The U.K. Prudential Regulation Authority has published a Policy Statement following its consultation last year on changes to the Pillar 2 capital requirements for banks and large investment firms. The amendments will apply from January 23, 2020. The PRA has made some changes to the proposed text following feedback from respondents that further clarification would be helpful, in particular on the setting of the PRA buffer using the hurdle rate in stress, buffer interactions and usability. The amendments are implemented in:

• Statement of Policy, "The PRA's methodologies for setting Pillar 2 capital";
• Supervisory Statement, "The Internal Capital Adequacy Assessment Process (ICAAP) and the Supervisory Review and Evaluation Process (SREP)" (SS31/15); and
• Supervisory Statement, "Implementing CRD IV: Capital buffers" (SS6/14).

View the Policy Statement.

View the updated Statements.

View details of the PRA's consultation.

The European Banking Authority has commenced a consultation on proposed changes to the EU-wide stress test framework for banks. The EU-wide stress test contributes to improving the financial resilience of banks. Responses to the consultation may be submitted until June 30, 2020. The EBA is holding a public hearing on the proposals on February 21, 2020.

The EBA is proposing to amend the framework to have two parts. The first would be the supervisory element, based on a common EU methodology. It would include the current constrained bottom-up approach, but also have an option for national regulators to adjust or replace banks' estimates based on top-down models and other tools. The second part would be the bank element and would be based on the same common methodology applied in the supervisory part. However, banks would be given more discretion to calculate their projections, provided an explanation and disclosure of the rational and impact of any deviations is possible. The quality of disclosure of the results would remain high, with only the supervisory leg being amended to limit the quantity of disclosure. Feedback is also sought on the approach to scenario designs.

View the consultation paper and other details.

The Banking Supervision arm of the European Central Bank has set out its expectations of Eurozone banks regarding their dividend distribution and variable remuneration policies. The ECB is responsible for direct prudential supervision of certain significant banks based in the Eurozone as part of the Single Supervisory Mechanism and has certain powers relating to the supervision by national Eurozone regulators of smaller banks. The ECB has published a letter addressed to significant banks warning them to take a "prudent, forward-looking stance" when setting the banks' remuneration policy and has also published a Recommendation (dated January 17, 2020) on requiring significant banks to "establish dividend policies using conservative and prudent assumptions". The Recommendation will apply directly to significant Eurozone banks. The ECB expects national Eurozone regulators to consider how it might be applied proportionally to the smaller banks. The ECB expects Eurozone banks to consider how their variable remuneration policies and dividend distribution policies will impact their ability to continue to meet their regulatory capital requirements, particularly taking into account the transitional provisions of the Capital Requirements Directive (version IV) and the transitional arrangements for mitigating the impact of the introduction of IFRS 9 on own funds.

View the ECB's letter.

View the ECB's Recommendation.

The European Central Bank has opened a consultation on proposed guidelines on the materiality threshold for credit obligations past due for less significant institutions based in the Eurozone. The EU Capital Requirements Regulation risk quantification provisions set out that a default occurs when an obligor is past due more than 90 days on any material credit obligation to a firm, its parent or any of its subsidiaries. The materiality of the credit obligation is to be assessed against a threshold set by the national regulator according to its view of a reasonable level of risk. The ECB is responsible for direct prudential supervision of certain significant banks based in the Eurozone as part of the Single Supervisory Mechanism and has set the materiality threshold for these firms. The proposed guidelines are addressed to national Eurozone regulators within the SSM responsible for setting the threshold for less significant institutions. The ECB is proposing a single materiality threshold for all less significant institutions, both for retail and non-retail exposures.

The consultation closes on February 17, 2020.

View the consultation paper.

The European Banking Authority has launched a consultation on its draft regulatory technical standards specifying how institutions should calculate their own funds requirements for market risk in respect of non-trading book positions that are subject to foreign-exchange risk or commodity risk. The draft RTS have been published for consultation in accordance with the revised Capital Requirements Regulation, which came into force on June 7, 2019 and (subject to certain exceptions) will apply directly across the EU from June 28, 2021. Responses to the consultation should be submitted by April 10, 2020. The EBA is expected to consult in 2020 on other technical standards to supplement CRR II and has published a roadmap providing the due dates for its deliverables.

