01 August 2013

EBF publishes comments on the EBA consultation paper on asset encumbrance

EBF welcomed the EBA's efforts to establish a common harmonised European framework for reporting and determining the level of asset encumbrance. This will contribute to ensuring consistency when assessing the asset encumbrance of financial institutions and to creating a level playing field.

EBF fully recognises the usefulness of reporting on asset encumbrance to assess banks’ reliance on secured funding and the degree of structural subordination of unsecured creditors and depositors across institutions.

The second objective which the Consultation Paper pursues – i.e. to allow supervisors to assess the ability of institutions to handle funding stress, by providing an assessment of the ability to switch to secured funding - is, however, less obvious considering that it overlaps with what the CRR liquidity reporting framework (consisting of the LCR, the NSFR an Additional Monitoring tools) aims, amongst others, to achieve.

As the proposed reporting templates are highly complex and granular, they will generate significant costs both in terms of implementation of the required IT systems and of ongoing production. Indeed, producing the required reporting streams represents a significant challenge:

• The main challenge of the proposed reporting framework consists in the requirement to link information that is currently lodged in different information systems within banks (i.e. accounting data and management data) or that is currently not linked within banks’ IT-systems. It will already be a challenge to cross account and manage data on macro-aggregates and ensure consistency at that level. Requiring more granular levels of details to carry through both systems is clearly not feasible and will drive to implement counterproductive shortcuts which will not make sense. Hence we urge the EBA to limit the level of detail requested in the different tables.
• It will not be an easy task, moreover, to consolidate asset encumbrance data on a group-wide basis. As the Consultation Paper recognises, the cost of implementing the proposed requirements needs to be commensurate to the added value which the collected information may be expected to bring. We do not consider the proposed framework to achieve a right balance and strongly believe that ways should and can be found to simplify the reporting streams without significantly influencing the ability of banking supervisors to duly monitor and assess asset encumbrance. Detailed proposals for simplification are made in Part II of this submission.

As it will inevitably take time to implement the proposed reporting streams and a minimum of one year should be given starting from the final version of the templates for banks’ IT systems to generate the information, it would not be feasible for banks to implement the proposed them during the first half of 2014. The final version of the standard, therefore, needs to set a specific date in respect of the first remittance. We would like to suggest that the requirements would come into effect no earlier than January 1, 2015.

The proposed reporting streams will need to be supplied both on an individual and on a consolidated basis. It would seem to be more useful, however, bringing the consolidation circle in line with the one that that applies in the area of liquidity risk reporting. Furthermore, it does not seems appropriate to produce the reporting specific to covered bonds on a consolidated basis (Part D) considering that the risk taken on covered bonds is a risk that should be appreciated for each vehicle separately.

It would also be useful to clarify which accounting values need to be used whenever local GAAP needs to be applied to on an individual entity basis whilst IFRS are being applied to produce the consolidated figures. Our understanding is that institutions would be required to use IFRS figures only if they are available – meaning that institutions would not be required to produce IFRS figures if they use local GAAP for accounting purposes (on an individual entity basis or on a consolidated level).

Finally, it is not clear how encumbrance through insurance entities needs to be treated at consolidated level. The reporting template should at least allow isolating the encumbrance from insurance entities in accordance with prudential consolidation as imposed by CRR/CRDIV.

As the European Banking Federation had observed in a letter which was sent to the EBA and the ESRB on 6 December 2012, the consultation provides a typical example of data requirements which would benefit from being discussed in common by all stakeholders involved first. The EBF had, therefore, suggested that an expert meeting be organised to brainstorm on possible ways to satisfy the supervisory information needs in the area of asset encumbrance in a most efficient way.

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