Banking and finance regulatory news, 28 May 2021

Contents

• Download the full regulatory news bulletin
• COVID-19: FCA statement on regulatory treatment of Recovery Loan Scheme
• The necessity of using supervisory technology: ECB speech
• EU banking package: SRB updates MREL policy
• BRRD: EBA report on application of early intervention framework
• CRR: EBA final report and draft RTS on own funds and eligible liabilities
• Mapping climate risk: EBA report on pilot exercise
• Conduct risks in leveraged loans and collateralised loan obligations: IOSCO survey

COVID-19: FCA statement on regulatory treatment of Recovery Loan Scheme

The FCA has published a statement on the regulatory treatment of the UK Recovery Loan Scheme (RLS), which was launched on 6 April 2021 as part of the government's COVID-19 financial support for UK businesses. While the RLS has different terms and eligibility criteria, it has replaced the government’s Bounce Back Loan Scheme (BBLS) and Coronavirus Business Interruption Loan Scheme (CBILS), which have now closed to new applications.

The FCA confirms that most of the lending available as part of the RLS will not be a regulated activity and therefore most lending applications will be outside its regulatory perimeter. However, the FCA's rules will apply as usual to regulated lending under the scheme, which in this case is regulated asset finance. This includes the rules on creditworthiness assessments in CONC 5.2A.

The FCA also highlights that the relevant requirements under the Money Laundering Regulations 2017 will continue to apply and that lenders should undertake appropriate anti-money laundering and fraud checks on RLS applications.

The necessity of using supervisory technology: ECB speech

The European Central Bank (ECB) has published a speech by Petti Hakkarainen, ECB Supervisory Board Member, on the necessity of using supervisory technology. Ms Hakkarainen explains that ECB Banking Supervision not only makes use of modern technology but also aims to become a "suptech" pioneer. She then goes on to explain how the ECB intends to do this, based on four building blocks: an effective innovation model, a digital culture, an innovation ecosystem and successful delivery of business-related use cases.

EU banking package: SRB updates MREL policy

The Single Resolution Board (SRB) has published an updated version of its policy for the minimum requirement for own funds and eligible liabilities (MREL) under the EU banking package. MREL is one of the key tools in resolvability, ensuring that banks maintain a minimum amount of equity and debt to support an effective resolution.

In particular, the updated policy introduces:

• the MREL maximum distributable amount (MDA), which allows the SRB to restrict banks' earnings distribution if there are MREL breaches;
• policy criteria to identify systemic subsidiaries for which granting an internal MREL waiver would raise financial stability concerns (based on the absolute asset size and relative contribution to resolution group);
• the approach to MREL-eligibility of UK instruments without bail-in clauses.

The updated policy also refines:

• the methodology to estimate the Pillar 2 requirements (P2R) post-resolution (that is, one of the components used for MREL calibration);
• the MREL calibration on preferred versus variant resolution strategy, confirming that the SRB computes MREL in line with the preferred strategy; and
• the MREL calibration methodology for liquidation entities, where the SRB clarifies that the loss absorption amount may increase beyond the default adjustment in proportion to financial stability concerns.

The SRB has also published its MREL dashboard covering the reporting period Q4 2020.

BRRD: EBA report on application of early intervention framework

The European Banking Authority (EBA) has published a report on the application of the early intervention framework under Articles 27 to 29 of the Bank Recovery and Resolution Directive  (BRRD).

The BRRD introduced early intervention measures (EIMs) to expand the existing set of powers available to supervisors when institutions are experiencing difficulties. The EBA monitored the application of EIMs in 2015 to 2018 and observed their limited use across the EU. It found that instead of resorting to EIMs, competent authorities often preferred to apply other pre-BRRD supervisory powers available to them. The EBA investigated the reasons for these supervisory practices and published a discussion paper in June 2020. The report includes the content from the discussion paper and also provides an overview of the feedback received from consultations, as well as the EBA's conclusions.

CRR: EBA final report and draft RTS on own funds and eligible liabilities

The EBA has published its final report on revisions to Commission Delegated Regulation (EU) 241/2014, which contains regulatory technical standards (RTS) on own funds requirements, supplementing the Capital Requirements Regulation (CRR) to reflect new mandates introduced by CRR II.

The EBA will submit the final draft RTS to the European Commission for adoption. The RTS will enter into force on the day following that of its publication in the Official Journal of the European Union.

Mapping climate risk: EBA report on pilot exercise

The EBA has published a report setting out the main findings from an EU-wide pilot exercise on mapping climate risk. The EBA undertook the pilot exercise in 2020, using a sample of 29 banks which provided data on non-SME corporate exposures to EU member states. The EBA explains that, as the EU taxonomy and climate risk stress test frameworks are still developing, this pilot was designed as a learning exercise to investigate how existing and newly developed climate risk assessment and classification tools perform, and to test banks' readiness to deal with related data and methodological challenges.

The EBA intends for its findings to form the basis of a wider discussion on the design of a climate risk stress test for the EU banking sector. It considers that further interaction with industry will be key to exploring possible solutions and identifying key challenges for developing methodologies and data requirements that would be suitable for this purpose.

Conduct risks in leveraged loans and collateralised loan obligations: IOSCO survey

The International Organization of Securities Commissions (IOSCO) has announced that it is issuing four surveys for industry participants on conduct risks in leveraged loans (LLs) and collateralised loan obligations (CLOs). The surveys are for:

• bank lenders;
• CLO investors;
• CLO managers; and
• LL sponsors.

The surveys are being launched to help IOSCO's committees understand the potential conflicts of interest and conduct issues which may exist in the LL and CLO markets, and how they are managed by market participants. IOSCO will consider the survey responses when formulating any report regarding LLs and CLOs.

The submission deadline is 30 June 2021.

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Authored by Yvonne Clapham