Adopted and published on the Official Journal
These Regulatory Technical Standards (RTS) set out the requirements related to prudent valuation adjustments of fair valued positions. Their objective is to determine prudent values that can achieve an appropriate degree of certainty while taking into account the dynamic nature of trading book positions.
The European Banking Authority (EBA) has decided to make a specific and limited amendment to its final draft Regulatory Technical Standards (RTS) on Prudent Valuation published on 31 March 2014. As a consequence of this decision, all occurrences of ‘volatility' in Article 9 and Article 10 of the final draft RTS published on 31 March 2014 should be replaced by ‘variance' for the purposes of computing market price uncertainty and close-out costs additional valuation adjustments (AVAs).
This amendment, which affects only institutions using the Core approach, will result in a slight relaxation of the calibration of the volatility test performed under these two articles, thus avoiding unwanted side-effects in the already challenging first year implementation of the Core approach. However, while allowing for this flexibility in the context of the first implementation of the Prudent Valuation framework, the EBA also suggested reassessing the calibration of the volatility test within the first two years of implementation of the RTS.
The European Banking Authority (EBA) published today an updated list of FAQs on the Prudent Valuation Quantitative Impact Study (QIS), amending the version published on 3 October 2013. Changes and/or clarifications to the FAQs are marked in red in the excel file.
The European Banking Authority (EBA) published today an updated list of FAQs on the Prudent Valuation Quantitative Impact Study (QIS). Changes and/or clarifications to the FAQs are marked in red in the excel file.
Following the publication of the Consultation Paper on draft RTS on prudent valuation, the EBA launched today a Quantitative Impact Study (QIS) to assess the capital impact of the proposals for the calculation of additional value adjustments (AVAs). This QIS, which will be carried out in co-ordination with the National Supervisory Authorities, will also be used to calibrate the thresholds and underlying assumptions of AVAs.
The EBA expects 75-100 banks across the EU, including large and small banks, to participate in the exercise. National Supervisory Authorities bear responsibility for ensuring banks' participation in the QIS. In this respect, the EBA has prepared a standardised QIS template that participating banks will be requested to fill in.
The QIS should be completed on a "best efforts" basis and banks should use this possibility to prepare for the implementation of prudent valuation requirements which will take place towards the end of 2014.
Participating banks are expected to submit the results of the QIS exercise to their respective National Supervisory Authorities by 15 November 2013 and to use end September 2013 data.
Throughout the exercise, National Supervisory Authorities will act as a first point of contact although participating banks can also submit questions on the QIS template and the subsequent implementation of prudent valuation requirements by e-mail to prudent-valuation@eba.europa.eu.
The EBA will use the QIS results in the finalisation of the draft RTS on Prudent Valuation which it envisages to submit to the European Commission in the second quarter of 2014.
Following up on its strategic communications of 12th, 25th, 31st March and 2nd April, the European Banking Authority (EBA) provides today further clarity on how additional flexibility will guide supervisory approaches in relation to market risk, the Supervisory Review and Evaluation Process (SREP), recovery planning, digital operational resilience and ICT risk and securitisation. At the same time, the EBA notes the need for stringent attention by supervisors and financial institutions in relation to key risks in these areas.
To mitigate the impact of exceptional volatility triggered by the COVID-19 pandemic on the prudential requirements for market risk, the EBA is proposing to adjust the capital impact by amending its standards on prudent valuation. In particular, the EBA is proposing to introduce the use of a 66% aggregation factor to be applied until the 31 December 2020 under the so-called core approach. Furthermore, acknowledging the increased operational challenges faced by banks in the area of reporting, the EBA also intends to delay reporting for the first FRTB-SA figures to September 2021. Finally, the EBA highlights the flexibility in the prudential requirements available to competent authorities for banks using internal VaR models.
The EBA also recognises the need for a pragmatic approach to SREP assessments in 2020, focusing on the most material risks and vulnerabilities driven by the crisis.
On recovery planning activities for institutions, the EBA believes the focus should be placed on understanding which recovery options are necessary and available under the current stressed conditions.
The EBA emphasises the importance of digital operational resilience. In this respect, the EBA calls on institutions to ensure business continuity, adequate ICT capacity and security risk management. The new EBA ICT and security risk management Guidelines will guide financial institutions and supervisors to focus on priority areas.
Finally, the EBA provides further clarity on the prudential application of the definition of default and forbearance as well as how the EBA Guidelines on legislative and non-legislative moratoria on loan repayments apply to securitisations.
