Banking and Finance

Issue 1126 / 9 September 2021

Overview

  • IFPR - HM Treasury publishes consultation paper on amending Banking Act 2009
  • COVID-19 - FCA updates webpage relating to temporary guidance on delaying mortgage capital repayments

Basel Committee on Banking Supervision

Basel III - BCBS publishes speech on global co-operation - 8 September 2021

The Basel Committee on Banking Supervision (BCBS) has published a speech by BCBS Secretary General, Carolyn Rogers, on Basel III and global co-operation.

Ms Rogers uses her speech to emphasise the connection between multilateralism and financial stability, stating that “multilateralism lies at the heart of the work of the Basel Committee” and that, looking ahead, “there is no shortage of cross-border financial stability issues that will require global cooperation”. She also uses her speech to respond to some of the arguments circulating against the full implementation of Basel III in the EU, registering her concern that some stakeholders continue to lobby against consistent and timely implementation.

Speech by BCBS Secretary General, Carolyn Rogers: Basel III and global co-operation: Where do we go from here?

International Organization of Securities Commissions

Credit sensitive rates - IOSCO publishes statement - 8 September 2021

The International Organization of Securities Commission (IOSCO) has published a statement on credit sensitive rates. Credit sensitive rates are interest rate benchmarks that seek to measure the credit risk component of unsecured borrowing in certain markets. These rates have started to emerge as a possible alternative to USD LIBOR.

In the statement, IOSCO highlights that alternative financial benchmarks will need to be compliant at all times with its principles on financial benchmarks (IOSCO Principles). In particular, it focuses on Principles 6 and 7, calling on benchmark administrators to assess (in line with those Principles) whether the systemic benchmarks that are used extensively are based on active markets with high volumes of transactions, representing the underlying interest they intend to measure and whether such benchmarks are resilient during times of stress.

IOSCO further explains that benchmark users should consider the robustness and reliability of the benchmarks they choose and ensure they have reliable fallback mechanisms that can be used, should their chosen benchmarks cease or become unrepresentative. Finally, IOSCO notes that users of benchmarks place considerable value on a benchmark being IOSCO-compliant, and states that it will be monitoring closely how the IOSCO ‘badge’ is used in compliance assessments of the relevant credit sensitive rates.

Bank of England Governor Andrew Bailey has welcomed the IOSCO statement, noting that credit sensitive rates may well fail to comply with the IOSCO Principles if their use became widespread.

Statement: Credit Sensitive Rates

European Commission

BRRD - European Commission adopts Delegated Regulation setting out RTS for contractual recognition of write down and conversion powers - 8 September 2021

The European Commission has adopted a Delegated Regulation supplementing the Bank Recovery and Resolution Directive (2014/59/EU) (BRRD) with regard to regulatory technical standards (RTS) for the contractual recognition of write down and conversion powers.

Under Article 55 BRRD, EU banks are required to insert a clause in contracts governed by the laws of non-EU countries to ensure that the powers of EU authorities to apply bail-in in case of bank failure is recognised. However, the BRRD II Directive ((EU) 2019/879) amended Article 55 of the BRRD to address the scenario where it is impracticable for institutions and entities subject to the BRRD to include bail-in contractual recognition clauses in liability contracts. In particular, new Article 55(6) of the BRRD gives the European Banking Authority (EBA) a mandate to draft RTS specifying conditions under which it would be legally, contractually or economically impracticable to include contractual recognition clauses.

To this end, the Delegated Regulation specifies those conditions and also specifies:

  • the conditions for the resolution authority to require the inclusion of the clauses in certain categories of liabilities, where it concludes that none of the conditions of impracticability notified to it are fulfilled; and
  • the reasonable timeframe for the resolution authority to require inclusion of those clauses.

The next step is for the Council of the EU and the European Parliament to consider the Delegated Regulation. If neither of them object, it will enter into force 20 days after it is published in the Official Journal of the EU.

Commission Delegated Regulation (EU) …/… supplementing Directive 2014/59/EU with regard to regulatory technical standards for the contractual recognition of write down and conversion powers (C(2021) 3697 final)

Official Journal of the European Union

Delegation and internal tasks - ECB decisions published in OJ - 6 September 2021

A number of European Central Bank (ECB) decisions have been published in the Official Journal of the EU (OJ), relating to tasks and procedures of the ECB when carrying out certain functions in a member state whose currency is not the Euro. These include, among others:

  • Decision (EU) 2021/1437 amending Decision (EU) 2017/934 on the delegation of decisions on the significance of supervised entities (ECB/2021/33);
  • Decision (EU) 2021/1438 amending Decision (EU) 2017/935 on delegation of the power to adopt fit and proper decisions and the assessment of fit and proper requirements (ECB/2021/34); and
  • Decision (EU) 2021/1439 amending Decision (EU) 2018/546 on delegation of the power to adopt own funds decisions (ECB/2021/35).

