The following posts provide a snapshot of the principal U.S., European and global financial regulatory developments of interest to banks, investment firms, broker-dealers, market infrastructures, asset managers and corporates.
US Federal Financial Regulators Publish Proposed Changes to the Volcker Rule
The U.S. Office of the Comptroller of the Currency, U.S. Board of Governors of the Federal Reserve System, U.S. Federal Deposit Insurance Corporation, U.S. Securities and Exchange Commission and U.S. Commodity Futures Trading Commission published their previously announced notice of proposed rulemaking entitled Proposed Revisions to Prohibitions and Restrictions on Proprietary Trading and Certain Interests in, and Relationships with, Hedge Funds and Private Equity Funds in the Federal Register. The proposed rules seek to simplify and tailor the Volcker Rule. Comments to the proposal are due by September 17, 2018.
View proposed changes to the Volcker Rule.
View full text of the proposal.
EU Court Annuls European Central Bank Leverage Ratio Decisions for Six Banks
The General Court of the European Union has annulled decisions of the European Central Bank, refusing to allow six French banks to exclude from the calculation of the leverage ratio certain exposures connected to French savings accounts. Banque Postale, BPCE, Confédération Nationale du Crédit Mutual, Société Générale, Crédit Agricole and BNP Paribas applied to the ECB, as their direct prudential supervisor under the Single Supervisory Mechanism, for permission to exclude exposures consisting of sums in a number of savings accounts taken out with them and transferred to the Caisse des Dépôts et Consignations, a French public investment vehicle. National regulators and the ECB have discretion to allow banks to exclude exposures that satisfy a number of conditions from the calculation of the leverage ratio under the Capital Requirements Regulation.
EU Secondary Legislation Adopted Amending Liquidity Coverage Requirement
The European Commission has adopted an Amending Regulation to make amendments to an existing Delegated Regulation (Regulation (EU) 2015/61) supplementing the Capital Requirements Regulation. The existing Delegated Regulation sets out detailed requirements on the Liquidity Coverage Requirement and specifies which assets are to be considered as liquid (so-called high quality liquid assets) and how the expected cash outflows and inflows over a 30-day stressed period are to be calculated.
The European Commission consulted on a draft of the Amending Regulation between January and February 2018. The Amending Regulation makes changes to the existing Delegated Regulation with the objective of improving its practical application, relating to:
- full alignment of the calculation of the expected liquidity outflows and inflows on repurchase agreements, reverse repurchase agreements and collateral swaps transactions with the international liquidity standard developed by the Basel Committee on Banking Supervision;
- treatment of certain reserves held with third-country central banks;
- waiver of the minimum issue size for certain non-EU liquid assets;
- the application of the unwind mechanism for the calculation of the liquidity buffer; and
- integration in the existing Delegated Regulation of the new criteria for simple, transparent and standardized securitizations.
UK Prudential Regulator Provides Hurdle Rate Change Information for 2018 Stress Test
The U.K. Prudential Regulation Authority has published a statement on Systemic Risk Buffers and Pillar 2A in stress test hurdle rates. The Bank of England announced in its March 2018 Key Elements of the 2018 Stress Test that it would be making four changes to the way hurdle rates are calculated. Hurdle rates are the level that a firm's capital ratio falls to during a stress scenario relative to the level of capital a firm is expected to maintain during the scenario. The PRA's statement provides details on two of the ways in which hurdle rates will change: (i) hurdle rates will incorporate buffers to capture domestic systemic importance, in addition to global systemic importance; and (ii) the calculation of minimum capital requirements (incorporated in the hurdle rates) will more accurately reflect how they would evolve in a real stress scenario.
The PRA has not commented on when further details of the other changes to hurdle rates will be published. The BoE expects to publish the results of the stress test in Q4 2018.
View the statement.
View details of the Key Elements of the 2018 stress test.
US FDIC Publishes Updates to Interagency Forms
The U.S. Federal Deposit Insurance Corporation announced updates to four of its interagency forms: (i) the Biographical and Financial Report (OMB Control Number 3064-0006); (ii) the Bank Merger Act Application (OMB Control Number 3064-0015); (iii) the Notice of Change in Control form (OMB Control Number 3064-0019); and (iv) the Notice of Change in Director or Senior Executive Officer form (OMB Control Number 3064-0097). The U.S. Board of Governors of the Federal Reserve System also published updated versions of these forms (FR 2081c, FR 2070, FR 2081a and FR 2081b, respectively) to its website on July 11, 2018. The FDIC announcement notes that these updates are based upon the comments and recommendations of an interagency working group, comprised of representatives from the FDIC, the Federal Reserve Board and the U.S. Office of the Comptroller of the Currency. The changes to the forms were made to improve the clarity of the specific information requested in the forms, provide additional transparency to financial institutions completing the forms, make changes to reflect new laws, regulations, capital requirements and accounting rules and to delete information requests that have been determined to be unnecessary. The changes to the FDIC forms are effective immediately.
View full text of the FDIC Financial Institution Letter.
EU Regulatory Technical Standards Published on Assessment Methodology For Use of Advanced Measurement Approaches for Calculating Operational Risk Capital Requirements
A Commission Delegated Regulation has been published in the Official Journal of the European Union, which supplements the Capital Requirements Regulation with Regulatory Technical Standards on the assessment methodology to be used by national regulators when deciding whether to permit institutions to use Advanced Measurement Approaches for operational risk. The RTS cover: (i) the qualitative and quantitative criteria that firms must meet before they are granted permission to use AMA models for calculating their capital requirements to cover operational risk; (ii) the criteria for the supervisory assessment of key methodological components of the operational risk measurement system; and (iii) common standards for the supervisory assessment of a bank’s operational risk governance.
The Delegated Regulation was made by the European Commission on March 14, 2018 and is based on final draft RTS submitted to the European Commission by the European Banking Authority in June 2015. The Delegated Regulation comes into effect across the EU on July 26, 2018. For institutions currently using AMA models or whose application to do so is pending, the Delegated Regulation will apply from July 26, 2019 and certain provisions related to correlation will not apply until July 26, 2020.
