The Prudential Regulation Authority published its final Supervisory Statement on the relationship between a firm's Minimum Requirement for own funds and Eligible Liabilities (MREL) and capital and leverage buffers as well as the relationship between MREL and the PRA's Threshold Conditions which are a set of minimum requirements that authorized firms must meet in order to continue carrying out their regulated activities. The PRA also provided feedback on the responses to its consultation on its proposed approach. The PRA is maintaining its proposed approach without any substantive changes but has amended the Supervisory Statement to provide clarity to firms. The PRA's approach is to prohibit firms from being able to double-count common equity Tier 1 capital towards MREL and to risk-weighted capital and leverage buffers. Some guidance has been given on enforcement: when a firm is in breach of its MREL requirements, the PRA may investigate whether that firm is failing or likely to fail to meet the Threshold Conditions, although investigation will not be automatic. The PRA's Supervisory Statement should be read in conjunction with the Bank of England's policy documents on setting MREL. The PRA will apply the MREL buffer and Threshold Conditions policies in line with the interim and end-state MREL dates set by the BoE. A firm that cannot meet its MREL requirement should notify the PRA promptly.

View the PRA's Policy Statement on buffers and capital requirements for MREL.

View the PRA's Supervisory Statement on buffers and capital requirements for MREL.

The Bank of England published the final rules on implementing the EU Minimum Requirement for own funds and Eligible Liabilities (MREL). This is the equivalent of the US Total Loss Absorbing Capacity (known as TLAC) rule. Under the Bank Recovery and Resolution Directive and related UK legislation, the BoE is responsible for directing relevant firms to maintain MREL. MREL is a minimum requirement for firms to maintain equity and eligible debt liabilities that can bear losses before and in resolution and results in a top up to standard regulatory capital requirements, similar in concept to the old Tier 3 requirements under Basel II. The requirement will apply to UK authorized banks, building societies and PRA-designated investment firms, parent undertakings of those firms that are financial holding companies and to UK authorized subsidiaries of such firms.

Read more.

The European Banking Authority published a consultation paper on proposed technical standards on the information to be provided by applicant banks to national regulators in support of their applications for authorization. The Capital Requirements Directive requires a bank to obtain authorization before it begins its operations. Member states set out the requirements for the authorization in their country which means that different standards apply across the EU. At the moment, national regulators stipulate the information required to be submitted in support of a bank's application for authorization and the requirements around the application process. CRD IV requires the EBA to prepare Regulatory Technical Standards setting out the information to be provided in support of an application for bank authorization, requirements applicable to shareholders and qualifying holdings and obstacles which may prevent the effective exercise of supervisory powers by a national regulator. The EBA is also required to prepare Implementing Technical Standards setting out the forms, templates and procedures relating to an authorization application. Once the RTS and ITS enter into force, the requirements will be directly applicable across the EU, largely replacing the existing national regimes on information requirements for authorization applications. However, the proposed RTS do allow some flexibility for national regulators to require additional information from an applicant and provide that information is not required where a national regulator has waived a certain authorization requirement for a particular applicant bank. The EBA is proposing that an application for authorization includes, amongst other things, information on a bank's identification and history, own funds, the proposed activities the bank intends to carry out, shareholders and close links, organizational structure and internal audit policies and infrastructure.

Read more. 

The US OCC announced that it will launch a web-based system for banks to file licensing and public welfare investment applications and notices early next year. The Central Application Tracking System will allow OCC-supervised institutions to draft, submit and track applications and notices online. The system also will allow OCC staff to receive, process and manage those submissions online. The first phase of the system’s rollout will start on January 17, 2017, with the second and third phases set to begin that spring. The new system will replace the current OCC systems, e-Corp and CD-1 Invest. Before the phase 1 rollout, the OCC will provide webinars and resources to explain registration and use of the new system.

View the OCC press release.

The European Banking Authority published a Report on the impact of the adoption into EU legislation of the new international frameworks for counterparty credit risk and market risk. The EBA Report responds to Calls for Advice from the European Commission received in April 2016, as part of the Commission's review of the Capital Requirements Regulation.

As part of its review, the Commission is considering the impact of implementing the Basel Committee on Banking Supervision's framework for market risk, known as the fundamental review of the trading book (FRTB), published in January 2016 and the new standardized approach for the calculation of the exposure value of derivatives, known as SA-CCR, published in March 2014. The Commission asked the EBA to provide technical advice assessing the impact for EU banks resulting from the adoption of the Basel Committee's framework on market risk and whether any adjustments to that framework would be appropriate. The EBA was also asked for advice on the impact of implementing the SA-CCR, including the proportionate application of SA-CCR to smaller firms.

Read more.

The European Central Bank launched a consultation on proposals to harmonize how Euro member state national regulators of less significant banks exercise the options and discretions available to them under the Capital Requirements Regulation and Capital Requirements Directive. The ECB has already harmonized the application of options and discretions for the banks that it directly prudentially supervises under the Single Supervisory Mechanism. The ECB considers that it is appropriate to develop a harmonized approach of supervision for all banks within the SSM, to ensure the smooth functioning of the whole euro area banking system. To do so, the ECB is intending to adopt a Guideline, which would be legally binding, and a Recommendation, which would not be legally binding. The options and discretions relate to own funds requirements, capital requirements, large exposures, liquidity and transitional provisions. The consultation closes on January 5, 2017.

