Banking and finance regulatory news, May 2021 # 2

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Reports on key recent regulatory developments focussing on banking and finance. 

Contents

  • 2022/23 supervisory benchmarking exercise for capital internal models: PRA statement
  • LIBOR transition: Working Group recommends successor rate for fallbacks in bond documents
  • Securitisation requirements: ECB to supervise bank compliance
  • SSM reporting of supervisory financial information: ECB adopts amendments
  • EU crisis management and deposit insurance framework review: SRB blueprint
  • EBA report on reliance on external credit ratings

2022/23 supervisory benchmarking exercise for capital internal models: PRA statement

The UK Prudential Regulation Authority (PRA) has published a statement on its expectations concerning the 2022 and 2023 supervisory benchmarking exercise relating to banks' capital internal models. These relate to year-ends 2021 and 2022 respectively. The statement is relevant to those credit institutions that have been in scope of the associated reporting requirements.

As set out in the Benchmarking of Internal Approaches Part of the PRA Rulebook, relevant firms are required to report annually information on their internal approaches to the PRA. The specifications to report this information were included in Commission Implementing Regulations. However, the PRA states that such technical standards are outdated and in relation to market risk are no longer applicable under UK law. Therefore, firms will not be required or expected to submit any data for the 2022 and 2023 benchmarking exercise. This includes credit risk, market risk and IFRS 9 data.

For IFRS 9, it reflects the fact that no requirement to submit this information has been brought into UK law.

Following the end of the UK's participation in the EBA benchmarking exercise, the upcoming changes to credit and market risk models as a result of the EBA internal ratings based roadmap, and the UK's future implementation of the fundamental review of the trading book (FRTB), the PRA intends to review the future direction of the exercise.

The PRA will consult on any future proposals for a benchmarking exercise in due course. It states that firms should expect the market risk benchmarking exercise to resume in line with the UK implementation of FRTB, and the credit risk benchmarking exercise to resume in 2024.

If firms have questions with regard to their planned reporting approach, they should contact their supervisor.

LIBOR transition: Working Group recommends successor rate for fallbacks in bond documents

The Working Group on Sterling Risk-Free Reference Rates has published a statement recommending SONIA compounded in arrear as the successor rate for fallbacks in bond documents that reference GBP LIBOR. The recommendation follows feedback received by the Working Group on its consultation in February 2021.

Securitisation requirements: ECB to supervise bank compliance

The European Central Bank (ECB) has announced that it will start ensuring that the banks it directly supervises comply with requirements for risk retention, transparency and resecuritisation, which are set out in Articles 6 – 8 of the Securitisation Regulation. The decision follows recent clarifications in amendments to the Securitisation Regulation.

Over the coming months, the ECB will define how it intends to perform these supervisory tasks. It will then communicate further details on its supervisory approach and model, including obligations for banks to notify their supervisor of securitisation-related activities.

SSM reporting of supervisory financial information: ECB adopts amendments

The European Central Bank (ECB) has adopted a Regulation (ECB/2021/24 – "Amending Regulation") amending ECB Regulation (EU) 2015/534 on the reporting of supervisory financial information under the single supervisory mechanism (SSM).

The Financial Reporting Regulation applies to supervised entities and supervised groups in the single supervisory mechanism (SSM). It sets out reporting requirements for credit institutions and rules for the submission of information by national competent authorities to the ECB. It supplements and cross-refers to Commission Implementing Regulation (EU) 680/2014, which contains implementing technical standards on supervisory requirements under the Capital Requirements Regulation (CRR) and provides for the use of templates.

Commission Implementing Regulation (EU) 680/2014 will be repealed and replaced, with effect from 28 June 2021, by Commission Implementing Regulation (EU) 2021/451. The Amending Regulation revises the Financial Reporting Regulation to reflect these changes and to update cross-references to refer to Commission Implementing Regulation (EU) 2021/451.

The Amending Regulation will enter into force on the fifth day following that of its publication in the Official Journal of the European Union (OJ) and apply from 28 June 2021.

EU crisis management and deposit insurance framework review: SRB blueprint

The Single Resolution Board (SRB) has published a blueprint setting out key considerations for the European Commission's review of its crisis management and deposit insurance (CMDI) framework.

The CDMI framework sets out the rules for handling bank failures while protecting depositors. It consists of three EU legislative texts acting together with relevant national legislation: the Bank Recovery and Resolution Directive, the Single Resolution Mechanism Regulation and the Deposit Guarantee Schemes Directive.

EBA report on reliance on external credit ratings

The European Banking Authority (EBA) has published a report, mandated under Article 161(3) of the Capital Requirements Directive (CRD) on member states' reliance on external credit ratings for regulatory purposes. In December 2020, the EBA sent a survey to EU banking supervisors seeking information on this issue, as well as on steps taken by member states to increase the use of internal approaches for calculating own funds requirements and to reduce mechanistic reliance on external credit assessments.

The EBA found that references to external credit ratings were not material in member states law. On that basis, it considers that there is limited value in producing a regular report on this issue and recommends that the mandate in Article 161(3) should be removed. It also notes that changes to member states' laws relating to the use of credit ratings introduced by CRD IV and the securitisation framework in the CRR are already in effect and that the final Basel III reforms will further amend the standardised approach for credit risk to reduce mechanistic reliance on external credit ratings through enhanced due diligence.

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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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