EBA issues Report on the application of the BRRD early intervention framework

27 May 2021

The European Banking Authority (EBA) published today a Report on the application of early intervention measures under the Bank Recovery and Resolution Directive (BRRD). The Report highlights the key challenges faced by supervisors in the application of the current regulatory framework on the EIMs and various options for addressing them. The Report  follows the Discussion Paper launched in June 2020 to explore ways of enhancing crisis management tools available for competent authorities in addition to well-established and widely used supervisory powers laid down in the Capital Requirements Directive (CRD) and in the Single Supervisory Mechanism Regulation (SSMR).   

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 2015-2018 and observed their limited use across the European Union. 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 in June 2020, published a Discussion Paper including its preliminary findings on the most important implementation issues in the area of EIMs and possible solutions on how to address them. The Report published today concludes the EBA’s work on EIMs and also provides an overview of the feedback received from public consultations as well as the EBA conclusions.

Key conclusions and next steps

The EBA observed supervisory consensus on the need to eliminate existing overlaps between EIMs and other supervisory powers, as well as to remove the formal sequencing of EIMs specified in Articles 27-29 of the BRRD. In addition, the EBA observed that competent authorities supported the importance of amending Article 27(1) of the BRRD that includes an example of a quantitative early intervention trigger. For early intervention triggers specified in regulatory technical standards (e.g. based on SREP scores or monitoring of key risk indicators), the EBA will conduct further work and amend its current Guidelines on the EI triggers upon finalisation of the ongoing review of the BRRD.

Legal basis and background

The EBA has drafted this discussion paper and report on early intervention in accordance with Article 27(5) of the BRRD in relation to the monitoring of the application of the EBA Guidelines on early intervention triggers (EBA/GL/2015/03).

The DP on EIMs brought the key challenges in the implementation of the EIMs framework to the attention of the EU legislators and the European Commission is currently working on revising the existing BRRD provisions on EIMs.

EBA publishes final draft technical standards on own funds and eligible liabilities

26 May 2021

The European Banking Authority (EBA) published today its final draft Regulatory Technical Standards (RTS) on own funds and eligible liabilities. Since their entry into force, the RTS on own funds have significantly enhanced regulatory harmonisation of prudential rules and contributed to strengthening the quality of regulatory capital. With the revised Capital Requirements Regulation (CRR) introducing new criteria and requirements for eligible liabilities, these amended RTS capture several aspects of eligible liabilities as well as the changes to the own funds framework.

The draft RTS align existing provisions to changes introduced in the revised CRR in the area of own funds. This is the case, in particular, for provisions relating to the regime of supervisory prior permission for the reduction of own funds.

In addition, the draft RTS specify some of the newly introduced criteria for eligible liabilities instruments derived from the own funds regime. These include the absence of direct or indirect funding for the acquisition of ownership of eligible liabilities, the absence of incentives to redeem, the need for the resolution authority’s prior permission for the reduction of eligible liabilities. For some of these aspects, the mandates attributed to the EBA explicitly require to ensure full alignment between eligible liabilities and own funds.

Following the feedback received during the public consultation, the calibration of the threshold for determining the predetermined amount for the general prior permission for reducing eligible liabilities instruments was increased from 3% to 10% of the total amount of outstanding eligible liabilities instruments. Moreover, the final draft RTS have been revised in order to recognise some relief for the renewal of general prior permission both for own funds and eligible liabilities and for introducing a proportionate approach for liquidation entities for which their minimum requirement for own funds and eligible liabilities (MREL) does not exceed the loss absorption amount.

Legal basis and background

The EBA has updated the RTS on own funds, in accordance with the original RTS mandates granted to the EBA under Articles 28(5), 29(6), 52(2), 76(4), 78(5) and 79(2) of Regulation (EU) No 575/2013 (‘CRR’). The provisions of the RTS related to eligible liabilities have been developed in accordance with Articles 72b(7) and 78a(3) CRR. The final standards have been sent to the European Commission for their adoption as EU Regulations that will be directly applicable throughout the EU.