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The European Banking Authority has published a report on big data and advanced analytics in the banking sector. The report sets out the findings of the EBA's review of big data and analytics and presents key pillars and elements of trust for the development, implementation and adoption of BD&AA by banks.

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The Bank of England and U.K. Financial Conduct Authority have published a series of proposals setting out their plans to enhance their data and analytics capabilities. The proposals include a revised FCA data strategy, a BoE discussion paper on transforming data collection and a viability report published by the FCA and BoE, together with seven regulated firms, on the possibilities of digital regulatory reporting. The FCA and BoE depend on data to conduct their supervisory responsibilities.  

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The European Parliament has published a resolution on relationships between the EU and third countries concerning financial services regulation and supervision. The resolution follows the publication of a report in August 2018 by the European Parliament’s Committee on Economic and Monetary Affairs setting out its proposal for the European Parliament’s resolution, which comes in the wake of the U.K.’s upcoming exit from the EU. The key factors prompting the resolution include the need to mitigate risks to financial stability arising from a possible no-deal Brexit, the need for clarification of the relationship between third-country markets and the EU’s single market in the interests of broader financial stability and the fact that existing third-country equivalence rules are not currently subject to a single framework.

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The Financial Stability Board has published a statement summarizing the feedback it received to its June 2019 consultation on firms’ public disclosures on resolution planning and resolvability. The consultation sought feedback on a series of questions regarding general and firm-specific disclosures made by systemically important banks and other firms subject to resolution planning requirements.

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The Financial Stability Board has published a statement summarizing the feedback it received to its June 2019 consultation on the solvent wind-down of derivatives and trading portfolios. The consultation sought feedback on a series of questions regarding existing wind-down practices that may be used as a recovery option for global systemically important institutions that find themselves under stress. The FSB intended to consider publishing guidance on solvent wind-down planning depending on the responses elicited by the consultation.

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The European Banking Authority has published final draft Regulatory Technical Standards governing the standardized approach to counterparty credit risk in derivatives transactions. The final draft SA-CCR RTS will supplement the requirements set out in the EU's Capital Requirements Regulation, as amended by CRR 2. The SA-CCR requirements aim to address the shortcomings of existing calculation methods to ensure parties are adequately protected in the event of default by a counterparty to a derivatives transaction and these final draft RTS aim to ensure a more harmonized calculation of own funds requirements for counterparty credit risk than has been the case under CRR.

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The Prudential Regulation Authority has published a letter addressed to the Chair of the Working Group on Sterling Risk-Free Reference Rates. The letter responds to the Working Group's letter in October 2019 requesting regulatory forbearance or clarification from regulators on the impact that the LIBOR transition is likely to have on the prudential requirements for banks. The main issues raised by the Working Group include: (i) the potential for certain capital instruments to no longer qualify as regulatory capital; (ii) the potential for securitizations and MREL-eligible instruments to be considered as "new contracts" as a result of changes to contractual terms, leading to the need to insert bail-in or other bank recovery contractual terms; and (iii) that many banks will need to obtain regulatory approvals for alterations to the models used to determine their regulatory capital arising from their exposures and risks.

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The European Supervisory Authorities have each published advice to the European Commission on undue short-term pressure from the financial sector on corporations. The ESAs comprise the European Banking Authority, the European Securities and Markets Authority and the European Insurance and Occupational Pensions Authority. The ESAs' advice responds to the European Commission's request in June 2019 for evidence and possible advice on potential undue short-term pressure by financial service participants on corporations. The Commission asked the ESAs to: (i) provide evidence of any short-termism and, if any, the consequences thereof; (ii) assess the drivers of such short-termism, including the effects of regulation on financial market participants, for example, the guidance on remuneration practices; (iii) identify existing regulations that either mitigate or exacerbate short-term pressures; and (iv) evaluate the need for regulatory or policy action and propose specific areas where action is needed. The ESAs' advice, summarized below, may result in the Commission proposing amendments to several pieces of EU legislation, such as the Capital Requirements Directive and related Regulation, the Markets in Financial Instruments package and the Non-Financial Reporting Directive.

