Current Positions on the regulation of banks and the financial markets. Spring 2018

Transcription

1 Current Positions on the regulation of banks and the financial markets Spring 2018

2 VÖB in Europe Liaison office Regular contact with the European Banking Authority (EBA) and the International Accounting Standards Board (IASB) Draft leadership for comments to EBA standards Eight local employees Regular contact with the European Parliament and the European Commission Member of the European Association of Public Banks (EAPB) Main lobbying office, with 70 staff members Professional support for member institutions Positioning and exchange of views in expert committees and working groups Contact with the German Federal government, and with both chambers of the German parliament (Bundestag/ Bundesrat) Berlin London Brussels Bonn Frankfurt/Main Paris Regular exchange of views with Deutsche Bundesbank, the German Federal Financial Supervisory Authority (BaFin), and the European Central Bank (ECB) Six press conferences per year Eight member institutions represented locally Regular exchange of views with BaFin Registered office of VÖB-Service GmbH subsidiary Liaison office Regular contact with the European Securities and Markets Authority (ESMA) VÖB representatives to ESMA's Stakeholder Group

3 Current VÖB positions on the regulation of banks and the financial markets

4 Dear readers, If you expect appropriate decisions, you will have to make your point clearly and concisely. As the voice of German public-sector banks and therefore one of the top associations of the German banking sector we are thus committed to providing comprehensive, transparent and factual information. Our mission is to inform readers about the most important legislative initiatives as well as regulatory requirements, on a regular and timely basis. Yet we also clearly voice our views and opinions, in order to successfully represent the common interests of our 62 member institutions, on a national and international level and to support decision-making by politicians and regulators in a resultsoriented and hands-on manner. We want to play our part in ensuring that Germany's financial markets are client-focused, powerful, and competitive. This vision of who we are also characterises our "Current Positions on the regulation of banks and the financial markets", where we cover the continuation of EU funding policy during the post-2020 budget period. Moreover, we take a stance on how regulators should proceed following the compromise reached within the Basel Committee concerning Basel IV, and what should be done in Europe to deal with nonperforming loans. VÖB member institutions which include, in particular, the Landesbanken as well as development and promotional banks owned by the Federal Republic of Germany or the German Federal States make an important contribution to Germany s prosperity. With aggregate total assets of approximately 2,900 billion euros, they represent around onethird of the entire German banking sector s total assets, as well as employing around 75,000 staff between them. Deeply rooted in their respective home regions, they take responsibility for the German Mittelstand, businesses, the public sector, and private customers all over Germany. With a 49 per cent market share, VÖB ordinary member banks are market leaders in local authority financing; they also provide some 26 per cent of all corporate lending in Germany. Last year, VÖB's development and promotional banks provided 71 billion euros in new development and promotional loans. I hope you will find our Current Positions interesting reading. Together with my colleagues at our Berlin head office, I will be happy to answer any questions you may have. Yours sincerely, Iris Bethge Executive Managing Director

5 Our topics 1. Supervision and regulation in Germany and Europe 6 2. International banking regulation 8 3. Discussions concerning definitive withholding tax 9 4. The path towards Brexit 10 NEW 5. EU funding policies after Revision of authority levels granted to European regulators Ongoing development of the crisis management framework (MREL, TLAC and bail-in) 13 NEW 8. Reduction of non-performing loans in Europe Discussions concerning the European Deposit Insurance Scheme (EDIS) European Capital Markets Union and Green Finance The European Central Bank's monetary policy Digital innovations in payment services Supervisory Requirements for IT Benchmark Regulation Accounting for financial instruments (based on IFRS 9) 21 Overview of Landesbanken and promotional/development banks 22 Glossary 24

6 1. Supervision and regulation in Germany and Europe Consider special characteristics of promotional and development banks, and of institutional groups no standardisation of internal risk measurement no reduction of threshold values for remuneration rules; safeguard exemption for pass-through business In the wake of the financial markets crisis, in 2010 the Basel Committee on Banking Supervision (BCBS) adopted stricter requirements for banks' equity and liquidity. This framework known as 'Basel III' was implemented by the EU through the Capital Requirements Regulation (CRR) and the Capital Requirements Directive (CRD IV). In November 2014, the European Central Bank (ECB) assumed the direct supervision of important euro area banks; less important institutions continue to be supervised by national competent authorities. The European Banking Authority (EBA) is responsible for drafting regulatory technical standards (RTS), and for the uniform application of banking regulation across the EU. Revision of the EU Capital Requirements Regulation (CRR II) and of the Capital Requirements Directive (CRD V) The European Commission submitted legislative proposals for a revision of the Capital Requirements Regulation ("CRR II") and of the Capital Requirements Directive ("CRD V") in November. The purpose of the CRR II is, in particular, the implementation of requirements set out by the Basel Committee on Banking Supervision: the Leverage Ratio and Net Stable Funding Ratio (NSFR), new large exposure rules, trading book rules, and the treatment of investment funds. Moreover, the EU Commission proposes to reduce capital requirements for qualified infrastructure financings by a quarter. The so-called SME Supporting Factor, which reduces capital requirements for loans to small and medium-sized enterprises by about a quarter is to be maintained. According to the proposal, collateral which banks take into account when determining their capi- tal requirements for credit risk will have to be included for the purposes of large exposure rules. At present, banks can decide themselves whether they want to include collateral in order to gain relief under these rules. Furthermore, institutions which include financial collateral within the framework of the comprehensive method will need to record a claim against the issuer of collateral, on top of the (reduced) claim against the borrower. The proposal for a revised CRD V is also set to specify the principle of proportionality concerning remuneration systems, according to which such systems would have to take all regulatory requirements into account where total assets exceed 5 billion. To date, national law provides for a threshold of 15 billion in this regard. Requirements for internal bank risk management For the purposes of the Internal Capital Adequacy Assessment Process (ICAAP), the EBA is to develop regulatory technical standards for risk measurement. These standards would restrict institutions in their capability to make decisions on methodology. Irrespective of this, at the end of October 2017 the EBA produced three papers on the further development of the second pillar, available for consultation until 31 January Especially the SREP guidelines dated December 2014 are being revised and amended, also integrating requirements for regulatory stress testing. Furthermore, the EBA is taking up the breakdown of the capital demand (divided into pillar 2 requirements (P2R) and pillar 2 guidance (P2G)) proposed within the scope of the CRD adjustment. Said breakdown leads to various amendments in the guidelines. The guidelines on bank-internal stress tests dated August 2010 are also being revised. The EBA had already launched a related consultation process in December 2015; however, without implementing the findings. Finally, the guidelines on Interest Rate Risk in the Banking Book (IRRBB) are being revised. The guidelines on bank-internal stress tests are scheduled to come into force in the second quarter of 2018; the guidelines on IRRBB on 31 December 2018; and the guidelines on SREP on 1 January Introduction of the Leverage Ratio The non-risk-related Leverage Ratio, expressed as the ratio of a bank's tier 1 capital to the aggregate of all on-balance sheet and off-balance sheet items, serves to supplement the risk-related capital requirements. A minimum of 3 per cent was set for the Leverage Ratio. Discussions regarding the question whether domestic 6

