Following a seasonal break, the next update will be published on 11 January 2021.
UK SRR code of practice
HM Treasury has published a revised version of the Banking Act 2009 special resolution regime (SRR) code of practice which applies to the use of the SRR after the end of Brexit transition period. The previous March 2017 version applies to the use of the SRR before the end of transition period.
COVID-19: PRA statement on capital distributions by large UK banks
The UK Prudential Regulation Authority (PRA) has published a statement on capital distributions by large UK banks.
In July, the PRA announced that in the Q4 2020 it would undertake an assessment of large UK banks' distribution plans for 2020. This assessment would be based on: the current and projected capital positions of the banks; the level of uncertainty on the future path of the economy; market conditions; and capital trajectories prevailing at that time. The PRA has now completed that assessment.
The PRA concludes that an extension of the exceptional and precautionary action taken in March due to the potential impact of COVID-19 is not necessary. Therefore, there is scope for banks to recommence some distributions should their boards choose to do so, within an appropriately prudent framework.
The PRA states that any distributions should be prudent, reflecting the still elevated levels of economic uncertainty and the need for banks to continue to support households and businesses through the continuing economic disruption. As a stepping stone back towards its standard approach to capital-setting and shareholder distributions, the PRA asks boards, when making their decisions for 2020 distributions, to operate within a framework of temporary "guardrails". The PRA is publishing that framework now in order to give bank boards time to take it into account as they approach those decisions in coming months.
In relation to full-year 2020 results, distributions to ordinary shareholders by large UK banks should not exceed the higher of 20 basis points of risk-weighted assets as at end-2020 or 25% of cumulative eight-quarter profits covering 2019 and 2020 after deducting prior shareholder distributions over that period. The PRA expects banks to satisfy it that any distributions would not create excess vulnerabilities to stress for a given bank or impede its ability or willingness to support households and businesses. If any firm wishes to make shareholder distributions in excess of these guardrails, it should engage with its supervisors and expect a high bar for justifying any exceptions.
The PRA has also updated its expectations on the payment of cash bonuses to senior staff, including all material risk takers. Firms should exercise a high degree of caution and prudence when determining the size of any cash bonuses granted to senior staff given the uncertain outlook and the need for banks to deploy capital to support the wider economy.
The PRA intends to transition back to its standard approach to capital-setting and shareholder distributions through 2021. For 2021 dividends the PRA is content for appropriately prudent dividends to be accrued but not paid out. It aims to provide a further update ahead of the large UK banks' 2021 half-year results.
2021 priorities for supervising UK deposit-takers: PRA Dear CEO letter
The PRA has published a Dear CEO letter sent to UK deposit-takers setting out its 2021 supervisory priorities. The priorities covered in the letter fall under the following headings:
- financial resilience;
- credit risk;
- operational risk and resilience;
- transition from LIBOR to alternative risk-free rate;
- competition and future regulatory frameworks; and
- financial risks arising from climate change.
In addition to the priorities set out in the letter, the PRA continues to see strong governance at firms as being key to underpinning progress in meeting its expectations.
2021 priorities for supervising international banks: PRA Dear CEO letter
The PRA has published a Dear CEO letter sent to PRA-regulated international banks setting out its 2021 supervisory priorities. The PRA's priorities relate to:
- financial resilience;
- operational risk and resilience;
- transition from LIBOR to alternative risk-free rate; and
- financial risks arising from climate change.
In addition to the four priorities set out in the letter, the PRA continues to see strong governance at firms as being key to underpinning progress in meeting its expectations.
CRD V: FCA finalised guidance on remuneration requirements
Following its consultation in CP20/14, the Financial Conduct Authority (FCA) has published a policy statement, PS20/16, setting out its final rules on remuneration for dual-regulated firms and feedback to the consultation responses. PS20/16 should be read in conjunction with the following finalised guidance updating the FCA's Dual-regulated firms Remuneration Code to reflect the fifth Capital Requirements Directive (CRD V):
The new Handbook rules and guidance come into force on 29 December 2020. Firms are required to apply the new rules and guidance from the next performance year starting on or after 29 December 2020.