EBA publishes results of EU-wide pilot exercise on climate risk

21 May 2021

The European Banking Authority (EBA) published today the findings of its first EU-wide pilot exercise on climate risk, whose main objective is to map banks’ exposures to climate risk and provide an insight into the green estimation efforts banks have carried out so far. The findings give a clear picture of banks’ data gaps and highlight the sense of urgency to remedy them if they are to achieve a meaningful and smooth transition to a low-carbon economy. It is only through a more harmonised approach and common metrics that banks’ efforts will prove meaningful in addressing and mitigating the potentially disruptive impacts of environmental risks. The findings also show big differences in banks’ application of the EU taxonomy. A first estimate of the starting point of their green asset ratio (GAR) estimated with a top-down tool currently stands at 7.9%.

Summary of key results

Overall, the findings show that more disclosure on transition strategies and greenhouse gas (GHG) emissions would be needed to allow banks and supervisors to assess climate risk more accurately. In addition, the results highlight the importance for banks to expand their data infrastructure to include clients’ information at activity level. This is particularly crucial as for the 29 banks in the sample, more than half of their exposures to non-SME corporates (58% of total) are allocated to sectors that might be sensitive to transition risk. A parallel analysis, based on GHG emissions, reveals that 35% of banks’ total submitted exposures are towards EU obligors with GHG emissions above the median of the distribution.

Banks’ disclosures will be reinforced following the EBA draft technical standards on Pillar 3 disclosures on climate-change and ESG related risks, including the definition of the green asset ratio (GAR), currently under consultation[1], which will allow stakeholders to assess bank’s ESG related risks and sustainability strategy[2] and to promote market discipline.

Regarding the EU taxonomy classification, banks are currently in different development phases to assess the greenness of their exposures. Two estimation techniques, banks’ bottom-up estimates and a top-down tool, are considered in the exercise and the report highlights the differences in outcomes. Given the outlined constraints and based on a first estimate coming from a top down tool, an EU aggregated GAR stands at 7.9%.

The scenario analysis shows that the impact of climate-related risks across banks has different magnitudes and is concentrated in some particular sectors. Tools for scenario analysis are quickly developing and further progress should be made on modelling the transmission channels of climate risk shocks to banks’ balance sheets. 

Despite the appreciated efforts made by the volunteer banks in the sample, given the data gaps and the various approaches used, the findings presented in the Report should be considered as starting point estimates for future work on climate risk. The EBA will continue to work actively on measuring and assessing climate related risks in the banking sector and these findings are a key starting point in view of building up consistent and comparable climate risk assessment tools, which will help banks quantify the amount of exposures that might require managerial attention from a transition perspective.

Notes to the editors

The EU-wide pilot exercise was run by EBA on a sample of 29 volunteer banks from 10 countries,  representing 50% of the EU banking sector’s total assets, which provided raw data on non-SME corporate exposures to EU domiciled obligors[3]. The exercise focused on the identification and quantification of exposures from a climate perspective, in particular, on transition risk.

The scope of the exercise is narrowed to EU corporate exposures, for which climate related information are expected to be easier to retrieve at this stage. Banks’ exposures were mapped and evaluated according to different classification approaches, including the EU taxonomy. The latter was applied by banks directly and complemented with a top-down classification tool run by the EBA. Finally, a scenario analysis based on a joint EBA/ECB tool was also used to explore modelling options regarding the transmission mechanism between the shocks coming from climate risk scenarios, as defined by the Network for Greening the Financial System (NGFS) and banks’ balance sheets.

