Financial Service Regulation and Compliance - Banking November 2018
Financial Service Regulation and Compliance - Banking November 2018
CBI publishes financial stability note on Irish retail bank profitability 2003 – 2018
The CBI published a financial stability note on Irish retail bank profitability which explored trends in the profitability of the Irish retail banking system over the past 15 years, with comparison to a sample of other European Union banks. The research considers changes in the net interest margin (NIM) of banks, the ratio of net interest income to average interest earning assets. The key findings of the note are that in post crisis years the NIM of Irish banks has increased significantly while the NIM for the sample of other EU banks declined. When faced with historically low levels of competition, Irish banks were in a position to capitalise on low funding costs and increase their margins substantially over the period, although these benefits appear to be diminishing in recent years. The note also highlighted that where market power allows for wider margins and greater profits, this may attract market entrants in the future and increased competition may place downward pressure on margins. It was also noted that greater competition in the market may benefit Irish consumers through reduced costs and increased choice.
European Banking Authority (EBA) publishes final guidance on management of non-performing and forborne exposures
The EBA published its final Guidelines on the management of non-performing and forborne exposures. The Guidelines, developed in accordance with the European Council Action Plan, aim to ensure that credit institutions have adequate prudential tools and frameworks in place to effectively manage their non-performing exposures (NPEs) and to achieve a sustainable reduction on their balance sheets. To this end, the Guidelines require institutions to establish NPE reduction strategies and introduce governance and operational requirements to support them. The EBA developed these Guidelines in accordance with Article 16 of Regulation (EU) No 1093/2010 and following the conclusions reached by the European Council in July 2017 specifying an Action Plan to tackle non-performing loans (NPLs) in Europe. The Guidelines apply from 30 June 2019.
EBA publishes EU-Wide stress test results for 2018
The EBA published the results of the 2018 EU-wide stress test which provides supervisors, banks and other market participants with a common analytical framework to assess the resilience of EU banks to adverse market developments and shocks. The EU-wide stress test is a constrained bottom-up exercise based on a common methodology and relevant scenarios, and a set of templates that capture starting point data and stress test results. The 2018 EU wide stress test exercise is designed to inform the Supervisory Review and Evaluation Process (SREP) carried out by Competent Authorities (CAs). The disclosure of granular data on a bank-by-bank level serves as a benchmarking tool. The exercise is based on common macroeconomic baseline and adverse scenarios covering a three-year horizon taking the end-2017 data as the starting point. The exercise covers a sample of 48 banks in 15 countries in the European Union (EU) and European Economic Area (EEA) at the highest level of consolidation.
EBA publishes 2018 EU-wide stress test results Q&A
The EBA published a Q&A in relation to the 2018 EU-wide stress test results. The Q&A covered the objective of the test, detailed the banks involved in the test and elaborated on the methodological features of the stress test exercise which were based on a constrained bottom-up approach. The risks covered in the exercise, including credit risk, market risk, counterparty credit risk and operational risk were outlined. The Q&A noted that the stress test took into account AML issues as a conduct risk event. It was also noted that the adverse scenario used in the test catered for a range of macroeconomic risks associated with Brexit. It highlighted that the EU-wide stress test is an important source of information for the purposes of the SREP and for setting Pillar 2 guidance. It noted that the results of the stress test will assist competent authorities in assessing banks’ ability to meet applicable prudential requirements under the stress scenario. Furthermore, the results will form a solid ground for a discussion between supervisors and individual banks, in order to establish relevant management actions so as to strengthen capital planning and ensure that banks will be above the applicable capital requirements under stress.
European Central Bank (ECB) publishes statement regarding EBA stress test results
The ECB published a statement advising that the EBA stress test results shows that euro area banks are more resilient to financial shocks. The results of the EU-wide stress test coordinated by the EBA show that the 33 largest banks directly supervised by the ECB have become more resilient to financial shocks over the past two years. The results showed that Banks’ average capital buffers are higher, despite larger capital depletion under more severe adverse scenarios than in 2016 stress test and the average final CET1 under adverse scenario 9.9%, up from 8.8% in 2016. The results highlighted that adverse scenario depletes the average CET1 by 3.8 percentage points, up from 3.3 percentage points in 2016. The results highlighted that banks show strong capital buffer build-up alongside efforts to address legacy assets.
