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BPFI response to the European Commission consultation on improving the EU macroprudential framework

On 17 March the Banking and Payments Federation Ireland (BPFI) responded to the European Commission (EC) public consultation on improving the EU macroprudential framework for the banking sector, focussing primarily on the assessment and calibration of the Other Systemically Important Institutions (OSII) buffer.

As expressed in the response, BPFI agrees with the EC assessment that it is necessary to “take into account the Covid-19 crisis experience” in terms of assessing the framework as it was the “first time many macroprudential instruments were utilised” and no doubt lessons can be drawn.

In our view, what the recent COVID crisis has shown is that the EU framework is overly complex and should be simplified. Specifically, more transparency is required with respect to how the different elements of the capital stack are calibrated and how the risks being targeted by each buffer interact, with any overlap of risks captured by the various macro and micro-prudential requirements avoided.

One area in particular where more transparency and changes would be beneficial is with respect to the application of the O-SII buffer, which currently gives rise to significant level-playing field challenges between EU Member States, with smaller jurisdictions like Ireland negatively impacted due to the current framework.

From our perspective, it is crucial that the O-SII buffer is applied on a consistent and harmonised basis across the EU’s Single Market (SM) so that smaller EU Member States remain an attractive jurisdiction in which to establish an internationally focussed institution and that existing banks can compete on an equal footing with peers located in other EU Member States.

It is therefore welcome to see that the European Banking Authority (EBA) share these concerns regarding the application of the buffer across the SM. As highlighted in its report on the O-SII methodology from 2020, there is significant heterogeneity across the EU with respect to the O-SII buffer, which can regrettably result in two O-SIIs with similar balance sheets and risk profiles receiving significantly different O-SII buffers depending on their location.

In order to ensure a level playing field is maintained within the EU, we recommend the following changes:

  • Harmonise the calibration of the O-SII buffer rates so that institutions with the same O-SII score are subject to the same buffer rates.
  • Mandate the Single Supervisory Mechanism (SSM) with undertaking the O-SII assessment and setting of rates in close coordination with NCAs.
  • The size parameter which determines O-SII scores should be benchmarked against that of the EU banking sector and not only a domestic peer set.

The BPFI Response to the EC Consultation on the Macroprudential Framework is available for download below in PDF format.