CBFA. We hope that the Commission will take into consideration the CBFA's comments in its revision of the proposal. Yours sincerely.

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1 CBFA Prudential Policy- Banks and Insurance BANKING, RAN FINANCE AND INSURANCE COMMISSION European Commission Internal Market and Services DG Mr. Patrick PEARSON Head of Unit Financial Institutions Banking and Financial conglomerates PB CORRESPONDENT D.Guillaume policy@cbfa.be OUR REFERENCE PPB/088 YOUR REFERENCE DATE 11 June 2008 Dear Sir, ^ ^ \ i X x t I Re: Public consultation on possible changes to the Capital Requirements Directive (CRD) The Banking, Finance and Insurance Commission (CBFA), as a supervisory authority, welcomes the opportunity to comment on the European Commission's Consultation Paper on possible changes to the Capital Requirements Directive (CRD). The CBFA generally welcomes the potential changes to the Capital Requirements Directive, notably the legal footing for colleges and the non binding role for CEBS. However, it would like to express its concerns relating mainly to the supervisory arrangements, large exposures and hybrid instruments. Hence, you will find enclosed a paper, and its annex, with the comments of the CBFA. We hope that the Commission will take into consideration the CBFA's comments in its revision of the proposal. Yours sincerely. The Chairman L.4-- rue du Congrès Brussels p I f I

2 Prudential Policy- Banks and Insurance CBFA Public consultation on possible changes to the Capital Requirements Directive Banking, Finance and Insurance Commission's comments The Banking, Finance and Insurance Commission (CBFA) generally welcomes the potential changes to the Capital Requirements Directive, notably the legal footing for colleges and the non binding role for CEBS. However, it would like to express hereafter its main important concerns related to the proposed provisions. In addition to those concerns, please find in annex some other suggestions. Comments relating to the supervisory arrangements 1. First of all, the CBFA strongly supports the concept of supervisory colleges as a tool to promote effective and efficient supervision of cross-border active financial groups in the EEA. However, having already a long standing tradition of experience with the functioning of supervisory colleges, the CBFA urges the European Commission to limit the scope of the mandatory establishment of supervisory colleges to significant and systemic relevant cross border financial groups. This would avoid the establishment of supervisory colleges in all cases where there is consolidated supervision with a cross border dimension. For instances, supervisors should not install automatically a formal supervisory college if an institution has a subsidiary in another member state. This could be left to supervisory cooperation and arrangements on a bilateral basis. On the basis of criteria introduced in the directive, defining significant and systemic relevant cross border institutions, a mapping exercise should be performed to assess the practical implications of the proposed criteria. The CBFA is in favour of a flexible functioning of supervisory colleges (in a so called 'géométrie variable' modus). Nevertheless, in order to enhance the legal certainty of the functioning of the supervisory colleges, the CBFA suggests to introduce criteria in art. 129, 3 to define: - which authorities are part of the so-called 'core college'; - under which circumstances the 'core college' should operate and under which circumstances the college in its full composition should be activated. These criteria and circumstances will, although not exhaustive, create more legal certainty for the functioning of the colleges. 2. It should not be allowed for the applicant to trigger the consultation of CEBS during the model validation process. The role of CEBS should focus on offering a non binding mediation between supervisory authorities and should not be extended to a non binding mediation mechanism between credit institutions and supervisory authorities. Therefore, it is crucial to delete the words "at the request of the applicant" in Article 129 2, subparagraph Article 129 3, subparagraph 4, states that the consolidating supervisor and the supervisors of the subsidiaries of the groups should reach an agreement on the application of some provisions of the CRD. This obligation to reach an agreement should be limited to the reporting for the calculation of minimum capital requirements and to the own funds requirements in excess of the minimum level.

