EBA publishes Report on benchmarking of national insolvency frameworks across the EU

18 November 2020

The European Banking Authority (EBA) published today its Report on the benchmarking of national loan enforcement frameworks across EU Member States, in response to the EU Commission’s call for advice. The Report introduces for the first time a set of benchmarks for bank loan recovery and identifies areas where the divergence in the national insolvency regimes is wider.  In addition, the Report provides an overview of the characteristics of insolvency regimes that help explain the differences across the EU.

The Report provides a rich and unique set of benchmarks on national insolvency frameworks across 27 EU countries, based on loan-by-loan data. Benchmarks are calculated by asset class for recovery rates (gross and net), time to recovery and judicial cost to recovery. The dispersion among different categories of loans and across the EU27 is high for most of the benchmarks in most loan categories.  

Collateralised lending, including RRE and CRE, generally present higher recovery rates while retail credit cards generally show the lowest recovery rates, but are characterised by the shortest recovery times. Retail loans, in general (credit cards and other consumer loans), show the highest levels of judicial cost to recovery relative to the size of the receivables.

Loans to large corporates always present higher recovery rates than loans to SMEs, whereas the time to recovery tends to be similar for the two loan categories. Loans to SMEs also show one of the highest judicial costs to recovery.

The legal system that forms the basis of the enforcement framework (referred to as “legal origin” throughout the Report) is a significant factor explaining the recovery rates and time to recovery. The results also indicate that the existence of certain characteristics related to both the legal framework and the judicial capacity are important to improve the recovery outcomes. Positive characteristics of the enforcement frameworks that are common to three or more asset classes are for example: (i) legal instruments to enable out-of-court enforcement of collateral available; (ii) the possibility for creditors to influence the proceedings through creditor committees; and (iii) the existence of triggers for collective insolvency proceedings taking into consideration the debtor's future positive/negative cash flow. Positive characteristics of the judicial capacity that seem important to improve the recovery outcomes include, for instance, the existence of courts and judges who are specialised in insolvency cases, as well as the possibility of electronic communication between the courts and the insolvency administrators.

Note to the editors

In January 2019, the EBA received a Call for Advice from the EU Commission to benchmarking national loan enforcement frameworks across individual EU Member States. For the analysis, in 2019-20 the EBA and the National Competent Authorities collected loan-by-loan data on loans under insolvency proceedings from more than 160 banks located in 27 Member States.

The sample of loans under enforcement comprises of more than 1.2 million loans and is divided in the following asset classes: corporate, small and medium-sized enterprises (SMEs), commercial real estate (CRE), residential real estate (RRE), retail-credit cards and retail-other consumer loans. The reference date for the data is the period before December 2018.

The ratio of total assets of the banks participating in the exercise over the total assets of the respective banking sectors is, on average, above 30% for all asset classes considered.

This is the first time that individual loan-level information was collected by the EBA across the EU. Some remaining data quality issues, which are highlighted in the Report, suggest some caution in the analysis of the results.

EBA publishes the methodology for the 2021 EU-wide stress test

13 November 2020

The European Banking Authority (EBA) published today the final methodology, draft templates and template guidance for the 2021 EU-wide stress test along with the key milestones of the exercise. The methodology and templates include some targeted changes compared to the postponed 2020 exercise, such as the recognition of FX effects for certain P&L items, and the treatment of moratoria and public guarantees in relation to the current Covid-19 crisis. The stress test exercise will be launched in January 2021 with the publication of the macroeconomic scenarios and the results published by 31 July 2021.

Like the previous ones, the 2021 EU-wide stress test is a bottom-up exercise with constraints, including a static balance sheet assumption. The exercise is primarily a diagnostic tool focused on the assessment of the impact of adverse shocks on the solvency of banks. Banks are required to estimate the evolution of a common set of risks (credit, market, counterparty and operational risk) under an adverse scenario. In addition, banks are requested to project the impact of the scenarios on the main income sources.

A draft version of the stress test templates is also published along with a template guidance. The draft version of the templates and template guidance can still be subject to minor technical adjustments before its final publication. 

Along with the methodology, the sample of banks participating in the exercise is also published.

