The European Banking Group

Mr. Michel Barnier European Commissioner for Internal Market and Services European Commission (BERL 10/034) В-1049 Brussels Belgium

Paris, 5 July 2011

Dear Commissioner,

The European Banking Group (EBG) is a high-level discussion group formed with the aim to promote the European universal banking model and to provide a strong industry voice on European policy and regulatory issues.

The EBG is attended by the Chairmen or. CEOs of the 11 major European universal banks which are strongly committed to financing the real economy

We fully support the G20 declaration to establish rules ensuring more financial stability: appropriate measures must be taken to reduce systemic risk and to alleviate any possible impact on tax payers. In this context, we would like to contribute to the debate on systemically important financial institutions (SIFIs).

We would like to make clear at the outset that, regardless of any work we undertake on the detail of proposals for a SIFI surcharge, the consensus view of the industry is and will continue to be that the concept itself is misguided, will not enhance financial stability, and will have negative economic consequences.

Anticipating the July 2011 FSB consultation on SIFIs and noting the Basel Committee's decision of 25 June, these are our recommendations at this stage:

• The positive impact of large banks on financial stability must be acknowledged. Their geographic and business diversification reduces systemic risk.

• The significant number of regulatory reforms already agreed or in preparation will reduce idiosyncratic and systemic risk. The significant economic impact of these reforms would be further aggravated by a SIFI surcharge.

• The first priority should be the development of a credible crisis management and resolution framework.

• Any surcharge deemed necessary anyway should be moderate and should be allowed to be met through a broad range of capital instruments.

• To assess the 'SIFI-ness' of European banks, the EU internal market should be regarded as a single domestic jurisdiction.

Ref. Ares(2011)748391 - 08/07/2011Ref. Ares(2012)354033 - 27/03/2012

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As the introduction of a SIFI surcharge is not envisaged before 2016-2019, according to the Basel Committee, the final decision on their introduction should be postponed until 2014-2015 to avoid any risk of immediate market reaction and a strongly negative economic impact.

A SIFI capital surcharge is not the appropriate regulatory response

We recognise that systemic risk needs to be effectively managed and that the burden on States and tax payers needs to be minimised as much as possible. However, we question whether a capital surcharge for SIFIs is the appropriate regulatory response.

A capital surcharge is too simplistic and crude a tool to solve the underlying problem. A surcharge cannot prevent a SIFI from failing, nor can it exclude all possible burdens for tax payers. Far more important is the nature and concentration of risk in the balance sheet, and the way in which risk is managed and mitigated, for example through diversification.

Measures targeting large banks ignore the fact that these provided platforms of stability in the crisis. Combining diversification of business with geographic diversification, cross-border universal banks proved to be more resilient to the crisis than some financial institutions strongly focused on a given market or a given business. Historically, these banks even supported the rescue of smaller, narrowly focused and failing banks, and have also been crucial to the wider maintenance of financial stability, such as at the time of failure of LTCM. Also the benefits large universal banks provide to consumers in terms of increased choice and lower prices should be kept in mind.

The current situation is far different from the pre-crisis one as many regulatory changes are introduced to ensure financial stability Before considering a SIFI regime, the impact of those regulatory reforms should be further assessed. • Basel III [including the so-called Basel 2.5 market risk reform that will be put in

place in Europe as of the end of 2011]. The new capital and liquidity standards significantly increase the existing minimum requirements. This is bound to strengthen the idiosyncratic and systemic resilience of banks and the banking system, especially if there is effective and coordinated micro-prudential supervision. However, these measures will also harm economic growth, as evidenced by both industry and private sector impact assessments. A SIFI surcharge will only exacerbate the situation, further affecting the price and availability of financing to the economy all the more since markets may align all competitors on the highest capital requirement.

• Crisis management and resolution. The best way forward to reduce the potential cost of failure of cross-border institutions is to make their orderly demise possible by creating an efficient multilateral resolution and crisis management regime. It is important to build an internationally harmonized framework for designing and monitoring living wills that would satisfy regulators that each of these institutions could be restructured to preserve its essential functions and/or to resolve it by 'bailing-in' private sector stakeholders according to standardized rules on creditor priority.

• Macro-prudential supervision. Supervision should be able to quickly observe and react upon unhealthy changes in financial markets, including the unintended consequences of regulation. From the systemic risk perspective, the newly established macro-prudential supervisors will have the key role in this. The focus

of macro-prudential supervision should not only be on banks, but on the wider financial system. It should be noted that this mandate should cover macro-economic imbalances, which can be seen to reflect the systemic fragilities on a global scale.

