Financial Services Regulation and Compliance - Banking Oct 2021
Financial Services Regulation and Compliance - Banking Oct 2021
“Clear standards of conduct, accountability, and robust enforcement mechanisms are essential to fostering trust in the financial services sector” - Director General Derville Rowland
On 13 October 2021, Central Bank of Ireland (CBI) Director General Derville Rowland delivered the keynote speech at the A&L Goodbody Corporate Crime and Regulation Summit. Director General Rowland reflected on the CBI's work over the last decade to develop and enhance its enforcement capabilities, and how the CBI plans to build on that work going forward.
Director General Rowland noted:
Targeted enforcement actions will continue to underpin the CBI's supervisory approach to ensure the financial system operates in the best interests of consumers and the wider economy.
144 enforcement actions have been concluded, €166.5m of fines imposed, and 26 individuals disqualified from senior roles in firms.
The objective of the Individual Accountability Framework will be to drive uplift in governance across the board.
Macroprudential Policy in the Irish Mortgage Market: Taking Stock - Deputy Governor Sharon Donnery
On 5 October 2021, Deputy Governor of the CBI, Sharon Donnery participated virtually in the Bank of Lithuania’s macroprudential policy conference. Deputy Governor Donnery discussed the overall framework review of the CBI's mortgage measures and highlighted the role of evidence and analysis in the policymaking process. Deputy Governor Donnery also reflected on lessons learned during the COVID-19 pandemic and the benefits of the resilience that has been built since the introduction of the mortgage measures. Ms. Donnery further highlighted the findings of three Financial Stability Notes published on 5 October 2021, which illustrate the type of analysis that will inform the overall mortgage measures framework review.
The CBI is undertaking a broader review of the overall policy framework for the mortgage measures. A review of the framework will allow the CBI to assess the objectives of the mortgage measures and determine whether they remain appropriate. This is to ensure that the mortgage measures continue to remain fit for purpose in light of changes to the financial system and economy since the measures were first introduced in 2015.
European Commission adopts new rules to strengthen banks' resilience and better prepare for the future
On 27 October 2021, the European Commission adopted a review of EU banking rules (the Capital Requirements Regulation and the Capital Requirements Directive). These new rules will ensure that EU banks become more resilient to potential future economic shocks, while contributing to Europe's recovery from the COVID-19 pandemic and the transition to climate neutrality. The package is comprised of the following parts:
implementing Basel III – strengthening resilience to economic shocks
sustainability – contributing to the green transition
stronger supervision – ensuring sound management of EU banks and better protecting financial stability
The proposed reforms complete the post-financial crisis agenda with a view to substantially boosting the competitiveness and sustainability of the EU's banking sector. The legislative package will now be discussed by the European Parliament and Council.
Isabel Schnabel: Lessons from an unusual crisis
On 1 October 2021, Isabel Schnabel, Member of the Executive Board of the European Central Bank (ECB), spoke at the Federal Reserve Bank of New York conference on “Implications of Federal Reserve Actions in Response to the COVID-19 Pandemic.” Ms Schnabel discussed the conditions in the euro area at the outset of the pandemic which significantly affected the design of the ECB's policy response. Ms Schnabel also spoke to some lessons from the crisis by highlighting three features that were crucial for the success of the ECB response:
the ability to design and implement forceful measures with the appropriate degree of flexibility based on the pre-existing blueprints of the ECB's extensive monetary policy toolkit
the complementarity and mutually reinforcing effects of monetary policy instruments
the important role of fiscal policy in complementing monetary policy in counteracting the unprecedented economic fallout from the pandemic
Edouard Fernandez-Bollo: ECB Banking Supervision's post-pandemic priorities - the way forward
On 5 October 2021, Edouard Fernandez-Bollo, Member of the Supervisory Board of the ECB, gave the keynote address at the SmithNovak Global NPL Summit in Frankfurt. Mr Fernandez-Bollo spoke of three main messages; namely that we need to:
avoid risk complacency
effectively incorporate climate risks into risk governance frameworks
address structural challenges to the sustainability of European banks’ business models
Mr Fernandez-Bollo stated that results of the recent stress test exercise conducted by the ECB are indicative of increased banking sector resilience and suggest that euro area banks could cope with further adverse economic developments should they materialise. However, banks need to make significant progress in including climate-related and environmental risks in their strategy and risk governance. Mr Fernandez-Bollo concluded by stating that the way out of the pandemic is an opportunity for the banking system to fulfil its role of financing the much needed transformation of the economy, which is essential to ensure its sustainability.
EBA publishes its work programme for 2022
On 5 October 2021, the EBA published its annual work programme for 2022, describing the activities and tasks of the Authority as well as its key strategic areas of work for the coming year. For greater efficiency, the overall number of EBA activities was streamlined compared to 2021 and the EBA organisational structure adjusted as of 1 June 2021.
