Basel Committee on Banking Supervision
Basel III reforms - BCBS publishes speech by Pablo Hernández de Cos - 8 February 2022
The Basel Committee on Banking Supervision (BCBS) has published a speech by BCBS Chair and Governor of the Bank of Spain, Pablo Hernández de Cos, on the final Basel III reforms, delivered at the European Economic and Social Committee public hearing on ‘The EU banking reform package’. The speech focuses on the European Commission’s (the Commission’s) proposals for implementing the final Basel III reforms, which are set out primarily in the Commission’s legislative proposal for a Regulation amending the Capital Requirements Regulation (575/2013/EU) (CRR III) (2021/0342(COD)).
In his capacity as BCBS Chair, Mr Hernández de Cos highlights three points: (i) the importance of a resilient banking system, as highlighted by COVID-19; (ii) that the Basel III reforms have been adequately designed to reflect jurisdiction- or region-specific characteristics; and (iii) fully implementing Basel III will signal jurisdictions’ ongoing commitment to multilateralism.
In his capacity as Governor of the Bank of Spain, Mr Hernández de Cos stresses that, “it is critical to implement the full Basel III package in Europe, as its components are complementary in nature and are necessary to safeguard the resilience of the European banking system.” However, he highlights concerns in relation to the implementation timetable, given the Commission foresees an application date of 1 January 2025, two years later than the deadline set by the BCBS. Mr Hernández de Cos urges all stakeholders to accelerate work on CRR III and warns that “further delays could result in the European banking system being insufficiently prepared to face future shocks and could even have undesirable knock-on effects on the implementation process in other jurisdictions.”
Mr Hernández de Cos also expresses concerns about deviations in CRR III from the final Basel III standards, particularly in relation to the credit risk framework. He warns that these deviations, “could leave specific risk exposures under-capitalised,” citing collateral valuation as an example where the BCBS has identified a build-up of systemic risk in real estate markets across different jurisdictions.
Finally, Mr Hernández de Cos notes concerns relating to the output floor, where the Commission, “introduces a range of transitory adjustments when it comes to residential real estate, unrated corporates and derivative exposures.” He stresses that that these adjustments, “should be avoided as, in [his] view, they present a deviation from Basel III, are unfounded from prudential or financial stability grounds and could trigger a ‘race-to-the-bottom’”. He cautions that any such deviations should be strictly temporary in nature and should not be extended further.
Speech by BCBS Chair, Pablo Hernández de Cos: Implementing Basel III
European Parliament
Updates to the EU bank resolution framework - European Parliament publishes ECON report on proposed Regulation on MREL and TLAC amendments - 4 February 2022
The European Parliament has published the text of the report (A9-0020/2022) adopted by its Economic and Monetary Affairs Committee (ECON) on the so-called ‘Daisy Chain’ proposal. The proposal concerns the prudential treatment of global systemically important institution (G-SII) groups with a multiple point of entry (MPE) resolution strategy and a methodology for the indirect subscription of instruments eligible for internal minimum requirements for own funds and eligible liabilities (MREL).
The ‘Daisy Chain’ proposal would amend provisions in the Capital Requirements Regulation (575/2013/EU) (CRR) on total loss-absorbing capacity (TLAC) and MREL, and the Bank Recovery and Resolution Directive (2014/59/EU). The report contains a draft Parliament legislative resolution, which sets out suggested amendments to the proposed Regulation, including:
- introducing a cap for the deduction mechanism (‘daisy chain’) proposed by the Commission;
- a request for the Commission to assess the impact of the ‘daisy chain’ framework on the different banking group structures to avoid any unintended consequences; and
- establishing a transitional arrangement that allows the European resolution authority to apply a transitional deduction regime to G-SII groups with an MPE resolution strategy under certain restrictive conditions.
The proposed Regulation would enter into force and apply 20 days following its publication in the Official Journal of the European Union. However, Article 1, point (3), point (5)(b), and points (7), (8) and (9) and Article 2 would apply from 1 January 2024.
I Report on the proposal for a regulation of the European Parliament and of the Council amending Regulation (EU) No 575/2013 and Directive 2014/59/EU as regards the prudential treatment of global systemically important institution groups with a multiple point of entry resolution strategy and a methodology for the indirect subscription of instruments eligible for meeting the minimum requirement for own funds and eligible liabilities (2021/0343(COD))
Consumer Credit Directive - European Parliament publishes draft report - 7 February 2022
The European Parliament’s Internal Market and Consumer Protection Committee (IMCO) has published a draft report (2021/0171(COD)), dated 31 January 2022, on the European Commission’s (the Commission’s) legislative proposal for a Directive on consumer credit, which will revise and replace the Consumer Credit Directive (2008/48/EC) (CCD). The legislative proposal was adopted by the Commission in July 2021 (COM(2021) 347 final).
