Recent regulatory developments focussing on banking and finance. Includes updates from the UK PRA, the European Commission, the ECB and the EBA. See also our General regulatory news in the Related Materials links.

Contents

• IRB UK mortgage risk weights: PRA CP14/20
• BRRD II: European Commission guidance
• CRR II: ECB updates annexes to guidance on review of qualification of capital instruments
• EBA 2020 transparency exercise launched
• EBA 2021 work programme
• Banking Business Resolution Service: consultation findings and customer focus group

IRB UK mortgage risk weights: PRA CP14/20

The UK Prudential Regulation Authority (PRA) has published a consultation paper, CP14/20, on proposals to introduce new expectations on internal ratings based (IRB) approach UK mortgage risk weights. The proposals aim to address the prudential risks stemming from inappropriately low IRB UK mortgage risk weights, narrow differentials between IRB and standardised approach UK mortgage risk weights, and limit future divergence. The PRA considers that this would support competition between firms on the different approaches.

The PRA proposes to introduce two complementary expectations on the level of IRB UK mortgage risk weights. It believes models delivering risk weights below these levels are likely to be materially deficient in risk capture:

• a risk weight of at least 7% for each individual UK residential mortgage exposure; and
• an exposure-weighted average risk weight of at least 10% for all UK residential mortgage exposures to which a firm applies the IRB approach.

Both proposals would apply at all levels of consolidation and cover all UK residential mortgage exposures.

The PRA does not expect the changes to result in significant implementation costs.

The proposals would make changes to the PRA's supervisory statement, SS11/13, on IRB approaches.

The consultation closes on 30 January 2021. The PRA proposes that the final policy resulting from this consultation will take effect from 1 January 2022, alongside other IRB reforms.

BRRD II: European Commission guidance

A European Commission notice on the interpretation of certain legal provisions of the revised Bank Recovery and Resolution Directive (BRRD II) has been published in the Official Journal of the EU. The notice is in reply to questions raised by member states' authorities. The notice states that it does not extend in any way the rights and obligations deriving from the legislation nor introduce any additional requirements of the concerned operators and competent authorities.

The notice states that the Commission will adopt, in the near future, a communication containing answers to questions that it has received from the European Supervisory Authorities relating to BRRD II.

CRR II: ECB updates annexes to guidance on review of qualification of capital instruments

The European Central Bank (ECB) has published amendments to the annexes in its guidance on the procedure to be followed when reviewing the qualification of capital instruments as additional tier 1 (AT1) and tier 2 (T2) instruments. The ECB explains that the updates are as a result of amendments made by the updated Capital Requirements Regulation (CRR II), which entered into force on 27 June 2019.

The ECB advises institutions to make use of the updated templates for their new issuances of AT1 and T2 instruments.

EBA 2020 transparency exercise launched

The European Banking Authority (EBA) has announced that it has launched its 2020 transparency exercise. Transparency exercises are part of the EBA's efforts to monitor risks and vulnerabilities, and to reinforce market discipline.

The EBA expects to publish the results of the exercise in December 2020, together with its risk assessment report (RAR) for 2020. It will release around 1 million data points on about 130 EU banks. The data will cover capital positions, financial assets, financial liabilities, risk exposure amounts, sovereign exposures and asset quality. The exercise will also include data on loans and advances subject to legislative and non-legislative moratoria following publication of EBA guidelines on the topic.

EBA 2021 work programme

The EBA has published its work programme for 2021.

The EBA's strategic priorities for 2021 are:

• supporting deployment of the risk reduction package and the implementation of effective resolution tools;
• reviewing and upgrading the EU-wide EBA stress testing framework;
• becoming an integrated EU data hub, leveraging on the enhanced technical capability for performing flexible and comprehensive analyses;
• contributing to the sound development of financial innovation and operational resilience in the financial sector;
• building the infrastructure in the EU to lead, coordinate and monitor AML/CFT supervision; and
• providing the policies for factoring in and managing ESG risks.

In addition, stemming from its horizontal strategic priorities, the EBA will also prioritise:

• establishing a culture of sound and effective governance and good conduct in financial institutions; and
• addressing the aftermath of COVID-19.

The work programme also lists 37 specific activities that the EBA intends to undertake in 2021, including the timings for the main outputs of those activities.

Banking Business Resolution Service: consultation findings and customer focus group

The Banking Business Resolution Service (BBRS) has published two reports:

• BBRS stakeholder consultation summary, which summarises responses to the BBRS' June 2020 consultation to ensure the service is developed in line with stakeholder needs, as the organisation prepares to go live; and
• BBRS Live Pilot customer focus group findings, which sets out the findings from a live pilot customer focus group, which considered the personal experiences of customers and their representatives who took part in the live pilot.

A related BBRS press release reports that the BBRS consultation shows wide demand for a new service to resolve SME banking complaints, as the pilot phase customers and stakeholders welcome an alternative approach to dispute resolution.

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