CRR: European Commission adopts Delegated Regulation on specialised lending exposures
The European Commission has adopted a Delegated Regulation in respect of regulatory technical standards (RTS) for assigning risk weights to specialised lending exposures under Article 153(9) of the Capital Requirements Regulation (CRR). The draft RTS specify how institutions should take into account the factors of financial strength, political and legal environment, transaction and asset characteristics, strength of the sponsor and developer, and security package when assigning risk weights to specialised lending exposures in respect of which an institution is not able to estimate probabilities of default (PDs) or the institutions' PD estimates do not meet the requirements set out in Section 6 of Chapter 3 (Internal Ratings Based (IRB) Approach) of Title II of Part Three of the CRR.
The next step is for the Council of the EU and the European Parliament to consider the Delegated Regulation. If neither the Council nor the Parliament object, the Delegated Regulation will be published in the Official Journal of the EU (OJ) and enter into force on the twentieth day following its publication in the OJ.
COVID-19: European Commission communication on NPLs
The European Commission has published a communication on tackling non-performing loans (NPLs) in the aftermath of the COVID-19 pandemic, together with Q&As. In the communication, the Commission sets out an action plan intended to address COVID-19-related NPLs as early as possible and to prevent a renewed build-up of NPLs on banks' balance sheets. Initiatives announced by the Commission relating to financial regulation include:
- mandating the European Banking Authority (EBA) in early 2021 to review its NPL data templates developed in 2017 and to conduct a consultation on the templates with market participants during 2021;
- consulting stakeholders in the first half of 2021 on reviewing Pillar 3 disclosure requirements under the CRR;
- developing with the EBA in early 2021 a suitable approach to reduce the risk weight on purchased defaulted assets required under the standardised approach for credit risk set out in Article 127 of the CRR; and
- developing guidance by Q3 2021 for sellers of NPLs, including guidance on what constitutes a "best execution" sales process for transactions on the secondary markets.
The Commission also:
- considers the interaction between the COVID-19 crisis and the assessment under the Bank Recovery and Resolution Directive (BRRD) as to whether an institution is failing or likely to fail; and
- calls for the Council of the EU and the European Parliament to reach an agreement quickly on the proposed Directive on credit servicers and credit purchasers.
COVID-19: ECB letter on banks' remuneration policies
On 15 December 2020, the European Central Bank (ECB) published a letter to banks about remuneration policies in the context of COVID-19. The ECB last wrote to banks on this topic in July 2020.
The ECB emphasises that banks should continue to focus primarily on maintaining a suitable amount of capital to absorb potential losses and to support the real economy. The ECB states that banks should adopt extreme moderation in respect of variable remuneration until 30 September 2021, especially for staff identified as material risk takers. When doing so, institutions should consider the need to preserve or rebuild a sound capital base in the light of the possible consequences of the pandemic.
If they are unable to limit variable remuneration, banks should consider whether a larger part of variable remuneration could be deferred for a longer period of time, and also consider paying it in instruments. The ECB's expectations are not intended to apply where a bank is subject to a legal obligation to pay the variable remuneration.
Banks should not adopt measures that compensate staff for the reduction or loss of variable remuneration, as this would circumvent the relevant regulatory provisions and the ECB’s supervisory expectations.
The appropriateness of institutions' remuneration policies and practices will form part of the ECB's supervisory assessment within the 2021 supervisory review and evaluation process. In addition, the ECB will continue to assess the implementation of these supervisory expectations and requests that institutions keep their supervisory team informed of any decisions relating to their remuneration policy. It may also issue stricter supervisory measures based on institution-specific analyses.
At the end of September 2021, in the absence of materially adverse developments, the ECB intends to return to assessing banks' remuneration policies and practices in the context of the normal supervisory cycle.
COVID-19: ECB recommendation on bank dividend distributions
On 16 December 2020, the ECB published a recommendation to credit institutions on dividend distributions during the COVID-19 pandemic and repealing its previous recommendation on this topic. In brief, the ECB recommends that banks exercise extreme prudence on dividends and share buy-backs. They should consider not distributing any cash dividends or conducting share buy-backs, or limiting such distributions, until 30 September 2021.
The ECB explains that due to continuing uncertainty over the economic impact of COVID-19, it expects dividends and share buy-backs to remain below 15% of the cumulated profit for 2019-20 and not higher than 20 basis points of the common equity tier 1 (CET1) ratio, whichever is lower. Banks that intend to pay dividends or to buy back shares need to be profitable and have robust capital trajectories. They should contact their joint supervisory team to discuss whether the level of intended distribution is prudent. Banks should refrain from distributing interim dividends out of their 2021 profits.
