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.
European Banking Authority Launches Consultation on Technical Standards for Counterparty Credit Risk
05/02/2019The European Banking Authority has launched a consultation on the Regulatory Technical Standards that it is developing to govern certain aspects of counterparty credit risk in derivatives transactions. The EBA has been mandated to produce the RTS under the current draft of the Capital Requirements Regulation 2. The consultation runs until August 2, 2019. A public hearing will also take place at the EBA premises in Paris on June 17, 2019 from 15:00 - 17:00 CET. Parties interested in attending should register by May 28, 2019.
New EU Requirements On Minimum Loan Loss Coverage For Newly Originated Loans
An EU Regulation amending the Capital Requirements Regulation introducing a statutory prudential backstop, and requiring banks to have minimum loan loss coverage for newly originated loans, has been published in the Official Journal of the European Union. The Amending Regulation is part of the package of legislative and non-legislative measures proposed by the European Commission in March 2018 to address remaining and future non-performing loans in the EU.
The Amending Regulation builds on existing CRR provisions, requiring a deduction from own funds where non-performing exposures are not sufficiently covered. The Amending Regulation establishes a set of conditions for the classification of NPLs, which builds on the existing framework in the existing Implementing Technical Standards on Supervisory Reporting. It also makes provision for different levels of stringency depending on whether an exposure is collateralized or not and on the reason for the classification of an exposure as non-performing. National regulators will be able to use their supervisory powers under the Capital Requirements Directive to address situations in which a bank's NPLs are insufficiently covered by the backstop.
Evaluation of Bank of England's Stress Testing Program
The Independent Evaluation Office (the Bank of England's independent review body) has published its evaluation of the BoE's approach to concurrent stress testing of the U.K. banking system. It concluded that overall the BoE has delivered on its stated approach and that the tests are valued highly by policymakers. The IEO has, however, outlined opportunities for refinement in three key areas, which the BoE has confirmed it is committed to implementing.
In the wake of the global financial crisis, the BoE reviewed its stress testing policy for the U.K. banking system and in 2015 published its approach to "concurrent" stress testing (the practice of simultaneously testing the entire balance sheets of several banks) up to 2018. The BoE's approach includes two scenarios: the annual cyclical scenario, a countercyclical scenario in which the severity of the scenario increases as risks build, and the biennial exploratory scenario, probing risks not linked to the financial cycle.
European Commission Communication on Progress on Building the Capital Markets Union
The European Commission has published its latest progress report on building of the Capital Markets Union. The CMU is an EU initiative which aims to deepen and further integrate the capital markets of Member States, further safeguard financial stability, strengthen the international role of the euro and diversify sources of finances for small and medium enterprises. The CMU aims to allow consumers to buy cheaper and better investment products, and enable financial services providers to scale up by offering services in other Member States.
The progress report notes that the CMU is an important Single Market project that will give increased access to capital for both companies and citizens, especially in smaller countries. A well-developed CMU increases the EU’s attractiveness to foreign investment and complements the EU’s agenda of free and fair trade. Broadly, the Commission has delivered measures that it had committed to take forwards at the beginning of the mandate and put in place certain "building blocks" of the CMU. However, the report notes that it may take time for the impact of the Commission’s actions to be realized.
UK Regulators Host the First Meeting of the New Climate Financial Risk Forum
The Financial Conduct Authority and the Prudential Regulation Authority have published press releases following the first meeting of the Climate Financial Risk Forum on March 8, 2019. The CFRF is a joint forum established by the PRA and FCA in late 2018. The CFRF aims to encourage financial sector approaches towards managing the financial risks from climate change as well as supporting green finance. The CFRF will develop practical tools and approaches to reduce the barriers for firms looking to adopt a strategy for minimizing financial risks from climate change. The regulators are concerned with both the impact of climate change itself and the transition to supporting a low carbon economy. Both the FCA and the PRA consulted in late 2018 on the impact of climate change. The PRA consulted on a draft Supervisory Statement on managing the financial risks from climate change and the FCA consulted on climate change and green finance and the potential changes to its regulatory approach to these issues. The FCA consultation set out specific actions that the FCA intends to take in the short term in four areas - capital markets disclosures, public reporting requirements, green finance and pensions.
Basel Committee on Banking Supervision Announces Forthcoming Statements on Various Issues of Concern
On February 27-28th, the Basel Committee on Banking Supervision met to discuss policy and supervisory issues, and the extent to which members had implemented post-financial crisis reforms.
The Committee noted the implementation status of margin requirements for uncleared derivatives and it will publish in March a joint statement with the International Organization of Securities Commissions on certain implementation aspects of margin requirements.
European Banking Authority Publishes Revised Guidelines on Outsourcing Arrangements
The European Banking Authority has published revised Guidelines on outsourcing arrangements. The guidelines are intended to update and replace outsourcing guidelines issued in 2006 (by the EBA's predecessor, the Committee of European Banking Supervisors) on outsourcing by credit institutions. The EBA Guidelines 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, as well as payment institutions and electronic money institutions. The investment firms within scope, provided that the new Investment Firm Regulation and Directive and related changes to CRD and the Capital Requirements Regulation have entered into force, will only be the largest investment firms (Class 1 Investment Firms). The Guidelines also integrate the recommendation on outsourcing to cloud service providers that was published by the EBA in December 2017. Both the 2006 guidelines and the December 2017 recommendations will be repealed when these new Guidelines enter into force.