View the proposed Guideline.

View the proposed Recommendation.

View further information about the ECB's proposals.

The European Banking Authority published a discussion paper on the design for a new framework for applying prudential standards to non-bank investment firms that are not deemed to be systemically important. The EBA published a report in December 2015 in response to a Call for Advice from the European Commission on the suitability of certain aspects of the EU prudential regime for investment firms. In that report, the EBA recommended that it was necessary to distinguish between investment firms for which the requirements in the Capital Requirements Directive and the Capital Requirements Regulation are appropriate and investment firms for which those requirements are inappropriate. It recommended that a separate prudential regime should be established for these investment firms. The Commission issued a second CfA in June 2016, asking for advice on the criteria to identify the investment firms for which the CRD IV requirements are appropriate and which rules should apply to them. The EBA published an Opinion on the criteria aspect of the CfA on October 20, 2016.

Read more.

The European Banking Authority launched a consultation on draft revised Guidelines on internal governance for credit institutions and investment firms. The EU Capital Requirements Directive imposes governance requirements on banks and investment firms which include, amongst other things, requirements to have robust governance arrangements, to establish a risk committee and nomination committee and to have adequate risk management processes and internal controls. CRD requires the EBA to develop Guidelines on internal governance. The proposed new Guidelines set out the internal governance arrangements, processes and mechanisms that firms must implement to ensure effective management of the firm. The Guidelines will apply to a firm's governance arrangements, including their organizational structure and processes to identify, manage, monitor and report risks that they may be exposed to, taking into account the three lines of defense model. The EBA's current Guidelines on internal governance, published on September 27, 2011, will be repealed when the new Guidelines enter into force. Responses to the consultation are due by January 28, 2017.

View the consultation paper and proposed revised Guidelines.

View the current Guidelines.

The European Banking Authority and the European Securities and Markets Authority launched a joint consultation on proposed Guidelines on the Assessment of the Suitability of the Members of Management Body and Key Function Holders. The revised Markets in Financial Instruments Directive and the Capital Requirements Directive require firms to assess the suitability of members of their management body. Firms subject to CRD must all assess the suitability of all key function holders that have a significant influence over the direction of the firm. The proposed Guidelines provide criteria for assessing the individual and collective knowledge, skills, experience, reputation, honesty, integrity and independence of members of the management body. The proposed Guidelines also include a framework for assessing whether individual members of management commit sufficient time to performing their duties, set out how diversity should be taken into account in the selection process for members of the management body and provide for appropriate financial and human resources to be allocated to induction and training.

View the consultation paper.

The US Board of Governors of the FRS announced the annual indexing of reserve requirement exemption amount and low reserve tranche, two amounts used in determining reserve requirements of depository institutions under Regulation D.

All depository institutions must hold a percentage of certain types of deposits as reserves in the form of vault cash, as a deposit in a Federal Reserve Bank or as a deposit in a pass-through account at a correspondent institution. Reserve requirements currently are assessed on the depository institution’s net transaction accounts (mostly checking accounts). Depository institutions must also regularly submit reports of their deposits and other reservable liabilities.

For net transaction accounts in 2017, the first $15.5 million, up from $15.2 million in 2016, will be exempt from reserve requirements. A three percent reserve ratio will be assessed on net transaction accounts over $15.5 million up to and including $115.1 million, up from $110.2 million in 2016. A ten percent reserve ratio will be assessed on net transaction accounts in excess of $115.1 million.

The new low reserve tranche and reserve requirement exemption amount will apply to the 14-day reserve maintenance period that begins January 19, 2017. The Federal Reserve Board also announced changes in two other amounts, the nonexempt deposit cutoff level and the reduced reporting limit, that are used to determine the frequency with which depository institutions must submit deposit reports.

View the Federal Reserve Board final rule.

The US Federal Reserve Board announced that it had voted to affirm the countercyclical capital buffer at the current level of zero percent. The release notes that the CCyB is a macroprudential tool that can be used to raise capital requirements on internationally active banking organizations when such organizations are exposed to an elevated risk of above-normal future losses. In such circumstances, the CCyB would be available to help banking organizations absorb higher losses and to moderate credit supply fluctuations.

The Federal Reserve Board’s release noted that the Federal Deposit Insurance Corporation and the OCC were consulted before the Federal Reserve Board voted on this decision. Should the Federal Reserve Board in the future modify the CCyB amount, banking organizations would have twelve months before an increase becomes effective unless the Federal Reserve Board decides on an earlier effective date.

View the Federal Reserve Board press release.

The European Banking Authority published a report outlining its response to the Commission's call for advice, published on April 26, 2016, on the review of the large exposures framework laid down in the Capital Requirements Regulation. The Commission is considering whether to implement the agreed Basel Committee on Banking Supervision framework for measuring and controlling large exposures by modifying the CRR through a legislative proposal before the end of 2016. The EBA's Report analyzes the impact of aligning certain aspects of the large exposures framework pursuant to the CRR.

Read more.

