Gruppe Deutsche Börse

Transcription

1 Gruppe Deutsche Börse Position Paper Review of the Capital Requirements Directive in view of the financial turbulence Suggestions for action Berlin,

2 Deutsche Börse Group Position Paper on the Review of the Capital Requirements Directive Page 2 of 7 A. Introduction The Member States, in their ECOFIN Conclusions of November 2007, have asked the EU Commission to look into a limited and focussed review of the Capital Requirements Directive (CRD), which the Commission has done by opening a consultation until 16 June 2008 on a concrete set of proposals. The aim is to look into possibilities to strengthen transparency and tighten risk management and capitalisation requirements in the context of the sub-prime crisis. These are sensible aims, given that there is also a global impetus through the proposals of the Financial Stability Forum (FSF) to act in this sense. However, the aim of changes cannot be, to effectively tax money markets in a way that liquidity is further greatly reduced. This, we believe, would be the effect of the radical approach the Commission has suggested to the large exposures regime, where a zero-weighting for inter-bank exposures of less than one year is to be entirely abolished. This would also harm operations of international payments and financial instrument settlement via cash correspondence networks. We are proposing instead of abolishing the zero-weighting regime for inter-bank exposure to significantly shorten the timeframe for it in order to allow processing related time lags and assure the good functioning of money markets. (See Section B.) On top of this major issue, we want to make some smaller additional comments on the Commission s proposal. (See Section C)

3 Deutsche Börse Group Position Paper on the Review of the Capital Requirements Directive Page 3 of 7 B. Changes related to large exposures regime as proposed by the Commission In light of the recent financial markets situation, we support for the introduction of measures aimed at stabilising the market in critical situations and at mitigating the risk of contagion arising on the failure of a single bank. The approach to tighten the rules related to large exposures mainly in the inter-bank business is a logical consequence of this objective. Nevertheless, measures must be designed not to be overly restrictive. Overly restrictive measures may reduce liquidity in the money markets and prove counterproductive to the underlying objective We set out below four situations/needs where the proposed large exposure regime would be counterproductive: 1. In the course of normal operating business (i.e. mainly international payments and settlement of financial instruments) banks have a network of cash correspondents where they keep money on current accounts in order to facilitate operations. Cash flows out of these operations might come too late to be laid off in the market especially in collateralised form. The bank receiving the cash inflow will not have the chance to place this cash on the market (especially if it is not its domestic one) and therefore the resulting exposure will quickly exceed the large exposure threshold. This is true especially for custody payments (redemptions) and collateral delivery for e.g. CCP out of intraday margining. 2. At the very short end of the market, banks need the possibility to react on short notice; for example, to disburse a call account balance late in the day. In such a case, treasurers would need to raise money in the money markets when a repo transaction is no longer possible due to settlement processing restrictions on the securities side. In the case that a bank needs liquidity overnight, no other bank would be willing to give this without collateral. Collateral at that point in time often is (technically) not available or the markets to exchange collateral cannot be used any longer. 3. Given that the Commission s proposal heavily pushes for collateralised lending / placing via collateralised investments, there is a risk that collateral becomes scarce in the market and hindering liquidity distribution as a consequence. 4. In order to avoid problems with the large exposure regime, banks are likely to change their risk management policy and allow lending to more banks (with lower ratings but, due to regulations, equal usage of liable equity) in order to fulfil the regulations. Most problems should be solved by giving a zero-weighting for inter-bank exposures at the short end of the market.

4 Deutsche Börse Group Position Paper on the Review of the Capital Requirements Directive Page 4 of 7 Item 1 and 2 are related in any case to the very short end of the market. With regard to 1., we refer to article 106 of directive 2006/48/EC which already excludes two operational cases from the exposure definitions. In principle, these exemptions are valid for any kind of counterparty. Due to the current zero weighting for exposures to institutions their main focus is by nature on nonbanks. As a consequence of our concerns and taking some other related issues into account, we propose the following adjustments to the proposal of the European Commission: 1. Exposures out of receivables held in inter-bank current accounts Credit balances held for operational purposes in inter-bank current accounts reflect liquidity, which is held to facilitate payments and settlements. The account arrangements are made without any fixed maturity (on call) and usually with no fixed interest rate or no interest payment at all. In case interest is paid, it is usually lower than the interest on money market placings. As the exposure is coming from a credit balances held on the nostro account, no line confirmed or unconfirmed can be attached to that as legally only the account operating cash correspondent bank can grant lines. In addition, the account holding bank cannot influence any incoming cash transfer done by its customers. As a consequence, we feel that related to this particular kind of exposures which by nature is a major problem mainly for banks being involved in (cross-border) payments as well as settlement or custody transactions, the technical background of the exposure is the main characteristics. As this was the reason for the two existing exemption in article 106 which is not proposed to be changed in the current Commission s proposal we believe, that the item should be integrated in article 106 by adding a lit (c) as follows: (c) exposures resulting from credit balances on current accounts held at other credit institutions.. The proposal reflects, that exposures from current inter-bank accounts of customers at the reporting credit institution are not excluded, as they are at the discretion of the credit institution. Nevertheless, they might be needed in order to facilitate financial instruments (securities) settlement or cash payments systems. Therefore this measure is at first step just solving part of the problem to facilitate fast execution of settlement and payment processes and to take care of all the other measures partially initiated by the Commission to speed up payment and settlement efficiency. 2. Short term operational exposures on inter-bank accounts As described above, it is not sufficient to exempt credit balances on current inter-

