Financial Stability Board
Cross-border payments - FSB publishes consultation paper on quantitative targets - 31 May 2021
The Financial Stability Board (FSB) has published a consultation paper setting out proposals on quantitative targets for addressing the challenges faced by cross-border payments. The consultation covers a number of areas including:
- a description of the principles and key design features underpinning the targets and target metrics;
- a proposal for three market segments for which targets are to be set across four identified challenges for cross-border payments: cost, speed, transparency and access. The market segments are wholesale, retail and remittances. The retail segment is intended to cover non-financial corporates or public sector entities as payers or receivers, and peer-to-peer (P2P) payments other than remittances. The split between remittances and other P2P payments is proposed in recognition of the greater challenges and frictions that some payment corridors in the remittance market face;
- a consideration of relevant factors in setting the targets, relating to the four challenges of cost, speed, transparency and access; and
- proposals on a small number of high-level, simple targets that are focused on end-users.
The FSB proposes the end of 2027 as a common target date for achieving the individual targets, with the exception of the remittance cost target, where a 2030 date has already been set as a United Nations Sustainable Development Group Goal and endorsed by the G20.
The consultation closes on 16 July 2021 and the final recommendations are expected to be delivered for endorsement at the G20 Summit in October 2021.
The FSB also intends to develop an implementation approach for monitoring the targets that sets out: (i) how the targets will be measured and data sources and gaps to be filled; (ii) how progress toward meeting the targets will be monitored; and (iii) the frequency of data collection and publication.
Consultation paper: Targets for Addressing the Four Challenges of Cross-Border Payments
Webpage
Press release
European Banking Authority
EU CRR - EBA publishes consultation paper on institutions’ Pillar 3 disclosure of interest rate risk exposures - 28 May 2021
The European Banking Authority (EBA) has published a consultation paper (EBA/CP/2021/20) on draft implementing technical standards (ITS) in relation to Pillar 3 disclosures regarding exposures to interest rate risk on positions not held in the trading book. The ITS are introduced under the Capital Requirements Regulation (575/2013/EU) (CRR), as amended by CRR II ((EU) 2019/876).
Article 448 of the CRR requires institutions to disclose, from 28 June 2021, quantitative and qualitative information on the risks arising from potential changes in interest rates that affect both the economic value of equity and the net interest income of their non-trading book activities, as referred to in Articles 84 and 98(5) of the Capital Requirements Directive (2013/36/EU) (CRD IV). To implement this disclosure, the EBA has developed draft ITS amending Implementation Regulation (EU) 637/2021, published in the Official Journal of the European Union on 21 April 2021.
The draft ITS propose qualitative disclosures on how institutions calculate their interest rate risk in the banking book (IRRBB) exposure values based on their internal measurement systems and on institutions’ overall IRRBB objectives and management. They also propose quantitative disclosures on the impact of changes in interest rates on institutions’ economic value of equity and net interest income.
As the underlying regulatory framework relating to IRRBB is under review, the consultation paper takes into account the current regulatory framework, specifically the Basel Pillar 3 disclosure requirements, and the EBA guidelines on the management of interest rate risks arising from non-trading book activities. The draft ITS have been developed with the intention of minimising any potential future changes that might be needed following the finalisation of the review. The EBA is also proposing transitional provisions that should facilitate institutions’ disclosures while the policy framework is finalised.
The consultation closes on 30 August 2021. The EBA is also holding a public hearing on 30 June 2021 and intends to submit the draft ITS to the European Commission in October 2021.
Consultation paper: Draft Implementing Technical Standards amending Implementing Regulation (EU) 637/2021 on disclosure of information on exposures to interest rate risk on positions not held in the trading book in accordance with Article 448 of the Capital Requirements Regulation (575/2013/EU) (EBA/CP/2021/20)
Annex I – Templates for interest rate risk of non-trading book activities disclosure
Annex II – Instructions for interest rate risk of non-trading book activities disclosure templates
Public hearing
Press release
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Benchmarking of internal models - EBA publishes final report on draft implementing technical standards - 3 June 2021
The EBA has published a final report on draft implementing technical standards (ITS) updating Commission Implementing Regulation (EU) 2016/2070 on the benchmarking of internal models (EBA/ITS/2021/03), in preparation for its 2022 benchmarking exercise.
The Commission Implementing Regulation contains ITS specifying the information that firms must report to the EBA and national competent authorities (NCAs) in order to enable the assessments of internal approaches for calculating own funds requirements in accordance with Article 78 of the Capital Requirements Directive (2013/36/EU) (CRD IV).
