Banking and finance regulatory news, June 2021 #3

Hogan Lovells

Hogan Lovells

Reports on key UK and EU recent regulatory developments focussing on banking and finance. See also our supplementary Financial institutions general regulatory news and other sector news in the Related Materials links.


  • CRR: ECB extends leverage ratio relief for banks until March 2022 due to COVID-19
  • BRRD: SRB approach and expectations on notifications of impracticability of bail-in recognition clauses in contracts
  • EU challenges of resolving mid-sized banks: SRB speech
  • EU banking union: Council of EU progress report
  • CRR: Implementing Regulation amending ITS as regards disclosure of indicators of global systemic importance
  • CRR: European Commission extends transition period for treatment of exposures to third-country CCPs
  • CRD: EBA report on treatment of incoming third-country branches
  • CRR: EBA draft RTS on calculation of specific credit risk adjustments
  • CRR: EBA report on monitoring of Additional Tier 1 capital instruments
  • CRR: EBA consults on amendments to reporting on securitisation, asset encumbrance and G-SIIs

CRR: ECB extends leverage ratio relief for banks until March 2022 due to COVID-19

The European Central Bank (ECB) has adopted a Decision on the temporary exclusion of certain exposures to central banks from the leverage ratio total exposure measure (TEM) in view of the COVID-19 pandemic and repealing Decision (EU) 2020/1306.

Article 500b of the Capital Requirements Regulation (CRR), which was introduced by Regulation (EU) 2020/873 (COVID-19 CRR Amending Regulation), currently allows institutions to exclude exposures to their central bank from the TEM where the institution's competent authority has determined there are exceptional macro-economic circumstances. In September 2020, the ECB adopted Decision (EU) 2020/1306, which allows credit institutions to exclude certain central bank exposures from the leverage ratio, in the light of the COVID-19 pandemic.

Article 500b will cease to apply on 27 June 2021, with its provisions on the exclusion of central bank exposures replicated in new Article 429a, which was inserted by the CRR II Regulation and will apply from 29 June 2021.

The ECB has decided to extend the effect of the exclusion, as it considers that exceptional macro-economic circumstances continue to apply in respect of the eurozone. The Decision, which is made under Article 429a(5) of the CRR, will apply from 28 June 2021 in respect of any credit institution that is a significant supervised entity for the purposes of the ECB's banking supervision role under the Single Supervisory Mechanism (SSM). The Decision also repeals Decision (EU) 2020/1306 with effect from 28 June 2021.

The Decision will cease to apply on 31 March 2022. The ECB states that this date was chosen to facilitate the implementation of monetary policy measures linked to the situation resulting from the COVID-19 pandemic, including measures under the Pandemic Emergency Purchase Programme. The ECB warns that banks that make use of the exclusion should plan to maintain sufficient capital in preparation for the expiry of the exclusion in March 2022.

BRRD: SRB approach and expectations on notifications of impracticability of bail-in recognition clauses in contracts

The Single Resolution Board (SRB) has published a document setting out its approach and expectations on notifications of impracticability to include bail-in recognition clauses in contracts.

Under Article 55(2) of the Bank Recovery and Resolution Directive (BRRD), if a bank determines that it is impracticable to include a contractual recognition clause in a liability contract, it must make a notification to its resolution authority. The resolution authority then assesses the notification and may require the bank to include the clause. Article 55(7) requires resolution authorities to specify, if deemed necessary, categories of liabilities for which banks may reach the conclusion that it is impracticable to include the relevant bail-in recognition clauses.

In the document, the SRB sets out its expectations on these notifications, the conditions and categories for impracticability, as well as the process by which it may require banks to include such clauses following the receipt of the notification.

EU challenges of resolving mid-sized banks: SRB speech

The SRB has published a speech given by Pedro Machado, SRB Director of Resolution Planning and Decisions, on the challenges of resolving mid-sized banks.

