Financial Services Regulation and Compliance - Banking July 2020
Tánaiste and Ministers for Finance and Public Expenditure and Reform meet CEOs of AIB, Bank of Ireland and Ulster Bank
Senior members of government met with the CEOs of BoI, AIB and Ulster Bank on 16 July 2020 to discuss the role banks will play in the economic recovery following COVID-19. The Government confirmed that all banks have committed to ensuring the success of the new €2bn Credit Guarantee Scheme. The scheme will facilitate low interest financing, at rates below market level. Tánaiste Leo Varadkar also addressed the possibility of banks reducing customer charges on payments cards due to the uptake in use of these products.
Blog by the Governor of the CBI
The Governor of the Central Bank of Ireland (CBI) is continuing to update his blog, covering topics such as the medium term debt challenge in light of COVID-19, public policies needed to support firms through COVID-19 and the impact of COVID-19 on consumption.
The General Board of the ESRB held its 38th regular meeting on 25 June 2020
This meeting, held on 25 June 2020, focused on the impact of COVID-19 on the EU economy and financial system. The General Board acknowledged the risk of widespread defaults in the economy, and high volatility in financial markets. Government debt was also addressed, especially as it has grown due to the necessary economic supports implemented to protect the economy. The European Systemic Risk Board (ESRB) has established a working board to monitor the impact of debt moratoria and public guarantee schemes related to COVID-19. It also exchanged views on the stress test scenario for the EBA's EU-wide stress test in 2021.
ECB launches public consultation on its supervisory approach to consolidation
On 1 July 2020, the European Central Bank (ECB) published a guide for consultation aimed at clarifying its supervisory approach to consolidation projects involving euro area banks. Supervisory tools will be used to enable sustainable consolidation projects. The projects will have to be based on credible business and integration plans, must improve the sustainability of the business model, and respect high standards of governance and risk management. The guide aims to explain how supervisors use their powers with respect to consolidation projects, and it is anticipated that greater transparency will make supervisory actions more predictable and avoid misunderstandings of supervisory expectations.
EBA publishes final Guidelines on the treatment of structural FX positions
On 1 July 2020, the European Banking Authority (EBA) published its final guidelines on the treatment of structural FX positions. The guidelines aim to harmonise the application of the structural FX waiver and its supporting framework. This will ensure that there is consistent application moving forward.
The Guidelines, originally intended to apply from 1 January 2021, will now apply from 1 January 2022.
ECB welcomes initiative to launch new European payment solution
On 2 July 2020, the ECB voiced its support for the decision by 16 European banks to launch the European Payments Initiative. This initiative aims to create a unified payment solution for consumers and merchants across Europe, encompassing a payment card and a digital wallet and covering in-store, online and person-to-person payments as well as cash withdrawals. The move contributes to the progress being made towards creating a safe and efficient integrated European payments market. While significant progress has been made in recent years with the introduction of pan-European infrastructures under the Single Euro Payments Area (SEPA), the market remains fragmented in the way people actually pay, be it online or on-site in brick and mortar shops.
EBA publishes updated Guidelines on loan moratoria classification
The EBA has published detailed final guidelines on the requirements for public and private moratoria in order to help avoid the unnecessary classification of exposures under the definition of forbearance or as defaulted under distressed restructuring. These guidelines were first published on 2 April 2020 without public consultation due to the urgency of the COVID-19 pandemic situation.
The guidelines clarify that payment moratoria do not trigger forbearance classification and the assessment of distressed restructuring if they are based on the applicable national law or on an industry-wide or sector-wide private initiative agreed and applied broadly by relevant credit institutions.
The Guidelines note that banks must continue to identify situations where borrowers may face longer-term financial difficulties and classify exposures in accordance with the existing regulation. The requirements to identify forborne exposures and defaulted obligors remain in place.
EBA publishes report on the implementation of selected COVID-19 policies, follows with list of public guarantee schemes issued in response to the COVID-19 pandemic
The EBA published a report on 7 July 2020 addressing issues that arose in the implementation of the guidelines on payment moratoria and operational risk published to combat the shock of COVID-19. On 21 July, the EBA published a complementary guide listing all 47 EU and EEA public guarantee schemes issued in response to COVID-19. The guide aims to promote public transparency and clarifies whether each scheme is linked to new lending or existing exposures, the type of obligors covered and the coverage level offered.
The consultation ends on 1 October 2020.
ECB publishes guidelines on definition of default for banks directly supervised by national supervisors
On 8 July 2020, following consultation, the ECB published guidelines aimed at defining the materiality threshold for banks directly supervised by national competent authorities (NCAs). The threshold relates to the point when a bank decides a debtor is in default, and the definition offered specifies how NCAs should exercise discretion in relation to the point of default. The threshold relates to less significant banks than those directly supervised by the ECB, the threshold for which was defined previously.
