Recent regulatory developments focussing on banking and finance. See also our General regulatory news of relevance to all financial institutions.
- Asset encumbrance: PRA PS18/20 and updated supervisory statements
- COVID-19: ECB and PRA statements on dividend payments, share buybacks and assessment of distribution plans
- COVID-19: PRA updated statement on implementation of EBA guidelines on reporting and disclosure of exposures
- COVID-19: ECB letter to banks about remuneration policies
- COVID-19: ECB vulnerability analysis of banking sector
- COVID-19: ECB letter to banks about operational capacity to deal with distressed debtors
- COVID-19: ECB extends recommendation on dividends and bonuses and clarifies timeline to restore buffers
- €STR: ECB consults on publishing compounded term rates
- BRRD: EBA consults on RTS on indirect subscription of MREL instruments within groups
- BRRD: EBA consults on ITS on reporting of MREL decisions
- 2021 EU-wide stress test: EBA update
- Business continuity: SRB operational guidance on operational continuity in resolution and FMI contingency plans
Asset encumbrance: PRA PS18/20 and updated supervisory statements
The UK Prudential Regulation Authority (PRA) has published a policy statement, PS18/20, and the following updated supervisory statements on asset encumbrance:
PS18/20 is relevant to all PRA-regulated firms except credit unions and insurance firms. It sets out feedback received from the PRA's September 2019 consultation in CP24/19. Respondents to the consultation generally welcomed the proposals and only requested clarifying changes. The PRA has made two minor changes to its policy to reflect that the term "market counterparties" does not refer to central banks, and to explain that building societies should have an appropriate forward view of collateral availability (and not a comprehensive one).
Among other things, the revised policy means firms need to consider the prudential risks posed by elevated asset encumbrance, monitor them through clearly-defined metrics and set limits where appropriate. This should be documented in firms' internal liquidity adequacy assessment process (ILAAP) documents. Firms also need to consider the effects that increased asset encumbrance might have on their abilities to maintain or restore their financial viability during a variety of stress scenarios. Firms should ensure that their levels of asset encumbrance do not unduly impair the amount and cash value of the assets which could be lent against in resolution, including by the Bank of England (BoE) within its usual risk tolerance.
The updated supervisory statements come into effect immediately.
COVID-19: ECB and PRA statements on dividend payments, share buybacks and assessment of distribution plans
On 28 July 2020, the PRA published a statement on dividend payments and share buybacks, confirming when it will assess firms' distribution plans. The statement has been published in response to the European Central Bank's (ECB) recommendation on dividend payments (also published on 28 July 2020) in which the ECB extends its previous advice to banks on dividend distributions and share buy-backs, asking that they are not paid until 1 January 2021. The ECB also updated its FAQs on supervisory measures in reaction to the coronavirus.
The PRA states that it will undertake its assessment of firms' post-2020 distribution plans in Q4 2020. The assessment will be based on the current and projected capital positions of the banks and will take into account the level of uncertainty on the future path of the economy, market conditions, and prevailing capital trajectories.
The PRA notes that it has already published information on the topic, welcoming the decisions of large UK banks to suspend dividends and buybacks on ordinary shares until the end of 2020, and setting out expectations that banks will not pay cash bonuses to senior staff.
COVID-19: PRA updated statement on implementation of EBA guidelines on reporting and disclosure of exposures
On 28 July 2020, the PRA published an updated statement on the implementation of European Banking Authority (EBA) guidelines addressing gaps in reporting data and public information in the context of COVID-19.
The EBA guidelines require firms to make disclosures in three templates. Templates one and two relate to loan moratoria, while template three relates to public guarantee schemes.
As highlighted in its previous statement on 10 July 2020, the PRA realises that there may be practical difficulties caused by the publication of the EBA guidelines and templates close to the 30 June 2020 disclosure reference date. The PRA realises that producing the disclosures to a high standard will take some time and so it will exercise some flexibility in its assessment of the timeliness of the disclosures. Disclosures made for subsequent reference dates, including 31 December 2020, should be made as part of the Pillar 3 report.
Relevant firms should make disclosures in accordance with the statement on a biannual basis. Firms may disclose as at 30 June and 31 December, or may disclose at the half-year and year-end dates for their financial year if they have an accounting reference date other than 31 December. The PRA expects firms to continue making disclosures for reporting periods ending on dates up to and including 31 December 2020.
The PRA will keep its approach to these disclosures under review for disclosure reference dates after 31 December 2020.
The statement includes a link to the reporting templates.
COVID-19: ECB letter to banks about remuneration policies
On 28 July 2020, the ECB published a letter to banks about remuneration policies in the context of COVID-19. The ECB is of the view that the level of economic uncertainty due to the COVID-19 pandemic remains elevated. Therefore, credit institutions need to maintain a sufficiently large amount of capital to absorb potential losses and to support the economy by providing credit.
The ECB expects credit institutions to adopt extreme moderation in relation to variable remuneration payments until 1 January 2021. This is particularly relevant to identified staff (material risk takers) to the extent these payments may result in a deterioration in the amount or quality of total capital for a bank.