All of these decisions enter into force on 26 September 2021.

Decision (EU) 2021/1437 amending Decision (EU) 2017/934 on the delegation of decisions on the significance of supervised entities (ECB/2021/33)

Decision (EU) 2021/1438 amending Decision (EU) 2017/935 on delegation of the power to adopt fit and proper decisions and the assessment of fit and proper requirements (ECB/2021/34)

Decision (EU) 2021/1439 amending Decision (EU) 2018/546 on delegation of the power to adopt own funds decisions (ECB/2021/35)

Decision (EU) 2021/1440 amending Decision (EU) 2019/1376 on delegation of the power to adopt decisions on passporting, acquisition if qualifying holdings and withdrawal of authorisations of credit institutions (ECB/2021/36)

Decision (EU) 2021/1441 amending Decision (EU) 2019/322 on delegation of the power to adopt decisions regarding supervisory powers granted under national law (ECB/2021/37)

Decision (EU) 2021/1442 on delegation of the power to adopt decisions on internal models and on extension of deadlines (ECB/2021/38)

Decision (EU) 2021/1443 nominating heads of work units to adopt delegated internal models and extension of deadlines decisions (ECB/2021/40)

European Banking Authority, European Central Bank and EU Prudential Supervisors and Central Banks

Basel III - EU implementation of outstanding reforms - 7 September 2021

The European Banking Authority (EBA) and European Central Bank (ECB), in addition to a group of EU prudential supervisors and central banks, have written separate letters to the European Commissioner for Financial Services, Financial Stability and Capital Markets Union, Mairead McGuinness, on the implementation of outstanding Basel III reforms.

Both letters highlight that further postponements to the implementation of the outstanding reforms in 2023 could have a negative impact on the confidence of the EU banking sector and credibility of the EU regulatory framework. They observe that it is crucial to avoid implementation approaches that are inconsistent with international agreements and that would, in addition, leave shortcomings in the existing framework. In particular, both letters draw attention to the potential impact of delays to the implementation of the output floor, which reduces variability in how banks risk-weight their assets and which is a key element of the Basel III framework.

In March 2021, Commissioner McGuinness announced that the European Commission would adopt a legislative proposal on the implementation of the final Basel III standards in July 2021. The Commission has since indicated that the legislative proposal will be adopted by the European Parliament during its October 2021 plenary session.

EU prudential supervisors and central banks: Joint letter to the European Commission: The EU should stick to the Basel III agreement

ECB/EBA: Letter to the European Commission: EU implementation of outstanding Basel III reforms

European Central Bank

SSM - ECB speech on obstacles to banking sector integration in EU legislation - 9 September 2021

The European Central Bank (ECB) has published a speech by the Chair of the Supervisory Board of the ECB, Andrea Enria, on concrete actions the European banking sector can take to achieve progress towards an integrated prudential jurisdiction within the Single Supervisory Mechanism (SSM).

In the speech Mr Enria highlights the main obstacles to integration within EU banking legislation, including limitations placed on intra-group waivers, the fact that many national macro-prudential powers are delinked from EU legislation, and issues relating to transfer between deposit guarantee schemes.

Mr Enria further argues that if banking groups were to make greater use of branches and the free provision of services to develop cross-border business within the banking union, rather than subsidiaries, there might be significant efficiency gains in terms of simplified legal structures and corporate governance, savings related to annual accounts and internal audit, and lower overall regulatory requirements.

Speech by Chair of the Supervisory Board of the ECB, Andrea Enria: How can we made the most of an incomplete banking union?

HM Treasury

IFPR - HM Treasury publishes consultation paper on amending Banking Act 2009 - 7 September 2021

HM Treasury has published a consultation paper on amending the definition of ‘investment firm’ in section 48D of the Banking Act 2009 to reflect the FCA’s Investment Firms Prudential Regime (IFPR).

This follows the government’s decision to remove FCA-regulated ‘730k investment firms’ (investment firms subject to a EUR 730,000 initial capital requirement) from the scope of the UK resolution regime. As a consequence of this decision, a question has arisen as to whether short-term liabilities owed to FCA investment firms should continue to be excluded from the Bank of England’s bail-in power under section 48B of the Banking Act 2009. Sections 48B and 48D Banking Act 2009 relate to the liabilities owed to firms within the scope of the UK resolution regime. Currently, section 48B(8)(d) of the Banking Act 2009 means that the Bank’s bail-in power cannot be used to bail-in liabilities with an original maturity of less than seven days owed by the bank to a credit institution or 730k investment firm.