View the Commission Delegated Regulation (EU) 2018/959.
Basel Committee Finalizes Revised Assessment Framework for G-SIBs
The Basel Committee on Banking Supervision has published a revised methodology and the higher loss absorbency (HLA) requirement for the assessment of Global Systemically Important Banks. The revised framework updates and replaces the Basel Committee's July 2013 publication, "Global systemically important banks: updated assessment methodology and the higher loss absorbency requirement."
The Basel Committee committed, on the introduction of the G-SIB framework, to review the framework every three years. It consulted on potential enhancements to the framework between March and June 2017. Following feedback to that consultation, the Basel Committee is proposing no changes to the fundamental structure of the G-SIB framework and states that it is generally recognized that the G-SIB framework is meeting its primary objective of requiring systemically important banks to hold higher capital buffers. The framework is also providing incentives for G-SIBs to reduce their systemic importance.
The proposed revisions to enhance the framework include a timetable for implementation. The revised assessment methodology will apply from 2021, based on end-2020 data. The corresponding HLA requirements based on the revised methodology will apply from January 1, 2023.
US Federal Financial Regulators Release Statements Regarding Implementation and Impact of the Economic Growth, Regulatory Relief, and Consumer Protection Act
The U.S. Board of Governors of the Federal Reserve System, U.S. Office of the Comptroller of the Currency and U.S. Federal Deposit Insurance Corporation released statements regarding the implementation and impact of the passage of the Economic Growth, Regulatory Relief, and Consumer Protection Act.
UK Financial Policy Committee Outlines Steps to Reduce Risks to the UK's Financial Stability
The Bank of England has published a Financial Stability Report, dated June 2018, and a record of the Financial Policy Committee Meeting held on June 19, 2018. The Report sets out the FPC's view of the U.K.'s financial stability, the resilience of the U.K.'s financial system and the risks posed to each of those. Where applicable, the Report also notes the steps that the FPC is taking to address the risks. The record of the meeting provides a summary of issues discussed by the FPC in June.
European Central Bank Consults on Materiality Threshold for Credit Obligations Past Due
The European Central Bank has launched a consultation on a proposed Regulation on the materiality threshold for credit obligations past due under the Capital Requirements Regulation. The CRR risk quantification provisions set out that a default occurs when an obligor is past due more than 90 days on any material credit obligation to a firm, its parent or any of its subsidiaries. The materiality of the credit obligation is to be assessed against a threshold set by the national regulator according to its view of a reasonable level of risk. The ECB is responsible for direct prudential supervision of certain significant banks based in the Eurozone as part of the Single Supervisory Mechanism and must set the materiality threshold for these banks. The ECB must take into account the Regulatory Technical Standards on the materiality threshold for credit obligations past due that supplement the CRR requirements on the conditions for use of the internal ratings-based approach.
UK Prudential Regulator Consults on Reflecting the Systemic Risk Buffer Framework Within the Leverage Ratio Framework for UK Systemic Ring-Fenced Bodies
The U.K. Prudential Regulation Authority has published a consultation paper entitled "UK leverage ratio: Applying the framework to systemic ring-fenced bodies and reflecting the systemic risk buffer."
The Systemic Risk Buffer is one of the elements of the overall capital framework for U.K. banks and building societies. It is applied by the PRA to individual institutions and will be introduced at the same time that ring-fencing comes into force in 2019. SRB institutions are banks falling within the definition of Ring-fenced Bodies in the Financial Services and Markets Act 2000 and large building societies that hold more than £25 billion in deposits (where one or more of the accountholders is a small business) and shares (excluding deferred shares).
EU Draft Amended Technical Standards on Benchmarking of Internal Models
The European Banking Authority has published amended draft Implementing Technical Standards specifying the benchmarking portfolios, templates and definitions to be used as part of the annual benchmarking exercise by those institutions that use internal approaches for market and credit risk under the EU Capital Requirements Directive. The EBA consulted on proposed changes to the ITS in Q4 2017 and Q1 2018.
The amended ITS include all the portfolios that will be used for the 2019 benchmarking exercise, provided that the amended ITS are adopted by the European Commission. For market risk benchmarking, major changes have been made to the portfolios, including the introduction of a new set of portfolios comprising vanilla instruments. Minor changes have been made to the credit risk portfolios including changes to the information requested from firms.
Regarding the 2018 benchmarking exercise, the EBA has confirmed that firms do not have to resubmit the same data as a result of the difference between the submission dates in the draft ITS published by the EBA and the final ITS published on May 18, 2018 in the Official Journal of the European Union.
View the amended ITS.
View details of the EBA's consultation on amending the ITS.
UK Prudential Regulator Sets out Expectations on Firms' Exposures to Crypto-Assets
The U.K. Prudential Regulation Authority has published a "Dear CEO" letter, addressed to the Chief Executive Officers of banks, insurance companies and designated investment firms. The purpose of the letter is to remind firms of their relevant obligations under the PRA rules and to communicate the PRA's expectations regarding firms' exposures to crypto-assets.
Crypto-assets have exhibited high price volatility and relative illiquidity and may also be vulnerable to fraud and manipulation, which raises concerns about potential misconduct and poses issues for market integrity. The PRA's letter does not define crypto-assets, but the Financial Conduct Authority uses this term to refer to any publicly available electronic medium of exchange that features a distributed ledger and a decentralized system for exchange. The FCA recently published a "Dear CEO" letter outlining best practice for firms in handling the financial crime risks that crypto-assets can pose.
UK Prudential Regulator Confirms Changes to Large Exposures Framework
Following a consultation in October 2017, which closed on January 4, 2018, the U.K. Prudential Regulation Authority has published a Policy Statement on changes to its large exposures framework.
