Financial Services Regulation & Compliance - Banking Nov 2017

DOMESTIC:

Macro-prudential policy making: where's the evidence? - Deputy Governor Sharon Donnery.

Ms. Donnery's speech focused on the justification for the implementation of macro-prudential policies, the importance of having an evidence-based approach and the current environment in this regard. She noted the importance of having an evidence based framework stating that it is essential as many financial instruments are new to countries, they are unfamiliar to the public and the potential for side-effects in unrelated sectors of the economy.

Central Bank publishes its seventh Consumer Protection Bulletin

This bulletin analyses the key trends on current accounts and switching based on information gathered from credit institutions. The bulletin highlights that 99% of account switches completed under the Switching Code were completed within the timeframes prescribed by that Code, the number of switches have remained low and all payment service providers providing payment accounts in Ireland are subject to the statutory switching code. The results indicate that the number of current accounts held by personal customers has increased and complaints relating to current accounts represent the largest number of complaints about banking products. 

Central Bank announces the outcome of the annual review of macroprudential capital buffers

The review has shown that six banks have been identified as being Other Systemically Important Institutions (O-SII), capital buffers for each institution have been established and buffers are a tool to reduce potential impact of a systemically important institution’s failure. The list of O-SIIs and the associated buffer rates is reviewed on an annual basis and the review has highlighted two changes to the existing policy in that Permanent tsb plc has not been identified as an O-SII due to its reduced size and the buffer applied to Citibank Holdings Ireland Limited has been increased to 1% due to its increased importance.

Central Bank publishes outcome of 2017 Review of Residential Mortgage Lending Requirements

As a result of the outcome, the Central Bank has announced that it will be making very minor changes to its Residential Mortgage Regulations from 1 January 2018. The main elements of the Residential Mortgage Regulations will remain unchanged, but separate loan-to-income allowances will be introduced for first-time buyers (FTBs), and for second-time buyers (SSBs), with 20% of the value of new lending to FTBs and 10% of the value of new lending to SSBs, respectively, being allowed above the allowances.

Minister D'Arcy's gives statement on tracker mortgages to Seanad Éireann

Minister D'Arcy, who gave this statement on 22 November 2017, highlighted how the fair treatment of customers is a requirement of the financial services regulatory framework and of the Central Bank consumer protection code. He noted that mortgage lenders have significantly failed in their regulatory or contractual responsibilities to many of their tracker mortgage borrowers in this respect. He spoke about the enforcement and supervision powers of the Central Bank and the importance of holding the banks to account for their actions. Minister D'Arcy stated that it is the wish of the Government to have adequate redress and compensation provided to impacted customers as quickly as possible. He noted the Governments support of the Central Bank and hoped the tracker mortgage examination was completed as quickly as possible.

European Commission and European Central Bank staff issue statement on eighth post-programme surveillance mission to Ireland

The review was carried out the week of 28 November to 1 December. The meetings covered a wide range of topics, including fiscal policy, financial sector developments and the macroeconomic outlook. The review highlighted that the Irish economy will continue to remain strong in the short term but risks do remain which are primarily linked to the outcome of the negotiations of Brexit and the increase of property prices. The Banks have further strengthened their regulatory position but there are concerns about the draft bill enabling the Central Bank of Ireland to cap interest rates on variable rate mortgages as this could effect financial stability. The level of non-performing loans have reduced although the level at which they are reducing at has decreased. The review also showed that the supply shortage and increase demand in residential property are key factors which are driving the process of property and rent.

EUROPEAN:

European Central Bank has identified one new bank as significant during 2017

The ECB's annual assessment of significance brings the number of banks directly supervised by the ECB to 119. Barclays Bank PLC Frankfurt Branch has been identified as significant and will be directly supervised by the ECB from 1 January 2018. The results also show that two banks, Raiffeisen-Holding Niederösterreich-Wien registrierte Genossenschaft mit beschränkter Haftung and SEB AG are no longer identified as being significant due to no longer meeting the significance criteria for the past three years.

