Financial Services Regulation and Compliance - Banking Mar 2022
Financial Services Regulation and Compliance - Banking Mar 2022
Countercyclical capital buffer rate announcement - March 2022
On 24 March 2022, the CBI announced that the countercyclical capital buffer (CCyB) rate on Irish exposures is to be maintained at 0%. The CBI released the previous 1% CCyB in April 2020. Since this time, maintaining the CCyB at 0% has facilitated the banking system to absorb negative impacts of the COVID-19 pandemic. To date, banking sector capital has remained resilient. A recovery in bank profitability has been evident recently, as overall pandemic related risks facing the banking sector have receded. In November 2021, the Bank outlined that, given the outlook for the macro-financial environment at that time, it would expect to announce a gradual rebuilding of the CCyB in 2022. While that guidance remains, the current outlook is subject to considerable uncertainty and the implications of the conflict in Ukraine for macro-financial conditions and the impact of the associated economic sanctions and disruption to global trade will continue to be monitored closely.
Central Bank of Ireland response to the European Commission targeted consultation on improving the EU’s macroprudential framework for the banking sector
On 16 March 2022, the CBI published its response to the EC targeted consultation on improving the EU's macroprudential framework for the banking sector. The CBI addressed the macroprudential framework in Europe, capital buffers and borrower-based measures.
The CBI highlighted the openness of the Irish economy means the Irish economy is more prone to structural macroeconomic shocks. The CBI views the implementation of macroprudential policy appropriate to domestic conditions as critical to the overall policy framework to achieve macroeconomic stability.
Regarding capital buffers, the CBI supports legislative amendments that broadened the focus of the indicators around the countercyclical capital buffer (CCyB) setting to cyclical systemic risk more generally. The CBI also supports further work to consider a joined up framework providing a consistent approach to the assessment of systemic importance across both other systemically important institution (O-SII) identification and buffer setting.
The CBI highlighted it is of paramount importance that borrower-based measures (BBMs) are tailored to national markets, to ensure appropriate design and calibration, reduce risk of leakages and circumvention and allow for a strong governance framework with appropriate accountability for domestic macroprudential authorities.
EBA report on competent authorities' approaches to the anti-money laundering and countering the financing of terrorism supervision of banks (Round 2 – 2020/21) (EBA/REP/2022/08)
On 22 March 2022, the EBA published a report on competent authorities' approaches to the anti-money laundering (AML) and countering the financing of terrorism (CFT) supervision of banks. The report focuses on how competent authorities (CAs) assess money laundering and terrorist financing risks associated with banks under their supervision, and how CAs are using these risk assessments to inform their supervisory practice and enforcement. The EBA found AML and CFT supervision of banks is improving. However, CAs continue to face challenges in operationalising the risk-based approach to AML/CFT. Common challenges include:
difficulties in identifying and assessing ML/TF risks in the banking sector and individual banks
translating ML/TF risk assessments into risk-based supervisory strategies
using available resources effectively, including by ensuring sufficiently intrusive onsite and offsite supervision, and
taking proportionate and sufficiently dissuasive enforcement measures to correct AML/CFT compliance weaknesses
The EBA will follow up and work bilaterally with CAs to strengthen AML/CFT supervision in Europe.
EBA publishes final draft technical standards on default probabilities and loss given default for default risk model under the internal approach for market risk
On 21 March 2022, the EBA published final draft technical standards (RTS) on default probabilities (PDs) and loss given default (LGDs) for default risk model for institutions using the new Internal Model Approach (IMA) under the Fundamental Review of the Trading Book (FRTB).
The final draft RTS specify and clarify the requirements for estimating PDs and LGDs using an institution's internal methodology or external sources. The final draft RTS require institutions using the IMA to compute own funds requirements for market risk to compute additional own funds requirement using an internal default risk model for their positions in traded debt and equity instruments included in IMA trading desks.
EBA revised guidelines on common procedures and methodologies for the supervisory review and evaluation process (SREP) and supervisory stress testing under Directive 2013/36/EU (EBA/GL/2022/03)
On 18 March 2022, the EBA published revised guidelines on the common procedures and methodologies for the supervisory review and evaluation process (SREP) and supervisory stress testing (the guidelines). The guidelines are developed to implement the amendments to the Capital Requirements Directive (CRD V) and Capital Requirements Regulation (CRR II) and promoting convergence towards best supervisory practices. The guidelines aim to align the text with other relevant guidelines, technical standards, as well as incorporating identified best practices.
