Shearman & Sterling LLP | Financial Regulatory Developments Focus | European Banking Authority Seeks Views on Implementation Issues Arising From Revisions to the Capital Requirements Regulation
Financial Regulatory Developments Focus
  • European Banking Authority Seeks Views on Implementation Issues Arising From Revisions to the Capital Requirements Regulation
    The European Banking Authority has published a discussion paper seeking early-stage feedback on potential implementation issues arising from proposed revisions to the Capital Requirements Regulation to incorporate new international standards for counterparty credit risk and market risk. These international standards, developed by the Basel Committee on Banking Supervision, comprise: (i) the SA-CCR framework, a new standardized approach for measuring exposure at default for counterparty credit risk, which will replace both current non-internal models approaches, namely the Current Exposure Method and the Standardised Method; and (ii) the Fundamental Review of the Trading Book framework, which makes a number of revisions and enhancements to the framework for market risk following the fundamental review of the trading book undertaken by the Basel Committee.

    The CRR 2 proposal published by the European Commission in December 2016 is still being discussed by the Council of the European Union and the European Parliament as part of the normal EU legislative procedure. However, the EBA has considered its draft mandates under those proposals and identified a number of issues that banks implementing the SA-CCR and/or the FRTB frameworks are likely to face, due to the need to introduce changes to infrastructures, IT systems, data management, pricing models or approximating techniques.

    For implementation of SA-CCR, the EBA considers that the key implementation issues arise from the requirements for mapping of derivative transactions to risk categories and the incompatibility of negative interest rates with the supervisory delta formula established in the SA-CCR framework. For implementation of FRTB, the EBA highlights six issues: the revised boundary between the trading book and non-trading book; the treatment of non-trading book positions subject to FX or commodity risk; residual risk add-on; the assignment of appropriate liquidity horizons under the internal model approach; the revised requirements for backtesting and the new profit and loss attribution test; and the calculation of the stress scenario that must be applied, under the internal model approach, to risk factors that have been identified as "non-modellable".

    Stakeholders are invited to give feedback on the analyses and proposed approaches set out in the discussion paper by March 15, 2018. The EBA will hold a public hearing on the issues in the discussion paper on February 5, 2018.

    The EBA will review the responses to the discussion paper and will formally consult on Regulatory Technical Standards once the CRR 2 legislation, and the EBA mandates under it, are finalized.

    View the discussion paper.

    View the online response form.