5 Deutsche Börse Group Position Paper on the Review of the Capital Requirements Directive Page 5 of 7 bank nostro accounts in order to facilitate efficient payments and settlement procedures. For various reason like different time zones, different public holiday regulations and different settlement algorithms related to settlement day (e.g. T, T+2, T+3, etc.) and settlement processes (e.g. batch, real time, etc. processing) exposures out of operational reasons may remain for a couple of days. The vast majority is settled within one day (overnight) or within 48 hours. Nevertheless, there are regular circumstances, where 48 hours (2 business days) are not enough. Usually cash related to operational purposes is held on current accounts which by nature of those accounts are due at any time and therefore a maturity is not to be specified. As a consequence, we suggest to implement one of the following two proposals: a) Either to amend out proposal made a above related to article 106 as follows (preferred solution): Article 106 section 2 should be amended by lit (c) as follows: (c) exposures on current accounts with other credit institutions.. or b) reintroduce article 113 section 3(i) as article 113 section 1 (i) but exchange with a maturity of one year or less with on current accounts. In certain cases, it is necessary to pre-fund transactions. In such cases (e.g. to overcome time zone or public holiday problems), cash is sometimes placed at a fixed rate first and transferred for settlement / payment purposes in time to the correct account. For those purposes, a provision is needed as well (please see out proposal 3 for a possible solution). 3. Short term uncollateralized exposures on inter-bank accounts from money market transactions In order to place excess cash received late (but not too late for our processes) in the day for the foreseeable future in the inter-bank market, we believe, that based on the reasons 2 to 4 stated above, a zone for zero weighting at the short end is absolutely necessary. Banks need to earn interest on the cash positions and payments and settlement must be secured in any case. If short term money market borrowing / lending in an uncollateralized form is not feasible without being subjected to large exposure regulations, the cash could just be kept on current accounts (if our proposals 1 and / or 2 above are accepted) or with central banks. This cash would then be free of interest which assures that incentives point in the right direction. (Note that even some central bank might not be eligible for zero weighting as their country rating might not be sufficient)) It is difficult to determine a sound level of short term without giving the opportunity to overcome this boundary by a revolving solution. Nevertheless, in

6 Deutsche Börse Group Position Paper on the Review of the Capital Requirements Directive Page 6 of 7 principle short term interest rates are in general lower as mid or long term interest rates. Therefore the competent authority has at least some possibility to check the keeping of a short term provision (as is given below) as part of pillar 2 by comparing interest rates. As the directive already has at various places a 5 day range implemented (e.g. Article 106 (2) lit b, xxxx (to be specified)), we suggest keeping this range as a definition for short term as well. As a consequence, we suggest to add another section into article 113 as follows: Introduce article 113 section 3(i) as article 113 section 1 (i) but exchange with a maturity of one year or less with with a remaining maturity of 5 working days or less. As this proposal would include our alternative proposal 2 b), that one would not be necessary any longer. From the perspective of banks in general, a longer timeframe may well be needed and we suggest consulting as to adequate periods for stepping up weightings. This could be done by reintroducing article 115 section 2 with appropriate time frames. 4. Alternative solution Proposal 3 could also be seen as an alternative general solution for all our proposals made above. We believe though, that from a logical argumentation, the exemptions proposed in 1 (and as 2 a)) fit better in the framework of the directive. Overall, whether amounts are considered to not constitute exposure or whether they are zero weighted arrives at the same result. 5. Conclusion Should the current Commission s proposal be adopted as it stands, it would do serious damage to our business and to settlement efficiency in the market as a whole. Furthermore, we believe that the increased weighting for exposures toward credit institutions to 100 % from the first day would do serious harm to financial markets and would result in a drying up of liquidity. Measures proposed in article 111 section 1 (i) and (ii) are not sufficient. All possible measures to avoid breaching the large exposure limits will result in massive reductions of interest income and settlement efficiency as well as disturbing the stability of financial markets and hindering proper levels of liquidity. We believe that this cannot and should not be the aim of regulators or the Commission. We therefore ask the Commission to carefully assess, if our proposals could not be taken into account.

7 Deutsche Börse Group Position Paper on the Review of the Capital Requirements Directive Page 7 of 7 C. Technical amendments to Directive 2006/48/EC and other comments (1) Article 111 section 1 (i) and (ii) The Commission has explicitly asked about inter-bank exposure limits in the context of helping smaller banks which have an issue with percentages of equity. GDB believes that in turn for the increase of weight for exposures to institutions the introduction of a second limit trigger in principle can be useful. In order to facilitate liquidity provision at short notice, we believe, that the amount x, notwithstanding our other arguments, should be around EUR 250 million on a stand-alone base and around EUR 500 million on a consolidated basis. We suggest in any case allowing a higher amount on a consolidated level than on a stand-alone level. Taken the problems described above (section B) into account, this would not help banks being active in international payments and settlement / custody activities. We therefore see the proposal as an supporting measure for the short to mid-term uncollateralized placings but not for exposures coming from operational purposes. (2) Article 106 section 3 new We do not understand the intention of this new section. As there is a choice given e.g. in Annex VI part 1 section to take the exposure on the investment share as a whole or to look through onto the single investment, we cannot see any reason to derive from the approach chosen for the determination of a group of connected clients. Therefore the question is, if the new section implements a mandatory looking through principle or should just be used to determine the existence of a group of connected clients. In the latter case, we cannot see how this should work. In both cases, we believe the regulation should not be implemented. In any case we suggest reviewing the wording and making it more precise. (3) Article 115 section 1 current The current regulation should be maintained, at least in principle, with slightly modified weights. As we are talking about regional governments and local authorities of member states, and ratings of credit quality step 2, a 100 % weight even regardless of remaining maturity - seems to be a too big increase. Of course, the regulation needs to take into account the proposal for the new article 113 section 1 (e).