6th January, 2015

Parliamentary hearing on Bill 264/XII on the transposition of the Directive on Recovery and Resolution of Credit Institutions and the recent amendment to the Directive on Deposit
Guarantee Schemes.

Mr Chairman of the Budget, Finance and Public Administration Committee,
Members of parliament,

I would like to thank you once again for giving Associação Portuguesa de Bancos the opportunity to express its comments and contributions on bills of interest to the banking sector. This case has regard to Bill 264/XII, which transposes the Directive on Recovery and Resolution of Credit Institutions and the amendment to the Directive on Deposit Guarantee chemes into Portuguese law.

These, together with Capital Requirements Directive IV and regulations on Single Supervisory and Resolution Mechanisms belong to a series of profound reforms and restructuring measures in the European banking sector in recent years.

Associação Portuguesa de Bancos has been very closely monitoring all these projects through the European Banking Federation, analysing and commenting on its preparatory work, and in Portugal, in response to government consultations and through parliament and this parliamentary committee.

During the preparation, opinion-gathering and discussion phase of the Directive on Recovery and Resolution of Credit Institutions, we made our contributions via the European Banking Federation and directly to the European Commission and Parliament. We worked hard with national authorities, the government and Banco de Portugal on defending essential points of view on relevant provisions of the resolution model, such as protection of depositors via protection of deposits and eligible credits that enjoy special protection in bail-ins. 
We can say that we were in the front line of defence of this solution. We must also mention the commendable work that MEP Elisa Ferreira did on this matter as head rapporteur in ECON and that done by MEP Diogo Feio. Their performance was a credit to our country.

The draft Resolution has some controversial issues, such as the defence of competition. Nonetheless, considerations like the protection of financial stability in order to prevent crises with potential systemic impacts and the defence of taxpayers by minimising state intervention led to the adoption of this draft.

This draft Resolution presumes that the costs of resolution of a bank for which insolvency is imminent are borne by the other banks in a mutualisation solution involving the Single Resolution Fund. It has the advantage of avoiding systemic risks, which benefits everyone else. In short, what matters is not the bank that failed, but how many would have failed if the system had not been deployed. So this benefit overcomes any possible deviations of competition by making the other banks bear the costs of resolving a bank on the brink of insolvency…

But while the division of these costs among all the European banks can minimise these impacts, when the Single Resolution Mechanism is up and running, the situation is very different at national level, especially if the 'bad bank' is of considerable size.

It was important to find a solution that was as balanced as possible in Europe. This was why the Portuguese government, Banco de Portugal and our MEPs worked so hard and made such a valuable contribution.

Where this law is concerned, we had the opportunity to apprise the government of our comments on the preliminary draft and we then took the initiative of sending this parliamentary committee an additional note on matters that had not been included in that version. 

The note addressed the transitory regimes in Article 14 of the bill, which complement the changes made to the General Rules on Credit Institutions and Financial Companies (RGICSF).

We are talking particularly about point 5 of the article, which sets out that, in addition to the periodic and special contributions provided for in future articles 153-H and 153-I of the RGICSF, additional periodic and special contributions can be charged for the Resolution Fund in order to make it possible to fulfil commitments or provide financial support for resolution measures taken before 31 December 2014.

As we pointed out at the time, an annual limit of three times the additional periodic contribution in the year in question is not considered for these additional special contributions, as is the case in Article 153-I of the RGICSF.

Considering that these additional contributions in the bill are limited to the final amount of commitments calculated, as a result of the resolution of Banco Espírito Santo the banks are naturally concerned about the impact it may have on them, which cannot yet be determined.

Given that these contributions do not exempt the banks from achieving the mandatory minimum amount in the Resolution Fund by 2024 (1% of guaranteed deposits), we feel that this is one more reason for the law to provide for maximum annual limits on these contributions to prevent overburdening the participating institutions, who are not actually responsible for the resolution of Banco Espírito Santo.

In any case, we feel that the additional periodic and special contributions should always be adjusted on the basis of the participating institution's risk profile and take account of the phase of the economic cycle and the potential impact of procyclical contributions on their financial situation.

Article 14 (1) sets out that the bail-ins provided for in Article 145-U of the General Regime cannot be applied to personal and SMEs' accounts guaranteed by the Deposit Guarantee Scheme before 31 December 2015. Bail-ins cannot affect these accounts, even the part exceeding the guaranteed €100,000.

Article 130 of the Directive on Recovery and Resolution of Credit Institutions allows bail-ins to come into effect only on 1 January 2016.

This means that our bill adopts only a partial solution because bail-ins begin to apply to financial instruments and accounts belonging to institutions and large companies in 2015, albeit guaranteed by the Deposit Guarantee Scheme.