No Revision Needed to International Liquidity Risk Management Principles
The Basel Committee on Banking Supervision has completed the review of its 2008 Principles for sound liquidity risk management and supervision. The Basel Committee has concluded that the Principles do not require revision. The Committee expects both supervisors and banks to remain attentive to liquidity risks in the financial markets. Banks should take into account developments since 2008 that may impact their liquidity risk management considerations. These developments include, for example, increasing digitisation of finance and payment systems, an increased use of central clearing of derivatives and margining and the increasing significance of cyber-attacks.
View the announcement.
View the 2008 Principles.
Final EU Guidelines on Simple, Transparent and Standardized Criteria for Securitizations
The European Banking Authority has published two sets of finalized guidelines under the Securitization Regulation which, along with targeted amendments to the Capital Requirements Regulation, forms part of the new EU Securitization Framework for simple, transparent and standardized securitizations from January 2019. Originators and sponsors will be required to notify the European Securities and Markets Authority of any securitization that meets the STS criteria to be able to use the "STS" designation. ESMA will maintain a list of all such securitizations on its website.
UK Regulations Implementing the EU Securitization Regulation Made
The U.K. Securitization Regulations 2018 have been laid before Parliament and will come into force on January 1, 2019. The Regulations implement the EU Securitization Regulation (also known as the STS Regulation) into U.K. law.
The EU Securitization Regulation provides the criteria for identifying which securitizations will be designated as simple, transparent and standardized securitizations, a system to monitor the application of those criteria and common requirements on risk retention, due diligence and disclosure. It also allows (but does not require) originators, sponsors and securitization special purpose entities to use third-party firms to assess whether a securitization meets the STS criteria, provided that those firms are authorized by the relevant national regulator. Originators, sponsors or original lenders of a securitization will be required to retain on an ongoing basis a material net economic interest in the securitization of at least 5%. Related amendments to the Capital Requirements Regulation set out preferential regulatory treatment for investors, in particular, for bank investors, of their exposures to securitizations that are deemed to be STS securitizations.
European Supervisory Authorities Advocate Proportional Approach to Compliance With Certain Aspects of the Securitization Regulation
The European Supervisory Authorities have issued a joint statement addressing two issues arising from the Securitization Regulation. The Securitization Regulation will apply directly across the EU from January 1, 2019 to securities issued under securitizations on or after January 1, 2019. Securitizations issued before that date may be referred to as STS securitizations, provided that they meet certain conditions.
The first issue addressed in the joint statement relates to disclosure requirements for EU securitizations. The Securitization Regulation requires originators and sponsors to notify ESMA of any securitization that meets the "Simple, Transparent and Standardized" criteria. ESMA will maintain a list of all such securitizations on its website. Securitization special purpose entities, originators and sponsors of a securitization will be required to make certain information available via a securitization repository to holders of a securitization position, to the national regulators and, upon request, to potential investors. The European Securities and Markets Authority and the European Commission still have to address a number of market concerns on the proposed ESMA disclosure templates (that will be introduced as Technical Standards under the Regulation) as part of these transparency requirements. This is a process that will not be concluded by January 1, 2019.
Basel Committee on Banking Supervision Agrees Next Steps for Basel Standards
Central bankers and banking supervisors from over eighty jurisdictions met this week in Abu Dhabi, United Arab Emirates to discuss a range of policy and supervisory topics.
On November 26-27, 2018 there was a meeting of the Basel Committee on Banking Supervision at which it was agreed that a consultation would take place next year to discuss a framework to consolidate the Committee's standards into a single integrated structure. Moreover, a number of items were agreed:
- A set of targeted revisions to the market risk framework which is due to be implemented by January 1, 2022.
- A consultation on potential enhanced disclosures to reduce bank window-dressing behaviour related to leverage ratio will be pursued. The Basel Committee issued a statement in October declaring unacceptable the alleged tendency in banks to engage in so-called window-dressing by temporarily reducing transaction volumes around key reference dates, which has supposedly the effect of allowing banks to report and publicly disclose better leverage ratios.
- A set of revisions to the Pillar 3 disclosure framework will be published in December.
- A report will be published in December setting out the range of bank, regulatory and supervisory cyber-resilience practices across jurisdictions.
View the press release.
View details of the Basel Committee's consultation on the revised market risk framework.
UK Financial Conduct Authority Reports on Cyber Security Resilience in Financial Services
The Financial Conduct Authority has published a report entitled "Cyber and Technology Resilience: Themes from cross-sector survey 2017-2018." The FCA compiled the report by requesting 296 firms during 2017 and 2018 to provide a self-assessment of their cyber and technological capabilities, focusing on governance, delivery of change management, managing third-party risks and the effectiveness of cyber defenses. The FCA analyzed the responses and considered data from firm's responses to recent operational incidents to produce the report.
UK Parliamentary Committee Launches Inquiry Into Operational Resilience in the Financial Services Sector
The U.K. Treasury Committee has announced the launch of a new Inquiry into IT failures in the financial services sector. The Inquiry has been launched in response to recent IT failures at a number of financial institutions that have led to consumers being unable to access their bank accounts or becoming subject to fraud.
The Committee will assess the causes and consequences of these recent IT failures. Among other things, the Committee will consider the extent to which such incidents are becoming more frequent, sources of concentration risk in the financial sector, the impact of legacy IT systems, the effect of outsourcing on operational resilience, best practices in responding to operational incidents and whether the U.K. regulators are able to regulate firms' capabilities for responding to such incidents.