European Banking Authority publishes Guidelines on procedures for complaints of alleged infringements of Payment Services Directive 2 (PSD2)

The guidelines address the requirement for the EBA to issue guidelines under Article 100(6) of PSD2. The guidelines apply to complaints submitted to competent authorities with regard to payment service providers’ alleged infringements of PSD2 as laid down in Article 99(1) of the Directive.

European Commission follows up on the 'Call for Evidence'

The Commission have issued a new report on the Call for Evidence on EU financial services. This Call for Evidence was previously launched in 2015. It assesses whether rules adopted since the financial crisis have had their intended affect. The report shows that the financial services framework is working well and that the reforms made were necessary. The report also highlights that the Commission is focusing on ensuring the regulatory compliance framework is fit for the digital age, where possible through automation and standardisation.

European Commission launches public consultation on supervisory reporting requirements

This consultation has been issued on the back of concerns which were raised in the Call for Evidence on the costs being incurred due to supervisory reporting requirements. The aim of the consultation is to assess how effective reporting is, as the information gathered from these reports are heavily relied upon by supervisors in the EU. The objective is to gather quantitative evidence on any investments required to meet these requirements, and to gather specific examples of inconsistent, redundant or duplicative supervisory reporting requirements.

European Banking Authority updates list of CET1 instrument

The EBA has published its sixth updated list of capital instruments that Competent Authorities (CAs) across the European Union (EU) have classified as Common Equity Tier 1 (CET1). Since the publication of the previous update in May 2017, some new CET1 instruments have been assessed and evaluated as compliant with the Capital Requirements Regulation (CRR). The list will be maintained and updated on a regular basis.

The next update of the list will include, in particular, modifications related to the grandfathering of state aid instruments under Article 483 of the CRR, which will elapse at the end of 2017.

European Commission publishes proposal for a Directive amending Directive 2014/59/EU (BRRD)

The proposed amendments to the BRRD are part of a legislative package that also includes amendments to the CRR, CRD and the Single Resolution Mechanism Regulation. The amendments aim to unify national laws on recovery and resolution of credit institutions and investment firms, in relation to their loss-absorbing and recapitalisation capacity in resolution, with the objective of equipping Member States and union banks with the same tools to address bank failures in line with the agreed international standards.

European Commission publishes proposal for a Regulation amending Regulation EU No 575/2013 (CRR)

The proposed amendments relate to the leverage ratio, the net stable funding ratio, requirements for own funds and eligible liabilities, counterparty credit risk, market risk, exposures to central counterparties, exposures to collective investment undertakings, large exposures, reporting and disclosure requirements and amending EMIR.

European Commission publishes proposal for a Directive amending Directive 2013/36/EU (CRD IV)

The proposed amendments relate to exempted entities, financial holding companies, mixed financial holding companies, remuneration, supervisory measures and powers and capital conservation measures.

European Banking Authority publishes 2018 EU-wide stress test methodological note

The note outlines the method which defines how banks should calculate the stress impact of the common scenarios and, at the same time, sets constraints for their bottom-up calculations. In addition to setting these requirements, the note aims to provide guidance and support for conducting the EU-wide stress test.

European Banking Authority updates Single Rulebook Q&A

The EBA has published questions and answers in the Single Rulebook Q&A on the following topics:

• In relation to BRRD: Recovery and resolution (Article 44, 45, 63, 72)
• In relation to CRR: Large exposures (Article 4), own funds (Article 36, 82, 111 and 484), supervisory reporting (Article 99), credit risk (Article 143, 166 and 500), liquidity risk (Article 423), and supervisory reporting (Article 99, 166, 415, 429)
• In relation to CRD: O-SII Buffer on individual and consolidated level (Article 131)

European Banking Authority acknowledges the Commission adoption of amended supervisory reporting standards

The EBA has acknowledged the European Commission's adoption of the Implementing Act amending Regulation (EU) No 680/2014 (Implementing Technical Standards on Supervisory Reporting) with regard to amendments to COREP and Additional Monitoring Metrics for liquidity as well as other amendments. The publication of the Implementing Act in the EU Official Journal, which was adopted by the Commission on 9 November 2017, is still pending. The amended requirements will apply from 1 March 2018.

