11 July 2012

Final Version of an EBF Positioning on the EBA consultation on draft regulatory standards on Own Funds – Part one

Comments to selected questions are mentioned:

Q01. Are the provisions on the meaning of foreseeable when determining whether any foreseeable charge or dividend has been deducted sufficiently clear? Are there issues which need to be elaborated further? What would be your definition of foreseeable?

EBF agrees, in general, with what the consultation paper proposes in this respect.

In general, the explanations provided are sufficiently clear. It would, however, be useful to clarify the following:

• the foreseeable dividend must be estimated considering the effective decrease in equity only. Therefore, only cash dividends are subject to deduction whilst other types of dividends (such as scrip dividends) do not need to be deducted;
• there is no requirement for the management body to make its dividend policy publicly available;
• restrictions on payments (e.g. if buffers are breached) should also be taken into account to compute the foreseen distribution;
• the "average payout" does not have to be computed on the statutory Profit and Loss Account if the institution's avowed policy is to compute the payout on the basis of the consolidated Profit and Loss Account.

Q02. Are the provisions on the applicable forms of indirect funding of capital instruments sufficiently clear? Are there issues which need to be elaborated further?

It is EBF's understanding that indirect funding of an institution’s capital instruments as referred to in the proposed Article 6, §1 (c) can refer only to those types of funding that have been made deliberately with the intention that the borrower finances the institution’s own capital instruments.

Anyway, it would not be possible, from a practical perspective, for an institution to be (or become) aware of all those situations where:

• the borrower uses the funding to buy capital instruments of the funding institution; or
• the borrower transfers the funding to another investor that is buying capital instruments of the funding institution.

It would be useful to clarify that intra-group transactions conducted in normal course of business (e.g. within the framework of intra-group cash management) are not affected by the provisions.

Q04. Are the provisions on the limitations on redemption of own funds instruments sufficiently clear? Are there issues which need to be elaborated further?

EBF agrees with what is being proposed in Article 7. The provisions are sufficiently clear. It feels, however, that concepts or definitions that are already set in an accounting context should not be reintroduced into the regulatory framework unless this is absolutely necessary. In EBF's opinion, CRR/CRD IV already include all necessary aspects with respect to distributions. EBF therefore believes the definition of “distributable items” to be superfluous.

Q15. How would you assess the meaning of operationally burdensome and which circumstances would be considered as operationally burdensome?

EBF strongly believes that the Technical Standard should provide for an “exemption threshold” which it would like to suggest setting at 3 per cent of an institution’s Total Capital. As a result, a complete deduction of the holding of the index would be applicable only if:

• steps 1 and 2 of the EBA-approach are not feasible; and
• the sum of all net long positions of those index holdings exceeds 3 per cent of an institution’s Total Capital.

Additionally EBF suggests opting for an alternative treatment of index holdings so that potential long positions are included in the RWA calculation.

Q16. How would you assess the cost of conducting look-through approaches vs structure-based approaches for the treatment of indirect holdings arising from index holdings?

Article 26 suggests that competent authorities, in their assessment of the nature of operationally burdensome situations, might take into account ”low net exposure to the capital of the relevant entity relative to the institution’s total own funds”. The difficulty is, however, that it is only possible to calculate the net exposure after having performed a complete look-through exercise. The proposal would therefore not provide for a solution.

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