Financial Services Regulation and Compliance - Banking Jan 2021
Financial Services Regulation and Compliance - Banking Jan 2021
CBI publishes quarterly bulletin - Recovery anticipated in second-half of 2021 picking up momentum in 2022
The Central Bank of Ireland (CBI) published its first Quarterly Bulletin of 2021 on 22 January 2021. The CBI notes that the outlook for the economy is dependent on the future path of the virus and the measures implemented to contain its spread. It is anticipated that economic activity will benefit from the positive impact of the increasingly widespread deployment of vaccines. While the EU-UK Trade and Cooperation Agreement (EU-UK TCA) has the potential to cause new trade frictions which may impeded growth in the Irish economy, the outlook, both for exports and for overall economic activity, has improved compared to the prospects under a no-deal Brexit.
The recent surge in cases and re-imposition of lockdown measures has caused economic uncertainty and has weakened the near-term outlook however it is anticipated that with the successful deployment of vaccines by the second half of the year, domestic economic activity should begin to recover and improve in 2022. Further economic improvement supported by improving business and consumer confidence is expected in 2022. It is also anticipated that unemployment will reduce from an average rate of 9.3% in 2021, to 7.8% in 2022. The CBI notes that Ireland's budget balance was significantly affected by COVID-19 related expenditure programmes in 2020, with a deficit of 8.8% of GNI last year. It is expected that this deficit will remain unchanged in 2021.
EBA consults on its new guidelines on the monitoring of the threshold for establishing an intermediate EU parent undertaking
The EBA has launched a public consultation on its new guidelines on the monitoring of the threshold and other procedural aspects on the establishment of intermediate EU parent undertakings (EU IPUs) as laid down in the Capital Requirements Directive (CRD). The guidance sets out the methodology to calculate the total value of assets in the EU of the third-country groups and provides clarity as to how to monitor this value in order to meet the EU IPU requirement. Under Article 21b of the CRD, institutions belonging to third-country groups with total group assets in the EU equal to or greater than €40bn are required to establish an EU IPU.
These guidelines provide that the total value of assets for this purpose should be calculated as an average over the last four quarters. Institutions are required to monitor the total value of assets in the EU on a quarterly basis and must communicate their findings to the relevant competent authorities. They are also required to assess at least annually whether the threshold is expected to be breached within the three-year horizon. The guidelines also provide guidance as to the exchange of information between the institutions, third-country branches and competent authorities, as well as appropriate timelines for the establishment of an EU IPU. A public hearing will take place on 26 February 2021 from 11am to 12.30pm and the deadline for submissions is 15 March 2021.
SRB and Bank of England bank resolution cooperation arrangement comes into force
A cooperation arrangement between the Single Resolution Board (SRB) and the Bank of England came into force on 1 January 2021, the aim of which is to facilitate bank resolution while maintaining financial stability in the European Union and the United Kingdom. The arrangement sets out a framework for consulting, cooperating and exchanging information when preparing for and implementing bank resolution in both jurisdiction. Reciprocity and proportionality are key elements of the arrangement which recognises the complex nature of cross-border bank operations.
SEPA payment scheme participation fees
The European Payments Council (EPC) has published the 2021 table of fees which must be paid by payment service providers (PSPs) to use the EPC SEPA payment schemes. The SEPA payment scheme participation fee is calculated for each PSP by taking into account the number of payment schemes to which they adhere. The fees paid by PSPs may change every year because they depend on the number of SEPA payment schemes, the number of scheme participants and the costs borne by the EPC in relation to the management of the payment schemes.
MREL reporting update: checklist on reported liabilities and sign-off form
The SRB has requested that banks under its remit use a checklist when preparing the additional liability report (ALR) and complete a sign-off form before submission, in order to provide additional assurance on liabilities reported as eligible for MREL. The checklist, which lists eligibility criteria and conditions that should be met for reported liabilities to be considered MREL eligible should be used by resolution reporting officers as a guide when filling out the ALR. A sign-off form which confirms that procedures and controls were put in place to ensure that the reported data in the ALR correspond to liabilities which meet the eligibility criteria in the legislation is also required and should be submitted to the institution’s local national resolution authority with the ALR with reference date 31 December 2020. The deadline for submission is 31 March 2021.
ECB finalises guide on supervisory approach to consolidation
The ECB has published its final guide outlining its supervisory approach to consolidation in the banking sector, following the conclusion of a public consultation on 1 October 2020.The ECB will avail of its supervisory tools to facilitate sustainable consolidation projects. Such projects must be based on a credible business and integration plan, improve the sustainability of the business model, and respect high standards of governance and risk management. The guide provides clarity in relation to the following issues:
The ECB will not penalise credible integration plans by setting higher Pillar 2 capital requirements. The ECB will communicate during the application process to the banks an indication of the capital levels the combined bank will need to maintain.
Supervisors expect acquirers to use the profits stemming from badwill (the difference between the re-evaluated book value of a bank and the price the acquirer pays) as capital of the combined bank. This means that banks are expected not to pay out in dividends profits stemming from badwill until the sustainability of the business model has been firmly established. The ECB expects the acquirer to take advantage of a relatively low acquisition price to increase sustainability.
