Banking and finance regulatory news, July 2020 #4

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Hogan Lovells Recent regulatory developments focussing on banking and finance. Includes updates relating to COVID-19, PRA consultations, CRR, BRRD and more.

Contents

  • COVID-19: HM Treasury statement on applicability in UK of CRR Amending Regulation
  • Securitisation significant risk transfer: PRA PS17/20
  • Recovery planning: PRA CP10/20 on simplified obligations
  • New and growing non-systemic banks: PRA CP9/20 on approach to supervision
  • Interest rate transition: ECB good practices for banks
  • COVID-19: EBA guidelines on pragmatic 2020 SREP
  • BRRD: EBA consults on RTS on estimating Pillar 2 and combined buffer requirements for setting MREL
  • BRRD: EBA consults on RTS and ITS on impracticability of contractual recognition of bail-in
  • Benchmarking of remuneration practices at EU level: EBA report
  • CRR: EBA consults on draft RTS for determination of indirect exposures to underlying clients of derivatives and credit default derivatives
  • CRR: EBA consults on draft guidelines on application of alternative treatment of institutions' exposures related to tri-party repurchase agreements
  • CRR: EBA consults on draft RTS on estimating default probabilities and losses give defaults for internal default risk model

Reporting requirements: EBA questionnaire and call for case studies on cost of compliance

COVID-19: HM Treasury statement on applicability in UK of CRR Amending Regulation

HM Treasury has published a statement on the applicability of COVID-19 related amendments to the Capital Requirements Regulation (CRR) made by Regulation (EU) 2020/873 (Amending Regulation).

HM Treasury confirms that any directly applicable provision in the Amending Regulation will automatically form part of retained EU law under the EU (Withdrawal) Act 2018 (EUWA). It will use its powers under the EUWA to legislate to ensure that these provisions operate effectively in the UK at the end of the Brexit transition period. The statement contains a list of those provisions in the Amending Regulation that became applicable on 27 June 2020 and will form part of retained EU law at the end of the transition period.

HM Treasury also sets out those provisions in the Amending Regulation that will not apply in the UK as they apply after the end of the transition period.

HM Treasury states that matters relating to the leverage ratio and G-SII requirements are for the Financial Policy Committee (FPC) and the UK Prudential Regulation Authority (PRA) to consider as part of the UK's leverage ratio framework.

The statement follows the approach outlined in a letter sent by John Glen, Economic Secretary to the Treasury, to the House of Lords European Union Committee in June 2020.

 

Securitisation significant risk transfer: PRA PS17/20

The PRA has published a policy statement, PS17/20, setting out its response to feedback received on some of the proposals in its March 2020 occasional paper, CP3/20. In PS17/20, the PRA confirms its final policy relating to chapter 8 (Securitisation: updates to significant risk transfer) of CP3/20. It received no responses to this chapter and has made no changes to the draft policy. However, it has updated a footnote reference to include the date that supervisory statement, Securitisation: significant risk transfer (SS9/33), was updated.

The changes will take immediate effect.

The PRA will publish feedback and final policy for chapters 2 to 7 of CP3/20 at a later date, as responses are still being considered.

 

Recovery planning: PRA CP10/20 on simplified obligations

The PRA has published a consultation paper, CP10/20, on simplified obligations for recovery planning in light of the discretion it has under Article 4(1) of the Bank Recovery and Resolution Directive (BRRD) as to whether to apply simplified obligations. Simplified obligations enable the PRA (as UK competent authority) and the Bank of England (BoE) (as the UK resolution authority) to decide on the level of detail of firms' recovery and resolution planning respectively.

The PRA is proposing changes to its supervisory statement "Recovery planning" (SS9/17), which would reduce expectations for certain firms' recovery planning. The firms concerned would be notified by the PRA that they are eligible for simplified obligations. The proposed changes are set out in Appendix 1 to CP10/20.

Comments can be made on CP10/20 until 23 October 2020. The PRA intends to publish a final policy statement and to notify firms that are eligible for simplified obligations in the second half of 2020. Pending consideration of responses to CP10/20, the amendments to SS9/17 would apply with immediate effect once the final policy statement is published.

 

New and growing non-systemic banks: PRA CP9/20 on approach to supervision

The PRA has published a consultation paper, CP9/20, setting out its proposed approach to supervising new and growing non-systemic UK banks.

The PRA proposes to:

  • create a new supervisory statement (SS): Non-systemic UK Banks: The Prudential Regulation Authority's approach to new and growing banks. The PRA includes a draft version of the new SS;
  • reference the new SS in paragraph 5.25 of Pillar 2 capital policy in SS31/15: The Internal Capital Adequacy Assessment Process (ICAAP) and the Supervisory Review and Evaluation Process (SREP); and
  • reference the new SS in paragraph 9.45 of the statement of policy (SoP): The PRA's methodologies for setting Pillar 2 capital.
  • The PRA states that its proposals are clarifications of its current supervisory approach, except for proposed changes to the calculation of the PRA buffer for new banks and expectations relating to solvent wind-down plans. It adds that its proposed approach follows up on the March 2013 joint BoE and Financial Services Authority review into barriers to new entrants to the banking sector.

    The proposals are intended to:

  • help banks understand how and why PRA expectations increase as they grow;
  • clarify the expectations of new and growing banks as they mature;
  • clarify that in a competitive environment it is normal to see both the entry and exit of banks (the PRA does not seek to operate a zero-failure regime); and
  • communicate the PRA's aim for banks to have positive regulatory relationships through open, constructive, and forward-looking communication.

The PRA categorises new banks as firms that are in the "mobilisation stage" (authorisation with restrictions) and those that have received authorisation without restrictions within the past 12 months. Growing banks are banks that are typically between one and five years post-authorisation without restrictions.