Key milestone dates of the 2021 EU-wide stress test exercise

  • Launch of the exercise at the end of January 2021;
  • First submission of results to the EBA at the beginning of April 2021;
  • Second submission to the EBA in mid-May 2021;
  • Third submission to the EBA at the end of June 2021
  • Final submission to the EBA in mid-July 2021;
  • Publication of results by end-July 2021.

Notes to editors

The aim of the EU-wide stress test is to assess the resilience of EU banks to a common set of adverse economic developments in order to identify potential risks, inform supervisory decisions and increase market discipline.

The EBA EU-wide stress test is conducted in a bottom-up fashion, using consistent methodologies, scenarios and key assumptions developed jointly with other authorities.

In particular, the exercise is coordinated by the EBA and carried out in cooperation with the European Central Bank (ECB), the European Systemic Risk Board (ESRB), the European Commission (EC) and the Competent Authorities (CAs) from all relevant national jurisdictions.

To give banks sufficient time to prepare for the exercise, the EBA publishes the methodology and templates well ahead of the formal launch, when the relevant macroeconomic scenarios will be released.

The EBA reminds financial institutions of the need for readiness in view of the Brexit transition period ending on 31 December 2020

09 November 2020

  • The transition period agreed between the EU and the UK following the UK withdrawal from the EU on 1 February 2020 will end on 31 December 2020 meaning that EU law will stop to apply in the UK from 1 January 2021. From that date provision of financial services from UK authorised institutions to EU customers on a cross-border basis (passporting) will no longer be possible.
  • UK financial institutions offering services to EU customers should (1) ensure they have obtained the necessary authorisations from EU competent authorities and have effectively established themselves before the end of the transition period, and (2) provide adequate information to their EU customers regarding the availability of services after the end of the transition period.
  • eIDAS certificates issued to the UK-based account information service providers and payment initiation service providers should be revoked and no longer supported.
  • Payment service providers should include additional details regarding the payer and the payee for the transfer of funds between the EU and UK.

The European Banking Authority (EBA) reminds financial institutions affected by the end of the transition period to finalise the full execution of their contingency plans in accordance with the conditions agreed with relevant competent authorities before the end of the transition period on 31 December 2020. The EBA also reminds institutions to ensure adequate communication regarding their preparations and possible changes to any affected EU customers.

Finalisation of preparations and effective establishment in the EU as agreed with relevant competent authorities

In order to continue to provide services in the EU, UK-based financial institutions need to finalise their authorisations from the EU competent authorities and fully establish their EU-based operations in accordance with the conditions and establishment plans agreed with the relevant competent authorities. In particular, financial institutions should ensure that associated management capacity, including appropriate risk management capabilities, is effectively in place in the EU, and is commensurate to the magnitude, scope and complexity of their activities and the risks they generate in their EU operations. Financial institutions are reminded of the need to have clearly articulated and appropriate booking arrangements, to meet the outsourcing requirements as provided in the EBA Guidelines on outsourcing arrangements, and not to outsource activities to such an extent that they operate as ‘empty shell’ companies as also provided in the EBA Opinion on preparations for the withdrawal of the United Kingdom from the EU.

Despite significant action by many financial institutions, and the steps taken by EU public authorities to address financial stability concerns (notably the European Commission’s time-limited equivalence decision to give financial institutions 18 months access to UK central counterparties (CCPs) and call upon them to reduce their exposures to and reliance on those CCPs), even the institutions that have already obtained all necessary authorisations and permissions should remain vigilant. In this regard, financial institutions are also reminded to complete the necessary actions regarding the repapering of contracts with their EU clients.

The EU supervisory authorities continue to pay specific attention to the preparations of payment and electronic money institutions, where many services in the EU have been provided by UK-based institutions on a cross-border basis benefiting from the EU’s Single Market passporting arrangements.

In their preparations for the end of the transition period and ramping up of their EU operations, financial institutions should duly comply with all applicable EU legislation and pay particular attention to prudential, consumer protection and AML/CFT requirements.