The ECB will accept the temporary use of existing internal models, subject to a strong roll-out plan.
The ECB has published a feedback statement on its website incorporating the comments received during the consultation process.
EBA points to a further rise in capital and leverage ratios, whereas profitability remains strongly subdued
The EBA has published its quarterly risk dashboard along with the results of the risk assessment questionnaire. Data for Q3 illustrates a rise in capital ratios and an improvement in the NPL ratio however the return on equity remained significantly below banks’ cost of equity. Data on moratoria and public guarantee schemes has been included in the risk dashboard for the first time. The data demonstrates that non-performing loans had declined while forborne loans were further on the rise. Share of stage 2 exposures continued to grow for loans under moratoria.
ECB digital euro consultation ends with record level of public feedback
The ECB's public consultation on the digital euro ended on 13 January having received 8,221 responses from citizens, firms and industry associations. The consultation began on 12 October 2020 following the publication of the Eurosystem report on a digital euro. A comprehensive analysis of the public consultation will be published by the ECB in the spring and will be considered as part of the ECB’s Governing Council decision-making process in relation to whether or not to launch a digital euro project. The initial findings show that the most requested features of a potential digital euro are privacy of payments, security and pan-European reach.
EBA releases erratum of the taxonomy package on reporting framework 3.0 phase 1
The EBA has published an erratum of the technical package on the reporting framework 3.0 phase 1. The corrections relate for the most part to the taxonomy files in the COREP NSFR module and COREP LR module where the EBA has addressed the issue of non-reportable data points on columns 0020 and 0030 of tables C 84, and amended a member code for “Cash pooling arrangements” in C 47.
Non-performing loans: ECON adopts report on draft Directive
The European Parliament's Economic and Monetary Affairs Committee (ECON) has adopted a report on a proposed Directive on credit servicers and credit purchasers. The measures voted upon provide for common EU standards regulating the transfer of bad loans from banks to secondary buyers while protecting borrowers’ rights. The standards were adopted with 38 votes to four and 13 abstentions. The ECON MEPs also voted in favour of beginning negotiations with the Council and the Commission, with 39 votes to four and 12 abstentions.
The standards aim to develop professional secondary markets for credit agreements originally issued by banks and qualified as non-performing. The measures would enable third parties (credit purchasers) to buy non-performing loans (NPLs) across the EU. Credit purchasers do not require special authorisation as they are not creating new credit but rather are buying existing NPLs at their own risk. They are however required to comply with the relevant consumer protection rules. Credit servicers will be required to obtain authorisation and will be supervised by the Member States' competent authorities. Member States are required to maintain a publicly available up-to-date list or national register of all credit servicers. Borrower protection remains a key concern.
Andrea Enria: Crisis management for medium-sized banks: the case for a European approach
The Chair of the Supervisory Board of the ECB, Mr Andrea Enria, gave the keynote speech at the Banca d’Italia workshop on the crisis management framework for banks in the EU on 15 January 2021. In his speech, Mr Enria noted that the crisis management framework for banks has developed significantly in the wake of the financial crisis. The Financial Stability Board identified global best practices for managing crises at large and complex institutions which have been implemented at EU level. These practices combined with the establishment of European banking supervision and the Single Resolution Mechanism have allowed for a consistent approach to be taken towards preventing and managing crises at the largest EU banks.
Mr Enria noted however that less attention has been afforded to management of crises at small and medium-sized banks. Mr Enria highlighted that there are substantial differences in the national legal regimes for the liquidation of banks and that this suggests divergences from the European supervisory framework. Mr Enria warned that such divergences create playing field concerns in terms of banking market integration and may impede a smooth exit from the market for weaker participants.
EBA launches its 2021 EU-wide stress test exercise
The EBA launched its 2021 EU-wide stress test on 29 January with the publication of the macroeconomic scenarios. This year's adverse scenario is based on a narrative of a prolonged COVID-19 scenario in a 'lower for longer' interest rate environment, in which negative confidence shocks would prolong the economic contraction. Particularly as the 2020 stress test was postponed due to the pandemic, it is hoped that this year's exercise will provide valuable information for assessing the resilience of the European banking sector and possible exit strategies from the various flexibility measures afforded to banks due to the crisis, or the need for additional measures, should economic conditions deteriorate further. The results of the exercise are expected to be published by 31 July 2021.
Christine Lagarde: Climate change and central banking
On 25 January 2021, Ms Christine Lagarde, President of the ECB, gave the keynote speech at the ILF conference on Green Banking and Green Central Banking in Frankfurt. In her speech, Ms Lagarde discussed the threats posed by climate change and emphasised the role of central banks in tackling this issue. Ms Lagarde noted that although banks are not responsible for climate policy, they do have a role in combating climate change.
ECB sets up climate change centre
The ECB has decided to establish a climate change centre in an effort to unify the work on climate issues across the different parts of the bank. This endeavour reflects the increasing importance of climate change for the ECB's policy as well as the need for an enhanced structure in terms of the approach to planning and coordination. The climate change centre will be made up of ten staff working with existing teams across the bank and will report to the ECB’s President, Christine Lagarde who supervises the ECB's work on climate change and sustainable finance.