It should be noted that the more burdensome and complex the new regulatory framework will be -adding different charges and surcharges at the national, regional and global level- the more difficult it will be to apply an effective supervision and the more there will be an incentive for regulatory arbitrage towards the shadow banking system and towards other international jurisdictions. Such an evolution would change the nature of systemic risk and make it much more difficult for macro-prudential supervisors to capture a build-up of systemic risk. As a result, the financial system would end up more vulnerable than before.

In sum, it is far from clear that a SIFI surcharge could ever achieve the purpose for which it appears to be intended. It would be prudent to take time to observe the effect of other reforms before finally determining the need for a SIFI surcharge, which may be disproportionate or may distort competition, for example by creating a class of preferred counterparty, which could have the unintended consequence of further concentrating the industry.

Any surcharge should be based on a reasonable framework

If a SIFI surcharge is introduced anyway, utmost care should be taken to make the framework as reasonable as possible.

Systemic risk is a dynamic concept, which may stem from a variety of situations and institutions, as the crisis has shown. This makes it difficult to draft a reliable list of SIFIs. Any methodology and indicators to determine systemic relevance must be thoroughly tested and debated to be as objective and transparent as possible, be indifferent to the accounting method used and leave as little room for challenge or uncertainty as possible. This means that the list of systemic institutions should be very large and at least include all the banking systems of G20 countries. Indeed, if a systemic event originating from a financial institution not listed as a SIFIs would occur, it would deeply hamper confidence in the regulatory framework and the credibility of all financial supervision authorities.

To factor in other regulatory developments and the positive effect cross-border universal banks have on financial stability and to avoid competitive distortions, any surcharge should be moderate in size. This would also avoid further exacerbating the negative impact on the economy of other regulatory reforms and limit the risk of regulatory arbitrage.

Furthermore, it would also be very important to allow the surcharge to be met by a broad range of capital instruments including, for example, contingent convertible bonds. It should not have to be composed solely common equity, as envisaged by the Basel Committee.

The EU single market for financial services must be acknowledged when drafting a list or setting a surcharge. It would go against the spirit of European integration if banks were treated less favourably on the sole ground of doing business in several EU Member States. Such intra-EU operations should not be considered more global or complex or interconnected than operations within any single country. In other

words, banks engaging in such operations should not be considered more systemic on that ground alone.

When imposing a SIFI surcharges, the level playing field between all financial institutions should be kept in mind - globally, regionally and nationally. It is not sufficient to draw up a list at global level, ignoring the differentiated way in which banks compete by business line or geography. The relation between global and national surcharges should be carefully considered to ensure consistency.

If a surcharge were to be introduced, it should be done gradually, over several years. Even for healthy, well-managed banks, the requirement to raise a significant additional amount of new capital in a short period of time is likely to be overly burdensome and hence endanger credit creation just when the global economy needs resources for recovery. Furthermore, it would disproportionately depress the bank's share price.

The Basel Committee's consultative document of 25 June sets out measures for global systemically important banks, which would become fully effective in 2019 after a phase-in period starting in 2016. However, recent experience shows that markets expect near immediate implementation of any new capital requirements. To avoid such a risk and the very negative consequences it would have on the financing of the economy, we recommend that the FSB and the G20 postpone any decision on such measures until 2015. This delay would permit a thorough appraisal of the new solvency and liquidity rules, as well as an assessment of the combined impact of ongoing reforms, and allow the adoption of an effective crisis management and resolution framework.

In conclusion, we firmly believe in the importance of preserving financial stability. However, such stability must be reasonably balanced with economic growth. Regulatory reforms are ongoing to effectively achieve this balance. As a result, a SIFI surcharge would be inefficient and excessive. We hope that the above principle based recommendations provide some useful thoughts that may still be taken into consideration before the upcoming FSB/BCBS consultation on G-SIFIs.

We look forward to continuing the dialogue with you on these important issues, and remain at your disposal to discuss them in more depth.

We will also send this letter to the Chairman of the FSB, Mr. Mario Draghi.

Yours sincerely,

lßstM** Michel Pébereau,

Chairman of the European Banking Group and Chairman of the Board, BNP Paribas

Members of The European Banking Group:

Clemens Börsig, Chairman of the Supervisory Board of Deutsche Bank AG Jean-Paul Chifflet, Chief Executive Officer of Credit Agricole SA Douglas Flint, Group Chairman of HSBC Holdings Pic Federico Ghizzoni, Chief Executive Officer of UniCredit Group Francisco Gonzalez, Chairman and CEO of BBVA Sir Philip Hampton, Chairman of The Royal Bank of Scotland Group Pic Jan Hommen, Chairman of the Executive Board of ING Group Michel Pébereau, Chairman of the Board of BNP Paribas and Chairman of the European Banking Group Urs Rohner, Chairman of the Board of Directors of Credit Suisse Group AG Alfredo Saenz Abad, Vice Chairman and CEO of Banco Santander Björn Wahlroos, Chairman of the Board of Nordea Bank AB