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The Bank of England has published a discussion paper seeking feedback on its proposals for a series of 2021 stress-tests on climate-related risks for the largest banks, insurers and the financial system. The stress tests will help to quantify potential climate change risks faced by the financial system and enable market participants and oversight bodies like the BoE to develop measures to prepare for those risks. Responses to the consultation should be submitted by March 18, 2020. The final stress testing framework will be published in the second half of 2020 with the results of the exercise published in 2021.

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The U.K. Prudential Regulatory Authority has published a Policy Statement, revised reporting rules and a revised Supervisory Statement on the PRA's approach to supervising liquidity and funding risks (SS 25/15).

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The Financial Policy Committee of the Bank of England has published its latest financial stability report. The report sets out the FPC's view of the resilience of the U.K. financial system and the main risks to the U.K.'s financial stability as well as the work being carried out to address those risks. The FPC states that the 2019 annual cyclical scenario stress test indicates that the U.K. banking system would be resilient to deep simultaneous U.K. and global recessions. Furthermore, the U.K. financial system is resilient to and prepared for any disruptions that may arise from a disorderly Brexit.

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The Basel Committee on Banking Supervision has published a discussion paper seeking the views of stakeholders on the prudential regulatory treatment of crypto-assets. The paper is relevant for academics, banks, central banks, finance ministries, market participants, payment system operators and providers, supervisory authorities and technology companies. Responses should be submitted by March 13, 2020.

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The European Securities and Markets Authority has published draft Implementing Technical Standards amending the existing ITS that establish the standards for the main indices and recognized exchanges that can hold securities eligible as collateral under the revised Capital Requirements Regulation (or “CRR II”).

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The European Systemic Risk Board has published a Recommendation on the exchange and collection of information for macroprudential purposes by national regulators about branches of banks (credit institutions) that have their head office in another Member State or in a third country. 

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The European Commission’s Implementing Technical Standards amending the existing Implementing Regulation on closely correlated currencies has been published in the Official Journal of the European Union.

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The European Banking Authority has published its final report on an update of its guidelines on harmonized definitions and templates for banks (credit institutions) to report their funding plans in accordance with the European Systemic Risk Board’s Recommendation on the funding of banks. The Guidelines apply to national regulators and banks that report their funding plans to national regulators in accordance with the local implementation of the European Systemic Risk Board’s Recommendation.

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The U.K. Financial Conduct Authority has published a consultation on its proposed changes to various aspects of the FCA Handbook.

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The European Banking Authority has published an action plan on sustainable finance, setting out how it intends to deliver on its aims to help combat environmental, social and governance risks and providing clarity on the direction of its policy in this area. The EBA has been mandated to contribute to work on ESG risks under various pieces of EU legislation and will focus on environmental factors and climate change in its initial phase of work. The action plan also sets out the EBA’s projected timelines and milestones on sustainable finance.

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The U.K. Prudential Regulation Authority is consulting on proposals for modernizing the regulatory framework on outsourcing and third party risk management by the financial services sector. The proposals are relevant to banks, building societies, PRA-designated investment firms, insurance and reinsurance firms and groups in scope of the Solvency II Directive as well as U.K. branches of overseas banks and insurers. Responses to the consultation should be submitted by April 3, 2020. The PRA aims to publish its final policy on the proposals in the second half of 2020.

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The new EU Investment Firms Regulation and Investment Firms Directive have been published in the Official Journal of the European Union. The new legislation aims to create a more tailored regulatory regime for many EU investment firms that reflects the risks inherent in the diverse activities those firms undertake.

