Response to consultation paper on draft Guidelines on the interpretation of the different circumstances when an institution shall be considered as failing or likely to fail
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While we understand that this is an important issue to be defined so that the CA or RA could formally and unambiguously evaluate whether the entity is failing or likely to fail, ESBG does not have precise proposals on specific thresholds. In greater detail, we believe that a predefinition in the decrease in asset values would very much depend on the asset itself. Each asset category shows a different reaction to certain events and/or market developments. The best way for a predefinition would probably be the creation of certain scenarios implying a range of assumptions. In combination with the range of asset categories, the outcome of these predefinitions would be a rough estimation.
Besides, many indicators referring to asset quality, such as the non-performing loans (NPL) ratio, the volume of refinancing, the rate of entry of NPLs to total loans, the cost of risk, expected loss and other coverage ratios and indicators that the EBA proposed for the purposes of recovery plans (Recovery Indicators), can be identified.
In para 25 the EBA Guidelines refer to the likelihood of lacking an adequate capital position. ESBG would welcome further clarity on the methodology used by the CA and RA in order to determine the probability that the entity may fail in the short to medium term. In fact, there are different methodologies, such as internal stress models or supervisory models. We assume that the EBA is thinking of the SREP methodology, but clarity regarding the exact methodology would certainly be welcomed."
However, if the indicator of governance arrangements is not transferred to the draft Guidelines on triggers for use of early intervention measures, ESBG would like to ask the EBA to further specify the process on which the RA will base its analysis of identifying problems in the entity in this regard. Almost all the elements that the RA could asses are of a quantitative nature. Finally, we have difficulty to understand why only the RA is mentioned when the government arrangements should be assessed.
However, if the indicator of the operational capacity to provide regulated activities is not transferred to the draft Guidelines on triggers for use of early intervention measures, ESBG would like to call again on the EBA to specify in greater detail which process is going to be used in order to carry out the assessment.
Question 2: Do you consider the level of detail of these draft Guidelines to be appropriate?
The EBA could consider to further specify certain quantitative indicators with thresholds.Question 3: Do you consider the examples provided in Box 2 to be sufficiently clear and providing useful guidance?
While we believe that the examples presented by the EBA in the box are clear and useful, we fear that they could be too simplistic in certain circumstances and don’t always accurately reflect the sometimes more complex reality. For instance, they only provide guidance on cases where, despite the fact that an institution may be failing or likely to fail, the latter does not meet all the criteria necessary for resolution actions. It could also be useful to provide examples for cases where the determination of an institution being failing or likely to fail would lead to resolution actions.Question 4: Do you have any comments on the proposed specification of circumstances which should be taken into account by the competent authority in determining that an institution is failing or likely to fail?
Para 19 sets out that authorities should consider the result of the valuation of the institution’s assets and liabilities to the extent that they are consistent with Article 36 BRRD. However, it remains unclear when a valuation in line with Article 36 should have been undertaken prior to determining that the institution is likely to fail. ESBG assumes that the valuation in Article 36 would in principle be the first step to be undertaken prior to implementing resolution actions, but after determining that the institution is failing or likely to fail.Question 5: Do you reckon that a significant decrease in asset value can be predefined in a quantitative manner? If yes, which threshold would you suggest for that purpose?
Yes, a rough predefinition could be established.While we understand that this is an important issue to be defined so that the CA or RA could formally and unambiguously evaluate whether the entity is failing or likely to fail, ESBG does not have precise proposals on specific thresholds. In greater detail, we believe that a predefinition in the decrease in asset values would very much depend on the asset itself. Each asset category shows a different reaction to certain events and/or market developments. The best way for a predefinition would probably be the creation of certain scenarios implying a range of assumptions. In combination with the range of asset categories, the outcome of these predefinitions would be a rough estimation.
Besides, many indicators referring to asset quality, such as the non-performing loans (NPL) ratio, the volume of refinancing, the rate of entry of NPLs to total loans, the cost of risk, expected loss and other coverage ratios and indicators that the EBA proposed for the purposes of recovery plans (Recovery Indicators), can be identified.
Question 6: Do you have any comments on the proposed specification of objective elements related to the capital position which should be taken into account by the resolution authority in determining that an institution is failing or likely to fail?
An objective element to be considered related to the capital position of an entity could be to analyse the full implementation" of the CRD IV.In para 25 the EBA Guidelines refer to the likelihood of lacking an adequate capital position. ESBG would welcome further clarity on the methodology used by the CA and RA in order to determine the probability that the entity may fail in the short to medium term. In fact, there are different methodologies, such as internal stress models or supervisory models. We assume that the EBA is thinking of the SREP methodology, but clarity regarding the exact methodology would certainly be welcomed."
Question 7: Do you have any comments on the proposed specification of objective elements related to the liquidity position which should be taken into account by the resolution authority in determining that an institution as failing or likely to fail?
Please see our comments to question 6.Question 8: Do you have any comments on the proposed specification of the circumstances, related to governance arrangements, which should be taken into account by the resolution authority in determining that an institution is failing or likely to fail?
Please see our comments to question 1.However, if the indicator of governance arrangements is not transferred to the draft Guidelines on triggers for use of early intervention measures, ESBG would like to ask the EBA to further specify the process on which the RA will base its analysis of identifying problems in the entity in this regard. Almost all the elements that the RA could asses are of a quantitative nature. Finally, we have difficulty to understand why only the RA is mentioned when the government arrangements should be assessed.
Question 9: Do you have any comments on the proposed specification of the circumstances, related to the institution’s operational capacity to provide regulated activities, which should be taken into account by the resolution authority in determining that an institution is failing or likely to fail?
Please see our comments to question 1.However, if the indicator of the operational capacity to provide regulated activities is not transferred to the draft Guidelines on triggers for use of early intervention measures, ESBG would like to call again on the EBA to specify in greater detail which process is going to be used in order to carry out the assessment.