EBA publishes final draft technical standards to identify investment firms’ risk takers and to specify the instruments used for the purposes of variable remuneration

21 January 2021

The European Banking Authority (EBA) published today two final draft Regulatory Technical Standards (RTS) on (i) the criteria to identify all categories of staff whose professional activities have a material impact on the investment firm’s risk profile or asset it manages (‘risk takers’) and (ii) on the classes of instruments that adequately reflect the credit quality of the investment firm and possible alternative arrangements that are appropriate to be used for the purposes of variable remuneration. The objective of these RTS is to define and harmonise the criteria for the identification of such staff and the use of instruments or alternative arrangements for the purposes of variable remuneration so as to ensure a consistent approach across the EU.

RTS to identify material risk takers

Risk takers will be identified based on a combination of qualitative and quantitative criteria specified in the RTS. To ensure that all risk takers are identified, members of staff are identified as having a material impact on the institution’s risk profile as soon as they meet at least one of the qualitative or quantitative criteria in the RTS or, where necessary because of the specificities of their business model, additional internal criteria.

Following the feedback received during the consultation phase, the qualitative criteria have been revisited to enhance the application of proportionality. The final draft RTS also clarify how the criteria should be applied on a consolidated and individual basis. Finally, some flexibility in calculating the amount of remuneration for the application of the quantitative requirements has been introduced similarly to the remuneration framework applicable under the Capital Requirements Directive (CRD).

In addition, the 0.3% of staff with the highest remuneration criterion has been included to be applied only by institutions that have more than 1 000 staff in order to reduce the burden for small firms. The quantitative criteria are based on the rebuttable assumption that the professional activities of those staff would have a material impact on the institutions’ risk profile.

RTS on the use of instruments and possible alternative arrangements for risk takers’ variable remuneration

The final draft RTS introduce requirements for investment firms regarding Additional Tier 1, Tier 2 and other instruments used for the purposes of variable remuneration, to ensure that they appropriately reflect the credit quality of the investment firm as well as, to specify possible alternative arrangements for the pay out of variable remuneration where investment firms do not issue any of the instruments referred to in Article 32 of the Investment Firms Directive (IFD).

The provisions in the RTS are aligned with Commission Delegated Regulation 527/2014 on classes of instruments that are appropriate to be used for the purposes of variable remuneration under the CRD to ensure that, in particular, groups of credit institutions and investment firms are able to use a common set of instruments for remuneration purposes.

Legal Basis

The EBA has been mandated, under Articles 30(4) and 32(1)(j) of the Directive (EU) 2019/2034, to develop, in cooperation with the European Securities and Markets Authority (ESMA), final draft RTS to specify the appropriate criteria to identify the categories of staff whose professional activities have a material impact on the risk profile of the investment firm or asset it manages; and to develop draft RTS to specify the classes of instruments that satisfy the conditions set out in point (j)(iii) of paragraph 1 of Article 32 and to specify possible alternative arrangements set out in point (k) of paragraph 1 of Article 32.

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EBA observes an increase in the asset encumbrance ratio amidst extensive use of central bank facilities

18 January 2021

  • After decreasing by 80bp in 2019 to 25%, in the first half of 2020, the asset encumbrance ratio went up to 27.5%.
  • In the first half of 2020, the volume of total assets and collateral received rose by almost 10% while encumbered assets and collateral increased by more than 20%.

The European Banking Authority (EBA) published today its annual report on Asset Encumbrance. As COVID-19 spread across Europe and activity in primary markets froze, banks made extensive use of central bank liquidity facilities to build precautionary liquidity buffers. In this context, the asset encumbrance ratio rose substantially in the first half of 2020.

Overview of key figures

Asset Encumbrance ratio

Encumbrance ratio of central bank eligible assets

Q2 2020

27.5%

49.3%

Q4 2019

25.0%

44.4%

Q4 2018

25.8%

44.9%

 

The extensive use of the extraordinary central bank liquidity facilities in 2020 has driven up the share of central bank funding over total sources of encumbrance. In contrast, the attractive conditions of central bank facilities have led many banks to reduce their reliance on covered bonds. Repos, whose share has remained roughly stable, were the most important source of encumbrance in 2020.

Almost half of total central bank eligible assets were encumbered in June 2020. Nonetheless, banks increased their stock of unencumbered central bank eligible assets and collateral by more than 10% in the first half of 2020.

Supervisory authorities should pay special attention to the increased reliance on central bank funding. Although the recent increase in the asset encumbrance ratio is not a concern by itself, banks’ capacity to further make use of central bank funding when necessary should be monitored.

Notes to editors

Following the United Kingdom’s departure from the EU, banks domiciled in this country are not included in the figures based on supervisory reporting data for the current year. For previous years, EU-27/respective EEA pro-forma data are accordingly used to make consistent comparisons.

