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%.
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.

EBA explains how it will use its new power to carry out risk assessments in the fight against money laundering and terrorist financing

17 December 2020

The European Banking Authority’s (EBA) published today the methodology for carrying out risk assessments under Article 9a of the revised EBA Regulation. These risk assessments are part of the EBA’s new role to lead, coordinate and monitor the fight against money laundering and terrorist financing (ML/TF) in all EU Member States.

The main objective of a risk assessment under Article 9a is to establish how well equipped competent authorities are to tackle emerging ML/TF risks, in terms of their capabilities and resources to respond to future risks that may arise as well as to intervene early and in a coordinated manner to manage those risks across the single market. 

This methodology sets out how the EBA will identify emerging ML/TF risks, and how it will carry out the risk assessment. The methodology also explains the review and publication process of the outcome of each risk assessment.

Going forward, the EBA will use this methodology to assess whether the use of its powers under Article 9a is warranted.

Legal basis

This methodology has been prepared in accordance with Article 9a(5) of the EBA Regulation, which empowers the EBA to ‘perform risk assessments of the strategies, capacities and resources of competent authorities to address the most important emerging risks related to money laundering and terrorist financing (ML/TF) at Union level as identified in the supranational risk assessment (SNRA).’

EBA updates its Report on liquidity measures and confirms banks’ solid liquidity position

17 December 2020

The European Banking Authority (EBA) published today its EBA Report on liquidity measures, which monitors and evaluates the liquidity coverage requirements currently in place in the EU. The liquidity coverage ratio (LCR) of EU banks stood at around 166% in June 2020, materially above the minimum threshold of 100%.

The Report shows that EU banks have continued to improve their LCR. This trend continued at end-June 2020 even if the Covid-19 crisis had an impact on banks’ liquidity positions. At end-June 2020, EU banks' average LCR stood at 166% and no bank reported LCR levels below 100%. The access to additional liquidity via extraordinary central bank facilities supported EU banks’ efforts to maintain their LCR buffers.

A more in-depth analysis of potential currency mismatches in LCR levels revealed that EU banks tend to hold materially lower liquidity buffers in some foreign currencies, in particular US dollar. The activation of FX swap lines among the major central banks in the first semester of 2020 helped mitigate the stress in the FX funding markets and contributed to an improvement in EU banks’ foreign currency LCRs.

Note to the editors

  • The results of the Report on liquidity measures are presented separately for G-SIIs and O-SIIs and other banks (non G-SIIs or O-SIIs). Some figures are presented by country.
  • Article 412(1) of the CRR foresees the possibility of monetising liquid assets during times of stress (resulting in an LCR below 100%) as maintaining the LCR at 100%, under such circumstances, could produce undue negative effects on the credit institution and other market participants.
EBA publishes final draft technical standards on capital requirements of non-modellable risks under the FRTB

17 December 2020

The European Banking Authority (EBA) published today its final draft Regulatory Technical Standards (RTS) on the capitalisation of non-modellable risk factors (NMRFs) for institutions using the FRTB Internal Model Approach (IMA) implemented in EU as a reporting requirement. These draft RTS are a key deliverables in the EBA’s work on implementing the FRTB in EU and part of its roadmap for the new market and counterparty credit risk approaches published on 27 June 2019.

These draft RTS lay down a specific methodology that institutions are to use for determining the own funds requirements related to non – modellable risk factors in the new market risk regime. The methodology is applicable to all kinds of risk factors and adjusts to different levels of NMRF data availability. Data collected in the data collection exercise launched in June 2019 served as a basis for its calibration.

The methodology set out in these draft RTS ensures a level playing field among credit institutions in the Union on a key component for determining own funds requirements for market risk. They also provide legal certainty on how the level of own funds requirements for NMRFs should be determined. With this publication, a significant milestone is reached towards the implementation of the FRTB standards in the EU.

Legal basis

These draft RTS have been developed according to Article 325bk(3) of REGULATION (EU) 2019/876 of the European Parliament and of the Council of 20 May 2019 amending Regulation (EU) No 575/2013. 

Article 325bk(3) of that Regulation requires the EBA to develop draft RTS to specify (a) how institutions are to develop extreme scenarios of future shock applicable to non-modellable risk factors; (b) a regulatory extreme scenario which institutions may use when they are unable to develop an extreme scenario of future shock in accordance with point (a) or which competent authorities may require that institution apply; (c) the circumstances under which institutions may calculate a stress scenario risk measure for more than one non-modellable risk factor; (d) how institutions are to aggregate the stress scenario risk measures of all non-modellable risk factors.

EBA publish final draft technical standards on the prudential treatment of investment firms

16 December 2020

The European Banking Authority (EBA) published today a package of seven final draft Regulatory Technical Standards (RTS) on the prudential treatment of investment firms. These final draft RTS, which are part of the phase 1 mandates of the EBA roadmap on investment firms, will ensure a proportionate implementation of the new prudential framework for investment firms taking into account the different activities, sizes and complexity of investments firms.