7 or other systemically important institutions should fulfil a higher Leverage Ratio are yet to be held. As part of the revised Capital Requirements Regulation (CRR), the European Commission has now also published the specific calculation methodology. According to this, certain items may be excluded, such as pass-through promotional loans, guaranteed export credits, intra-group claims, or claims by development and promotional banks against regional governments, local authorities, and other public-sector entities. In Germany, promotional loans are passed through the borrower's main banking relationship: the intention being that potential borrowers submit their application for a promotional loan to their main bank, which in turn forwards the application to a centralised institution, or directly to the development and promotional bank granting the loan. Default risk is transferred to the receiving bank. Exemption is also possible for public investment finance, provided that the criteria of a development and promotional bank are fulfilled. One such criterion is the exclusion of accepting covered deposits, as defined in the EU Deposit Guarantee Scheme Directive (DGSD). At present, the Council is discussing whether this criterion should be specified, to the extent that factual non-acceptance of term deposits and savings deposits of consumers would be sufficient for the purpose of exemption. EU banking regulation We strongly advocate for the exemption of German development and promotional banks from the application of the Capital Requirements Regulation (CRR) and the Capital Requirements Directive (CRD). Development and promotional banks should be under national supervision, as this allows for acknowledgement of their special features. We welcome the lower capital requirements for qualified infrastructure financings, and the fact that the SME Supporting Factor will be maintained. Yet we unequivocally reject the inclusion of an additional exposure to the collateral provider, as proposed under large exposure rules. To date, banks are only required to include the uncollateralised portion of claims for the purposes of maximum large exposure limits. We also advocate the current treatment of investment funds in the standardised approach for credit risks be maintained: fund management companies should retain the option of determining an average risk weighting applicable to investing banks. We strongly suggest a significant increase to the proposed threshold for remuneration systems, given that for smaller institutions, implementation of all regulatory requirements causes excessive additional administrative efforts. In the area of corporate governance, we advocate that shareholder and institutional representatives appointed according to national regulations be accepted in supervisory or administrative bodies, even if political influence is thus exerted. This must apply especially to members of supervisory bodies who as a result of specific national regulations also belong to committees responsible for ensuring the founding purpose of the company or the public mandate. Banks' internal risk management We reject regulatory technical standards to be issued by the EBA within the scope of the ICAAP. This would constitute intervention into the specifications of banks' internal methods, for reasons unknown. We are in favour of completely offsetting the pillar 2 guidance against the capital conservation buffer. We advocate a uniform implementation date which should be set as late as possible and simultaneous application of all three EBA guidelines. Leverage Ratio We advocate exemption of pass-through promotional loans from the Leverage Ratio, retaining the Commission's CRR proposal. We demand that reference to the DGSD be deleted from the deposits criterion, and that a clarification be added that accepting covered deposits is only prohibited regarding deposits from consumers. Whilst development and promotional banks owned by the German Federal states are generally prohibited from taking deposits, it would be virtually impossible to comply with a full legal exclusion, in line with the definitions in the DGSD, given the very broad definition. We oppose any further add-on to the Leverage Ratio for domestic or other systemically important institutions (D-SIBs), to prevent further restrictions being imposed on low-risk business models. 7

8 2. International banking regulation No further increase in capital requirements; focus on proper functioning and competitive standing Following protracted negotiations, the Basel Committee on Banking Supervision (BCBS) published its final standards on Basel III in December A particular source of controversy has been the discussion on the level of the 'output floor' a quantitative lower threshold for the calculation of capital requirements based on internal models. Finally, the Group of Governors and Heads of Supervision (GHOS) has agreed on an output floor level of 72.5 per cent. The output floor is set to gradually rise over a five-year period, beginning on 1 January 2022 (starting with 50 per cent) and ending in Moreover, supervisory authorities are granted the opportunity to limit the increase in risk-weighted assets (RWA) to 25 per cent after the application of the output floor, until In addition, the Basel Committee has finalised and published its new standards on credit risk (standardised approach and IRBA), credit valuation adjustment risk, operational risk and Leverage Ratio. First-time application is scheduled for 1 January Hence, a simultaneous implementation throughout the EU appears to be possible. Basel III places German banks at a competitive disadvantage, since it causes a significant increase in their capital requirements. The sharp differences in lending practices between Europe and the US have not been sufficiently taken into account. It is now important that European legislators consider the characteristics of the German and European markets for the purposes of implementation, and that corrective measures are carried out at their sole discretion. The implementation must not threaten the proper functioning and competitive standing of the European banking sector. This is all the more crucial given that other countries apparently do not plan to implement Basel III in full. In June 2017, the US Treasury Department proposed a number of deviations from international regulations that had already been agreed upon within the Basel Committee. The implementation of the previously agreed Net Stable Funding Ratio (NSFR) and the Fundamental Review of the Trading Book (FRTB) are to be delayed indefinitely. Moreover, reform of US tax policy further strengthens the profitability and competitiveness of American financial institutions. The United Kingdom s exit from the European Union ("Brexit") might add to the regulatory disparity. There is a risk that British legislators will lower regulatory standards in their own interests. Additional capital requirements under Basel IV Output floor (per cent) 50 Transitional phase Source: own representations We demand that the global standards set by the Basel Committee be implemented appropriately, with a sense of perspective and taking national specifics into account. Appropriate regulations are key to ensuring the stability of the global financial markets. Unilateral deregulation tendencies must be counteracted. We advocate new regulations being examined even more closely to check whether they are necessary. International agreements that have already been reached must not be stepped up even further when they are implemented within the EU. The existing regulations are to be evaluated in terms of their impact on the proper functioning and competitive standing of the banking industry. Only economically sound banks can be stable in the long run, and are in a position to finance innovation and growth. 8

9 3. Discussions concerning definitive withholding tax Simple, transparent and fair: retain the definitive withholding tax in its current form According to the deal reached in negotiations on the new German government coalition, "definitive withholding tax on interest income will be abolished with the establishment of the automatic exchange of information". In the run-up to the general elections in 2017, some political parties already announced their intention to abolish the tax, or to put it up for discussion, citing its shortcoming in terms of fair and equal treatment, and pointing out that this tax concept has become obsolete with the international exchange of information. What is new is the proposal, put forward by the parties forming the new government coalition, to retain definitive withholding tax for dividends and capital gains, but to return to taxation at the personal income tax rate for interest income. If dividends were to be taxed at the personal income tax rate, prior taxation of income at the level of the distributing company would need to be taken into account in which case corporate taxation would need to be revisited. This is something the coalition partners did not want to get involved with. Under definitive withholding tax, all income from capital investments has been taxed with a flat tax rate of 25 per cent, plus solidarity surcharge and church tax (if applicable), since Under this regime, capital gains are taxable without limit, and are offset against losses from disposals; whilst deduction of income-related expenses is not permitted, a flat-rate allowance is granted. With this tax regime, the assessment basis for the more moderate tax rate was significantly expanded compared to the previous tax system for investment income. The fiscal administration checks for accurate taxation when auditing banks. Investment income as a source of taxes Investment income tax revenues Definitive withholding tax Dividend payments Definitive withholding tax on interest income and capital gains Forecast 19.7 bn 7.5 bn Sources: Handelsblatt, own representations We reject the notion of a 'split definitive withholding tax', which would be retained for dividends and capital gains only, and which would return to taxation of interest income at the personal income tax rate. Such a system would be impossible to manage: whilst expenses would once again be deductible from interest income, they would remain non-deductible with regard to dividend income and capital gains. We would like to point out that the global exchange of information only commenced in 2017 targeted evaluation of the data collected by the fiscal administration has not yet been ascertained. We advocate retaining definitive withholding tax in its current form: 1. From a fiscal perspective, it yields good tax revenues. Given deductibility of expenses, it is unlikely that tax authorities would yield significant extra revenues from taxation of interest income at the personal income tax rate. On a general note, in a low interest rate environment, taxation of interest income is of minor significance for after-tax returns from investment income, compared to dividend income. The partial systematic change is thus questionable. 2. It is efficient in terms of tax administration: its abolition would require Federal states to hire and train a higher number of tax officials. Especially the inclusion of income-related expenses involves extensive administrative efforts for the tax authorities. 3. It provides certainty in terms of tax structures. Prior to its introduction, the taxation of so-called 'financial innovations', which converted taxable investment income into tax-free capital gains, was unsatisfactory. Abolishing the definitive withholding tax would in fact allow such undesired tax structures. 9