Given the freedom that the Directive on Recovery and Resolution of Credit Institutions grants Member-States, we feel that the entry into force of the bail in, at least with regard to the remaining accounts, should also be postponed until 1 January 2016.

Article 153-H (1) of the draft amendment to the RGICSF in the bill, also warrants some comments.

The current version sets out that “participating institutions transfer to the fund an annual contribution, whose amount is fixed in a separate law, by the last business day of April”.

The draft amendment proposes the following “participating institutions transfer to the fund periodic contributions to be set by Banco de Portugal pursuant to applicable legislation”.

The following points indicate the amount of the periodic contribution to be made by each participating institution.

In order to avoid any divergence in the versions of these rules, we would like to suggest that point 1 should read as follows: “each participating institution transfers a periodic contribution to the fund”.

The new version of this point does not stipulate when the period contributions should be paid, which is different from the current version and that foreseen for the Deposit Guarantee Scheme (Article 161 (1) of the RGICSF), which naturally raises doubts, which need to be cleared up.

Finally, Article 116-AA (6) sets out that no civil or criminal disciplinary proceeding may be brought against an employee who reports irregularities, unless this report is deliberately and clearly unfounded.

In our view, it could be very difficult and sometimes impossible to determine that a particular report was “deliberately and clearly unfounded”.

While it is true that a whistleblower's position should be protected, the institution's image and reputation must be safeguarded when a report of this kind proves to be false or unfounded.

We therefore suggest that we have recourse to Article 180 (2) of our Criminal Code, which sets out that the crime of defamation is not punishable if:
a) the allegation is made for legitimate reasons and
b) the perpetrator proves that the allegation was true or he had serious grounds to believe, in good faith, that it was true.

This solution seems the most appropriate, as it will be easier for whistleblowers to prove that their allegation, although false, was made in good faith than for the institution in question to prove that the allegation was made in bad faith. Furthermore, there is case law on the crime of defamation which may be able to facilitate enforcement of this rule by courts and supervisory and resolution bodies.

Distinguished Members of Parliament,

The European banking sector is being buried under an unprecedented regulatory avalanche. Its aims are to ensure financial stability, strengthen the banking system so that it can do its job, especially funding the economy, use good banking practices to protect consumers, avoid the need for state intervention and use of public monies to solve banking institutions' crises and increase confidence in the sector and its governance.

We are naturally in total agreement with these goals. But the construction of this new framework for the European financial system must take account of the impacts of its measures on the economy, society and the sector.

The new regulatory framework and supervisory system have resulted in a radical change in banking.

Their complexity and extent are considerable and the cost of implementing them is very high.

The impacts of these changes on the economy and banking sector must be assessed in advance and then periodically re-evaluated.

Each measure and set of regulatory measures must be properly calibrated and put into practice within appropriate time limits and proper transition periods. The bank's absorption and execution capacities must be taken into account.

And absorption capacities influence needs for skills and costs, which are of great concern to us.

The fact is that the greatest concern of our banking system at the moment is profitability.

The banks have been affected by the financial crisis and particularly by the recession and sovereign debt crisis and have been through a three-year period of aggregate losses.

With the lack of demand for loans that has limited profits, the ongoing pressure on net interest income, persistently high default levels, greater competition and administrative restrictions on legitimate fees charged in the area of payments, it is absolutely vital to reduce costs if we are going to recover profitability.

The equation gets very complicated when new, extremely high costs appear, such as those from the new measures and systems imposed by regulation, supervisory fees and contributions to the Resolution Fund, plus the special extraordinary contribution levied on the banking sector.

In addition to the competitive disadvantages that our banking sector had already had to face as a result of the recession and sovereign debt crisis, we have to consider the effects of the resolution of BES, which represent even more costs for the other banks.

We don't really know their extent yet or any impacts in terms of competition. We naturally assume that the banks will be at no risk of litigation as they were not even involved in the decision to resolve BES.

The most important thing at the moment is for the sale to go well, which is the best way to minimise these costs.

There are other costs involved in the BES crisis, such as the effects on the image of sector and even the country. We have to separate the wheat from the chaff, and made sure that other banks are not held accountable and suffer unfair generalisations that are harmful to the sector as a whole.

It is important to highlight the excellent work done by the other banks in such difficult circumstances. They have shown remarkable resilience and a capacity for significant restructuring, while continuing to fulfil their fundamental roles.

And it is for all these reasons that it is so important for lawmakers to consider the need to weigh and define transition periods when measures are implemented, and not, for example, bring forward the entry into force of provisions that will take longer to come into effect in the EU.

Finally, I would like to thank you once again for the invitation to this parliamentary hearing and express our hope that our comments will make a useful contribution to your appreciation of this bill.

Fernando Faria de Oliveira
President of Associação Portuguesa de Bancos