19 February 2021
The European Banking Authority (EBA) published today final draft regulatory technical standards (RTS) specifying how institutions should determine exposures arising from derivative and credit derivative contracts not entered directly into with a client but whose underlying debt or equity instrument was issued by a client. These draft RTS will ensure appropriate levels of consistency through different pieces of the regulatory framework for the calculation of large exposures.
As part of the Risk Reduction Measures (RRM) package adopted by the European legislators, the large exposure framework under the Capital Requirements Regulation CRR) was amended to ensure greater alignment with the Basel standard (LEX).
These draft RTS propose a methodology for the calculation of indirect exposures for different categories of derivative contracts and credit derivative contracts with a single underlying debt or equity instrument, namely:
In addition, they provide a separate methodology for the calculation of exposures stemming from contracts with multiple underlying reference names. The proposed methodologies are expected to be easy to implement and applicable by all institutions in a standardised manner.
The final draft RTS have been developed in a way to ensure that they are compatible with the jump-to-default (JTD) approach under the Fundamental Review of the Trading Book (FRTB) and the CRR and the corresponding draft RTS on JTD that the EBA is currently developing. The basis of both draft RTS is the variation in price that would stem from the default of an issuer.
The EBA consulted on the draft RTS for three months, and the feedback received led to a clarification, on the treatment of derivatives and credit derivatives allocated to the trading book or non-trading book. Furthermore, the draft RTS have been amended to align the proposed rules applicable to multi-underlying derivatives with a structure (i.e. an index and collective investment undertakings) or without a structure, as well as the introduction of a partial look-though approach for this type of derivatives.
Article 390(5) of the CRR, as amended by Regulation (EU) 2019/876, requires institutions to add to the total exposures to a client the exposures arising from derivative contracts listed in Annex II of the CRR and credit derivative contracts, where the contract was not directly entered into with that client but the underlying debt or equity instrument was issued by that client.
Article 390(9) of the CRR mandates the EBA “to specify how to determine the exposures arising from derivative contracts listed in Annex II and credit derivative contracts, where the contract was not directly entered into with a client but the underlying debt or equity instrument was issued by that client for their inclusion into the exposures to the client”.
18 February 2021
The European Banking Authority (EBA) published today its final draft Implementing Technical Standards (ITS) on the disclosure of indicators of global systemically important institutions (G-SIIs). These standards help to identify which banks are GSIIIs and specify the formats and instructions in accordance with which G-SIIs disclose the information required under the Capital Requirements Regulation (CRR) and aim at ensuring consistency of information.
The ITS will amend the final draft ITS on institutions’ public disclosures with the strategic objective of defining a single, comprehensive Pillar 3 framework under the CRR that should integrate all the relevant Pillar 3 disclosure requirements. This will facilitate institutions’ implementation and enhance clarity for users of such information, as expressed in the EBA Pillar 3 roadmap.
The ITS on disclosure of indicators of global systemic importance by G-SIIs have been developed in accordance with the mandate included in Article 434a of Regulation (EU) N0 575/2013, which mandates the EBA to develop draft implementing technical standards specifying uniform disclosure formats, and associated instructions in accordance with which the disclosures required under Titles II and III of Part 8 of the CRR shall be made.
16 February 2021
The European Banking Authority (EBA) published today final guidelines specifying the conditions for the application of the alternative treatment of institutions’ exposures related to ‘tri-party repurchase agreements’ for large exposure purposes. Under the alternative treatment, institutions are allowed to replace the total amount of their exposures to a collateral issuer due to tri-party repurchase agreements facilitated by a tri-party agent, with the full amount of the limits that the institution has instructed the tri-party agent to apply to those exposures.
If institutions perform such a replacement, the Capital Requirements Regulation (CRR) requires them to comply with three conditions, which are further specified in the final guidelines, namely:
In addition, the final guidelines set the requirements on the conditions and frequency for determining, monitoring and revising the limits specified by the institution.
The final guidelines were consulted for three months during which the EBA received feedback from stakeholders, which led to some minor amendments to clarify some aspects. The guidelines will apply from 28 June 2021.
The EBA has developed the final guidelines in accordance with Article 403(4) of Regulation (EU) No 575/2013 and Article 16 of its founding Regulation, which mandatesthe Authority to issue guidelines and recommendations addressed to competent authorities or financial institutions with a view to establishing consistent, efficient and effective supervisory practices within the European System of Financial Supervision, and to ensuring the common, uniform and consistent application of Union law.
04 February 2021
The Joint Committee of the three European Supervisory Authorities (EBA, EIOPA and ESMA – ESAs) delivered today to the European Commission (EC) the Final Report, including the draft Regulatory Technical Standards (RTS), on the content, methodologies and presentation of disclosures under the EU Regulation on sustainability-related disclosures in the financial services sector (SFDR).