10 4. The path towards Brexit Reach fair negotiation results for the EU and the United Kingdom; move euro derivatives clearing to the euro area; strengthen the Frankfurt financial marketplace The UK s exit from the EU is set to be completed by 29 March Following a first phase of negotiations, the EU and the UK finally agreed on sufficient progress in the EU s core priority areas: the rights of EU citizens, UK compensation payments to the EU, and the border between Northern Ireland and the Republic of Ireland. This agreement enabled the opening of the important second phase of negotiations on the terms of future trade relationships between the UK and the EU. Since the conclusion of a comprehensive agreement by March 2019 is rather unlikely due to the short negotiation period, and since both parties want to avoid failure, negotiations are set to focus primarily on a potential transition period. From the EU s perspective, such a transition period until the end of 2020 would be plausible and reasonable only if the UK continues to be fully subject to European law throughout that period. At the same time, the UK would not have any power of co-decision, since non-member states are not allowed to take part in the decision-making process of the EU. Moreover, any agreement would also need to recognise the judicial review by the European Court of Justice. The EU intends to start further discussions on the framework of the future relationships between the EU and the UK in March From a capital markets perspective, the issue of euro derivatives clearing which mainly takes place in London at present has evolved as one of the key topics of Brexit negotiations. The importance of euro derivatives clearing is driven by the obligation of clearing standardised derivatives via a central counterparty, pursuant to the European Market Infrastructure Regulation (EMIR) which came into force in A 'clean' Brexit would mean that UK clearing houses lose their status as eligible central counterparties. Consequently, discussions are focusing on moving euro derivatives clearing into the euro area; alternatively, an agreement might be reached that retains the ability of European regulators to supervise central counterparties in the UK. We support a rapid agreement on reasonable transitional arrangements which are practicable for market participants, in order to avoid grave negative implications for the market and to ensure financial stability. A failure to achieve this would not only affect banks, but also the provision of banking services and financial products such as hedging transactions to the real economy. From a regulatory perspective, we recommend moving euro derivatives clearing into the euro area to safeguard the stability of financial markets in the EU, even during times of crisis. Specifically, the transfer of existing derivatives portfolios requires the establishment of clear legal and technical provisions in order to maintain market stability failing that, grandfathering rules will be required. The transfer of new business may require transitional provisions. We believe that a cooperation with the UK on the basis of equivalent-measure regimes should provide the opportunity to ensure durable legal and planning certainty, in order to enable a solid business foundation on the one hand and investments for an improved market infrastructure on the other. With regard to the timeframe and the previous negotiations, the development of appropriate regulations appears questionable. We believe that negotiations should lead to results which are fair for both sides. Looking at the future of the Single Market, we support strengthening Frankfurt as a financial centre, and welcome the corresponding dialogue between BaFin and banks as well as service providers. 10

11 5. EU funding policies after 2020 NEW Continue cooperation with regional and national development and promotional banks; streamline funding conditions, making them practice-oriented; ensure compatibility of rulebooks and combinability of EU funding instruments As the current Multiannual Financial Framework (MFF) is set to expire at the end of 2020, the European Commission intends to substantiate its ideas for the EU budget as of 2021 this year. The MFF defines the spending limit for the European Union's general annual budget, determining the maximum annual amounts the EU may spend in its various fields of activity (headings). The EU Commission has been discussing different scenarios since last summer. As a result of 'Brexit', i.e. the United Kingdom leaving the EU, the EU budget will be short of approximately 12 billion to 13 billion per year. At the same time, new tasks within the European Union are burdening the EU budget's expenditure side. Therefore, the EU Commission's lines of thought for the upcoming EU budget currently range from 'continuing as is' to suggesting radical EU budget structure changes. The EU Commission has announced it will table its proposals on the future of the EU budget in May The amount of the EU funding budget ranging from cohesion funds to the directly managed EU framework programmes (so-called EU-level instruments) also depends on the MFF structure. This in turn impacts the exposure of national and regional development and promotional banks in Germany, as the exposure is not only based on regional and national funding. After all, the various EU funding pools also significantly enhance the product range offered by promotional banks. The European Structural and Investment Funds (ESI Funds) offer the largest contribution to promoting convergence and reducing development disparities within and between European regions and thus also Germany. The underlying financial instruments of the directly managed EU funding programmes contribute to strengthening the European Union's economic strength. On the one hand, funding is focused on investments in research and innovation within the scope of Horizon 2020; on the other hand it focuses on supporting the competitiveness of small and medium-sized enterprises within the scope of the programme COSME. We advocate a broad, subsidiary approach in the cohesion policy, also after In order to perpetuate past funding successes, whilst at the same time instigating innovation and growth for the future, all European regions have to continue to benefit from EU funding. In addition, we want to see funding conditions and ESIF funding become generally simpler. Amended and new rules must meet practical requirements, and be adopted and released in good time. We advocate a preferred cooperation of the European Investment Bank (EIB) with regional and national development and promotional banks, this being the only way to avoid parallel funding and crowding-out. The EU Commission must ensure the continuity and reliability of the funding. We recommend coordinating the EU funding requirements, and advocate the financial instruments the EU funding programmes are based on following uniform and simple structuring principles, therefore becoming more practical and combinable. We recommend a flexible mix of instruments comprising subsidies, loans, guarantees, indemnities, and equity participations so as to enable tailor-made support for every region. 11

