Financial Services Regulation and Compliance - Banking Apr 2021

DOMESTIC

The CBI publishes guidance on Fitness and Probity for a Payment Institution, Electronic Money Institution or Account Information Service Provider

On 16 April 2021 the Central Bank of Ireland (CBI) published guidance on the Fitness and Probity requirements under the European Union (Payment Services) Regulations 2018 and the European Communities (Electronic Money) Regulations 2011 for electronic money institutions (EMI), payment institutions (PI) and account information service providers (AISP). The CBI has made a number of changes to the standard Fitness and Probity Individual Questionnaire (IQ) to reflect the requirements in the EBA Guidelines, in particular Guidelines 11 (AISPs) and 16 (PIs/EMIs) which relate to the "identity and suitability assessment of directors and persons responsible for the management of the payment institution or electronic money institution". These changes only concern applicants seeking approval for PCF roles in an EMI, PI or AISP.

The guidance on PCF roles in an EMI, PI or AISP include the following:

• When an individual proposes to hold multiple PCF roles, the Individual Questionnaire must show that the individual has adequate qualifications and experience for each role. 
• The firm must demonstrate how the holding of multiple PCF roles does not present a conflict of interest.
• Specific guidance was provided on preliminary questions, supporting documentation, applicant's personal details, questions relating to an applicant's reputation and character and if the applicant held a positon as an executive/non-executive director, chairman, manager or financial service provider in a financial or other entity.
• If the individual applicant does not provide all of the required information, the CBI will reject the IQ. 

"Delivering trust in money and payments, ensuring safety, resilience efficiency and access" – Deputy Governor Sharon Donnery

On 28 April 2021 the CBI hosted a webinar titled 'Future of Retail Payments'. The aim of the webinar was to provide industry stakeholders with an overview of strategic policy developments and technological innovation within the retail payments sector.

In her opening speech at the webinar, CBI Deputy Governor Sharon Donnery outlined two key trends that have been shaping the payments landscape; speed and innovation. This is in response to the world becoming more digitalised and the expectation of instant delivery and the removal of cross-border frictions. Ms Donnery emphasised the importance of making sure that trust is maintained in traditional payment instruments such as banknotes to ensure a choice of payment for the public. Ms Donnery stressed that progress on instant payments in Ireland needs to be made as well as more interoperability with European systems. This is needed for Ireland to have harmonised standards, common goals and shared polices on a pan-European basis. This will result in trust being built in our systems.

The CBI publishes its second Quarterly Bulletin of 2021

On 1 April 2021 the CBI published its second Quarterly Bulletin of 2021, which focused on the impact of the COVID-19 pandemic on the domestic economy.

EUROPEAN

ECB publishes the results of its targeted review of internal models

The European Central Bank (ECB) has published the results of its targeted review of internal models (TRIM). The purpose of the TRIM was to assess whether the Pillar I internal models used by significant institutions (SIs) within the Single Supervisory Mechanism (SSM) are appropriate in light of the applicable regulatory requirements and whether their results are reliable and comparable. TRIM also aimed to harmonise supervisory practices relating to internal models within the SSM. TRIM is the biggest project ever carried out by the ECB banking supervision in conjunction with the national competent authorities, with 200 on-site internal model investigations conducted in 65 SIs. It covered internal models for credit risk, market risk and counterparty credit risk.

Overall, TRIM confirmed that the internal models of SIs can continue to be used for the calculation of own funds requirements. However, for certain models, limitations were needed to ensure a level of own funds appropriate to cover the underlying risk, and some 5,800 findings were identified across all risk types which institutions are expected to remediate. It was emphasised that it is essential that banks continue to invest in high-quality models and to strengthen their validation function. In order to ensure that banks will continuously meet the requirements for the use of such models, the ECB will focus on continuing its demanding risk-based supervision.

ECB publishes report on its public consultation on a digital euro

The ECB has published a report on the results of its public consultation on a digital euro which ran from 12 October 2020 to 12 January 2021.

The report concludes that respondents expect privacy, security, usability, low cost and accessibility from a possible digital euro. It was noted that the majority of the respondents acknowledge the role of intermediaries in the digital euro ecosystem in order to enable the introduction of innovative and efficient services and indicate that it should be integrated into with existing banking and payment offerings. The report demonstrated that the majority of respondents will support a digital euro. It was noted at the conclusion of the report that the analysis does not pre-empt decisions or commit the Eurosystem to provide a digital euro.

