Recent regulatory developments focussing on banking and finance. Includes latest COVID-19 and CRD IV/CRR updates.
- COVID-19: PRA Dear CEO letter on treatment of payment deferrals under IFRS 9 and CRR
- COVID-19: EBA guidelines on reporting and disclosure of exposures subject to measures applied in response to COVID-19
- CRR: EBA consults on draft RTS on capital requirements of non-modellable risks under the FRTB
- COVID-19: SRB speech on the future of European banking regulation
- Banking Business Resolution Service consults on launch of new service
- CRD IV: EBA guidelines on loan origination and monitoring
- CRR: EBA consults on amendments to RTS on own funds and eligible liabilities
- CRR: EBA cost of compliance with supervisory reporting study
- Banking union: Council of EU progress report
- Convergence of 2019 EU supervisory practices: EBA report
- Basel framework: BCBS FAQs
COVID-19: PRA Dear CEO letter on treatment of payment deferrals under IFRS 9 and CRR
On 4 June 2020, the UK Prudential Regulation Authority (PRA) published a Dear CEO letter on International Financial Reporting Standard 9 (IFRS 9) and capital requirements in the context of COVID-19. The letter updates the PRA's guidance set out in a Dear CEO letter of 26 March 2020 to give further guidance on payment deferrals, including exits from initial deferrals following the Financial Conduct Authority's (FCA's) updated guidance on how lenders should treat retail mortgage borrowers at the end of their initial deferral period. The FCA's guidance is reported in our briefing: COVID-19: FCA finalises extended mortgage support measures and its updated Guidance for lenders and servicers.
The PRA's detailed guidance is set out in the annex to the letter but the PRA summarises it as follows:
- when there has been a payment deferral, counting of days past due should be based on the agreed schedule for the purposes of the expected credit loss accounting (ECL) backstops and for the Capital Requirements Regulation (CRR) definition of default. However, loans that are not past due can still have suffered a significant increase in credit risk (SICR), credit impairment or default;
- eligibility for, and use of, COVID-19 related initial and further payment deferrals taken up in accordance with the FCA's guidance on the subject does not on its own automatically result in a loan: (a) being regarded as having suffered a SICR or being credit-impaired for ECL; or (b) triggering a default under the CRR. Firms will therefore need to consider other indicators to determine the appropriate treatment. For example, for CRR purposes, firms will need to assess whether the deferral should be considered a distressed restructuring and in cases where it is likely to result in a diminished financial obligation this may be an indication of default;
- firms are likely to have limited borrower-specific information to make the determinations on an individual borrower-basis. Therefore, they need to make holistic assessments that look beyond past-due information and use of payment deferrals in order to treat such loans appropriately for accounting and regulatory purposes; and
- the PRA does not envisage that these holistic assessments for accounting and CRR purposes will be made at the time when a payment deferral is taken up, as the FCA guidance does not require such information to be available at that time. These assessments are expected to be made subsequently and be based on the information available at the next and subsequent reporting dates.
The guidance is not intended to be applied to payment deferrals that are not COVID-19 related. The PRA will review the guidance in due course in the light of future developments.
The PRA also advises that, before banks' Q2 2020 reporting, the PRA intends to gather further information from firms on estimated provision levels to enable it to compare the timing and amount of losses modelled under the recent Financial Policy Committee (FPC) desktop stress test to those anticipated by banks.
COVID-19: FCA expectations of firms regarding branch access for essential services
On 4 June 2020, noting that firms will begin to re-open branches and increase the range of their services available as COVID-19 restrictions start to ease, the FCA published a statement outlining its expectations of firms regarding branch access for essential services. The statement is an update to a consumer-facing statement published by the FCA on 25 March 2020.
In its statement, the FCA states that it does not expect banking services to fully return to normal immediately and further adjustments may be required depending on the public health situation. Firms need to follow the relevant guidance from the government and devolved administrations. This will mean continuing to balance the needs of their customers with the safety and welfare of their staff. In particular, firms should consider the needs of their most vulnerable customers who may struggle to access essential services, particularly if they are self-isolating. Essential services for these customers may include access to cash, telephone banking and the ability to make in-person payments through third parties.