The proposed RTS aim to strengthen protection for end-investors by improving Environmental, Social and Governance (ESG) disclosures to end-investors on the principal adverse impacts of investment decisions and on the sustainability features of a wide range of financial products. This will help to respond to investor demands for sustainable products and reduce the risk of greenwashing.
Steven Maijoor, Chair of the ESAs Joint Committee, said:
The significant set of rules issued today provide a strong basis to improve ESG reporting and combat greenwashing. They strike a careful balance between achieving common disclosures across the range of financial products covered by the SFDR and recognising that they will be included in documents that are very diverse in length and complexity. The ESAs have listened to the consultation feedback from stakeholders and have adjusted the proposed disclosures.
Entity-level principal adverse impact disclosures
The principal adverse impacts that investment decisions have on sustainability factors should be disclosed on the entity’s website. The disclosure should take the form of a statement showing how investments adversely impact indicators in relation to
The ESAs have updated the list of indicators for principal adverse impacts. The principal adverse impact reporting in the SFDR is based on the principle of proportionality – for companies with fewer than 500 employees, the entity-level principal adverse impact reporting applies on a comply-or-explain basis.
Product level disclosures
The sustainability characteristics or objectives of financial products are to be disclosed in an annex to the respective sectoral pre-contractual and periodic documentation in mandatory templates and on providers’ websites.
Proposals relate to:
As the ESAs were not empowered to differentiate the disclosures between financial market participants and products, the RTS contain a harmonised approach to all financial products. Therefore, the same disclosures are required for a very broad range of products attached as annexes to existing sectoral disclosure documents that have different levels of granularity and length.
The EC is expected to endorse the RTS within 3 months of their publication.
While financial market participants and financial advisers are required to apply most of the provisions on sustainability-related disclosures laid down in the SFDR from 10 March 2021, the application of the RTS will be delayed to a later date according to the EC letter to the ESAs. The ESAs have proposed in these draft RTS that the application date of the RTS should be 1 January 2022.
The ESAs plan to issue a public supervisory statement before the application date of SFDR in order to achieve an effective and consistent application of the SFDR’s requirements and consistent national supervision of the SFDR.
The ESAs will also publish a consultation on taxonomy-related product disclosures under the Taxonomy Regulation which amends the empowerments in Articles 8(4), 9(6) and 11(5) of the SFDR.
On 9 December 2019, the SFDR was published in the Official Journal. The Taxonomy Regulation was published in the Official Journal on 22 June 2020.
The Final Report takes into account the feedback received on the consultation paper launched in April 2020.
03 February 2021
The European Supervisory Authorities - ESAs (the European Banking Authority, the European Insurance and Occupational Pensions Authority and the European Securities and Markets Authority) submitted today to the European Commission draft Regulatory Technical Standards (RTS) on amendments to the key information document for packaged retail and insurance-based investment products (PRIIPs).
Following a request from the European Commission in December 2020, EIOPA’s Board of Supervisors further analysed the draft RTS which was adopted today by a qualified majority of EIOPA’s Board.
While some national competent authorities at EIOPA’s Board continued to express reservations on the draft RTS, they supported the proposal based on the further details provided by the European Commission on their approach to the broader review of PRIIPs Regulation, namely that the review will thoroughly examine the application of the PRIIPs framework, including:
In July 2020 the ESAs informed the European Commission of the outcome of a review that had been conducted on the PRIIPs key information document. This followed an ESA consultation paper published on 16 October 2019 on draft RTS to amend the technical rules on the presentation, content, review and revision of KID (Delegated Regulation (EU) 2017/653). At that stage, the draft RTS was adopted by the Board of Supervisors of ESMA and EBA, but did not receive the support of a qualified majority at the Board of Supervisors of EIOPA.
In December 2020, the Commission invited the ESAs to submit an RTS to amend the KID within a six week period referring to the need to make urgent amendments to European Commission’s Delegated Regulation (EU) 2017/653.
Following the submission to the European Commission, the ESAs draft RTS is now subject to adoption. If adopted by the European Commission, the RTS would be subject to non-objection by the European Parliament and the Council of the European Union.
29 January 2021
The European Banking Authority (EBA) launched today the 2021 EU-wide stress test and released the macroeconomic scenarios. Following the postponement of the 2020 exercise, due to the COVID-19 pandemic, this year’s EU-wide stress test will provide valuable input for assessing the resilience of the European banking sector. Accordingly, the adverse scenario is based on a narrative of a prolonged COVID-19 scenario in a ‘lower for longer’ interest rate environment, in which negative confidence shocks would prolong the economic contraction. The EBA expects to publish the results of the exercise by 31 July 2021.