Written submissions can be made to the Committee by January 18, 2019. The Committee will also appoint a special advisor to provide policy advice to the Committee on the issues. Individuals interested in the role should respond to the call for Expressions of Interest.
View the announcement.
UK Prudential Regulator Proposes Minor Policy Change for Systemic Risk Buffer
The U.K. Prudential Regulation Authority has published a consultation paper entitled "The systemic risk buffer: Updates to the Statement of Policy," proposing minor updates to its Statement of Policy, "The PRA’s approach to the systemic risk buffer." The consultation is relevant to "SRB institutions," which are: (i) ring-fenced bodies within the meaning in the Financial Services and Markets Act 2000; or (ii) large building societies that hold more than £25 billion in deposits (where one or more of the account holders is a small business) and shares (excluding deferred shares).
The PRA proposes to amend the Statement of Policy to:
- remove the statement that the PRA’s approach to reviewing the SoP every two years is mandated by the SRB regulations;
- replace references to the PRA's April 2018 consultation, "The PRA’s methodologies for setting Pillar 2 capital," with references to the finalized Statement of Policy that was subsequently published; and
- include references to the PRA's Supervisory Statement, "UK leverage ratio framework," that was recently updated to apply an additional leverage ratio buffer rate to SRB institutions.
As the proposals are of only a minor nature, the consultation period is short and comments on the consultation paper are invited by December 6, 2018.
View the consultation paper (PRA CP 29/18).
Return to main website.
Final Report on Incentives to Clear OTC Derivatives Published by Global Standard Setting Bodies
A final joint report on the incentives to clear OTC derivatives has been published by the Financial Stability Board, the International Organization of Securities Commissions, the Basel Committee on Banking Supervision and the Committee on Payments and Market Infrastructures. The report is part of the FSB's post-implementation evaluation of the effects of the G20 financial regulatory reforms.
The report sets out the results of an evaluation of the reforms that have been implemented to incentivize central clearing of OTC derivatives and outlines areas for further consideration by the global standard setting bodies. The reforms considered include mandatory clearing requirements, capital, liquidity and margin requirements, as well as the reforms to CCP resilience, recovery and resolution.
2018 List of Globally Systemically Important Banks Published
The Financial Stability Board has published the 2018 list of global systemically important banks. Alongside the 2018 G-SIB list, the Basel Committee on Banking Supervision has published further information relating to its 2018 assessment of G-SIBs, including:
- a list of all the banks in the assessment sample;
- the denominators of each of the 12 high-level indicators used to calculate the banks' scores;
- the 12 high-level indicators for each bank in the sample used to calculate these denominators;
- the cut-off score used to identify G-SIBs in the updated list and the thresholds used to allocate G-SIBs to buckets for the purpose of calculating the specific higher loss absorbency requirements; and
- links to disclosures of all banks in the assessment sample.
The Basel Committee assessment was based on its 2013 methodology for identifying G-SIBs. The revised 2018 assessment methodology will apply from 2021, based on end-2020 data and the corresponding higher loss absorbency requirements will apply from January 1, 2023.
View the 2018 G-SIB list.
View details of the revised assessment framework for G-SIBs.
EU Final Draft Technical Standards on Estimating and Identifying an Economic Downturn in IRB Modelling
The European Banking Authority has published final 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 aim of the RTS is to ensure that institutions using the Internal Ratings-Based approach to calculating capital requirements 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.
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.
European Central Bank Publishes Final First Chapter of Its Guide to Internal Models
The European Central Bank has published the final first chapter of its guide to internal models. The Capital Requirements Regulation requires the ECB to assess and grant permission for banks directly supervised by the ECB to use internal models for credit risk, counterparty credit risk and market risk. The ECB's guide sets out how the ECB intends to approach the assessment of whether a firm meets the necessary requirements for the permission to be granted. This chapter is on general topics, comprising overarching principles for internal models, implementation of the internal ratings-based approach, internal model governance, internal validation and audit, model use, change management and third-party involvement. The ECB recently consulted on model-specific chapters, including for credit, market and counterparty credit risks.
The ECB notes that the guide may need to be amended if the European Commission adopts a different version of the European Banking Authority's final Draft Regulatory Technical Standards on assessment methodology for the IRB approach.
View the guide.
View the feedback statement.
UK Prudential Regulator Finalizes Supervisory Approach for New EU Securitization Framework
The U.K. Prudential Regulation Authority has published a Policy Statement setting out its approach to supervision under the new EU securitization framework that will take effect from January 1, 2019. The PRA consulted on its proposals in May 2018. The incoming EU framework consists of: (i) the Securitization 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. Respondents to the PRA's consultation on its approach were largely supportive. The PRA has made some changes (outlined in the Policy Statement) to its consultation text in line with comments received.
UK Prudential Regulator Finalizes Changes to the Leverage Ratio Rules for Ring-Fenced Banks
The U.K. Prudential Regulation Authority has published a Policy Statement on applying the U.K. leverage ratio to systemic Ring-fenced Bodies and reflecting the Systemic Risk Buffer. The SRB is one of the elements of the overall capital framework for U.K. banks and building societies. It will be applied by the PRA to individual institutions and introduced at the same time that ring-fencing comes into force in 2019. RFBs are banks that hold more than £25 billion in core deposits. They must separate their core retail banking business from their investment banking business by January 1, 2019.