Credit institutions should take account of the need to preserve or rebuild a sound capital base, and should therefore consider the extent to which it is possible to reduce the payment of variable remuneration. If a reduction in variable remuneration cannot be implemented, a credit institution should consider whether a larger part of variable remuneration could be deferred for a longer period of time, as well as considering the payment of variable remuneration in instruments. Credit institutions should also not adopt measures that compensate staff for the reduction or loss of variable remuneration. These supervisory expectations are not intended to apply to cases where a credit institution is subject to a legal obligation to pay variable remuneration.
The appropriateness of remuneration policies and practices will form part of supervisory assessments.
COVID-19: ECB vulnerability analysis of banking sector
On 28 July 2020, the ECB published the results of its COVID-19 vulnerability analysis of banks directly supervised within the Single Supervisory Mechanism (SSM). The ECB has carried out a supervisory exercise to assess how the economic shock caused by the COVID-19 pandemic could impact banks and has aimed to identify potential vulnerabilities within the banking sector using a three-year horizon. The results show that the euro area banking sector can withstand pandemic-induced stress, but if the situation worsens, there will be a material depletion of bank capital.
COVID-19: ECB letter to banks about operational capacity to deal with distressed debtors
The ECB has published a letter to banks about the operational capacity to deal with distressed debtors in the context of COVID-19. The ECB aims to clarify operational expectations on the management of the quality of loan portfolios, so that credit institutions can better provide financial support to businesses that have, or may come, under distress as a result of the COVID-19 pandemic.
The ECB expects the content of the letter to be discussed at board level and for responses from individual credit institutions to be sent to the ECB by 15 September 2020.
COVID-19: ECB extends recommendation on dividends and bonuses and clarifies timeline to restore buffers
On 28 July 2020, the ECB published a recommendation on dividend distributions during the COVID-19 pandemic, along with information about its supervisory expectations in relation to executive pay.
The recommendation extends previous advice to banks on dividend distributions and share buy-backs, asking that they are not paid until 1 January 2021. In a related press release, the ECB sets out a number of supervisory expectations, including the expected pace to restore capital and liquidity positions.
The recommendation repeals the ECB's March recommendation on dividend distributions.
More information about the ECB's supervisory measures is contained in a set of FAQs. Sections on dividend distribution and remuneration have been updated.
€STR: ECB consults on publishing compounded term rates
The ECB has published a consultation on the publication by the ECB of compounded term rates using the euro short-term rate (€STR). The ECB is considering publishing compounded term rates based on €STR on a daily basis shortly after €STR is published. Maturities could range from one week up to one year. It also envisages publishing a daily index, making it possible to compute compounded rates over non-standard periods.
The consultation document sets out the proposed rate compounding formula, index calculation methodology and publication policies. The ECB also asks for views on day-count conventions and states that it proposes determining tenors using the European modified previous business day convention. Accordingly, when a date falls on a non-business day, the preceding business day will be used, unless the first preceding business day is in the previous calendar month. In the latter case that date will be the first following business day.
The ECB's initiative aims to encourage and support the wider use of €STR by providing a "golden source" for compounded €STR values and, in line with the EU Benchmarks Regulation (BMR), to provide a rate that can be used in contractual fallback provisions in contracts using euro LIBOR and EURIBOR.
The consultation closes on 11 September 2020.
BRRD: EBA consults on RTS on indirect subscription of MREL instruments within groups
The EBA has published a consultation paper on draft regulatory technical standards (RTS) on indirect subscription of minimum requirement for own funds and eligible liabilities (MREL) instruments within groups under Article 45f of the Bank Recovery and Resolution Directive (BRRD).
The consultation closes on 27 October 2020.
BRRD: EBA consults on ITS on reporting of MREL decisions
The EBA is consulting on draft implementing technical standards (ITS) under Article 45(j) of the BRRD, specifying uniform reporting templates, instructions and methodology for the identification and transmission, by resolution authorities to the EBA, of information on MREL.
Comments can be made on the consultation until 24 October 2020. Once finalised, the EBA will send the draft ITS to the European Commission for endorsement.
2021 EU-wide stress test: EBA update
The EBA has announced that its Board of Supervisors (BoS) has agreed on the tentative timeline and sample of the 2021 EU-wide stress test. The exercise is expected to be launched at the end of January 2021 and its results should be published at the end of July 2021.
The 2021 EU-wide stress test will be carried out at the highest level of consolidation on a sample of 51 banks. The EBA has published a list of the tentative sample. It includes the banks that were going to participate in the postponed 2020 stress test, with some adjustments to ensure sufficient coverage in terms of total assets as well as to reflect changed conditions for specific institutions. UK banks are excluded from the sample although their EU27 subsidiaries are included when necessary. The final sample remains subject to adjustments, depending on possible events, such as mergers, divestments, or restructuring.
Business continuity: SRB operational guidance on operational continuity in resolution and FMI contingency plans
The Single Resolution Board (SRB) has published two documents containing operational guidance on: