European Commission
CRR Leverage ratio buffer framework and calculating total exposure measure – European Commission publishes report – 16 February 2021
Further to Article 511 of the Capital Requirements Regulation (575/2013) (as amended by the CRR II Regulation ((EU) 2019/876)), the European Commission has published a report, and submitted it to the European Parliament and to the Council, on a possible extension of the leverage ratio buffer framework to other systemically important institutions (O-SIIs) and on the definition and calculation of the total exposure measure, including the treatment of central bank reserves.
The Commission concludes in the report that it would not be appropriate to introduce a leverage ratio surcharge for O-SIIs but that this issue should be considered as part of the comprehensive review of the macro-prudential toolbox in banking by 30 June 2022, as set out in Article 513 of the CRR. It suggests an adjustment to the calculation of the total exposure measure referred to in Article 429(4) of the CRR to align the treatment of client-cleared derivatives with internationally agreed standards. It also notes that the treatment of central bank reserves has already been altered by Regulation (EU) 2020/873.
European Commission report
Review of the Financial Collateral Directive and Settlement Finality Directive – Consultation Papers published by the European Commission – 12 February 2021
The European Commission is consulting on a targeted review of the Financial Collateral Directive (FCD) (2002/47/EC), with particular reference to the provision of cash and financial instruments as financial collateral and the recognition of close-out netting provisions. The Commission seeks views on, among other things, whether there is a need to specify the ways in which financial collateral (in the form of claims relating to or rights in or in respect of financial instruments (such as dividends or interest)) could be evidenced in writing when provided separately from its financial instrument and whether the concepts of "possession" and "control" require further clarification.
The Commission is also conducting a related review of the Settlement Finality Directive (SFD) (98/26/EC) to examine the impact of new developments in a changing business, technological and regulatory environment. The Commission is considering whether to extend the scope of the SFD to e-money and payment institutions, the position of central securities depositories (CSDs) and the SFD’s effect on distributed ledger technology and cryptoassets.
The deadline for responses to both consultations is 7 May 2021.
Consultation paper relating to the Financial Collateral Directive
Consultation paper relating to the Settlement Finality Directive
European Banking Authority
CRR and tri-party repurchase agreements – EBA publishes its final report on guidelines specifying the conditions for application of the alternative treatment of exposures – 16 February 2021
The EBA has published its final report on guidelines specifying the conditions for the application of the alternative treatment of institutions' exposures related to “tri-party repurchase agreements” set out in Article 403(3) of the Capital Requirements Regulation (575/2013) (CRR) for large exposure purposes. Among other things, the guidelines specify the frequency for determining, monitoring and revising the limits to be applied in this context and make recommendations on the contents of the service agreement between the firm and a tri-party agent. They also establish a set of safeguards that the tri-party agent must put in place and include a non-exhaustive list of circumstances that could lead a national competent authority (NCA) to raise material concerns and prevent an institution's use of the alternative treatment.
National competent authorities have two months to report to the EBA on how they will comply with the guidelines. They will apply from 28 June 2021.
Final guidance
CRR – EBA consults on assessment of breaches of the large exposure limits – 17 February 2021
The European Banking Authority (EBA) has published a consultation paper on draft guidelines specifying the criteria for assessing the exceptional cases when institutions exceed the large exposure limits in Article 395(1) of the Capital Requirements Regulation (575/2013/EC) (CRR) and the time and measures required to return to compliance under Article 396(3).
The EBA sets out three questions for competent authorities to consider in the context of a breach of large exposure limits:
- Was the breach a rare event?
- Could the institution foresee the event if it had applied proper and effective risk management?
- Was the breach caused by reasons beyond the institution’s control?
If the breach does not fulfil those criteria, a competent authority should not grant the institution more than three months to restore compliance with the large exposure limit.
The consultation closes on 17 May 2021, after which the finalised guidelines will be translated and published on the EBA website. They will apply from 1 March 2022.
EBA consultation paper on guidance to assess breaches of large exposure limits
Webpage
Press release
G-SIIs – EBA publishes final draft technical standards on disclosure of indicators of global systemic importance – 18 February 2021
The European Banking Authority (EBA) has published its final draft Implementing Technical Standards (ITS) on the disclosure of indicators of global systemically important institutions (G-SIIs).
The ITS will amend the final draft ITS on institutions’ public disclosure with the objective of defining a single, comprehensive Pillar 3 framework under the Capital Requirements Regulation (575/2013/EC) (CRR) that should integrate all the relevant Pillar 3 disclosure requirements. By maintaining consistency of disclosure formats with international standards on disclosures, the ITS will facilitate the comparability of information.
EBA final report on final draft Implementing Technical Standards on disclosure of indicators of global systemic importance by G-SIIs
Press release
UK Finance
Discontinuation of LIBOR – UK Finance publishes guide to transition – 12 February 2021
UK Finance has published a 46-page guide to LIBOR transition for banks and lenders. The purpose of the document, published together with PwC, is to help UK Finance members identify the actions they need to take to ensure they are ready to meet the various LIBOR implementation deadlines and to provide a “UK focused introduction to regulatory, commercial and operational challenges of LIBOR transition.” As previously reported in this Bulletin, the Working Group for Sterling Risk Free Reference Rates published its high-level priorities and roadmap for 2021 last month.
UK Finance has also published a blog post about how banks and lenders should be preparing for LIBOR transition.