European Central Bank Publishes Final Guides for Capital and Liquidity Management
The European Central Bank has published two finalized Guides, one on the internal capital adequacy assessment process (ICAAP) and the other on the internal liquidity adequacy assessment process (ILAAP). The ECB consulted on draft versions of the Guides between March and May 2018. The Guides, which are relevant to institutions within the Single Supervisory Mechanism, are designed to assist institutions in strengthening their ICAAPs and ILAAPs and encourage the use of best practices by explaining in greater detail the ECB's expectations.
The ICAAP and ILAAP Guides each set out seven principles that have been derived from the relevant provisions of the Capital Requirements Directive and that will be considered, among other things, by the ECB in the assessment of each institution's ICAAP or ILAAP as part of the Supervisory Review and Evaluation Process. Frequently Asked Questions have also been published alongside the Guides, along with consultation responses received and a feedback statement.
The ECB intends to use the guides to assess significant institutions' ICAAPs and ILAAPs from January 1, 2019.
View the ICAAP Guide.
View the ILAAP Guide.
View the FAQs.
View the consultation responses.
View the feedback statement.
EU Legislation Published to Update Supervisory Reporting Requirements
A Commission Implementing Regulation supplementing the Capital Requirements Regulation has been published in the Official Journal of the European Union. The Implementing Regulation amends the existing Implementing Regulation ((EU) No 680/2014) to reflect the gradual supplementation and amendment of elements of the CRR reporting requirements by the adoption of further Regulatory Technical Standards. The Amending Regulation was adopted by the European Commission on October 9, 2018. It amends the existing Implementing Regulation to set out:
- additional requirements relating to prudent valuation adjustments of fair-valued positions;
- additional requirements to accommodate the reporting on securitization positions subject to the revised securitization framework; and
- minor changes to the reporting requirements on the geographical distribution of exposures.
The Amending Regulation will enter into force on November 29, 2018 and will apply directly across the EU from December 1, 2018.
View Commission Implementing Regulation (EU) 2018/1627.
European Banking Authority Final Guidelines on Managing Non-Performing and Forborne Exposures
The European Banking Authority has published a final report setting out finalized Guidelines on management of non-performing exposures (NPEs) and forborne exposures (FBEs). The EBA consulted on a draft of the Guidelines in March 2018. The aim of the Guidelines is to help to reduce NPEs on banks' balance sheets by providing supervisory guidance to ensure that credit institutions effectively manage NPEs and forborne exposures (FBEs) on their balance sheets.
The final Guidelines cover: (i) key elements for developing and implementing an NPE strategy; (ii) the key elements of governance and operations in relation to an NPE workout framework; (iii) governance and operations in relation to FBEs; (iv) governance and operations for NPE recognition; (v) NPE impairment measurement and write-offs; (vi) collateral valuation of immovable and movable property; and (vii) supervisory evaluation of management of NPEs and FBEs.
The Guidelines will apply from June 30, 2019. Credit institutions should calculate their NPL ratios using the reference date of December 31, 2018.
View the final report.
View details of the EBA's consultation on the Guidelines.
UK Prudential Regulator Updates Approach Document on Banking Supervision
The U.K. Prudential Regulation Authority has published an updated version of its document entitled "The Prudential Regulatory Authority's approach to banking supervision." The document replaces the previous version that was dated March 2016.
In the latest update, the PRA has removed duplicative information and replaced some text with links to information contained in legislation or other material on the PRA's or Bank of England's website. The update includes a new foreword by the PRA's Chief Executive Officer, Sam Woods.
The update includes two new chapters, on identifying the risks to the PRA's objectives and on how the PRA tailors its supervisory approach. A number of new sections to existing chapters have also been added, covering safety and soundness and the stability of the financial system, the PRA's regulatory principles and operational resilience. Further detail in areas such as capital and resolvability is also added.
View the Updated Approach Document.
EU Amending Legislation Published for Liquidity Coverage Requirement
An Amending Regulation supplementing the Capital Requirements Regulation has been published in the Official Journal of the European Union, following its adoption in July 2018 by the European Commission. The Amending Regulation, which relates to the Liquidity Coverage Requirement for credit institutions, makes changes to the existing Delegated Regulation on the LCR with the objective of improving its practical application. The existing Delegated Regulation sets out detailed requirements on the LCR 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 Amending Regulation makes the following changes:
- 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.
The Amending Regulation will enter into force on November 19, 2018 and will apply directly across the EU from April 30, 2020.
View the Amending Regulation.
EU Supervisory Authorities Propose Revisions to Implementing Technical Standards for Mapping of External Credit Ratings
The Joint Committee of the European Securities Authorities (that is, the European Banking Authority, the European Securities and Markets Authority and the European Insurance and Occupational Pensions Authority) has published a consultation paper setting out proposed revisions to Implementing Technical Standards on the mapping of External Credit Assessment Institutions' credit assessments under the Capital Requirements Regulation.
The proposed revisions will amend the existing Implementing Regulation ((EU) 2016/1799), which sets out how ECAIs' credit assessments should be "mapped" to credit quality steps for the purposes of calculating capital requirements. The proposed amendments reflect the result of a monitoring exercise on the adequacy of mappings, which necessitates amendments related to: (i) the re-allocation of the credit quality steps for two ECAIs; and (ii) changes in credit rating scales/types for ten ECAIs. The consultation webpage also contains mapping reports for each of the 11 ECAIs concerned.