3 As regards the disclosure requirements for significant subsidiaries, it would certainly be useful to have a harmonised definition of what is deemed as significant. However, considering that the absence of such definition in the current Directive results from the fact that it was not possible to find an agreement between Member States, it seems that asking colleges of supervisors to harmonize that area will not result in one harmonised concept but rather in different concepts for different groups. It seems that relying on level 2 implementing measures will be the best way to achieve harmonisation on this issue. As regard to intra-group transactions, and without prejudice to our comments on the proposals relating to large exposures, the current proposal in article 113 (f) refers to some criteria that must be fulfilled, notably that there's no current or foreseen material practical impediment to the prompt transfer of own funds or repayment of liabilities from the counterparties to the credit institution. This criterion, which is probably the most controversial as mentionned above, must be assessed country by country, taking into account the legal framework of each country, and not only on group by group in order to avoid unlevel playing field between groups within EU. If this criterion is maintained in the directive (see our comments on large exposure), it appears inappropriate that a college will take the responsibility to reach an agreement on the fulfillment of this criterion for each group without having a more general assessment at European level on the transferability of own funds within EU and clear common guidance on the assessment of this criterion 4. Based on an analysis of its domestic market, CBFA considers that the threshold provided in Article 42 2 triggering an obligation to assess the systemic relevance of an institutions, should be fixed at 2 % of deposits. 5. In order to avoid duplication, the text of Article 42 3 should be clarified in order to stress that, when there is a college of supervisors led by the consolidating authority as provided by Article 129, the cooperation obligation and exchange of information between the home supervisor and the host supervisor of a relevant branch referred to in Article 42, 3 should take place in the context of the college without duplication between the home and the host supervisor acting between them. 6. It is not clear whether the obligations set out in Article 40, 3 could have legal consequences, in particular regarding the legal responsibility of the competent authorities visà-vis the depositors in other Member States. Considering that this provision does not seem to aim to set up direct legal obligations, we suggest including this paragraph 3 in the recitals of the directive. 7. The efficient advance preparation of a coordinated management of emergency situations by relevant supervisors and central banks that is suggested by Article 129, 1 (c), as well as by the new EU MoU on cross- border financial stability, presupposes a free flow of pertinent information between supervisors and central banks also in advance of a crisis situation. We therefore suggest to delete the introductory section "In an emergency situation as referred to in Article 130 (1)" of the very last sentence of Article 49 to ensure that member states allow competent authorities to transfer proprietary information on individual entities to central banks also in order to prepare the management of an emergency or crisis situation. 8. Article in fine provides that the consolidating supervisor shall inform CEBS of the activities of the college, including in emergency situations. It would be worthwhile to have more information on the use CEBS will or is expected to do with this information, in particular in emergency situations. Will this use go beyond feeding the work of CEBS relating to the issue of guidelines for the operational functioning of colleges? Will it also be used by CEBS in order to accomplish its role of monitoring the financial stability and reporting risks to the EEC?