Payments and payment services

The EBA draws to the attention of market participants that any eIDAS certificate issued to UK-based third party providers under the Payment Services Directive (PSD2) - in particular to account information service providers and payment initiation service providers, or TPPs - for the purpose of identification towards EU-based account servicing payment service providers (ASPSPs) will, as of the end of the transition period on 31 December 2020, no longer meet the legal requirements of Article 34 of the Commission Delegated Regulation (EU) 2018/389, since these providers will no longer have an EU authorisation number and no longer be authorised/registered by a competent authority of an EU Member State.

In that regard, the EBA also calls upon qualified trust service providers in the EU that have issued eIDAS certificates to the UK-based TPPs for the purpose of identification under the aforementioned Delegated Regulation to revoke said certificates at the end of the transition period in order to prevent unauthorised access to customer payment accounts held at EU-based ASPSPs.

Furthermore, the EBA highlights to EU-based payment service providers (PSPs) their obligations under the Regulation (EU) 2015/847 (the Wire Transfer Regulation or ‘WTR’) and reminds them that, as of the end of the transition period, transfers of funds to/from the UK will be subject to the WTR requirements concerning payments from/to outside the EU.

In particular, under the WTR, PSPs need to provide more detailed information on the payer and the payee for transfers of funds from/to outside the EU, compared to intra-EU transfers where all PSPs involved in the payment chain are established in the EU. This means that, as of the end of the transition period:

  • for transfers of funds from the EU to the UK, EU-based PSPs of the payer will need to ensure that these transfers include, in addition to the information regarding the payer's payment account number or a unique transaction identifier, also information on the payer's name and either the payer's address, official personal document number, customer identification number or the date/place of birth (see Article 4(1) of the WTR). The payer's PSP will also need to verify the accuracy of the information obtained (Article 4(4) of the WTR). This is without prejudice to the requirements applicable to PSPs under Regulation (EU) No 260/2012 (the SEPA Regulation);
  • for transfers of funds from the UK into the EU, EU-based PSPs of the payee will need to ensure that they have the necessary procedures in place to detect whether the required information on the payer is included in the transfer message, and to implement effective risk-based procedures for determining whether to execute, reject or suspend transfers of funds lacking the complete payer and payee information that is required (Articles 7-8 of the WTR).

The EBA also notes that as of 1 January 2021, the SEPA rules applicable to SEPA credit transfers (SCT) and SEPA direct debits (SDD) from/to non-EEA jurisdictions will become applicable to SCT/SDD transactions with the UK. In this regard, the industry should take note of the statements issued by the European Payment Council.

Communication to customers

The EBA is calling on all financial institutions affected by the end of the transition period, and in particular, those offering financial services to EU-based customers on a cross-border basis and benefiting from the passporting arrangement, to adequately and timely inform their EU-based customers of any actions they are taking as part of their preparations for the end of the transition period affecting the availability and continuity of the services they provide, or whether institutions plan to cease offering services to EU-based customers. Information on the cessation of the services to the EU-based customers should explain the impact of the cessation on the provision of services and the way to exercise customer rights, in order to avoid any detrimental effects for customers.

The EBA also notes that, should EU-based customers have concerns about whether they may be impacted by the end of the transition period, and they have not been contacted by their financial service providers, they may contact financial institutions. Where practically possible, customers, specifically large corporates and institutions, may consider checking with their UK-based financial service providers to confirm whether they have obtained all necessary authorisations from EU competent authorities to continue to providing services to EU-based customers after the end of the transition period.

Financial institutions’ customers are also invited to consult the websites of their national competent authorities for communications and guidance about the UK withdrawal from the EU and its impact on the provision of financial services in specific jurisdictions.

EBA publishes revised final draft technical standards and Guidelines on methodology and disclosure for global systemically important institutions

04 November 2020

The European Banking Authority (EBA) published today revised final draft regulatory technical standards (RTS) to specify how to identify the indicators of global systemic importance and revised Guidelines on their disclosure. The need for this revision was prompted by the revised framework introduced by the Basel Committee on Banking Supervision (BCBS) in July 2018 to identify global systemically important banks (G-SIBs) as well as by the new requirements laid down in the fifth Capital Requirements Directive (CRD V), which recognise the importance of cross-border activities within the European Banking Union area.