Comments on the consultation are invited by December 31, 2018. Respondents are asked to provide comments via the "Send your comments" button on the EBA's consultation webpage.
View the consultation paper.
View the EBA's consultation webpage.
European Banking Authority Sets Out Its Work Priorities for 2019
The European Banking Authority has published its Work Programme for 2019, setting out details of, and planned main outputs from, 37 separate work streams across the following five key strategic priorities:
- Leading the Basel III implementation in the EU.
- Understanding risks and opportunities arising from financial innovation.
- Collecting, disseminating and analyzing banking data.
- Ensuring a smooth relocation of the EBA to Paris.
- Fostering the increase of the loss-absorbing capacity of the EU banking system.
The EBA also confirms that work related to Brexit will remain a horizontal priority for the EBA in 2019 and explains that the EBA's other activities may be affected in the future by Brexit-related developments. Should that be the case, any substantial change in the work programme will be communicated in due time, in order to seek steering and approval from its Management Board and Board of Supervisors.
View the EBA's 2019 Work Programme.
European Commission Announces Work Plan for 2019
The European Commission has published a Communication, outlining its work plan for 2019. The Communication is addressed to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions. The Communication discusses the ongoing challenges for the EU in the run-up to the European Parliamentary elections and the post-Brexit Summit in Sibiu at which a new multi-annual framework for the EU27 will be finalized.
Separately published Annexes to the Communication relating to: (i) new initiatives; (ii) REFIT initiatives; (iii) priority pending proposals; (iv) legislative initiatives that have been withdrawn; and (v) a list of envisaged repeals. Priority pending proposals of particular relevance to financial institutions include legislative proposals relating to the forthcoming sustainable finance package, cross-border distribution of collective investment schemes, crowdfunding, amendments to the European Market Infrastructure Regulation, prudential regulation and supervision of investment firms and a proposed amending regulation relating to minimum loss coverage for non-performing exposures.
Basel Committee on Banking Supervision Consults on Leverage Ratio Treatment of Client-Cleared Derivatives
The Basel Committee on Banking Supervision has published a consultation paper entitled "Leverage ratio treatment of client-cleared derivatives," seeking views from stakeholders on whether a targeted and limited revision of the leverage ratio exposure measure is warranted with respect to the treatment of client cleared derivatives.
On the publication of the finalized Basel III framework in December 2017, the Basel Committee stated that it would continue to monitor the impact of the Basel III leverage ratio’s treatment of client-cleared derivative transactions. It confirmed that it would review the impact of the leverage ratio on banks’ provision of clearing services and any consequent impact on the resilience of central counterparty clearing. The Basel Committee has completed its review and is of the view that only a strong evidence-based case would justify making revisions to the current leverage ratio treatment of client cleared derivatives.
Basel Committee on Banking Supervision Highlights Concerns About Leverage Ratio "Window-Dressing"
The Basel Committee on Banking Supervision has issued a statement on leverage ratio "window-dressing" behavior by banks.
To comply with the Basel III leverage ratio standard, among other things, banks are required to publicly disclose their leverage ratio, calculated on a quarter-end basis, or more frequently in certain jurisdictions. The Basel Committee has noted what may be a tendency in banks to engage in so-called window-dressing by temporarily reducing transaction volumes around key reference dates, which has the effect of allowing banks to report and publicly disclose higher leverage ratios.
The Basel Committee states that window dressing is unacceptable as it undermines the policy objectives of the leverage ratio standard and risks disrupting the operations of financial markets. The Basel Committee calls on banks to desist from undertaking transactions for window-dressing purposes and makes several suggestions for actions by supervisors to address these concerns. These include increasing the frequency of reporting and supervisory monitoring, focused supervisory inspections and/or additional public disclosures. The Basel Committee will continue to monitor potential window-dressing behavior and may consider adjusting the Pillar 1 minimum capital requirements and/or Pillar 3 disclosure requirements if necessary.
View the Basel Committee's Statement.
Basel Committee on Banking Supervision Publishes Updated Stress Testing Principles
The Basel Committee on Banking Supervision has published a final version of its Stress Testing Principles, which replace its 2009 Principles for Stress Testing and Supervision. The Basel Committee conducted a review of the 2009 Principles during 2017 and launched a consultation on proposed revisions in December 2017.
The new principles reflect the growth in importance of stress testing since the 2009 version was produced and its evolution into a critical element of risk management for banks as well as a core tool for both banking supervisors and macroprudential authorities.
The new principles are also set at a higher level than the previous version, so that the principles can apply across many banks and jurisdictions and so that they are robust to developments in stress testing practices. The principles focus on the core elements of stress testing frameworks, including the objectives, governance, policies, processes, methodology, resources and documentation that guide stress testing. Each principle is followed by a short description of considerations that are equally relevant for banks and authorities, along with additional considerations for banks or authorities.
View the Stress Testing Principles.
UK Prudential Regulator Consults on Managing Financial Risks from Climate Change
The Prudential Regulation Authority has published a consultation paper on a draft Supervisory Statement on managing the financial risks from climate change. The consultation follows the PRA's publication in September 2018 of its report "Transition in thinking: The impact of climate change on the U.K. banking sector." The consultation paper is relevant to banks, insurers, re-insurers, building societies and PRA-designated investment firms. The PRA wants firms to take a strategic approach to financial risks from climate change by taking into account current and credible risks and identifying actions needed now to mitigate existing and future risks.