The draft updating ITS contain all benchmarking portfolios and metrics that will be used for the 2022 benchmarking exercise. The exercise will cover approved internal approaches used for own funds requirements for credit and market risk, as well as internal models used for International Financial Reporting Standard (IFRS) 9. The draft updating ITS also cover the following:
- for market risk benchmarking, the framework has been extended to allow for the collection of new information, in particular relating to sensitivity-based-measures. Some instruments have also been clarified and updated, and the overall composition of the portfolio changed compared to the 2021 benchmarking exercise;
- for credit risk, a limited number of additional data fields have been included to understand the level of conservatism incorporated in the risk estimates and the resulting risk weighted exposures amounts, while enhancements have been made to existing data requirements;
- for the IFRS 9 portfolios, a limited number of additional data fields have been included to collect information on additional IFRS 9 parameters, in particular the loss given default; and
- changes and clarifications to the ITS based on the EBA consultation paper published in December 2020 (EBA/CP/2020/26).
The EBA will now submit the draft updating ITS to the European Commission for endorsement. The technical standards will apply 20 days after publication in the Official Journal of the European Union.
Final report: Draft Implementing Technical Standards amending Commission Implementing Regulation (EU) 2016/2070 with regard to benchmarking of internal models (EBA/ITS/2021/03)
Press release
Annexes
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Mapping climate exposures to risk - EBA publishes results of EU-wide pilot exercise - 21 May 2021
The EBA has published the results of its first EU-wide pilot exercise on climate risk. We reported on this development in summary in our Bulletin last week and this item provides further details.
The main objective of the exercise was to map banks’ exposures to climate risk and provide insight into the green estimation that banks have carried out so far. It used a sample of 29 volunteer banks from ten EU member states, which together hold 50% of the EU banking sector’s total assets, and focused on these banks’ non-SME corporate exposures. The purpose of the exercise was to assess the performance of existing and newly developed risk assessment and classification tools, and the extent to which banks are: (i) using these effectively; and (ii) meeting related data and methodology challenges.
The EBA’s key findings include that:
- 58% of total non-SME corporate exposures are allocated to sectors that might be sensitive to transition risk, and are concentrated in some specific sectors;
- 35% of banks’ total non-SME corporate exposures are to corporates with greenhouse gas emissions above the median of the distribution;
- the estimated average ratio for the green asset ratio (GAR) across EU banks was 7.9%. The GAR is constructed for each bank by dividing the green amount, relating to a subset of exposures, by the total original exposure; and
- the impact of climate-related risks across banks has different magnitudes and is concentrated in particular sectors.
Overall, the EBA considers that the findings provide a clear picture of banks’ data gaps and highlight the sense of urgency to remedy them if banks are to achieve a meaningful and smooth transition to a low-carbon economy.
More specifically, the EBA considers that more disclosure on transition strategies and greenhouse gas emissions is needed to allow banks and national supervisors to assess climate risk more accurately. The findings also highlight the importance for banks of expanding their data infrastructure to include more granular client information. The EBA indicates that banks’ disclosures will be reinforced by the EBA draft technical standards on Pillar 3 disclosures on climate-change and ESG-related risks, including the definition of the green asset ratio (GAR) which is currently under consultation. These aspects will allow stakeholders to assess more effectively banks’ ESG-related risks and sustainability strategies, and to promote market discipline.
The EBA intends to continue working actively on the measurement and assessment of climate-related risks in the banking sector. These findings are a key starting point to achieving consistent and comparable climate risk assessment tools, particularly in relation to transition risk.
Mapping climate risk: Main findings from the EU-wide pilot exercise
Press release
Single Resolution Board
Resolution framework public interest assessment - Single Resolution Board publishes addendum - 31 May 2021
The Single Resolution Board (SRB) has published an addendum setting out its revised approach to the resolution framework public interest assessment (PIA). The SRB’s updated approach takes into account that a bank’s failure may take place under either an idiosyncratic scenario, a system-wide event or as a result of broader financial instability. The updated approach consists of a single assessment and conclusion, under which two sets of circumstances are considered, namely normal market conditions and system-wide events. The SRB considers that this approach strengthens the choice of the best resolution strategy to protect EU taxpayers and promote EU financial stability.
The PIA addendum is being implemented in the current resolution planning cycle. The SRB is also considering whether further enhancements to its PIA framework are needed, including in relation to the protection of covered deposits and the scope of critical functions.