The list of EU G-SIBs identified by the BCBS and the global systemically important institutions (G-SIIs) identified by Member States' authorities have remained identical. One of the key changes stemming from the BCBS’ revised approach is the introduction of a new trading volume indicator, which adds up to the existing 12 indicators used to measure systemic importance. In addition, the revised standards include insurance activities in the indicators-based measurement approach.

At EU level, CRD V has mandated the EBA to develop an additional methodology for the identification of G-SIIs that excludes the cross-border activities of EU banks in Member States of the European Banking Union. The rationale behind this request is to recognise the efforts made in recent years to create harmonised European banking regulation and a common approach to resolution. This additional EU methodology shall take into account the Single Resolution Mechanism (SRM), which could lead to the re-allocation of a G-SII from a higher to a lower sub-category, hence potentially translating into lower capital buffer requirements. These revised RTS will apply from the 2022 G-SII assessment exercise based on end-2021 information.

As a result of the revised Basel framework, also the EBA Guidelines on G-SIIs disclosure requirements have been updated. These requirements apply not only to institutions that have already been identified as G-SIIs but also to other very large entities in the EU that have an overall leverage ratio exposure measure exceeding EUR 200 billion. The EBA Guidelines go beyond the requirements laid down in the Regulation and enable Member State authorities to perform the identification and scoring process and disclosure in a timely manner, and in particular before the identification of any G-SIIs.

Both the RTS on the identification methodology for G-SIIs and the EBA guidelines on disclosure requirements will be under ongoing review, as the BCBS identification process is subject to regular reviews of the identification methodology.

Legal basis

The revised RTS have been drafted in line with the new BCBS’ framework for the identification of G-SIBs introduced in July 2018 and in accordance with Article 131 of Directive (EU) 2019/878 (CRD V) which requires that the EBA designs an additional identification methodology for G-SIIs based both on the existing international standards and on the cross-border activities of the group.

The Guidelines have been issued in accordance with Article 16 of Regulation (EU) No 1093/2010 (EBA Founding Regulation), which mandates the Authority to establish consistent, efficient and effective supervisory practices within the ESFS, and to ensure the common, uniform and consistent application of Union law.

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ESAs’ Board of Appeal dismisses case against EIOPA on alleged non-application of Union law as manifestly inadmissible

04 November 2020

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) published today its decision in relation to an alleged non-application of Union law by six national competent authorities brought by Mr. Howerton against the European Insurance and Occupational Pensions Authority (EIOPA). In its decision, the Board of Appeal dismisses the Appellant’s claim as inadmissible as the facts described do not seem to involve insurances and occupational pension funds or any other subject-matter within the remit of EIOPA nor of the Board of Appeal.

The Board of Appeal finds that Mr Howerton’s appeal merely reiterated the very same complaints which had been raised in the past by the Appellant towards the European Securities and Markets Authority (ESMA) and which the Board of Appeal determined to be inadmissible in that context. As in the ESMA Decision, the Board of Appeal fails to see how the facts described by the Appellant, and previously filed in a complaint directed to EIOPA, may involve insurances and occupational pension funds or any other subject-matter within the remit of EIOPA and of the Board of Appeal. In addition, the Board of Appeal notes that the Appellant, at the time of filing this new appeal, was fully aware of the reasons of inadmissibility of the appeal filed against ESMA. The Board of Appeal, therefore, considers the appeal as manifestly inadmissible and does not allow for any further consideration.

Background

On 18 august 2020, Mr. Howerton sent several requests to EIOPA to investigate six national competent authorities under Article 17 of Regulation (EU) No 1094/2010. EIOPA assessed the content of the requests to investigate and concluded that the facts were outside the scope of EIOPA’s remit because they did not fall under any of the Union acts referred to in Article 1(2) of Regulation (EU) No 1094/2010. The Appellant was informed of this conclusion by EIOPA on 30 September 2020. The appeal against EIOPA’s communication of 30 September 2020 was filed on 9 October 2020.

EBA sets out how prudential supervisors should take money laundering and terrorist financing risks into account in the Supervisory Review and Evaluation Process

04 November 2020

The European Banking Authority (EBA) published today an Opinion setting out how prudential supervisors should consider money laundering and terrorist financing (ML/TF) risks in the context of the Supervisory Review and Evaluation Process (SREP). This Opinion forms part of the EBA’s ongoing work to strengthen the fight against money laundering and terrorist financing in Europe.