UK Prudential Regulator Proposes Period of Overlap for Transition to New Pillar 2 Reporting Template
The U.K. Prudential Regulation Authority has published a consultation proposing a six-month overlap period following the introduction of the new Pillar 2 Liquidity reporting template (PRA110) from July 1, 2019. The Capital Requirements Directive gives national regulators discretion to set additional Pillar 2 liquidity requirements, to capture those liquidity risks that are either not captured or not fully captured under the Pillar 1 framework. The final element - Pillar 3 - involves public reporting of capital. The PRA published its final Policy Statement on the introduction of its Pillar 2 framework in February 2018. The PRA110 template was scheduled to replace the existing "daily flows" and "enhanced mismatch" liquidity reports (FSA047 and FSA048) from July 1, 2019.
Since its Policy Statement, the PRA has reassessed the risks from transitioning to the PRA110 template and considers it prudent to delay the termination of FSA047 and FSA048, to ensure data quality and continuity. The PRA proposes that the PRA110 is introduced on July 1, 2019 as planned. However, between then and January 1, 2020, firms should additionally continue to submit liquidity reports using FSA047 and FSA048. The overlap will allow the PRA and firms alike to assess the quality of PRA110 reporting.
The PRA is inviting comments on the proposal by November 12, 2018. The PRA considers that the short consultation period is justified due to the fact that firms are already reporting using FSA047 and FSA048.
View the consultation paper (PRA CP22/18).
View details of the PRA's Pillar 2 Policy Statement.
UK Conduct Regulator Consults on Brexit-Related Changes to Its Rulebook and Binding Technical Standards
The U.K. Financial Conduct Authority has published its first consultation on proposed changes to the FCA Handbook to ensure a functioning legal and regulatory framework for financial services in the event of a "no-deal" scenario whereby the U.K. exits the EU on March 29, 2019 without a ratified Withdrawal Agreement in place and there is consequently no transitional period for firms. The proposed amendments will not take effect if the U.K. enters into a transitional period after exit day.
The consultation includes the FCA's proposals in relation to the Binding Technical Standards it has been empowered by HM Treasury to amend prior to Brexit and to maintain afterward. These are the retained EU "Level 2" delegated and implementing regulations that set out regulatory technical standards and implementing technical standards. The consultation also sets out the FCA's proposed approach to non-legislative "Level 3" materials such as guidelines, recommendations and opinions that will also be onshored.
The FCA states in the consultation that the majority of the proposed changes are consequential in nature and follow the amendments to retained EU law that HM Treasury is proposing, as set out in the series of financial services-related statutory instruments being made under the European Union (Withdrawal) Act 2018.
UK Financial Policy Committee Publishes Outcome of its October Meeting
The Financial Policy Committee has published a statement from its meeting held on October 3, 2018 where it reviewed developments since June 19, 2018. The FPC continues to consider that the U.K. banking system is sufficiently robust to withstand the disruption of a "hard Brexit" and that there is no need for additional capital buffers for banks as a result. The FPC is of the view that the banking system would be able to absorb, in addition to a disorderly Brexit, further costs that might arise from trade tensions. However, the FPC is concerned about the lack of action taken by EU authorities to address the risks of disruption in the event of the U.K. leaving the EU without a deal on March 29, 2019. In particular, the FPC would like mitigating action to be taken to address the risks associated with derivatives contracts and the transfer of personal data.
Aside from the risks presented by Brexit, the FPC considers that domestic risks are still at a standard level overall. However, the FPC is concerned about the swift growth of leveraged lending and intends to: (i) assess the implications for banks in the 2018 stress test; and (ii) review the impact of the increasing role of non-bank lenders and changes in the distribution of corporate debt. The FPC has decided to maintain the U.K. countercyclical capital buffer rate at 1% and will review the rate again at its meeting on November 28, 2018.
US FDIC Seeks to Improve Communication, Transparency and Accountability10/05/2018
The U.S. Federal Deposit Insurance Corporation published a notice and request for comment seeking input on how to improve the efficacy, efficiency and transparency of the agency’s communication with insured depository institutions. The notice outlines current forms of communication, including, regulations, policies, procedures and guidance; news and updates; industry data, educational materials and outreach; general communication; and direct communication. The notice requests comment with respect to the efficiency, ease of access and content of communications with insured financial institutions. Comments to the FDIC’s notice are due no later than December 4, 2018.
UK Prudential Regulator Consults on Changes to Forms for Regulatory Transactions
The U.K. Prudential Regulation Authority has launched a consultation entitled "Regulatory transactions: Changes to notification and application forms." The proposals in the consultation are for the amendment of various PRA forms that are used for applications and notifications for regulatory transactions. The PRA has chosen to combine the proposals into one substantial consultation paper to avoid having to issue multiple separate consultations on the same forms. The affected forms are located in the Passporting, Change in Control, Insurance Special Purpose Vehicles (ISPVs) and Notifications Parts of the PRA Rulebook.
The consultation proposals are relevant for PRA-authorized firms and any firms that have, or intend to acquire, a qualifying holding in a PRA-authorized firm.
Comments on the consultation are invited by November 1, 2018. The PRA expects that the proposals will take effect immediately after the publication of its planned Policy Statement.
View the consultation paper (PRA CP 21/18).
