Communication NBB_2016_34 / Restructuring Plans – Obligations Regarding Encumbered Assets

NBB_2016_34 – 18 July 2016 Communication – Page 1/5 14 Berlaimont Boulevard – BE-1000 Brussels tel. +32 2 221 38 12 – fax +32 2 221 31 04 company number: 0203.201.340 RPM Brussels www.bnb.be

Communication
Brussels, 18 July 2016
Reference: NBB_2016_34 your contact:
Janet Mitchell tel. +32 2 221 34 59 – fax +32 2 221 31 04 janet.mitchell@nbb.be

Restructuring Plans – Obligations Regarding Encumbered Assets

Scope
This communication is intended for all Belgian credit institutions.

Summary/Objectives
This communication aims to provide further clarification to institutions regarding their obligations concerning encumbered assets, which arise from Article 110, § 2, of the Banking Law.

Madam, Sir,

Pursuant to Article 110 of the Law of 25 April 2014 on the status and supervision of credit institutions (hereinafter the "Banking Law"), the restructuring plan provides for corrective measures when the quantity of encumbered assets exceeds certain limits. This obligation is clarified using definitions and general minimum and maximum thresholds, provided for in the National Bank of Belgium (hereinafter the "Bank") Regulation of 1 April 2014 concerning encumbered assets in the context of restructuring plans 1 (hereinafter the "Regulation"), within the framework of which the supervisory authority must determine for each credit institution a graduated scale of thresholds for the proportion of its encumbered assets (hereinafter "thresholds").

These provisions on the "asset encumbrance ratio" must ensure that the credit institution retains sufficient assets on which the general privilege on movable property granted to deposits of individuals and small and medium-sized enterprises 2 (Article 389, §§ 1 and 2, of the Banking Law) can be exercised.

1 Regulation of 1 April 2014 of the National Bank of Belgium concerning encumbered assets in the context of restructuring plans, B.M. 7 May 2014 (ed. 2).
2 Explanatory Memorandum of the Banking Law, Parl. Doc. Chamber 2013-14, n° 3406/001

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This communication aims to provide supplementary instructions to make the legislative framework on encumbered assets operational. To this end, this communication provides guidance on the following topics:

1. The restructuring plan obligations regarding encumbered assets (I).
2. Compliance with the restructuring plan obligations regarding encumbered assets for institutions that can draw up a simplified restructuring plan as well as for those that are part of a consolidated group and do not have to draw up a restructuring plan on an individual basis (II).
3. The specific thresholds to be applied for encumbered assets (III).
4. The periodicity with which the encumbrance of assets should be monitored (IV).
5. The obligation to notify the Bank (V).

Regarding the method of calculating encumbered assets, reference is made to the Annex to this communication.

I. Restructuring Plan Obligations
Institutions are required to comply with the following obligations regarding the restructuring plan concerning the monitoring of their asset encumbrance ratio:

• content obligations: the restructuring plan must include the corrective measures to be considered in the event of exceeding each of the applicable thresholds (Article 110, § 2, first paragraph, of the Banking Law).
• procedural obligations: the restructuring plan must determine the following procedures, appropriately:
  • the procedure for periodic monitoring of the graduated scale of thresholds (Article 110, § 1, second paragraph, in conjunction with Article 110, § 2, of the Banking Law) (see (IV));
  • the procedure for examining corrective measures to be considered in the event of exceeding each of the thresholds (Article 110, § 1, second paragraph, in conjunction with Article 110, § 2, first paragraph, of the Banking Law) (see (III));
  • the escalation procedure to be followed in the event of exceeding a threshold (Article 110, § 1, second paragraph, of the Banking Law) (see (III) and (V)).

II. Institutions that can draw up a simplified restructuring plan and institutions that are part of a consolidated group and do not have to draw up a restructuring plan on an individual basis
This communication applies, by virtue of Article 113, § 5, of the Banking Law, also:

• to credit institutions that can draw up a simplified restructuring plan pursuant to Article 113, § 4, of the Banking Law. These institutions are also required to include in their restructuring plan the corrective measures and procedures mentioned under (I).
• to credit institution subsidiaries of a parent undertaking and which do not themselves have to draw up an individual restructuring plan. These institutions are also required to establish the corrective measures and procedures mentioned in point I, preferably in their group restructuring plan, and to communicate them to the Bank.

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III. Thresholds
Pursuant to Article 110, § 2, second paragraph, of the Banking Law, the supervisory authority must determine for each credit institution a graduated scale of thresholds, according to the definitions of the implementing technical standard on the reporting of encumbered assets referred to in Article 100 of the CRR Regulation hereinafter the "implementing technical standard") 3. The Bank fulfills this legal requirement by dividing Belgian credit institutions into three groups based on the importance of eligible deposits referred to in Article 389 of the Banking Law relative to total assets. The following deposits are considered eligible deposits as referred to in Article 389 of the Banking Law:

• Insured deposits, regardless of their holders; and
• eligible deposits that exceed the coverage level of 100,000 euros, provided they are held by individuals and SMEs 4.

For the definition of "eligible deposits," reference is made in particular to

• Article 5 of the Royal Decree of 14 November 2008 implementing the crisis measures provided for in the Law of 22 February 1998 establishing the organic statute of the National Bank of Belgium, as amended by the Law of 22 April 2016 transposing Directive 2014/49/EU on deposit guarantee schemes and containing various provisions 5;
• the Royal Decree of 16 March 2009 on the protection of deposits and life insurance by the special fund for the protection of deposits and life insurance 6, which complements the definition of Article 5 of the Royal Decree of 14 November 2008. It should however be mentioned that the Royal Decree of 16 March 2009 will be amended to bring it into conformity with the amended deposit guarantee directive 7. This amendment will place, in particular, the eligible deposits of large companies among the deposits benefiting, up to 100,000 euros, from the privilege for insured deposits referred to in Article 389, § 1, of the Banking Law. Furthermore, eligible deposits will no longer be limited to deposits expressed in a currency of the European Economic Area. Deposits expressed in all currencies will in the future be able to meet the definition of "eligible deposits."

