Banking and finance regulatory news, 21 June 2021 2021

Contents

• Download the full regulatory news bulletin
• Draft Bank of England Act 1998 (Macro-prudential Measures) (Amendment) Order 2021 published
• Overseas IRB models for credit risk: PRA PS13/21
• RFRWG Best Practice Guide for GBP Loans and GBP Loan Market Q&A updates
• Access to Banking Standard review: LSB consultation
• CRR: Delegated Regulation with RTS on standardised approach for counterparty credit risk
• CRR: Delegated Regulation with RTS relating to economic downturn
• CRD: Delegated Regulation with RTS on criteria to identify material risk takers for remuneration purposes
• SSM: ECB Regulation amending Regulation on reporting of supervisory financial information
• SSM: ECB consults on revised fit and proper guide and questionnaire
• Secondary markets for NPLs: European Commission consults on improving transparency and efficiency
• BRRD II and CRD V transposition infringement proceedings
• Cost of complying with supervisory reporting requirements: EBA report
• EBA methodological guide on risk indicators and detailed risk analysis tools updated
• Crowdfunding Regulation: EBA consults on draft RTS on individual portfolio management loans
• Prudential treatment of cryptoasset exposures: BCBS consultation

Draft Bank of England Act 1998 (Macro-prudential Measures) (Amendment) Order 2021 published

A draft version of the Bank of England Act 1998 (Macro-prudential Measures) (Amendment) Order 2021 has been published, together with a draft explanatory memorandum. The draft Order sets out amendments to the statutory instruments that give the Financial Policy Committee (FPC) the power to direct the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA) to take action with respect to specified prudential measures. The intention of these amendments is to ensure that those statutory instruments appropriately track the PRA's new powers that are being introduced under the Financial Services Act 2021 in relation to sectoral capital requirements, mortgage lending and the leverage ratio.

Overseas IRB models for credit risk: PRA PS13/2

Following its consultation in CP16/20, the Prudential Regulation Authority (PRA) has published a policy statement, PS13/21, on its approach to overseas internal ratings based (IRB) models for credit risk. PS13/21 also contains the PRA's final policy in the form of an updated supervisory statement, SS11/13, on IRB approaches, which is effective from 1 July 2021.

Three changes have been made to the draft amendments to SS11/13 in light of the responses the PRA received to consultation. These are:

• the aggregate amount of credit risk risk-weighted assets (RWAs) derived using overseas models, and aggregate amount of exposure value allowed on the OMA, has been increased from 5% to 7.5%;

• the scope of asset classes eligible for the overseas model approach (OMA) has been expanded to include corporate small and medium-sized enterprises (SMEs); and
• a definition of the overseas models' exposure value measure has been introduced.

In light of PS13/21, for existing overseas IRB models built to non-UK requirements that are not currently used for UK consolidated capital requirements, there are two options:

• firms that wish to use the OMA can now submit applications using the updated pro forma on the PRA's website. The implementation date for the changes is 1 July 2021; and
• firms that do not wish to use the OMA can continue not to use it for UK consolidated capital requirements.

For existing overseas IRB models built to non-UK requirements that are already used for UK consolidated capital requirements, there are three options:

• if these models meet the new OMA criteria, they can continue to be used for UK consolidated capital requirements. Firms should submit a self-attestation that the criteria are met;
• if these models do not meet the OMA criteria from 1 July 2021, firms may need to remediate these models to meet UK IRB requirements or the criteria for the OMA. The PRA expects those models that do not meet the criteria to be remediated by 1 January 2023; and
• if firms do not wish to use these models on the OMA, they will need to develop models that meet UK IRB requirements and to discuss this with their supervisor.

RFRWG Best Practice Guide for GBP Loans and GBP Loan Market Q&A updates

The Working Group on Sterling Risk-Free Reference Rates (RFRWG) published a revised version of its Best Practice Guide for GBP Loans. The guide addresses conventions for new sterling SONIA-referencing loans (including refinancing and renewals) and for transitioning legacy sterling LIBOR-referencing loans. This update deals with calculating SONIA-based cost of carry for loans traded on the secondary market.

The RFRWG has also updated its GBP Loan Market Q&A for the Working Group’s end-Q1 2021 recommended milestone to include a new question 8 about how the milestone affects existing facilities with extension options.

Access to Banking Standard review: LSB consultation

The Lending Standards Board (LSB) has published a consultation paper on its review of the Access to Banking Standard. The Standard is an industry agreement with 12 banks signed up to it. The Standard is intended to ensure that customers are well-informed about branch closures and the options they have to access banking services. The LSB is responsible for monitoring the application of the Standard by firms. As the Standard has now been in place for four years, the LSB considers it appropriate to conduct a review to understand its effectiveness, take into account recent developments and consider whether any changes to the Standard are required.