With the entry into force of the Investment Firms Regulation (IFR) and Directive (IFD), most of the investment firms authorised under the Markets in Financial Instruments Directive (MiFID) will be subject to a new prudential regime, different and independent from the Capital Requirements Regulation (CRR) applicable today. With today’s submission, the EBA is preparing for a smooth introduction of the IFR/IFD, which is due to be applicable by mid-2021.

The technical standards included in this package set out the main aspects of the new prudential regime in relation to the calculation of the regulatory capital requirements. They provide further technical clarifications on the methodologies to be applied by all types of investment firms, including investment advisors, portfolio managers, execution brokers, firms trading on own account and commodity dealers.

In addition, certain specific investment firms may be required to apply the banking rules also after the entry into force of the IFR. Therefore, one of the mandates delivered today includes the criteria for the identification of these investment firms on the basis of their systemic importance.

Finally, under the new framework, large investment firms trading on their own account or underwriting on a firm committed basis may be required to apply for a credit institution authorisation. To support this requirement, the package includes a specification of the information required for such authorisation, consisting of simplified and reduced requirements as to what is expected from a bank holding deposits or providing loans.

Legal basis and background

The EBA has developed these draft RTS and ITS according to Article 8a(6)(a) of the Capital Requirements Directive (CRD) and Article 13(4), Article 15(5)(a), Article 15(5)(b), Article 15(5)(c), Article 23(3), of  the IFR - (EU) 2019/2033 -  and Article 5(6), of the IFD - (EU) 2019/2034, which mandate the Authority to further specify, develop, determine a prudential framework for investment firms to ensure supervisory convergence and a level playing field among investment firms across the EU. The technical standards will be applicable from 26 June 2021.

The Investment Firms Prudential Package consists of the Directive (EU) 2019/2034 and the Regulation (EU) 2019/2033, which were published in the Official Journal on 5 December 2019 and establish a new prudential framework for investment firms authorised under MIFID.

EBA welcomes European Commission’s action plan to tackle NPLs in the aftermath of the COVID-19 pandemic

16 December 2020

  • The EBA stands ready to support the EU Commission in a wide range of actions to increase banks’ resilience and boost secondary markets for NPLs.
  • As part of the action plan, the EBA will be working on improving data quality and comparability, and data infrastructures needed for development of secondary markets for distressed assets. In particular, the EBA will revise its NPL data templates.

The European Banking Authority (EBA) welcomed today the European Commission’s comprehensive action plan to tackle the expected rise of non-performing loans (NPLs) on banks’ balance sheets following the outbreak of the COVID-19 pandemic. The action plan requests the EBA’s support to improve data quality and comparability, enhance transparency and market discipline under Pillar 3 rules, and address regulatory impediments to NPL purchases. The EBA is going to act swiftly to support these initiatives while continuing its wider regulatory and supervisory work on NPLs in the EU.

The Commission’s action plan is focused, among other elements, on secondary markets for distressed assets, asset management companies, and insolvency and debt recovery frameworks.

The European Commission asked the EBA to review its NPL data templates, published in December 2017, to reassess the criticality of the data fields and to make them more user friendly for the purposes of financial due diligence and the valuation of NPL transactions. The NPL data templates are a central element of the action plan, which also includes initiatives such as EU guidance on best-execution NPL sales process, organisation of asset management companies, and a European data hub.

Next steps

Throughout the review process of the NPL data templates, the EBA will have close engagement with relevant market participants before the publication of a discussion paper on the revised data templates in Q2 2021. In addition, the EBA will also work to specify the appropriate regulatory treatment of sold NPL loans.

The EBA will continue to monitor and support the roll out of Guidelines on management of non-performing and forborne exposures, and Guidelines on loan origination and monitoring to ensure that sound and prudent approaches to loan management are accompanied by high standards of consumer protection.

EBA publishes final technical standards to ensure effective application of stay powers under the BRRD

16 December 2020

The European Banking Authority (EBA) published today its final draft Regulatory Technical Standards (RTS) on the contractual recognition of stay powers. The technical standards provide further specification of essential elements to ensure the effectiveness of the resolution regime established by the Bank Recovery and Resolution Directive (BRRD). 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.

These technical standards aims to ensure the effective application of stay power. Where financial contracts are governed by the law of a third country, the BRRD requires these contracts to include a contractual recognition term by which the parties acknowledge that the contract may be subject to these stay powers and agrees to be bound by their effect.

The final draft RTS further determine the contents of the contractual recognition term for stay powers. The EBA's approach is designed to strike a balance between the need for harmonisation and the need for flexibility to take account of any issues arising in relation to a specific third country law, type of financial contract.

Legal basis

The final draft RTS on contractual recognition of stay powers have been developed according to Article 71a(5) of the BRRD, which requires the EBA to further determine the contents of the term required in paragraph 1 of article 71a of the BRRD, taking into account institutions' and entities' different business models.