Ms Lagarde stated that "The climate change centre provides the structure we need to tackle the issue with the urgency and determination that it deserves.” The climate change centre will begin its work in early 2021 and its activities will be organised in workstreams ranging from monetary policy to prudential functions. In light of the ultimate aim of incorporating climate considerations into the routine business of the ECB, the new structure will be reviewed after three years.
Statement by the Eurogroup President, Paschal Donohoe, on the signature of ESM Treaty and the Single Resolution Fund Amending Agreements
Mr Paschal Donohoe, President of the Eurogroup has given a statement in relation to signature of the amending agreements to the Treaty on the European Stability Mechanism (ESM) and the Single Resolution Fund Intergovernmental Agreement. The signature of the agreements begins the ratification procedure in Member States. Mr Donohoe noted that on 30 November 2020, a political agreement was reached by the Eurogroup in relation to the ESM reform package.
The purpose of this agreement is to enhance the effectiveness and flexibility of the ESM. The ESM will provide a common backstop to the Single Resolution Fund by means of a credit line as of the beginning of 2022. The common backstop aims to ensure that a bank failure does not harm the broader economy or cause financial instability. The backstop will be financed by contributions from the banking sector rather than taxpayers' money in order to reduce the link between banks and sovereigns in the Banking Union.
Following the ESM Treaty reform, the ESM will have a more accessible precautionary credit line and will have a stronger role in financial assistance programmes and crisis prevention. This combined with the early introduction of the common backstop, will help to ensure that the euro area is capable of handling challenges which may arise.
ECB asks banks to address credit risk and improve efficiency
The ECB has published the outcome of its 2020 Supervisory Review and Evaluation Process (SREP) and announced its supervisory priorities for 2021.The ECB made an early decision to take a pragmatic approach towards conducting its annual core activities on account of the COVID-19 pandemic and this is reflected in this year's SREP results. The focus of this pragmatic approach was banks' ability to address the challenges and risks to capital and liquidity arising from the ongoing pandemic. The results demonstrate that overall, banks have shown resilience but that vulnerabilities remain in several areas, particularly credit risk. The ECB's supervisory priorities for 2021 include credit risk management, capital strength, business model sustainability and governance.
EBA provides additional clarity on the implementation of selected COVID-19 policies
The EBA has published additional clarifications on the application of the prudential framework in response to issues raised as a consequence of the COVID-19 pandemic. These updates clarify the FAQ section of the EBA report on COVID-19 implementation policies, which provides clarity on the implementation of the EBA guidelines on moratoria and the EBA guidelines on COVID-19 reporting and disclosure. This report forms part of the EBA’s wider monitoring of the implementation of COVID-19 policies as well as of the application of existing policies under these exceptional circumstances.
Additional technical clarifications in relation to the application of the guidelines on moratoria have been included in the report. The EBA has provided further guidance in relation to the functioning of the nine-month cap (the limit on the period of time for which payments on a certain loan can be suspended, postponed or reduced as a result of the application (and reapplication) of general payment moratoria). The clarifications address how the guidelines on moratoria should be applied when assessing forbearance classification and how to determine whether there is a diminished financial obligation in relation to moratoria applied to loans exceeding the nine-month cap.
The updated report also provides clarity as to the reporting and disclosure requirements which arise in the context of loans and advances subject to expired moratoria. In particular, the report provides that upon the expiration of a moratorium, loans and advances subject to this expired measure must be reported, whether or not they are subject to another measure.
ECB Banking Supervision: Assessment of risks and vulnerabilities for 2021
The ECB has published the results of its assessment of the main challenges expected to affect supervised institutions in the coming two to three years. The results of this assessment have been set out in the Single Supervisory Mechanism Risk Map for 2021 and the table of vulnerabilities in the report. The ECB has identified three concerns which inform the ECB Banking Supervision’s assessment of key risks and vulnerabilities in the banking sector. The first concern is the unprecedented fall in euro area economic activity in the second quarter of 2020 as a result of the global pandemic.
It is expected that activity will remain below pre-pandemic issues until mid-2022 and recovery is predicted to be asymmetric across countries and sectors. Other prominent downside risks include renewed geopolitical tensions and re-emerging trade conflicts. It is expected that effect of the end of the Brexit transition period on the euro area economy will be limited for the banking sector, given the preparatory measures which have been taken by banks.
However, it is possible that trade conflicts and other geopolitical tensions could result in an abrupt reassessment of risk premia and a sharp repricing in financial markets. The third concern is the possibility of a disconnect from underlying economic fundamentals in some equity markets as a result of the strong rebound in financial asset prices since the repricing episode in March 2020 which increases the risk of corrections should investor sentiment change. Based on the current risk assessment, the following four areas have been identified as a priority for the ECB in 2021:
credit risk management
business model sustainability
In addition, supervision will focus on action taken by banks in response to the ECB Guide on climate-related and environmental risks as well as on prudential threats stemming from money laundering, cyber and digitalisation-related risks and banks’ preparedness for Basel III implementation.