The European Banking Authority published for consultation draft Implementing Technical Standards on the reporting requirements of the minimum requirements for own funds and eligible liabilities. The ITS set out the procedures and templates for the identification and transmission of information by resolution authorities to the EBA on the MREL that has been set for each firm. The Bank Recovery and Resolution Directive requires national resolution authorities to set individual levels of MREL for each firm. MREL is the EU equivalent of US Total Loss-Absorbing Capacity (TLAC). The consultation closes on November 21, 2016.

View the consultation paper.

The European Banking Authority published an Opinion on the criteria for identifying investment firms to which the EU regulatory capital requirements legislation should apply. The EBA published a report in December 2015 in response to a Call for Advice from the European Commission on the suitability of certain aspects of the EU prudential regime for investment firms. In that report, the EBA recommended that it was necessary to distinguish between investment firms for which the requirements in the Capital Requirements Directive and the Capital Requirements Regulation are appropriate and investment firms for which those requirements are inappropriate. It recommended that a separate prudential regime should be established for these investment firms. The Commission issued a second Call for Advice in June 2016, asking for advice on the criteria to identify the investment firms for which the CRD IV requirements are appropriate and which rules should apply to them.

Read more.

The US Federal Reserve Board issued letters to two banks, granting relief from certain US risk committee requirements under Regulation YY in light of certain home country corporate governance requirements and practices of the banks involved. Regulation YY requires foreign banking organizations with combined US assets of more than $50 billion but US non-branch assets of less than $50 billion to establish a US risk committee as a committee of the global board of directors, on a standalone basis, or as a joint committee with its enterprise-wide risk committee. One member of the committee must not be an officer or employee of the company or its affiliates (or an immediate family member of a person who is an executive officer of the company or its affiliates).

Read more.

The European Banking Authority published final Guidelines on the correction required for the calculation of Modified Duration for debt instruments subject to prepayment risk under the Capital Requirements Regulation. The CRR establishes two methods to calculate capital requirements for general interest rate risk. The relevant methods are the Maturity-Based calculation and the Duration-Based calculation of general risk. The final Guidelines apply to the Duration-Based calculation. The Duration-Based calculation uses the concept of Modified Duration pursuant to the formulae outlined in the CRR. This method is only valid for instruments that are not subject to repayment risk. The EBA has is mandated to issue guidelines establishing how to correct the Modified Duration calculation to reflect prepayment risk. The EBA has proposed two approaches to correct the calculation. One option is to treat the debt instrument with prepayment risk as if it is a combination of a plain vanilla bond and an embedded option. The Modified Duration of the plain vanilla bond is therefore corrected with the change in value of the embedded option; which is estimated according to its theoretical delta, resulting from a 100 basis point movement in interest rates. The other option is directly to calculate the change in value of the whole instrument subject to a repayment risk resulting from a 100 basis point movement in interest rates. The Guidelines will apply from March 1, 2017.

View the final Guidelines.

The European Securities and Markets Authority published two sets of final Guidelines on Sound Remuneration Policies under the Undertakings for Collective Investments in Transferable Securities Directive and the Alternative Investment Funds Management Directive. The Guidelines follow ESMA’s final report that was published in March of this year.

The UCITS Sound Remuneration Guidelines will apply to management companies, including those that are subsidiaries of credit institutions subject to sector-specific remuneration principles, and investment companies that have not designated a management company authorized under the UCITS Directive. The Guidelines set out the obligations of the management company to manage its financial situation and the governance of remuneration (which includes issues such as the design, approval and oversight of the remuneration policy) and outline the requirements for establishing and applying remuneration policies and practices for management companies and their identified staff, specifying the categories of identified staff. 

Read more.

The Basel Committee on Banking Supervision published the final Standard for Total Loss Absorbing Capacity holdings. The Financial Stability Board published the TLAC requirements for global systemically important banks in November 2015, which set a minimum requirement for TLAC for G-SIBs, including a Term Sheet implementing the requirements. The Term Sheet states that G-SIBs must deduct, from their own TLAC or regulatory capital, exposures to TLAC instruments and liabilities issued by other G-SIBs and calls on the Basel Committee to further specify these requirements. The Basel Committee consulted in November 2015 on the proposed treatment of TLAC holdings in G-SIBs. 

The TLAC holdings standard will require banks to deduct holdings of TLAC instruments that are not already included in regulatory capital from their own Tier 2 capital, subject to the thresholds that apply to existing holdings of regulatory capital and an additional 5 per cent threshold for non-regulatory-capital TLAC holdings only. In addition, instruments that are ranked at the same level as subordinated forms of TLAC must also be deducted. 

The TLAC holdings standard will apply to G-SIBs and non-G-SIBs from January 1, 2019 for investments in
most G-SIBs which is the same time that the TLAC requirements apply. The TLAC holdings standard will apply later for G-SIBs headquartered in emerging market economies. 

View the final Standard.

A Commission Implementing Regulation containing Implementing Technical Standards on the mapping of assessments by Credit Rating Agencies for securitization positions under the Capital Requirements Regulation was published in the Official Journal of the European Union. The CRR permits the risk weights under the standardized and internal ratings based approaches for securitization positions to be determined, if applicable, based on the credit quality of the positions. This credit quality is determined by reference to credit ratings issued or endorsed by ECAIs (i.e., credit rating agencies that are registered or certified under the EU Credit Rating Agency Regulation). The ITS determine the mapping between credit ratings and the credit quality steps for the allocation of risk weights set out in the CRR for securitization positions. The ITS enter into force from November 1, 2016.

