Financial Services Regulation & Compliance - Banking June 2018

DOMESTIC

CBI Deputy Governor advocates positive countercyclical capital buffer

CBI Deputy Governor Sharon Donnery spoke in favour of setting a positive countercyclical capital buffer early in the economic cycle at Maynooth University. The aim of the buffer is to keep credit flowing in the economy during times of financial stress. It would do this by increasing banks' minimum capital requirement when cyclical risks begin to build. Capital requirements would release during periods of downturn, seeking to reduce the pressure that capital requirements put on bank lending during times of financial stress.

CBI Deputy Governor of Prudential Regulation cautions banks about NPLs

CBI Deputy Governor of Prudential Regulation Ed Sibley warned that Irish banks are 'highly vulnerable' to future economic downturn, owing to continuing high volumes of non-performing loans (NPLs) on their books. Speaking at the Institute of Banking, he noted that selling NPLs is a 'legitimate and necessary approach' for banks to address this issue. However, he emphasised that the CBI, with the support of the Oireachtas, has applied the Bank's Codes of Conduct, including the Code of Conduct on Mortgage Arrears to purchasers of these loans.

CBI Macro-Financial Review 2018: Financial system strengthened but still vulnerable

The CBI published its first Macro-Financial Review of 2018. While the financial system has been strengthened and the economy has enjoyed substantial growth, new developments pose significant risks. Primarily, Brexit presents obstacles for Irish banks issuing debt through the UK and may cause a slowdown in UK and Irish economic growth, with a potential rise in NPLs.

Domestically, risks are posed by a concentration of bank exposures in property-related lending and high levels of household and public debt, along with a relatively small number of companies accounting for much of the State's corporate tax revenue. Additional, related dangers include a general move towards economic protectionism and changes in corporate tax arrangements, both in the EU and the US.

EUROPEAN

EBA releases draft implementing technical standards on disclosure of supervisory information by national authorities

The European Banking Authority (EBA) has published draft implementing technical standards which propose to amend Commission Implementing Regulation 650/2014 on the format, structure, contents list and annual publication date of supervisory information that must be disclosed by competent national authorities. The draft standards aim to take account of significant changes in the EU supervisory landscape since the Commission Regulation 650/2014 was adopted, such as the introduction of the Liquidity Coverage Ratio Delegated Act and the EBA Guidelines on the Supervisory Review and Evaluation Process. The draft also deals with changes accompanying the establishment of the Single Supervisory Mechanism.

ECB outlines supervisory implications of banking digitisation

Panttii Hakkarainen, Member of the Supervisory Board of the ECB, addressed the opportunities and risks presented by the growing role of technology in banking. Speaking at the Lisbon Research Centre on Regulation and Supervision, he noted that technology helps banks provide cross-border services and reduces barriers to market entry.

However, digitisation also poses risks; banks must be vigilant in their choice of third-party IT service providers. Bank leaders must involve themselves in implementation of AI algorithms and understand the risks involved. Equally serious is the threat presented by cyber criminals and data breaches.

Commission proposes regulations for credit servicers and minimum loss coverage for NPL exposures

The European Commission has proposed a regulation intending to streamline the process by which banks can recover debt on NPLs or sell them to credit servicers. The regulation outlines an extrajudicial accelerated collateral enforcement procedure, through which banks may recover debt more efficiently. In addition, the proposal would create a common regulatory framework for third party credit servicers, thereby allowing a harmonised secondary market for NPLs to develop.

Another proposal would amend Regulation 575/2013 by requiring banks to set aside sufficient capital resources once loans become non-performing.

ECB and SRB agree Memorandum of Understanding on cooperation and information exchange

The ECB and Single Resolution Board (SRB) have concluded a Memorandum of Understanding (MoU) to govern cooperation and information exchange between the two bodies. The MoU declares that the bodies will cooperate in planning, early intervention and resolution phases of financial institutions in accordance with the Single Resolution Mechanism. The MoU sets out a procedure for requesting and exchanging information and regulates cooperation in particular aspects, such as on-site inspections and interaction with external experts.

SRB publishes FAQ on Valuation 3

The SRB has released a Q&A on the 'Valuation 3' bank resolution framework. Valuation 3 provides that an independent valuer must carry out a valuation as soon as possible after a bank resolution has taken effect. In line with the 'no creditor worse off' principle, the valuer must establish whether the affected shareholders and creditors would have been better off if the bank was wound up in a normal insolvency, rather than in a resolution.