IMCO’s draft report contains a draft European Parliament legislative resolution, which sets out suggested amendments to the proposed Directive. The accompanying explanatory statement contains a number of proposals and comments, including:
- that IMCO is pleased to see that the Commission’s proposal includes a broadening of the scope of the CCD. However, it considers that the Commission’s proposal does not sufficiently address the issue of peer-to-peer crowdfunding lending and that it should be removed from scope;
- a proposed ban on personalised advertisements and an obligation to show only standardised offers. The requirements on advertisements should be extended to include information on the consequences and/or costs of missed payments and EU Member States should prohibit misleading advertisements that underexpose the consequences of a loan, that might create over-indebtedness and that focus on the ease of obtaining a loan;
- the proposed provision of pre-contract information in the clearest possible way by restructuring the Standard European Consumer Credit Information form, to include information on missed payments and the right of withdrawal;
- a proposed list of objective financial data to be used to assess a customer’s creditworthiness;
- a proposal that the European Banking Authority, industry stakeholders and consumer representatives develop a range of standardised environmentally sustainable consumer credit products; and
- a proposed new Article laying down rules on the debt collection process.
The annex to the draft report sets out the entities and persons that have provided input to it.
I Draft Report on the proposal for a directive of the European Parliament and of the Council on consumer credits (2021/0171(COD))
European Central Bank
COVID-19 - ECB announces no further extension of capital and leverage relief for banks - 10 February 2022
The European Central Bank (ECB) has announced that it sees no need to allow banks to operate below the level of capital defined by their Pillar 2 Guidance beyond December 2022, nor to extend beyond March 2022 the supervisory measure that allows them to exclude central bank exposures from their leverage ratios. The ECB introduced these provisions in March and September 2020 to assist banks in the context of COVID-19.
The ECB notes that there is still some uncertainty regarding the impact of COVID-19. However, it highlights that banks have ample headroom above their capital requirements and above the leverage ratio requirement. At the end of September 2021, the aggregate Common Equity Tier 1 ratio of banks under direct ECB supervision stood at 15.47% and their average leverage ratio stood at 5.88%.
In light of this, the ECB sets out that Banks should: (i) operate above Pillar 2 Guidance from 1 January 2023; and (ii) re-include central bank exposures in their leverage ratios from 1 April 2022. It has published an updated version of the FAQs on its supervisory measures in relation to COVID-19 to reflect its decision.
Press release
FAQs on ECB supervisory measures in reaction to the coronavirus
HM Treasury
The Financial Services and Markets Act 2000 (Exemption) (Amendment) Order 2022 - Statutory instrument and explanatory memorandum published - 7 February 2022
The Financial Services and Markets Act 2000 (Exemption) (Amendment) Order 2022 (SI 2022/100) (the Order) has been published, together with an explanatory memorandum, under section 38 of FSMA. The Order allows Norges Bank, the Norwegian central bank, to continue its activities in the UK without authorisation when the Temporary Transition Regime ends.
The Order amends the Financial Services and Markets Act 2000 (Exemption) Order 2001 (SI 2001/1201) (the Exemption Order), which provides for certain persons to be exempt from the general prohibition imposed by section 19 of FSMA (regulated activities must only be carried out by an authorised, or exempt, person). Article 2 of the Order adds Norges Bank to Part IV of the Schedule to the Exemption Order and, in combination with Article 5(2) of the Exemption Order, exempts Norges Bank from requiring authorisation in respect of the activities specified under Articles 14, 21, 25, 37, 40, 53 and 64 of the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001.
The Order comes into force on 31 March 2022.
The Financial Services and Markets Act 2000 (Exemption) (Amendment) Order 2022 (SI 2022/100)
Explanatory memorandum
Prudential Regulation Authority
Definition of capital - PRA publishes Consultation Paper (CP2/22) on updates to PRA rules and supervisory expectations - 7 February 2022
The PRA has published a Consultation Paper (CP2/22) on changes to its rules and supervisory expectations relating to the definition of capital. It sets out the PRA’s proposed approach to transferring the UK Technical Standards for own funds requirements for institutions (UKTS) into PRA rules, with amendments to reflect revisions to the Capital Requirements Regulation (575/2013/EU) (CRR) introduced by CRR II ((EU) 2019/876) in June 2019.
