The Chair of the European Securities and Markets Authority, Steven Maijoor, has written to the European Commission recommending that clarification of certain provisions of the European Market Infrastructure Regulation should be made during the current revision of EMIR. EMIR requires clearing members of CCPs to provide initial margin and default fund contributions. ESMA has noticed that CCPs across the EU, as well as their national regulators, are adopting different approaches to these requirements for public entities. Some CCPs and national regulators exempt public entity clearing members from the requirement to provide initial margin and default fund contributions while others grant no exemptions.

ESMA requests the Commission to consider whether the scope of EMIR needs to be clarified and whether a specific amendment could be made to EMIR during the current review process.

The European Commission published legislative proposals to amend EMIR in May - the technical revisions in so-called EMIR 2.1 - and June 2017 - the Brexit-driven CCP "location policy" or so-called EMIR 2.2, which attempts to force the relocation of UK CCPs to the Eurozone. The legislative procedures to finalize those changes are ongoing.

View the letter.

View the Commission's technical amendments legislative proposal.

View the Commission's location policy legislative proposal.

A Commission Implementing Regulation has been published in the Official Journal of the European Union. This Amending Regulation, which takes effect on May 15, 2018, revises a Commission Implementing Regulation adopted in October 2016 under the Capital Requirements Regulation.

Under the CRR, firms that use the Standardised Approach for the purposes of calculating their capital requirements for credit risk can use external credit assessments to determine the credit quality of exposures. These external credit assessments must be made by External Credit Assessment Institutions. ECAIs are either credit rating agencies registered under the CRA Regulation or central banks that issue credit ratings (which are exempt from the application of the CRA Regulation). The 2016 Implementing Regulation set out Implementing Technical Standards for the mapping of the credit quality of exposures (obtained from ECAIs) to their corresponding risk weights.

The Joint Committee of the European Supervisory Authorities consulted in July 2017 on the need to make changes to the 2016 Implementing Regulation to reflect the fact that, since it was adopted, five additional ECAIs had been recognized and one ECAI had been de-registered. The Joint Committee submitted draft revised ITS to the Commission in December 2017 and the Commission has adopted them in the Amending Regulation.

View the Amending Regulation ((EU) 2018/634).

View details of the July 2017 consultation.

The Basel Committee on Banking Supervision has published its 14th progress report on implementation of the Basel III prudential framework, based on responses from Basel Committee member jurisdictions, and reports the status as of the end of March 2018. The Report sets out in tabular form the results of the Basel Committee's monitoring of the adoption progress of all Basel III standards agreed to date, which will come into effect by 2022. The table omits details of those Basel III standards that have already been implemented by all Basel Committee member jurisdictions. It sets out the ongoing implementation progress of each member jurisdiction on aspects of the risk-based capital standards, leverage ratio requirements, liquidity requirements, the requirements for systemically important banks, interest rate risk in the banking book, the supervisory framework for large exposures and the Pillar 3 disclosure requirements.

Read more.

The Financial Stability Board has published a report, "Strengthening Governance Frameworks to Mitigate Misconduct Risk: A Toolkit for Firms and Supervisors." The report is part of the FSB's work on measures to reduce misconduct in the financial sector and follows the FSB's stocktake of endeavors by international bodies, national authorities, industry associations and firms.

The Toolkit is designed to provide firms and authorities with a set of tools that can be used, taking into account the applicable legislative, judicial and regulatory frameworks. Rather than creating an international standard or adopting a prescriptive approach, the FSB's Toolkit allows firms and supervisors to decide whether and how to use the Toolkit to address misconduct risk. The FSB also states that firms and their supervisors can use individual tools separately or in combination.

The Toolkit comprises 19 tools, divided into three categories and assigned between firms and national authorities.

Read more. 