European Central Bank publishes Consolidated Banking Data for end-June 2017

The ECB has published the Consolidated Banking Data with reference to end-June 2017, a data set of the European Union banking system compiled on a group consolidated basis. The end-June 2017 data refer to 337 banking groups and 3,063 stand-alone credit institutions operating in the EU, covering nearly 100% of the EU banking sector balance sheet. The dataset includes an extensive range of indicators on profitability and efficiency, balance sheets, liquidity and funding, asset quality, asset encumbrance, capital adequacy and solvency.

European Banking Authority republishes DPM and XBRL taxonomy 2.7 for remittance of supervisory reporting

The EBA has published a corrective update (2.7.0.1) to the XBRL taxonomy that Competent Authorities shall use for the remittance of data under the EBA Implementing Technical Standards on supervisory reporting. The revised taxonomy will be used for the first report of Financial Reporting (FinRep) requirements compiled under IFRS 9. The update modifies the previously published 2.7 taxonomy which it replaces, correcting technical errors in the reportable content and errors in the XBRL implementation of some validation rules.

European Banking Authority publishes Final Peer Review Report on the guidelines on the criteria to determine the conditions of application of Article 131(3) of Directive 2013/36/EU (CRD IV) in relation to the assessment of other systemically important institutions (O-SIIs)

The final peer review report presents the outcomes of the ongoing EBA peer review exercise on the guidelines. The report summarises the main findings arising from the review by peers and identifies good practices implemented by relevant authorities, which are either national competent authorities or national designated authorities. The peer review exercise concluded that the majority of RAs are compliant with the Guidelines but there are some practices deviating from the guidelines. The review panel deems that further guidance is highly desirable to reduce variation in the calibration and use of the O-SII buffer.

European Banking Authority publishes final guidance on connected clients

The EBA has published its final guidelines on the treatment of connected clients as defined in the CRR, aiming at supporting institutions in identifying all possible connections among their clients, in particular when control relationships or economic dependency should lead to the grouping of clients because they constitute a single risk. The guidelines apply wherever the concept of 'group of connected client' is used in all areas of CRR. The guidelines cover control relationships and economic dependencies, which make up the types of interconnection that lead to two or more clients being regarded as a single risk.

European Banking Authority report on results from the 2017 market risk benchmarking exercise

The EBA has published results from its 2017 market risk benchmarking exercise pursuant to Article 78 of the CRD and the related regulatory and implementing technical standards that define the scope, procedures and portfolios for benchmarking internal models for market risk. The report summarises the conclusions drawn from a hypothetical portfolio exercise conducted by the EBA during 2016/2017. The objective of the exercise was to assess the level of vulnerability observed in risk-weighted exposure amounts for market risk produced by banks' internal models. As part of the exercise the EBA conducted interviews with a subsample of the participating banks to discuss the assumptions behind banks’ models, the banks’ results compared with the benchmarks, and how the banks approached and carried out the benchmarking exercise.

Banking supervision - What next? speech by Sabine Lautenschläger

Sabine Lautenschläger, Member of the Executive Board of the ECB and Vice-Chair of the Supervisory Board of the ECB, delivered a speech at the Banking Supervision, Resolution and Risk Management Conference during 20th Euro Finance Week in Frankfurt, Germany. Ms Lautenschläger first looked back at what has happened in recent years before discussing what needs to be done going forward and the challenges that the banking sector is facing, focusing in particular on non-performing loans. Ms Lautenschläger stated that non-performing loans are a joint problem, one which each of the banks, supervisors and politicians have a role to play in resolving.

