Financial Services Regulation and Compliance - Banking November 2022
Financial Services Regulation and Compliance - Banking November 2022
Central Bank (Supervision and Enforcement) Act 2013 (Section 48(1)) (Housing Loan Requirements) Regulations 2022 [S.I. No. 546 of 2022] (the regulations)
The regulations, which will come into operation on 1 January 2023, include the following changes as announced by the CBI in October 2022 following the conclusion of the mortgage measures framework review:
First-time buyers will be able to borrow up to four times their gross income.
Second and subsequent buyers will continue to be able to borrow up to 3.5 times their gross income.
Loan-to-value (LTV) for first-time buyers will remain at 90%. LTV for second and subsequent buyers will increase to 90%. LTV for buy-to-let buyers will remain at 70%.
Lenders will continue to be able to lend a certain amount above these limits, in line with their own credit policies.
A number of changes were also made to the criteria for being a first time buyer (FTB). A 'fresh start' borrower who is divorced or separated or has undergone bankruptcy or insolvency may be considered a FTB where they no longer have an interest in the previous property. FTBs who get a top-up loan or re-mortgage with an increase in the principal may be considered 'first time', provided the property remains their primary home.
Request for advice to the EBA regarding green loans and mortgages
On 23 November 2022, the European Commission (EC) wrote to the European Banking Authority (EBA), enclosing a request for advice on green loans.
The key aspects of the EC's request are as follows:
An overview of current market practices and the prevalence of green loans in the banking market, including information on the market segments in which retail borrowers and SMEs are most active and where they might benefit from gaining access to green loans.
Views on the merits of a voluntary EU definition of green loans, based on the EU taxonomy and its disclosure requirements.
Identify and assess potential measures (legislative and non-legislative) that could encourage and facilitate the uptake of, or access to, green finance by retail and SME borrowers. The EC has suggested that any proposals by the EBA could include measures to enhance the comparability, reliability and transparency of green retail lending activities by credit institutions, with a consumer protection overlay.
EBA consults on guidelines to institutions and resolution authorities on resolvability testing
On 15 November 2022, the EBA launched a public consultation on its draft guidelines addressed to institutions and resolution authorities on resolvability testing. The guidelines aim to set-out a framework to ensure that resolvability capabilities developed to comply with the resolvability and transferability guidelines are fit for purpose and effectively maintained. The consultation runs until 15 February 2023.
The guidelines aim to promote the involvement of firms into the resolvability assessment process and increase they ownership of resolvability and make the following proposals:
Institutions submit a resolvability self-assessment annually to set out how they will meet the resolvability capabilities and how they have gained assurance of their adequacy.
Authorities develop multi-annual testing programme so as to gain assurance of firms’ resolvability while providing sufficient visibility to banks.
"Complex banks" develop a master playbook to ensure a holistic approach to resolution planning.
Guideline (EU) 2022/2250 of the European Central Bank of 9 November 2022 amending Guideline (EU) 2022/912 on a new-generation Trans-European Automated Real-time Gross Settlement Express Transfer system (TARGET)
Guideline (EU) 2022/2250 of the European Central Bank of 9 November 2022 was published by the ECB on 16 November 2022 which amends Guideline (EU) 2022/912 on a new-generation Trans-European Automated Real-time Gross Settlement Express Transfer system (TARGET) to provide that the compliance date for member states is 20 March 2023.
Eurosystem central banks are required to comply with the guideline from 21 November 2022.
EBA statement in the context of COP27
On 9 November 2022, the EBA has pledged its commitment to delivering on a more resilient and sustainable financial system. As part of the supervisory community, the EBA subscribes to the international consensus that climate-related financial risks are material in the financial sector and need effective management and supervision.
The EBA outlined that: "Climate resilience, sustainability of finance as well as making finance flows consistent with the goals of the Paris Agreement are at the core of the EBA’s efforts. Our pilot climate exercise showcased already in 2021 that a large share of banks’ exposures under scrutiny were allocated to sectors that might be sensitive to transition risk."
The EBA reiterated that it is continuously working towards more sustainability in the banking sector by enhancing market transparency and discipline and by translating sustainability considerations into risk management practices and supervision. The EBA noted that: "the emergence of adequate, risk-based and proportionate rules on sustainable finance will foster banks’ orderly transitioning while allowing them to play an important role in financing the net zero transition needs of our society and economies at large."
ECB sets deadlines for banks to deal with climate risks
On 2 November 2022, the ECB published the results of its thematic review, which shows that banks are still far from adequately managing climate and environmental risks. The ECB is now setting staggered deadlines for banks to progressively meet all the supervisory expectations it laid out in its guide on climate-related and environmental risks in 2020.
The ECB has set institution specific deadlines for achieving full alignment with its expectations by the end of 2024. While there can be exceptions in individual cases, the ECB has communicated its expectation to banks to reach, as a minimum the following milestones. As a first step, the ECB expects banks to adequately categorise climate and environmental risks and to conduct a full assessment of their impact on the banks activities by March 2023 at the latest.
As a second step and the latest by the end of 2023, the ECB expects banks to include climate and environmental risks in their governance, strategy and risk management. As a final step, by the end of 2024 banks are expected to meet all remaining supervisory expectations on climate and environmental risks outlined in 2020, including full integration in the ICAAP and stress testing.
EBA publishes assessment on the application of the supporting factor to infrastructure lending
On 3 November 2022, the EBA published a report, which analyses some qualitative as well as quantitative aspects of the lending trends and riskiness of infrastructure loans which have benefitted from a capital reduction due to the introduction of the so-called infrastructure supporting factor (ISF) under the Capital Requirements Regulation (CRR).
While data on infrastructure lending is scarce overall, the EBA analysis relied on information received from a sample of banks that participated in a survey launched in April 2022. The data collected is not sufficient to conclude on the impact of ISF on lending or the consistency of the riskiness of the affected loans with the own funds requirements. At the same time, from a broader prudential perspective, and in line with previous EBA recommendations, the continued application of the ISF could be questioned.
The findings, based on the quantitative data and the qualitative survey, do not allow to conclude on the impact of ISF on lending nor on the consistency of the riskiness of the affected loans with the own funds requirements. In addition, due to the latest Basel III changes as well as the CRR3 proposal that ensure an increased risk sensitivity of the standardised approach (SA), and preserve the IRB risk-sensitivity, the continued application of the ISF could be questioned from a broader prudential perspective.
EBA publishes methodology and draft templates for the 2023 EU-wide stress test
On 4 November 2022, the EBA published the final methodology, draft templates and template guidance for the 2023 EU-wide stress test along with the milestone dates for the exercise. The methodology and templates cover all relevant risk areas and have considered the feedback received from industry. The stress test exercise will be launched in January 2023 with the publication of the macroeconomic scenarios. The results will be published by the end of July 2023.
The 2023 EU-wide stress test uses a constrained bottom-up approach with some top-down elements. Balance sheets are assumed to be constant. Focus is on the assessment of the impact of adverse shocks on banks’ solvency. Banks are required to estimate the evolution of a common set of risks (credit, market, counterparty, and operational risk) under an adverse scenario. Banks are also asked to project the impact of the scenarios on main income sources. For net fee and commission income, risk weights of securitisation, and the credit loss path of sovereign exposures, banks are required to make use of prescribed parameters. The methodology includes the sample of banks participating in the exercise.
For more information on these topics please contact any member of A&L Goodbody's Financial Regulation team.