Banking and finance regulatory news, September 2020 # 4

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Recent regulatory developments focussing on banking and finance. Includes updates from the ECB, the EBA and the UK PRA's report on its proprietary trading review.

Contents

  • Proprietary trading review: PRA report
  • COVID-19: EBA phasing out guidelines on legislative and non-legislative moratoria on loan repayments
  • COVID-19: ECB Decision excluding certain central bank exposures from leverage ratio
  • CRD IV: EBA Opinion on definition of credit institution and scope of authorisation
  • EBA launches 2020 transparency exercise
  • CRR: ESCB proposes reduced reporting burden for banks
  • Counterparty credit risk: ECB guide to assessing banks' calculations

Proprietary trading review: PRA report

The UK Prudential Regulation Authority (PRA) has published a report on the outcome of its proprietary trading review. The review was required under section 9 of the Financial Services (Banking Reform) Act 2013, for the PRA to consider the case for further restrictions on proprietary trading within a year of the commencement of ring-fencing.

The report discusses proprietary trading carried out by relevant authorised persons (banks, building societies and PRA-designated investment firms). It discusses the extent of this activity, the risks it poses to the safety and soundness of firms, the tools the PRA has to mitigate these risks, and the experience of other countries in restricting proprietary trading within the banking sector. It also addresses whether the ring-fencing regime, together with the other tools available to the PRA, are sufficient to mitigate the risks proprietary trading poses to financial stability and the safety and soundness of firms.

The PRA concludes that it does not need new powers to address the risks of proprietary trading as it already has substantial supervisory powers which can be and are used to mitigate the risks created by proprietary trading in its various forms where appropriate.

The report has been submitted to HM Treasury and laid before Parliament.

COVID-19: EBA phasing out guidelines on legislative and non-legislative moratoria on loan repayments

On 21 September 2020, the European Banking Authority (EBA) announced that it is phasing out its guidelines on legislative and non-legislative moratoria on loan repayments published in the early stages of the COVID-19 pandemic.

The majority of EU banks participated in payment moratoria schemes; however, the EBA does consider it appropriate at this stage to extend such an exceptional measure. Instead, banks should return to the practice of assessing any rescheduling of loan requests on a case-by-case approach. The EBA will keep monitoring the situation as needed.

The regulatory treatment contained in the guidelines will continue to apply to all payment holidays granted under eligible payment moratoria prior until 30 September 2020.

COVID-19: ECB Decision excluding certain central bank exposures from leverage ratio

Decision (EU) 2020/44 of the European Central Bank (ECB) on the temporary exclusion of certain exposures to central banks from the total exposure measure, in view of the exceptional circumstances presented by COVID-19, has been published in the Official Journal of the EU.

The Decision entered into force on 26 September 2020. It will allow euro area banks under the ECB's direct supervision to exclude certain central bank exposures (such as coins and banknotes and deposits held at the central bank) from the leverage ratio.

CRD IV: EBA Opinion on definition of credit institution and scope of authorisation

The EBA has published an Opinion on elements of the definition of credit institution under Article 4(1)(1)(a) of the Capital Requirements Regulation (CRR) and on aspects of the scope of the authorisation.

In the Opinion, the EBA calls on the European Commission to clarify certain issues relating to the definition of credit institution in its upcoming review of the CRR and the Capital Requirements Directive (CRD). It is concerned that there are divergent interpretations of the term "credit institution" across the EU that are affecting the uniform application of EU law and the convergence of supervisory practices.

Aspects that the EBA considers would benefit from clarification are the notions of "deposits", "other repayable funds" and "from the public". These issues have previously been analysed by the EBA and communicated to the European Commission.

The EBA also raises points relating to divergent approaches to the scope of the authorisation, and the kind and extent to which commercial activities may be carried out by credit institutions.

The EBA recommends to the Commission that any changes to the regulatory perimeter be accompanied by an impact assessment.

EBA launches 2020 transparency exercise

The EBA has launched its 2020 transparency exercise. The EBA expects to publish the results of the exercise in December 2020, together with its risk assessment report for 2020.

The EBA will release around 1 million data points on about 130 EU banks. The data will cover capital positions, financial assets, financial liabilities, risk exposure amounts, sovereign exposures and asset quality. The exercise will also include data on loans and advances subject to legislative and non-legislative moratoria following publication of EBA guidelines on the topic.

CRR: ESCB proposes reduced reporting burden for banks

The ECB has published input from the European System of Central Banks (ESCB) into the EBA feasibility report under Article 430c of the CRR on an integrated reporting system for the collection of statistical, resolution and prudential data from European banks.

The report proposes to reduce the statistical, resolution and prudential reporting burden for banks by:

  • using a common standard data dictionary and common data model for statistical, resolution and prudential information requirements;
  • adopting smarter procedures, such as harmonised transmission reporting formats, the removal of duplications, and improved data sharing between regulatory authorities; and
  • increasing cooperation between European regulatory authorities, and between authorities and the banking industry, to achieve a common standard data dictionary, a common data model and better procedures.

Counterparty credit risk: ECB guide to assessing banks' calculations

Following consultation, the ECB has finalised its guide on the methodology it uses to assess how banks calculate their exposure to counterparty credit risk and advanced credit valuation adjustment risk (A-CVA), especially in internal model investigations. The ECB states that the guide is also relevant where banks apply to extend or make changes to their models, and for the ECB's ongoing monitoring of such models.

The ECB has also published a feedback statement to its related consultation.

[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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