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The Bank of England, U.K. Prudential Regulation Authority and U.K. Financial Conduct Authority have published a shared policy summary and consultation papers on strengthening operational resilience in the financial services sector. The consultation impacts banks, building societies, PRA-designated investment firms, firms subject to the Solvency II Directive, recognized investment exchanges, CCPs, central securities depositories, payment system operators, FCA enhanced scope SM&CR firms and entities authorized and registered under the Payment Services Regulations 2017 and Electronic Money Regulations 2011. Responses to the consultation should be submitted by April 3, 2020.

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The European Banking Authority has published the second part of its two-part technical advice on the impact of the Basel III reforms in the EU. The Basel III reforms aim to reduce excessive variability of risk weighted assets and improve the comparability of banks’ capital ratios, and in 2018, the European Commission requested the EBA to provide technical advice on their implementation in the EU. The first part of the EBA’s advice was delivered in August 2019, relating to Basel III reforms to credit risk, operational risk, output floor and securities financing transactions.

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The Financial Stability Board has published its final report on the impact of financial regulatory reforms on the provision of financing to small- and medium-sized enterprises. The report follows the FSB’s consultation in June 2019 on its draft paper examining the way in which the Basel III and certain national and regional regulatory reforms have impacted SME financing. 

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The European Banking Authority has published its final guidelines on the management of information and communication technology and security risks by financial institutions in the EU. The Guidelines set out how financial institutions should comply with relevant provisions on the governance and risk management of ICT and security risks under the Fourth Capital Requirements Directive and the Second Payment Services Directive. 

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The Basel Committee on Banking Supervision has published a consultation paper seeking feedback on its final amendments to the credit valuation adjustment risk framework set out under the Basel III standards. The paper provides a detailed description of the amendments and sets out the proposed revised standards. Responses to the consultation should be submitted by February 25, 2020.

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The Basel Committee on Banking Supervision has today published its guiding principles for the operationalization of a sectoral countercyclical capital buffer (or "SCCyB"). The SCCyB complements the Basel Committee's countercyclical buffer by establishing capital requirements that could be imposed on a particular sector, in addition to the countercyclical buffer that is based on banks' total risk weighted assets. The SCCyB will only apply to jurisdictions that choose to implement it on a voluntary basis and will not form part of the Basel standards.

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The Basel Committee on Banking Supervision has published a joint statement with the Basel Consultative Group on the proportionality of the implementation of the Basel Framework by the banks and jurisdictions to which it applies. The Basel Consultative Group is the Basel Committee's sub-group responsible for enhancing the Basel Committee's engagement with global supervisors, including those from non-member countries. The Basel Framework is the set of bank prudential standards established by the Basel Committee that Basel members have agreed to implement. The joint statement confirms the role of proportionality that is established in the Basel Committee's "Core principles for effective banking supervision".

The statement follows the Basel Committee's survey on proportionality in bank regulation and supervision, in which it found that a majority of Basel Committee and BCG jurisdictions apply proportionality measures in supervision of banks.

View the Basel Committee's statement on proportionality.

View the Basel Committee's Core principles for effective banking supervision.

View the Basel Committee's survey on proportionality in bank regulation and supervision.

The European Banking Authority has published a consultation paper on its draft Implementing Technical Standards for supervisory reporting and public disclosure of minimum requirements for own funds and eligible liabilities (or “MREL”) and total loss-absorbing capacity (or “TLAC”). Responses to the consultation should be submitted by February 22, 2020. The EBA expects to submit the final draft ITS to the European Commission in June 2020.

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The Financial Stability Board has published the 2019 list of global systemically important banks. Alongside the 2019 G-SIB list, the Basel Committee on Banking Supervision has published further information relating to its 2019 assessment of G-SIBs, including:
 

• The denominators of each of the 12 high-level indicators used to calculate the banks’ scores under the G-SIB methodology;
• The 12 high-level indicators used to calculate these denominators; and
• The cutoff score used to identify the G-SIBs in the updated list and the thresholds used to allocate G-SIBs to buckets for the purpose of calculating the specific higher loss absorbency requirements.