The Policy Statement sets out the PRA's feedback on the responses received to its consultation. Respondents were largely supportive of the proposals. The PRA is implementing its proposals largely as consulted on, with only minor changes. The Policy Statement outlines the changes as follows:
(i) Changes to the relevant part of the PRA Rulebook on large exposures and regulatory reporting - the text of the changes is set out in a PRA Rulebook Instrument, "CRR Firms: Large Exposures Amendment Instrument".
(ii) An update to the PRA's supervisory statement on large exposures (SS16/13) to reflect the PRA's expectations on the resolution exemption and to provide additional guidance to firms on Core UK Group and Non-core Large Exposures Group permissions.
(iii) An update to the PRA's supervisory statement, Guidelines for completing regulatory reports (SS34/15), to remove the requirement to submit the UK integrated groups - large exposures data item (FSA018).
US Office of the Comptroller of the Currency Releases Updated Supervision Booklets
The U.S. Office of the Comptroller of the Currency has announced updates to a number of supervision booklets, including the "Bank Supervision Process," "Community Bank Supervision," "Compliance Management Systems" and "Large Bank Supervision" booklets of the Comptroller's Handbook, and the "Federal Branches and Agencies Supervision" booklet. The updated booklets replace previously issued booklets of the same titles. The OCC also provided a table of previously issued bulletins and publications that have been rescinded and incorporated into the updated booklets. At a high level, the revisions and updates clarify the applicability of the booklets for financial institutions of differing size; add content with respect to asset management, including assessing Bank Secrecy Act, anti-money laundering and Office of Foreign Assets Control compliance; incorporate aspects of the Dodd-Frank Act; make technical corrections, including clarified terminology and to reflect the integration of the Office of Thrift Supervision into the OCC; include revised concepts and references; and incorporate references to OCC issuances published since each booklet's last publication date.
View the full text of the OCC press release and revised booklets.
US Federal Reserve Vice Chairman for Supervision Discusses the Promotion of Global Financial Stability
U.S. Board of Governors of the Federal Reserve System Vice Chairman for Supervision, Randal Quarles, discussed the importance of the promotion of global financial stability at the Utah Bankers Association 110th Annual Convention. Vice Chairman Quarles began by discussing financial stability in the United States, noting that the implementation of post-financial crisis reform is largely complete and is now in the process of being reviewed and revised to promote efficiency and efficacy. Vice Chairman Quarles also noted how this review and revision process is easing the regulatory burden on community and regional banks, through reforms such as the passage of the Economic Growth, Regulatory Relief and Consumer Protection Act, the Bank Exams Tailored to Risk program and the implementation of a new streamlined Call Report form in 2017. With respect to global financial stability, Vice Chairman Quarles discussed the role of the Financial Stability Board, explaining that the FSB helps to improve access to information on an international scale and promote minimum standards in areas such as resolution planning. Vice Chairman Quarles also highlighted that while the FSB may set international regulatory standards, it has no enforcement powers and no legal authority to direct its members to act. Instead, the FSB promotes effective dialogue by functioning by consensus, which allows international stakeholders to have meaningful input in the decisions that are made.
View the full text of Vice Chairman Quarles's speech.
European Banking Authority Proposes Updated Guidelines on Outsourcing by Financial Institutions
The European Banking Authority has launched a consultation on draft Guidelines on outsourcing arrangements. The proposed Guidelines are intended to update and replace the outsourcing guidelines issued in 2006 (by the EBA's predecessor, the Committee of European Banking Supervisors) that applied to outsourcing by credit institutions. The proposed Guidelines will have a wider scope, applying to all financial institutions that are within the scope of the EBA's mandate, namely credit institutions and investment firms subject to the Capital Requirements Directive, payment institutions and electronic money institutions. The proposed Guidelines also integrate the recommendation on outsourcing to cloud service providers that was published by the EBA in December 2017.
The proposed Guidelines set out a definition of outsourcing in line with delegated legislation under the revised Markets in Financial Instruments Directive. They cover: (i) proportionality and group application; (ii) the nature of outsourcing arrangements; (iii) the applicable governance framework; (iv) the outsourcing process; and (v) guidelines on outsourcing addressed to competent authorities. A separate Annex provides an illustrative template that could be used for complying with the requirement in the proposed Guidelines to maintain a register of all outsourcing arrangements at institution and group level where applicable.
European Banking Authority Updates Recommendations on Equivalence of Non-EU Confidentiality Regimes
The European Banking Authority has published an updated Final Report on recommendations on the equivalence of confidentiality regimes under the Capital Requirements Directive. The Final Report was originally published in April 2015.
The EBA has added three third-country national regulators to the current list of third-country national regulators whose confidentiality regimes can be regarded as equivalent with those in the EU, following an assessment of the professional secrecy and confidentiality frameworks under which they operate.
The new entries are:
- The Guernsey Financial Services Commission (the Bailiwick of Guernsey);
- The Superintendence of the Financial Services of the Central Bank of Uruguay (the Oriental Republic of Uruguay); and
- The Bank of Korea (the Republic of Korea).
The updated recommendations apply from June 21, 2018. The recommendations are intended to assist national regulators in the EU in their assessment of third-country equivalence with the aim of facilitating cooperation with third-country supervisory authorities and their participation in supervisory colleges overseeing international banks.
View the updated Final Report.
European Central Bank Updates its Asset Quality Review Manual
The European Central Bank has published a revised version of its manual on the methodology for phase 2 of its Asset Quality Review, which forms part of the Comprehensive Assessment that the ECB and national regulators must make of relevant Eurozone banks under the EU Regulation on the Single Supervisory Mechanism. This revised version replaces the earlier version of the AQR manual published in 2014.
In Frequently Asked Questions published alongside the updated AQR manual, the ECB explains that the AQR manual has been updated to reflect the entry into force of the new accounting rules of International Financial Reporting Standard 9 on January 1, 2018. This has required some changes to the provisions of the AQR manual, in particular to incorporate new approaches to determining impairments and classifying financial instruments. The manual has also been updated to reflect their view that bank business models focused on investment services have become increasingly important for ECB Banking Supervision, in particular in the context of Brexit.
