Banking and finance regulatory news, March 2020

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Recent regulatory developments of interest to financial institutions.

Content

  • Download the full regulatory news bulletin
  • CRR: PRA PS5/20 on pre-issuance notification requirements
  • Banking fraud control: FCA comparison data
  • COVID-19: ECB expectations, temporary capital and operational relief
  • COVID-19: EBA letter on actions to mitigate the impact on the EU banking sector
  • BRRD: EBA finalises valuation handbook for purposes of resolution
  • Basel III implementation: EBA opinion on treatment of credit insurance
  • CRD IV: EBA consults on RTS, ITS and guidelines on methodology for identifying G-SIIs
  • Basel III: EBA additional analysis on output floor and equity exposure class
  • SFTs and the CSDR buy-in rules: ICMA FAQs

CRR: PRA PS5/20 on pre-issuance notification requirements

Following its earlier consultation paper, CP20/19, the Prudential Regulation Authority (PRA) has published a policy statement, PS5/20, on changes to the pre-issuance notification (PIN) regime for regulatory capital instruments applicable to firms within scope of the Capital Requirements Regulation (CRR).

In PS5/20, the PRA gives its feedback to consultation responses and the PRA's final policy decisions including:

  • amendments to the Definition of Capital Part of the PRA Rulebook (Appendix 1);
  • an updated Supervisory Statement, SS7/13, "Definition of capital (CRR firms)" in Appendix 2;
  • an updated PIN form in Appendix 3;
  • an updated Common Equity Tier 1 (CET1) compliance template in Appendix 4; and
  • a summary table showing the PRA's final clarification of "sufficiently in advance" notification and "substantially the same" terms (as defined in updated SS7/13), in the Annex.

The requirements apply at both the individual and UK consolidated level.

The changes take effect on 1 April 2020.

Banking fraud control: FCA comparison data

The Financial Conduct Authority (FCA) has published a webpage on the comparison of banking providers' fraud controls.

The webpage contains information submitted to the FCA through UK Finance, by 21 current account providers on their fraud prevention processes and procedures. The data provided includes information on the firms' approach to fraud prevention, the controls that they have for consumer protection and the steps that they take to educate their customers on fraud issues.

UK Finance has published a blog on the publication of the information. It states that the purpose of this initiative is to provide consumers with more information so they can make an informed decision when choosing who to bank with.

The publication of information on banks' fraud controls reflects a recommendation made by the House of Commons Public Accounts Committee (PAC) in a December 2017 report on the growing threat of online fraud that the banking industry should make relative online fraud vulnerability performance data publicly available.

COVID-19: ECB expectations, temporary capital and operational relief

On 3 March 2020, the European Central Bank (ECB) published a letter sent to banks classified as significant institutions for the purposes of the single supervisory mechanism on the ECB's expectations concerning COVID-19.

The ECB states that it expects banks to review their business continuity plans and consider what actions can be taken to enhance preparedness to minimise the potential adverse effects of the spread of COVID-19. The ECB warns of difficulties for banks arising from employees being unable to perform their usual tasks and key third-party outsourcers and suppliers being unable to maintain critical processes.

The ECB expects banks to take appropriate actions for preparing and responding to a potential pandemic, which may include:

  • assessing the extent to which their contingency plans include a pandemic scenario that provides for scaling measures commensurate with the bank's geographic footprint and business risk for the particular stages of a pandemic outbreak;
  • assessing how quickly measures foreseen under the pandemic scenario could be implemented and how long operations could be sustained;
  • proactively assessing and testing the capacity of existing IT infrastructure, particularly in light of a potential increase of cyber-attacks and potential higher reliance on remote banking services; and
  • entering into dialogues with critical service providers to determine whether and how service continuity would be ensured if there is a pandemic.

Banks should contact their joint supervisory team (JST) immediately if they identify significant shortfalls after performing the checks outlined in the letter or if there are any significant developments. The ECB also expects banks to provide to their JST contact details of the team and key person responsible for business continuity in the context of a pandemic.

