Recent regulatory development focussing on banking and finance. Includes updates relating to COVID-19 regulatory response, CRR, and more.

Contents

• COVID-19: application of credit risk approaches to CBILS and CLBILS
• COVID-19: PRA statement on CRR Amending Regulation
• SSM banks: ECB consults on supervisory approach to consolidation
• CRR: EBA final guidelines on treatment of structural FX
• BRRD early intervention measures: EBA discussion paper
• AML and CTF: BCBS updates guidelines on management of risks
• Too-big-to-fail reforms for systemically important banks: FSB evaluation

COVID-19: application of credit risk approaches to CBILS and CLBILS

On 26 June 2020, the UK Prudential Regulation Authority (PRA) published an updated statement on the regulatory treatment of the UK Coronavirus Business Interruption Loan Scheme (CBILS) and the UK Coronavirus Large Business Interruption Loan Scheme (CLBILS).

The update relates to the application of credit risk approaches. The PRA provides clarification for firms under three scenarios:

• firms using the standardised approach for exposures to the obligor: the portion of an exposure benefiting from the protection of a government guarantee under the schemes is assigned the relevant sovereign risk weight prescribed by the standardised approach (the amount of guarantee recognised should be adjusted under relevant credit risk mitigation (CRM) provisions for any payment types excluded under the guarantees). The residual part of the exposure (that is, the portion not benefitting from such a guarantee) is assigned the standardised approach risk weight that would apply if the exposure were not guaranteed;
• firms using the internal ratings based (IRB) approach for exposures to the obligor and the standardised approach for exposures to the guarantor (under permanent partial use or rollout): the portion of an exposure benefiting from the protection of a government guarantee under the schemes is assigned the relevant sovereign risk weight prescribed by the standardised approach (the amount of guarantee recognised should be adjusted under relevant CRM provisions for any payment types excluded under the guarantees). The residual part of the exposure is risk weighted according to the relevant approved IRB approach as if the exposure were not guaranteed; and
• firms using the IRB approach for exposures to the obligor and the IRB approach for exposures to the guarantor: firms should adopt an approach to reflect the effect of the government guarantee that is consistent with their approved IRB models and their IRB permissions.

COVID-19: PRA statement on CRR Amending Regulation

On 30 June 2020, the PRA published a statement on Regulation (EU) 2020/873, which amends the Capital Requirements Regulation (CRR) and CRR II as regards certain adjustments in response to COVID-19 (CRR Amending Regulation or "CRR Quick Fix").

The statement sets out the PRA's initial views on the following measures included in the package:

• transitional arrangements for capital impact of IFRS 9 Expected Credit Loss (ECL) accounting;
• acceleration of the date of application of certain CRR II measures that had been due to apply from 28 June 2021:
  • a revised small and medium-sized enterprises (SME) support factor;
  • an infrastructure support factor; and
  • non-deduction of certain software assets from Common Equity Tier 1 (CET1) capital; and
• discretion to apply a temporary prudential filter to certain unrealised gains or losses measured at fair value through other comprehensive income.

SSM banks: ECB consults on supervisory approach to consolidation

The European Central Bank (ECB) is consulting on a draft guide on its supervisory approach to consolidation for banks in the single supervisory mechanism (SSM), together with a related blog.

The purpose of the guide is to clarify the prudential supervisory approach that the ECB follows when determining whether the arrangements implemented by a bank resulting from a consolidation ensure the sound management and coverage of its risks.

The deadline for responses is 1 October 2020.

CRR: EBA final guidelines on treatment of structural FX

The European Banking Authority (EBA) has published its final guidelines on the treatment of structural foreign exchange (FX) positions under Article 352(2) of the CRR. The aim of these guidelines is to establish a harmonised framework for the application of the structural FX waiver.

The structural FX provision allows competent authorities to authorise, on an ad hoc basis, the exclusion of FX-risk positions deliberately taken by firms to hedge against the adverse effect of exchange rates on capital ratios from the calculation of the net open currency positions where those positions are of a structural nature. Considering that the application of the waiver can have a significant impact on capital requirements, these guidelines identify objective criteria to assist competent authorities in their assessment of the structural nature of an FX position and to understand whether such position has been deliberately taken for hedging the capital ratio.

The EBA notes that the guidelines have been developed considering also changes to the market risk framework introduced by CRR II and the new structural FX treatment envisaged in the Fundamental Review of the Trading Book (FRTB) standards. As a result, these guidelines have been designed in a way that institutions will not be required to ask for a new permission once they switch to the FRTB framework for computing the own funds requirements for market risk.

The guidelines apply from 1 January 2022, one year later than originally envisaged to ensure that institutions have time to prepare for the introduction of the requirements.

BRRD early intervention measures: EBA discussion paper

The EBA has published a discussion paper on the application of early intervention measures (EIMs) in the EU under Articles 27-29 of the Bank Recovery and Resolution Directive (BRRD).

The EBA has found that there has been limited application of EIMs since the BRRD entered into force and that almost half of the NCAs decided to apply supervisory measures instead of EIMs in cases where early intervention conditions were met. Also, in a relatively large number of cases where the early intervention triggers were breached, the NCAs subsequently concluded that the firm in question had not actually met the conditions for EIMs. The EBA considers the key challenges faced by supervisors in the application of the current regulatory framework on the EIMs and various options for addressing them.

The consultation period ends on 25 September 2020.

AML and CTF: BCBS updates guidelines on management of risks

The Basel Committee on Banking Supervision (BCBS) has updated its guidelines on sound management of risks related to money laundering and financing of terrorism, with guides on the interaction and cooperation between prudential and AML/CFT supervisors.

The revisions set out principles and recommendations for information exchange and cooperation in relation to:

• authorisation related procedures of a bank;
• ongoing supervision; and
• enforcement actions.

In addition, possible mechanisms to facilitate such cooperation in the jurisdictional and international context are provided.

Too-big-to-fail reforms for systemically important banks: FSB evaluation

The Financial Stability Board (FSB) has published a consultation report that sets out the preliminary results of its evaluation of the effects of the too-big-to-fail reforms for systemically important banks (SIBs). A summary and related information are available on the FSB webpage.

Despite the progress made in many areas, the FSB finds that there are still gaps that need to be addressed. For example, improvements to the resolvability of SIBs could be made, public funds continue to be used to support small or medium-sized banks, even in jurisdictions with well-developed resolution frameworks, and the application of the reforms to domestic SIBs (D-SIBs) needs monitoring further.

The FSB has extended the consultation period to 30 September 2020 to give respondents more time to provide feedback. It expects to publish the final report in early 2021.

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