International Task Force Report Shows Momentum Building for Climate-Related Financial Disclosures
The Task Force on Climate-related Financial Disclosures has issued a status report outlining progress on adoption of the TCFD disclosure recommendations issued in June 2017. The TCFD was established by the Financial Stability Board in 2015 and its 2017 recommendations provide a voluntary framework for companies to develop more effective climate-related financial disclosures through their existing reporting processes. The recommendations are structured around four areas: (i) governance; (ii) strategy; (iii) risk management; and (iv) metrics and targets.
Prudential Regulator Reports on Climate-Related Financial Risks for the UK Banking Sector
The U.K. Prudential Regulation Authority has published a report entitled "Transition in thinking: The impact of climate change on the U.K. banking sector".
The purpose of the report is to: (i) examine the financial risks from climate change that impact PRA regulated banks, building societies and designated investment firms; (ii) assess how those entities are responding to and managing the financial risks from climate change; and (iii) assist those entities in understanding the PRA's supervisory approach to the financial risks from climate change. The report will also be used to inform the Bank of England's wider work to assess the system-wide financial risks from climate change.
European Central Bank Guide to On-site Inspections and Internal Model Investigations
The European Central Bank has published its finalized Guide to on-site inspections and internal model investigations under the Single Supervisory Mechanism. The ECB is empowered under the SSM Regulation to conduct, with respect to Eurozone entities within its supervisory remit: (i) on-site inspections, which are in-depth investigations of risk, risk controls and governance; and (ii) internal model investigations, which involve in-depth assessments of internal models used for the calculation of own fund requirements.
The ECB has developed the Guide as a reference document for supervised entities and other legal entities for which the ECB has decided to launch an on-site inspection. It consulted on a draft of the Guide in July 2017 and has published a separate feedback statement on the consultation responses that were received. The Guide applies to ECB inspections of significant institutions, less significant institutions and other legal entities referred to in the SSM Regulation, including third parties to whom credit institutions have outsourced functions.
The Guide comprises three sections: (i) the general framework for inspections; (ii) the inspection process; and (iii) applicable principles for inspections. The Guide is not a legally binding document and does not replace the legal requirements laid down in the relevant applicable EU law.
View the Guide.
View the feedback statement.
Basel Committee on Banking Supervision Provides Brief Update on Various Workstreams
The Basel Committee on Banking Supervision has published a press release summarizing the outcome of its meeting on September 19-20, 2018. The Committee committed to consider Pillar 1 and Pillar 3 measures to prevent banks adjusting their balance sheets around regulatory reporting dates to manipulate reported leverage ratios. In addition, the Committee intends to further analyze banks' exposures to crypto-assets to reach a conclusion on whether action is needed to address the risks that these assets may present.
The Basel Committee will publish the following before the end of the year:
- an updated 2018 list of global systemically important banks, along with the high-level indicator values of all the banks that are within the G-SIB assessment exercise;
- final revisions to the market risk framework (towards the end of the year);
- a consultation paper (in October 2018) on whether the exposure measure should be revised to alleviate its impact on client clearing, including presenting options for revising this; and
- the revised Principles on Stress Testing (in October 2018).
The Basel Committee also published responses to Frequently Asked Questions on the treatment of settled-to-market derivatives under the Liquidity Coverage Ratio and Net Stable Funding Ratio.
View the press release.
View the FAQs.
US-UK Financial Regulatory Working Group Holds Inaugural Meeting
The U.S.-U.K. Financial Regulatory Working Group has issued a statement following its inaugural meeting held on September 12, 2018 in London. Participants discussed the outlook for financial regulatory reforms and future priorities, including possible areas for deeper regulatory cooperation to facilitate further financial services activity between U.S. and U.K. markets. Participants also discussed Brexit-related issues, including: (i) U.S.-U.K. financial regulatory issues resulting from the U.K.’s exit from the EU; and (ii) the implications of Brexit for financial stability and cross-border financial regulation, including contractual continuity and potential cliff-edge risks.
The Working Group was established in April 2018 to serve as a forum for staff from the U.S. Department of the Treasury and HM Treasury and financial regulatory authorities to exchange views on the regulatory relationship between the U.S. and the U.K. Its objectives are to further financial regulatory cooperation, improve transparency, reduce regulatory uncertainty, identify possible cross-border implementation issues, address regulatory arbitrage and work towards achieving compatibility of U.S. and U.K. laws and regulations.
The next meeting of the Working Group will be held in the first half of 2019 in Washington, D.C.
View the statement.
European Central Bank Consults on Part 2 to Guide to Licensing Credit Institutions
The European Central Bank has opened a consultation on a draft Part 2 to its Guide to Assessments of Licence Applications by banks. The ECB published the Guide to Assessment of Licence Applications in March 2018, which applies to all license applications to become a credit institution within the meaning of the Capital Requirements Regulation. The ECB developed the Guide, which is not legally binding, to promote awareness and enhance the transparency of the assessment criteria and processes for establishing a credit institution within the Single Supervisory Mechanism.
The consultation on the draft Part 2 of the Guide focuses on assessment criteria for capital requirements and business plans, including initial capital, own funds, location, operations and structural organization, banking group and outsourcing.
The consultation closes on October 25, 2018.
View the consultation paper.
View the consultation webpage.
View details of the Guide to Assessments of Licence Applications.
US Federal Deposit Insurance Corporation Seeks Comments Regarding the Treatment of Reciprocal Deposits
The U.S. Federal Deposit Insurance Corporation published a notice of proposed rulemaking and request for comments regarding a limited exception for a capped amount of reciprocal deposits from treatment as brokered deposits.