EBA points to a further rise in capital and leverage ratios, whereas profitability remains strongly subdued

13 January 2021

  • Capital and leverage ratios increased quarter-on-quarter (QoQ).
  • Forborne loans were further on the rise while non-performing loans declined.
  • Share of stage 2 exposures kept on growing for loans under moratoria.

The European Banking Authority (EBA) published today its quarterly Risk Dashboard together with the results of the Risk Assessment Questionnaire (RAQ). The Q3data shows a rise in capital ratios, and an improvement in the NPL ratio, while the return on equity (RoE) remained significantly below banks’ cost of equity. The Risk Dashboard includes, for the first time, data on moratoria and public guarantee schemes.

Capital ratios continued to improve in Q3 2020. Due to a further increase in capital and contraction in risk-weighted assets, the CET1 ratio grew by 40bps to 15.1%. The leverage ratio similarly increased from 5.2% in Q2 to 5.5% in Q3 (both based on a fully phased in definition).

The non-performing loan (NPL) ratio continued its decline, from 2.9% in Q2 to 2.8% in Q3, supported by a contraction in the NPL volume and rising total loans and advances. The forborne loan ratio remained unchanged at 2% and volume of forborne loans rose by around 2.5% QoQ. The share of stage 2 loans in total loans contracted in Q3 by 20bps to 8%, whereas the share of stage 1 loans increased by 20bps. According to the RAQ results, more than 75% of banks expect a worsening in asset quality for corporate portfolios as well as consumer credit. While 60% of the banks expect their cost of risk for the current financial year will not exceed 100bps, most of the analysts estimate it will be in the range of 100-150bps.

Loans under non-expired moratoria declined from around EUR 810bn in Q2 to around EUR 587bn in Q3. The share of stage 2 loans under moratoria increased from 16.7% to 20.2% in contrast with the declining trend recorded for total loans. Loans under public guarantee schemes increased from around EUR 185bn to EUR 289bn in Q3. The coverage through public guarantees was nearly 70% for these exposures.

RoE increased from 0.5% to 2.5% in Q3. The rise was driven by the contraction of the cost of risk (74bps, down from 86bps in Q2). Total net operating income increased slightly, supported by lower losses in net trading income. The cost to income ratio declined from 66.6% to 64.7% in Q3, mainly due to a further decline in costs.

Banks indicate that extension of remote working and the strengthening of related infrastructure, including cyber-security levels, were key reactions to the COVID-19 crisis. Banks also suggest that enhanced teleworking arrangements will probably remain in place in the long-term (around 80%) and they expect increased spending on digital innovation and new technologies in order to attract new business channels (around 60% plan a significant or slight increase of respective spending).

The loan to deposit ratio further declined from 116% to 113.6% driven by strongly rising client deposits. The liquidity coverage ratio (LCR) rose to new heights, reaching 171.3% (166% in Q2). Focusing on the next 12 months, banks intend to attain more senior unsecured and senior non-preferred / holdco debt (close to 50% of respondents for both categories). A rising share of banks also intends to issue subordinated debt including AT1/T2 (around 30%).

Notes to editors

The figures included in the Risk Dashboard are based on a sample of 147 banks, covering more than 80% of the EU/EEA banking sector (by total assets), at the highest level of consolidation, while country aggregates also include large subsidiaries (the list of banks can be found here).

ESA’s Joint Board of Appeal dismissed appeal by Scope Ratings Gmbh against the European Securities and Markets Authority

11 January 2021

The Joint Board of Appeal of the European Supervisory Authorities (ESAs – European Banking Authority, European Insurance and Occupational Pensions Authority, and European Securities and Markets Authority) unanimously decided to dismiss the appeal brought by the credit rating agency Scope Ratings GmbH against the European Securities and Markets Authority (ESMA) in relation to the interpretation of the applicable legal provisions of the Credit Rating Agencies (CRA) Regulation.

Central to this appeal is the appellant’s 2015 covered bond methodology, its application in the context of unsolicited ratings issued by the Appellant in 2015, and the Appellant’s subsequent amendment of this methodology in 2016.

On 28 August 2020, the appellant challenged the Decision of the ESMA Board of Supervisors of 28 May 2020, and published on ESMA’s website on 4 June 2020, which had (a) found that Scope Ratings infringed points 43 of Section I, 3a and 3b of Section II and 4a of Section III of Annex III of the CRA Regulation, (b) adopted a supervisory measure in the form of a public notice pursuant to Article 24 of the CRA Regulation and (c) imposed on Scope Ratings a fine pursuant to Article 36a of the CRA Regulation.