European Banking Authority Consults on Use of Purchased Receivables Approach for Capital Requirements for Securitized Exposures
The European Banking Authority has launched a consultation on draft Regulatory Technical Standards on the conditions to allow institutions to calculate capital requirements, including on expected loss, arising from securitized exposures (known as KIRB) in accordance with the purchased receivables approach under the Capital Requirements Regulation.
As part of the new EU Securitization framework that will apply from January 1, 2019, an Amending Regulation makes amendments to the CRR to revise the capital requirements for securitizations.
European Banking Authority Issues Annual Report for 2017
The European Banking Authority has published its Annual Report for 2017.
The Annual Report summarizes the progress made in a number of workstreams undertaken by the EBA in 2017, including the EBA's work on: (i) developing and maintaining an EU Single Rulebook for banking; (ii) promoting supervisory convergence; (iii) developing resolution policies and promoting common approaches for the resolution of failing financial institutions; (iv) determining and monitoring key risks in the banking sector across Europe; (v) strengthening the EBA's role as EU data hub for the collection, use and dissemination of banking data; (vi) protecting consumers, monitoring financial innovation and contributing to easy retail payments in the EU; (vii) Brexit preparations; (viii) international engagement; and (ix) cross-sectoral work by the European Supervisory Authorities under the Joint Committee.
US Office of the Comptroller of the Currency Issues Clarifications Regarding CRA Evaluation
The U.S. Office of the Comptroller of the Currency has issued clarifying guidance with respect to the examination and evaluation of institutions under the Community Reinvestment Act. The bulletin issued by the OCC notes that clarifications with respect to CRA evaluation processes were previously communicated to examiners, and that effective June 1, 2018, the OCC rescinded its previous "Large Bank CRA Examiner Guidance," issued December 29, 2000 (OCC Bulletin 2000-35). The OCC bulletin provides clarification with respect to a number of aspects of the CRA evaluation process, including the frequency and timing of CRA performance evaluations, the applicable CRA performance evaluation period, full-scope and limited-scope reviews, the evaluation of various components of CRA evaluations and the timing for the finalization of CRA performance evaluations when there is an open investigation regarding potential discriminatory or other illegal credit practices. The OCC bulletin also outlines the guidance provided to examiners with respect to CRA evaluations, including the factors to consider in the evaluation process, communication with supervised institutions during the evaluation process and the presentation and analysis of performance data.
View the full text of the OCC bulletin.
US Comptroller of the Currency Discusses Agency Priorities before House and Senate Committees
U.S. Comptroller of the Currency Joseph M. Otting has discussed the priorities of the U.S. Office of the Comptroller of the Currency before the U.S. House Financial Services Committee and U.S. Senate Committee on Banking, Housing, and Urban Affairs. Comptroller Otting identified the following as his key priorities: modernizing the OCC's approach to the Community Reinvestment Act, encouraging institutions to meet the short-term, small-dollar credit needs of their customers, enhancing Bank Secrecy Act and anti-money laundering compliance, simplifying regulatory capital requirements, simplifying the Volcker Rule and promoting efficacy and efficiency in the supervisory activities of the OCC.
View the full text of Comptroller Otting’s prepared testimony before the two committees, here, here and here.
US Federal Reserve Board Approves Final Rule Regarding Single-Counterparty Credit Limits for Bank Holding Companies and Foreign Banking Organizations
The U.S. Board of Governors of the Federal Reserve System approved a final rule, which implements section 165(e) of the Dodd-Frank Act, and establishes single-counterparty credit limits for bank holding companies and foreign banking organizations with $250 billion or more in total consolidated assets (including any U.S. intermediate holding company of these foreign banking organizations with $50 billion or more in total consolidated assets) and any other bank holding company classified by the Federal Reserve Board as a global systemically important bank.
Under the final rule, a U.S. GSIB cannot have aggregate net credit exposure to another single global systemically important banking organization or a nonbank financial company supervised by the Federal Reserve Board that exceeds 15% of its tier 1 capital, and cannot have aggregate net credit exposure that exceeds 25% of its tier 1 capital to any other counterparty (defined under the final rule to include a company (including any consolidated affiliates of the company); a natural person (including the person's immediate family collectively where the exposure to the natural person exceeds 5% of the institution's tier 1 capital); a U.S. state (including all of its agencies, instrumentalities, and political subdivisions); foreign sovereign entities that are not assigned a zero risk weighting under the risk-based capital rules (including their agencies and instrumentalities); and political subdivisions of foreign sovereign entities (including their agencies and instrumentalities)). Other financial institutions subject to the final rule (other than U.S. IHCs subject to the rule) cannot have aggregate net credit exposure to any other counterparty that exceeds 25% of an institution's tier 1 capital.
UK Prudential Regulator Confirms its Approach to MREL Reporting
The U.K. Prudential Regulation Authority has published a Policy Statement on reporting the minimum requirement for own funds and eligible liabilities and an updated Supervisory Statement "Resolution Planning", following a consultation which ran from January 8 to April 9, 2018. MREL is a minimum requirement for firms to maintain equity and eligible debt liabilities that can bear losses before and in resolution and results in a top up to standard regulatory capital requirements, similar in concept to the old Tier 3 requirements under Basel II. The requirement will apply to U.K. authorized banks, building societies and PRA-designated investment firms, parent undertakings of those firms that are financial holding companies and to U.K. authorized subsidiaries of such firms. The MREL requirement is the EU implementation, in the Bank Recovery and Resolution Directive, of the standard for total loss-absorbing capacity (TLAC) set by the Financial Stability Board.
