The final report presents revised guidelines on methods for calculating contributions to deposit guarantee schemes (DGS). The European Banking Authority (EBA) analyzed the risk assessment approach for institutions and found that the current methodology remains appropriate, although some improvements are needed. The new guidelines, which will come into effect on July 3, 2024, aim to clarify the contribution…
This document is the final corrected report of the revised guidelines of the European Banking Authority (EBA) on methods for calculating contributions to deposit guarantee schemes (DGS) pursuant to Directive 2014/49/EU. Published in 2023, it replaces the initial 2015 guidelines (EBA/GL/2015/10) and applies to the member states of the European Economic Area (EEA) and the relevant DGS. The scope covers risk-based contribution calculation methods for financial institutions members of the DGS, explicitly excluding branches of third-country establishments, but may be extended to these by national decision. The document comprises 69 pages, including approximately 36 pages provided for this synthesis, and is dated 21 February 2023 with a correction in May 2023 (p. 1-2).
- Subject: Directive 2014/49/EU requires the EBA to develop and revise every 5 years guidelines on methods for calculating contributions to DGS. This 2021-2022 revision analyzes the relevance of the initial 2015 methodology and proposes targeted improvements.
- Importance: DGS protect depositors in case of bank failure, and accurate calculation of contributions according to institution risk is crucial for financial stability and fairness among members.
- Main findings: The analysis of DGS interventions since 2015 shows that concerned institutions were mostly among the riskiest according to the current methodology, generally validating its adequacy. However, improvements are needed to correct technical issues, better integrate certain types of uncertain deposits (notably client funds), and strengthen regular calibration of methods.
- Conclusions: In July 2022, the EBA proposed targeted amendments, notably a new exponential formula for the risk adjustment factor, explicit consideration of the stock-based contribution method (in addition to the flow-based method), and transfer of a prospective method requirement from other guidelines.
- Recommendations: The revised guidelines, applicable from 3 July 2024, clarify and improve the contribution calculation method, enhance risk sensitivity, and impose regular calibration review. They also introduce a smoothing mechanism for the stock-based method to avoid excessive fluctuations in individual contributions. These measures aim to ensure that contributions better reflect the real risk of institutions and that DGS reach and maintain their target fund level (p. 3-11).
- Legal mandate: Article 13(3) of Directive 2014/49/EU obliges the EBA to issue guidelines on methods for calculating contributions to DGS and to revise them every 5 years. The first version dates from 2015, with a first review in 2018.
- Issues: Ensure that contributions from member institutions to DGS are proportional to their risk, to guarantee the financial soundness of DGS and effective protection of depositors.
- Problematic: After several EBA opinions (2019-2021) on deposit eligibility, DGS funding, and client fund treatment, questions remain on certain technical aspects and risk sensitivity of methods.
- Objectives: Improve the contribution calculation method to better reflect risk, correct identified anomalies, integrate the stock-based method, and clarify prospective requirements for DGS funding.
- Limits: The document does not cover branches of third-country establishments except voluntary application, and the review relies on a limited sample of DGS interventions (39 cases analyzed) (p. 4-11).
Contribution calculation methodology:
- Basic formula: Periodic contribution of an institution = contribution rate * aggregated risk weight (ARW) * guaranteed deposits * adjustment coefficient (µ) (p. 16).
- Contribution rate (CR): determined annually, based on the periodic target level and the sum of guaranteed deposits (p. 16).
- Aggregated risk weight (ARW): calculated from an aggregated risk score (ARS) which sums weighted individual scores (IRS) according to risk indicators (p. 26).
Risk indicators:
- Five categories: capital (leverage, CET1 or coverage ratio), liquidity and funding (LCR, NSFR), asset quality (non-performing loans ratio), business model and management (risk exposure / total assets, profitability), potential losses for the DGS (guaranteed deposits / unencumbered assets) (p. 19-21).
- Each indicator receives an IRS score from 0 to 100 according to "bucket" (classes) or "sliding scale" (continuous scale) method, with minimum thresholds ensuring that an indicator below regulatory requirements obtains a maximum risk score (100) (p. 23-25).
- Minimum weightings: 75% of weights are assigned to core indicators, the remaining 25% can be distributed to additional indicators or increase core indicator weights (p. 22).
Contribution methods:
- Flow-based: contributions calculated annually without considering past payments.
- Stock-based: contributions take into account cumulative past contributions, allowing adjustment of contributions based on risk and deposit evolutions even after reaching the target level (p. 7-9).
- The stock-based method requires a smoothing mechanism to avoid abrupt increases in individual contributions (p. 8).
- Guidelines specify how to apply the stock-based method and clarify the prospective method of setting contributions (p. 7-11).
Optional adjustments and modifications:
- Uniform minimum contributions possible to avoid too low contributions (p. 28).
- Possible inclusion of total risk exposure amount (TREA) in the calculation base if the DGS uses its funds to prevent a failure (p. 29).
- Adjustments of already paid contributions can be offset against future contributions (p. 31).
Calibration and review:
- Calibration based on expert judgment, historical data, national characteristics, and consistency with prudential requirements (p. 30).
- Regular review at least every 5 years, with comparison to benchmarks such as the SREP (p. 30).
Data collection and transparency:
- Adequate systems for collecting necessary information, priority use of already available data (p. 31).
- Public publication of the method and parameters, individual communication of results to institutions, confidentiality of sensitive data (p. 32).
Implementation and compliance:
- Mandatory application from 3 July 2024, notification by competent authorities to the EBA on compliance before 11 September 2023 (p. 13-15).
- Repeal of the 2015 guidelines and removal of redundant provisions in other guidelines (p. 15).
- Analysis of DGS interventions (2015-2021): Of 30 institutions with ARS data, 25 had a score above their DGS median, 20 in the 3rd quartile, 17 in the top 10%. For 38 institutions with ARW data, 33 above the median, 28 in the 3rd quartile, 23 in the top 10% (p. 35-37).
- ARS and ARW scores reflect well risks related to solvency, profitability and regulatory compliance, but less risks related to fraud, money laundering or liquidity, which represent a minority of interventions (p. 37).
- No clear trend of increase or decrease in ARS/ARW scores in the 3 years preceding an intervention was identified, probably due to the limited sample and sometimes sudden nature of failures (p. 38).
- The current methodology appears generally effective for the riskiest institutions to pay higher contributions, justifying keeping the general framework rather than a complete change (p. 39).
- Partial use of IRS score ranges by some DGS, notably for certain key indicators, suggests a need to set minimum thresholds to ensure sufficient risk differentiation (p. 40).
- The stock-based method, already used by some DGS, allows better consideration of risk and deposit evolutions over time but requires a smoothing mechanism to avoid destabilizing effects on individual contributions (p. 7-9).
- Clarification of the prospective nature of setting contributions, notably to ensure repayment of loans contracted by DGS without compromising the target fund level (p. 8-11).
- The revised method improves risk sensitivity and consistency with prudential requirements, while maintaining necessary flexibility to adapt indicators and weightings according to national specificities (p. 30-31).
- The EBA confirms the general relevance of the current methodology for calculating contributions to DGS, particularly for solvency and profitability risks, and recommends retaining the general framework with targeted improvements.
- The revised guidelines introduce an exponential formula for the risk adjustment factor to ensure a consistent relationship between risk and contribution.
- They explicitly integrate the stock-based method, with a smoothing mechanism to limit excessive fluctuations in individual contributions.
- They specify the prospective method of setting contributions to guarantee compliance with fund replenishment deadlines, notably in case of loans contracted by DGS.
- They impose a regular review (at least every 5 years) of the calibration of calculation methods, in comparison with prudential benchmarks such as the SREP.
- They recommend transparency on the method and its parameters, while ensuring confidentiality of individual data.
- Implementation is planned from 3 July 2024, with an obligation for competent authorities to notify their compliance to the EBA before 11 September 2023.
- These measures aim to strengthen risk sensitivity of contributions, ensure fairness among institutions, and guarantee the financial soundness of DGS to effectively protect depositors (p. 3-15, 30-33).
Synthesis note written from the full document by DataSAI Academy. This note comes from the scientific library of the DataSAI Academy, open to all.