European Commission Proposes Enhancements to the European Banking Authority's Supervisory Powers for Anti-Money Laundering
The European Commission has published a Communication setting out a broad strategy for strengthening the EU's framework for anti-money laundering supervision. The Communication is accompanied by a fact sheet setting out Questions and Answers on the strategy.
The Commission notes that, despite the recent strengthening of the EU's framework, through the Fourth Money Laundering Directive (4MLD) and the forthcoming Fifth Money Laundering Directive (5MLD), there are concerns that gaps remain in the EU's supervisory framework. The Commission highlights that there is no clear articulation between the prudential and anti-money laundering rules for financial institutions. It identifies shortcomings in the reaction time of national supervisors and in the level of cooperation and information sharing both between prudential and anti-money laundering supervisors and on a cross-border basis between EU supervisors and other supervisors based both within and outside the EU. While the Commission recognizes that 5MLD will remove certain obstacles to cooperation between anti-money laundering and prudential supervisors, it also notes that further steps are necessary to ensure effective supervisory cooperation, especially where financial institutions operate across borders.
UK Prudential Regulator Consults on Revisions to Supervisory Reporting Requirements
The U.K. Prudential Regulation Authority has launched a consultation on changes to the PRA's reporting requirements to reflect proposed changes set out by the European Banking Authority in EBA consultations launched in August 2018. The EBA proposes a number of revisions to the existing Implementing Technical Standards on the supervisory reporting requirements under the Capital Requirements Regulation. These include proposed revisions to the financial reporting (FINREP) annexes of the ITS, which add new reporting requirements for non-performing and forborne exposures, amend the reporting of profit or loss items (in particular on expenses) and amend the reporting on leases following International Financial Reporting Standard 16. Proposed revisions to the common reporting (COREP) annexes relate to the Liquidity Coverage Requirement for credit institutions.
US Office of the Comptroller of the Currency Proposes to Permit Certain Federal Savings Associations to Operate with National Bank Powers
The U.S. Office of Comptroller of the Currency published a notice of proposed rulemaking regarding permitting federal savings associations with total consolidated assets of $20 billion or less as of December 31, 2017 (“covered savings associations”), to elect to operate with the same rights and privileges as a national bank. The proposed rule seeks to implement Section 206 of the Economic Growth, Regulatory Relief, and Consumer Protection Act, which amends the Home Owners’ Loan Act, and is intended to provide business flexibility for certain federal savings associations to adapt to change without a corresponding requirement to change charters. Under the proposed rule, a covered savings association has same rights and privileges as a national bank that has its main office situated in the same location as the home office of the covered savings association, and is subject to the same duties, restrictions, penalties, liabilities, conditions and limitations that would apply to such a national bank. The covered savings institution, however, will retain its federal savings association charter, and will be treated as a federal savings association for governance and other purposes, including consolidation, merger, dissolution, conversion, conservatorship and receivership. Treatment as a covered savings association would generally continue even after the institution’s total consolidated assets exceed $20 billion. Comments to proposed rule are due no later than November 19, 2018.
View full text of the proposal.
US Federal Deposit Insurance Corporation Seeks to Retire Certain Financial Institution Letters
The U.S. Federal Deposit Insurance Corporation published a proposal (FIL-46-2018) seeking comment with respect to the retirement of certain Financial Institution Letters. FILs are letters that typically announce various types of regulations, policies, publications, and other matters of interest to those in the banking community. The retired FILs would be archived and moved to inactive status, but would still be available for reference. The FDIC issued the proposal pursuant to the Economic Growth and Regulatory Paperwork Reduction Act of 1996, which requires the FDIC (and other agencies) to conduct a review of their rules at least every 10 years to identify outdated or unnecessary regulations. In connection with this mandate, the FDIC has identified 374 FILs issued between 1995 and 2017 regarding risk management supervision that have become outdated or redundant. The FDIC is also currently reviewing FILs regarding other subject matters, and is exploring opportunities to update or streamline its remaining FILs generally. Comments to the proposal are due by October 10, 2018.
View full text of the FDIC proposal, including a list of the letters to be retired.
Basel Committee Finalizes Technical Amendment to Pillar 3 Disclosure Requirements
Following a consultation in March 2018, the Basel Committee on Banking Supervision has published a finalized technical amendment to the consolidated Pillar 3 disclosure technical standard that was issued in March 2017. The amendment imposes additional Pillar 3 disclosure requirements for those jurisdictions implementing an Expected Credit Loss, or ECL, accounting model as well as for those adopting transitional arrangements for the regulatory treatment of accounting provisions. These additional disclosures require banks to disclose, where applicable: (i) the "fully loaded" impact of ECL transitional arrangements used in Total Loss Absorbing Capacity resources and ratios; (ii) the allocation between general and specific provisions for standardized approach exposures; and (iii) the rationale for their categorization of ECL accounting provisions in general and specific categories for standardized approach exposures.
The technical amendment will also apply to jurisdictions adopting transitional arrangements for the regulatory treatment of accounting provisions. The interim approach to, and transitional arrangements for, the regulatory treatment of accounting provisions were published separately by the Basel Committee in March 2017.
The amendments covered by the revised Technical Standard will take effect from January 1, 2019.
View the Technical Amendment.
View the consultation paper.
View the interim approach and transitional arrangements published March 2017.