Asset purchases, financial regulation and repo market activity - Speech by Benoît Cœuré,

Benoît Cœuré, Member of the Executive Board of the ECB, delivered a speech at the ERCC General Meeting in Brussels on 14 November 2017. Mr Cœuré discussed two factors that have recently been highlighted by market observers, practitioners and academics alike as potentially challenging the intermediation capacity of repo markets, namely central bank asset purchases and post-crisis prudential regulation. He noted that the repo market is undergoing significant change and regulation is forcing market participants to re-examine the extent of their engagement and make more efficient use of their balance sheets. Such an adjustment has coincided with worldwide central banks adopting unconventional monetary policy measures which have also affected the nature and scope of repo market activity. The full impact on the permanency of these effects can only be assessed once markets have fully transitioned to their new steady state.

European Bank Authority report on other financial intermediaries and regulatory perimeter issues

The EBA has published a report on other financial intermediaries (OFIs) and regulatory perimeter issues. This report aims to present a comprehensive analysis of the prudential treatment of OFIs carrying out credit intermediation activities beyond the perimeter of prudential regulation established by specific EU sectoral legislation. It provides and assessment of the use of Articles 2(5) and 9(2) CRD IV and consolidation issues that may arise from the application of the definitions of ‘financial institution’ and ‘ancillary services undertaking’ as set out in, respectively, points (26) and (18) of Article 4(1) CRR. The report also considers issues of interpretation encountered by competent authorities on the list of activities in Annex I to the CRDIV.

European Banking Authority publishes an opinion on regulatory perimeter issues relating to the CRDIV/CRR

The Opinion covers the use of Articles 2(5) and 9(2) CRD IV and the interpretation of the terms 'financial institution' and 'ancillary services undertaking' as defined in the CRR. The Opinion is based on the results of the assessment carried out throughout the EU on the prudential treatment of OFIs i.e. those entities carrying out credit intermediation activities that are not credit institutions nor other specified types of financial entity.

European Banking Authority publishes consultation paper on Draft Regulatory Technical Standards on the methods of prudential consolidation under Article 18 of CRR

This consultation paper has been issued pursuant to the obligation on the EBA to develop draft regulatory technical standards to specify conditions according to which consolidation shall be carried out in the cases referred to in paragraphs 2 to 6 of Article 18 of the CRR. The EBA invited comments on all proposals put forward by 9 February 2018. The final draft RTS will be subsequently submitted to the Commission for endorsement before being published in the Official Journal of the European Union.

The European Commission set out its work programme for 2018

The focus of the work programme for 2018 is two-fold. First, it sets out a limited number of targeted legislative actions to complete the Commission's work in priority policy areas over the next months and secondly it presents a number of initiatives that have a more forward-looking perspective. The work programme also proposes a number of proposals that follow on from regulatory fitness and performance (REFIT) reviews of current laws, taking into account the opinions of the REFIT platform.

European Commission publishes Q&A memo on corporate bonds

The European Commission published a Q&A memo on corporate bonds which discussed a number of questions, including why they are important and why the Commission is concerned about European corporate bond markets. The memo notes that these concerns were raised in the Capital Market Union consultation and the Call for Evidence which are:

• a perceived reduction of liquidity in European secondary markets
• the segmentation of corporate bond markets along national lines
• barriers standing in the way of larger and more efficient European corporate bond markets

European Banking Authority publishes final guidelines on the estimation of risk parameters under the IRB Approach

The EBA has published its final guidelines on the estimation of risk parameters for non-defaulted exposures - namely of the probability of default (PD) and the loss given default (LGD), and on the treatment of defaulted exposures under the advanced IRB Approach, including estimation of parameters such as ELBE and LGD in-default. The guidelines form part of the EBA's regulatory review of the IRB approach. They aim to restore market participants' trust in internal models by reducing the unjustified variability in their outcomes, ensuring comparability of risk estimates while at the same time preserving risk sensitivity of capital requirements.

