7th January 2015

The Hökmark Report on the Bank Structural Reform Proposal

On 7 January 2014 Gunnar Hökmark MEP, Rapporteur on the Bank Structural Reform proposals, published a report that recommended some significant changes to the draft measure.  Here is our summary of his key amendments.

AMs 13 – 18 alter the objectives of the regulation to focus on the protection of depositors, to ensure there is no excessive risk taking, and to achieve higher levels of liquidity making and investment in the framework of enhanced financial stability.

AM 21 changes the metric of trading activities to trading related risk exposures amounting at least to EUR 70 billion or 50 per cent of its total eligible liabilities for bail-in requirements. The definition and calculation of this is given in AMs 69 – 81 (see below).

AM 22 adds: “This definition includes any such transaction undertaken with the aim of making profit, irrespective of whether such profit would be realised in the short term or in the longer term, or is in fact realised at all” to the definition of proprietary trading.

The ban on proprietary trading remains, but AM 26 exempts the ban from trading in AIFs for the first 5 years after the entry into force of the regulation if the amount of those activities is below 2% of the core credit institution’s own funds, calculated on a consolidated basis.

AMs 30 & 31 exempt from the definition of trading activities:

  • activities for the purpose of prudently managing capital, liquidity, funding and the balance sheet, and
  • the selling of interest rate derivatives, foreign exchange derivatives, credit derivatives, emission allowances derivatives and commodity derivatives eligible for central counterparty clearing and emission allowances to non-financial clients and to financial entities referred to in the second and third indents of point (19) of Article 5, to insurance undertakings, or to institutions providing occupational retirement benefits where the sole purpose of the sale is to hedge interest rate risk, foreign exchange risk, credit risk, commodity risk or emissions allowance risk.

AM 35 exempts any core credit institution (CCI) from the assessment from a competent authority under Article 9 if the CCI does not engage in the regulated activity of dealing in investments as principal and holding trading assets, with the exception of risk-mitigating activities for the purpose of prudently managing its capital, liquidity and funding and to provide limited risk management services to customers.

AM 36 exempts any CCI from the assessment if it is legally separated from group entities that engage in the regulated activity of dealing in investments as a principal or hold trading assets and which:

  • is able to make decisions independently of other group entities;
  • has a management body that is independent of other group entities;
  • is subject to capital and liquidity requirements in its own right; and
  • may not enter into contracts or transactions with other group entities other than on terms similar to those referred to in Article 13(7).

However, AM 37 holds that these two exemptions will not apply if the institutions and groups have been deemed unresolvable following the assessment by the resolution authority under the provisions of the BRRD.

AM 39 provides that the exemptions above can only apply where the CCI has been separated on a timetable comparable to that under the BSR regulation.

AM 44 provides that the competent authority can begin the procedure leading to a separation decision if the metrics are exceeded and only if there is a threat to the resolvability of the CCI, taking into account the objectives referred to in Article 1 and the size, complexity and risk intensity of the institution.

AM 45 has removed the permission of the competent authority to begin the procedure leading to a separation decision even if the metrics are not broken (based on the threat to the financial stability of the CCI due to its trading activities) and has replaced it with the ability to begin the procedure only if the trading activity carried out by the CCI poses a threat to the financial stability of the whole or part of the Union financial system.

AM 46 mandates that the competent authority will need to inform members of a supervisory college should the CCI be a member of a group where one is established.

AM 47 allows for the use of other supervisory tools rather than automatic separation following a decision from a CA. The tools at the disposal of the competent authority include enhanced supervision and higher capital requirements in addition to separation of the relevant trading activities from the CCI.

Further, AM 48 provides that the competent authority may authorise the CCI to carry out market making activities which do not pose a threat to the financial stability of the CCI or to the whole or part of the Union financial system.

AM 52 allows for the CCI to use OTC derivatives for hedging balance-sheet risk.

AMs 55 – 59 align the large exposure limits to those within the CRR and ensure parity in large exposure limits and credit mitigation between separated and non-separated CCIs.

AM 64 has deleted the derogation.

AMs 69 – 81 make extensive changes to the calculation of trading activities. The ‘trading activities’ have been replaced by ‘trading related risk exposures’, calculated by adding the risk exposure amounts for market risk, counterparty risk in derivatives, credit valuation adjustments, and derivative liabilities (although the definition in Article 23 has been deleted).

AMs 84 – 86 see a lowering of the amounts for administrative sanctions which can be imposed by competent authorities.

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