Q2. Do you agree with the proportionate approach to the application of the SREP to different categories of institutions? (Title 2)
Q3. Are there other drivers of business model / strategy success and failure that you believe competent authorities should consider when conducting the BMA? (Title 4)
As stated above, in general, we are concerned of the enhancement of supervisory assessments beyond regulatory compliance. In addition, another concern must be addressed.
Low risk and low return financial business models have been, and still are, the very backbone of housing financing in several parts of Europe. The Danish mortgage model is an example of a low risk and low return financial business model.
Given the focus on profitability when conducting the BMA, cf. the presentation slides from the public hearing of the draft guidelines for SREP, it is paramount that low risk/low profit business models are acknowledged and treated in a correct manner. Otherwise, the consequences could be detrimental to European housing finance
Q4. Does the breakdown of risk categories and sub-categories proposed provide appropriate coverage and scope for conducting supervisory risk assessments? (Title 6)
The proposed breakdown of risk categories and sub-categories in general seems appropriate.
Given the fact, that institutions currently are striving to comply within the risk framework outlined in CRD/CRR, it is key that institutions become subject to appropriate phasing-in arrangements for mitigating potential risk-exposures disclosed by the application of risk frameworks different from the CRD /CRR framework.
Accordingly, we strongly agree that assessments of risk, based on alternative risk categories, must be appraised within the context of the business model and the total risk landscape of the institution in question.
Moreover, the benefit of an alternative breakdown of risk categories carefully should be weighted with respect to the potential implementation- and production costs of reporting - and thus managing - risks across alternative categories. As stated above, ideally new monitoring requirements should be modeled within the boundaries of available information in the form, and aggregation as specified in COREP/FINREP.
Q5. Do you agree with the use of a standard approach for the articulation of additional own funds requirements to be used by compete authorities across the Union? (Title 7)
Harmonization within supervisory requirements, both with respect to communication and proportionality of measures, benefits transparency of regulatory discipline, and assessment, within financial institutions in the EEA. This should be beneficial to the markets and the society in general. Nonetheless, we must reiterate, the importance of rooting such requirements within a supervisory analytic framework which is equally harmonized and meticulously adjusted to embrace, and correctly assess, the diversity of financial European business models.
Concluding on the example of TSCR articulation (page 117), the acknowledgement of own funds to cover Pillar 2 capital requirements depicts an area of the draft guidelines which require further adjustments.
Acknowledgement of capital own funds to cover Pillar 2 capital requirements
In article 339 of the draft guidelines specify that competent authorities shall set a composition requirement for the additional own fund requirement under Pillar 2 of at least 56 % CET1 and 75 % Tier 2 in line with the Basel III requirements (4.5% CET1; 6% T1 and 8% total capital).
In the example of TSCR articulation (page 117) and OCR articulation (page 118) it is unclear whether the requirements for Additional Tier 1 instruments (44 %) and Tier 2 instruments (25%) can be met by the Additional Tier 1 instruments and Tier 2 instruments with additional trigger features for write downs or conversion to equity, which have been approved as eligible to cover Pillar 2 capital requirements according to Regulation (EU) No 575/2013 by the competent authorities in some member states. It must be clearly stated, that the before mentioned instruments are eligible to cover the Pillar 2 capital requirements.
In the case that the draft guidelines actually intent to follow a different approach than outlined, by the competent authorities in some member states, we would deeply regret such intentions. Such ruling would severely influence institutions who have already issued such instruments and be a clear act of a surplus of harmonization. Moreover, Additional Tier 1 and Tier 2 instruments with additional trigger features which have been recognised by competent authorities to cover Pillar 2 capital requirements should, at least, be protected by a grandfathering clause. The deferred implementation date until 1 January 2019 would not be sufficient because of the long effective maturity of many such issued instruments”
Q6. Do you agree that competent authorities should be granted additional transition periods for meeting certain capital and liquidity provisions in the guidelines (Title 12)?
We support the granting of transition periods for meeting certain capital and liquidity provisions. On the same note, transition periods and observation/assessment periods should be used extensively, when imposing regulatory requirements, to facilitate a balanced use of supervisory measures.