12 6. Revision of authority levels granted to European regulators Prevent hefty cost burdens for institutions, only restrict the co-determination rights of national regulators in matters of pan-european significance The work of the European Supervisory Authorities (ESAs), which comprise the European Banking Authority (EBA), the European Securities and Markets Authority (ESMA) and the European Insurance and Occupational Pensions Authority (EIOPA) and which have been operating since 2011 is currently under review. Within this context, the European Commission evaluated a reform of the regulatory framework and powers of the ESAs in the period leading up to the end of May 2017 and, based on the outcome of this evaluation, published a proposal for a reform of the authority levels granted to the ESAs in September Plans to enhance the supervisory powers of the ESAs at the expense of the national competent authorities (NCAs) will change the face of the current European supervisory structure significantly. In particular, the ESMA s supervisory powers are to be considerably enhanced by making it directly responsible for certain areas of prospectus law, critical benchmarks, certain types of funds and data reporting. Supervised institutions are to make a direct contribution to the financing of supervisory costs in the future. The current fixed proportion of the EU budget that is earmarked for financing is to be replaced by a variable contribution of up to 40 percent. The organisational structure will also be changed considerably, with plans to introduce an Executive Board to replace the current Management Board. In the future, the Executive Board is to consist of independent full-time members and a Chairperson. The authority levels assigned to the EB considerably restrict the influence that can be exerted by the Board of Supervisors and, as a result, by the NCAs. What is more, the fact that in the future the Executive Board is to have the power to set supervisory priorities and strategic supervisory objectives for the NCAs with binding effect, will give the NCAs even less of a voice. As the guidelines developed by the ESAs have often involved the latter exceeding its authority, the stakeholder group is to be given the opportunity to initiate a review of the guidelines by the European Commission. The proposal does not, on the other hand, address the legal status of guidelines. Nor does it include a merger of EBA and EIOPA (known as the twin peaks model), an idea that was mentioned explicitly in the consultation paper. We would like to point out that the costs associated with national supervision must drop as a result of the planned direct contribution to be made by the institutions. In addition, we believe that the EU budget has to make a permanent, fixed contribution to financing for budget control purposes. We demand a critical evaluation of the proposed establishment of an Executive Board that would act independently of the representatives of the national authorities. The ESAs are essentially authorities that are supported by the supervisory authorities in the member states. At the very least, we take a critical line on the number of members of the Executive Board and its planned strong position. We support enhanced powers for the ESAs in matters of pan-european significance. These include, by way of example, structures in third countries and direct ESMA supervision of critical benchmarks. Efficient national supervisory structures should remain intact in the spirit of subsidiarity. We welcome the idea of the ESA guidelines being reviewed by the Commission if the stakeholder group finds that the ESA has exceeded its authority. Ensuring a direct judicial review of such guidelines, however, would be a better option. 12

13 7. Ongoing development of the crisis management framework (MREL, TLAC and bail-in) Safeguard the principle of proportionality and preserve grandfathering arrangements in the context of crisis management announce requirements for adjustment on a national level openly, and at an early stage, in order to prevent legal and planning uncertainty In November, the European Commission submitted its proposals for a revision of the EU Bank Recovery and Resolution Directive (BRRD), and of the Regulation for the Single Resolution Mechanism (SRMR). The primary purpose of these proposals is to implement the recommendations of the Financial Stability Board (FSB) on Total Loss-Absorbing Capacity (TLAC), and to harmonise TLAC requirements with the Minimum Requirement for Eligible Liabilities (MREL), bringing MREL parameters and inclusion criteria into line with TLAC. In addition, rules governing reporting and disclosure as well as breaches of MREL requirements are to be introduced; resolution authorities are to be authorised to recommend higher levels of MREL (the so-called "MREL guidance"). Only global systemically important institutions (G-SIBs) will be required to comply with minimum TLAC ratios, and with the mandatory obligation to maintain subordinated liabilities. MREL obligations for other institutions will continue to be set on an individual basis by the respective resolution authority. At the end of 2017, ranking harmonisation of senior unsecured debt securities within the bail-in liability cascade came into force by fast-track legislative procedure. The proposal calls for contractual subordination, based on a new 'non-preferred senior' class, following implementation on a national level by year-end 2018 at the latest. Any debt instruments which were issued prior to the effective date of the new rules will continue to be governed by national law in force as at the end of. General bail-in liability cascade Harmonisation of the bail-in liability cascade Planned amendment of EU regulations, with cross-relationship to section 46f of the KWG Structured senior unsecured bonds (grandfathering pursuant to section 46f of the KWG) Excluded from bail-in (e.g. covered deposits 100,000) Deposits from natural persons and SMEs > 100,000 Derivatives Unstructured senior unsecured bonds (grandfathering statutory subordination pursuant to section 46f of the KWG) Large corporate deposits > 100,000 Other subordinated liabilities Tier 2 AT1 CET1 Structured and unstructured preferred senior issues (new issues) Non-preferred senior issues (new issues subject to contractual subordination) Source: own representations We welcome the Commission's decision to confine the FSB's recommendation concerning TLAC requirements to G-SIBs, and reject expanding certain TLAC requirements to further institutions according to a 'TLAC light' regime. As in banking regulation, the principle of proportionality should also apply to crisis management, in order to take the heterogeneous business models and interconnectedness of institutions into due consideration. We are concerned by the fact that the catalogue of criteria, adjusted to TLAC, for recognition of liabilities for the purposes of MREL diverges significantly from requirements established recently, and is to apply to all institutions. In order to prevent the unnecessary reduction of market depth and disproportionate costs for new issues, we advocate instituting a grandfathering rule for existing MREL-eligible liabilities. We welcome the harmonisation of the bail-in liability cascade, in order to remove competitive distortions within the EU single market. In order to prevent pricing uncertainty for investors and issuers, early clarification is required as to which amendments will be required from EU member states. In view of the imminent (this year's) cancellation of central bank eligibility for statutorily non-preferred, unsecured bank bonds, we advocate for longer grandfathering arrangements. 13

14 8. Reduction of non-performing loans in Europe NEW No statutory prudential backstops for non-performing loans (NPL) In order to reduce banks' NPL ratios, the Council of the European Union published the Action Plan to tackle non-performing loans in Europe in July 2017, including recommendations for political measures to be implemented by various European institutions within the areas of banking supervision, insolvency law, development of secondary markets for NPLs, and restructuring within the banking sector. In January 2018, the EU Commission published a first progress report, according to which implementation is advancing as scheduled. Nevertheless, the report also states that NPL levels are higher than before the financial crisis. At request of the Council, the EU Commission initiated a consultation process regarding proposals for structuring minimum requirements for regulatory risk provisioning (statutory prudential backstops) for NPLs in November These minimum requirements intend for institutions to fully cover with CET1 the unsecured parts of new loans classified as non-performing loans within two years, and the secured parts of such loans within six to eight years. Alternatively, a haircut approach is proposed. The proposals are set to be introduced as mandatory pillar 1 requirements in the European Capital Requirements Regulation (CRR). The EU Commission is planning on submitting a comprehensive package of measures with legislative proposals on this topic, on the management of NPLs and on the prevention of NPLs in spring 2018 The ECB has suggested a timely write-down of the NPL stocks beyond the Action Plan. As the proposals also refer to the first pillar, similar to the EU Commission's suggestions, the ECB is being accused of overstepping its mandate. For this reason, a significant shift and mitigation of the proposals is imminent. The ECB will limit its suggestions to pillar 2 measures. Non-performing loans in the euro area 3rd Quarter 2017 Share of total lending volume (%) Total euro area ( bn) Greece 46.6 Italy Spain France Germany 2.0 (Q3) Sources: European Central Bank; own representations We generally welcome the NPL reduction measures. However, in our opinion, a mechanistic pillar 1 rule applicable to all banks would be excessive. Introducing statutory prudential backstops would surpass the increased requirements of IFRS 9 accounting and financial reporting, leading to pro-cyclical effects and exercising additional pressure to realise NPLs on secondary markets. Implementing targeted measures for banks with high NPL levels would be more efficient. In order to reduce NPLs, we advocate promoting consistent supervisory practices instead of a pillar 1 rule. We demand case-by-case assessments within the scope of the ECB's Supervisory Review and Evaluation Process (SREP), on the basis of NPL strategies elaborated by the banks. 14