ECB provides information on submitting requests on internal models

The ECB has set out the process for submitting requests relating to internal models, as well as the documents to be included. The guidance governs applications for:

  • internal model approvals
  • material model changes and extensions
  • reversions to less sophisticated approaches
  • modifications to the scope of assets for which permanent partial use of the standardised approach is permitted

Danièle Nouy, Chair of the ECB Supervisory Board, addresses banks' interactions with borrowers

Replying to a letter from MEP Nikolaos Chountis, ECB Suvervisory Board Chair Danièle Nouy addressed the threat posed by NPLS to banks' solvency profitability and resources, while undermining the trust that markets and investors have in them. He then stressed the need for all banks concerned to resolve NPL issues in a timely manner, in order to be able to revive their lending activities and regain investors' trust.

EBA publishes 2017 Annual Report

This report provides a detailed account of all the work the Authority achieved in the past year and anticipates the key areas of focus in the coming years. It outlines how that in 2017, the EBA finalised important components of the Single Rulebook and welcomed the agreement reached on the Basel III framework by the Basel Committee on Banking Supervision, in December 2017, which concludes the global post-crisis prudential reforms and puts an end to the remaining regulatory uncertainty.

EBA issues first binding mediation decision between the SRB and the NBR

This month the EBA published its first binding mediation decision between two resolution authorities, the SRB and the National Bank of Romania (NBR). The decision was following a request from the NBR for the EBA to assist in settling a dispute with the SRB concerning the resolution planning for two banking groups.

ECB updates manual for Asset Quality Review of banks

ECB Banking Supervision has updated its manual for the Asset Quality Review of euro area banks. The manual contains the methodology for assessing the valuations of bank assets from a prudential perspective.

The update incorporates the implications of the entry into force of the new accounting standard IFRS 9. In addition, the revised manual reflects the increased importance for ECB Banking Supervision of business models focused on investment services.

EBA updates recommendation on the equivalence of third country confidentiality regimes

The EBA has updated its recommendation on the equivalence of confidentiality and professional secrecy regimes by adding three non-EU (third country) supervisory authorities to the current list of third country supervisory authorities whose confidentiality regimes can be regarded as equivalent.

The EBA Recommendation is designed as a guide for EU authorities in their assessment of third country equivalence with the aim of facilitating cooperation with third country supervisory authorities and their participation in supervisory colleges overseeing international banks.

Bank resilience: Economic affairs MEPs back EU plans to adopt Basel III rules

An EU plan to adopt Basel III rules, in order to enhance EU banks’ resilience and financial stability, were backed by the European Parliament's Economic and Monetary Affairs Committee.

Proposals to amend the EU’s prudential requirements (CRD-V/CRR-II) involve an increase of lending capacity and creation of deeper and more liquid capital markets. MEPs adopted a 3% leverage ratio and additional 50% buffer for globally systematically important institutions. They also agreed to a waiver of own funds and liquidity requirements for banking groups operating across borders, provided that no more than 25% of the minimum own funds requirement would be waived. In addition, the Committee inserted simplified requirements for recovery and resolution planning and reduced reporting frequencies for 'small and non-complex institutions

ECB releases FAQs on relocation of banks to the Euro area

The ECB has responded to questions in relation to relocating banking activities to the Euro area. Topics covered include authorisations, licences, internal governance and supervision. The ECB noted that these FAQs would be particularly helpful for banks considering relocation due to Brexit.

ECB publishes methodology for calculating Euro Short-Term Rate (ESTER)

The ECB published a methodology for calculating the Euro Short-Term (ESTER). ESTER is an overnight unsecured rate based on money market statistical reporting. Publication will begin by October 2019. Pre-ESTER will be published from this summer in an attempt to facilitate adoption of the new rate by markets.

EBA issues opinion on Swedish plan to tackle mortgage risk

The EBA has issued an opinion on a proposal by the Swedish financial supervisory authority to apply Article 448 of the Capital Requirements Regulation in order to change the risk weight floor method used to calculate capital requirements applicable to exposures to mortgages. While acknowledging the macroprudential risks Sweden faces as result of exposure to residential mortgage loans, the EBA expressed a number of concerns regarding the rationale, calibration and impact of the measure.  

For further information please contact a member of the Financial Regulation team.

Date Published: 10 July 2018