28 May 2015

EBA publishes guidelines on contributions and payment commitments to deposit guarantee scheme

<p style="text-align: justify;"> The objective of the DGSD is to increase the resilience of deposit guarantee schemes (DGSs) and improve depositors&#39; access to compensation. All DGSs in Europe will now have to be pre-financed by credit institutions. Depositors will be compensated quicker and in case of failure at a branch of a bank established in a different Member State, will benefit from the assistance of their own local DGS acting as a one-stop-shop.</p> <p style="text-align: justify;"> The EBA Guidelines on risk-based contributions set forward methods for calculating ex-ante contributions to DGSs that are adjusted to the risk profile of each credit institution, thus promoting risk discipline and addressing moral hazard.</p> <p style="text-align: justify;"> Under these Guidelines, calculation methods will include a set of core indicators capturing the main dimensions of the risk profile of credit institutions. Obligatory indicators will thus cover aspects such as capital, liquidity, asset quality, business model and asset encumbrance. These obligatory indicators will represent 75% of the risk assessment, thus leaving some framed flexibility to the DGSs and designated authorities to determine the remaining 25%. This flexibility will allow DGSs and designated authorities to take into account the specificities of credit institutions, while respecting a number of safeguards so as to ensure harmonisation and comparability across the Single Market.</p> <p style="text-align: justify;"> In line with the DGSD, the Guidelines on payment commitments further specify the option for DGSs to authorise credit institutions to contribute, up to 30% of the required contributions, in the form of secured commitments to pay upon request.</p> <p style="text-align: justify;"> Under these Guidelines, credit institutions will be able to make payment commitments by concluding two types of arrangements: a Payment Commitment Arrangement formalising the commitment, the amount and the rights of the DGS to claim the funds; and a Financial Collateral Arrangement, fully compliant with EU law on financial collateralisation, which ensures that the DGS access to funding is properly guaranteed by low risk assets that can be quickly mobilised in case the institution does not meet its commitment.</p> <p style="text-align: justify;"> The Guidelines provide for criteria on the eligibility and management of collateral. Assets will be eligible for collateral only if they are of sufficiently low risk. The Guidelines also provide that DGSs should limit their exposure to debt, whether public or private, the value of which is highly correlated to events where the DGS would have to use its funds, and therefore might have to call in the payment commitment. Collateral will be subject to regular marking to market and precautionary haircuts in order to cater for possible losses at the point of failure.</p> <p style="text-align: justify;"> The Guidelines also introduce principles ensuring that the prudential treatment of payment commitments does not encourage procyclicality by incentivising payment commitments over cash contributions. Accordingly, unless payment commitments are fully reflected on balance sheets and profit and loss accounts, supervisory authorities should assess, within their supervisory review and evaluation process, the risks to which the capital and liquidity positions of a credit institution would be exposed should the DGS call this institution to pay its commitment in cash. In the latter case, supervisory authorities should seek to mitigate that risk by requiring additional capital or liquidity requirements.</p> <p style="text-align: justify;"> <a href="http://www.eba.europa.eu/-/eba-publishes-guidelines-on-contributions-and-payment-commitments-to-deposit-guarantee-scheme" target="_blank">Press release</a></p> <p style="text-align: justify;"> <a href="http://www.eba.europa.eu/documents/10180/1089310/EBA-GL-2015-09+Guidelines+on+DGS+payment+commitments.pdf" target="_blank">Guidelines on DGS payment commitments</a></p> <p style="text-align: justify;"> <a href="http://www.eba.europa.eu/documents/10180/1089322/EBA-GL-2015-10+GL+on+methods+for+calculating+contributions+to+DGS.pdf" target="_blank">Guidelines on methods for calculating contributions to DGS</a></p>

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