EU banking union: Council of EU progress report

The Council of the EU has published a progress report on strengthening the EU banking union. In the report, the Council summarises work undertaken during the Portuguese Presidency of the EU relating to the Council's June 2016 conclusions on the roadmap to complete the banking union. The report focuses on technical discussions between member states on the design of the proposed European Deposit Insurance Scheme (EDIS), relating to issues including:

  • the use of a hybrid model as a potential compromise model for launching EDIS and the key elements of such a model;
  • the scope of EDIS and, in particular whether it should apply to certain entities outside the scope of the CRR, to institutional protection schemes and to third-country branches;
  • the treatment of options and national discretions in the context of EDIS; and
  • the design of the methodology for calculating risk-based contributions.

The report also summarises discussions on member states' views on the interaction between EDIS and the review of the Crisis Management and Deposit Insurance framework and, in particular, how closely connected the two initiatives should be.

CRR: Implementing Regulation amending ITS as regards disclosure of indicators of global systemic importance

Commission Implementing Regulation (EU) 2021/1018, which amends the implementing technical standards (ITS) laid down in Commission Implementing Regulation (EU) 2021/637 as regards the disclosure of indicators of global systemic importance and repeals Implementing Regulation (EU) 1030/2014, has been published in the Official Journal of the European Union.

Article 441 of the CRR, as amended by CRR II, requires global systemically important institutions (G-SIIs) to disclose, on an annual basis, the values of the indicators used for determining their score in accordance with the identification methodology referred to in Article 131 of the CRD (as amended by CRD V). The Implementing Regulation amends Commission Implementing Regulation (EU) 2021/637 by adding a new Article 6a, incorporating the Article 441 disclosure provisions into the ITS on institutions' public disclosures of the information referred to in Titles II and III of Part Eight of the CRR.

In addition, the Implementing Regulation repeals Commission Implementing Regulation (EU) 1030/2014. This is because Implementing Regulation (EU) 2021/637 was adopted on the basis of Article 434a of the CRR and lays down new disclosure requirements rather than those set out in Commission Implementing Regulation (EU) 1030/2014.

To ensure a seamless transfer from Commission Implementing Regulation (EU) 1030/2014, the date of application of the Implementing Regulation needs to be the same as the date of application of Commission Implementing Regulation (EU) 2021/637. Accordingly, the Implementing Regulation enters into force on 24 June 2021 and applies from 28 June 2021.

CRR: European Commission extends transition period for treatment of exposures to third-country CCPs

The European Commission has extended by one year the transitional period during which EU credit institutions can treat exposures to a third-country central counterparty (CCP) that has not been recognised in accordance with the European Market Infrastructure Regulation (EMIR) as if they were exposures to a recognised (or qualifying) CCP. This transitional regime will now continue to apply until 28 June 2022.

The Commission states that this is the final possible extension of this transitional period under the CRR. Exposures to those non-EU CCPs which will not be recognised by ESMA by 28 June 2022 will no longer be eligible for lower capital requirements after that date. The Commission emphasises that stakeholders should start preparing for this possibility. In the meantime, the Commission will continue its work on equivalence assessments (which are not guaranteed to be successful).

CRD: EBA report on treatment of incoming third-country branches

The European Banking Authority (EBA) has published a report on the treatment of incoming third-country branches (TCBs) under the national law of member states, in accordance with Article 21b(10) of the Capital Requirements Directive (CRD).

The EBA explains that recent structural changes have renewed the EU's interest in the regulation of TCBs. Cross-border regulatory reforms in the aftermath of the financial crisis, as well as the UK's withdrawal from the EU, have determined the reorganisation of the presence of third-country groups (TCGs) within the EU, including by way of TCBs. This has prompted calls for an assessment of the state of play and for further harmonisation of EU law.

