European and International Developments
Final draft regulatory technical standards on prudent valuation
The European Banking Authority (EBA) final draft regulatory technical standards on prudent valuation under Article 105(14) of Regulation (EU) No. 575/2013 (Capital Requirements Regulation).
European Parliament issues Guide to New Rules on Banking Union
A guide to the EU’s new Rules on Banking Union.
Final Standard for Measuring and Controlling Large Exposures published by the Basel Committee
On the 15 April, the Basel Committee on Banking Supervision, published a final standard. This sets out the supervisory framework for measuring and controlling large exposures, that will take effect from 1st January 2019.
A large exposure framework is meant to protect banks from significant losses caused by the sudden default of an individual counterparty or a group of connected counterparties. The framework is designed so that, the maximum possible loss a bank could incur if such a default were to occur would not endanger the bank’s survival as a growing concern.
In cases where the bank’s counterparty is another bank, large exposure limits will directly reduce of system-wide risk. The wider scope of coverage includes exposure: to funds, securitisation structures and collective investment undertakings,
The framework strengthens the oversight and regulation of the shadow banking system. The large exposure published by the Basel Committee includes a general limit set at 25% of a bank’s Tier 1 capitalised to all of a bank’s exposure to a single counterparty. This limit also applies to a bank’s exposure to identified groups of connected counterparties. A tighter limit will apply to exposures between banks designated as global systemically important banks. This limit is set at 15% of Tier 1 capital.
Conglomerate capital rules
Following on from an earlier post on conglomerate capital rules, the EU now made the conglomerate rules official. This is EU’s answer to criticism on its watered down implementation of Basel III. But it may never become clear why the EU uses conglomerate rules to compensate for weaknesses in bank rules.
CRR and CRD
Over a hundred mandates for regulatory and implementing technical standards are provided for in CRR and CRD. To (March 2014), of the hundred mandates for regulatory and implementing technical standards provided for in the CRDIV legislation, the European Commission has adopted thirteen Regulatory Technical Standards (RTS) and one Implementing Technical Standard (ITS), some of which cover several mandates.
The Joint Committee of the European Supervisory Authorities (EBA, ESMA and EIOPA) published a consultation in February 2014 (see below) on draft Implementing Technical Standards (ITS) on the mapping of credit assessments to the risk weights of External Credit Assessment Institutions (ECAIs) under Article 136(1) and (3) of the Capital Requirements Regulation. The deadline for responses to this consultation has now been extended from 5 May 2014 to 20 June 2014.
Supervisory reporting in Europe’s financial sector has been far from harmonised. Regulated firmsreport similar information to their respective national regulators but in slightly varying ways, which makes comparisons difficult. Since the publication of the CRD IV last year, the European Banking Authority (EBA) has a clear timeline for managing the unenviable task of getting Europe’s 8.300 credit institutions and 32 National Competent Authorities NCAs) to all ‘speak the same language’. The first step in reaching that ambitious objective requires translating the contents of the CRD IV Package into what is known as Implementing Technical Standards (ITS).
For a uniform implementation across Europe of the ITS on supervisory reporting requirements for regulated entities, the data items included in the consultation EBA/CP/2012/05 are translated into a Data Point-Model (DPM). The DPM is a structured representation of the data, identifying all the business concepts and their relations (including validation rules), and it contains all the relevant technical specifications necessary for developing a reporting solution. The process involves adapting the DPM and associated XBRL (eXtensible Business Reporting Language) taxonomies to reflect the final CRR/CRD IV text, as well as the feedback received from stakeholders.
For the objectives of the CRD IV Package to be achieved, there must be convergence between the structural and technical choices made by the EBA in the taxonomy translation of the CRR/CRD IV text, and the technology choices made by regulated firms and National Competent Authorities with regard to production, validation and collection of the regulatory data required .
The CRD IV disclosure regime imposes extensive reporting demands on regulated firms, both in the speed and frequency with which they are required to generate reports and the amount of information they must provide. Regulated firms face immediate and difficult choices both about how far to automate the reporting process, and with the challenges of how to collate the data required for reporting, and how to staff and organize for the new regime. Firms have gaps both in their data and expertise relating to reporting under CRD IV, because they are required to report using a harmonized format – XBRL – a standard ( but less familiar) reporting language.
The transition to CRD IV is an excellent opportunity for firms to re-examine their data and reporting systems and to consider how those might be improved. Technology sits right at the heart of CRD IV, COREP and FINREP projects. Choices made about the technology deployed in the coming months could make the difference between projects that run to budget and on time, and those that fall short. Failure will leave firms unable to report to regulators on time and in the required format.
Timelines are tight so, firms must consider how to deploy proven framework systems now that they can build on in the future as their internal needs and regulatory demands evolve. If not, they risk shutting the door to benefits they can unlock at a later stage as the industry continues down the path towards improved data quality, governance and reporting.
CRR EBA published consultation on draft RTS on the treatment of equity exposures under the IRB approach
CRD IV EBA updated Single Rulebook Q&As 30 April 2014 concerning CRD IV and related technical standards
The European Systematic Risk Board (ESRB)
Published its response to a call for evidence from the European Commission on the sufficiency of the macro-prudential rules in CRD IV to mitigate systemic risks in the EU. According to Article 513 of the CRR the Commission must report to the European Parliament and the Council on the review of macro-prudential provisions in the EU capital requirements framework by 31 December 2014.