HM Treasury proposes to amend the definition of ‘investment firm’ in section 48D to capture PRA-designated investment firms and FCA-regulated investment firms with permission to underwrite or deal on own account (that is, those that will be subject to a £750,000 initial capital requirement under the FCA’s IFPR). This will mean that short-term liabilities owed to these firms will continue to be exempt from bail-in.

The government notes that if all FCA investment firms were removed from the exemption, the bail-in of a firm subject to the resolution regime could have significant implications for its FCA counterparties if their short-term exposures were written down.

The consultation closes on 5 October 2021.

Consultation paper: Amendment to Section 48D of the Banking Act 2009

Updated webpage

Bank of England

RTGS and CHAPS - Bank of England publishes annual report - 6 September 2021

The Bank of England has published its annual report on its Real-Time Gross Settlement (RTGS) and CHAPS services. The report focuses on the Bank’s strategy for RTGS and CHAPS and its main strategic focus for 2021/22.

The Bank observes that COVID-19 has driven changes in the use of the RTGS and CHAPS services, with a new RTGS peak value day of £943bn set on 14 September 2020. For CHAPS alone, a new record value day of £485bn was set on 30 November 2020.

Looking ahead, the Bank’s main focus will be on its RTGS Renewal Programme, and to realise the benefits of increased resilience, widened access, greater innovation and improved user functions for the financial system as a whole. The Bank is planning to consult on further enhancements for the RTGS service later in 2021.

Bank of England – RTGS and CHAPS Annual Report 2021

Press release

Prudential Regulation Authority and Financial Conduct Authority

Trade finance activity - PRA and FCA publish joint letter - 9 September 2021

The PRA and the FCA have sent a joint Dear CEO letter to firms that carry out trade finance activity, the purpose of which is to reiterate their expectations of such firms. The letter also asks firms to carry out a holistic assessment of financial crime risk if they have not already done so.

Observing that recent assessments of individual firms have highlighted significant issues relating to credit risk analysis and financial crime controls, the regulators set out a restatement of their expectations in the areas of risk assessment, counterparty analysis, transaction approval and transaction payments.

Dear CEO letter: Trade Finance Activity

Financial Conduct Authority

COVID-19 - FCA updates webpage relating to temporary guidance on delaying mortgage capital repayments - 8 September 2021 

The FCA has updated its webpage on policy statement PS20/11, ‘Mortgages: Removing barriers to intra-group switching and helping borrowers with maturing interest-only and part-and-part mortgages’, which aimed at helping borrowers whose repayment strategy may have been affected by the COVID-19 pandemic, as well as borrowers with ‘closed book’ mortgages who lacked switching options.   

The FCA observes that its temporary guidance, which came into force on 31 October 2020, allowed borrowers with an interest-only or part-and-part mortgage due to mature between 20 March 2020 and 31 October 2021 to delay repayment of their capital until 31 October 2021. 

This guidance will expire on 31 October 2021. Having reviewed market conditions, the FCA does not intend to extend the guidance, and so borrowers who have benefited from the guidance should aim to repay their capital as soon as possible. The FCA suggests that firms may want to contact borrowers who delayed their capital repayment to discuss their position and how they plan to make the repayment.

The FCA also advises that it is in the course of updating its data on the characteristics of ‘mortgage prisoners’, and reviewing the effect of its interventions in this area (the modified affordability assessment and intra-group switching), as set out in the terms of reference for its Mortgage Prisoner Review.

Updated webpage: PS20/11: Policy Statement: Mortgages: Removing barriers to intra-group switching and helping borrowers with maturing interest only and part-and-part mortgages

UK Finance

UK CBDC - UK Finance publishes report - 8 September 2021

UK Finance has published a report on a retail UK Central Bank Digital Currency (CBDC), questioning whether a retail CBDC (“effectively electronic money, issued by a central bank, available to all households and businesses”) is a threat or an opportunity for the payments industry.

The report explains that in April 2021 Rishi Sunak, the Chancellor of the Exchequer, announced a new Taskforce between HM Treasury and the Bank of England to explore the viability of a UK CBDC. The Bank released its consultation paper on 7 June 2021 looking closely at the opportunities and risks of new forms of digital money, including a UK CBDC.

To help further this debate, UK Finance’s paper explores what a CBDC is, how it could impact the UK payments system and what issues UK banks should consider. It also considers the opportunities and risks for the Bank, the government and the commercial market, as well as the possible impact on consumers.

Report: Retail CBDC – A threat or opportunity for the payments industry?

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