Bank of England Confirms its Approach to Setting Internal MREL in Groups
The Bank of England has published a Policy Statement setting out its feedback to the responses it received to its October 2017 consultation on its approach to setting a minimum requirement for own funds and eligible liabilities. MREL is a minimum requirement for firms to maintain equity and eligible debt liabilities that can bear losses before and in resolution and results in a top-up to standard regulatory capital requirements, similar in concept to the old Tier 3 requirements under Basel II. The requirement will apply to U.K. authorized banks, building societies and PRA-designated investment firms, parent undertakings of those firms that are financial holding companies and to U.K. authorized subsidiaries of such firms. The MREL requirement is the EU implementation, in the Bank Recovery and Resolution Directive, of the standard for total loss-absorbing capacity (TLAC) set by the Financial Stability Board.
The BoE's October 2017 consultation set out proposals for changes to the BoE's 2016 Statement of Policy on its approach to setting "external" MREL for resolution entities, to include the BoE's approach to "internal" MREL, i.e. instruments that are issued to a resolution entity from other legal entities in a group. Internal MREL is intended to cover U.K.-headquartered banking groups as well as U.K. subsidiaries of overseas banking groups.
Financial Stability Board Seeks Comment on Technical Implementation of TLAC
The Financial Stability Board is seeking feedback on the technical implementation of standards on the adequacy of total loss-absorbing and recapitalization capacity for Global Systemically Important Banks in resolution - the TLAC Standard. The FSB wants to assess whether implementation aligns with the timelines and objectives set out in the TLAC Standard. The TLAC Standard is being phased in, with G-SIBs expected to reach the first minimum requirement by January 1, 2019.
The FSB is due to report to the G20 on the implementation of TLAC by the end of 2019. The comments provided in response to the call for feedback will help the FSB to prepare that report. The FSB highlights that the objective of the call for feedback is to monitor implementation by jurisdictions of the TLAC Standard and to identify whether there are any technical issues or operational challenges in implementation. The aim is not to seek views on the substantive aspects of the standard or whether any changes should be made to it. The FSB will consider whether further implementation guidance is needed based on the feedback.
The FSB requests views and evidence on:
1. the regulatory adoption of the TLAC principles and Term Sheet;
2. cross-border aspects of the implementation of the TLAC Standard;
3. G-SIBs' issuance strategies and overall progress towards meeting external and internal TLAC requirements;
4. distribution of TLAC instruments and liabilities in the market; and
5. any technical issues or material factors impacting implementation of the TLAC Standard.
Responses to the call for feedback should be submitted via email by August 20, 2018.
View the call for feedback.
Basel Committee on Banking Supervision's 2018-2019 Work Program
The Basel Committee on Banking Supervision has published its 2018-2019 work program, setting out its focus areas for policy development, supervision, implementation and monitoring. Industry will welcome the news that the Committee intends to adopt a limited number of new policy initiatives, concentrating primarily on cyber risk, operational resilience and proportionality. On the implementation of the Committee's post-crisis reforms, one of the more immediate actions will be to finalize the revised market risk framework, which is due to be implemented by January 1, 2022. Other revisions to be finalized include the assessment framework for Global Systemically Important Banks and the Pillar 3 disclosure framework. Other work will include:
- Furthering discussions on the regulatory treatment of sovereign exposures.
- Continuing to promote strong supervision, which will involve holding discussion sessions and workshops on emerging challenges for supervision, such as how supervisors should comprehensively assess risks when banks change their business models, oversight of third-party origination practices and oversight of risk management practices, in particular, lending standards, collateral management and valuation practices.
US Federal Financial Regulators Propose First Major Revisions to Volcker Rule
The U.S. Board of Governors of the Federal Reserve System, U.S. Office of the Comptroller of the Currency, U.S. Federal Deposit Insurance Corporation, U.S. Securities and Exchange Commission and U.S. Commodity Futures Trading Commission released for public comment a proposal that would simplify and tailor the Volcker Rule. The joint notice of proposed rulemaking includes 342 specific questions for public comment largely focused on reducing compliance burdens under the Volcker Rule.
Transitional Periods Further Extended for Own Funds Requirements for Exposures to CCPs
A Commission Implementing Regulation has been published in the Official Journal of the European Union, following a consultation by the European Commission in April 2018 which closed on May 15, 2018. The Commission Implementing Regulation extends the transitional periods related to own funds requirements for exposures to CCPs that are set out in the Capital Requirements Regulation and the European Market Infrastructure Regulation.
Thirty-two third-country CCPs have been recognized by the European Securities and Markets Authority to date. However, a number of third-country CCPs are still awaiting recognized status and their recognition process is not scheduled to be completed by the expiry of the existing CRR and EMIR transitional periods on June 15, 2018. Without an extension of the transitional periods, banks and investment firms in the EU (or which are subject to consolidated supervision in the EU) would need to increase their own funds requirements for their exposures to those CCPs that are awaiting recognized status.
The Commission Implementing Regulation takes effect on June 7, 2018 and will apply directly across the EU. The effect of the Commission Implementing Regulation is to extend the transitional periods by a further six months, to expire on December 15, 2018.
View the Commission Implementing Regulation ((EU) 2018/815).
EU Authorities Raise Concerns About Proposed Data Waiver for Non-Performing Loans
The European Banking Authority and the European Central Bank have written to the European Commission, the European Parliament and the Council of the European Union expressing concerns about the impact of proposed data waivers for non-performing loans. The letter refers to a proposal put forward by certain stakeholders, in particular the Bank of Italy, that losses due to the sale of NPLs should be permanently eliminated from the dataset used for the Loss Given Default (LGD) estimation for the firm disposing of the NPLs. The proposal is based on the belief by some stakeholders that the disposal of NPLs and the corresponding capital release is hindered by the regulatory framework for internal models, in particular the requirements in the Capital Requirements Regulation for LGD estimation.