The changes to these Guidelines do not alter the overall SREP framework but affect its main elements, including:
(i) business model analysis,
(ii) assessment of internal governance and institution-wide control arrangements,
(iii) assessment of risks to capital and adequacy of capital to cover these risks, and
(iv) assessment of risks to liquidity and funding and adequacy of liquidity resources to cover these risks
Additional relevant changes relate to the enhancement of the principle of proportionality as well as the encouragement of cooperation among prudential supervisory authorities and AML/CFT supervisors, as well as resolution authorities.
The guidelines will be translated into the official EU languages and published on the EBA website. Competent authorities must report compliance with the guidelines within 2 months after the publication of the translations. The guidelines will apply from 1 January 2023.
EBA Report on developing a framework for sustainable securitisation (EBA/REP/2022/06)
On 2 March 2022, the EBA published a report on developing a framework for sustainable securitisation (the report). The report examines how sustainability could be introduced in the specific context of securitisation to foster transparency and credibility in the EU sustainable securitisation market and to support its sound development.
As the EU sustainable securitisation market is still at an early stage of development, the report narrowed its focus to three areas for which regulatory guidance was relevant at this early stage
the application of the EU Green Bonds Standard (EU GBS), the EU Taxonomy and the Sustainable Finance Disclosure Regulation to securitisation;
the relevance, policy implications and possible design of a dedicated framework for sustainable securitisation products; and
the nature and content of sustainability-related disclosures for securitisation products.
The EBA’s analysis shows that it would be premature to establish a dedicated framework for green securitisation, though such a framework may be increasingly relevant as the EU economy transforms. Rather, the EBA is of the view that the upcoming EU GBS regulation should also apply to securitisation, provided that some adjustments are made to the standard. Further, the EBA recommended that the Securitisation Regulation is amended in order to extend voluntary ‘principal adverse impact disclosures’ to non-STS (simple, transparent and standardised) securitisations.
Next steps require the EC to submit a report to the European Parliament and the Council on the creation of a sustainable securitisation framework, together with a legislative proposal, if deemed appropriate.
ECB publishes its Decision on the exclusion of staff members from the presumption of having a material impact on the risk profile of a credit institution in the Official Journal
On 4 March 2022, the ECB published its decision on the procedure to exclude staff members from the presumption of having a material impact on the risk profile of a supervised credit institution (the decision) in the Official Journal.
Commission Delegated Regulation (EU) No 604/2014 (2) established qualitative and quantitative criteria to identify categories of staff whose professional activities have a material impact on an institution's risk profile. Based on such determination, the credit institution may notify, or request authorisation from, the competent authority to exclude the relevant staff member from the presumption that their professional activities have a material impact on the institution’s risk profile.
The decision reflects recent draft regulatory technical standards which define the concepts of managerial responsibility, control functions, material business units and significant impact on a material business unit’s risk profile, and to identify the staff members or categories of staff referred to under point (c) of paragraph 2 of Article 94 of the Capital Requirements Directive, CRD IV.
This decision entered into force on 24 March 2022.
Supervisory assessment of institutions’ climate- related and environmental risks disclosures - ECB report on banks’ progress towards transparent disclosure of their climate-related and environmental risk profiles
On 14 March 2022, the ECB published its report on banks' progress towards transparent disclosure of their climate-related and environmental (C&E) risk profiles (the report). This report aims to take stock of the climate-related and environmental risk disclosure practices of significant institutions and to measure their progress against the ECB’s expectations.
The report is the second stocktake of bank's climate – related and environmental disclosures, with the first being published in November 2020. This report notes that the quality of banks’ disclosures has improved since the first stocktake, especially in the areas of risk management, governance and business models. However, this improvement has been only marginal: as of 2021, 70% of banks disclosed information about C&E risk management and governance (compared to 50% in 2020), while only 40% shared relevant information about the incorporation of C&E risks into their strategic considerations (up from 30% in 2020).On the whole, none of the 115 banks directly supervised by the ECB fully meets the supervisory expectations for disclosures.
In a speech which accompanied the publication of this report, Frank Elderson, Member of the Executive Board of the ECB and Vice-Chair of the Supervisory Board of the ECB, stated that "there is very little justification for this lack of substantial progress… addressing climate-related and environmental risks, and publishing good-quality disclosures, is not optional". In order to address this, the ECB has sent individual feedback letters to all banks under direct supervision, setting out the key gaps in their disclosures and conveying the ECB's explicit expectation that they will take decisive action to address these gaps.
The C&E disclosures by significant institutions will be assessed again at the end of 2022, with the ECB expecting to see "major progress" by then.
Sanctions imposed in response to the crisis in the Ukraine
Over the course of February and March, the EU imposed a number of sanctions in response to the crisis in the Ukraine. Given that the crisis is developing and sanctions are continuing to evolve, the CBI is publishing details of new restrictive measures/sanctions that are adopted in this regard, as well as any associated EU/UN guidance, on their dedicated webpage.