionality Article 5(4) of Treaty on European Union " Under the principle of proportionality, the content and form of Union action shall not exceed what is necessary to achieve the objectives of the Treaties." 30/06/20166

Who is responsible for the respect of this principle according to recital 46 ? The legislators : when writing the Regulation and the Directive; The Member States regarding the application of the Regulation; The Commission : regarding the delegated and implementing acts and the regulatory and implementing technical standards; The EBA : in the drafting of regulatory and implementing acts. Besides, the ECJ would determine whether the principle has been respected or not. 30/06/20167

1/ Proportionality principle : elements of definition 2/ How did legislators address this principle in the Regulation and the Directive ? 3/ How did legislators address this principle in the mandates they gave EBA ? 30/06/20168

2/ In the CRR / CRD : The main aim of legislators : increasing quality and quantity of own funds They applied the principle of proportionality in few fields: Disclosure Eligibility criteria of CET1 instruments Grandfathering rules Capital buffers definition Waivers Rules of consolidation On what considerations? the diversity in size and scale of operations and the range of activities of institutions the nature, scale and complexity of the risks associated with an institution's business model and activities 30/06/20169

Disclosure Article 13 CRR proportionates the disclosure requirements on grounds of size and importance of the institutions, and states that it is only required for : EU parent institutions on a consolidated basis Significant subsidiaries Subsidiaries of material significance for their local market 30/06/201610

Eligibility criteria of CET1 instruments Legislators took into consideration that mutual and cooperative banks capital instruments have specific features which stem directly from a set of national legislative constraints they have to abide by. Article 29 CRR amends therefore CET1 eligibility criteria of article 28 : Cap on distribution: is forbidden for CET1 instruments, but accepted for mutuals; Redemption : should be at the initiative of the issuer, but for mutuals it can be at the initiative of the investors (members); Differentiated rights to the net assets or to reserves : some cooperative capital instruments do not give the same rights to the rerserves or to the net asset. 30/06/201611

Grandfathering rules Legislators took into consideration the fact that some European banks were just recovering from the financial crisis and needed capital instruments held by Member States; Therefore, in Art 483, legislators set specific rules to recognise temporarily (until Dec. 2017) state aid instruments in CET1; 30/06/201612

Capital buffers definition CRD IV defines a set of capital buffers The level of the combined buffer requirement will depend on specific risks or specific features of the institutions and their activities : Countercyclical buffer Systemic risk buffer : "must not entail disproportionate adverse effects on the […] financial system". G and O-SII buffers : depend on the some criteria : Size Interconnectedness Complexity Significance of cross-border activity Importance for the economy of the Union and the Member States 30/06/201613

Waivers Article 7 CRR : waiver of own funds requirements on an individual basis under certain conditions. Article 79 CRR : temporary waivers to accomodate and allow the application of financial assistance operation plans. 30/06/201614

Rules of consolidation CRR authorises specific rules for decentralised banking structures : Networks in which banks are permanently affiliated to a central body Banks connected via institutional protection schemes Banking groups with cross-guarantee schemes in place 30/06/201615

Proportionality & Business Model: The case of mutuals, cooperatives and savings banks Definition of capital: cap, multiple, redemption Special rules for decentralised banking structures: networks in which banks are permanent permanently affiliated to a central body banks connected via institutional protection schemes banking groups with cross-guarantee schemes in place The rules on remuneration have been adapted to accommodate cooperatives which are not able to pay part of their managers variable remuneration in shares, as foreseen by the general rule Basel has adopted specific rules for the liquidity systems of cooperative banks, which allow for a preferential treatment for certain deposits. The rules on Liquidity in the CRR will be recalibrated after a thorough review and monitoring by EBA, which will take different business models into account. The same applies to the introduction of a leverage ratio in 2018: The will be a thorough review that is expected to capture the broadest range of impacts, including those on the business model of cooperative banks. Only after this review the final calibration of the leverage ratio will be carried out. 30/06/201616

1/ Proportionality principle : elements of definition 2/ How did legislators address this principle in the Regulation and the Directive ? 3/ How did legislators address this principle in the mandates they gave EBA ? 30/06/201617

3/ In the mandates given to EBA : Some mandates explicitly refer to proportionality : The meaning of operationally burdensome (art 76(3)) (RTS – Part 1) The concept of minimal and insignificant for the purpose of identifying qualifying AT1 and Tier 2 capital issued by a SPV (RTS – Part 1) Some mandates give the opportunity to apply the rule in a proportionate way : By introducing a hierarchy of ways to evaluate forseeable dividends (RTS – Part 1) By introducing a structure-based approach to determine the indirect holdings (RTS – Part 3) Use of broad market index : the correlation shall be avoided, but EBA took into consideration the fact that in some Member States there could be very few contributors to an index. (RTS – Part 3) 30/06/201618