EBA announces plans for the 2021 EU-wide Transparency exercise and EBA Risk Assessment Report

18 May 2021

The European Banking Authority (EBA) announces that the annual 2021 EU-wide Transparency exercise will be carried out in autumn and the information on banks’ exposures and asset quality during the crisis will be released to market participants. The exercise will cover the figures from the second half of 2020 and the first half of 2021. The exercise is planned to be launched in September and the results are expected to be published at the beginning of December, along with the EBA Risk Assessment Report.

The EBA publishes report on Member States’ reliance on external credit ratings

17 May 2021

The European Banking Authority (EBA) published today a Report, which analyses the extent to which Member States' national law relies on external credit ratings. Based on a survey among EU banking supervisors, no mechanistic reliance on external credit ratings was identified. Furthermore, using EBA supervisory reporting data, the Report shows that the use of external credit ratings in the calculation of risk-weighted exposure amounts (RWEA) under the standardised approach, and under the External Ratings Based Approach (SEC-ERBA) of the securitisation framework is limited. The EBA’s assessment will ensure a comprehensive overview of the reliance on ratings for regulatory purposes ahead of the implementation of Basel III reforms into the EU legislative framework.

Based on the quantitative evidence collected, the EBA recommends to remove the mandate laid down in Article 161 (3) of the Capital Requirements Directive (CRD) to publish bi-annually a Report on the extent to which Member State’s law refers to external credit ratings, and how Competent Authorities are encouraging internal credit risk assessment capacity, promoting internal models for own funds requirements, and reducing reliance on external credit ratings . The recommendation is made on the basis of the limited references to external credit ratings found in Member States’ national law, together with developments in international regulation, namely  the provisions to reduce mechanistic reliance on external credit ratings in the standardised approach of the credit risk framework in the final Basel III reforms, and in the new securitisation framework introduced in the Capital Requirements Regulation (CRR). In addition, the Report stresses that the “enhanced due diligence” introduced in the final Basel III framework should be implemented in the EU framework.

To collect the relevant information, in December 2020, the EBA launched a survey among EU banking supervisors, which showed that Member States’ national law does not introduce mechanistic references to external credit ratings, and that the CRD-related requirements to reduce reliance have been transposed into national legislation.

Legal basis

The Report has been developed in accordance with Article 161 (3) of the CRD, which requires the EBA to analyse the extent to which Member States' national law refers to external credit ratings and how Competent Authorities are encouraging internal credit risk assessment capacity, promoting internal models for own funds requirements whenever proportional, and reducing reliance on external credit ratings.

ESAs report on the implementation and functioning of the securitisation regulation

17 May 2021

The Joint Committee of the European Supervisory Authorities (ESAs – European Banking Authority, European Insurance and Occupational Pensions Authority, and European Securities and Markets Authority) published today its analysis of the implementation and the functioning of the EU Securitisation Regulation (SECR), including recommendations on how to address initial inconsistencies and challenges, which may affect the overall efficiency of the current securitisation regime. The Report is meant to provide guidance to the European Commission in the context of its review of the functioning of the SECR. It also provides initial inputs to the ongoing discussion on the efficiency of the securitisation framework given the role that securitisation could play in the recovery post the Covid-19 pandemic.

The SECR, which became applicable in January 2019, has been useful in increasing the overall soundness of the EU securitisation market and in reducing the stigma of securitisation products. However, some adjustments could be considered to further improve the overall consistency of the existing framework. In particular, the Report highlights:

  • Transparency requirements: given the trend in increasing issuances of private securitisations and considering the SECR objectives of access of information and investor protection, a more precise legal definition for private securitisations should be specified in the SECR in order to clearly identify private securitisations that should comply with the transparency requirements. Data reported for those private securitisations should also be made available by means of a securitisation repository in order to ensure high quality data and facilitate the supervision of the compliance with the transparency requirements.
  • Due diligence requirements: regulatory guidance would be useful to specify how proportionality could be implemented in the area of due-diligence to facilitate entrance of new investors in the EU securitisation market.
  • Criteria for simple, transparent and standardised (STS) securitisation: targeted amendments in the STS criteria would be needed to facilitate the use of the STS label for ABCP programmes. In addition, in the medium term, as more STS issuances are executed and the STS market reaches a stable pace, further analysis should be performed by the European Commission with ESAs’ support to determine how the STS criteria could be simplified without reducing the quality of the standard.
  • Supervision of securitisation requirements: in order to further enhance the supervision of securitisation requirements, it is deemed necessary to explore i) how to develop common EU supervisory tools, ii) potential alternatives to the current STS supervisory framework, in particular for those jurisdictions with limited STS securitisation issuances and, iii) the relevance of a common EU approach to the ongoing supervision of authorisation conditions for third-party verifiers (TPVs).

Legal Basis

This Report has been developed in accordance with Article 44 of the SECR (Reg. EU 2017/2402) which requires that the JC of ESAs delivers a first report on the implementation and the functioning of the SECR by January 2021. In accordance with the mandate, the analysis focuses on the implementation of the general requirements applicable to all securitisations, including the risk retention, due-diligence and transparency requirements as well as on the specific requirements related to STS securitisations. The Report also includes further analysis to cover material risks and new vulnerabilities that may have materialised.

The EBA observes achievements in a number of key areas of the supervisory review across the EU, but also highlights items requiring continued attention

12 May 2021

The European Banking Authority (EBA) published today its Report on convergence of supervisory practices in 2020. Notwithstanding a refocusing of supervisory practices towards the areas impacted by the COVID 19 crisis, in line with the EBA Guidelines  on the pragmatic 2020 supervisory review and evaluation process in light of the COVID‐19 crisis, overall, the Report finds that supervisors converged in using the key topics of the EBA 2020 Convergence Plan in their supervisory work in 2020 and good progress in supervisors’ efforts could be achieved across the EU. 

The Report forms part of the EBA’s work to actively foster and promote supervisory convergence across the Union and ensure the consistent, efficient and effective application of the Union law.

The EBA actively drives the convergence efforts by establishing the annual Convergence Plan, the implementation of which is then followed up by the EBA, together with other aspects of the supervisory review process.

Overall, the Report finds that in 2020, increased supervisory attention was given to the assessment of profitability and the business model (closely linked to asset quality), as well as to selected areas of ICT risk and operational resilience, while the loan origination key topic received less supervisory attention as COVID-19 shifted the focus within the ‘life cycle’ from loan origination to the management of distressed debtors and to the monitoring of risk exposures. Therefore, loan origination practices should remain an area of attention for supervisors in 2021 and onwards.

The EBA also observed continued efforts by competent authorities to cooperate with their resolution authority counterparts and prudential supervisory practices have also been converging in the context of money laundering and terrorist financing risk. Nevertheless, some differences remain in supervisory practices both in the context of the Convergence Plan as well as in the broader Pillar 2 framework, affecting the setting of Pillar 2 Requirements and Pillar 2 Guidance. 

Another key element of the Report is the convergence in supervisory colleges, where the EBA observed increased interaction in 2020, compared to 2019, due to the close cooperation among college members during the pandemic and the colleges definitely becoming the natural platform for exchanges when it comes to cross-border banks.

Under  the 2021 Convergence Plan, the EBA also published four key topics, which in 2021 will require heightened supervisory attention: i) asset quality and credit risk management; ii) ICT and security risk, operational resilience; iii) profitability and business model; and iv) capital and liability management. The selection of these key areas for 2021 were primarily driven by the implications of the COVID-19 pandemic while they also ensure continuity in other areas to enhance supervisory efforts towards further convergence.

Note to the editors

According to its founding regulation, the EBA shall contribute to enhancing supervisory convergence across the internal market and building a common supervisory culture. Specifically in the context of the supervisory review and evaluation process (SREP), the EBA is mandated to annually report to the European Parliament and the Council on the degree of convergence of the application of the supervisory review as mandated by Article 107 of the Capital Requirements Directive (CRD).