View the ITS on mapping of credit assessments for securitizations.

A Commission Implementing Regulation containing the Implementing Technical Standards on the mapping of credit assessments to risk weights of External Credit Assessment Institutions under the Capital Requirements Regulation was published in the Official Journal of the European Union. The CRR requires the credit ratings scales used by ECAIs (i.e., credit rating agencies that are registered or certified under the EU Credit Rating Agency Regulation) to be mapped to the risk weights categories in the CRR. 

The European Commission has adopted ITS that amended the final draft ITS submitted by the European Supervisory Authorities (the European Banking Authority, the European Securities and Markets Authority and the European Insurance and Occupational Pensions Authority). This is despite the ESAs rejecting the Commission's proposed amendments in an Opinion published in May 2016. 

The ITS aim to ensure sound credit assessments to encourage financial stability in the EU and determine an objective approach for attributing risk weights to assessments carried out by ECAIs. 

View the ITS on mapping of credit assessments for credit risk.

The Basel Committee on Banking Supervision published a consultation paper and discussion paper on the regulatory treatment of accounting provisions under the Basel III capital framework and related policy considerations. The International Accounting Standards Board and the US Financial Accounting Standards Board have adopted new provisioning standards that require the use of expected credit loss models rather than incurred loss models - the International Financial Reporting Standard (IFRS) 9 and the Current Expected Credit Losses (CECL), respectively. These standards modify provisioning standards to incorporate forward-looking assessments in the estimation of credit loss. The new IASB Standards will apply from January 1, 2018, although earlier application is permitted. The new FASB Standards will apply from January 1, 2020 for certain banks that are public companies and from 2020 for all other banks, although early application by all banks is permitted from 2019. The Basel Committee is considering the implications of new ECL models for regulatory capital because the new models will result in fundamental changes to the provisioning practices of banks. The consultation paper sets out the current regulatory treatment of provisions as well as the Basel Committee’s proposal to retain, for an interim period, the current regulatory treatment of provisions under the standardized and the internal ratings-based approaches. In particular, the Committee is proposing that, in the interim period, jurisdictions would extend their existing approaches to categorizing provisions as general provisions (GP) and specific provisions (SP) to provisions measured under the applicable ECL accounting model.

Read more.

The European Banking Authority published an updated Report on the monitoring of Additional Tier 1 instruments and standardized templates for AT1 instruments. This follows a consultation in July 2016. The Capital Requirements Regulation sets out the eligibility criteria for AT1 instruments, which are further detailed in Regulatory Technical Standards. The CRR requires the EBA to review the quality of own funds instruments issued by banks across the EU. The Report sets out the results of its monitoring the issuances of AT1 capital instruments, assessing the terms and conditions of selected issuances against the criteria provided for in CRR and the related RTS. The Report is based on the review of 33 AT1 issuances from EU banks, which took place between August 2013 and December 2015, for a total amount of EUR 35.5 billion. The Report sets out detailed analysis of some of the clauses reviewed, including the EBA's views on those clauses, and interpretation of some of the CRR provisions, in particular the provisions relating to triggers.  

Read more.

The European Banking Authority launched a consultation on the proposed Guidelines for the assessment of Information and Communication Technology risk under the Supervisory Review and Evaluation Process. The increasing complexity of ICT risk in the banking industry and the increasing potential adverse prudential impact such risks pose to individual firms and on the sector as a whole has led the EBA to propose the Guidelines. The purpose of the proposed Guidelines is to promote common procedures and methodologies for regulators throughout the EU when they are conducting supervisory assessments of a firm's governance and strategy on ICT and a firm's exposures and controls, as required by the Capital Requirements Directive. National regulators should apply the Guidelines to their assessment of firms proportionately, as set out in the EBA SREP guidelines. The proposed Guidelines should be read alongside the EBA SREP Guidelines. Responses to the consultation are due by January 6, 2017.          

View the draft Guidelines.

View the EBA SREP Guidelines. 

The Bank of England announced that the results of the UK 2016 banking stress test would be reported to the relevant firms involved on November 29, 2016 and published on November 30, 2016. The 2016 test is the first to be designed under the new approach to stress testing published in October 2015 and covers seven UK banks and building societies: Barclays plc, HSBC Holdings plc, Lloyds Banking Group plc, Nationwide Building Society, The Royal Bank of Scotland Group plc, Santander UK plc and Standard Chartered plc. 

The Bank also announced that for the first time the UK stress test next year will include two scenarios: the annual cyclical scenario, which assesses the risks to the banking system resulting from the financial cycle, and an additional "exploratory" scenario which assesses a bank's resilience to a wider range of potential threats. 

View the announcement.