The Board of Appeal unanimously decided to dismiss the appeal. In particular, the Board of Appeal found that ESMA did not err in law in its interpretation of the applicable legal provisions of the CRA Regulation.

 
EBA publishes final technical standards on estimation of Pillar 2 and combined buffer requirements for setting MREL

23 December 2020

The European Banking Authority (EBA) published today its final draft Regulatory Technical Standards (RTS) specifying the methodology to be used by resolution authorities to estimate the Pillar 2 (P2R) and combined buffer requirements (CBR)  at resolution group level for the purpose of setting the minimum requirement for own funds and eligible liabilities requirement (MREL). These standards are part of the EBA's major programme of work to implement the BRRD and address the problem of too-big-to-fail banks.

The estimation of P2R and CBR is necessary for setting MREL when the resolution group perimeter differs significantly from the prudential perimeter at which own fund requirements have been set by the competent authority.

The final draft RTS further specify a straightforward and proportionate methodology for estimating own fund and combined buffer requirements. They provide a framework for a dialogue between resolution groups, competent authorities and resolution authorities aiming to improve the accuracy of the input for MREL setting.

Legal basis

These final draft RTS have been developed according to Article 45c4 of the Bank Recovery and Resolution Directive (BRRD).

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EBA publishes final technical standards on reporting of MREL decisions from authorities to EBA

23 December 2020

The European Banking Authority (EBA) published today its final draft Implementing Technical Standards (ITS) specifying uniform reporting templates, instructions and methodology for the identification and transmission, by resolution authorities to the EBA, of information on minimum requirements for own funds and eligible liabilities (MREL). These standards are part of the EBA's major programme of work to implement the BRRD and address the problem of too-big-to-fail banks.

This reporting between resolution authorities and the EBA aims to ensure that the EBA has all the necessary information to understand how MREL is set within the Member States.

Legal basis

These final draft ITS have been developed according to Article 45j of the Bank Recovery and Resolution Directive (BRRD).

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EBA publishes final draft technical standards on impracticability of contractual recognition under the BRRD framework

23 December 2020

The European Banking Authority (EBA) published today its final draft Regulatory Technical Standards (RTS) and final draft Implementing Technical Standards (ITS) on impracticability of contractual recognition of bail-in powers under the Bank Recovery and Resolution Directive (BRRD). These standards, which aim at ensuring the harmonised application of instances of impracticability of contractual recognition of bail-in powers, are part of the EBA's work to implement the BRRD.

Where contracts are governed by the law of a third country, the BRRD requires that these contracts include a contractual recognition term by which the parties acknowledge that the contract may be subject to bail-in powers and agree to be bound by their effect. In certain situations, it might be legally or otherwise impracticable to achieve contractual recognition of the bail-in powers.

The final draft RTS further determine the conditions of impracticability, the conditions for the resolution authority to require its inclusion and the timeframe for the resolution authority to require the inclusion of a contractual term. Finally, the draft ITS specify the uniform formats and templates for the notification to resolution authorities of determinations of impracticability to achieve contractual recognition.

Legal basis

These final draft RTS and ITS have been developed according to Articles 55(6) and 55(8) of the BRRD, which mandate the Authority to develop draft RTS to further specify (a) the conditions under which it would be legally or otherwise impracticable for an institution or entity referred to in point (b), (c) or (d) of Article 1(1) to include the contractual term referred to in paragraph 1 of Article 55 BRRD in certain categories of liabilities; (b) the conditions for the resolution authority to require the inclusion of the contractual term pursuant to the third subparagraph of paragraph 2 of Article 55 BRRD; (c) the reasonable timeframe for the resolution authority to require the inclusion of a contractual term pursuant to the third subparagraph of paragraph 2 of Article 55 BRRD and, respectively, to develop draft implementing technical standards to specify uniform formats and templates for the notification to resolution authorities for the purposes of paragraph 2 of Article 55 BRRD.

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EBA monitors the use of the proportionality principle for recovery and resolution planning

22 December 2020

The European Banking Authority (EBA) published today its second Report on the application of simplified obligations and waivers under the Bank Recovery and Resolution Directive (BRRD) across the EU. The Report presents the results of the EBA monitoring on how competent and resolution authorities have applied the principle of proportionality for recovery and resolution planning in their respective jurisdictions, and describes the current level of convergence in this area. The EBA observed an increase in a number of authorities applying simplified obligations for less significant banks, especially for resolution planning purposes. There was a higher convergence when assessing which institutions are eligible for simplified obligations. However, significant divergences remained in determining reduced requirements for institutions benefiting from simplified regimes where the regulatory framework does not provide detailed guidance.

The Report highlights that the vast majority of competent and resolution authorities have used their discretion to grant simplified obligations by introducing less strict requirements for some credit institutions and investment firms. The proportion of credit institutions under simplified obligations within particular jurisdictions varied although the highest was typically observed in those Member States with the largest number of banks in Europe.