European Central Bank Updates Guide to Management Body Fit and Proper Assessments
The European Central Bank has published an updated Guide to Fit and Proper assessments for the suitability of members of the management body and key function holders in significant institutions. The ECB is responsible for direct prudential supervision of certain significant banks based in the Eurozone as part of the Single Supervisory Mechanism. The ECB Guide covers fit and proper assessments of members of management bodies, both in their management function (executives) and supervisory function (non-executives). It applies to all institutions under the direct supervision of the ECB, namely in-scope credit institutions, financial holding companies and mixed financial holding companies. In the context of licensing or qualifying holdings, the ECB Guide will also apply to less significant institutions.
The ECB Guide has been updated following the publication of the joint European Banking Authority and European Securities and Markets Authority Guidelines on the suitability of management body members and key function holders, which will apply from June 30, 2018, and the EBA Guidelines on Internal Governance.
US President Trump Signs Dodd-Frank Act Reform Bill
U.S. President Trump signed into law the Economic Growth, Regulatory Relief, and Consumer Protection Act; the first major financial services reform bill since the enactment of the Dodd-Frank Act in 2010. While the act is not a wholesale repeal of the Dodd-Frank Act, and does not offer the broad regulatory relief that was proposed under the Financial Choice Act of 2017, it does modify or eliminate certain requirements on community and regional banks and nonbank financial institutions in particular that have been perceived to be especially burdensome. The key aspect of the act may be the increase, from $50 billion to $250 billion, of the threshold at which a large banking organization automatically becomes subject to enhanced prudential standards. The act contains several other important provisions, including: exempting banks with less than $10 billion in total consolidated assets from the Volcker Rule and easing certain fund naming restrictions under the Volcker Rule; exempting certain deposits held by custodial banks from the calculation of the supplementary leverage ratio; reducing reporting and supervision requirements applicable to community banks; and easing certain securities law requirements. Many of the provisions in the act are self-executing, although a number of other provisions require positive action to be taken by U.S. federal financial regulatory agencies.
View more detailed discussion of the act.
View full text of the act.
US Office of the Comptroller of the Currency Publishes its Spring Semiannual Risk Perspective
The U.S. Office of the Comptroller of the Currency announced the publication of its spring 2018 Semiannual Risk Perspective. The OCC report discusses risks facing national banks and federal savings associations and provides high-level overviews of the economic operating environment, bank performance, and trends in supervisory actions. The report highlights key risks in three areas: easing underwriting practices with respect to credit underwriting practices, elevated operational risk, due, in part, to cybersecurity and increased use of third-party service providers, and compliance risk, particularly with respect to high BSA/AML/OFAC compliance risk, changing regulatory landscape and evolving risks outpacing compliance management systems. The report also focuses on risk that is emerging with respect to rising interest rates and their effect on increased uncertainty in deposits. With respect to trends in supervisory actions, the report notes that the number of banks with composite ratings of 4 or 5 have declined year-over-year through the end of 2017, that the number of outstanding matters requiring attention has been declining over the past few years, and that the number of outstanding enforcement actions has declined since 2010.
View full text of the OCC report.
UK Prudential Regulation Authority Consults on Its Approach to New EU Securitization Framework and Significant Risk Transfer
The U.K. Prudential Regulation Authority has published a Consultation Paper, setting out the PRA's proposals on its approach to supervision under the new EU securitization framework that will take effect from January 1, 2019. The incoming EU framework consists of: (i) the Securitisation Regulation, which imposes general requirements for all EU securitization activity and outlines the criteria and process for designating certain securitizations as "Simple, Transparent and Standardised"; and (ii) revisions to the banking securitization capital framework within the Capital Requirements Regulation.
European Banking Authority Consults on Standards for Estimating and Identifying an Economic Downturn in IRB Modelling
The European Banking Authority has launched two consultations on standards for estimation and identification of an economic downturn in Internal Ratings Based modelling.
The first consultation sets out draft Regulatory Technical Standards on the specification of the nature, severity and duration of an economic downturn in accordance with the Capital Requirements Regulation. The nature of the economic downturn is defined as a set of relevant economic factors and its severity is specified via the most severe values observed on the relevant economic factors over a given historical period. The duration of an economic downturn is specified using the concept of a "downturn period", namely the period of time where the peaks or troughs, which relate to the most severe values of one or several economic factors, are observed. The aim of the RTS is to ensure that institutions using the IRB approach can use a well-defined and common specification of the nature, duration and severity of an economic downturn for portfolios relating to comparable types of exposure.
EU Implementing Regulation Published for Revised Benchmarking Portfolios, Reporting Templates and Reporting Instructions under the Capital Requirements Directive
A Commission Implementing Regulation has been published in the Official Journal of the European Union, setting out changes to Implementing Technical Standards contained in a Commission Implementing Regulation published in 2016. The ITS cover benchmarking portfolios, reporting templates and reporting instructions for the purposes of the supervisory benchmarking exercise under the Capital Requirements Directive. The benchmarking exercise is conducted at least annually to assess the internal approaches used by firms for calculating own funds. The European Banking Authority consulted on the proposed revisions to the ITS in a consultation which closed in January 2018 and subsequently submitted draft revised ITS to the European Commission, on which provisions of the Amending Regulation are based.
EU Secondary Legislation Published on the Exclusion of Transactions With Non-EU Non-Financial Counterparties From Credit Valuation Adjustment Risk Charges
A Commission Delegated Regulation has been published in the Official Journal of the European Union, setting out Regulatory Technical Standards on procedures for excluding from the own funds requirement for credit valuation adjustment risk transactions with non-financial counterparties that are established in a third country and that do not hold positions over the clearing threshold under the European Market Infrastructure Regulation (so called NFC-s). The RTS supplement the requirements of the Capital Requirements Regulation.
Under the CRR, transactions between an institution and a NFC- are excluded from the own funds requirements for CVA risk, irrespective of whether that NFC- is established in the EU or in a third country. As NFC-s established in third countries are not subject directly to EU regulation, the RTS clarify that EU firms are responsible for: (i) taking the necessary steps to identify all NFC-s under this exemption and calculating accordingly their own funds requirements for CVA risk; (ii) ensuring that exempt counterparties established outside the EU would qualify as NFC-s if they were established in the EU; and (iii) ensuring that counterparties calculate the clearing threshold according to the relevant provisions in EMIR and do not exceed those thresholds.
