Basel Committee on Banking Supervision
Climate-related financial risks, prudential treatment of cryptoassets, G-SIB assessment methodology - Basel Committee provides update - 9 November 2021
The Basel Committee on Banking Supervision (the Basel Committee) has announced updates on its work regarding climate-related financial risks, cryptoassets, and the G-SIB assessment methodology. Of particular note, the Basel Committee has:
- agreed to consult on a set of principles for the effective management and supervision of climate-related financial risks in internationally active banks later on in November 2021;
- confirmed that it will further specify the prudential treatment of banks’ cryptoasset exposures, and that it intends to issue a further consultative document on the topic by mid-2022; and
- following feedback to its consultation earlier this year for a technical amendment to the process for reviewing the assessment methodology for global systemically important banks (G-SIBs), the Basel Committee has agreed to proceed with its proposed approach to replacing the existing three-year review cycle of the methodology with a process of ongoing monitoring and review in order to ensure that it remains appropriate over time.
Technical amendment: G-SIB assessment methodology review process technical amendment finalisation
Pillar 3 disclosure requirements - Basel Committee publishes revised market risk disclosures and voluntary disclosure of sovereign exposures templates - 11 November 2021
The Basel Committee has published revisions to its market risk disclosure requirements and the finalised disclosure templates relating to voluntary disclosures of sovereign exposures.
The revisions to the market risk disclosure requirements include:
- amendments to reflect the revised framework for minimum capital requirements introduced in January 2019;
- the introduction of a ‘traffic light’ system for banks using the internal model approach (IMA), which will replace the previous pass-or-fail basis used in relation to the profit-and-loss attribution (PLA) test. The new system includes an ‘amber zone’ where banks can use the IMA subject to a capital surcharge; and
- the introduction of the simplified standard approach (SSA) - an alternative method to calculate capital requirements for market risk which may be used by banks with small or non-complex trading portfolios, subject to supervisory approval.
The revised requirements come into force on 1 January 2023.
The changes to the sovereign exposures templates follows the Committee’s consultation and include:
- the inclusion of cross-references to the Basel Framework to add clarity;
- the addition of ‘maturity buckets’ for total exposures in relation to debt instruments, and receivables and derivatives;
- the removal of ‘derivatives indirect exposures’;
- the inclusion of space in the accompanying narrative to allow explanations of the exposure levels; and
- the addition of an option to disclose data by region, rather than by country, for non-significant jurisdictions.
The use of the sovereign exposure disclosure templates is voluntary. National competent authorities (NCAs) can decide whether to require banks within their jurisdiction to make these disclosures.
Basel Committee Paper - revisions to market risk disclosure requirements
Webpage - Revisions to market risk disclosure requirements
Basel Committee Paper - Voluntary disclosure of sovereign exposures
Webpage - Voluntary disclosure of sovereign exposures
Council of the European Union
Economic and Financial Affairs Council - Outcome of meeting published - 9 November 2021
The Council of the EU has published the outcome of a meeting of the Economic and Financial Affairs Council held on 9 November 2021. Among other things, the Council:
- debated the package of proposals presented by the Commission to amend legislation implementing Basel III standards into EU law, including proposals to amend the Capital Requirements Directive IV (2013/36/EU) (CRD IV) and the Capital Requirements Regulation (575/2013/EU) (CRR), including in relation to resolution;
- adopted the directive on credit services and credit purchasers amending directives 2008/48/EC and 2014/17/EU; and
- adopted amending directive 2009/103/EC regarding motor insurance.
Economic and Financial Affairs Council meeting outcome
Proposal to amend the Capital Requirements Directive
Proposal to amend the Capital Requirements Regulation
Proposal to amend the Capital Requirements Regulation in the area of resolution
European Banking Authority
EU CRR - EBA publishes final report on institutions’ Pillar 3 disclosures on interest rate risk exposures - 10 November 2021
The European Banking Authority (EBA) has published a final report (EBA/ITS/2021/07) 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 (IRRBB). 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 final report includes the draft ITS which propose comparable disclosures of exposures to IRRBB and amend the ITS on public disclosures. The draft ITS aim to help stakeholders assess the IRRBB risk management framework of a firm and its sensitivity to changes in interest rates.
The ITS include templates for the qualitative and quantitative disclosures (Annex I) and related instructions (Annex II). They also include transitional provisions to facilitate disclosures while the policy framework relating to IRRBB is finalised.
The final report also summarises responses to the EBA’s consultation paper (EBA/CP/2021/20) and subsequent amendments made to the EBA’s proposals.