The European Banking Authority published final Guidelines on implicit support for securitization transactions under the Capital Requirements Regulation. Examples of such transactions include purchases of deteriorating credit risk exposures from an underlying pool or improvement of quality of credit enhancements through the addition of higher quality risk exposures. The CRR places restrictions on providing implicit support to securitizations. These rules apply in addition to the so-called "skin in the game" requirements on originators to retain part of the risk on securitizations. To prevent uncapitalized risks of implicit support, the CRR requires that any reduction in capital requirements gained through a securitization must be justified by a corresponding transfer of risk to third parties. The CRR also states that a transaction is not considered to provide support to a securitization if it is executed under arm’s length conditions and taken into account in the assessment of significant risk transfer. The CRR requires a sponsor or originator institution that has failed to comply with this requirement to, at a minimum, hold own funds against all of the securitized exposures as if they had not been securitized. The Guidelines set out an objective test in relation to the definition of arm's length conditions.

Read more.

The Prudential Regulation Authority published a Policy Statement and Supervisory Statement setting out its final policy approach to underwriting standards for buy-to-let mortgage contracts. The Supervisory Statement sets out the minimum standards that firms should use to underwrite buy-to-let mortgage contracts, including minimum requirements for affordability assessments. It also clarifies that the PRA's expectation is that the reduction of capital requirements under the Capital Requirements Regulation for loans to small and medium-sized enterprises should not be applied where the purpose of the loan is to fund a buy-to-let business. The standards will apply to all PRA-regulated firms undertaking buy-to-let lending that are not subject to regulation by the Financial Conduct Authority. The PRA expects firms within scope to ensure that the standards are adopted by other firms within their groups that undertake buy-to-let lending. 

The new standards will need to be implemented by relevant firms by January 1, 2017 for the interest cover ratio tests and interest rate affordability stress tests. The remaining standards will need to be implemented by September 30, 2017.
 
View the Policy Statement.

View the Supervisory Statement. 

A Commission Implementing Regulation amending Regulatory Technical Standards on the reporting of financial information under the Capital Requirements Regulation was published in the Official Journal of the European Union. The RTS lay down uniform requirements in relation to supervisory reporting to regulators, pursuant to the Capital Requirements Regulation, in the following areas: (i) own funds requirements and financial information; (ii) losses stemming from lending collateralized by immovable property; (iii) large exposures; (iv) leverage ratio; and (v) Liquidity Coverage requirements and Net Stable Funding Requirements. The amending Regulation amends the definitions, templates, and instructions used for the purposes of supervisory reporting. The amending Regulation is based on draft RTS submitted by the European Banking Authority in March 2016. The amending Regulation will enter into force on October 19, 2016 and will apply from December 1, 2016 with the first reporting date being December 31, 2016.

View the amending Regulation. 

The European Banking Authority published the final Guidelines specifying the application of the definition of default in relation to the Internal Ratings Based Approach and the Standardized Approach under the Capital Requirements Regulation. The CRR sets out the definition of default of an obligor that is used for the purposes of the IRB and Standardized Approaches. The purpose of the Guidelines is to harmonize the definition of default across the EU framework so that EU banks apply regulatory requirements to their capital positions in a more consistent and comparable way, especially in the context of IRB models. The Guidelines expand on various aspects of the application of the definition of default including the “days past due” criterion for default identification, indications of unlikeliness to pay, specific aspects of the application of the definition of default for retail exposures, application of the default definition in a banking group, treatment of external data and criteria for a return to non-defaulted status. 
 

The US BoG of the Federal Reserve System issued a proposed rule modifying the capital plan and stress testing rules for the 2017 test cycle. The proposed changes include eliminating the qualitative portion of Comprehensive Capital Analysis and Review for certain large and noncomplex firms (generally, firms with less than $250 billion in total consolidated assets), along with reduction in the amount of data that such firms are required to submit on the FR Y-14 regulatory reports. Such institutions however, would remain subject to quantitative CCAR requirements and to normal supervision by Federal Reserve Board regarding their capital planning. The proposed rule would be effective for the 2017 CCAR. Comments on the proposal are due by November 25, 2016.

In a speech given the same day, FRB Governor Tarullo stated that the Federal Reserve Board is considering adoption of a “stress capital buffer approach” to setting post-stress capital requirements whereby the G-SIB capital surcharge would be factored into the estimate of the amount of capital required under stress. However, Governor Tarullo emphasized that this was a preliminary proposal and would not apply to the 2017 cycle of CCAR.

View proposal.

View Govenor Tarullo speech.

The Financial Policy Committee of the Bank of England released a statement following its meeting on September 20, 2016. The FPC considers that the current outlook for financial stability in the UK remains challenging following the outcome of the referendum in June for the UK to leave the EU. The FPC has reaffirmed that it expects to maintain a countercyclical buffer rate of 0% until at least June 2017 unless any material changes warrant an amendment. The Prudential Regulation Authority's expectation is that banks should not increase dividends and other distributions as a result of the CCyB being maintained at 0%. 

View the statement.

The European Banking Authority published final draft Implementing Technical Standards on the common procedures, forms and templates for the consultation process between the relevant national regulators when carrying out the prudential assessment relating to proposed acquisitions of qualifying holdings in credit institutions.  The Capital Requirements Directive requires regulators to fully consult with each other when carrying out the assessment of a proposed acquirer of qualifying holdings. The final draft ITS supplements this requirement by setting out the requirements for the designation of contact points by regulators, as well as a timeframe and process for submitting the consultation notice and for providing the response. The final draft ITS provide templates for the response from the regulator from whom information has been requested. It also outlines language requirements and means of communication, as well as how mutual feedback would be carried out. The EBA has made certain amendments to the version of the ITS that it consulted on previously to take into account the final draft ITS prepared on a similar topic under the Markets in Financial Instruments Directive II, which was published by the European Securities and Markets Authority in March 2015. Those amendments seek to align the requirements across sectors. The final draft ITS must be submitted to the Commission for adoption before it can enter into force.  