15 9. Discussions concerning the European Deposit Insurance Scheme (EDIS) Avoid sharing of risks; no legal basis for a European deposit insurance scheme; prevent EDIS from leading to unequal treatment In November 2015, the European Commission submitted a proposal for establishing a European Deposit Insurance Scheme (EDIS) as a third pillar of the European Banking Union. EDIS shall be introduced in three stages; starting with a reinsurance scheme, it will be developed into a co-insurance and ultimately a full insurance system. In Germany this would apply to deposit guarantee schemes and their associated credit institutions. Moreover, the proposal calls for the establishment of a Deposit Insurance Fund (DIF), to be funded from contributions of credit institutions. In the event of a payout, or where national deposit guarantee schemes are involved in a restructuring or resolution cases, EDIS is supposed to cover liquidity shortfalls and losses. In June, the Economic and Financial Affairs Council (ECOFIN) decided to only commence concrete negotiations on a political level once sufficient progress has been made concerning risk mitigation measures. In November, a draft report was presented to the EU Parliament s Committee on Economic and Monetary Affairs (ECON), which is chiefly responsible for this issue. The draft report suggests a significant dilution of the Commission s proposal. Given the wide variety of positions held by members of the European Parliament, the issue was not yet put to vote. In early October 2017, the European Commission published a communication for the completion of the Banking Union by 2018, in order to help facilitate a compromise in the Parliament and the Council. Compared to its original proposal, the Commission propsed a modified approach, based on a two-phase model: during the reinsurance phase, which is scheduled to commence in 2019 gradually increasing liquidity support on a loan-by-loan basis shall be provided, while EDIS will cover increasing losses during the coinsurance phase only after certain conditions are met. Nevertheless the 2015 legislative proposal remains at the table as well as the ambition to have a fully mutualised EDIS at the end. Moreover, the Commission plans to further adjust the Deposit Guarantee Scheme Directive (DGSD) in order to improve harmonisation between national deposit guarantee schemes. We reject the full mutualisation of risks, given that this would separate the liability for risks from risk monitoring. Whilst a deepening of the Banking Union is only conceivable after successful implementation of risk-reducing measures, it must not threaten the viability of tried-and tested German deposit guarantee schemes. We generally welcome the Commission s modified approach. But in our view it is imperative that the prerequisites for risk reductions as set out in the report will have to be met already for the reinsurance phase. Moreover, the proposal remains unclear regarding key aspects, such as safeguarding the repayment of liquidity support provided. We criticise the fact that introducing EDIS would manifest striking differences between credit institutions within the euro area and those outside. But even within the euro area, EDIS would lead to unequal treatment, e. g. concerning the statutory protection of deposits above 100,000. Whether and to what extent the Commission plans to adjust the DGSD, which has been applicable since 2014, remain unclear to us. We do not see a legal basis for the introduction of EDIS: The draft Regulation constitutes a breach of the subsidiarity principle; it is not in line with the principle of proportionality. No comprehensive impact assessment has been published, thus breaching the principle of 'Better Regulation'. 15

16 10. European Capital Markets Union and Green Finance Continue promoting market-based solutions in a European context refrain from imposing overly strict legal criteria for Green Finance products Sustainable or 'green' finance has evolved into the central project of Capital Markets Union. In its mid-term review published in June 2017, the European Commission has stated goals of attracting more private capital for forward-looking investment, to increasingly promote SMEs and the transition of the energy sector, and to enhance cross-border movements of capital. Specifically, private capital flows are to be diverted to more sustainable investments, enhancing the management of risks which are relevant to climate and environmental issues. Also, environmental, social and governance ("ESG") aspects should be incorporated into decision-making processes. The high-level group of sustainable finance experts appointed by the Commission provided a detailed report of these considerations in its final report submitted at the end of January The Commission submitted an action plan on Capital Markets Union in March 2018, comprising a series of new legislative initiatives, for Pfandbriefe and crossborder transactions involving securities and assets, amongst others. In the context of private placements, the Commission duly acknowledged and recognised promissory note loans (Schuldscheine) as a best-practice initiative. It commissioned a survey to analyse the benefits of private placements, and to identify impediments to their wider use within the European Union. Moreover, the EU Commission presented a Sustainable Finance action plan according to the action plan, high priority will be assigned to the transition to a low-carbon, energy- and resource-efficient economy. The action plan for a more sustainable orientation of the financial markets is essentially based on the recommendations of the expert group. This calls for definitions, standards and labels for green and/or sustainable financial products to be developed, based on an EU-wide sustainability classification. Controversial discussions focus on the issue of a green supporting factor in the capital requirements for financial instruments considered to be sustainable. We welcome the objectives of Capital Markets Union, as well as the fact that the Commission recognises the material importance of bank financing for the economy. Moreover, the Commission does not restrict its scope to regulation as the only true guideline, but has expressed an interest in promoting market-based solutions. We support measures designed to reduce the burdens upon cross-border movements of capital. Besides the removal of burdens in tax law, an integrated European market infrastructure with a uniform legal framework will be decisive for any progress to be made. Likewise, stimulating demand from institutional and retail investors will be important. When establishing European frameworks for certain types of securities, such as covered bonds, we emphasise the importance of incorporating national standards acknowledged and appreciated by investors, thanks to a high degree of legal certainty and established business practice. We suggest promoting private placements in particular: this will facilitate the cross-border distribution of promissory note loans. In the context of developing uniform EU standards for 'green' financial products, we advocate promoting market initiatives, opposing excess regulation, allowing this nascent market segment to develop well, and to flourish. Any capital relief may only be granted on the basis of measurably lower risks for 'green' loans. 16