International Bodies Publish Identification Criteria and Capital Treatment for Simple, Transparent and Comparable Short-Term Securitizations
The Basel Committee on Banking Supervision and the International Organization of Securities Commissions have published an updated version of the sound practices document, "Criteria for identifying simple, transparent and comparable short-term securitisations", which was originally published in 2015. The Basel Committee has also published an updated version of its standards document, "Capital treatment for simple, transparent and comparable short-term securitisations".
The Basel Committee and IOSCO consulted on the proposed updated Criteria in July 2017. The Basel Committee consulted at the same time on proposed additional guidance and requirements for the purpose of applying preferential regulatory capital treatment for banks acting as investors in, or as sponsors of, STC short-term securitisations, typically in asset-backed commercial paper structures.
Eurozone Risk Data Aggregation and Risk Reporting Needs Strengthening
The European Central Bank has published a report on the thematic review on effective risk data aggregation and risk reporting. The ECB launched the thematic review in 2016 to carry out an in-depth assessment of credit institutions' governance, data aggregation capabilities and reporting practices. The thematic review was based on 25 Eurozone significant institutions and took into account the Basel Committee on Banking Supervision's principles for effective risk data aggregation and risk reporting.
The ECB has ascertained that implementation of the Basel Committee's principles is unsatisfactory and that the issues are mostly as a result of a lack of clarity around responsibility for data quality. The ECB considers that further efforts are needed to enhance the effectiveness of risk data aggregation and risk reporting.
View the report.
US Federal Reserve Board Approves Amendments to Regulation A
The U.S. Board of Governors of the Federal Reserve System approved final amendments to Regulation A (Extensions of Credit by Federal Reserve Banks). The amendments make technical changes to provisions regarding establishing the primary credit rate in a financial emergency and delete obsolete provisions of Regulation A. With respect to the former, Regulation A will be amended to provide that in a financial emergency (defined as “a significant disruption to the U.S. money markets resulting from an act of war, military or terrorist attack, natural disaster, or other catastrophic event”), the primary credit rate will be the target federal funds rate or, if the Federal Open Market Committee has established a target range for the federal funds rate, a rate corresponding to the top of the target range. The amendments also delete references to credit ratings for Term Asset-Backed Securities Loan Facilities, given that the program has expired. The amendments to Regulation A will take effect on June 8, 2018.
View full text of the final rule.
European Banking Authority to Provide Technical Advice on Implementation of Final Basel III Reforms
The European Banking Authority has announced that the European Commission had requested technical advice on implementing the final Basel III reforms into EU law. The Basel Committee on Banking Supervision published the final revisions to Basel III on December 7, 2017. The revisions cover the standardized approach and the Internal Ratings-Based approach for credit risk, the Credit Valuation Adjustment risk framework, the leverage ratio framework, including the introduction of a leverage buffer for Global Systemically Important Banks, the operational risk framework and the new output ratio floor. The revised standards will take effect from January 1, 2022, except for the output floor which may be phased-in until January 1, 2027.
The Commission has asked the EBA to provide technical advice on the potential impact of the revisions on the EU banking sector and the wider EU economy and on any potential implementation challenges. The Commission has also requested that the EBA consider the potential changes to the Basel market risk framework, on which the Basel Committee is currently consulting.
US Federal Reserve Board Vice Chairman for Supervision Randal Quarles Discusses Liquidity Regulation and the Federal Reserve Board’s Balance Sheet
U.S. Board of Governors of the Federal Reserve System Vice Chairman for Supervision Randal Quarles discussed the relationship between liquidity and other post-crisis regulation and the Federal Reserve Board’s balance sheet.
UK Prudential Regulation Authority Finalizes Policy on Groups and Double Leverage
The U.K. Prudential Regulation Authority has published a Policy Statement setting out its proposals to amend the Groups policy framework it has in place for the application of prudential standards to firms on an individual and consolidated basis within banking groups.
The PRA consulted between October 2017 and January 2018 on proposals to enable: (i) assessment and mitigation of the risks to group resilience due to the use of "double leverage" (which occurs when one or more parent entities in a group funds some of the capital in its subsidiaries by raising debt or lower forms of capital externally); (ii) assessment and mitigation of the risks highlighted by prudential requirements applied by local national regulators on overseas subsidiaries of U.K. consolidation groups; and (iii) improved monitoring of the distribution of financial resources across different group entities.
Following feedback received, the PRA has made three changes to the proposals, which it does not consider to be significant changes. The first and second changes affect the PRA Supervisory Statement, "The Internal Capital Adequacy Assessment Process (ICAAP) and the Supervisory Review and Evaluation Process (SREP)" by: (a) changing the definition of "double leverage" so that it is accounting based to reflect the reporting practices of stand-alone holding companies; and (b) clarifying the level of application of the double leverage formula. The third change affects the PRA Statement of Policy, "The PRA's methodologies for setting Pillar 2 capital" by amending the formula for double leverage.
UK Prudential Regulation Authority Finalizes Model Risk Management Principles for Stress Testing
The U.K. Prudential Regulation Authority has published a Policy Statement and a finalized Supervisory Statement following a consultation which ran from December 2017 to March 2018 on model risk management principles for stress testing. In the consultation, the PRA proposed that firms that use stress testing models, and that participate in the Bank of England's annual concurrent stress test, should follow in full a set of four proposed principles when establishing and adopting risk management practices in relation to their models. Firms not participating in the BoE's annual stress test should instead seek to apply the four principles on a proportionate basis, taking into account their size, complexity, risk profile and the relevance to the firm of using stress test models.