Money laundering and terrorist financing can have a significant, adverse impact on an institution’s soundness and viability. It can also have an impact on the stability and integrity of the financial system in which an institution operates. This is why prudential supervisors need to develop a sufficient understanding of ML/TF risks to enable them to identify ML/TF risks and prudential concerns. ML/TF risks that are particularly relevant to prudential supervisors include those that are indicative of broader deficiencies in the internal governance or internal controls framework, such as ICT-related weaknesses, that criminals can use.

The EBA expects prudential supervisors to cooperate effectively and in a timely manner with AML/CFT supervisors to exchange information on ML/TF risks and to assess the implication of those risks for the safety and soundness of the institution they supervise.

This applies to prudential and AML/CFT supervisors that form part of the same competent authority, as it does to prudential and AML/CFT supervisors from different competent authorities and in cross border situations.

The EBA will include more detailed guidance on how ML/TF risks should be considered by prudential supervisors as part of their overall SREP assessment in the revised version of the SREP Guidelines that is planned to be published by end December 2021 as set out in the Pillar 2 roadmap.

Legal basis and background

The EBA has delivered this Opinion in accordance with Article 29(1)(a) of Regulation (EU) No 1093/2010, which mandates the Authority to play an active role in building a common Union supervisory culture and consistent supervisory practices, as well as in ensuring uniform procedures and consistent approaches throughout the Union.

This Opinion is part of the EBA's wider work to strengthen the link between prudential and AML/CFT supervision, and to lead, coordinate and monitor the EU financial sector’s fight against ML/TF. It reflects a specific request in the Council Anti Money Laundering Action Plan of 2018.

The EBA has published guidance on supervisory cooperation in the AML/CFT context. Guidance on the cooperation between prudential and AML/CFT supervisors under Art 117 of the CRD is currently being drafted, and will be published for consultation shortly

 

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EBA encourages financial institutions to put the required focus on consumers’ interests when applying Product Oversight and Governance Arrangements

03 November 2020

  • The Report identifies a range of good practices and encourages financial institutions to  use them;
  • Many financial institutions do not sufficiently put the required focus on ensuring that consumers’ needs are met in line with the Guidelines;
  • The EBA and relevant competent authorities will continue monitoring how financial institutions apply the EBA POG Guidelines and whether they make use of the good practices identified in this Report.

The European Banking Authority (EBA) published today its second report on how the industry has implemented the EBA Guidelines on Product Oversight and Governance Arrangements (POG). It identifies good practices of financial institutions and concludes that many of them do not sufficiently put the required focus on ensuring that consumers’ needs are met in line with the Guidelines. Therefore, the EBA encourages financial institutions to ensure that the interests, objectives and characteristics of consumers are taken into account when applying POG arrangements, in order to avoid consumer detriment.

This second Report aims again to examine the application of the EBA POG Guidelines by the industry, but this time based on a larger sample of financial institutions, and in a larger number of Member States, so as to come to more robust conclusions. The review was carried out with 78 credit institutions, payment and e-money institutions across 12 EU Member States.

This Report identifies ways for financial institutions to further strengthen the application of the EBA POG Guidelines. It does so by outlining good practices identified in the sample concerning the scope of the EBA POG Guidelines and general governance, identifying the target market, product testing, product monitoring and remedial actions, and the POG arrangements for distributors.

The Report confirms the conclusions reached in the first report and namely that while manufacturers surveyed had implemented the internal processes in relation to product oversight for retail products, this was not necessarily done in a way that put the required focus on ensuring that consumers’ needs are met. Despite the objectives of the EBA POG Guidelines to enhance consumer protection and also to address the prudential risks arising from misconduct, financial institutions appeared to focus almost only on the requirements set out in the EBA Guidelines on internal governance under the Capital Requirements Directive (CRD IV).

The EBA and relevant competent authorities will continue monitoring how financial institutions apply the EBA POG Guidelines and whether they make use of the good practices identified in this Report.