In line with the aforementioned mandate, the EBA prepared this Report to inform the Parliament and the Council on the degree of convergence of supervisory practices in 2020.

EBA updates data on Deposit Guarantee Schemes across the EEA

10 May 2021

  • In 2020, nearly all Deposit Guarantee Schemes (DGS) in the EU, Iceland, Lichtenstein and Norway have increased their available financial means (AFM) for reimbursing depositors in case of bank failures by more than 12%*.
  • In the same period, covered deposits in the EEA grew by 8.6%*, which is twice the annual growth rate of the four preceding years.
  • The strong increases in covered deposits in the pandemic year raise the likelihood of higher contributions from the industry in the coming years to meet the target level of 0.8% of AFM to covered deposits. This is because despite the increase in DGSs’ AFM, the relative amount of AFM to covered deposits has in aggregate increased only slightly.

The European Banking Authority (EBA) published today 2020 data relating to two key concepts and indicators in the Deposit Guarantee Schemes Directive (DGSD): available financial means, and covered deposits. The EBA publishes this data on a yearly basis to enhance the transparency and public accountability of deposit guarantee schemes (DGSs) across the European Economic Area (EEA) to the benefit of depositors, markets, policymakers, DGSs and Members States.

AFM is the amount of funds raised by DGSs from credit institutions and its main purpose is to reimburse depositors in case of bank failures. The data as of 31 December 2020 shows that 34 of 36 DGSs in EU Member States, Iceland, Lichtenstein and Norway had increased their funds since the previous year by more than 12%*. In general, the increase stems from levies paid by banks that are members of those DGSs. In some cases, a significant increase in AFM in 2020 was the result of the DGS receiving recoveries from a previous intervention. In other instances, DGSs experienced a significant drop in AFM following bank failures where they had to use their AFM to reimburse depositors.

Covered deposits, in turn, are guaranteed up to 100,000 Euro or the equivalent in other currencies per depositor at each bank. In 2020, they increased significantly throughout the European Economic Area, reaching a year on year growth rate of 8.6%*, which is twice the annual growth rate for the period from 2015-2019 of 4.3%*. About half the DGSs even saw double-digit growth rates of the covered deposits they protect. The increase could be a consequence of the global COVID-19 pandemic as households may have delayed purchases due to commercial restrictions or sought to store their savings safely.

Changes in the AFM and covered deposits are relevant, because the ratio of AFM to covered deposits is the measurement for the target level of 0.8% of covered deposits set out in the DGSD, which the DGSs needs to reach by 3 July 2024. As of 31 December 2020, 18 DGSs have already reached the target level while 16 DGSs have yet to reach it. The above-average increases in covered deposits mean that the ratio of AFM to covered deposits increased by less than it would have otherwise. The consequence might be that the DGS contributions might need to be higher in the coming years, particularly where the DGS has not yet reached the target level of 0.8% of AFM to covered deposits.

Legal basis and background

The EBA is collecting this data in accordance with Article 10(10) of the DGSD.

On 23 July 2018, the EBA issued a decision to explain that it will make this data publicly available on its website.

 

(*) The growth rates in this press release are measured based on the aggregate for the EU 27, Iceland, Lichtenstein and Norway in Euros at constant exchange rates as of 31 December 2019.

 

The European Banking Authority publishes report on mystery shopping activities of national authorities

03 May 2021

  • This publication is the EBA’s first step in the fulfilment of its new coordination mandate on mystery shopping activities of National Competent Authorities (NCAs);
  • It summarises the most common approaches taken by NCAs on mystery shopping, presents some lessons learned, and identifies good practices;
  • Mystery shopping allows NCAs to obtain greater insight into the conduct of financial institutions. The latter are then encouraged to take corrective actions and to better comply with applicable requirements, thus eventually enhancing the protection of consumers.