The FCA expects firms to prioritise several areas, including:
- continuing to ensure essential services are available for the most vulnerable customers and expand capacity where possible. As part of this, firms will proactively contact these customers to make sure they know about the services offered to those self-isolating and how they can contact their bank if they do not have access to online banking;
- where possible, and in line with relevant government guidelines, reinstating access to cash and essential services in local areas that have lost access to bank branches or cash during the crisis; and
- where it is not possible to reinstate access, and in areas where a reduced service remains, ensuring that there is clear communication to customers through websites and physical signs at branches to signpost to alternatives, such as Post Office services.
The FCA advises consumers to continue to use alternatives to branches where possible, for example, online banking. However, they should contact their banking provider if they need to access services in person. Firms should provide customers with further information and help on the options available to them.
The FCA is working closely with firms and will continue to monitor the situation to ensure they are taking consistent approaches and communicating clearly with their customers.
COVID-19: EBA guidelines on reporting and disclosure of exposures subject to measures applied in response to COVID-19
On 2 June 2020, the European Banking Authority (EBA) published a final report with guidelines on reporting and disclosure of exposures subject to measures applied in response to the COVID-19 crisis, together with related reporting and disclosure templates and instructions, available as Annexes on the EBA's webpage. The guidelines have been published following the implementation of a broad range of measures by member states to support the operational and liquidity challenges faced by borrowers. They aim to address data gaps associated with such measures to ensure an appropriate understanding of institutions' risk profiles and the asset quality on their balance sheets both for supervisors and the wider public.
The EBA is introducing, on a temporary basis, additional reporting for the application of the payment moratoria, forbearance measures applied in response to COVID-19 to the existing loans and public guarantees to new lending in response to the COVID-19 pandemic. In the development of these reporting and disclosure templates, the EBA states that it was mindful of the need for proportionality that can take account of the size and complexity of the institutions, as well as of the specificities of the measures introduced in member states, and institutions' operational efficiency in the current circumstances.
These additional reporting and disclosure requirements are expected to be time-limited as they are introduced strictly in the context of COVID-19.
The first reporting reference date and the disclosure reference date is 30 June 2020. The reporting guidelines will be part of the version 2.10 reporting framework release that will be published in June 2020.
CRR: EBA consults on draft RTS on capital requirements of non-modellable risks under the FRTB
The EBA has published a consultation paper on draft regulatory technical standards (RTS) on the capitalisation of non-modellable risk factors under the Fundamental Review of the Trading Book (FRTB). The draft RTS have been developed under Article 325bk(3) of the Capital Requirements Regulation (CRR), as amended by CRR II.
One of the key features of the FRTB is the classification of risk factors that are included in the risk measurement model of a bank as modellable or non-modellable. Institutions must calculate a separate stress scenario risk measure for each non-modellable risk factor (or non-modellable bucket). This has to be calibrated to be at least as prudent as the expected shortfall calibration used for modelled risks (that is, a loss calibrated to a 97.5% confidence threshold over a period of extreme stress for the given risk factor or the given bucket).
The draft RTS set out the methodologies that institutions are required to use for the purpose of determining the extreme scenario of future shock that, when applied to the non-modellable risk factor, provides the stress scenario risk measure. The consultation paper contains two possible options (and therefore two versions of the draft RTS). Option A requires institutions to identify a stress period for each broad risk factor category and to collect data for non-modellable risk factors on the stress period to determine an extreme scenario of future shock. Option B recognises that, for non-modellable risk factors, data availability in a period of stress might be limited and requires institutions to collect data on non-modellable risk factors on the current period.
The draft RTS also specify a regulatory extreme scenario of future shock, how stress scenario risk measures are calculated, and the formula that institutions should use where aggregating the stress scenario risk measures.
The consultation closes on 4 September 2020.
COVID-19: SRB speech on the future of European banking regulation
On 2 June 2020, the Single Resolution Board (SRB) published a speech by Sebastiano Laviola, SRB board member, on the future of European banking regulation in the aftermath of COVID-19. In his speech, Mr Laviola outlines the impact of COVID-19 on the economy and financial markets and the various policy responses.