The Policy Statement sets out feedback on the three responses it received to the consultation. The PRA has made a number of changes to the consultation draft of the Supervisory Statement to address issues raised by respondents. In particular, the PRA has made changes to the wording of Principles 1.2 (Model Inventory), 2.1 (Board oversight), 2.3 (Model developers, owners, users and control functions), 3.1 (Model purpose and design), 3.7 (Business Involvement), 3.8 (Model uncertainty), 3.9 (Model Monitoring), 4.1 (Scope and validation of review) and 4.2 (Independence). In addition, it has included a further section in the Supervisory Statement to set out its expectations on the application of materiality considerations.
UK Regulator Confirms Revised Pillar 2 Reporting Requirements
The Prudential Regulation Authority has published a Policy Statement confirming that updated Pillar 2 reporting requirements will apply from October 1, 2018 for banks, building societies and PRA-designated investment firms. This follows the PRA's consultation on the proposed updates, which ran from December 6, 2017 to March 5, 2018. The PRA proposed a new data item to capture stress-testing data currently included in firms' Internal Capital Adequacy Assessment Process documents. This change aims to increase transparency and comparability in stress test data provided alongside ICAAP documents and to decrease the operational risks associated with capturing stress test data manually. The PRA also proposed reducing the frequency of reporting of the data items in the Reporting Pillar 2 part of the PRA Rulebook for some firms as well as consolidating the definition of several reporting parts of the PRA Rulebook into the Glossary.
European Banking Authority Consults on Draft Guidelines on Disclosure of Non-Performing and Forborne Exposures
The European Banking Authority has launched a consultation on draft Guidelines on disclosure of non-performing and forborne exposures. Since the 2007/08 financial crisis, there has been a build-up of non-performing loans in the EU, which impacts banks' viability and lending capabilities. The European authorities have agreed various actions to tackle NPLs in Europe, resulting in several recent steps being taken by the European Commission, the European Central Bank and the EBA.
The proposed Guidelines set out the content, format and frequency of disclosures for non-performing exposures, forborne exposures and foreclosed assets. The draft Guidelines would apply to all banks that are subject to any of the disclosure requirements under the Capital Requirements Regulation and would apply to all exposures that fall within the definition of either non-performing or forbearance in the ITS on Supervisory Reporting (Commission Implementing Regulation (EU) No 680/2014). The level and frequency of disclosure will depend on the significance of a firm and the level of NPEs.
The draft Guidelines should be read with the EBA's proposed Guidelines on sound risk management practices for banks for managing NPEs, FBEs and foreclosed assets.
As with the proposed risk management Guidelines, the EBA intends to publish the finalized disclosure Guidelines before the end of 2018 and for the Guidelines to apply from January 1, 2019. Feedback on the proposed Guidelines can be provided by June 27, 2018. The EBA is holding a public hearing on the draft Guidelines on June 27, 2018.
View the consultation paper.
View the EBA's proposed Guidelines on sound risk management practices for NPEs.
View the Commission's proposals to address the build-up of NPLs.
Clarification on Scope of EMIR Obligations for Public Entity Clearing Members Needed
The Chair of the European Securities and Markets Authority, Steven Maijoor, has written to the European Commission recommending that clarification of certain provisions of the European Market Infrastructure Regulation should be made during the current revision of EMIR. EMIR requires clearing members of CCPs to provide initial margin and default fund contributions. ESMA has noticed that CCPs across the EU, as well as their national regulators, are adopting different approaches to these requirements for public entities. Some CCPs and national regulators exempt public entity clearing members from the requirement to provide initial margin and default fund contributions while others grant no exemptions.
ESMA requests the Commission to consider whether the scope of EMIR needs to be clarified and whether a specific amendment could be made to EMIR during the current review process.
The European Commission published legislative proposals to amend EMIR in May - the technical revisions in so-called EMIR 2.1 - and June 2017 - the Brexit-driven CCP "location policy" or so-called EMIR 2.2, which attempts to force the relocation of UK CCPs to the Eurozone. The legislative procedures to finalize those changes are ongoing.
View the letter.
View the Commission's technical amendments legislative proposal.
View the Commission's location policy legislative proposal.
European Commission Adopts Revised Implementing Technical Standards on Mapping of External Credit Ratings
A Commission Implementing Regulation has been published in the Official Journal of the European Union. This Amending Regulation, which takes effect on May 15, 2018, revises a Commission Implementing Regulation adopted in October 2016 under the Capital Requirements Regulation.
Under the CRR, firms that use the Standardised Approach for the purposes of calculating their capital requirements for credit risk can use external credit assessments to determine the credit quality of exposures. These external credit assessments must be made by External Credit Assessment Institutions. ECAIs are either credit rating agencies registered under the CRA Regulation or central banks that issue credit ratings (which are exempt from the application of the CRA Regulation). The 2016 Implementing Regulation set out Implementing Technical Standards for the mapping of the credit quality of exposures (obtained from ECAIs) to their corresponding risk weights.
The Joint Committee of the European Supervisory Authorities consulted in July 2017 on the need to make changes to the 2016 Implementing Regulation to reflect the fact that, since it was adopted, five additional ECAIs had been recognized and one ECAI had been de-registered. The Joint Committee submitted draft revised ITS to the Commission in December 2017 and the Commission has adopted them in the Amending Regulation.
View the Amending Regulation ((EU) 2018/634).
View details of the July 2017 consultation.
Basel Committee on Banking Supervision Progress Report on Basel III Implementation
The Basel Committee on Banking Supervision has published its 14th progress report on implementation of the Basel III prudential framework, based on responses from Basel Committee member jurisdictions, and reports the status as of the end of March 2018. The Report sets out in tabular form the results of the Basel Committee's monitoring of the adoption progress of all Basel III standards agreed to date, which will come into effect by 2022. The table omits details of those Basel III standards that have already been implemented by all Basel Committee member jurisdictions. It sets out the ongoing implementation progress of each member jurisdiction on aspects of the risk-based capital standards, leverage ratio requirements, liquidity requirements, the requirements for systemically important banks, interest rate risk in the banking book, the supervisory framework for large exposures and the Pillar 3 disclosure requirements.