The EBA has set five vertical priorities for 2022:
monitoring and updating the prudential framework for supervision and resolution
revisiting and strengthening the EU-wide stress-testing framework
leveraging the European centralised infrastructure for supervisory data (EUCLID)
deepening analysis and information-sharing in the areas of digital resilience, fintech and innovation
fighting AML/CFT and contributing to a new EU infrastructure
Additionally, the EBA has set two horizontal priorities:
providing tools to measure and manage environmental, social and corporate governance (ESG) risks
monitoring and mitigating the impact of COVID-19
Introductory statement by EBA Chairperson to the ECON Committee of the European Parliament
On 14 October 2021, EBA Chairperson José Manuel Campa gave the introductory statement at the annual hearing of the European Parliament's Committee on Economic and Monetary Affairs (ECON) with the chairpersons of the European Supervisory Authorities (ESAs). The statement reflected on the EBA's achievements over the last year and in particular addressed the following topics:
COVID-19: the need for close cooperation and coordinated relief
the EBA stress test exercise: robustness of the banking system
structural weaknesses in the banking sector
sustainability at the heart of the recovery
continued efforts to complete the Single Rulebook
data strategy and proportionality
the EBA’s mandate on AML/CFT
digital transformation in times of pandemic and beyond
protecting EU consumers from financial harm
EBA repeals its guidelines on the security of internet payments under PSD1
On 14 October 2021, the EBA repealed its guidelines on the security of internet payments introduced under PSD1. The guidelines had been issued in 2014 to provide details as to how provisions in PSD1 should be interpreted for the purpose of enhancing the security of payment services, with a view to mitigating the risks from the growing payments fraud that occurred at the time.
In January 2016, the revised Payment Services Directive (EU 2015/2366, or PSD2) entered into force, which articulates more specific requirements concerning the security of payments. The revised Directive, which applies since January 2018, also mandated the EBA to develop several legal instruments, including the technical standards on strong customer authentication and common and secure communication (RTS on SCA&CSC), which apply since September 2019.
As the revised directive and the related EBA instruments incorporate, and also go beyond, the requirements set out in these guidelines, the EBA has decided to repeal them, and asked national competency authorities to take the corresponding steps that may be necessary at a national level.
Information on participation in the 2022 ECB Climate Risk Stress Test
On 18 October 2021, the ECB published a "Dear CEO" letter to CEOs of significant institutions providing information on participation in the 2022 ECB Climate Risk Stress Test. The stress test aims to identify vulnerabilities, industry best practices and the challenges faced by banks. The exercise will also help enhance data availability and quality, and allow supervisors to better understand the stress-testing frameworks banks use to gauge climate risk.
The output of the stress test exercise will be integrated into the Supervisory Review and Evaluation Process (SREP) using a qualitative approach. No direct capital impact via the Pillar 2 guidance is envisaged, though a possible impact of the exercise will be indirect, via the SREP scores on Pillar 2 requirements. The stress test comprises of three distinct modules:
Module 1: An overarching questionnaire to assess how banks are building their climate stress test capabilities for use as a risk management tool. Module 1 will provide an overview of where banks are in this process.
Module 2: A peer benchmark analysis to compare banks across a common set of climate risk metrics. These metrics include how much banks rely on income from carbon-intensive industries and what volume of greenhouse gas emissions banks finance. Module 2 will provide an indicative proxy for the sustainability of banks’ business models and how exposed banks are to emission-intensive companies.
Module 3: A bottom-up stress test targeting transition and physical risks. The stress test assesses how extreme weather events would affect banks over the next year, how vulnerable banks are to a sharp increase in the price of carbon emissions over the next three years and how banks would respond to transition scenarios over the next 30 years. Banks will provide starting points and their own projections under a common scenario and methodology prepared by the ECB. Supervisors will then challenge banks’ starting points and projections.
The ECB will conduct the Climate Risk Stress Test 2022 in tandem with other ECB supervisory initiatives on climate-related and environmental risk. Specifically, the ECB will carry out a thematic review of banks’ climate related and environmental risk management practices and will fully include the results in the SREP.
SRB publishes guidance on separability of banks in time of crisis
On 26 October 2021, the Single Resolution Board (SRB) published the operational guidance on separability for partial transfer tools, which is designed to help ensure financial stability. This operational guidance helps banks by providing more detail on how to concretely deliver the relevant information and analysis. This will be done through an analytical document known as the separability analysis report, as well as an operational document, called the transfer playbook. Separability allows the SRB to access the necessary information and analysis from banks to make full use of resolution tools should a bank get into difficulty and to ensure, for example, that different arms of a banking group can be separated out with appropriate solutions applied.