QED-Conference on Banking Package Review

Transcription

1 June, 20th 2017 QED-Conference on Banking Package Review Session 1 : Resolution, TLAC implementation, hierarchy of claims in insolvency Issues regarding capital requirements G. Niochaut, Head of Recovery and Resolution, BPCE

2 Preliminary The EC has issued new regulatory projects in Nov regarding CRR/CRD/SRMR/BRRD. One of the objective is to implement TLAC at European level. Still EC projects raise significant issues that ought to be corrected to secure the success of this regulatory upgrade. Two main issues are : (1) Extension of the MDA triggers to TLAC/MREL requirements (2) Implementation of an internal MREL for all banks These measures will impact the capital requirements of banks. The aim of this presentation is to illustrate the impacts of these measures for cooperative banks. 2

3 Topics for discussion 1 Maximum Distributable Amount on TLAC/MREL requirements 3

4 1.1. Current project on TLAC/MREL MDA 1. Initial problematic: Existence of a distortion between the difficulties encountered by an entities and shareholder s interest. Shareholders should not receive dividends in crisis situation. 2. Reform package objective: Alignment of shareholders incentive towards the respect of capital requirements especially MREL and TLAC. 3. Principle: Prohibit distribution of dividends to shareholders in a situation of non-respect of the MREL/TLAC requirement. 4

5 1.2. The likeliness of TLAC / MREL breach compared to CET1 1 RWA 100G CET 1 Requirements 8% ROE 5% Current CET 1 10G Loss to breach CET 1 requirements 2,5G 2 RWA 100G TLAC Requirements 18% ROE 5% Current TLAC 20G Absence of debt renewal to breach TLAC requirements 1,1G* 3 If RWA increase by 10% during crisis and all other parameters remain constant, TLAC ratio originally at 20% falls down to 18,2% while CET 1 new ratio is still at 9,1% compared to 8% required *2,5G spot minus by 1,4G of T2 and non-preferred debt expired at the end of the year (average maturity of 7 years) 5

6 1.3. Conclusion on TLAC/MREL MDA l l BPCE key facts CET1 ratio as of versus MDA trigger MDA 7,75% CET1 14,3% Total capital ratio versus MDA trigger 1. Current proposal stands for automaticity between a breach of TLAC and a suspension of dividends Examples demonstrate the non-negligible probability of having a well-capitalized banking group breaching temporarily MREL requirements l Dividends MDA 11,25% 300M dividends versus 400G of RWA Total Capital 18,7% 0,6% of the total capital in Restricting dividends in case of prudential breach might be necessary However, MDA implementation without a judgment call from authorities might not serve the ultimate goal : financial stability. Ø Such important decision suspension of dividends should stand in the hands of resolution authorities in coordination with supervisory ones. 6

7 Topics for discussion 2 Internal MREL 7

8 2.1. The current project on internal MREL 1. Initial problematic: In resolution, the holding company may only be called for its investment in capital, as the funding of critical subsidiaries might be external (not provided by the holding company) 2. Reform package objective: Secure the financial support of the holding company to its critical subsidiaries beyond the invested capital so that subsidiaries can be internally recapitalized 3. Principle: The holding company subscribe subordinated debt in sufficient amount issued by the critical subsidiaries (i.e. internal eligible) Critical subsidiaries Holding compagny Critical subsidiaries Holding compagny Assets Liabilities Assets Liabilities Assets Liabilities Assets Liabilities Equity : 100 Equity : 100 Total assets : 1000 Internal debt : 0 External debt : 900 Equity: 100 Total assets : 1000 Internal debt : 80 External debt : 820 Equity : 100 Internal debt: 80 If asset value decrease, holding compagny legally binded to absorb losses up to 100 without recapitalization requirements If asset value decrease, holding compagny legally binded to absorb losses up to 100 and to participate in the recapitalization up to 80 8

9 2.2. The case of cooperative banking groups BPCE Structure Mutual shareholders 100% Mutual shareholders 100% Existence by law (art L of monetary and financial code) of an internal solidarity mechanism enforced and managed by the central body (BPCE SA). Retail networks (Banque Populaire and Caisse d Epargne) provide critical services to the society. 50% BPCE SA 50% The Central has : (1) legal responsibility to ensure compliance with prudential requirements at individual level 100% 71% Subsidiaries (2) legal power to take own funds from any BP or CE and use it to recapitalize any failing affiliated entity And others Ø Stronger mechanism than internal MREL one as financial support for recapitalization goes well beyond a limited amount of internal debt 9

10 2.3. Conclusion on internal MREL for cooperative banks A valid amendment to BRRD to strengthen financial stability and minimize external / public financial support Compared to existing legal requirements for cooperative banking groups, a redundant, less powerful and more limited tool A proposal not aligned with guidelines published by the Financial Stability Board 10

11 June, 20th 2017 QED-Conference on Banking Package Review Session 1 : Resolution, TLAC implementation, hierarchy of claims in insolvency Issues regarding capital requirements G. Niochaut, Head of Recovery and Resolution, BPCE