The European Banking Authority (EBA) published today its final draft Regulatory Technical Standards (RTS) laying out the requirements related to prudent valuation adjustments of fair valued positions. The objective of these draft RTS is to determine prudent values that can achieve an appropriate degree of certainty while taking into account the dynamic nature of trading book positions. These standards will be part of the EU Single Rulebook in banking aimed at enhancing regulatory harmonisation. Update: on 23 January 2015 the European Banking Authority (EBA) published an amended version (EBA/RTS/2016/06/rev1) of its final draft Regulatory Technical Standards (RTS) on Prudent Valuation. All occurrences of ‘volatility' in Article 9 and Article 10 of the final draft RTS published on 31 March 2014 were replaced by ‘variance' for the purposes of computing market price uncertainty and close-out costs additional valuation adjustments (AVAs).
The EBA final draft RTS on prudent valuation put forward a methodology to calculate additional valuation adjustments (AVAs) for the purpose of determining the prudent value of fair valued positions. Two approaches are proposed in order to take proportionality into account, in particular for those institutions with limited exposure to fair valued positions:
These final draft RTS reflect both the feedback received from the consultation document, as well as the results of the Quantitative Impact Study (QIS). The QIS was completed on a "best efforts" basis by 59 institutions across 15 jurisdictions. The QIS results showed that on average the expected AVA would be equivalent to 1.5 % of the CET1 of institutions in absolute terms (on average EUR 227 million per institution), which is on average 0.07 % of the value of fair-valued positions on banks' balance sheets. These results were used in the final calibration of the prudent valuation framework.
These final RTS have been developed in accordance with Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 (CRR) on prudential requirements for credit institutions and investment firms.
The approach for calculating AVAs is directly linked to the valuation approach applied under accounting requirements. Therefore, if future accounting requirements alter the approach for determining a fair value, the EBA will consider whether to amend these RTS.
The European Banking Authority (EBA) launches today a public consultation on draft Regulatory Technical Standards (RTS) setting out the requirements related to prudent valuation adjustments of fair valued positions. The objective of these draft RTS is to determine prudent values that can achieve an appropriate degree of certainty while taking into account the dynamic nature of trading book positions. The consultation runs until 8 October 2013.
These draft RTS present a methodology to calculate additional valuation adjustments (AVAs) for the purpose of determining the prudent value of fair valued positions. To take account of proportionality and namely of those institutions with limited exposure to fair valued positions, the following two approaches are proposed:
Comments to this consultation can be sent to the EBA by clicking on the "send your comments" button on the consultation page. Please note that the deadline for the submission of comments is 8 October 2013.
All contributions received will be published following the close of the consultation, unless requested otherwise.
A public hearing will take place at the EBA premises on 29 July 2013 from 10:30 to 13:00 hours UK time.
The proposed draft RTS have been developed on the basis of Regulation 575/2013 published in the Official Journal of the European Union on 28 June 2013.
Before submitting these draft RTS to the European Commission for endorsement, the EBA will carry out a Quantitative Impact Study (QIS) to assess the capital impact of the proposed approaches for the calculation of AVAs. The QIS will also be used to calibrate the thresholds and underlying assumptions of AVAs.
The EBA envisages to finalise and to submit the draft RTS to the European Commission in the second quarter of 2014, after completion of the QIS.
This discussion paper presents some preliminary views of the European Banking Authority (EBA) on the application of prudent valuation requirements to all positions that are measured at fair value, as provided for under Articles 31 and 100 of the draft Capital Requirements Regulation (CRR). It also sets the EBA’s preliminary view on how valuation adjustments could in practice be applied by institutions in a consistent manner.
The inputs gathered from stakeholders will assist the EBA in the development of draft regulatory standards (RTS) on how these prudent valuation requirements should be applied. These RTS will also cover the analysis of the costs and benefits that the legal requirements will imply.
Background and process
Articles 31 and 100 of the fifth Council compromise version text from 11 May 2012 (the latest available version) of the draft CRR require institutions to apply prudent valuation standards to all positions that are measured at fair value when calculating the amount of their own funds. Any additional value adjustments necessary to reduce the fair value of those positions to the relevant prudent value, as calculated in accordance with the relevant accounting standards, should be deducted from common equity tier 1 capital.
The draft CRR mandates the EBA with the task of developing RTS to provide more details on how the standards set out in Article 100 should be applied. In particular, Article 100 lays out a number of valuation adjustments that should be considered when calculating a prudent valuation. The intended effect of these adjustments is to set valuations at a level that achieves an appropriate degree of certainty that the valuation used for regulatory purposes is not higher than the true realisable value. With this aim in mind, this paper considers the possibility of defining what the ‘appropriate degree of certainty’ or level of confidence is that the requirements wish to achieve in the adjusted valuation.
Consultation process
The EBA invites comments on the issues raised in this discussion paper (DP).
All interested stakeholders are requested to send their comments to the EBA by e-mail to DP-2012-03@eba.europa.eu by 13 January 2013, including the reference to ‘EBA/DP/2012/3’ in the subject field. Answers should be sent preferably both in PDF and Word formats.
Please note that comments submitted after the deadline, or sent to another e-mail address, will not be processed.
All contributions received will be published on the EBA’s website following the close of the consultation, unless requested otherwise.