4 Comments relating to the large exposure framework In general de CBFA supports the proposed changes to the Large Exposures regime, including the removal of the 800% limit. However great concerns exist about the effects the proposed adjustments to the treatment of intra-group transactions and the transactions to institutions will have. Intra group transactions: Imposing risk concentration limits on intra-group transactions will increase the counterparty credit risk and result in less effective the liquidity management for those institutions who have centralised the management thereof. The current liquidity crisis in the banking sector has also demonstrated the importance to have a free access to the liquidity available within the group. In consequence, we support the removal of a national discretion relating to intra group transactions. Nevertheless, the requirement that there is no current or foreseen material practical or legal impediment to the prompt transfer of own funds from the counterparty to the credit institution (Article 80, 7, (e)) seems not to be a relevant condition in this matter'. Moreover, different interpretations of this condition may exist throughout the EU, and as a result this could be used as an implicit national discretion. We support the view that intra-group transactions must be justified as a normal banking transactions regarding their nature and conditions, meaning that the transacfions must be done at arm-the-length, and may be justified by the management of risk (i.e. liquidity risk) at group level. In this case, these transactions should be exempted from large exposures limits. Therefore, condition (e) of Article 80, 7 should be removed or at least be replaced by the requirement for the institution to have a policy with regard to intra-group transactions and that these transactions should be done at arm's lenght basis. This policy should clarify the justifications and the purposes of these transactions given the risk management of the group (e.g. liquidity risk). According to Article 110, 1 and 2, we underline that these transactions should be reported not less than twice each year to the competent authorities. It should be clear that, even when not subject to a limit, the national supervisor can take exceptional measures when deemed necessary (Article 136). The supervisors should consult togheter on the these exceptionnal measures within the context of the college of supervisor (new article 129). A fall back solution acceptable for the CBFA will be to maintain the current national discretion relating to intra-group exposures. Inter- bank exposures: The proposal to limit large exposures on institutions to 25 % is in practice much more strict that the current directive and the potential impact of this new rule on the market has not been assessed for the moment, notably with regard the access to funding or derivative market. The regulation should also take into consideration that institutions have developped management practices relating to counterparty risks and that institutions are subject to supervision. Then, the CBFA may accept less stricter rule than the one propose in the consultative paper, notably that short term transactions with institutions (maturity of 3 months or less) will be subject to a 20 % risk weight for large exposures purpose. For exemple, the fact that a bank subsidiary must be able to transfer own funds to it's mother bank is not relevant when the mother bank has a large exposure on this subsidiary.

5 For smaller institutions, the proposal of the European Commission (i.e. the maximum of the 25 % limit or an absolute amount) may not be restrictive at all. Therefore, we prefer to apply a limit of 25 % relative to the amount of own funds but with the possibility for the small institutions to apply, on case by case basis and subject to approval of the supervisor, a lower weigthing of short term transactions (maturity of 3 months or less), i.e. 10 % (in stead of 20 % mentionned above). The prior approval of the supervisor is only to ensure that the institution has assessed carefully the credit quality of the counterparty before applying a 10 % risk weight and that this counterparty has a sufficient credit standing. In our market, we consider that smaller institutions are those with own funds lower than Eur 50m. Settlement activities performed by credit institutions generate a specific type of interbank exposures which should not be treated in a similar way to exposures arising from usual interbank lending activities. The main reasons are that these exposures are of a very shortterm maturity (generally no longer than overnight), and that they are beyond the control of the institutions concerned. Such exposures are indeed mainly the result of client activity: in order to provide the settlement bank'" with the cash needed to settle their securities purchases, clients throughout the day transfer funds to the settlement bank's cash correspondant bank account. The timing of those transfers being beyond the control of the settlement bank, some of those happen very late in the day resulting in an impossibility for the settlement bank to manage those late transfers leading to an excess exposure. It should be however noted that these unsecured interbank exposures are in general very short term (limited to overnight). At the end of the day, the settlement bank is not in a position to secure these exposures, nor to diversify its exposures by redepositing the funds at other counterparties. Considering that the post-trading activités are essential for the smooth functionning of the financial markets and reduce the settlement risk as well as the risk of funding or collateral shortage for the whole industry, it should be recognised that a credit institution providing settlement services to other counterparties may exceed the 25 % limit for very short term interbank exposures. As a consequence, we suggest to apply a 20% risk weight to exposures resulting from settlement services to other counterparties and having a maturity of 5 working days maximum (this time span being in line with the one foreseen under article (b)). Comments relating to hybrid instruments In addition to the proposed limits in article 66, la, the CBFA favors also a rule ensuring that core original own funds must be sufficient to cover a percentage of the minimum capital requirements defined in article 75 and the deduction from total own funds (50:50 deductions). CBFA suggests that this percentage will be 50 % and that core original own funds will be defined as original own funds less hybrid instruments referred in the new art. 57 ca. As compromise solution, CBFA may accept eventually a lower percentage (i.e. 35 %) or that the core original own funds (for this specific additional requirement only) includes hybrid instruments not subject to the 35 % limit proposed by the Commission in article 66.1a.(b)) due to the quality of these instruments. This proposal aims to maintain the quality of own funds and is justified by the fact that the proposal of the Commission increases the limit of eligibility of hybrid instruments in many EU countries. in Settlement bank meaning here «the bank who provides settlement services»

