The application of proportionality measures in the EBA’s regulatory work Liquidity risk Andrea Pezzotta (Federcasse) EBA Workshop London, 22 October 2013

2 2 Agenda 1.Features of small co-op banks relevant for liquidity risk regulation 2.Deposits treatment 3.Intra-network transactions 4.Additional liquidity metrics 5.Conclusions

3 3  Key features of small co-op banks relevant for liquidity risk regulation and its proportional application Local ownership by member-customers Membership to a national banking network where: -the central institutions perform the role of a wholesale products and services provider for local co-op banks -the mutual solidarity systems play an important role in the recovery and resolution phase Focus on traditional retail banking and local economy Small size and relatively small market shares Indirect participant to the payment and settlement systems The almost exclusive source of capital is their retained profits Shares are not listed on a stock exchange 1. Features of small co-operative banks

4 4  The differentiation between stable and less stable retail deposits and the identification of retail deposits subject to different outflows can be very difficult to handle in practice  Operational simplifications should be sought out and introduced whenever it is warranted by the liquidity risk profile of institutions  This could be the case of a small co-op bank's retail deposits to member and/or employee-customers Recognition of the above by the EBA RTS or GL as part of “an established relationship” without any need to perform further assessments Non application on the above of higher outflow rates, setting aside very high value deposits 2. Deposits treatment

5 5  The existence of an explicit deposit guarantee provided by a co- op mutual solidarity system (larger than the one provided by the DGS) can act as a mitigating factor of the depositors sensitiveness to stress situations  A specific treatment which takes into account the (additional) explicit protections might also be evaluated by the EBA during the observation period 2. Deposits treatment

6 6  Operational deposits held by local co-op banks with the central institutions Wide range of services and products to local co-op banks offered by the central institutions within the network In general, the underlying rationale for keeping extra money in each operational deposit resides with a local bank’s behaviour Distinguishing money that is addressed for operational functions on an account-by-account basis is very demanding Effort and cost of estimating excess balances will far outweigh the benefits A simple and efficient approach could consist in using the difference, only if positive, between the end-of-month balances and the monthly averages to determine the excess balances 3. Intra-network transactions

7 7  Secured funding Small co-op banks perform central bank refinancing operations and secured funding transactions in the wholesale markets through their central institutions To this end they pre-position at their central institutions financial assets They should be permitted to -apply the general rule (0% run-off factor) to secured funding transactions performed with the relevant central bank through their central institutions -include in the liquidity buffer assets that have been pre-positioned but have not been used to generate liquidity Therefore it is worth reporting separately the above transactions during the observation period 3. Intra-network transactions

8 8  Unsecured funding The central institutions’ business model is based on inter-bank transactions -relationship-based transactions with local co-operative banks which are at the same time their shareholders -‘Treasurers’ within the network These transactions have different liquidity risk characteristics The EBA has been explicitly mandated by the CRR to assess “the provision of specific lower outflow and/or higher inflow rates for intragroup flows (…)” This assessment should also be carried out with respect to the intra- network inter-bank liquidity flows, both in the case of an IPS and of co-op banking network 3. Intra-network transactions

9 9  The ‘materiality principle’ in the reporting system area should be appropriately considered  Small retail institutions should be exempted from reporting the additional monitoring tools aimed at capturing non material elements of their liquidity risk  In order to simplify and reduce the burden of the reporting framework, the EBA might consider incorporating some of the additional templates in the reviews of the ILAAP  Proportionality might be more adequately applied by adopting a more flexible and granular approach 4. Additional liquidity metrics

 Small institutions (not engaged in any cross-border activities and where their total assets are below 1% of the whole banking system) should be required to report semi-annually (ideally) or quarterly (alternatively) the: contractual flows maturity ladder additional monitoring tools on the concentration of funding  Institutions with total assets below a certain percentage (e.g. 5%) of the whole banking system or lower than an absolute value (e.g. €30 billion) and whose level of the LCR exceeds some minimum level should be allowed to report quarterly the above liquidity metrics 4. Additional liquidity metrics

Conclusions  Implementing the principle of proportionality is a demanding task  The assumption of ‘implicit’ proportionality should not entail automatically that there is no need for ‘explicit’ proportionality’  Liquidity risk of small institutions which are members of a network (where the central institutions and mutual solidarity systems play important roles) is different from that of the standalone small institutions  During the observation period it is worth reporting separately some types of liabilities/transactions which reflect the co-op small banks’ business model  Operational simplifications should be sought and introduced if they do not imply a deviation from achieving safety-and-soundness aims  Dialogue between small banks and the EBA should be intensified

Thank you for your attention!