ECB publishes note on Eurosystem's retail payments strategy

The ECB has published a note on a retail payments strategy to promote European retail payment solutions that are safe and efficient for society as a whole and to meet the challenges to European sovereignty in the payments market. This strategy is consistent with the current work on a possible digital euro.  Firstly, the ECB highlights that the pandemic has increased the use of digital payments. Secondly, the strategy also highlights that if the European payments market becomes overly dependent on non-European payment solutions and technologies it can become more vulnerable to external disruption. Thirdly, the ECB notes that the interests of global technology firms may not necessarily be in line with those of European stakeholders.

The strategy focuses on the following points:

• Developing a pan-European solution for payments at the point of interaction that is governed at a European level. The Eurosystem welcomes the European Payment Initiative (EPI), which is a market initiative to develop a payment solution for consumers and merchants across Europe.
• The full deployment of instant payments. Additional functionalities are to be developed for instant payments in order to compliment the SEPA credit transfer (SCT Inst) scheme and the TARGET instant paymentscheme (TIPS). It was noted that the level of adherence to the SCT Inst scheme and its overall deployment has been below expectations.
• The improvement of cross-border payments in order to better support European businesses and individuals who make and receive payments overseas.
• Support for innovation and digitisation and a European ecosystem for payments. The ECB noted that the revised Payments Services Directive (PSD2) has provided the initial steps needed in order to open up the banking system and to begin the development of innovative payment services by fintech companies. The ECB is also looking at revising the settlement finality directive in order to allow direct access to payment systems for non-bank payment service providers, for example payment institutions and electronic money institutions.
• Concerns for vulnerable individuals' ability to make payments as a result of the continuing reduction of bank branches, ATM networks and the decline in the acceptance of cash by public administrations and retailers in some countries. The ECB noted that the Eurosystem will investigate how usability can be promoted in the area of payments and will map out the challenges individuals face in dealing with the digitisation of payments.

ECB publishes report on the use of distributed ledger technology in post-trade processes

The ECB has published a report by the Advisory Group on Market Infrastructures for Securities and Collateral (AMI-SeCo). AMI-SeCo have been investigating European stakeholders' use of distributed ledger technology (DLT) in securities post-trade processes in line with current regulation. The report focuses on the following:

• Categorising issuance and post-trade processes into models depending on how distributed ledger technology (DLT) is used in each scenario. To achieve this the report looks at the use of DLT at the various stages of the securities life cycle, from issuance to custody and settlement.
• Many market players and institutional actors are currently experimenting with DLT to possibly enhance efficiency and to reduce costs.
• The report noted that to prevent further market fragmentation, the adoption of DLT-based solutions should be based on common practices and standards that allow DLT systems to engage with both each other and conventional systems.

ECB Governing Council announces new policies for collateral mobilisation and settlement

The ECB Governing Council has decided that, when the Eurosystem Collateral Management System (ECMS) is launched in November 2023, the national banks (NCBs) in the euro area will take eligible marketable collateral from their monetary policy counterparties only via central securities depositories (CSDs) that are part of TARGET2-Securities (T2S).

The T2S settlement policy requires Eurosystem monetary policy counterparties to mobilise collateral for use in the Eurosystem credit operations into accounts held by euro area NCBs in CSDs that participate in T2S. It was also decided that with the launch of the ECMS, the fees related to the mobilisation of marketable assets as collateral via the Correspondent Central Banking Model (CCBM) will be set at zero.

The ECMS will replace the existing 19 individual collateral management system of the euro area NCBs and hence become the new common system for managing assets used as collateral in Eurosystems credit operations.

EBA publishes final draft technical standards specifying the methods of prudential consolidation

The European Banking Authority (EBA) has published its final draft regulatory technical standards (RTS), which sets out the conditions according to which consolidation will be carried out in line with Article 18 of the Capital Requirements Regulation (CRR).

These draft RTS have been revised to reflect changes to the CRR and Capital Requirements Directive (CRD), as well as the feedback received during the public consultation last month. The draft RTS include step-in risk indicators that should be taken into account by competent authorities when assessing whether an undertaking should be fully or proportionally consolidated for prudential purposes.

 EBA updates the list of Other Systemically Important Institutions in the EU

The EBA has updated the list of other systemically important institutions (O-SIIs) in the EU. Together with global systemically important institutions (G-SIIs) O-SIIs are identified as systemically important by the relevant authorities according to criteria set in the EBA Guidelines. The EBA guidelines set the criteria for identifying O-SIIs as being size, importance, complexity and interconnectedness.

The EBA acts as the single point of disclosure for the list of O-SIIs across the EU. The list of O-SIIs is disclosed on an annual basis, along with any common equity tier 1 (CET1) capital buffer requirements.