ECB publishes guide to the internal capital adequacy assessment process (ICAAP)
The ECB published a guide to the ICAAP for the purpose of providing transparency by making the ECB's understanding of the ICAAP requirements public. The Guide is aimed at assisting institutions in strengthening their ICAAPs and at encouraging the use of best practices by explaining in greater detail the ECB’s expectations of the ICAAP, leading to more consistent and effective supervision. The Guide deduces from the CRD IV ICAAP provisions seven principles that will be considered, in the assessment of each institution’s ICAAP as part of the SREP. These principles include; the management body is responsible for the sound governance of the ICAAP, the ICAAP is an integral part of the overall management framework, internal capital is of high quality and clearly defined and regular stress testing is aimed at ensuring capital adequacy in adverse circumstances. The ECB, together with the national competent authorities (NCAs), has developed ICAAP principles. The objective of these principles is to ensure high standards of supervision.
ECB publishes working paper titled Bank to sovereign risk spillovers across borders: evidence from the ECB's comprehensive assessment
The ECB published a working paper noting that there is an additional channel of bank-sovereign risk transmission across countries, whereby banking sector risk in stressed countries can affect the credit risk of non-stressed sovereigns in the euro area. The ECB's study exploits variation from a negative information shock associated with the release of the ECB's Comprehensive Assessment (CA) results in October 2014. The paper documents that following the publication of the CA results in 2014, bank equity prices declined by about 12 percent after the arrival of adverse news about bank risk in stressed euro area countries. The bank's study showed that the banking sector risk in stressed countries spilled over to non-stressed euro area sovereigns. The ECB advise that cross-border risk-sharing mechanisms allow insurance against idiosyncratic, country-level shocks at a low cost and thereby make the euro area as a whole more resilient.
Sabine Lautenschläger delivers speech titled "Good governance and the role of supervisory boards"
Sabine Lautenschläger, Member of the Executive Board of the ECB and Vice-Chair of the Supervisory Board of the ECB, delivered a speech at the Luncheon of Chairs of Supervisory Boards of banks in Germany. Sabine advised that supervisory boards play a major role in managing risks as they contribute to the checks and balances that every bank needs and they are a core element of good governance. It was noted that those who chair a board, who are members of board committees or who interact with internal control functions need to be available and possess the right knowledge and experience, not only to meet today’s needs but also tomorrow’s challenges. Assessing and overseeing management bodies requires more technical knowledge and the collective knowledge of the board needs to be well-balanced. Sabine proffered that the risk appetite framework of a bank comprises of the principles, processes, internal controls and systems, as well as the responsibilities and the limits of material risks that the bank wants to take on or has already taken on, with the supervisory board playing an important role in building a sensible risk appetite framework. It was noted that building a sensible risk-appetite framework is not easy and the work doesn’t stop there as it also has to be applied.
EBA publishes executive summary of the annual report 2017
The EBA published an executive summary of the annual report of 2017 outlining the key deliverables in 2017. The work included enhancement of the comparability of capital requirements, progress on the roadmap for the implementation of the regulatory review of internal models and the production of four reports on the outliers in the calculations of risk weighted assets (RWAs). The report also discussed the EBA's Brexit preparations and the discussion paper on the implementation in the EU of the revised market risk and counterparty credit risk frameworks. The report examined the key areas of focus of the EBA in 2018 including preparations for the full implementation of Basel III, EU wide stress testing, establishing the EBA's online platform and implementing new rules on payment services.
ECB publishes statement given by Mario Draghi's during an exchange of views with members of the Irish Parliament
ECB published statement given by Mario Draghi President of the ECB, during his exchange of views with the House of Representatives in Dublin to discuss monetary policy and policies to make the euro area economy and its constituent parts more resilient. The euro area economic outlook was discussed and it was noted that the ECB are seeing a growing willingness to question multilateralism, which has underpinned global growth since the end of the Second World War. The protectionist trade measures implemented may have had very limited effects thus far, but the escalation of trade tensions is undermining confidence. It was also noted that the financial stability environment in the euro area overall remains favourable, but it has become somewhat more challenging in recent months. The results of the European stress test published show that euro area banks are increasingly resilient to financial shocks. This also reflects the continuing economic expansion, which has strengthened private and public balance sheets alike.
ECB publishes final guides for banks on their capital and liquidity management
The ECB published its expectations regarding institutions’ internal capital and liquidity adequacy assessment processes (ICAAPs and ILAAPs). The guides, which are not legally binding, will be applied from 1 January 2019 and replace the expectations published in January 2016. They aim to assist banks in strengthening their ICAAPs and ILAAPs, and to encourage the adoption of best practices.