In the report, which is addressed to the European Parliament, the Council of the EU and the European Commission, the EBA outlines the results of a stock-taking exercise conducted with competent authorities about their national laws and supervisory practices. The EBA has identified a variety of regulatory and supervisory approaches across the EU, and the consequent divergent treatment of TCBs in different member states.

The EBA states that, in light of the significant volume of activities carried out via TCBs, as evidenced by the amount of assets held by such entities in the EU, and of the current fragmented state of play, the related arbitrage opportunities and potential associated risks, the EBA is of the view that further harmonisation of the EU legal framework applicable to TCBs is needed. Accordingly, the EBA sets out 14 high-level policy recommendations for further harmonising EU law applicable to TCBs. It states that these need to be developed further based on a comprehensive impact assessment and offers the Commission its assistance for that purpose.

Under Article 21b(10), once the EBA has submitted its report, the Commission is to submit a legislative proposal to the Parliament and the Council, where appropriate, based on the EBA's recommendations. In the meantime, the EBA will continue to monitor the establishment of TCBs in the EU.

CRR: EBA draft RTS on calculation of specific credit risk adjustments

The EBA is consulting on amendments to the regulatory technical standards (RTS) on the calculation of specific and general credit risk adjustments under Article 110(4) of the CRR. The EBA's proposed revision reflects the European Commission's action plan to tackle non-performing loans (NPL) in the aftermath of the COVID-19 pandemic, which indicated that the treatment of defaulted exposures under the standardised approach needed to be revised. The action plan asked the EBA to consider the appropriate regulatory treatment of defaulted assets, as laid out in the CRR, which have been sold at a discount.

The proposed amendment to the existing RTS on credit risk adjustments ensures that the prudential framework does not create disincentives to the sale of NPL assets. It introduces a change to the recognition of total credit risk adjustments. This ensures that the risk weight can remain the same in the balance sheets of both the seller and the credit institution buying the assets. In particular, the price discount stemming from the sale will be recognised as a credit risk adjustment for the purposes of determining the risk weight.

The deadline for comments on the proposed revision to the RTS is 24 September 2021. The EBA will hold a public hearing on the proposals on 13 July 2021.

While this amendment is intended to clarify the regulatory treatment of sold NPL assets, the EBA also recommends that the treatment set out in this RTS be included in the Commission's considerations as part of the future revised CRR (CRR III) proposal.

CRR: EBA report on monitoring of Additional Tier 1 capital instruments

The EBA has published an updated report on the monitoring of Additional Tier 1 (AT1) capital instruments of EU institutions. The purpose of the report is to inform external stakeholders about the EBA's continuing work in monitoring issuances ATI capital instruments and to present the results of this monitoring, in line with Article 80 of the CRR. This report constitutes the EBA's fourth update.

The EBA notes that, while the initial focus of this report is on AT1 instruments, several findings are relevant for other types of own funds instruments, in particular Tier 2 ones. Among other things, the EBA also flags that this report integrates a dedicated part on environmental, social and governance (ESG) capital bonds, as a follow-up of the preliminary observations published in the TLAC/MREL monitoring report. This guidance is valid with no distinction between any type of loss-absorbing regulatory instruments, although it targets more prominently Tier 2 and eligible liabilities instruments which fall more naturally in the ESG sphere.

CRR: EBA consults on amendments to reporting on securitisation, asset encumbrance and G-SIIs

The EBA has published a consultation paper on draft ITS amending Commission Implementing Regulation (EU) 2021/1451 with regards to COREP (common reporting), asset encumbrance and global systemically important institution (G-SII) supervisory reporting. A related press release links to the four annexes to the consultation paper. Among others things, this consultation aims to enhance proportionality in the area of asset encumbrance reporting, as recommended by the EBA's Report on the Study on the Cost of compliance with supervisory reporting requirements. The consultation runs until 23 September 2021.

The EBA expects to submit the finalised draft ITS to the European Commission in Q4 2021 or Q1 2022, with the revised requirements expected to apply from the reference date of 31 December 2022.

[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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