In the consultation, the LSB seeks views on:

• implementation of the Standard;
• changes in the provision and use of banking services; and 
• changes to the regulatory environment. 

The consultation closes on 4 August 2021. The LSB intends to publish a final report with recommendations to UK Finance (which is responsible for the content of the Standard), firms signed up to the Standard, and, if appropriate, to the LSB itself and other relevant stakeholders.

CRR: Delegated Regulation with RTS on standardised approach for counterparty credit risk

Delegated Regulation (EU) 2021/931 supplementing the EU Capital Requirements Regulation (CRR) with regard to regulatory technical standards (RTS) on the standardised approach for counterparty credit risk has been published in the Official Journal of the EU (OJ). The RTS specify the method for identifying the material risk drivers of derivative transactions on the basis of which the mapping to one or more of the risk categories set out in Article 277 of the CRR is to be done.

The Delegated Regulation will enter into force on 30 June 2021.

CRR: Delegated Regulation with RTS relating to economic downturn

Commission Delegated Regulation (EU) 2021/930 supplementing the CRR with regard to RTS specifying the nature, severity and duration of an economic downturn referred to in Article 181(1), point (b), and Article 182(1), point (b), of the CRR has been published in the OJ.

Articles 181(3)(a) and 182(4)(a) of the CRR empower the European Commission to adopt delegated acts specifying the nature, severity and duration of an economic downturn to be taken into account for the estimation of loss given default (LGD) and conversion factors (CFs) appropriate for an economic downturn, where LGD and CFs are estimated under the internal ratings based (IRB) approach.

The Delegated Regulation will enter into force on 30 June 2021. It will apply from 1 January 2021.

CRD: Delegated Regulation with RTS on criteria to identify material risk takers for remuneration purposes

Commission Delegated Regulation (EU) 2021/923, which contains RTS supplementing the remuneration provisions in the Capital Requirements Directive (CRD) has been published in the OJ.

Article 94(2) of the CRD was amended by CRD V to require the European Banking Authority (EBA) to develop RTS specifying the criteria for identifying staff members whose professional activities have a material impact on an institution's risk profile (material risk takers). Accordingly, the Delegated Regulation sets out provisions on:

• the criteria for determining whether the professional activities of staff members have a significant impact on the relevant material business unit’s risk profile;
• staff members or categories of staff whose professional activities have an impact on the institution’s risk profile that is comparably as material as senior management and staff entitled to significant remuneration;
• quantitative and qualitative criteria for determining whether staff members have a material impact on an institution's risk profile; and
• calculation of the average total remuneration for members of the management body and senior management and of variable remuneration awarded.

The Delegated Regulation repeals and replaces Delegated Regulation (EU) 604/2014, which contains RTS on the same issue. The Delegated Regulation entered into force and applied from 14 June 2021. Delegated Regulation (EU) 604/2014 will continue to apply to investment firms until 26 June 2021.

SSM: ECB Regulation amending Regulation on reporting of supervisory financial information

European Central Bank (ECB) Regulation (EU) 2021/943 (the Amending Regulation) has been published in the OJ. The Amending Regulation amends ECB Regulation (EU) 2015/534 on the reporting of supervisory financial information (Financial Reporting Regulation) to:

• reflect the repeal and replacement of Commission Implementing Regulation (EU) 680/2014 by Commission Implementing Regulation (EU) 2021/451, with effect from 28 June 2021; and
• update cross-references to refer to Commission Implementing Regulation (EU) 2021/451.

The Amending Regulation enters into force on 19 June 2021 and applies from 28 June 2021.

SSM: ECB consults on revised fit and proper guide and questionnaire

The ECB is consulting on revisions to its guide to fit and proper assessments and a fit and proper questionnaire for members of the management bodies of significant credit institutions under the Single Supervisory Mechanism (SSM).

The aim of the revisions is to "raise the bar, increase transparency and improve the quality and efficiency of fit and proper assessments and processes". They also  introduce supervisory expectations on climate-related and environmental risks and explain the ECB's approach to diversity (the ECB has published a blog post on why it is seeking greater diversity in banks).

The deadline for comments is 2 August 2021.

Secondary markets for NPLs: European Commission consults on improving transparency and efficiency

The European Commission has published a targeted consultation on improving transparency and efficiency in secondary markets for non-performing loans (NPLs). The consultation is in two main sections, focussing on:

• establishing a data hub at European level; and
• reviewing Pillar 3 disclosures.

Stakeholders are also invited to highlight to the Commission any other regulatory impediments that could be addressed through this initiative.

The consultation closes on 8 September 2021.

BRRD II and CRD V transposition infringement proceedings

The European Commission has announced that due to the lack, or delay, of the notification of national transposition measures, or their incompleteness, relating to the amended Bank Recovery and Resolution Directive (BRRD II) and the updated Capital Requirements Directive (CRD V), infringement proceedings for non-communication of national transposition measures are pending against various EU member states. The amendments to the Directives had to be transposed by member states by 28 December 2020.

