Annual contributions of institutions – which data should constitute the basis for the calculation of annual contributions to resolution financing arrangements in case of a significant change of the risk profile of an institution

In case of a significant change of the size and risk profile of an institution (in particular as a result of an M&A transaction), which data should constitute the basis for the calculation of the annual contributions to the resolution financing arrangements: (i) data derived from the most recently approved annual financial statements available prior to 31 December of the year preceding the contribution period (i.e. data which effectively precedes the contribution period by two years, e.g. for 2017, the resolution authority would rely on data as of 31 December 2015); or (ii) more recent data that adequately corresponds to the actual size and risk profile of the institution?

Bank X, with its registered seat in Poland is an affiliate of Group Z. As at 31 December 2015, the assets of Bank X amounted to approximately PLN 31 207 541 ths. In 2016, Bank Y, a universal bank with its registered seat in Poland, acquired the core banking activities of Bank X by way of a demerger (spin-off) transaction. The spin-off was effectuated on the basis of the demerger plan agreed between Bank X and Bank Y and approved by their respective shareholders. Following the completion of the demerger, Bank X is now a run-off entity that solely manages its existing legacy mortgage portfolio. Bank X does not have or accept any deposits, nor does it underwrite any new business. Following the demerger and the transfer of the core business to Bank Y, as at 31 December 2016, the assets of Bank X were reduced by 50% and amounted to approximately PLN 15 772 782 ths. Poland delayed the implementation of the BRRD into national law. As a result, 2017 is the first year in which Polish credit institutions are required to contribute to the resolution financing arrangement in accordance with the Polish implementation of BRRD. In accordance with Article 14(1) of Delegated Regulation (EU) 2015/63, the Polish resolution authority has calculated the amounts of individual contributions on the basis of data as at 31 December 2015, i.e. the data included in the approved annual financial statements of banks available prior to 31 December of the year preceding the contribution period. Pursuant to Article 103(2) of the BRRD, an annual contribution should reflect an institution’s size as the contribution should be based on a fixed amount determined on the basis of that institution's liabilities (basic annual contribution). Secondly, it should reflect the risk level of the relevant activities of an institution as the basic annual contribution should be adjusted in proportion to the risk profile of such institution (additional risk adjustment). The size of an institution represents the first indicator of the risk posed thereby. The larger an institution is, the more likely it is that, in the case of distress, the resolution authority would consider it in the public interest to resolve such institution and to make use of the resolution financing arrangement to ensure the effective application of resolution tools. Pursuant to Article 4(1) of the Delegated Regulation (EU) 2015/63, the resolution authorities should determine the annual contributions to be paid by each institution in proportion to its risk profile. Since the demerger transaction, the size of Bank X and the risk it generates to the banking sector have been both significantly and materially reduced. The calculation of the amount of its annual contribution to the resolution financing arrangement on the basis of historical data as at 31 December 2015 does not at all reflect Bank X’s current size and risk level. Such application of Delegated Regulation (EU) 2015/63 would therefore not be consistent with the requirements of Article 103(2) of the BRRD as it would disregard both the size of Bank X and its risk level.