View the final draft ITS.

The European Banking Authority published a consultation paper proposing draft Guidelines on how to stipulate the minimum monetary amount of professional indemnity insurance required for authorization under the Payment Services Directive II. PSD2 entered into force on January 12, 2016, and will apply from January 13, 2018. The PSD2 recognizes new types of payment services that have emerged in the area of internet payments, such as payment initiation services and account information services. The PSD2 sets out the criteria on how to stipulate the minimum monetary amount of professional indemnity insurance or other comparable guarantee to be held by regulated firms. The draft Guidelines also set out the criteria, indicators, calculation methods and a formula that regulators should use when granting authorization or registration. The consultation paper explains the EBA's proposal for the use of a formula to calculate the minimum monetary amount of professional indemnity insurance or any comparable guarantee, when and how the lowest tier (the default value) should be used when calculating the monetary amount, provides details on indicators for the criteria set out in the PSD2 and the proposed methodology for some of the indicators. Responses to the consultation are due by November 30, 2016. 

View the consultation page. 

FDIC Chairman Martin Gruenberg issued a statement on the release of updated data regarding the FDIC’s Deposit Insurance Fund. (DIF) The DIF balance stood at almost $78 billion, leading to a reserve ratio of 1.17%, an eight-year high. Chairman Gruenberg’s statement noted that the FDIC still intends to reach the statutory minimum ratio of 1.35% set forth in the Dodd-Frank Wall Street Reform and Consumer Protection Act, before September 30, 2020.

View text of Chairman Gruenberg’s statement.

The US Federal Deposit Insurance Corporation released the semi-annual report of the Global Capital Index. In a concurrent statement, Vice-Chairman Thomas M. Hoenig noted that while Global Systemically Important Banks did increase their equity capital, a beyond-proportionate increase in assets led to a net increase in the overall leverage of G-SIBs. Vice-Chairman Hoenig also noted that asset quality in Europe remains an issue in comparison to the United States, with more than three times as many non-performing loans, and that better-capitalized banks trade at a premium when compared to banks with weaker capital positions. Vice-Chairman Hoenig noted that, while banks are better capitalized now, with average leverage ratios of around 5%, such ratio remains inadequate should banks have to withstand losses similar to the last financial crisis.

View text of Vice-Chairman Hoenig’s statement.

View Global Capital Index.

The Comptroller of the Currency Thomas J. Curry addressed how the US federal banking system has progressed since the Great Recession and the 2008 financial crisis, the strength of US banks today and the need for continued vigilance to manage risks. Among other things, the Comptroller discussed leverage ratios and their role as an additional line of defense, or backstop, to the risk-based capital measures.  Curry criticized the proposals of some to “water down” the ratios by manipulating what is included or excluded from consideration and stressed the need for clear definitions that accurately and transparently capture the leverage of regulated banks.  Curry argued that “weakening the ratio through special exclusions only undermines our original intent and weakens the protection against excessive leverage.” He further noted that while some wish to exclude certain assets from measures of leverage on the grounds that it could affect certain business lines’ profitability, “the essence of assessing a bank’s leverage is about comparing its equity to its assets, and carving out various assets would cut against the very meaning of leverage.”

View the Comptroller's full remarks.

The US Office of the Comptroller of the Currency released its bank supervision operating plan for fiscal year (FY) 2017.  The plan sets forth the foundation for policy initiatives and for supervisory strategies applicable to individual banks. OCC staff members will use this plan to guide their supervisory priorities, planning and resource allocations.

Of note, the agency indicated that it will focus on Bank Secrecy Act/anti-money laundering compliance management in 2017.  Additional supervisory strategies for FY 2017 will focus on: (i) commercial and retail loan underwriting; (ii) business model sustainability and viability; (iii) operational resiliency; and (iv) change management processes to address new regulatory requirements.

The OCC will provide periodic updates about supervisory priorities through the Semiannual Risk Perspective in the spring and fall of 2017, and with a mid-cycle operating plan status report in the third quarter of FY 2017.

View the OCC's Fiscal Year 2017 Operating Plan.

The OCC issued a proposed rule setting forth a framework for placing uninsured national banks regulated by the OCC into receivership.  While the National Bank Act and Federal Deposit Insurance Act specify the Federal Deposit Insurance Corporation as receiver for insured banks and savings associations, the law grants the Comptroller of the Currency broad authority to choose a receiver for uninsured national banks. The proposal would not apply to federal savings associations, all of which are insured, or to uninsured US branch offices of foreign banks.

The proposed rule describes:  (i) the appointment of a receiver and required federal notice; (ii) the process for submitting claims against the receivership; (iii) the order of priorities for payment of administrative expenses and claims; (iv) the powers and duties of the receiver; (v) the payment of dividends on claims; (vi) the sources of funds for payments and claims; and (vii) the status of fiduciary and custodial assets and accounts.

