Banking and finance regulatory news, October 2020 # 2

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

Contents

  • COVID-19: PRA letter to credit unions and direction modifying minimum provisioning requirements
  • Written auditor reporting: PRA Dear CFO letter
  • CRD IV: PRA CP15/20 on market risk: calculation of RNIV and sVaR
  • CRD: EBA final guidelines on subsets of exposures in application of systemic risk buffer

COVID-19: PRA letter to credit unions and direction modifying minimum provisioning requirements

On 7 October 2020, the UK Prudential Regulation Authority (PRA) published a letter to directors of credit unions on COVID-19. The letter addresses the following issues:

  • the PRA has published a direction modifying a rule in the Credit Unions Part on minimum provisioning requirements, available to all credit unions from 2 January 2021 until 31 December 2022. Credit unions can consent to the modification so that the minimum provisioning requirements for bad debt are reduced in line with the rates set out in the letter. The PRA states that credit unions should consider carefully whether they want this rule modification to apply to them, taking into account the profile of the membership and the historic and current rates of arrears in the loan book. If they take up the modification, they should be mindful of the overarching PRA requirement on provisioning and provision accordingly and appropriately. The modification is identical in effect to a modification currently available to credit unions that expires on 1 January 2021, which the PRA announced in April 2020. Credit unions that have consented to the current modification must also consent to the new modification if they wish the modified rules to continue to apply to them after 1 January 2021;
  • the PRA notes that some credit unions have changed their strategic approach to new lending and credit control in light of COVID-19. The boards of credit unions making such changes should consider and accept the associated risks and the potential financial impact, and ensure they have focused management information allowing them to measure the success of their approach. The PRA stresses the importance of a credit union's cure rate as an indicator, commenting that credit unions that engage with members with loans in arrears have a far better chance of avoiding financial difficulty; and
  • in relation to regulatory reporting, the PRA reminds directors of their obligation to be open, transparent, and honest with it at all times. It highlights the obligation on credit unions to have adequate and proportionate financial management controls, which should be demonstrated in part by the timely submission to the PRA of accurate financial data in regulatory returns.

Written auditor reporting: PRA Dear CFO letter

The PRA has published a Dear CFO letter, sent to selected deposit-takers, providing thematic feedback from its review of written auditor reports received in 2020, and its subsequent discussions with firms.

The main thematic findings are briefly set out in the letter, with detail provided in the two annexes. The first annex covers thematic findings on IFRS 9 expected credit loss (ECL) accounting. The second annex covers thematic findings relating to the global benchmark reform, investment in technology, and third-party controls.

CRD IV: PRA CP15/20 on market risk: calculation of RNIV and sVaR

The PRA has published a consultation paper, CP15/20, which sets out the PRA's proposals to update its expectations regarding (i) the measurement of risks not in value at risk (RNIV); and (ii) the meaning of "period of significant financial stress relevant to the institution's portfolio" for the stressed value at risk (sVaR) calculation. The proposals would make amendments to the PRA's supervisory statement, SS13/13: Market risk.

Market volatility relating to the COVID-19 pandemic has highlighted elements of the PRA's market risk framework that may lead to an excessively pro-cyclical increase in own funds requirements during periods of stress. The PRA proposes to set expectations that are intended to attenuate this pro-cyclicality by in own funds requirements for market risk.

The consultation closes on 6 November 2020. The PRA proposes that the changes to SS13/13 will take effect from publication of its final policy.

CRD: EBA final guidelines on subsets of exposures in application of systemic risk buffer

The European Banking Authority (EBA) has published its final guidelines on the appropriate subsets of four sectoral exposures to which competent authorities may apply a systemic risk buffer (SyRB) under the Capital Requirements Directive (CRD).

The EBA is required to issue the guidelines under a mandate in Article 133(6) of the CRD, as amended by CRD V. The introduction of a sectoral SyRB enables competent authorities to use the SyRB to target systemic risk in a broad sense, as well as to target systemic risk in specific sectors or subsets of these sectors.

The guidelines will apply from 29 December 2020. Once translated into the official EU languages and published on the EBA website, the deadline for competent authorities to report whether they comply with the guidelines is two months.

[View source.]

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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