17 11. The European Central Bank's monetary policy End expansive monetary policy, prevent price bubbles and negative consequences for retirement provisioning, asset formation, and companies. Most central banks responded to the US sub-prime crisis, and the subsequent financial markets crisis, by drastically lowering key interest rates and pumping a high amount of liquidity into financial markets. The US Federal Reserve (Fed), lowered key interest rates to a range of 0 to 0.25 per cent at one point. The European Central Bank (ECB) repeatedly and rapidly cut its key interest rate starting from 4.25 per cent in October 2008 initially arriving at a low of 1 per cent (in May 2009). The deposit rate for banks has been in negative territory since June In March, the ECB reduced its key interest rate to 0 per cent, and the deposit rate for banks to 0.4 per cent. Whilst in the US, interest rate policy was supplemented by the purchase of fixed-income securities, the ECB has pursued an even more expansive monetary policy since March 2015 in order to fend off deflation. The ECB initiated a comprehensive securities purchasing programme. Central banks within the Eurosystem bought securities worth 60 billion on a monthly basis until the end of 2017; the amount was halved to 30 billion since January As a consequence of the asset-purchase programme, the ECB's balance sheet will increase to more than 4.7 trillion by the end of September Whereas the Fed terminated its purchase programme in 2014, and has been raising its key interest rates since the end of 2015, reducing its total assets since October 2017, the ECB has been maintaining its policy stance. Reducing bond purchases is, however, a first step towards a normalised monetary policy. Even if the ECB decided to follow in the Fed's footsteps, we do not expect a first interest rate hike before the end of Total assets (USD billion) Key interest rate (%) 5, , , , , / / / / / / / / / / 09/2017 US$ key interest rate key interest rate Total assets (ECB) Total assets (Fed) Source: own representations We highly respect the ECB's swift and decisive action at the height of the financial markets crisis, very probably not only avoiding the euro area sinking into a phase of economic depression, but also securing the continued existence of the euro. We warn about potential price bubbles for example, in equities, bonds and real estate which could emerge as a result of the extensive liquidity on the market. We are concerned about potential negative effects for retirement provisioning and asset formation at the expense of future taxpayers. Even today, companies are burdened by higher balance sheet provisions for pension commitments. We are now worried that the traditional banking business of maturity transformation i.e. accepting (shortterm) deposits and lending them (on a long-term basis) is unable to generate sufficient income. Banks must therefore assume higher risk in order to achieve their cost of capital. We expect the ECB to present a transparent schedule outlining a change of its monetary policy, and then to implement this change consistently and without delay. We suggest lifting the deposit rate for banks from currently 0.4 to 0 per cent, as well as reducing the purchase of securities gradually and in a timely manner. 17

18 12. Digital innovations in payment services Legal and planning certainty for new as well as established providers in the financial sector encourages digital innovations and protects customer interests The Second Payment Services Directive (PSD II), which was implemented through the German Payment Services Supervision Act (Zahlungsdiensteaufsichtsgesetz ZAG) and amendments to the German Civil Code, effective 13 January 2018, is designed to promote competition between banks and fintechs for new digital solutions and products in payment services, whilst further increasing security in payment services. In this context, providers of legally defined payment initiation and account information services, and third-party card issuers, will henceforth gain access to customer payment accounts at banks and savings banks. Third-party service providers will thus be able to initiate transfers on behalf of the customer, or process and analyse account transactions. The European Banking Authority (EBA) will provide further details regarding the implementation of PSD II, by way of regulatory technical standards (RTS) and guidelines. The RTS on strong customer authentication plays a key role for the future shape of payment methods; new products and business models will be based on it. The EU Commission submitted the Delegated Act to the RTS to the Parliament and the Council at the end of November First-time application will occur 18 months following publication in the Official Journal September 2019 at the earliest. In future, supervisory authorities will register or approve fintechs as payment service providers if they operate according to PSD II requirements. Moreover, EBA is examining the framework for cooperation between fintechs and banks, analysing relevant regulatory aspects and issues in this context such as requirements for the outsourcing of data and services in cloud-based solutions. The aim is to create transparency regarding dependencies and connecting points, in order to identify potential regulatory needs. The macroeconomic scenario has already changed profoundly as a result of the cross-linking of previously independent service systems and platforms; the banking business will continue to be materially impacted by technological change. Institutions will increasingly offer digital (debit/credit) cards over the years to come, expanding their product range over the long term, they will thus link the spheres of offline and online payments. This will open up the scope for new cooperations between institutions and retailers. We support transparent rules for data and consumer protection, especially regarding responsibilities and liability issues for market participants. We reject weakening the existing rules. We rely on the creation of cross-sector interoperability through compliance with European standards, for example regarding real-time payment schemes such as 'instant payment'. We support further expansion of banking infrastructure for the operation of digital cards, in order to create digital ecosystems. We advocate the banking sector retaining responsibility for maintenance, further development, and orderly implementation of technical procedures. In this way, the standards for data protection, banking secrecy and IT security, which banks have established for their online banking services, are safeguarded. In our view, fair competition is essential. We thus demand a risk-adjusted supervision which oversees banks and technology companies, following the principle of 'same business, same risks, same regulation'. We support rules enabling institutions to expand their product range with 'fintech services'. Over the long term, we envisage instant payments to have profound implications for the settlement of payment transactions in Europe, and for the integration of payment solutions into digital offerings for consumers and businesses alike. 18

19 13. Supervisory Requirements for IT Requirements for IT infrastructure and IT security continue to impose requirements upon banks for taking action At the end of 2017, German and European legislators and regulatory authorities tightened the IT security requirements applicable to critical infrastructure, as well as reporting duties and the requirements for banks' IT systems, through a variety of legislative initiatives and implementation regulations. Most recently, the legislative process for the adoption of the revised Regulation Determining Critical Infrastructure (Verordnung zur Bestimmung Kritischer Infrastrukturen "BSI-KritisV") was concluded, as part of the implementation of the German IT Security Act (IT-Sicherheitsgesetz "IT-SiG"). When it comes into force, this will also implement the EU Directive concerning measures for a high common level of network security and information systems into German law. What is decisive with regard to the BSI-KritisV, is that banks as well as technical service providers and IT centres may be considered as 'operators', provided they have material involvement in the planning and design of the IT infrastructure. Operators of critical infrastructure are obliged to establish a contact for reporting IT faults or disruptions to the German Federal IT Security Authority (BSI), and to conduct audits regarding stateof-the-art security. The German Federal Financial Supervisory Authority (BaFin) has formulated banking supervisory requirements for banks IT systems ("BAIT"), thus specifying the requirements set out in the German Banking Act (KWG) and the Minimum Requirements for Risk Management in Banks (MaRisk). With the cooperation of banks and the German Banking Industry Committee, existing requirements were revised to enhance transparency, and communicated to institutions' senior management by way of a circular dated November 2017, following publication of the revised MaRisk. The focus is on key aspects of IT management and IT operations. BaFin's BAIT rules are also designed to implement concrete requirements set out by the European Banking Authority (EBA), including those from the ICT (information and communications technology) risk review, as part of the Supervisory Review and Evaluation Process (SREP), or governing outsourcing of cloudbased services. Moreover, BSI and BaFin are discussing the extent to which BAIT (plus detailed related IT security requirements) can be seen as a sector-specific standard within the meaning of the IT-SiG. We generally welcome the more detailed specification and hence, improved transparency concerning requirements for bank's IT security and infrastructure. We strongly request a continuous review of whether existing regulations on a European as well as national level are in fact appropriate. Any potential relief that is available to banks must be consistently pursued. We expect that additional efforts for banks be prevented for example, due to dual or even multiple regulation on a European and/or national level. For instance, the details which operators of critical infrastructure are required to report to BSI overlap with the regulatory reporting requirements under the Second Payment Services Directive (PSD II), as well as with evidence to be submitted to BaFin and BSI concerning the fulfilment of requirements. We welcome the active involvement of banks and their associations during discussions on BAIT, and recommend continuing this dialogue in order to ensure regulation that is practicable. We demand that the principle of proportionality, as set out in MaRisk and BAIT, be applied throughout, with a corresponding harmonisation and review of the auditing practice. 19

20 14. Benchmark Regulation Seamless transition must be guaranteed when existing benchmarks are discontinued Level II measures must be available at an early stage prior to application To date, most major benchmarks have been calculated on the basis of quotes, i.e. through the regular provision of certain indicators within a bank. Unfortunately, however, this procedure turned out to be susceptible to manipulation in the past. Hence, the new Benchmark Regulation requires benchmarks to be calculated on the basis of transaction data in the future. Yet adjusting existing benchmarks turns out to be difficult, as seen with the problems in the transition of Euribor (Euro Interbank Offered Rate) and the discussions surrounding LIBOR (London Interbank Offered Rate). In both cases, the problem lies in the insufficient quantity of transactions in the underlying markets. Therefore, the Head of the UK Financial Conduct Authority (FCA) has raised the prospect of LIBOR benchmark rates to be discontinued post The long lead time to discontinuation was chosen in order to provide market participations with sufficient time to prepare, and to develop alternatives. A solution for the required seamless transition to alternative benchmarks to prevent any negative impact upon markets is not yet evident. Moreover, LIBOR was included in the scope of critical benchmarks at the beginning of Therefore, three benchmarks are currently classified as 'critical' within the meaning of the Benchmark Regulation: Euribor, LIBOR and Eonia (Euro OverNight Index Average). Looking at the Eonia benchmark rate (the interest rate at which euro area banks place money with other banks 'overnight'), the primary issue is the negative development of volumes, most recently due to the increasing number of banks leaving the Eonia panel in the first half of Lower volumes have increased Eonia volatility. In response to this critical trend, the ECB announced in September 2017 that it would provide its own benchmark for overnight rates at some point prior to For the ECB, this represents a departure from its previous policy that benchmarks should be developed by the market, for the market. Looking at the Benchmark Regulation itself, numerous pending Level II measures delay implementation by the institutions. With regard to the potential discontinuation of the LIBOR benchmark, we advocate its continuation at the very least, a seamless transition to a new benchmark must be ascertained. Major market distortions must be avoided. We welcome the ECB's decision to provide its own benchmark for overnight rates prior to 2020: this will ensure that institutions will continue to have a robust benchmark for overnight interest rates at their disposal in the future. We take a critical view of the large number of outstanding Level II measures: this leads to significant implementation delays and difficulties for institutions. 20

21 15. Accounting for financial instruments (based on IFRS 9) No more intervention by banking supervisors in accounting and financial reporting Accounting and financial reporting for financial instruments has changed with effect from 1 January 2018, with IAS 39 being replaced by IFRS 9. Introduction of the new standard has brought about additional challenges, due to a plethora of interpretations and guidelines, as well as through regulatory requirements. Besides, the changeover to IFRS 9 is accompanied by significant expenditure in terms of processes and IT support; this is exacerbated by the conflicting timing of reports to be submitted during the first quarter of 2018 which were adjusted extensively due to IFRS 9. The stress test to be conducted by the European Banking Authority (EBA) in 2018 will also be based on figures in accordance with IFRS 9. Both the assignment to stages and the calculation of lifetime expected credit losses (ECL) are expected to pose challenges. Standardised impairment tools for regular operations do not appear to be agile enough to facilitate flexible calculations, based on stress test assumptions. In future there will be similar requirements under the ICAAP, which will place high operational demands upon systems. To limit the effects of first-time adoption of IFRS 9 on common equity tier 1 capital, transitional provisions were adopted within the scope of a fast-track procedure for amendments to the EU Capital Requirements Regulation (CRR). This provides institutions with the option of gradually phasing in the impact of higher allowance for credit losses in accordance with IFRS 9 on CET1 capital. Reviewing the implementation of IFRS 9 and the associated regulatory changes constitute a focal aspect of ECB s supervision. Against this background, the ECB already carried out a thematic review of IFRS 9 implementation, during the course of which it discovered significant room for improvement. The ECB will therefore continue its monitoring and follow-up measures this year; however, it has not yet announced any further review. It is thus fair to assume that the next review of IFRS 9 implementation will take place in This will probably also include a review of the implementation of EBA Guidelines on Accounting for Expected Credit Losses in the back office. Three-stage model for expected credit losses Significant increase in credit risk? Objective evidence of impairment? Initial recognition Stage 1 Stage 2 Stage 3 Impairment recognition Calculation of 12-month expected credit losses Calculation of lifetime expected credit losses Calculation of lifetime expected credit losses Source: own representations We expect financial markets supervision to refrain from imposing any restrictions to the options available under IFRS 9 for example, via the Supervisory Review and Evaluation Process (SREP). We welcome the decision taken by the EBA to postpone its stress test, meaning that the first data delivery will not be due before the end of May

22 Glossary BCBS Basel Committee on Banking Supervision The Basel Committee, which comprises representatives of central banks and regulatory authorities from key industrial countries and emerging markets, develops recommendations for banking regulation on an international level. BRRD Bank Recovery and Resolution Directive The EU Bank Recovery and Resolution Directive (also referred to as the Crisis Management Directive) sets out minimum requirements for the restructuring and resolution of banks and investment firms. CRD IV Capital Requirements Directive IV The purpose of CRD IV is to implement the requirements of the so-called 'second pillar' of Basel III within the EU. CRR Capital Requirements Regulation The purpose of CRR is to implement the so-called 'first pillar' of Basel III within the EU. Besides providing a definition of regulatory capital, the CRR governs particularly the measurement of risk exposures and the corresponding capital requirements. EBA European Banking Authority Based in London, the EBA's key task is to defined technical standards which specify certain requirements of EU banking regulations, on behalf of the EU Commission. ECON Economic and Monetary Affairs Committee ECON is an expert committee of the European Parliament, whose responsibilities include regulating and monitoring financial services, financial institutions and financial markets, economic and monetary policy, as well as safeguarding the free movement of capital and payments throughout the EU. EDIS European Deposit Insurance Scheme There is a proposal for a Regulation to create a European deposit insurance scheme. EIOPA European Insurance and Occupational Pensions Authority European regulatory authority for the insurance and company pension sectors. Eonia Euro Overnight Index Average Reference interest rate provided by the ECB, reflecting the interest rate for uncollateralised overnight placements in euros on the interbank market within the euro area. ESAs European Supervisory Authorities The ESAs were established during the course of reforming the European System of Financial Supervisors in 2011; they comprise the EBA, ESMA and EIOPA. The ESAs are responsible for micro-prudential supervision at the EU level; their task is to contribute to a consistent and converging financial markets supervision within the EU, by way of guidelines, technical standards and recommendations. ESMA European Securities and Markets Authority Paris-based ESMA contributes to the regulation of capital markets. Euribor European Interbank Offered Rate Reference interest rate reflecting the rates charged amongst banks for uncollateralised loans denominated in euros. FSB Financial Stability Board The tasks of Basel-based FSB is to develop proposals for the regulation of the financial system, on behalf of the G20 countries. G-SIBs Global Systemically Important Banks The collapse of a global systemically important bank would compromise the global financial system. The list of G-SIBs is updated annually by the FSB. ICAAP Internal Capital Adequacy Assessment Process Internal process to safeguard an institution's ability to carry and sustain risk; the ICAAP constitutes the preliminary stage to regulatory procedures for assessing the appropriateness of a bank's capital. IFRS International Financial Reporting Standards International accounting standards for companies. 22