UK Finance Guide
UK Finance blog post
Business Banking Resolution Service
Disputes with banks – BBRS launches independent resolution service for SMEs – 17 February 2021
The Business Banking Resolution Service (BBRS) has announced the launch of a free and independent service to help SMEs resolve disputes with their banks. The service will use alternative dispute resolution techniques to settle unresolved complaints from larger SMEs with participating banks (these currently include Barclays Bank plc; Danske Bank; HSBC UK Bank plc; Lloyds Banking Group (Lloyds Bank plc and Bank of Scotland plc); NatWest Group (including The Royal Bank of Scotland plc, National Westminster Bank plc, and Coutts & Company); Santander UK plc; and Virgin Money (including Clydesdale Bank Plc and Yorkshire Bank)). Decision-making will be led by Alexandra Marks CBE, Chief Adjudicator and a Deputy High Court Judge, who will be able to decide cases on the basis of what is fair and reasonable in the particular circumstances of each case.
The BBRS will look at two types of unresolved complaint:
- cases for the period from 1 April 2019 onwards covered by the “contemporary scheme” for businesses with a turnover up to £10m per annum; a balance sheet of up to £7.5m; and which are not eligible to take their complaint to the Financial Ombudsman Service; and
- cases for the period from 1 December 2001 to 31 March 2019 covered by the “historical scheme” for businesses with a turnover up to £6.5m per annum; a balance sheet of up to £5m; and which were not eligible to take their complaint to the Financial Ombudsman Service and have not had access to an independent review.
BBRS press release announcing dispute resolution service launch
Blog
Bank of England
Stress Test – BoE publishes variable paths for Solvency Stress Test scenario – 15 February 2021
The Bank of England (BoE) has published this year’s Solvency Stress Test scenario for firms that are not part of concurrent stress testing. Firms may use the scenario as a template and severity benchmark to support their own Internal Capital Adequacy Assessment Process (ICAAP) stress testing scenario design processes. According to the BoE webpage, the scenario is “calibrated to robustly test and challenge business models and support firms in identifying key sensitivities and vulnerabilities within their balance sheets in the context of a severe downside outcome with an intensification of the macroeconomic shocks seen in 2020.” It has been derived from the 2021 Solvency Stress Test scenario, published on 20 January 2021 and previously reported in this Bulletin, to support stress testing of the largest UK banks and building societies.
Stress test
Supervisory Statement 31/15 The Internal Capital Adequacy Assessment Process (ICAAP) and the Supervisory Review and Evaluation Process (SREP)
Updated BoE stress test webpage
Prudential Regulation Authority
Current and horizon risk issues for independent NEDs – PRA publishes letter summarising discussions – 16 February 2021
The PRA has published a letter on the themes emerging from virtual meetings held in October and November 2020 with a number of independent non-executive directors (iNEDs) from banks and insurers in which the PRA sought to understand the current issues and risks facing boards of firms regulated by it. Unsurprisingly, the coronavirus outbreak dominated the discussions, although a number of other topics were also raised, including climate related financial risks and the increasingly changing regulatory landscape.
It is noted in the letter that the economic consequences of the outbreak would place further pressure on firms’ profitability, but several other potential impacts on firms were also cited, including an acceleration in spending on digital technologies and pressure to identify cost-cutting opportunities. The ongoing low interest rate scenario is also noted as a significant factor in retail banks’ search for other revenue streams as net interest margins continue to be squeezed. Another major theme was operational resilience in light of the new working environment. Overall iNEDs indicated that Chairs and boards had adapted well to the virtual environment.
PRA Letter
IFRS 9 – Dear CEO letter on IFRS expected credit loss accounting – 16 February 2021
The PRA has published a Dear CEO letter asking for an update on the implementation of IFRS 9 expected credit loss accounting disclosures. The letter refers to the Taskforce on Disclosures about Expected Credit Losses, whose first report, “Recommendations on a comprehensive set of IFRS 9 Expected Credit Loss disclosures”, was published in November 2018. The PRA expects firms to adopt the report’s recommendations in full, as amended by the second report. This was communicated to firms in a Dear CEO letter in January 2019.
The letter asks firms to confirm whether they have been able to adopt each of the Taskforce’s recommendations, and any justifications for not yet implementing the recommendations (including plans for future adoption).
Firms are asked to respond within 6 weeks of finalising their 2020/2021 year-end annual report. Providing the information is voluntary, but firms’ responses will help the PRA in the work it is doing to encourage UK banks to embrace the objective underlying the Taskforce’s work.
PRA Dear CEO Letter
PRA Consultation Paper (CP5/21) - Implementation of Basel standards – 12 February 2021
The PRA has published a consultation paper setting out its proposed rules in respect of the implementation of international standards through a new PRA Capital Requirements Regulation (CRR) instrument. In short, the purpose of the consultation is to implement the standards set by the Basel Committee on Banking Supervision, which are being implemented in the EU through the CRR II Regulation (CRR II). The consultation paper sets out the proposed new PRA CRR rules in full, including parts of the onshored CRR that are not changing but rather are being transferred into PRA rules.
The PRA has used the implementation of the standards in CRR II “as an initial basis for developing many of the proposed draft rules”, but it has taken a different approach where it considers that replicating CRR II provisions would not be fully consistent with the PRA's objectives, as set out in the Financial Services Bill 2019-21 (FS Bill). According to the paper, “the rationale for this approach is to achieve closer alignment with Basel III standards; enhance proportionality; and enable the new PRA rules to interact clearly and effectively with the requirements that remain in the CRR, and to be supported by a consistent suite of the UK version of revised supervisory Common Reporting.”
The proposed revisions would come into force on 1 January 2022, at the same time as HM Treasury's proposed revocation of relevant parts of the onshored CRR.
The deadline for responses on the consultation is 3 May 2021.
PRA Consultation Paper (CP5/21)
PRA webpage
Please see the General section for an item on an FCA consultation on the extension of guidance relating to cancellations and refunds.