Two thresholds are defined by category: a flashing threshold and a restructuring plan threshold. In the event of exceeding these thresholds, the following is expected of the institution:

1. In the event of exceeding the flashing threshold, credit institutions must examine the underlying reasons for this exceedance. Furthermore, institutions are expected to communicate this exceedance to the supervisory authority (see point V). If the underlying reasons are such that rapid measures are required, the institution must consider following the escalation procedure set out in point 2 and taking the corrective measures mentioned in point 2.

2. In the event of exceeding the restructuring plan threshold, credit institutions are expected, in any event, to follow the internal escalation procedure described in their restructuring plan to determine whether it is necessary to take one of the corrective measures indicated in the restructuring plan ("restructuring option"), or one or more other corrective measures.

3 Implementing Regulation (EU) No 2015/79 of the Commission of 18 December 2014 amending Implementing Regulation (EU) No 680/2014 laying down implementing technical standards with regard to supervisory reporting of institutions pursuant to Regulation (EU) No 575/2013 of the European Parliament and of the Council, as regards encumbrance on assets, the single data point model and validation rules, O.J. L 14/1 of 21 January 2015 (hereinafter referred to as the "implementing technical standard").

4 Article 2, 7°, of the Regulation of 1 April 2014.

5 B.M. 12 May 2016.

6 B.M. 25 March 2009.

7 Directive 2014/49/EU of the European Parliament and of the Council of 16 April 2014 on deposit guarantee schemes, O.J. L of 12 June 2014, p. 173, 149.

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eligible as referred to in Article 389 of the Banking Law relative to total assets, by category Strictly defined available assets relative to eligible deposits as referred to in Article 389 of the Banking Law: regulatory range: 80-100% 8 Broadly defined available assets relative to eligible deposits as referred to in Article 389 of the Banking Law: regulatory range: 100-135% 9

Category 1:
< 70%
Flashing threshold: 100%
Restructuring plan threshold: 95%
Flashing threshold: 135%
Restructuring plan threshold: 130%

Category 2:
70% - 90%
Flashing threshold: 95%
Restructuring plan threshold: 90%
Flashing threshold: 110%
Restructuring plan threshold: 105%

Category 3:
≥ 90%
Flashing threshold: 85%
Restructuring plan threshold: 80%
Flashing threshold: 105%
Restructuring plan threshold: 100%

IV. Periodic Monitoring of Thresholds
Pursuant to Article 110 § 1, first paragraph, of the Banking Law, the restructuring plan includes a matrix of quantitative and qualitative indicators of a potential deterioration of the credit institution's financial situation. These indicators – all of them, and therefore not only the asset encumbrance ratio indicators – must be monitored periodically on the basis of Article 110, § 1, second paragraph.

The explanatory memorandum relating to Articles 108 to 113 of the Banking Law further specifies that the asset encumbrance ratio must ensure that credit institutions continuously monitor the degree of encumbrance of their assets 10.

The implementing technical standard prescribes a quarterly report on encumbered assets 11. In order to enable credit institutions to effectively fulfill their periodic monitoring obligation, the Bank will align this obligation with the aforementioned reporting obligation. This is why the Bank will consider the periodic internal monitoring of encumbered assets resulting from Article 110 of the Banking Law as a quarterly obligation. However, this internal monitoring does not entail any pre-established reporting obligation to the Bank. On the other hand, the monitoring obligation induces an mandatory notification to the Bank when any of the thresholds relating to encumbered assets is reached (see (V) below).

V. Notifications to the Bank
a. At the end of the escalation procedure
At the end of the escalation procedure described under (III, 2), the credit institution must, pursuant to Article 110, § 3, third paragraph, of the Banking Law, inform the Bank without delay of any decision to take a measure within the framework of the implementation of the restructuring plan or to refrain from taking such a measure while the relevant threshold is reached. Pursuant to Article 110, § 4, of the Banking Law, the supervisory authority may order the credit institution to take one or more corrective measures provided for in the restructuring plan if the institution fails to take adequate measures on its own initiative.

8 Article 4 of the Regulation of 1 April 2014.

9 Article 5 of the Regulation of 1 April 2014.

10 Explanatory Memorandum of the Banking Law, Parl. Doc. Chamber 2013-14, n° 3406/001, 108.

11 Article 1, paragraph 2, of the Implementing Technical Standard. Based on the principle of proportionality, Article 1, § 3, provides that institutions with a total balance sheet of less than 30 billion euros that retain less than 15% of encumbered assets are exempt from certain detailed elements in their information.

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b. Exceedance of a threshold
Given that due to the potential deterioration of the credit institution's financial situation resulting from the decrease in unencumbered assets, corrective measures must be able to be taken quickly, the Bank requests in point (III) to be informed without delay when any of the thresholds has been reached, namely the flashing indicator or the restructuring plan indicator.

This notification must take place as soon as the credit institution notes that the relevant indicator has been reached. It must occur even if the aforementioned escalation procedure is not yet completed and the credit institution has not yet decided to take one or more corrective measures provided for in the restructuring plan. This information is of crucial importance to the Bank because it must have sufficient time to decide in a timely manner whether corrective measures are still necessary if the credit institution were to estimate that these measures are not indicated.

VI. Conclusion
A copy of this circular is sent to the commissioner(s), approved auditor(s) of your institution.

We ask you to accept, Madam, Sir, the expression of our distinguished sentiments.

Jan Smets

Annex: 1