Legal basis and background

This Report has been drafted in accordance with Articles 1(5) and 9(2) of the EBA founding Regulation. Article 1(5) requires the EBA to “contribute to improving the functioning of the internal market, including, in particular, a sound, effective and consistent level of regulation and supervision. […], preventing regulatory arbitrage and promoting equal conditions of competition, […] enhancing customer and consumer protection, as well as supervisory convergence across the internal market”. Article 9(2) states that the EBA “shall monitor new and existing financial activities and may adopt guidelines and recommendations with a view to promoting the safety and soundness of markets, and convergence and effectiveness of regulatory and supervisory practices”.

In partial fulfilment of this mandate, the EBA decided to address some of the causal drivers of conduct failure that had been identified in the wake of the financial crisis 2008/9. Following initial work carried out in 2012/13 by the three European supervisory authorities, the EBA developed detailed Guidelines on POG arrangements for retail banking products. The EBA Guidelines were consulted in 2014/15, issued in March 2016 and are applicable since January 2017. In July 2019, the EBA published its first implementation report, at the time based on a small sample of credit institutions only. 

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EBA issues first monitoring report on TLAC-MREL instruments accompanied by 15 recommendations

29 October 2020

The European Banking Authority (EBA) published today its first monitoring Report on minimum requirement for own funds and eligible liabilities (MREL) and total loss absorbing capacity (TLAC) instruments. The purpose of this Report is to inform stakeholders about the implementation review performed by the EBA on TLAC / MREL instruments so far and to present its views and current recommendations on specific features commonly seen in these instruments. This Report follows the same approach of the reports regularly published on CET1 and AT1 monitoring of issuances.

 The Report is based on the review of 27 transactions issued in 14 jurisdictions for a total amount of EUR 22,75bn. In particular, the Report includes EUR 21bn of senior non-preferred (SNP) issuances and EUR 1,75bn of senior holding company (HoldCo) issuances.

 

The Report covers five main areas of assessment relevant to determine the quality of the TLAC / MREL instruments, namely: availability, subordination, capacity for loss absorption, maturity and other aspects including governing law, tax and regulatory calls, and tax gross-up clauses. The Report contains 15 recommendations in total, four in the area of subordination, seven in the area of capacity for loss absorption, three in the area of maturity and one on tax gross-up.

 

In addition, the Report stresses the areas where further work from the EBA is ongoing. In particular, the Report highlights the importance to provide further guidance on the interaction between the clauses used for environmental, social and governance (ESG) capital issuances and the eligibility criteria for eligible liabilities instruments.

 

Consistent with the other work performed by the EBA on the monitoring of capital issuances, the review is not intended to be fully comprehensive. Going forward, the EBA will continue to monitor the quality of the TLAC/MREL instruments issued and exchange views with institutions and market participants on the results of this monitoring.

Legal basis and background

The EBA has developed the Report in accordance with Article 80(1) of the Capital Requirements Regulation (CRR), which specifies that the ‘EBA shall monitor the quality of own funds and eligible liabilities instruments issued by institutions across the Union and shall notify the Commission immediately where there is significant evidence that those instruments do not meet the respective eligibility criteria set out in this Regulation’.

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EBA issues Opinion to address possible infection risk stemming from legacy instruments

21 October 2020

The European Banking Authority (EBA) issued today an Opinion to clarify the prudential treatment of the so-called ‘legacy instruments” in view of the end of the grandfathering period on 31 December 2021. In its Opinion, the EBA proposes policy options to address the infection risk when created by such instruments. The EBA’s recommendations aim at ensuring a high quality of capital for EU institutions and a consistent application of rules and practices across the Union.

When reviewing EU institutions’ legacy instruments and examining the clauses that led to their grandfathering, the EBA identified two main issues, which could create the so-called infection risk, i.e. the risk that other layers of own funds or eligible liabilities instruments are disqualified. The first issue relates to the flexibility of distribution payments principle, while the second one regards clauses that might contradict the eligibility criterion of subordination. Legacy instruments will need to be subject to different tests to be cascaded down into a lower category of capital or as eligible liabilities instruments without creating an infection risk.