The exercise assesses the impact of an adverse macroeconomic scenario on the solvency of EU banks. The stress test allows supervisors to assess if banks’ capital buffers, which have been accumulated in recent years, are sufficient to cover losses and support the economy in stressed times. Moreover, the exercise fosters market discipline through the publication of consistent and granular data at a bank-by-bank level, which is crucial particularly at times of increased uncertainty in the markets. The results of the exercise are an input to the Supervisory Review and Evaluation Process (SREP).
The EU-wide stress test will be conducted on a sample of 50 EU banks – 38 from countries under the jurisdiction of the Single Supervisory Mechanism (SSM) – covering roughly 70% of total banking sector assets in the EU and Norway, as expressed in terms of total consolidated assets as of end 2019.
Given the specific macroeconomic conditions caused by the COVID-19 pandemics coupled with a high degree of uncertainty, this year, the focus on the different objectives will depend on the conditions closer to the publication date. The outcome might also provide valuable input to make informed decisions on possible exit strategies from the flexibility measures granted to banks due to the COVID-19 crisis, or on the need for additional measures, should the economic conditions deteriorate further.
The baseline scenario for EU countries is based on the projections from the national central banks of December 2020, while the adverse scenario assumes the materialisation of the main financial stability risks that have been identified by the European Systemic Risk Board (ESRB) and which the EU banking sector is exposed to. The adverse scenario also reflects recent risk assessments by the EBA.
The narrative depicts an adverse scenario related to the ongoing concerns about the possible evolution of the COVID-19 pandemic coupled with a strong drop in confidence leading to a prolongation of the worldwide economic contraction. The worsening of economic prospects is reflected in a global decline of long-term risk-free rates from an already historically low level and results in a sustained drop in GDP and an increase in unemployment. Slowing growth momentum would cause a drop in corporate earnings leading, together with a re-assessment of market participants’ expectations, to an abrupt and sizeable adjustment of financial asset valuations as well as a significant drop in residential and commercial real estate prices. A decline in economic growth and rising risk premia could further challenge debt sustainability in the public and private sectors across the EU.
The adverse scenario is designed to ensure an adequate level of severity across all EU countries. By 2023, at EU level, the real GDP would decline by 3.6% cumulatively, unemployment rate would rise by 4.7 percentage points, residential real estate prices would decline by 16.1 %, and commercial real estate prices would decline by 31.2%. Equity prices in global financial markets would fall by 50% in advanced economies and by 65% in emerging economies in the first year. The 2021 adverse scenario is very severe having in mind the weaker macroeconomic starting point in 2020 as a result of the severe pandemic-induced recession.
 The convention used in the calibration of adverse scenarios for EBA stress tests is one of “no policy change”. This means that neither monetary policy nor fiscal policy reactions are assumed under the adverse scenario over and above what is already embedded in the baseline scenario.
 These confidence shocks could be triggered by a mutation of the virus, significant setbacks in the distribution or acceptance of vaccines, possible further lockdowns following re-emerging waves of infections and/or other unexpected negative developments in the containment of the pandemic.
 In the package that was published today, the sample has been revised. BFA Tenedora De Acciones S.A.U. and CaixaBank, S.A. have been excluded from the sample, because they have agreed on a merger that will take place in 2021. The two banks were replaced by the following banks (country abbreviation are in the brackets): Bankinter, S.A. (ES), Mediobanca – Banca di Credito Finanziario S.p.A. (IT) and Banco Comercial Português, SA (PT).
 The Macro-economic scenario has been amended on 12 February 2021. In particular, a correction of HICP and other consumption price indices on page 15 has been applied only for the United Kingdom
 The excel version of the market risk shocks has been updated on 1 March 2021 to amend an inconsistency in the tab called “All_shocks_column”
29 January 2021
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, which provides clarity on the implementation of (i) the EBA Guidelines on moratoria and (ii) the EBA Guidelines on COVID-19 reporting and disclosure. 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 technical clarifications on the application of the Guidelines on moratoria related to the recent re-activation of the EBA guidelines on payment moratoria. In particular, the EBA has provided clarifications on the functioning of the 9-month cap, which limits the period of time for which payments on a certain loan can be suspended, postponed or reduced as a result of the application (and reapplication) of general payment moratoria.
These clarifications explain how to apply the Guidelines on moratoria when assessing forbearance classification and how to determine whether there is a diminished financial obligation in relation to moratoria applied to loans exceeding the 9-month cap.
As regards reporting and disclosure, the updated Report covers the treatment of loans and advances subject to expired moratoria. In particular, it clarifies that when a moratorium expires, the loans and advances subject to this expired measure should be reported, regardless of whether they are subject to another measure.
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.
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 firms 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 investment firm’s risk profile or asset it manages.
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.
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.
18 January 2021
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.
Asset Encumbrance ratio
Encumbrance ratio of central bank eligible assets
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.
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.
13 January 2021
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%).
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).