At the end of September 2021, in the absence of materially adverse developments, the ECB intends to repeal the recommendation and return to assessing banks' capital and distribution plans based on the outcome of the normal supervisory cycle.
Banks should continue to use their capital and liquidity buffers for lending purposes and loss absorption. The ECB will not require banks to start replenishing their capital buffers before the peak in capital depletion is reached.
The ECB has published further details of supervisory measures it has taken in response to the COVID-19 pandemic in a set of FAQs.
COVID-19: EBA statement on bank dividends and other distributions
On 16 December 2020, the EBA also called on EU banks to apply a conservative approach to dividends and other distributions in light of the COVID-19 pandemic. Although EU banks have been able to continue supporting businesses and have mostly remained with strong levels of capitalisation, the EBA believes banks should refrain from distributing capital outside the banking system when deciding on dividends and other distribution policies, including share buybacks, unless they apply extreme caution. This is because the impact of the COVID-19 crisis on the economy is likely to continue, with possible further deterioration of asset quality metrics over the next quarters.
The EBA advises that the supervisory dialogue with banks on this issue should consider, in particular, banks' capacity to generate income based on prudent projections, to ensure that they retain sufficient resources to withstand further deterioration of asset quality while continuing to support the economic recovery and the financing of households and corporates.
The EBA also states that since the stressed conditions are likely to continue in 2021, the variable remuneration of material risk takers for the performance year 2020 should be set at a conservative level. 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, to ensure that they are consistent with an effective risk management and long-term interest of the bank.
COVID-19: EBA updates impact study for final Basel III reforms
In light of COVID-19, on 15 December 2020, the EBA published an updated version of its impact study on the implementation of the final Basel III reforms. The EBA concludes that the policy recommendations set out in its previous advice remain appropriate despite the COVID-19 crisis. It considers that the positive effects of the final Basel III reforms remain unchanged, while the capital impact has decreased overall.
MLD4 and DGSD: EBA opinion on interplay
The EBA has published an opinion on the interplay between the Fourth Money Laundering Directive (MLD4) and the Deposit Guarantee Schemes Directive (DGSD). The proposals set out in the EBA's opinion are addressed to the European Commission and aim at informing the Commission's ongoing reviews of MLD4 and the DGSD. The opinion is also addressed to EU national authorities, to implement some changes already under the current legal framework and ahead of the potential future revisions of MLD4 and the DGSD.
CRR: EBA opinion on European Commission amendments to draft RTS on assessment methodology for IRB approach
The EBA has published an opinion on the European Commission's proposal to amend draft RTS submitted by the EBA on the specification of the assessment methodology for competent authorities regarding compliance of an institution with the requirements to use the internal ratings based (IRB) approach in accordance with Articles 144(2), 173(3) and 180(3)(b) of the CRR. The EBA submitted the draft RTS to the Commission in July 2016. In July 2020, the Commission informed the EBA of its intention to endorse the draft RTS with amendments.
In the opinion, the EBA rejects several the Commission's amendments and highlights concerns about some of the other changes introduced "in an attempt to" provide additional clarity to the RTS.
The EBA sets out in an Annex to the opinion a revised version of the Commission's version of the RTS, changing the proposed drafting where it considers that the Commission's amendments do not reflect agreed policy. It also includes other non-substantive changes.
CRR: EBA report on EU banks' compliance with liquidity measures
The EBA has published a report on liquidity measures under Article 509(1) of the CRR. The objective of the report is to monitor EU banks' short-term liquidity risk profiles. It provides an update of EU banks’ compliance with the liquidity coverage ratio, defined as the stock of high-quality liquid assets over the net liquidity outflows arising during a 30-calendar-day stress period. The analysis is based on common reporting (COREP). The EBA published its previous report in October 2019.
CRR: EBA consults on technical standards to calculate risk weights of collective investment undertakings
The EBA is consulting on draft RTS on the calculation of risk-weighted exposure amounts of collective investment undertakings (CIUs) under Article 132a(4) of the CRR. The draft RTS clarify the steps to be taken for calculating the exposure value of CIU's derivatives exposures where the underlying risk of derivatives is unknown. They also provide for cases where the calculation of the exposure amount to counterparty credit risk of a netting set of CIU's derivative exposures is needed.