The Basel Committee assessment was based on its 2013 methodology for identifying G-SIBs. A revised assessment methodology was published by the Basel Committee in July 2018, which is expected to be implemented by member jurisdictions by 2021.

View the 2019 G-SIB list.

View the Basel Committee's statement on its G-SIB assessment methodology.

View details of the Basel Committee's revised assessment framework for G-SIBs.

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The European Banking Authority has launched a consultation on its proposed draft Implementing Technical Standards on specific supervisory reporting requirements for market risk. “Market risk” relates to the risk of losses that banks face to their on- and off-balance sheet positions from adverse movements in market prices. The EBA was mandated to produce the ITS under the Capital Requirements Regulation II, published in June 2019, which made extensive changes to the EU’s capital requirements regime, including through the implementation of the Basel Committee on Banking Supervision’s international standards on market risk. 

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The European Banking Authority has published a roadmap for the risk reduction package that involved changes to the EU Capital Requirements Regulation, the Capital Requirements Directive and the Bank Recovery and Resolution Directive. The EBA is mandated within the changed legislation to prepare technical standards, guidelines and reports on governance and remuneration, large exposures, resolution, reporting and disclosure. The EBA's roadmaps set out the timelines for delivery of all of the mandates, including where deadlines have been adjusted by the EBA.

View the EBA's roadmaps for the risk reduction package.

View details of CRD5 and CRR2.

View details of BRRD 2.

The Basel Committee on Banking Supervision has opened two consultations on revisions to the Basel III Pillar 3 disclosure requirements, one related to market risk disclosures and one on sovereign exposures disclosures. Responses to both consultations should be submitted by February 14, 2020. No indication is given as to when the sovereign exposure disclosure requirements might be introduced. The Basel Committee intends to publish the revisions of the market risk disclosure requirements in time for implementation of the revisions by member jurisdictions by no later than January 1, 2022.

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The European Banking Authority has published a report on non-performing loans in the EU banking sector, in which it finds that total NPLs have decreased from over €1.5 trillion in June 2015 to €636 billion in June 2019. The level of European NPLs was a key concern for EU supervisors and market participants following the financial crisis, triggering efforts to deal with the issue at a supervisory, political and market participant level.

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The Basel Committee on Banking Supervision has published a consultation paper on the “Introduction of guidelines on interaction and cooperation between prudential and anti-money laundering/counter-terrorism financing supervision”. Under the consultation paper, the Basel Committee proposes to amend its guidelines on the “Sound management of risks related to money laundering and financing of terrorism” to include guidance on the interaction between prudential and AML/CFT supervision in a bid to enhance the effectiveness of the supervision of banks’ AML/CFT regimes. Responses to the consultation should be submitted by February 6, 2020.

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The Financial Stability Board has met in Paris to review key issues facing financial markets, including vulnerabilities in the global financial system, FinTech developments and its 2020 work program. 

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The European Commission has published the results of its “fitness check” of EU supervisory reporting requirements.  The reporting requirements imposed by EU and national regulatory authorities require regulated institutions to provide information to their respective authorities regarding their financial condition and activities. The European Commission assessed the effectiveness, coherence, relevance and efficiency of existing reporting requirements in order to identify areas that may be simplified or streamlined.

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Regulatory Technical Standards under the EU Securitization Regulation on the conditions for a securitization to be considered "homogenous" have been published in the Official Journal of the European Union. Homogeneity is one of the requirements for a securitization to be classed as a simple, transparent and standardized securitization or STS securitization. Exposures related to STS securitizations will attract lower risk weightings for firms subject to the Capital Requirements Regulation. The RTS will apply directly across the EU from November 26, 2019.