6 ANNEX CBFA's other suggestions on the possible changes to the Capital Requirements Directive Please find hereafter the CBFA's comments relating to the different parts of the Commission's document. A. Large Exposures As regards Article 106 The proposed text refers to Article 57 for the definition of own funds when defining the large exposures: "For the purpose of this Section own funds shall mean own funds as referred to in Article 57 without deducting items referred to in Article 57 (q) and accepting items referred to in Article 63 (3)." By referring to Article 56 the specifications for own funds on a consolidated basis (Article 65) are included. Also for those institutions for which the alternative to the deduction of participations in insurance undertakings (Article 59) is allowed, the own funds used for the Large Exposures would be consistent with the one used for the capital requirements. However, the exposures of the insurance companies ought to be subject to the large exposure regime as well. As regards the deletion of Article Even though some regional authorities and local authorities have specific revenue-raising powers, it could be that the risk is considered somehow differently from the risk of the central government. Applying the 25% limit without a partial exemption for these exposures could create a disruption in this particular market. As no impact assessment has been carried out so far and to adequately reflect the reduced risk of these regional and local authorities (because of their revenue-raising powers), we propose to maintain the original Article 115, 1. However, in order to delete the national discretion, this paragraph could be rewritten as a general rule. B. Hybrid capital instruments New article 57 (a) : the current wording of the proposal may be subject to different interpretation within EU countries on the nature of the instruments that may be included in this paragraph, for example the non cumulative preferential shares. These instruments depending on the legal framework may also be considered as fully loss absorbent in going concern and they rank after all other claims. It could be useful to clarify the definition or to define more detailed implementing measures. In new Article 63a(a), the inclusion of certain [long-term] dated instruments with a "lock-in" clause in an institution's original own funds is considered. Even if dated instruments with a "lock-in" clause may economically be regarded as permanent, it's not obvious that the permanency is identical compared to an undated instrument with call and step up. There's also no clear agreement at international level, notably at the level of Basle Committee, to include dated instruments in the orginal own funds and no clear agreement regarding the

7 circumstances according which the lock in clause must apply. CBFA suggest not to address dated instruments in the Directive until this issue has been discussed at the Basel Committee. E. Technical amendments to Directive 2006/48/EC As regards article The new sentence in paragraph 95.2 proposes a floor (no less than 15 %) to the risk weighted exposure amounts of securitized exposures for an originator. This new sentence imposes a new capital requirement to originating bank in EU which may create unleveled playing field with non EU institutions. Other provisions in the directive already aim to prevent regulatory arbitrage or a disproportionate reduction in the risk weighted amounts. We suggest deleting this sentence for the time being (notably if there's no agreement on this at the level of the Basle Committee). As regards Annex X, Part 2. Point 1.1 The proposed text of Point 1.1 is unclear and remains incoherent with the text of Article 104, 2 and 4, of the Directive : " 2. For each business line, credit institutions shall calculate a capital requirement for operational risk as a certain percentage of a relevant indicator, in accordance with the parameters set out in Annex X, Part 2." " 4. The capital requirement for operational risk under the Standardised Approach shall be the sum of the capital requirements for operational risk across all individual business lines." In particular, the proposed text of Annex X, Part 2, Point 1.1 does not define the "relevant indicator" under the Standardised Approach does not explain how the capital requirement per business line has to be calculated uses undefined terminology such as "gross income", "capital charge", "total capital charge", "regulatory capital charge". requires more precise wording in order to reconcile the calculation sequence as suggested in Article 104 (first a "horizontal" calculation per business line using the relevant indicator per business line, then a "vertical" summation of the thus calculated capital requirements per business line in order to arrive at the (total) capital requirement for operational risk), with the calculation sequence inherent in the leeway offered in Annex X with regard to negative amounts (first a "vertical" procedure of offsets within each year between business lines).