09 February 2015

EBF response to EBA consultation on draft RTS on valuation

The European Banking Federation (EBF) provided its comments to European banking Authority consultation on draft RTS on valuation under Directive 2014/59/EU (EBA/CP/2014/38).

The valuation exercise proposed in the document, in a recovery/resolution context, is an attempt to set objective values which EBF believes, however, of difficult practical application due to the circumstances (resolution context), the need for a swift decision and to carry out valuations of future values of an uncertain nature.

EBF agrees with the concept of a buffer to account for the uncertainties involved in the valuation process. However, such a buffer needs to be assessed against the implications it may have on the affected stakeholders, since valuations, namely valuation 2, will impact on the authorities’ decision regarding the resolution action to be taken - cancellation or dilution of shares, write down and so on. Hence, some caution is warranted when setting the buffer, in order not to induce into decisions and actions that may be irreversible and excessive. EBF also understands further clarification is required regarding the way the buffer will be applied and how any remains of the buffer, after all valuation calculations have been finalized, will be treated.

Since a recovery/resolution process, in most cases and hopefully, results from a closer monitoring of the failing entity by the supervision and resolution authorities, EBF finds it questionable, in case of valuation 2, to allow "changes to the assumptions made in applying accounting principles and regulatory requirements". In their opinion, it would be wise to have the valuation based, at least, on previous indications given by the supervision authority to the entity as to the need to change accounting and prudential assumptions (historical evidence that there may be deviations). This way, the doubts would be eliminated and there would be a reasoned position for the valuation difference – strengthening of recital (8) of the RTS on valuation for the purposes of resolution.

European banks believe that valuations, namely the ex-post valuations aim at safeguarding the “no creditor worse off principle”. To the extent that there are creditors worse off than in liquidation, and after adjustment of conversion rates to transfer value of better off creditors (if applicable) to worse off creditors, any worse off creditors have a claim on the resolution financing arrangements. In case of severe (valuation) errors or other wrong decisions by the resolution authorities and/or the valuers, the compensation process implies that those errors/wrong decisions will be borne by the resolution fund. So, although it seems fair to provide for compensations, if due, to share holders/creditors affected, how fair is that any “valuation errors/wrong decisions” are borne by third parties such as the Resolution Funds’ contributors?

Full response

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