23 LIBOR London Interbank Offered Rate Reference interest rate in the international interbank market. MaRisk Minimum Requirements for Risk Management in Banks The Minimum Requirements for Risk Management in Banks (MaRisk) are binding administrative requirements for the structure of risk management in German banks, as promulgated by the German Federal Financial Supervisory Authority (BaFin). MREL Minimum Requirements for Own Funds and Eligible Liabilities MREL defines the requirements for all banks within the EU, pursuant to the BRRD, to maintain liabilities (over and above their own funds) from onwards, which may be written off or converted into equity (bail-in) in the event of a resolution. NPL Non-Performing Loans Pursuant to the German Audit Report Regulation promulgated by the German Federal Financial Supervisory Authority (BaFin), a loan is considered as non-performing if its repayment appears unlikely (and the bank is this required to recognise specific allowance for credit losses), or if a material liability of a borrower is at least 90 days in arrears. NSFR Net Stable Funding Ratio The purpose of this indicator, which measures a bank's funding structure, is to ensure that banks refinance their lending business using funds available to them for more than one year. The NSFR rules are scheduled to come into force in PSD Payment Services Directive The PSD defines payment services (including payment transfers, direct debits and card-based payments), and sets out the European legal framework for payment services providers. PSD 2, which came into force in January, includes regulations governing new services for accessing payment accounts, enabling third-party providers (TPPs) in terms of security, data protection, and liability. RTS Regulatory Technical Standards Technical regulation standards issued under explicit authorisation from the European Commission. SREP Supervisory Review and Evaluation Process Within the scope of the SREP, under pillar 2, regulatory authorities assess an institution's business model, corporate governance structures and the adequacy of capital and liquidity held, on a regular basis. SRM Single Resolution Mechanism The SRM is based on the requirements set out by the BRRD for the restructuring or resolution of institutions; the core concept is to establish a joint institutional framework for participating member states. The SRM represents the second pillar of the Banking Union; it is governed by the SRB. TLAC Total Loss-Absorbing Capacity TLAC refers to the FSB's recommendation for all G-SIIs to maintain liabilities (over and above their own funds) which may be written off or converted into equity (bail-in) in the event of a resolution. In contrast to MREL, TLAC is based on a fixed minimum ratio determined in relation to risk-weighted assets (RWA) and the Leverage Ratio. 23

24 Landesbanken and DekaBank HSH Nordbank AG Total assets: billion more information: NORD/LB Norddeutsche Landesbank Girozentrale Total assets: billion more information: Kiel SCHLESWIG- HOLSTEIN Schwerin Hamburg MECKLENBURG-WESTERN POMERANIA LOWER SAXONY Bremen BRANDENBURG Berlin Hanover Potsdam Münster NORTH RHINE WESTPHALIA Magdeburg SAXONY-ANHALT Dusseldorf Erfurt Leipzig DekaBank Deutsche Girozentrale Total assets: billion more information: HESSE THURINGIA SAXONY Dresden RHINELAND- PALATINATE Mainz Frankfurt Landesbank Hessen-Thüringen Girozentrale Total assets: billion more information: SaarLB Landesbank Saar * Total assets: billion (local GAAP) more information: SAARLAND Saarbrücken BADEN- WÜRTTEMBERG Stuttgart BAVARIA Munich BayernLB Total assets: billion more information: Landesbank Baden-Württemberg Total assets: billion more information: Source * Consolidated fi nancial statements in accordance with the German Commercial Code (local GAAP HGB ). S&P Global Market Intelligence; consolidated fi nancial statements as at 31 Dec in accordance with IFRS; Association of German Public Banks (Bundesverband Öffentlicher Banken Deutschlands, VÖB) Updated: September

25 Promotional and development banks at Federal and State level Dusseldorf 13 RHINELAND- PALATINATE 14 Münster NORTH RHINE WESTPHALIA SAARLAND Saarbrücken Mainz LOWER SAXONY Frankfurt/Main Bremen HESSE Offenbach 15 Kiel SCHLESWIG- HOLSTEIN Hanover 7 Hamburg Erfurt THURINGIA 9 Schwerin 1 MECKLENBURG-WESTERN POMERANIA Magdeburg SAXONY-ANHALT 17 BAVARIA BRANDENBURG Leipzig SAXONY 3 8 Potsdam Berlin 2 Dresden Landesförderinstitut Mecklenburg-Vorpommern Division of NORD/LB (Schwerin)* Total assets: billion more information: -mv.de Investitionsbank des Landes Brandenburg (Potsdam) Total assets: billion more information: Sächsische Aufbaubank Förderbank (Dresden) Total assets: billion more information: Investitionsbank Schleswig-Holstein (IB.SH) (Kiel) Total assets: billion more information: Hamburgische Investitions- und Förderbank (Hamburg) Total assets: billion more information: Bremer Aufbau-Bank GmbH (Bremen) Total assets: 1.16 billion more information: Investitions- und Förderbank Niedersachsen NBank (Hanover) Total assets: 3.9 billion more information: Stuttgart BADEN- WÜRTTEMBERG Munich 8 9 Investitionsbank Berlin (Berlin) Total assets: billion more information: Investitionsbank Sachsen-Anhalt institution of NORD/ LB (Magdeburg) Total assets: billion more information: 16 Wirtschafts- und Infrastrukturbank Hessen legally-dependent institution within Landesbank Hessen-Thüringen Girozentrale (Offenbach/Main) Total assets: billion more information: 10 LfA Förderbank Bayern (Munich) Total assets: billion more information: 17 Thüringer Aufbaubank (Erfurt) Total assets: 3.99 billion more information: 11 Bayerische Landesbodenkreditanstalt (Munich) Total assets: billion more information: Public-sector development banks at Federal level KfW Banking Group, Frankfurt/Main Total assets: billion more information: 12 NRW.BANK (Dusseldorf/Münster) Total assets: billion more information: Landeswirtschaftliche Rentenbank (Frankfurt/Main) Total assets: billion more information: 13 Investitions- und Strukturbank Rheinland-Pfalz (ISB) (Mainz)* Total assets: billion more information: SIKB Saarländische Investitionskreditbank AG (Saarbrücken) Total assets: 1.48 billion more information: Source * Annual report of the development and promotional bank (as published on the respective website). S&P Global Market Intelligence; annual reports of promotional/development banks (consolidated fi nancial statements in accordance with local GAAP); Association of German Public Banks (Bundesverband Öffentlicher Banken Deutschlands, VÖB) Details concerning promotional lending volumes: development and promotional banks (VÖB member institutions) Updated: November L-Bank, Baden-Württemberg State Bank (Karlsruhe, Stuttgart) Total assets: billion more information: 25