European Banking Authority report on IRB modelling practices - impact assessment for the GLs on PD, LGD and the treatment of defaulted exposures based on the IRB survey results

The EBA has published a report on IRB modelling practices. This report provides an overview of the modelling techniques used in the estimation of risk parameters for both non-defaulted and defaulted exposures i.e. PD, LGD non-defaulted, LGD in-default and ELBE, and provides an impact assessment for the GLs on PD, LGD and the treatment of defaulted exposures. The information is based on responses received on the EBA's survey on internal models in January 2017.

European Banking Authority observes good progress in implementation of SREP guidelines

The EBA has published its third annual report on the convergence of supervisory practices across the EU. The report notes good progress has been made by competent authorities in the implementation of the SREP guidelines as well as in taking forward recommendations and observations made by the EBA during the 2016 bilateral convergence visits. It does, however, highlight a number of remaining challenges in converging capital adequacy assessments and determining institution-specific additional own funds requirements.

European Central Bank publishes November 2017 Financial Stability Review

The review singles out four main risks to financial stability in the euro area over the next two years which are:

• abrupt and sizeable repricing of risk premia in global financial markets
• adverse feedback look between weak bank profitability and low nominal growth
• public and private sector debt sustainability concerns
• liquidity risks in the non-bank financial sector

European Commission publishes report to the European Parliament on the application of Regulation n°260/2012

The report covers the application of Regulation n°260/2012 technical and business requirements for credit transfers and direct debits in euro and amending Regulation (EC) No 924/2009 also known as the Single Euro Payments Area (SEPA) Regulation. This report concludes that, overall, the SEPA Regulation is correctly applied across the EU. There is currently no need for a follow-up legislative proposal.

European Commission adopts Regulatory Technical Standards concerning electronic payments

These rules implement PSD2 and will make electronic payments in shops and online safer. The rules contain built-in security provisions to significantly reduce payment fraud levels and to protect the confidentiality of users' financial data, which will significantly effect online payments. They require a combination of at least two independent elements, which could be a physical item - a card or mobile phone - combined with a password or a biometric feature, such as fingerprints before making a payment. Once the new rules are published in the Official Journal of the EU, banks and other payment services providers will then have 18 months to put the security measures and communication tools in place.

European Banking Authority repeals guidelines on retail deposits subject to different outflows for the purpose of liquidity reporting

The EBA are formally repealing the guidelines in light of Regulation (EU) 2016/322 (Implementing technical standard - ITS - on reporting on liquidity coverage ratio – LCR), which has become applicable as of September 2016 and adapted to the Commission LCR Delegated Regulation, as these regulations now take precedence and the Guidelines are no longer relevant for liquidity reporting purposes.

European Banking Authority publishes report on risk assessment

The EBA report shows a more resilient EU banking sector but challenges in non-performing loans, IT security and long-term profitability remain. Cyber and data security are the key areas for concern and the areas presenting as a significant challenge to the EBA with risks posed by cyberattacks remaining worryingly high. The report also shows that while banking operations are still dependent on IT platforms, cost pressures and operational challenges have resulted in an increasing reliance on third party service providers.  

European Central Bank publishes findings of thematic review on IFRS 9 implementation

IFRS 9 enters into force on 1 January 2018 and it imposes an obligation on banks to recognise loan losses earlier. This review was undertaken to assess how prepared firms are for the implementation of these new standards. The review also highlights the supervisory expectations for the implementation and application of IFRS 9. Overall, the supervisors have noted that the level of preparedness varies across the institutions assessed and it is clear that there is still room for improvement with regards to making changes to internal systems and process, and also the classification and measurement of financial instruments.

EU ambassadors endorse banking proposals

On 15 November 2017, EU ambassadors endorsed, on behalf of the Council, an agreement with the European Parliament on two banking proposals:

• a draft directive on the ranking of unsecured debt instruments in insolvency proceedings (bank creditor hierarchy)
• a draft regulation on transitional arrangements to phase in the regulatory capital impact of the IFRS 9 international accounting standard.

Date published: 11 December 2017