The consultation closes on 16 March 2020.
CRR: EBA final report on draft RTS on calculation of stress scenario risk measure
The EBA has published a final report setting out draft RTS on the calculation of the stress scenario risk measure under Article 325bk(3) of the CRR.
The final Basel III standard on market risk, which was implemented in part by CRR II, reflects the Basel Committee on Banking Supervision's Fundamental Review of the Trading Book (FRTB). Under the FRTB, risk factors that are included in the risk measurement model of an institution are classified as modellable or non-modellable. Institutions must calculate a separate stress scenario risk measure for each non-modellable risk factor (or non-modellable bucket).
The final draft RTS set out:
- the methodologies that institutions are required to use for the purpose of determining the extreme scenario of future shock that, when applied to the non-modellable risk factor, provides the stress scenario risk measure; and
- a regulatory extreme scenario of future shock, how stress scenario risk measures are calculated, and the formula that institutions should use where aggregating the stress scenario risk measures.
EBA Regulation: EBA methodology for carrying out risk assessments under Article 9a
The EBA has published a report setting out its methodology for carrying out risk assessments under Article 9a of the revised EBA Regulation. Article 9a(5) of the EBA Regulation 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 (ML) and terrorist financing (TF) at EU level, as identified in the supranational risk assessment. This work should inform the EBA's wider work on anti-money laundering and countering financing of terrorism, including the publication of the opinion on ML and TF risks under the MLD4. The EBA is also required under Article 9a(5) to develop a methodology for the risk assessments to ensure an objective assessment.
The report explains the EBA's methodology for identifying emerging ML and TF risks, and how it will carry out the risk assessment. It also explains the review and publication process of the outcome of each risk assessment.
The EBA will use this methodology to assess whether the use of its powers under Article 9a is warranted.
BRRD: EBA final report on draft RTS on contractual recognition of stay powers
The EBA has published a final report on draft RTS on the contractual recognition of stay powers under Article 71a(5) of the BRRD which was inserted by BRRD II. In the draft RTS, the EBA sets out a list of mandatory components that must be present in the contractual term required in the financial contracts.
SRB standardised valuation data set
Following an earlier consultation, the Single Resolution Board (SRB) has published a feedback statement and the final version of a standardised valuation data set that banks will, in principle, need to provide to the SRB and an independent valuer to perform a valuation for the purposes of the BRRD and the Single Resolution Mechanism (SRM) Regulation Regulation.
The SRB publications comprise:
- the SRB Valuation Data Set instructions document, developing the SRB Valuation Data Set and establishing clear expectations in relation to data needs; and
- an explanatory note aiming to provide guidance to the banks regarding their management information systems capabilities to produce information that is as up to date and complete as possible and of adequate quality to carry out a fair, prudent and realistic valuation.
Bank resolution preparation: European Court of Auditors report
The European Court of Auditors (ECA) has published a report about the preparation for resolution of medium-sized and small banks in the euro area. The report was prepared by the EU Contact Committee Task Force on Banking Union and is based on the findings of a parallel audit on banking resolution carried out by the Supreme Audit Institutions (SAIs) of Austria, Estonia, Finland, Germany, the Netherlands, Portugal and Spain in their respective Member States.
The task force found that preparation for resolution activities of medium-sized and small banks is under way, but the process and substance of resolution planning for medium-sized and small banks differ among the countries.
Key findings and recommendations include:
- data held by national resolution authorities (NRAs) does not distinguish between the size of banks. NRAs should document the resources (in terms of budget and staff) allocated to resolution planning. This exercise should be done separately for large, medium-sized and small banks;
- NRAs perceived a lack of specific guidance from the SRB for resolution planning related to medium-sized and small banks. The NRAs, together with the SRB, should therefore develop common resolution planning guidance for these banks; and
- due to conditions set by the SRB, internal SRB guidance for resolution planning related to medium sized and small banks could not be fully considered by SAIs.
The Contact Committee calls on all actors in charge at European and national level to strengthen the independent external audit of banking resolution, in particular by making sure that the SAIs have unlimited access to the information they deem relevant for their audit work.
In January 2021, the ECA will publish a special audit report on the state of preparedness of the SRM. The ECA's report is expected to cover the SRB's policy framework, the preparation of resolution plans for large, medium and small banks as well as the organisational set-up of the SRM.
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Authored by Yvonne Clapham