EBA consults on draft technical standards on default probabilities and loss given default for default risk model under the internal approach for market risk
This consultation paper, published on 22 July 2020, considers draft regulatory technical standards (RTS) related to default probabilities (PDs) and losses given default (LGDs) for default risk model for institutions using the new internal model approach under the Fundamental Review of the Trading Book. The RTS clarify PD and LGD estimation requirements under the default risk model. Internal methods used for calculating PDs and LGDs need to comply with requirements of the internal ratings‐based approach. The RTS also lay down the requirements that external sources are to satisfy for their use under the default risk model, such that they are similar to the internal methodology.
The consultation is open until 22 October 2020.
EBA consults on guidelines specifying the conditions for the substitution approach in the context of “tri-party transactions” for large exposures purposes
On 22 July 2020, the EBA published a consultation considering the conditions for compliance when using alternative treatment with regard to tri-party repurchase agreements using a tri-party agent.
Alternative treatment permits institutions to substitute the full amount of the institution’s exposure to a collateral issuer due to tri-party repurchase agreements facilitated by a tri-party agent, with the full amount of the limits that the institution would instruct the tri-party agent to apply to securities issued by the collateral issuer. The guidelines propose safety measures in order to prevent a breach of limits instructed by the institution.
The consultation remains open until 22 October 2020, with the guidelines set to apply from June 2021.
EBA observes an increase in high earners in 2018 and the persistence of differences in remuneration practices across the EU
The EBA published the results of its report on benchmarking of remuneration practices in the EU for 2017 and 2018 on 22 July 2020. Those receiving remuneration in excess of €1m rose only slightly on-year by 1.58% from 4,861 to 4,938 in 2018. Over the eight year period from 2010-2018, the number of high earners rose significantly (+44.09%). The report indicates that remuneration is not significantly harmonised across institutions, mainly due to different national implementations of the Capital Requirements Directive (CRD). It is expected that following amendments to the CRD in 2020, greater harmonisation will arise.
EBA consults on technical standards specifying the determination of indirect exposures arising from (credit) derivative contracts underlying a debt or equity instrument for large exposures purposes
On 23 July 2020, the EBA published draft RTS stipulating how institutions should determine exposures arising from derivative and credit derivative contracts, which were not entered directly with a client but whose underlying debt or equity instrument was issued by a client. The draft RTS outline a method for calculating indirect exposures for different kinds of derivative contracts with a single underlying debt or equity instrument as well as another method for calculating exposures arising out of contracts with more than one reference name.
The consultation is open until 23 October 2020.
EBA publishes guidelines on a pragmatic and flexible approach to the 2020 supervisory review and evaluation process in light of the COVID-19 pandemic
The EBA published final guidelines aimed at assisting competent authorities with their supervisory review and evaluation process (SREP) for 2020 on 23 July 2020. The guidelines suggest adaptations for competent authorities in light of COVID-19, while remaining within the scope of existing SREP guidelines and CRD requirements. Key aspects for SREP in 2020 include an emphasis on pragmatism, overall SREP assessment and scoring, supervisory measures and conduct of the SREP in a cross border context.
ECB announces public consultation on the publication of compounded €STR rates
On 24 July 2020, the ECB announced its intention to seek feedback on the publication of compounded euro short-term rates (€STR). The ECB proposes to publish the compounded €STR on a daily basis and published maturities could range from a week to a year. The ECB also proposes a daily index so that compounded rates may be calculated over non-standard periods.
The consultation runs until 11 September 2020.
EBA consults on technical standards on impracticability of contractual recognition of bail-in
On 24 July 2020, the EBA launched a consultation on draft RTS and implementing technical standards (ITS) relating to the difficulties surrounding contractual recognition of write-down and conversion powers and related notifications as established by the Bank Recovery and Resolution Directive (2014/59/EU) (BRRD).
The draft RTS outline when it would be impracticable, legally or otherwise, to have an institution include a contractual term for the recognition of the bail-in. The RTS also establish the conditions and a timeframe for the resolution authority to require the inclusion of the contractual term for the bail-in recognition.
The draft ITS stipulate the formats and templates for notification to resolution authorities of contracts where conditions rendering the contract impossible under the RTS are met.
The consultation runs until 24 October 2020.
EBA consults on estimation of Pillar 2 and combined buffer requirements for the purpose of setting MREL
The EBA shared draft RTS on 24 July 2020 as part of its consultation on the policies and methods to be adopted by resolution authorities to estimate the Pillar 2 and combined buffer requirements at resolution group level. These requirements are necessary in the context of setting the minimum requirements for own funds and eligible liabilities requirements under the BRRD.
The consultation runs until 24 October 2020.