SRB Addendum to the Public Interest Assessment: SRB Approach
Press release
Blog: System-wide events in the Public Interest Assessment
Bank of England
Resolvability assessment framework - Bank of England publishes updated statements of policy - 28 May 2021
The Bank of England (BoE) has published updated versions of several statements of policy (SoPs) on the resolvability assessment framework to reflect the PRA’s final operational continuity in resolution (OCIR) policy. The updated SoPs are those on: the approach to assessing resolvability; restructuring planning; management, governance and communication; and valuation capabilities to support resolvability.
The BoE has revised the SoPs to reflect the publication of the PRA’s policy statement (PS9/21) on its updated operational continuity in resolution (OCIR) policy. The BoE consulted on OCIR-related amendments to the SoPs in October 2020, alongside the PRA’s consultation on its own policy. It has decided to proceed with the changes consulted on, as well as to make revisions to reflect changes in the PRA’s approach to OCIR as set out in PS9/21. The BoE also states that its assessment of firms’ resolvability during 2021 and 2022 is expected to focus on the PRA OCIR policy that came into force on 1 January 2019, taking into account that the PRA’s revised OCIR policy is effective from 1 January 2023.
See also item on the PRA’s policy statements PS9/21 and PS10/21 below in this section.
Webpage: Updates to the Bank of England’s approach to assessing resolvability
Statement of Policy: Restructuring Planning
Statement of Policy: Management, Governance and Communication
Statement of Policy: Approach to Assessing Resolvability
Statement of Policy: Valuation capabilities to support resolvability
Updated webpage
Prudential Regulation Authority
Operational continuity in resolution - PRA publishes policy statement PS9/21 on revised policy - 28 May 2021
The PRA has published a policy statement (PS9/21) on revisions to its policy on operational continuity in resolution (OCIR), following its consultation paper (CP20/20) published in October 2020. The PRA’s proposed revisions to its OCIR policy are intended to improve firms’ resolvability and support the Bank of England in its approach to assessing resolvability.
In response to feedback, the PRA has amended the definition of ‘critical services’ – the term will now refer to both critical functions and core business lines, and the proposed term ‘essential services’ will not be introduced. The PRA has also decided to delay the implementation of the revised OCIR policy to 1 January 2023, 12 months after the 1 January 2022 date proposed in CP20/20.
The appendices to PS9/21 set out final versions of the following:
- ‘PRA Rulebook: CRR firms: Operational Continuity Instrument 2021’ (PRA 2021/8), which makes amendments to the Operational Continuity Part of the PRA Rulebook; and
- ‘Supervisory Statement (SS4/21): Ensuring operational continuity in resolution’, which will supersede the existing Supervisory Statement on ensuring OCIR (SS9/16).
The PRA emphasises that the current Operational Continuity Part of the PRA Rulebook and SS9/16 will remain in place until both the instrument and SS4/21 come into force on 1 January 2023. Before that date, firms will remain responsible for ensuring they continue to meet the existing OCIR policy while working on the implementation of the revised policy.
See also item below in this section on the PRA’s policy statement PS10/21 and item above in this section on the Bank of England’s publication of updated Statements of Policy.
Policy statement: Operational continuity in resolution: Updates to the policy (PS9/21)
Webpage
Appendix 1: PRA rulebook: CRR firms: Operational Continuity Instrument 2021
Appendix 2: SS4/21 ‘Ensuring operational continuity in resolution’
Webpage: SS4/21 | SS9/16 – Ensuring operational continuity in resolution
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Operational continuity in resolution - PRA publishes policy statement on amendments to reporting and disclosure dates for resolution assessments - 28 May 2021
The PRA has published a policy statement (PS10/21) on amendments to reporting and disclosure dates for resolution assessments, following its consultation paper (CP19/20) published in October 2020. The policy statement is relevant to UK banks and building societies with £50 billion or more in retail deposits on an individual or consolidated basis, as at the date of their most recent annual accounts.
Following its consultation, the PRA has amended paragraph 2.11 in its Supervisory Statement SS4/19 to remove the proposed expectation that firms’ 2021 resolution assessments should also include the progress made towards, and outstanding steps needed, for meeting the revised operational continuity in resolution (OCIR) policy. This change confirms that for their first report in October 2021, firms should assess their compliance against the OCIR policy that came into force on 1 January 2019.
See also items above in this section on the PRA’s policy statement PS9/21 and the Bank of England’s publication of updated Statements of Policy.