EBA launches consultation on its regulatory technical standards on the list of advanced economies to determine equity risk under the new market risk regime

The EBA has launched a consultation on its RTS on the list of countries with an advanced economy for calculating the equity risk under the alternative standardised approach (FRTB-SA). The RTS are part of the phase 3 deliverables for the new market and counterparty credit risk approaches.

Institutions that use the alternative standardised approach to determine own funds requirements for market risk must compute the equity risk coming from their trading book positions. This must be in accordance with a prescribed set of risk factors and corresponding risk weights. In order to determine the appropriate risk-weight, institutions must identify whether a risk factor relates to an emerging market or an advanced economy. It has be shown that risk factors that are mapped to the advanced economy bucket benefit from a lower risk weight compared to those mapped to the merging market bucket.

The consultation paper proposes a list of advanced economies corresponding to the list provided in the fundamental review of the trading book (FRTB), to ensure compliance with the international standards. The consultation period will run until 2 July 2021.

EBA launches public consultation to enhance proportionality in liquidity reporting

On 28 April 2021 the EBA launched a public consultation on its draft implementing technical standards (ITS) on supervisory reporting with respect to additional liquidity monitoring metrics (ALMM). The EBA is looking to introduce some proportionality considerations in ALMM reporting for non-complex and small institutions. It is possible that small and non–complex institutions will be exempt from reporting metrics in relation to concentration of funding by product type, the information on roll-over of funding and the funding price for various lengths of funding. The EBA is also proposing to exempt medium-sized institutions from reporting metrics on roll-over funding.

The aim of the additional reporting templates is to clarify the inconsistencies and gaps in the data as well as to streamline reporting requirements. This consultation process will close on 28 July 2021.

EBA launches public consultation on draft regulatory technical standards specifying the types of factors to be considered for the assessment of appropriateness of risk weights and conditions when assessing minimum loss given default (LGD) values for exposures secured by immovable property

The EBA has launched a consultation on draft RTS specifying the types of factors to be considered for the assessment of appropriateness of risk weights and the conditions to be taken into account when assessing the appropriateness of minimum LGD values for exposures secured by immovable property.

This consultation process closes on 29 July 2021. The finalisation of the draft RTS and communication to the European Commission is planned to take place by 31 October 2021.

EBA points to a rising share of loans that show a significant increase in credit risk (stage 2 loans)

The EBA has published its risk dashboard for the last quarter of 2020. The data show that there has been a rise in capital ratios, a contraction of the non-performing loan (NPL) ratio and a return on equity (RoE) significantly below banks' cost of equity. Other than asset quality and profitability, operational risks are still a pivotal concern going forward. The data collected showed the following:

• In Q4, capital ratios continued to improve, which was driven by an increase in capital. This more than offsets a slight rise in risk weighted assets.
• The NPL ratio has decreased by 20bps to 2.6%. This decrease was as a result of the contraction in NPLs which exceeded the decrease in loans and advances.
• In Q4 loans under EBA eligible moratoria nearly halved. The loans declined from roughly €590bn in Q3 to roughly €320bn in Q4. The decline was more noticeable for NFC exposures than for loans to households.
• Profitability remained strongly subdued. The rise in net fee and commission income could not compensate for the decline in net interest income. The decline in net interest income was as a result to the contraction in interest bearing assets, amid a flat net interest margin.
• Pressure on profitability is expected to remain persistently high. This is as a result of the deterioration of asset quality and uncertainty on the recovery possibly keeping the cost of risk elevated, while strong competition continues to add pressure on new interest margins and fee income.
• Banks' liquidity position has further improved. Due to a rise in client deposits from households and NFCs, the loan to deposit ratio has declined from 113.6% in Q3 2020 to 112.2% in Q4. The asset encumbrance ratio has remain unchanged at 27.9%.
• Phishing attempts and other types of cyber-attacks are becoming more common. The increase in remote customer on-boarding and increasing participation in virtual currency transactions may expose banks to additional money laundering/terrorist financing risks.

The Single Resolution Board publishes operational guidance on liquidity and funding in resolution

On 30 April 2021 the Single Resolution Board (SRB) published new operational guidance on liquidity and funding in resolution. This guidance focuses on aiming to enhance banks' resolvability and preparedness for a potential resolution. The guidance is aimed at banks within the SRB's direct remit, for which the strategy is resolution.

The guidance is divided into three sections: the identification of key liquidity entities, the assessment of the key drivers of the liquidity position and the methodologies for the estimation of the liquidity position in resolution. This guidance is meant to complement the content of the SRB's expectations for banks document and the 2021 priority letter.

For more information on these topics please contact any member of A&L Goodbody's Financial Regulation team.

Date published: 7 May 2021