EBA consults on technical standards on reporting of MREL decisions
On 24 July 2020, the EBA launched a consultation on draft ITS for reporting information on minimum requirements for own funds and eligible liabilities to the EBA.
The consultation is open until 24 October 2020.
ECB takes steps to ensure pan-European reach of instant payments
On 24 July 2020, the ECB's Governing Council announced that it has taken steps to ensure pan-European instant payments will be a reality by the end of 2021. Payment service providers (PSPs) who adhere to the EPC SEPA Instant Credit Transfer Scheme and are reachable in TARGET2 should also become reachable in a target instant payment settlement (TIPS) account as a participant or reachable party. Automatic clearinghouses should migrate their technical accounts from TARGET2 to TIPS.
This migration will facilitate instant payments across the Eurozone. It will also enable PSPs to comply with the SEPA regulation, and make reachability a commodity, as is legally required. Finally, the migration will remove liquidity traps and encourage competition.
EBA consults on technical standards on indirect subscription of MREL instruments within groups
On 27 July 2020, the EBA launched its consultation on draft RTS related to the indirect subscription of MRELs in a pattern referred to as "daisy chains of MRELs". There are two scenarios outlined in the draft RTS. The first relates to a general deduction framework, and the second relates to a situation where the deduction approach cannot apply, so a fall back is required.
The consultation runs until 27 October 2020
ECB extends recommendation not to pay dividends until January 2021 and clarifies timeline to restore buffers
On 28 July 2020, the ECB extended until January 2021 its recommendation to banks that they should not pay dividends or buy back shares. By letter, on the same date, the ECB also called for banks to be moderate when it comes to variable remuneration. Finally, the ECB clarified that banks will have enough time to restore capital and liquidity buffers so that they do not act pro-cyclically.
The recommendation on dividends will be reviewed in Q4 2020. Once the current COVID-19-related uncertainty subsides, banks will be able to resume paying out dividends, should they maintain sustainable financial positions. In relation to restoration of buffers, banks will be permitted to remain below the liquidity coverage ratio until at least the end of 2021, and below their usual P2G and buffer level requirements until the end of 2022. The ECB does not intend to extend the operational relief measures it granted to banks in March 2020, as the sector has demonstrated operational resilience.
Euro area banking sector resilient to stress caused by coronavirus, ECB analysis shows
On 28 July 2020, the ECB published the results of a vulnerability analysis of banks supervised by the SSM. The results indicate that the euro area banking sector is able to withstand the economic stress brought on by COVID-19, but that bank capital would deplete if the situation is prolonged. The survey projects a central scenario whereby there is a harsh recession and banks' CET1 ratio declines by only 1.9% to 12.6% from 14.5%, with no major impact on banks' ability to lend. In the severe scenario, CET1 ratios decline by 5.7% to 8.8% from 14.5%, and some banks would need to act to maintain compliance and capital requirements.
EBA calls on financial institutions to finalise preparations for the end of the transitional arrangements between the EU and UK
On 29 July 2020, the EBA reminded financial institutions of the end of the transition period between the UK and EU on 31 December 2020. After this date, UK-based financial institutions will no longer be able passport their services into the EU. Financial institutions need to ensure that they have the appropriate authorisations in place and be established before the end of the transition period. They also need to inform their EU customers about availability of services after the transition period ends.
ECB announces organisational changes to strengthen banking supervision
The ECB announced on 29 July 2020 a reorganisation of its supervisory arm to further strengthen the supervision of euro area banks. This change results in two new business areas and a redistribution of tasks across the supervisory function of the ECB.
Banks will be supervised according to business models under the headings of:
- systemic and international banks
- universal and diversified institutions
- specialised institutions and less significant institutions
The changes will be complete by Q4 2020.
EBA updates on 2021 EU-wide stress test timeline, sample and potential future changes to its framework
On 30 July 2020, the EBA's board of supervisors agreed a timeline and sample for the 2021 EU-wide stress test. The sample includes banks who were going to participate in the 2020 stress test before COVID-19, but excludes UK banks. The stress test is expected to launch at the end of January 2021 and results will be published at the end of July 2021. Changes to the stress-test framework will be proposed through a discussion paper, which will be open for feedback in Q2-Q3 2021.
ECB’s Governing Council approves one-year extension to T2-T2S consolidation project timeline
On 28 July 2020, the ECB Governing Council approved an extension of one year to the T2-T2S consolidation project timeline. It is now scheduled to go live in November 2022. This decision comes on the back of a community readiness survey which indicated that COVID-19 and the rescheduled global migration of SWIFT cross border payments to ISO 20022 was creating a challenging environment for national financial communities. The ECB's Governing Council has also decided to extend the go-live date of the Eurosystem Collateral Management System to June 2023.
For more information on this topic please contact any member of A&L Goodbody's Financial Regulation team.
Date published: 6 August 2020