Policy statement: Resolution assessments – Amendments to reporting and disclosure dates (PS10/21)
Webpage
Appendix 1: PRA Rulebook – CRR firms: resolution assessment instrument 2021
Appendix 2: SS4/19: ‘Resolution assessment and public disclosure by firms’
Webpage: SS4/19
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NPL securitisations - PRA publishes consultation paper on updated prudential standards - 3 June 2021
The PRA has published a consultation paper setting out proposed rules relating to the implementation of updated prudential standards agreed by the Basel Committee on Banking Supervision (BCBS) for non-performing loan (NPL) securitisations (CP10/21). The proposals in the consultation are relevant to all PRA-authorised firms to which the Capital Requirements Directive (2013/36/EU) applies.
A revised securitisation capital framework was implemented through the Capital Requirements Regulation (575/2013/EU) (CRR) and Policy Statement (PS29/18): ‘Securitisation: The new EU framework and Significant Risk Transfer’ in order to tackle shortcomings as observed during the global financial crisis. However, the Basel standards that were implemented through this legislation did not provide any specific treatment for the securitisation of NPLs. In order to address this, the BCBS published a technical amendment to be implemented no later than January 2023. The proposals in this consultation paper aim to implement the amendment in the UK and include:
- definitions for non-performing exposure (NPE) securitisations and qualifying NPE securitisations;
- revised rules for calculating capital requirements on exposures to NPE securitisations; and
- a new expectation that the person performing the firm’s Senior Management Function (SMF) 16 (Compliance Oversight) should satisfy themselves that performing loans are not being included in a NPE securitisation for the purpose of reducing the capital charge on those loans.
The proposals would result in the addition of a new Non-Performing Exposure Securitisation Part of the PRA Rulebook (set out in Appendix 1), and amendments to its supervisory statement: ‘Securitisation: General requirements and capital framework’ (SS10/18) (draft amended version set out in Appendix 2).
The consultation closes on 26 July 2021. The PRA proposes that the changes resulting from the consultation would be implemented on 1 January 2022 and would take effect in conjunction with any consequential amendment made by HM Treasury to the retained EU law version of the CRR.
Consultation paper: Implementation of Basel standards: Non-performing loan securitisations (CP10/21)
Webpage
Policy statement: Securitisation: The new EU framework and Significant Risk Transfer (PS29/18)
Financial Markets Law Committee
UK ring-fencing regime legislation - FMLC establishes working group on legal uncertainties - 3 June 2021
The Financial Markets Law Committee (FMLC) published a letter to the Chair of the Ring-fencing and Proprietary Trading Independent Review (Review), Keith Skeoch, outlining the remit and proposed output of its recently established working group to consider the legal uncertainties relating to the UK bank ring-fencing regime and identify suggestions on how these might be eliminated or ameliorated.
The FMLC explains that the working group’s work is in parallel to the work of the Review, which is largely concerned with policy issues or aspects of the regime that do not involve questions of legal uncertainty. However, the FMLC’s work may affect some of the Review’s questions on the appropriateness of certain aspects of the regime and any unintended consequences. As well as damaging the effectiveness of the regime, the FMLC points out that legal uncertainty can cause unnecessary costs for ring-fenced banks, and their customers and counterparties. It also provides examples to illustrate the issues that the working group is considering, including:
- uncertainties about how a bank can comply with the law in becoming a ring-fenced bank and on the correct process to be used for reorganisations, including where assets are moved between ring-fenced and non-ring-fenced banking entities;
- the absence of a regulatory process for clarifying in a legally binding manner how banks should behave where the key statutory instruments are uncertain or fail to deal with a particular situation; and
- uncertainty about whether a ring-fenced bank can lawfully participate in a reorganisation of, or otherwise deal with, a minority stake that it holds.
The working group intends to produce a paper setting out the legal uncertainties identified and its suggestions as to how these might be eliminated. It does not expect to complete its work by the deadline for responding to the Review’s call for evidence of 13 June 2021, but expects to share the paper with the Review by the end of July 2021. It also expects to share the paper with HM Treasury in the hope that the FMLC’s suggestions can be addressed. Jan Putnis of this firm is a member of the working group.
Letter: Ring-fencing and Proprietary Trading Independent Review: Call for Evidence
Webpage
See the General section for an item on the PRA’s policy statement (PS11/21) in relation to temporary absences of persons performing Senior Management Functions under the Senior Managers and Certification Regime.
