Financial Services Regulation and Compliance - Banking Jan 2020
Financial Services Regulation and Compliance - Banking Jan 2020
Central Bank of Ireland updates its Brexit FAQ for Financial Services Firms
The Central Bank of Ireland (CBI) has updated and published its FAQs providing general information to financial services firms considering relocating their operations from the UK to Ireland. The CBI updates the FAQs regularly as the Brexit negotiations progress, as and new issues emerge and are resolved to ensure that financial services firms are adequately prepared and resilient enough to cope with the possible effects of Brexit.
ECB publishes Working Paper on banking supervision, monetary policy, and risk-taking
The European Central Bank's (ECB) recent working paper focuses on whether changes in the European institutional setting had consequences in terms of credit supply and bank's risk-taking. The study employed data from both euro and non-euro area countries in the EU.
The ECB concludes:
supranational banking supervision influences credit supply by reducing excessive risk-taking
centralised banks' supervision offsets the more accommodative monetary policy stance
The ECB also mentioned that results were stronger in Eurozone countries.
ECB publishes a Working Paper on unconventional monetary policy and funding liquidity risk
A new paper by the ECB investigates the problem of non-bank financial institutions performing banking functions (also called shadow banks). As these shadow banks are not officially registered, traditional instruments proved insufficient in combatting any liquidity crises. The paper proposes a theoretical framework for investigating the challenges posed by shadow banks. With a larger shadow banking sector, the normal solutions to liquidity crises may be impaired. The paper recommends that central banks extend lending facilities to shadow banks or purchase illiquid loans to combat any emergent crises.
ECB publishes Working Paper on digital currencies and the financial system
In a recent working paper, the ECB discusses the merits and disadvantages of central bank digital currencies (CBDCs). Among the advantages are greater availability of efficient, secure and modern central bank money to everyone and ensuring a better way to verify retail payments. However, the paper also scrutinizes possible disadvantages. These include possibly disintermediating banking systems and causing people to withdraw funds out of deposit institutions into central banks. The ECB offers two solutions to this: either a cap on CBDC holdings or a tiered remuneration system. The paper also compares CBDC, in terms of financial system implications, to private digital money solutions such as cryptoassets, "narrow bank digital currency", and stablecoins.
ECB publishes Working Paper on bank funding costs and solvency
A recent working paper by the ECB examines the relationship between bank funding costs and solvency. The analysis draws its conclusions from datasets for banks in the euro area. The paper concludes that there is a negative relationship. An increase in funding costs will weaken a bank's ability to withstand macroeconomic shocks and endanger the overall stability of the banking sector. The paper also shows that the sensitivity of funding costs often depends on the risk of the funding instrument itself; senior bonds are most sensitive while overnight deposit rates are least receptive.
ECB keeps capital requirements and guidance for banks stable and increases transparency
The ECB has published the outcomes of its 2019 Supervisory Review and Evaluation Process (SREP). Overall SREP requirements and guidance for CET1 capital in 2019 are unchanged from 2018, at 10.6%. In a move to increase transparency, the ECB is also publishing bank-specific data on Pillar 2 requirements. As assessment of business models showed that business model risk remains a key area of concern owing to low profitability. Supervisors are increasingly focusing on banks' future resilience and the sustainability of their business models. Internal governance continues to be a source of supervisory concern, as governance scores continue to deteriorate.
ECB’s subscribed capital to remain steady after Bank of England leaves the European System of Central Banks
The ECB's total subscribed capital is to remain at €10.8bn billion following the Bank of England's departure from the European System of Central Banks (ESCB). The ECB will repay the Bank of England's share in its paid-up capital, €58m million, under the terms of the Withdrawal Agreement between the UK and the EU. Currently, the Bank of England holds 14.3% of the ECB's subscribed capital, of which 3.75%, is paid up. As a result, the ECB's subscribed capital will be reallocated among the remaining national central banks. The re-calculated weightings will be based on each Member State's share in the total population and gross domestic product of the EU after the UK leaves the EU.
EBA Report analyses Big Data and Advanced Analytics
The European Banking Authority (EBA) has released a report on the growing use of machine learning in the banking sector, namely Big Data and Advance Analytics (BDAA). To ensure that trust is preserved in financial institutions, the EBA has proposed 'four pillars' – data management, technological infrastructure, organsiation and governance, and analytics methodology – which will support the development, implementation and adoption of BDAA by banks. Elements of trusts will also require attention. These elements comprise factors such as: ethics, explainability and interpretability, fairness and avoidance of bias, traceability and auditability, data protection, data quality, security and consumer protection.
ECB publishes Risk report on less significant institutions
The ECB has published its annual risk report on less significant institutions (LSIs). The report assesses conditions in the LSI sector and is conducted jointly by the ECB and the national competent authorities. The report finds that there has been major consolidation in the LSI sector, with the overall number of LSIs down by 316 (11.4%) compared to 2017, and down by more than 600 banks since European banking supervision began. Despite this, poor profitability remains a major vulnerability for LSIs, with the sector experiencing a steady decline. The report also finds that LSIs are moving towards digitalisation, which represents both opportunities and risks, and considers whether digital-only LSIs can provide a solution to the issue of low profitability.
EBA launches public consultation on the future of the EU-wide stress test
The EBA has launched a public consultation on possible changes to the EU-wide stress test. The discussion paper outlines a proposed framework with a two-legged approach; the supervisory leg and the bank leg. The supervisory leg would be the starting point for supervisory decisions and would be directly linked to the setting of Pillar 2 Guidance, while the bank leg would allow banks to communicate their own assessment of risks in an adverse scenario. Both legs would use the same common scenarios and starting points for projecting the stress test results, to ensure a level of comparability. The discussion paper also addresses risks attached to the new stress-testing framework. This year's stress test (see below) will be conducted according to the current framework. The consultation runs until 30 April 2020.
EBA launches 2020 EU-wide stress test exercise
The EBA launched this year's EU-wide stress test on 31 January 2020. For the first time, the adverse scenario is a "lower for longer" narrative, depicting a recession coupled with low or negative interest rates for a prolonged period and a strong drop in confidence causing a significant weakening of economic growth in EU countries. The scenario is designed to ensure an adequate level of severity across all EU countries, which would see the EU real GDP decline by 4.3 cumulatively by 2022, unemployment rise by 3.5 percentage points, equity prices in financial markets fall by 25% in advanced economies and by 40% in emerging economies, and falls in real estate prices (16% residential and 20% commercial). The EU-wide stress test will be conducted on a sample of 51 banks, covering roughly 70% of total banking sector assets in the EU (including the UK) and Norway, as expressed in terms of total consolidated assets at end-2018.
EBA consults on RTS on the treatment of non-trading book positions subject to foreign-exchange risk or commodity risk
The EBA has launched a consultation on draft RTS on the treatment of non-trading book positions subject to foreign-exchange risk or commodity risk under the FRTB framework.
The draft standards aim to establish common requirements on:
the valuation of FX and commodity trading book positions
the specifications on the calculation of the actual and hypothetical changes associated to non-trading book positions for the purpose of the backtesting and the profit and loss attribution requirements.
The consultation runs until 10 April 2020.
ECB publishes working paper on 'lifting the banking veil: credit standards’ harmonization through lending transparency'
In this working paper, the ECB explores whether enhanced transparency in banks' lending decisions can facilitate the harmonisation of the credit standards that a bank employs across the different regions in which it operates. The report finds that compared to mortgages issued in pre-transparency period, mortgages originated under the transparency regime share more similar credit terms to same-purpose mortgages issued by the same bank in different geographic regions over the prior quarter.