On 12 March 2020, the ECB additionally announced a number of measures to ensure that its directly supervised banks can continue to fulfil their role in funding the real economy as the economic effects of COVID-19 become apparent.

In particular:

  • those banks can operate temporarily below the level of capital defined by the Pillar 2 Guidance (P2G), the capital conservation buffer (CCB) and the liquidity coverage ratio (LCR). The ECB considers that these temporary measures will be enhanced by the appropriate relaxation of the countercyclical capital buffer (CCyB) by the national macroprudential authorities;
  • ECB supervised banks are also allowed to partially use capital instruments that do not qualify as Common Equity Tier 1 (CET1) capital, for example Additional Tier 1 or Tier 2 instruments, to meet the Pillar 2 Requirements (P2R). This brings forward a measure that was initially scheduled to come into effect in January 2021, as part of the latest revision of the Capital Requirements Directive (CRD V).
    The banks are expected to use the positive effects coming from these measures to support the economy and not to increase dividend distributions or variable remuneration.

The ECB is discussing with banks individual measures, such as adjusting timetables, processes and deadlines. For example, the ECB will consider rescheduling on-site inspections and extending deadlines for the implementation of remediation actions stemming from recent on-site inspections and internal model investigations, while ensuring the overall prudential soundness of the supervised banks. In this context, the ECB Guidance to banks on non-performing loans also provides supervisors with sufficient flexibility to adjust to bank-specific circumstances. Extending deadlines for certain non-critical supervisory measures and data requests will also be considered.

In the light of the operational pressure on banks, the ECB supports the decision by the European Banking Authority to postpone the 2020 EBA EU-wide stress test (see report below) and will extend the postponement to all banks subject to the 2020 stress test.

The ECB expects banks to continue to apply sound underwriting standards, pursue adequate policies regarding the recognition and coverage of non-performing exposures, and conduct solid capital and liquidity planning and robust risk management.

COVID-19: EBA letter on actions to mitigate the impact on the EU banking sector

The EBA has published a statement on actions to mitigate the impact of COVID-19 on the EU banking sector. The EBA states that addressing any operational challenges banks may face should be the priority. Accordingly:

  • the EBA has decided to postpone the EU-wide stress test exercise to 2021. This will allow banks to focus on and ensure continuity of their core operations, including support for their customers;
  • for 2020, the EBA will carry out an additional EU-wide transparency exercise in order to provide updated information on banks' exposures and asset quality to market participants;
  • the EBA recommends competent authorities (CAs) plan supervisory activities, including on-site inspections, in a pragmatic and flexible way, and possibly postpone those deemed non-essential. CAs could also give banks some leeway in the remittance dates for some areas of supervisory reporting, without putting at stake the crucial information needed to monitor closely banks’ financial and prudential situation;
  • the EBA notes that a number of provisions in the regulatory framework ensure that banks build up adequate capital and liquidity buffers. These buffers, including macroprudential ones, are designed to be used in order to absorb losses and ensure continued lending to the economy during a downturn. Banks should also follow prudent dividend and other distribution policies, including variable remuneration;
  • CAs are encouraged, where appropriate, to make full use of the flexibility already embedded in the existing regulatory framework. The ECB-Banking Supervision's decision to allow banks to cover Pillar 2 requirements with capital instruments other than CET1 is an example. The use of Pillar 2 Guidance is another way to ensure that prudential regulation is countercyclical and banks can provide the necessary support to the household and corporate sectors;
  • notes that the liquidity coverage ratio (LCR) is also designed to be used by banks under stress. Supervisors should avoid any measures that may lead to the fragmentation of funding markets;
  • the EBA states that it is crucial that the classification of exposures accurately and timely reflects any deterioration of asset quality. There is, however, flexibility in the implementation of the EBA Guidelines on management of non-performing and forborne exposures and the EBA calls for a close dialogue between supervisors and banks, also on their non-performing exposure strategies, on a case by case basis.