Final report: Draft Implementing Technical Standards amending the Implementing Regulation (EU) No 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 Regulation (EU) No 575/2013 (EBA/ITS/2021/07)
Annex I – Table EU IRRBBAA – Qualitative information on interest rate risks of non-trading book activities and Template EU IRRBB1 - interest rate risk of non-trading book activities
Annex II - Instructions for interest rate risk of non-trading book activities disclosure templates
CRD IV - EBA publishes final report on common assessment methodology for credit institution authorisation - 11 November 2021
The EBA has published a final report on guidelines in relation to a common assessment methodology (CAM) for credit institution authorisation under Article 8(5) of the CRD IV.
The EBA is required to specify a CAM for granting authorisations in accordance with CRD IV, aimed at fostering supervisory convergence across the EU. The guidelines are at section 3 of the final report and are addressed to national competent authorities (NCAs) responsible for credit institution authorisation.
The guidelines include sections on the EU framework authorisation requirements in relation to: the business plan analysis; capital requirements; internal governance; and qualifying holdings and members. They propose a risk-based and proportionate approach, and the EBA confirms they apply equally to traditional and more innovative business models.
The guidelines also include guidance on money laundering and terrorist financing risks in the context of assessing applications for authorisation.
EBA final report on guidance on CAM for granting authorisation as a credit institution
Machine learning - EBA publishes discussion paper - 11 November 2021
The EBA has published a discussion paper on machine learning used in relation to internal ratings-based (IRB) models to calculate regulatory capital in the credit risk context. The EBA highlights the potential added value of machine learning in this space but notes it is more complex and often less transparent than traditional calculation methods.
The paper aims to discuss, and seeks industry views on, possible uses of machine learning in IRB models and to build a ‘common’ understanding of the challenges in relation to regulatory compliance, as well as setting out supervisory expectations. The EBA is considering providing principles-based recommendations on the use of machine learning in IRB models to ensure clear and consistent understanding of the regulatory requirements under the CRR and how new machine learning models can comply with those requirements.
The EBA invites views from stakeholders on the discussion paper, which should be submitted by 11 February 2022. It intends to hold a public hearing on 16 December 2021.
EBA discussion paper on machine learning for IRB models
CRR - EBA publishes final report relating to draft RTS on minimum loss given default values - 5 November 2021
The EBA has published its final report (EBA/RTS/2021/12) containing draft regulatory technical standards (RTS) specifying the types of factors to be considered to assess the appropriateness of risk weights and of minimum loss given default (LGD) values under Articles 124(4) and 164(8) of the CRR.
In particular, the draft RTS provide technical specification on two aspects:
- for institutions applying the standardised approach (SA): the types of factors that authorities should consider during the risk weight assessment on the basis of the loss experience and loss expectation relating to exposures secured by immovable property and forward-looking immovable property market developments; and
- for institutions applying the internal ratings-based approach (IRB): the conditions to be considered when assessing whether minimum LGD values cover the sources of systemic risk beyond economic downturn considerations and idiosyncratic risks.
The draft RTS will enter into force on the 20th day following that of its publication in the Official Journal of the European Union.
BRRD - EBA publishes final report and guidelines on recovery plan indicators - 9 November 2021
The EBA has published its final report and guidelines on recovery plan indicators under Article 9(2) of the Bank Recovery and Resolution Directive (BRRD) (2014/59/EU) (EBA/GL/2021/11). The main objective of recovery plan indicators is to help institutions monitor and respond to the emergence and evolution of stress. The EBA first published guidance on recovery plan indicators in 2015 (the 2015 guidelines), and decided to amend them based on practical experience acquired in recovery planning.
The EBA’s guidelines propose revisions to the 2015 guidelines in two areas, namely:
- additional guidance on principles to follow in setting the thresholds of recovery plan indicators; and
- recognition of the importance of timely notification of recovery plan indicator breaches and of frequent monitoring of indicators in a situation of crisis.
The EBA guidelines will apply from two months after the publication in all EU languages. The 2015 guidelines on recovery plan indicators will be repealed at the same time.
Final report: Guidelines on recovery plan indicators under Article 9 of Directive 2014/59/EU (EBA/GL/2021/11)
Crowdfunding service providers - EBA publishes final report relating to draft RTS - 9 November 2021
The EBA has published its final report containing draft regulatory technical standards (RTS) on the individual portfolio management of loans offered by crowdfunding service providers under Article 6(7) of the Regulation on European crowdfunding service providers for business ((EU) 2020/1503) (ECSPR). The EBA consulted on the draft RTS in June 2021.