Just a few EU authorities granted waivers to credit institutions as this is allowed only in those jurisdictions with specific regulatory frameworks for institutional protection schemes (IPS) and credit institutions affiliated to central bodies.     

The Report also highlighted a significantly improved level of harmonisation in the simplified obligations eligibility assessment methodologies applied by competent and resolution authorities compared to 2017. This was mainly driven by the application of the EBA Regulatory Technical Standards (RTS) specifying the conditions for applying simplified obligations that replaced the Guidelines previously issued on the same topic.

Finally, the EBA observed significant differences in the determination by the authorities of the reduced level of BRRD requirements for recovery and resolution plans. Divergent practices have been applied in relation to all possible areas in which such reductions could be introduced by the authorities (i.e. a deadline for preparing the first simplified plans, the frequency of updating the plans, content of the simplified plans, information required from institutions and the simplified resolvability assessment), as the regulatory framework does not provide detailed guidance in this respect.

Note to the editors and background

Article 4(7) of the BRRD requires competent authorities and resolution authorities to inform the EBA of the way they have applied simplified obligations and waivers for recovery and resolution planning to institutions in their jurisdiction. Based on that information the EBA is monitoring the application of simplified obligations and waivers across the European Union.

The BRRD introduces an obligation to prepare and maintain recovery and resolution plans, which in principle is applicable to all credit institutions and certain investment firms. However, the framework also gives competent and resolution authorities the opportunity to grant simplified obligations and waivers to institutions under their jurisdiction, provided that the institutions concerned fulfil specific eligibility criteria.

The EBA published its first Report in December 2017.

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EBA proposes appropriate methodology to calibrate O-SII buffer rates

22 December 2020

The European Banking Authority (EBA) proposed today the implementation of an EU-wide floor methodology to calibrate buffer rates of Other Systemically Important Institutions (O-SIIs). The proposed methodology included in the Report aims at  strengthening the stability of the banking sector and avoiding the under-calibration of O-SII capital buffer rates, while allowing the relevant authorities to consider national banking sector specificities. The proposed methodology will inform the European Commission’s further legislative initiatives that could shape the introduction of such an EU-wide floor.

With the proposed floor methodology, all EU institutions identified as O-SII will be assigned a non-zero percent buffer rate. National authorities will still retain the ability to set higher O-SII buffer rates than the prescribed floor and are encouraged to do so where deemed appropriate.

At the moment, there is no harmonised methodology at EU level to calibrate O-SII buffer rates. Therefore, the recommendations included in the Report do not bear immediate consequences for the EU banking sector and should be seen as a preparatory step to inform EU co-legislators in view of legislative initiatives to design and operationalise an EU-wide methodology for the calibration of O-SII buffer rates.

The EBA also published a user-friendly data visualisation tool that will allow stakeholders to better understand and navigate the charts, tables and most of the country-level data contributing to the findings and conclusions included in the Report.

Note to the editors

  • The EBA is mandated in article 131 of fifth Capital Requirement Directive (CRD V) to report to the European Commission, by end 2020, on the appropriate methodology to calibrate O-SII buffer rates. The publication of this Report and submission to the Commission fulfils this mandate.
  • The rationale for this mandate is the heterogeneity of O-SII buffer rates set at the national level by relevant authorities. Similar O-SII scores computed according to the EBA Guidelines of 2014 have often led to different levels of O-SII buffer rates, which under the CRD IV could range from 0% to 2%.

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EBA provides additional clarity on the implementation of selected COVID-19 policies

21 December 2020

The European Banking Authority (EBA) published today additional clarifications on the application of the prudential framework in response to issues raised as a consequence of the COVID-19 pandemic. These clarifications update the FAQ section of the EBA Report on COVID-19 implementation policies published on 7 August. They mainly cover the EBA Guidelines on moratoria and COVID-19 reporting, operational risk, downturn LGD estimation and the credit risk mitigation framework. This Report is part of the EBA’s wider monitoring of the implementation of COVID-19 policies as well as of the application of existing policies under these exceptional circumstances.

The Report includes additional clarifications on the application of the Guidelines on moratoria and on COVID-19 reporting and disclosure, as well as on the operational risk taxonomy to be used in light of COVID-19. Two new sections have been added, which provide further details on the likely identification of a COVID-19-triggered downturn period and its incorporation into downturn LGD estimation, and clarifications on the treatment of the COVID-19 public guarantee schemes as a form of credit risk mitigation under the A-IRB approach.

As additional policy issues are likely to arise in the context of the EBA’s monitoring of the implementation of COVID-19 policies, the EBA expects to update the Report at a later stage.

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