Sabine Lautenschläger delivers speech titled "Four Years of the Banking Union: where do we stand?"
Sabine Lautenschläger, Member of the Executive Board of the ECB and Vice-Chair of the Supervisory Board of the ECB, delivered a speech at the conference during the 21st Euro Finance Week in Frankfurt. Sabine discussed the status of the Banking Union noting that tough and fair European supervision, backed by tougher regulation, has contributed to making the banking sector significantly safer and sounder. It was noted that banks now hold more and better-quality capital than in the past. The fully-loaded CET1 ratio of significant institutions was 13.8% in the second quarter of this year, up by 2.6 percentage points compared with the last quarter of 2014 and significant progress has been made in relation to non-performing loans (NPL). Sabine proffered that whilst the banking sector is more resilient now, she was not entirely satisfied with the current banking situation due to a slowdown in reform momentum. It was noted that banks still need to further strengthen their risk management frameworks, IT systems and internal capital and liquidity management.
ECB publish paper titled "Government debt and banking fragility: the spreading of strategic uncertainty"
The ECB published a paper pertaining to the interaction of government debt and financial markets. This paper studies the interaction between government debt and financial markets. It examines the conditions for the existence of the diabolic loop between banks and sovereigns. This interaction is driven by government choice to bail out banks and the resulting incentives for banks to hold government debt rather than self-insure through equity buffers. The paper highlights the role of bank equity issuance in determining whether the diabolic loop is a Nash Equilibrium of the interaction between banks and the government. When equity is issued, no diabolic loop exists. In equilibrium, banks’ rational expectations of a bailout ensure that no equity is issued and the sovereign-bank loop is operative.
ECB publishes paper titled "Monetary policy and bank equity values in a time of low interest rates"
The ECB publishes a paper examining the effects of monetary policy on the equity values of European banks. The paper discusses monetary policy shocks by looking at changes in the Euro Overnight Index Average (EONIA) one month and two-year swap contract rates during narrow windows around the press statements and press conferences announcing monetary policy actions taken by the ECB. The ECB found that an unexpected decrease of 25 basis points on the short-term policy rate increases banks’ stock prices by about 1% on average. These effects were stronger during the crisis period and reversed during the recent period with low and even negative interest rates. The composition of banks’ balance sheets is important in order to understand these effects. In particular, the change in sensitivity to interest rate surprises as rates drop to low and negative levels is much more pronounced for banks with a high reliance on deposit funding, compared to other banks. The ECB's paper argues that this pattern can be explained by a reluctance of banks to pay negative interest rates on retail deposits.
ECB promotes a common understanding of the rules on internal models
ECB published the first chapter of its guide to internal models ("the guide”), following a public consultation which ended on 28 May 2018. The guide provides transparency regarding the ECB’s understanding of the most relevant aspects, for the institutions it directly supervises, of the applicable regulations on internal models. The guide contains principles for topics that are not risk-type-specific, in particular for the internal ratings-based (IRB) approach: overarching principles, implementation of the IRB approach, internal governance, internal validation, internal audit, model use, model change management and third-party involvement. The ECB launched a public consultation on these chapters that ran from 7 September to 7 November 2018. The guide was drafted in close cooperation with the NCAs and draws on the experience gained in the context of the targeted review of internal models (TRIM) project. A complete preliminary version of the guide was made available on 28 February 2017.
ECB publishes opinion on a proposal for a Directive on credit servicers, credit purchasers and the recovery of collateral
The ECB published an opinion on the proposal adopted by the European Commission for a Directive of the European Parliament and of the Council on credit servicers, credit purchasers and the recovery of collateral. The ECB opinion noted that the proposed directive establishes a number of reporting requirements and the ECB advised that Union legislators should consider whether these reporting requirements will impede efficient functioning of the secondary market for NPLs given that a significant reporting burden could deter new entrants to the market. The proposed directive also gives the EBA a mandate to develop draft implementing technical standards that specify the formats to be used by creditors that are credit institutions for the provision of detailed information on their credit exposures in the banking book to credit purchasers for the screening, financial due diligence and valuation of the credit agreement. The ECB noted that it is imperative that any new data templates should take into account the collection of granular credit and credit risk data in order to minimise the reporting requirements for credit institutions.