The UK version of Commission Delegated Regulation 241/2014/EU contains regulatory technical standards (RTS) on own funds requirements for banks, building societies and PRA-designated investment firms (Own Funds RTS). Articles 13 to 19 of the Own Funds RTS, which relate to deductions from Common Equity Tier 1 (CET 1), were moved to the Own Funds and Eligible Liabilities (CRR) Part of the PRA Rulebook on 1 January 2022 as part of the PRA’s implementation of the Basel III standards. CP2/22 sets out the PRA’s proposals to transfer the remaining provisions in the Own Funds RTS to the Own Funds and Eligible Liabilities (CRR) Part of the PRA Rulebook and to revoke the Own Funds RTS. The PRA also proposes to update PRA Supervisory Statement (SS) 7/13 ‘Definition of capital (CRR firms)’ to clarify the PRA’s expectations of CRR firms regarding capital issuances and reductions.
The policy proposals in CP2/22 are as follows:
- replicate UKTS requirements in the PRA Rulebook and update the relevant provisions in the Own Funds and Eligible Liabilities (CRR) Part of the PRA Rulebook (the text of which is contained in Appendix 1 of CP2/22) to align with the changes introduced to the CRR by CRR II. These include updates to the requirements on firms regarding: (i) information that must be provided when seeking PRA permission to reduce capital instruments; (ii) the new general prior permission process; and (iii) the process for reductions in share premium accounts; and
- update SS7/13 (the text of which is in Appendix 3 of CP2/22) to: (i) clarify the PRA’s expectations of CRR firms regarding the quality of capital instruments; (ii) set out PRA expectations on liability-accounted Additional Tier 1 (AT1) instruments; (iii) update existing references on subordinated swaps; and (iv) introduce an expectation for firms to seek PRA views prior to issuing any new Tier 2 instruments that include new or complex features; and (v) clarify the PRA’s expectation that firms seek PRA permission for all forms of reduction of own funds instruments and that firms should inform supervisory contacts when there is sufficient certainty regarding capital reduction transactions in order to facilitate publication of the related PRA permission.
The PRA proposes that the implementation date for the changes resulting from CP2/22 would be September 2022. The appendices to CP2/22 can be found on the associated PRA webpage.
The deadline for responses is 2 May 2022.
PRA Consultation Paper: Definition of capital: updates to PRA Rules and supervisory expectations (CP2/22)
Webpage
Payment Systems Regulator
Broadening coverage of Confirmation of Payee - PSR publishes Policy Statement (PS22/1) - 10 February 2022
They Payment Systems Regulator (PSR) has published a Policy Statement (PS22/1) setting out the next steps for the wider implementation of Confirmation of Payee (CoP), including the next steps through Phase 2 of CoP development. The Policy Statement follows the PSR’s Consultation Paper (CP21/11) on the matter, published in December 2021.
As previously reported in this Bulletin, CoP is a name-checking service designed to prevent Authorised Push Payment scams and misdirected payments, and is already offered by the UK’s six largest banking groups. Pay.UK has been working with the Open Banking Implementation Entity (OBIE) to develop the technical environment, rules and standards in phases. Phase 1 allowed payment service providers (PSPs) that operate accounts with a unique sort code and account number to implement CoP, under Specific Direction 10 (SD10). Phase 2 will broaden coverage to remaining PSPs.
In PS22/1, the PSR confirms that it will direct Pay.UK to ensure the Phase 1 environment is closed by 31 May 2022, with all PSPs to use Phase 2 in line with the PSR’s proposals in CP21/11. This will end ‘dual running’ (where the PSPs joining CoP operate in the Phase 2 environment, while existing CoP PSPs operate in the Phase 1 environment against Phase 1 rules and standards). This will ensure that CoP services across all PSPs can work together, increasing CoP coverage and further reducing fraudulent, and accidentally misdirected, payments being received by PSPs.
To ensure the end of ‘dual running’, the PSR has published a new Specific Direction (SD11), which:
- requires Pay.UK to terminate the terms and conditions for participating in Phase 1, withdraw each PSP’s CoP Phase 1 accreditation and retire the Phase 1 rules and standards on 31 May 2022;
- requires Pay.UK to notify the OBIE of this action, so the OBIE can close the Phase 1 technical environment;
- requires Phase 1 PSPs to use only the Phase 2 technical environment for the CoP service after 31 May 2022;
- requires relevant PSPs to report regularly to Pay.UK on their progress in migrating CoP traffic to the Phase 2 open banking environment by 1 May 2022 and requires Pay.UK to pass this information to the PSR;
- requires relevant PSPs to undergo enhanced reporting to both Pay.UK and to the PSR if the PSR considers such PSPs are at significant risk of failing to migrate by 1 May 2022, with an obligation to implement a remediation plan agreed with the PSR; and
- revokes SD10 on 31 May 2022.
SD11 will come into effect on 11 February 2022.
PSR Policy Statement: Confirmation of Payee: Response to consultation CP21/11: Ending dual running (PS22/1)
Press release
PSR Specific Direction 11: Closure of initial technical environment for Confirmation of Payee
Webpage