While the OCC has not appointed a receiver for an uninsured national bank in many years, the agency believes that clarifying the framework, process and authority promotes the orderly resolution of such institutions if required and contributes to the broader stability of the federal banking system.

All uninsured national banks are currently trust banks.  However, the OCC noted that it retains discretion to grant new charters for uninsured banks, and the OCC specifically stated that an uninsured federal bank charter may be an appropriate entity for delivering banking procedures in a new way in light of technological innovations in financial services.

The deadline to submit comments on the proposed rule is November 14, 2016.

View the proposed rule.


 

Implementing Technical Standards listing the main indices and recognized exchanges for the use of eligible collateral in accordance with the Capital Requirements Regulation was published in the Official Journal of the European Union.
 
The CRR states that equities or convertible bonds included in a main index may be used by institutions as eligible collateral for credit risk mitigation purposes. One of the eligibility criteria for collateral is that it should be sufficiently liquid. To be considered as main indices for the purposes of the CRR, equity indices should consist mainly of equities that can reasonably be expected to be realizable when an institution needs to liquidate them. Equity indices listed include STOXX Asia/Pacific 600, TSX60, Hang Seng Mainland 100 Index (China), FTSE Europe Index, S&P BMI France, Nikkei 300 and the OMXS60. The convertible bond indices listed as main indices are Exane ECI-Europe, Jefferies JACI Global and Thomson Reuters Global Convertible. 

Read more.

As part of the inaugural Marketplace Lending Policy Summit 2016, US Comptroller of the Currency Thomas J. Curry discussed marketplace lending’s risks and associated policy questions. Of note, Comptroller Curry addressed the OCC’s work around responsible innovation and feedback it has received to date on potentially granting federal banking charters to fintech firms.  Curry noted that if the OCC does decide to grant limited-purpose charters in this area, the institutions who receive the charters will be held to the same strict standards of safety, soundness and fairness that other federally chartered institutions must meet.

View Comptroller Curry's remarks.

The European Central Bank published proposed draft Guidance on non-performing loans. The proposed Guidance addresses the main aspects of strategy, governance and operations for resolving NPLs. Once finalized, the Guidance will apply to all Eurozone Significant Institutions supervised by the ECB in the Single Supervisory Mechanism as well as their international subsidiaries. Eurozone banks will be expected to apply the Guidance proportionately with those banks that have a high level of NPLs taking greater actions. The ECB Banking Supervision emphasizes that an NPL strategy should outline the bank’s approach and objectives regarding the effective management and ultimate reduction of NPL stocks in a clear, credible and feasible manner for each relevant portfolio. The ECB also published the results of a survey which it undertook with eight national supervisory authorities. The survey assesses the legal and supervisory practices of eight of the Eurozone countries. The ECB considers that some of those countries should revise and strengthen the legal framework on NPLs. Responses to the consultation are due by November 15, 2016.
 
View the draft Guidance and related information.
 
View the draft Guidance. 

The European Banking Authority published a report analyzing the core funding ratio across the EU. The report comes in response to a call for advice from the European Commission to explore the possibilities of the core funding ratio as a potential alternative metric for the assessment of EU banks’ funding risk, taking into account proportionality. 

Read more.

On September 8, 2016, the US Board of Governors of the Federal Reserve System, the US Federal Deposit Insurance Corporation and the OCC jointly issued, pursuant to a requirement under Section 620 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, a study on the scope of permissible activities and investments engaged in by banking entities, and the associated risks of those activities. The banking entities covered in the study include insured depository institutions and any company that controls an insured depository institution or is treated as a bank holding company.

The report recommends changes to mitigate risks associated with banking activities, including (i) repealing the authority of financial holding companies to engage in merchant banking and commodities activities, (ii) reviewing certain activities to determine whether changes in regulations are needed and (iii) clarifying certain prudential rules and regulations.  If enacted, the Federal Reserve Board’s recommendations relating to merchant banking and commodities activities would significantly restrict the permissible activities of FHCs established under the Gramm-Leach-Bliley Act in 1999.  The Federal Reserve Board also recommended the repeal of exemptions available to owners of industrial loan companies and grandfathered savings and loans.

View the text of the Report.
 

The Federal Reserve Board issued a policy statement setting forth the framework for setting the Countercyclical Capital Buffer for private-sector credit exposures in the United States. The CCyB is a macroprudential tool that is intended to assist banking organizations in absorbing shocks associated with fluctuations in credit conditions. As a general matter, the CCyB applies to large internationally active banking organizations that are subject to the advanced approaches capital rules (i.e., those with more than $250 billion in assets or $10 billion in on-balance-sheet foreign exposures), and to any depository institution subsidiary of such banking organizations. The policy statement describes the types of financial system vulnerabilities and other factors that the Federal Reserve Board may take into account as it evaluates settings for the buffer, which may include: leverage in the nonfinancial and financial sectors, maturity and liquidity transformation in the financial sector and asset valuation pressures.  However, the range of indicators and models that may be considered will likely change over time. Once activated, the CCyB imposes heightened capital requirements on such covered institutions, which heightened requirements may be removed or reduced by the Federal Reserve Board upon determination that financial conditions that led to the activation of the CCyB have abated or lessened. In addition, the policy statement notes that the Federal Reserve Board will provide notice and seek comment from the public on the proposed level of the CCyB as part of making any final determination to change the CCyB.