The ESRB notes that the macro-prudential review takes place only a few months after CRD IVs implementation. Nevertheless it recommends that the range of tools provided in CRD IV be maintained, with a number of considerations to improve effectiveness and coverage, and advises the introduction of a review of the macro-prudential provisions in the EU capital requirements framework once experience has been gained with the current toolkit. Annex 1 sets out a number of technical issues regarding the clarity and consistency of the macro-prudential framework
EBA publishes risk dashboard for EU banking sector
The European Banking Authority (EBA) published on 6 May the first risk dashboard for 2014 and it summarises the main risks and vulnerabilities in the banking sector in the European Union (EU), based on the evolution of Key Risk Indicators (KRI) from 55 banks across the EU in the fourth quarter of 2013.
European Banking Federation – Statement about the approval of the new Single Resolution Mechanism
The European Banking Federation endorsed the European Parliament’s approval of the new Single Resolution Mechanism (SRM) to determine how failing Eurozone banks can be resolved without relying on taxpayer support. This includes new rules for bank recovery and resolution in the EU. This vote paves the way for a European wide banking system. The Bank Recovery and Resolution Directive (BRRD) establishes a clear bail-in mechanism and common tool kit for all EU credit institutions with emphasis on early intervention and recovery. With BRRD as a foundation, the SRM for Eurozone banks is a second pillar of banking union and will be the counterpart of the Single Supervisory Mechanism that is already being put into place.
Basel Committee Progress Report on Implementation of the Regulatory Framework
The Basel Committee on Banking Supervision updated progress report on implementation of the Basel Regulatory Framework and Progress in adapting Basel II, Basel 11.1 and Basel 11.5.
Bank for International Settlements – FAQ
The Bank for International Settlements (BIS) released an updated Frequently Asked Questions on Basel III monitoring. These questions cover: definition of capital; leverage ratios; liquidity; trading book; hypothetical test portfolio exercise; and interest rate risk and credit spread risk in the banking book.
European Central Bank – Rules of Procedure
On 2 April 2014 the European Central Bank (ECB) issued rules of procedure of the Supervisory Board. The rules deal with a attendance at supervisory board meetings; voting; delegation of powers; mandate; composition and appointment of members.
External Audit of Banks
The Basel Committee on Banking Supervision published supervisory guidance on external audits of banks. The document supersedes previous committee guidance on the relationship between banking supervisors and bank’s external auditors. The Committee’s guidelines cover both an audit committee’s responsibilities in overseeing the external audit function and the prudential supervisors engagement with the external auditor of banks. It also sets out the Committee’s expectations and recommendations relevant to external audits of bank. The new guidance focuses on factors that contribute to enhancing audit quality at banks.
EU-wide stress test: methodology and scenario
The European Banking Authority (EBA) announced the key components of the forthcoming 2014 EU-wide stress test that will be conducted on a wide sample of EU banks. The objective of the EU-wide stress tests is to help supervisors assess the resilience of financial institutions in the European Union to adverse market developments. This exercise aims at ensuring consistency and comparability of the outcomes across all banks based on a common methodology, scenarios and accompanied by a consistent disclosure exercise.
EBA consults on draft technical standards on the treatment of equity exposures under the IRB approach
The European Banking Authority (EBA) launched a consultation on draft Regulatory Technical Standards (RTS) on 7th May to specify the treatment of equity exposures under the internal ratings-based (IRB) approach. These RTS will be part of the Single Rulebook aimed at enhancing regulatory harmonisation in the banking sector in the European Union. The consultation runs until 7 July 2014.
EBA launches data collection exercise on CVA
The European Banking Authority (EBA) at the end of April launched a data collection exercise to advise the European Commission on appropriate amendments to the European Credit Valuation Adjustment (CVA) framework . Banks with substantial portfolios of OTC derivatives are encouraged to participate in this data collection exercise on a voluntary basis.
Although the data collection exercise is to be carried out on a voluntary basis, the EBA expects banks with relatively substantial portfolios of OTC derivatives to participate in the exercise, regardless of whether they use the advanced or the standardised method for CVA risk. Accordingly, the EBA has prepared a standardised template that participating banks will be requested to fill in, with instructions due to be published on the EBA website early May.
ECB – Comprehensive Assessment
Capital shortfalls will be expected to be covered within six months for those identified in the AQR or the baseline stress test scenario and within nine months for those identified in the adverse stress test scenario. Recapitalisation measures to cover any shortfalls detected should rely on capital instruments of the highest quality. Shortfalls revealed by the AQR or the baseline stress test scenario may only be covered by Common Equity Tier 1 (CET1) capital instruments – unless the shortfalls are reduced through other means.
The ECB will publish the results of the comprehensive assessment in October 2014, before it takes over its supervisory tasks within the Single Supervisory Mechanism (SSM).
MiFID II
MiFID II – Council of the EU invites COREPER to approve MiFID II
FCA publishes new webpages
FCA Guidance Consultation GC14/2:
Revision of Transaction Reporting User Pack Version 3 (TRUP V3)
In March with the new EU banks rules stacking up , the demand for road-maps the EU provided an overview and state of play relating to CRR / CRD IV. It shows that progress has been made. However, still Europe has plans for many new standards. Gleaning from the chart, the EC and EBA are not even halfway through see: the table here: http://ec.europa.eu/internal_market/bank/docs/regcapital/acts/overview-crr-crdiv-rts_en.pdf
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http://www.pwc.com/gx/en/financial-services/issues/regulation/basel-iii-crdiv-navigator.jhtml