The EBA is in close contact with the European Systemic Risk Board in order to ensure that microprudential and macroprudential measures are fully aligned.

BRRD: EBA finalises valuation handbook for purposes of resolution

The EBA has published chapter 10 (Management information systems (MIS)) of its handbook on valuation for purposes of resolution under the Bank Recovery and Resolution Directive (BRRD). The EBA originally published the handbook, which is addressed to EU resolution authorities and supports valuations requested before and after resolution under the BRRD, in February 2019.

Chapter 10 forms part of and completes the handbook. It covers the approach that a resolution authority should take to assess a firm's MIS, in the context of a resolvability assessment, to ensure that data and information are swiftly provided to support a robust valuation for resolution.

The EBA has also published:

  • a data dictionary, with an explanatory note (Annex II to the handbook). The purpose of the data dictionary is to act as a benchmark to assist firms performing self‐assessments on their valuation MIS. It sets out a single reference of a resolution authority's expectations of data and information that are expected to be useful when performing an economic valuation before resolution; and
  • a table illustrating the interplay between internal valuation models and the data dictionary (Annex III to the handbook).

Basel III implementation: EBA opinion on treatment of credit insurance

The EBA has published an opinion on the treatment of credit insurance in the prudential framework in the context of the EU implementation of the final Basel III standards. The EBA issued the opinion in response to feedback received to its February 2019 consultation on guidelines on credit risk mitigation (CRM) for institutions applying the internal ratings based (IRB) approach by using their own estimates of loss given defaults (LGDs).

In the opinion, the EBA concludes that there is currently no sufficient rationale for allowing a preferential treatment to claims on credit insurance and consequently that there should not be a specific value of regulatory LGD for credit insurance claims. Its view is that the final Basel III framework should be implemented as agreed, including the calibration of the regulatory values of LGD used under the foundation IRB (F-IRB) approach, subject to considerations set out in in section 4.2.9 of its detailed policy advice on the final Basel III framework for credit risk, published in August 2019.

CRD IV: EBA consults on RTS, ITS and guidelines on methodology for identifying G-SIIs

The EBA is consulting on changes to:

  • Regulatory Technical Standards on the identification methodology for global systemically important institutions (G‐SIIs);
  • Implementing Technical Standards on Pillar 3 disclosure of indicators for G‐SIBs; and
  • Guidelines on the specification, reporting and disclosure of indicators of global systemic importance.

The deadline for responses to the consultation is 5 June 2020.

Basel III: EBA additional analysis on output floor and equity exposure class

The EBA has published letter to John Berrigan, Director General for Financial Stability, Financial Services and Capital Markets Union at the European Commission, giving additional analysis for the Commission's call for advice on Basel III reforms.

In the letter, the EBA sets out its analysis of the application of the output floor and increased risk sensitivity in the equity exposure class. Among other things, it concludes that:

  • the impact of applying the output floor at the individual level does not seem to be particularly high, except for co-operative banks; and
  • the impact of the implementation of the Basel III framework to equity exposures at the individual and sub-consolidated level has a significantly higher impact than at consolidated level and it is mainly driven by intra-group equity exposures.

The EBA received a request from the Commission in July 2019 for additional analysis of the impact of the final Basel III reforms relating to specialised lending, minimum requirements for own funds and eligible liabilities (MREL), intra-group equity exposures, and the application of the output floor. The EBA published its analysis on the impact of the final Basel III reforms on specialised lending and MREL on 2 March 2020.

SFTs and the CSDR buy-in rules: ICMA FAQs

The International Capital Market Association (ICMA) published FAQs on the EU Central Securities Depositories Regulation (CSDR) mandatory buy-in provisions, in relation to Securities Financing Transactions (SFTs).

The FAQs will be updated periodically for any new guidance from the European Securities and Markets Authority (ESMA) or changes to market best practice.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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