View Federal Reserve Board policy statement.

The US Board of Governors of the Federal Reserve System adopted revisions to the FR Y-9C reporting form, a standardized financial statement for consolidated bank holding companies. The Federal Reserve Board revised the FR Y-9C to, among other things, delete existing data items, increase existing thresholds for certain data items, and clarify certain instructional items. The changes were originally proposed to take effect on March 31, 2016.  In response to comments, the Federal Reserve Board is generally delaying the effective date for implementation for certain changes to September 30, 2016, while others will become effective March 31, 2017.

View the text of adopting release

A Commission Delegated Regulation amending the Regulatory Technical Standards specifying the methodology for the identification by national regulators of global systemically important institutions and the definition of subcategories of GSIIs was published in the Official Journal of the European Union. The RTS specify quantifiable indicators forming the five categories to be used when measuring the systemic significance of a bank. The RTS is based on international standards developed by the Basel Committee on Banking Supervision to assess global systemically important banks and on the higher loss absorbency requirement. This methodology is regularly updated. The Amending Regulation updates the reporting templates and reporting instructions for the data collection for 2016 as well as the current values of the indicators that are to be determined.
 
The Amending Regulation entered into force on September 9, 2016. 
 
View the Regulation.

View the original RTS.

As it indicated it would do in the Joint Report on Banking Activities and Investments, the OCC issued a proposed rule that would prohibit national banks and federal savings associations from dealing and investing in industrial or commercial metal. If finalized, the prohibition would cover metal, including alloy, in a physical form primarily suited to industrial or commercial use (including, for example: copper cathodes, aluminum T-bars and gold jewelry).  The proposal states that such metals do not constitute “exchange, coin, and bullion” under 12 USC 24(Seventh), nor would buying or selling such metals for the purpose of dealing or investing in that metal be part of or incidental to the business of banking.  By operation of various federal laws, the prohibition would also apply to FDIC-insured state banks and to US branches and agencies of foreign banks.  Comments must be submitted 60 days from the date of the proposed rule’s publication in the Federal Register.

View Text of OCC Proposed Rule

The Basel Committee on Banking Supervision published a report to the G20 leaders, providing an update on implementation of the Basel III regulatory reforms since the Basel Committee’s last progress report in November 2015. The Basel Committee concluded that the Basel III capital and liquidity standards have generally been transposed into domestic regulations within the time frame set by the Committee. Since the last report, key components such as the risk-based capital standards and the Liquidity Coverage Ratio have now been enforced by all member jurisdictions, while the global systematically important banks framework has been enforced by all member jurisdictions that are home jurisdictions to G-SIBs. The Basel Committee highlighted the ongoing efforts of member jurisdictions to adopt other Basel III standards such as the leverage ratio and the Net Stable Funding Ratio. 

Read more.

The US FDIC released the Summer 2016 issue of its publication, Supervisory Insights. The magazine contains two original articles and the regular “Regulatory and Supervisory Roundup” which provides summaries of recently released regulations and supervisory guidance. An article entitled “De Novo Banks: Economic Trends and Supervisory Framework,” lays out trends the FDIC staff has observed in de novo formation, the FDIC application review process and steps the FDIC takes to supervise and support new banking institutions. Another article entitled, “Matters Requiring Board Attention (MRBA)” provides a survey of trends among issues appearing in the MRBA section of examination reports. The article notes several specific trends: first, examinations resulting in MRBAs have declined since 2011, second, there have been relative increases in credit concentration risk management and liquidity management-related MRBAs, and third, corporate governance and IT practices are additional areas of increasing concern.

View Summer 2016 Supervisory Insights.
 

The White House Council of Economic Advisers released a report analyzing the impact of regulations issued pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act on community banks, defined generally as banks with assets less than $10 billion. The report disputed claims that increased regulations have negatively impacted smaller-size institutions, noting areas where community banks have remained strong since the Dodd-Frank Act. The report also describes certain long-standing structural challenges that precede the Dodd-Frank Act which community banks have continued to face, and noted the “importance of implementing Dodd-Frank in a way that allows community banks to compete on a level playing field.” In response, Republicans on the US House of Representatives Financial Services Committee published a blog post countering the assertions in the White House report, and posted statements from various community bankers and other small financial services operators commenting on the negative ways in which Dodd-Frank Act reforms have impacted their respective institutions.

View text of the White House Report.

View the HFSC blog post.

The European Banking Authority published an amended version of its implementing technical standards on benchmarking of internal approaches under the Capital Requirements Directive IV. The ITS have been amended to assist regulators in their 2017 benchmarking assessment of internal approaches for credit risk and market risk. The 2016 exercise covered credit risk for so-called high-default portfolios (small and medium enterprises and retail) and market risk portfolios. The 2017 exercise will focus on low-default portfolios. The EBA noted that it intends to update the ITS annually to ensure the quality of future benchmarking exercises. The amended ITS have been published as a package of documents with consolidated instructions, templates and annexes. The amended ITS have been submitted to the European Commission but as of yet have not been adopted.

View the amended ITS. 

View the amended draft benchmarking package.