The draft RTS specify the information that crowdfunding service providers offering individual portfolio management of loans must provide to investors in relation to the method used to assess credit risk, and on each individual portfolio. The draft RTS also specify the policies, procedures and governance arrangements that providers should have in place when managing, either directly or through a third-party provider, contingency funds.
The EBA will submit the draft RTS to the European Commission for endorsement, after which they will be subject to scrutiny by the European Parliament and the Council of the EU before being published in the Official Journal of the European Union.
Report: Draft Regulatory Technical Standards on individual portfolio management of loans offered by crowdfunding service providers under Article 6(7) Regulation (EU) 2020/1503 (EBA/RTS/2021/11)
Central Bank Digital Currencies - HM Treasury and Bank of England publish statement - 9 November 2021
HM Treasury and the Bank of England (the Bank) have published a statement announcing that a consultation will be launched in 2022 on potential plans for a UK Central Bank Digital Currency (UK CBDC) – a new type of digital money that would be issued by the Bank (but will not replace cash and bank deposits).
The consultation will set out HM Treasury’s and the Bank’s assessment of the case for a UK CBDC, and evaluate the main issues, high level design features, implications for users and businesses, and potential further work in this area.
Following the consultation, the authorities will decide whether to enter a ‘development phase’, which would include a technical specification and potentially in-depth testing to determine the design and feasibility of the digital currency. This phase could last several years.
Should the results of the consultation and development phase support the launch of a UK CBDC, the earliest launch date would be in the second half of the 2020s.
Bank of England
COVID-19 - Bank of England publishes ‘Dear CEO’ Letter to FMIs on the distribution of profits - 11 November 2021
The Bank of England (the Bank) has published a ‘Dear CEO’ Letter from Sir Jon Cunliffe, Deputy Governor for Financial Stability, to operators of UK financial market infrastructures (FMIs) on their distribution of profits in light of COVID-19. The letter states that the additional expectations placed on firms, as outlined in the Bank’s June 2020 ‘Dear CEO’ letter, are no longer necessary and have been removed with immediate effect.
The June 2020 Letter stated that, where UK FMIs were considering making any distributions to shareholders or decisions on variable remuneration, the Bank expected FMIs: (i) to pay close attention to the additional financial and operational risks arising from COVID-19; and (ii) to discuss these matters with the Bank before making any distributions to shareholders. The additional expectations were in place to reflect that FMIs face greater risks to their financial and operational resilience in situations of high uncertainty, but remain critical to the proper functioning and stability of the financial system.
Letter from Sir Jon Cunliffe
Prudential Regulation Authority
Occasional Consultation Paper - PRA publishes Policy Statement on responses - 8 November 2021
The PRA has published a Policy Statement (PS25/21) providing feedback on responses to its ‘Occasional Consultation Paper’ (CP13/21) published in June 2021. PS25/21 also contains final rules, updated Supervisory Statements, and updated templates, instructions, and associated guidance and notes.
Among other things, PS25/21includes a minor update to expand the scope of Chapter 4 of the Definition of Capital Part of the PRA Rulebook such that it covers all Capital Requirements Regulation firms, rather than only UK banks. This will take effect from 1 January 2022. Minor amendments were also made to the Branch Return, relevant to PRA-supervised third-country branches (applicable from 31 May 2022), alongside amendments to the Pillar 2A FSA081 template (applicable from 1 December 2021).
Policy statement: Responses to CP13/21 ‘Occasional Consultation Paper’
Financial Markets Law Committee
Bank ring-fencing legislation - FMLC publishes report on issues of legal uncertainty - 9 November 2021
The Financial Markets Law Committee (FMLC) has published a report on a number of issues of legal uncertainty relating to the implementation of the bank ring-fencing regime in the UK.
The FMLC highlights some of the key legal uncertainties stemming from this regime, which include: (i) the meaning and ambit of ring-fencing transfer schemes; (ii) excluded activities not subject to the regime; and (iii) liquidity management for ring-fenced banks. The report further explains the impact of these legal uncertainties on market participants, and makes recommendations on how each might be resolved.
The FMLC has sent a copy of the report to the Chair of the Ring-fencing and Proprietary Trading (RFPT) Review, the independent panel appointed by HM Treasury to review the operation of the legislation relating to ring-fencing.
FMLC’s Report: UK Bank Ring-Fencing Legislation