The EBA continues to call on banks to apply a conservative approach on dividends and other distributions in light of the COVID-19 pandemic

15 December 2020

In its 12 March statement, the EBA urged banks to follow conservative distribution policies and use capital for ensuring the continuous financing of the economy. Banks in the European Union have been able to continue supporting businesses and mostly remained with strong levels of capitalisation. However, given that the COVID-19 crisis and the uncertainty on its impact on the economy are likely to continue, with possible further deterioration of asset quality metrics over the next quarters, the EBA urges banks to refrain from distributing capital outside the banking system when deciding on dividends and other distribution policies, including share buybacks, unless extreme caution is applied.

Banks envisaging any dividends or other distribution should carefully take into account the resulting impact on the capital trajectory. The supervisory dialogue with banks in this context should, in particular, consider banks’ income generation capacity based on prudent projections, to ensure that banks retain ample resources to withstand a possible further deterioration of asset quality while continuing to support the economic recovery and the financing of households and corporates.

Continuing to apply conservative distribution policies is fundamental to ensure the preservation of sound capital levels within the European banking sector and forms the basis to provide the needed support to the economy. The EBA also considers that ensuring the efficient and prudent allocation of capital within banking groups remains crucial and should be monitored by competent authorities. Capital distributions within a banking group should serve the need to support the local and the broader European economies as well as to ensure the proper functioning of the Single Market, particularly crucial in this time of crisis.

Taking into account that the stressed conditions are likely to continue in 2021, the variable remuneration of material risk takers[1] for the performance year 2020 should be set at a conservative level. To achieve an appropriate alignment with risks stemming from the COVID-19 pandemic a larger part of the variable remuneration of material risk takers should be deferred for a longer period and a larger proportion should be paid out in instruments. Competent authorities should continue to monitor banks’ remuneration policies, in particular to ensure that they are consistent with an effective risk management and long-term interest of the bank.

The EBA will promote coordination among competent authorities as appropriate to ensure a level playing field within the EU.

 

[1] Staff, whose professional activities have a material impact on the institutions risk profile.

EBA observes improved cooperation between authorities through newly established AML/CFT colleges

15 December 2020

  • EBA observes that competent authorities are putting significant effort into setting up new AML/CFT colleges based on recent Guidelines. 
  • The EBA finds that active participation from competent authorities is needed for the colleges framework to work effectively. 
  • The EBA is monitoring work in AML/CFT colleges and providing technical support to the competent authorities in setting up the colleges.

The European Banking Authority (EBA) published today its first Report on progress made by competent authorities with the setting up of colleges to enhance supervisory cooperation for anti-money laundering and countering the financing of terrorism (AML/CFT) purposes. The EBA’s work on monitoring colleges is part of its new role to lead, coordinate and monitor the fight against money laundering and terrorist financing (ML/TF) in all EU Member States as set out in the EBA Regulation.

Cooperation between AML/CFT supervisors within the EU and globally is key to ensuring effective AML/CFT supervision of financial institutions that operate on a cross-border basis. To that effect, in December 2019, the European Supervisory Authorities (ESAs) published guidelines that require competent authorities to cooperate and exchange information through AML/CFT colleges.

Between the publication of the Guidelines in December 2019 and October 2020, AML/CFT colleges for 10 EU banks were established. The EBA staff attended all these colleges to monitor their functioning and share observations with competent authorities on their approach to AML/CFT supervision.

This Report provides examples of good and poor practices drawing on the lessons learnt from these first colleges,  with the aim of supporting the effective and efficient setting up and operation of new colleges going forward. In particular, the Report highlights that there was a good level of interaction and willingness to share the information through a mix of presentations and round-table discussions within the colleges, which contributed to enhancing the supervisors’ understanding of the group’s exposure to ML/TF risks in different jurisdictions.

The EBA also found some challenges, which were mainly related to the timely invitation of some observers. This meant that limited or no participation by third country authorities or prudential supervisors was observed in some colleges.

Legal basis and background

Directive (EU) 2018/843 (AMLD) introduced an explicit requirement for competent authorities to cooperate with each other but did not provide a framework of how this cooperation should happen in practice. To overcome this challenge, the three ESAs published Guidelines in December 2019 (JC 2019 81) on cooperation and information exchange between competent authorities supervising credit and financial institutions. These Guidelines provide details how competent authorities should give effect to the cooperation requirements set out in AMLD, by establishing a framework for AML/CFT colleges.

The colleges framework is broadly based on, and consistent with, the framework of colleges of prudential supervisors of banks. However, the framework of AML/CFT colleges extends beyond the banking sector and it is the first time that colleges of AML/CFT supervisors are established in the EU. In line with the Guidelines, AML/CFT colleges are permanent structures that provide a mechanism for cooperating and exchanging information between the competent authorities responsible for the supervision of financial institutions that operate on a cross border basis in different EU and non-EU jurisdictions.

The Guidelines recognise that establishing AML/CFT colleges from scratch is not an easy process and therefore provide a 2-year transition period during which competent authorities are required to put in place all elements and set up all necessary colleges on a risk sensitive basis, before the Guidelines fully apply as of 10 January 2022.