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The Basel Committee on Banking Supervision met on October 30-31, 2019 to discuss key policy and supervisory issues, including: (i) a proposed consultation on adjustments to the credit valuation adjustment risk framework; (ii) a proposed consultation on revised market risk and sovereign exposure disclosure requirements; (iii) a proposed discussion paper on the prudential treatment of cryptoassets; (iv) a proposed consultation on guidelines for enhanced cooperation between prudential regulatory authorities and anti-money laundering/counter-terrorism financing authorities; and (v) its reports into the implementation of the Net Stable Funding Ratio and large exposures standards in Argentina and China. All of the proposed consultation papers, as well as the NSFR/large exposures reports, are expected to be published in November 2019.

Other topics under discussion included benchmark rate reforms, the implementation of the Basel Committee's guidance on managing foreign exchange settlement risk and the usability of capital buffers. On the latter subject, the Basel Committee has also published a newsletter reiterating the importance of the capital buffer framework and emphasizing that the buffers are designed to be usable. The Basel Committee has announced that Canada will host the 21 International Conference of Banking Supervisors on October 21-22, 2020.

View the Basel Committee's press release on its October 30-31 2019 meeting.

View the Basel Committee's newsletter on capital buffers.

View details of the 21 International Conference of Banking Supervisors.

The European Banking Authority has published a report identifying potential barriers to customer choice and the cross-border provision of banking and payment services in the EU, together with proposals for how to overcome these issues. Building on the EBA's FinTech Roadmap and the European Commissioner's Consumer Financial Services Action Plan, the report sets out the areas where the institutions, including FinTech firms, may face challenges when seeking to provide intra-EU cross-border services, focusing on authorizations and licensing, consumer protection and conduct of business requirements and anti-money laundering and countering the financing of terrorism. The EBA makes recommendations for where changes to EU primary legislation or further guidelines could address the issues to enhance the EU's single market.

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The U.K. Prudential Regulation Authority has launched a consultation on the capital requirements that apply to credit unions. The PRA considers that credit unions approaching the thresholds of £10 million in assets or 15,000 members may find barriers to expansion under the current capital regime. It also finds that the risks that the capital regime endeavours to tackle could be addressed in a simpler manner than the link between capital and credit union membership size and activity which is currently used. The PRA also considers that engaging with small credit unions earlier could increase chances of a non-failure solution.

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The European Banking Authority has published an opinion recommending amendments to the regulatory treatment of the securitization of non-performing exposures. The opinion examines how securitizations may be used to fund the reduction of NPEs and outlines regulatory constraints imposed on the use of securitizations in this way, alongside its proposals for amendments to the regulatory framework.

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The Working Group on Sterling Risk-Free Reference Rates has written to the Prudential Regulation Authority raising issues in the banking prudential regulation regime that, in its view, will require changes and/or regulatory forbearance if a smooth transition from LIBOR to SONIA is to be achieved. Although the letter focuses on the U.K. regime, the issues are likely to be relevant globally.

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The European Commission has invited responses to its consultation on proposed changes to the standardized approach for market risk. The changes follow the Basel Committee on Banking Supervision’s revisions to the Basel III market risk capital framework, which were published in January 2019. 

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The U.K. Prudential Regulation Authority has launched a consultation on proposed amendments to its Supervisory Statement, “The PRA’s approach to supervising liquidity and funding risk”. The amendments are intended to clarify the appropriate use of the Bank of England’s liquidity facilities and the credibility of recovery plans that rely on such facilities.  

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The European Banking Authority has launched a consultation on its draft Implementing Technical Standards for public disclosures by financial institutions under the Capital Requirements Regulation. CRR implements the Basel Committee on Banking Supervision’s Pillar 3 disclosure requirements, which require relevant financial institutions to disclose information about their risks and risk management procedures and policies. In 2018, the Basel Committee published updated Pillar 3 requirements. The revised CRR was published in June 2019 and, for the most part, will apply directly across the EU from June 28, 2021.  It incorporates the revised Basel Committee disclosure standards into CRR and mandates the EBA to produce the draft ITS to ensure comparability of the disclosures made with international non-EU active banks. Responses to the consultation should be submitted by January 16, 2020. The EBA expects to submit the revised draft ITS to the European Commission in June 2020.

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