The member states are listed on webpages setting out the transposition status for BRRD II and CRD V. Infringement proceedings are pending against 21 member states in respect of BRRD II and 20 member states in respect of CRD V.

Cost of complying with supervisory reporting requirements: EBA report

The EBA has published a report following a study of the cost of compliance with supervisory reporting requirements.

This report (prepared on the basis of Article 430(8) of the CRR) analyses EEA credit institutions' experience with the EBA supervisory reporting requirements and process.  It focuses on the costs and challenges they face in that process. In the report, the EBA sets out 25 recommendations to further improve the supervisory reporting process. It states that the combined effect of the identified recommendations could reduce the reporting costs faced by firms by up to 15-24%.

The study also identified the need to remove barriers to the wider adoption by institutions of FinTech and RegTech solutions as well as to promote better digitalisation of the institutions' internal documents and contracts.

The report focuses on identifying savings in reporting costs for small and non-complex institutions. However, the recommendations will improve reporting requirements and processes for all institutions. The EBA also considered the needs of the supervisory users of reporting throughout.

The recommendations will be incorporated into the EBA's work programme to be implemented as part of its ongoing work. Figure 29 in the report sets out a tentative calendar for implementing the recommendations.

Certain recommendations would lead to specific policy products, such as amendments to the implementing technical standards on supervisory reporting, or guidelines and recommendations for the resubmission policies. Any changes to these will follow the usual policy development process.

EBA methodological guide on risk indicators and detailed risk analysis tools updated

The EBA has published an updated version of its methodological guide on risk indicators and detailed risk analysis tools (DRATs). It has updated the guide to include additional indicators about the COVID-19 pandemic, funding plans, resolution, and remuneration. It has also updated indicators on profitability, exposures to sovereign counterparties and own funds requirements for operational risk.

The updated guide is based on the EBA reporting framework version 2.10.

The main purpose of the guide is to serve EBA compilers of risk indicators and internal users presenting risk indicators and DRATs. To this end, the EBA has also published an updated list of EBA risk indicators and DRATs.

In addition, it provides guidance on indicators' concepts, data sources (that is, precise implementing technical standards (ITS) data points involved in their calculation), techniques on which they are computed, and clarity on methodological issues that may assist in their accurate interpretation and use.

The guide is not intended to bind competent authorities and, therefore, it is not mandatory, but only aims at supporting computation of indicators, consistent with EBA publications. It is a living document, which may evolve periodically, reflecting new experiences and user needs or changes in EU supervisory reporting (that is, ITS on supervisory reporting).

Crowdfunding Regulation: EBA consults on draft RTS on individual portfolio management loans

The EBA is consulting on draft RTS under the Regulation on European crowdfunding service providers for business (Crowdfunding Regulation). Among other things, the draft RTS specify the information that crowdfunding service providers offering individual portfolio management of loans must provide to investors in relation to the method to assess credit risk and on each individual portfolio.

The consultation closes on 4 September 2021. The EBA intends to submit the final draft RTS to the European Commission in October 2021.

Prudential treatment of cryptoasset exposures: BCBS consultation

The Basel Committee on Banking Supervision (BCBS) has published a consultative document on the prudential treatment of banks' cryptoasset exposures. The consultation paper builds on the BCBS's December 2019 discussion paper and the responses it received.

The BCBS explains that its proposed prudential treatment of cryptoassets is guided by the following general principles:

• same risk, same activity, same treatment;
• simplicity; and 
• minimum standards. 

In the consultation paper, the BCBS divides cryptoassets into two groups. In the first group are those eligible for treatment under the existing Basel framework (with some modifications), such as stablecoins. The second group comprise those, such as bitcoin, that are not eligible and would therefore be subject to a new conservative prudential treatment. 

The paper is organised as follows:

• section 1 sets out a general approach for determining minimum risk-based capital requirements, where cryptoassets are screened and classified into the two groups;
• section 2 sets out the capital requirements for those cryptoassets that meet all of these classification conditions, termed Group 1 cryptoassets;
• the minimum risk-based capital requirements for cryptoassets that do not meet any of the classification conditions (termed Group 2 cryptoassets) are outlined in section 3;
• section 4 sets out other regulatory requirements (i.e. leverage ratio, large exposures, liquidity ratios) for all cryptoassets;
• section 5 sets out the responsibilities of banks and supervisors for the supervisory review; and
• section 6 sets out disclosure requirements for all cryptoassets.

Responses are requested by 10 September 2021. The BCBS is of the view that policy development for cryptoasset exposures is likely to be an iterative process, involving more than one consultation.

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Authored by Yvonne Clapham