The PRA proposes that the amendments set out in this consultation paper would take effect in the first half of 2021.

The consultation closes on 14 October 2020.

 

Interest rate transition: ECB good practices for banks

The European Central Bank (ECB) has published:

  • the results of its industry-wide assessment of the preparedness of banks supervised under the Single Supervisory Mechanism in relation to interest rate reform, including a list of risks and challenges for banks; and
  • good practices for banks in relation to interest rate transition.

 

COVID-19: EBA guidelines on pragmatic 2020 SREP

On 23 July 2020, the European Banking Authority (EBA) published a final report which provides guidelines for competent authorities on the special procedure for the 2020SREP. The guidelines build on the existing requirements of the Capital Requirements Directive (CRD) and the SREP guidelines, and adapts them to the exceptional circumstances of the COVID-19 pandemic. They are addressed to competent authorities and elaborate on the key aspects of SREP for 2020.

Competent authorities may continue to apply the SREP guidelines as they currently stand if they wish to do so. However, they also have the option of applying the alternative specific process for 2020, which may be necessary in response to the pandemic.

Due to the urgency of the matter and the limited focus of the guidelines on COVID‐19 pandemic‐related features, the EBA did not consult on the guidelines.

 

BRRD: EBA consults on RTS on estimating Pillar 2 and combined buffer requirements for setting MREL

The EBA has published a consultation paper on its draft regulatory technical standards (RTS) specifying the methodology to be used by resolution authorities to estimate the Pillar 2 (P2R) and combined buffer requirements (CBR) at resolution group level. This is for the purpose of setting the minimum requirement for own funds and eligible liabilities requirement (MREL) under the BRRD.

Comments can be made on the consultation until 24 October 2020. The EBA intends to send the final draft RTS, by December 2020, to the European Commission for endorsement.

 

BRRD: EBA consults on RTS and ITS on impracticability of contractual recognition of bail-in

The EBA has published a consultation paper on draft RTS and draft implementing technical standards (ITS) on the impracticability of contractual recognition of write-down and conversion powers and related notifications under Articles 55(4) and 55(8) of the BRRD.

The draft ITS specify uniform formats and templates for the notification to resolution authorities of contracts meeting the conditions of impracticability defined in the draft RTS. The EBA has also published Annex I and Annex II to accompany the draft ITS.

Comments can be made until 24 October 2020. Once finalised, the EBA will send the draft RTS and ITS to the European Commission for endorsement.

 

Benchmarking of remuneration practices at EU level: EBA report

The EBA has published a report on benchmarking remuneration practices in EU banks for the financial years 2017 and 2018, together with high earners data for 2018.

The EBA found that banks' remuneration practices were not sufficiently harmonised, either at a member state and an institutional level. For example, the application of deferral and pay out in instruments. The EBA explains that this was mainly due to differences in the national implementation of CRD IV and that this situation should improve when amendments to that Directive come into effect at the end of 2020.

The EBA will continue to benchmark remuneration trends every two years and to publish data on high earners annually to monitor developments in this area.

 

CRR: EBA consults on draft RTS for determination of indirect exposures to underlying clients of derivatives and credit default derivatives

The EBA has published a consultation paper on draft RTS for the determination of indirect exposures to underlying clients of derivatives and credit default derivatives under Article 390(9) of the CRR, as amended by CRR II.

The deadline for comments on the paper is 23 October 2020. The EBA will submit the final draft RTS to the European Commission for endorsement before they are published in the Official Journal of the European Union (OJ).

 

CRR: EBA consults on draft guidelines on application of alternative treatment of institutions' exposures related to tri-party repurchase agreements

The EBA has published a consultation paper on draft guidelines specifying the conditions for the application of the alternative treatment of institutions' exposures related to "tri-party repurchase agreements" set out in Article 403(3) of the CRR for large exposure purposes.

Comments can be made on the consultation paper until 22 October 2020. The deadline for competent authorities to report whether they comply with the guidelines will be two months after publication of the official EU language translations of the final guidelines on the EBA website. The guidelines will apply from June 2021.

 

CRR: EBA consults on draft RTS on estimating default probabilities and losses give defaults for internal default risk model

The EBA has published a consultation paper on draft RTS on requirements that an internal methodology or external sources used under the internal default risk model are to fulfil for estimating default probabilities (DPs) and losses given default (LGDs) under Article 325bp(12) of the CRR, as amended by CRR II.

Comments can be made on the consultation paper until 22 October 2020. The draft Delegated Regulation states that it enters into force twenty days after publication in the OJ.

 

Reporting requirements: EBA questionnaire and call for case studies on cost of compliance

The EBA has published a questionnaire for all EU credit institutions on the cost of compliance with reporting requirements, together with an introduction to the questionnaire.

As part of its drive for more proportionate regulatory and supervisory framework, the EBA is looking for ways to optimise supervisory reporting requirements and reduce reporting costs for institutions, especially smaller ones. In addition to the questionnaire, the EBA has also launched a call for case studies to collect evidence on reporting costs as well as industry views on ways to reduce these costs and make supervisory reporting more efficient. To this end, alongside the questionnaire, the EBA has published an Introduction to its study on cost of compliance with supervisory reporting requirements, which is complemented by an explanatory note and a study of credit institutions' reporting costs (focusing on the specification of fact-finding case studies).

The EBA has split the questionnaire into two parts with different deadlines for responses, in order to take account of the challenges posed by COVID-19. Responses to the qualitative questions are expected by 1 October 2020, and responses to the quantitative questions as well as the submission of case studies are expected by 31 October 2020.

The EBA is required under Article 430(8) of the CRR to measure the costs institutions incur when complying with supervisory reporting requirements.

[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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