To address the infection risk and preserve the quality of regulatory capital, the EBA, in its Opinion, envisaged two main options. Institutions can either call, redeem, repurchase or buy-back the relevant instrument or, alternatively, amend its terms and conditions. In a limited number of cases, where institutions could demonstrate to their competent authorities that neither of these two options can be pursued, and taking into account all the relevant circumstances, the EBA also considered a third and last resort option. This option would allow institutions to keep the legacy instrument in their balance sheet while it would be excluded from regulatory own funds and TLAC / MREL eligible instruments.

The EBA will monitor the situation of the legacy instruments until the end of the grandfathering period, and will place particular focus on the use of the proposed options across jurisdictions with a view to ensuring a consistent application. In addition, the EBA will consider the transposition of specific provisions of Directive 2014/59/EU into national legislation and how this might alleviate concerns about the existence of infection risk linked to subordination aspects.

Legal basis and background

The EBA issued this Opinion in accordance with Article 29(1)(a) of Regulation (EU) No 1093/2010 (the EBA Founding Regulation), as part of its tasks of building a common Union supervisory culture and consistent supervisory practices, ensuring uniform procedures and consistent approaches throughout the Union, including in the area of own funds and eligible liabilities requirements, and monitoring the quality of own funds and eligible liabilities instruments issued by institutions across the Union, in accordance with Articles 29(1), first subparagraph, of that Regulation and Article 80(1) of the Regulation (EU) No 575/2013 (the Capital Requirements Regulation or CRR).

When the CRR entered into force, grandfathering provisions were introduced. In order to ensure that institutions had sufficient time to meet the requirements set out by the new definition of own funds, certain capital instruments that, at that time, did not comply with the new definition of own funds were grandfathered for a transition period with the objective of phasing them out from own funds. The beneficial treatment provided by the CRR1 grandfathering provisions will come to an end on 31 December 2021. 

On 9 September 2019, the EBA already announced its intention to clarify the end-treatment of the legacy instruments and called institutions to engage with their respective competent authorities with regard to the magnitude and intended future treatment of their outstanding ‘legacy' instruments.

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EBA published final draft regulatory technical standards specifying the prudential treatment of software assets

14 October 2020

The European Banking Authority (EBA) published today its final draft Regulatory Technical Standards (RTS) specifying the prudential treatment of software assets. As the banking sector is moving towards a more digital environment, the aim of these draft RTS is to replace the current upfront full deduction prudential regime so as to strike an appropriate balance between the need to maintain sufficient conservatism in the prudential treatment of software assets and their relevance from a business and an economic perspective. The final draft RTS keep a simple approach based on a prudential amortisation of software assets calibrated over a period of maximum three years.

These final draft RTS specify the methodology to be adopted by institutions for the purpose of the prudential treatment of software assets, following the amendments introduced as part of the Risk Reduction Measures (RRM) package adopted by the European legislators. In particular, these draft RTS envisage the application of a prudential treatment based on software amortisation, which is deemed to strike an appropriate balance between the need to maintain a certain margin of conservatism in the treatment of software assets as intangibles, and their relevance from a business and an economic perspective.

Following the feedback received during the public consultation, the calibration of the maximum prudential amortisation period of software has been extended to three years. Moreover, the final draft RTS have been revised in order to envisage that prudential amortisation shall be calculated starting from the date on which the software asset is available for use. This would result in a better alignment between the starting date of the accounting and the prudential amortisation, facilitating the implementation of the new prudential treatment of software.

Finally, in line with the recent targeted ‘quick fix’ amendments to the Capital Requirements Regulation (CRR) aimed at bringing forward the date of application of the new prudential treatment for software assets, the date of entry into force of the draft RTS has been anticipated to the day following that of its publication in the Official Journal of the European Union.

The EBA will closely monitor the evolution of the investments in software assets going forward, including the link between the proposed prudential treatment and the need for EU institutions to make some necessary investments in IT developments in areas like cyber risk or digitalisation.

Legal basis and next steps

These draft RTS have been developed according to Article 36(4) of Regulation (EU) No 575/2013 (CRR), which mandates the EBA to “specify the application of the deductions referred to in point (b) of paragraph 1 of Article 36, including the materiality of negative effects on the value which do not cause prudential concerns”.  The final standards have been sent to the European Commission for their adoption as EU Regulations that will be directly applicable throughout the EU.

 

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