Banking Business Resolution Service consults on launch of new service
The Banking Business Resolution Service (BBRS) has published a consultation to obtain feedback on the framework for a new service that will resolve disputes between eligible small and medium sized enterprise (SME) customers and participating banks. Among other things, the BBRS seeks to understand:
- awareness, experience of and favourability towards alternative dispute resolution;
- current and potential complaint types and what complaint types may arise from COVID-19; and
- views on the BBRS service delivery.
The deadline for responses to the consultation is 15 July 2020.
CRD IV: EBA guidelines on loan origination and monitoring
Following an earlier consultation, the EBA has published a summary of the feedback to its consultation, a final report on guidelines on loan origination and monitoring and an explanatory note on its approach to loan origination.
The guidelines specify internal governance arrangements for the granting and monitoring of credit facilities throughout their lifecycle. In particular, they clarify the credit decision-making process, including the use of automated models, building on the requirements of the EBA guidelines on internal governance. The guidelines also set requirements for assessing the borrowers' creditworthiness, together with the handling of information and data for the purposes of such assessments.
The EBA says it has developed these guidelines building on the existing national experiences and reflecting recent supervisory priorities and policy developments related to credit granting, including environmental, social and governance factors, anti-money laundering and countering terrorist financing, and technology-based innovation.
The guidelines apply from 30 June 2021. The guidelines on loan origination procedures also apply to loans and advances that already exist on 30 June 2021 if their terms and conditions are changed after 30 June 2022, provided that the changes follow a specific credit decision approval and their implementation requires a new loan agreement or an addendum to the existing agreement. A transition period lasting until 30 June 2024 will apply to allow firms time to address possible data gaps and adjust their monitoring frameworks and infrastructure.
The guidelines will repeal and replace existing EBA guidelines on creditworthiness assessments under the Mortgage Credit Directive.
CRR: EBA consults on amendments to RTS on own funds and eligible liabilities
The EBA is consulting on draft amendments to Commission Delegated Regulation (EU) 241/2014, which contains regulatory technical standards (RTS) on own funds requirements under the Capital Requirements Regulation (CRR), to reflect new mandates introduced by the CRR II Regulation.
The consultation ends on 31 August 2020.
CRR: EBA cost of compliance with supervisory reporting study
The EBA has published draft cover note, introduction and questionnaires relating to a study into the cost of compliance with supervisory reporting measures under the CRR. All documents and a timeline are available on the EBA's related webpage.
The CRR is mandated under Article 430(8) of the CRR to measure the costs that firms incur when complying with the supervisory reporting requirements and, in particular, with those set out in the EBA's implementing technical standards (ITS) on supervisory reporting set out in Regulation 680/2014. The EBA is to assess whether these costs are proportionate compared to the benefits delivered for prudential supervision and make recommendations to the European Commission on how to reduce the costs at least for small and non-complex institutions.
The EBA's original plan was to submit the report to the Commission by the end of 2020. However, its timetable is severely affected by COVID-19, therefore the timetable will need to be adjusted and finalised.
Banking union: Council of EU progress report
The Council of the EU has published a progress report on work undertaken during the Croatian Presidency of the EU relating to the banking union and the progress of related ongoing legislative proposals.
Convergence of 2019 EU supervisory practices: EBA report
The EBA has published a report on the convergence of EU supervisory practices in 2019. The EBA found that the four key topics for supervisory attention identified in the EBA 2019 convergence plan – internal governance, ICT risk and operational resilience, non-performing exposures, and benchmarking of internal models – have been largely implemented in supervisory work across the EU, although to different degrees. Areas that will require further attention include the formalisation of the ICT risk appetite and how it cascades down the organisation, ICT risk governance and controls and the ongoing assessment of the individual and collective suitability of the members of the management bodies.
The report incorporates the 2020 convergence plan.
Basel framework: BCBS FAQs
The Basel Committee on Banking Supervision (BCBS) has published FAQs on the Basel framework. They aim to promote consistent interpretation of the framework. The FAQs relate to identified paragraphs in the framework and cover:
- the definition of capital;
- market risk;
- counterparty credit risk;
- liquidity; and
- operational risk.