The European Banking Authority (EBA) published today a Report on the mystery shopping activities of NCAs. The EBA collated mystery shopping activities by NCAs with a view to share experiences, learn valuable lessons, and identify good practices for the benefit of the EBA and NCAs that use or intend to use mystery shopping in the future.

The Report covers mystery shopping initiatives of NCAs in respect of products that fall within the scope of action of the EBA’s consumer protection mandate, which are consumer credit, mortgage credit, deposits, payment services, electronic money, and payment accounts. It summarises the most common approaches used by the NCAs, based on the information collated primarily covering the period from 2015 to 2020. It does so by reviewing three key characteristics of mystery shopping activities: their objective, subject matter and product scope, the methodologies used by NCAs, and the follow-up actions after the mystery shopping was concluded. The Report also identify some lessons learned and sets out good practices.

At this stage, only a limited number of NCAs carried out such mystery shopping activities in their jurisdiction. Moreover, some NCAs reported that discussions are currently taking place at national level on the possibility of adding such powers to relevant competent authorities’ mandate, for some of them as part of the implementation of the EU Consumer Protection Cooperation Regulation.

Regarding the lessons learned, the Report explains that mystery shopping allows NCAs to obtain greater insight into the conduct of financial institutions. This, in turn, encourages them to take corrective actions better to comply with applicable requirements, and eventually enhances the protection of consumers. Among the good practices identified by the NCAs, most of them concern common procedural aspects such as organising training for NCAs’ inspection and supervisory staff,  identifying target customer profiles, and defining agreed ‘rules’ of customer’s behaviour.

Legal basis

The EBA publishes this Report as a first step to fulfilling the new mandate it received on 1 January 2020 in Article 9(1) of the EBA Founding Regulation. The mandates requires the EBA to ‘coordinate mystery shopping activities of competent authorities, if applicable’.

EBA published final draft technical standards specifying the methods of prudential consolidation

15 April 2021

The European Banking Authority (EBA) published today its final draft Regulatory Technical Standards (RTS) specifying the conditions according to which consolidation shall be carried out in line with Article 18 of the Capital Requirements Regulation (CRR). The aim of these draft RTS is to ensure that the appropriate method of prudential consolidation is applied for the calculation of the CRR requirements on a consolidated basis. Compared to the Consultation Paper, the final draft RTS have been revised also to reflect the amendments introduced as part of the Risk Reduction Measures Package adopted by the European legislators.

These final draft RTS specify the conditions for the application of the different methods of prudential consolidation. Entities to be included in the scope of prudential consolidation are, in particular, institutions, financial institutions and ancillary services undertakings.

Following the approval of the Risk Reduction Measures Package, these draft RTS have been revised in order to reflect the changes introduced in the CRR and in the Capital Requirements Directive (CRD), as well as the feedback received during the public consultation. In particular, the main changes deal with the newly introduced Article 18(8) of the CRR, allowing competent authorities to extend prudential consolidation also to certain non-financial undertakings in case there is a substantial risk of step-in. In this regard, building on the initial proposal presented in the Consultation Paper, these draft RTS include several step-in risk indicators to be taken into account by competent authorities in assessing whether an undertaking should be fully or proportionally consolidated for prudential purposes.

Legal basis and next steps

These draft RTS have been developed according to Article 18(9) of Regulation (EU) No 575/2013 (CRR), which mandates the EBA to ‘specify conditions accordance with which consolidation shall be carried out in the cases referred to in paragraphs 3 to 6 and paragraph 8’ of Article 18 of this Regulation. The final standards have been sent to the European Commission for their adoption as EU Regulations that will be directly applicable throughout the EU.

These RTS have taken into consideration also the Guidelines on the identification and management of step-in risk published by the Basel Committee on Banking Supervision (BCBS) and, therefore, include several indicators that should be assessed in order to identify the undertakings that can lead to step-in risk.