U.S. Board of Governors of the Federal Reserve System Governor Lael Brainard spoke at the Global Finance Forum regarding maintaining resiliency across economic cycles.  Governor Brainard drew comparisons between the current state of the economy and the economy prior to the financial crisis, noting positive growth, but highlighting elevated risks in asset valuation and business leverage.  Governor Brainard discussed that post-crisis regulation has greatly improved the capital and liquidity positions of financial institutions, and highlighted the importance of maintaining a dynamic capital regime, but cautioned against purely backward-looking analysis, rather than proactively seeking out emerging risks.  Governor Brainard discussed the importance of properly tailoring and calibrating existing regulations, such as the countercyclical capital buffer rule, but also stressed the importance of implementing additional critical regulatory elements, such as finalizing the net stable funding ratio, which she noted was close to finalization, and the Dodd-Frank Act limits on large counterparty exposure.  Governor Brainard also expressed her support for improving the efficiency of the Volcker Rule without undermining its efficacy, and for moving forward with minimum haircuts for securities financing transactions.  Governor Brainard distinguished these regulations, designed to promote the resiliency of large financial institutions, with the regulation of smaller institutions, suggesting that with respect to the latter, regulations should be appropriately tailored to reduce regulatory burden.

View full text of Governor Brainard's speech.

U.S. Board of Governors of the Federal Reserve System Vice Chairman for Supervision Randal Quarles testified before the U.S. Senate Committee on Banking, Housing, and Urban Affairs regarding the Federal Reserve Board’s regulation and supervision of financial institutions.  Vice Chairman Quarles submitted identical remarks to the U.S. House Financial Services Committee two days earlier on April 17, 2018.

Read more.

The U.S. Treasury Department and HM Treasury have issued a joint statement announcing the establishment of a Financial Regulatory Working Group. The Working Group will be a forum for treasury staff and financial regulatory authorities to exchange views on the regulatory relationship between the United States and the U.K. The objectives of the Working Group will be to further financial regulatory cooperation, improve transparency, reduce regulatory uncertainty, identify possible cross-border implementation issues, address regulatory arbitrage and work towards achieving compatibility of U.S. and U.K. laws and regulations.

View the statement.

U.S. Board of Governors of the Federal Reserve System Governor Lael Brainard spoke at the Federal Reserve Bank of Richmond Baltimore Community Development Gathering regarding efforts to modernize the Community Reinvestment Act.  Governor Brainard provided a brief summary of the history and importance of the CRA, noting that the current CRA regulations date back to 1995 and are in need of update to better reflect how banks currently operate and the customer base they serve, given structural and technological changes in the banking industry.

Read more.

The U.S. Board of Governors of the Federal Reserve System, U.S. Office of the Comptroller of the Currency and U.S. Federal Deposit Insurance Corporation announced proposed revisions to the agencies’ regulatory capital rules to reflect changes to U.S. generally accepted accounting principles regarding credit losses.  The proposed revisions will identify which of the new credit loss allowances will be eligible for inclusion in a financial institution’s regulatory capital.  The proposal will further provide for an optional transition period that will allow financial institutions to phase in the adverse effects on certain regulatory capital components over a three-year period.  The proposal also seeks to amend the stress testing regulations to allow covered institutions that have adopted these changes to U.S. GAAP to not include the effects from adopting this new standard until the 2020 stress test cycle.  The proposed amendment will also make conforming changes, including with respect to certain definitions, disclosures and regulatory reporting forms.  Comments to the proposal are due 60 days from the proposal’s publication in the Federal Register.

View ​full text of the agencies’ proposal.

The European Banking Authority has launched a consultation on draft Guidelines on certain types of exposures and the circumstances in which they can be categorized as being associated with high risk for regulatory capital purposes. The Capital Requirements Regulation provides that when firms use the Standardised Approach for determining minimum capital requirements for credit risk, risk weightings must be allocated to an exposure, based on its exposure class. One of the exposure classes is "exposures associated with particularly high risk," which are: investments in venture capital firms or private equity, speculative immovable property financing and investments in Alternative Investment Funds where the fund's mandate allows a higher leverage than required in the UCITS Directive. An exposure that is of particularly high risk receives a risk weight of 150%.

The EBA's mandate is to prepare guidelines on the types of exposures other than those set out in the CRR that must be associated with particularly high risk and under which circumstances. The EBA's draft Guidelines aim to implement that mandate by specifying that firms should classify exposures as items of high risk where the exposure has a "high risk of loss due to being structurally different from common exposures of the same asset class." The EBA provides a list of those exposures that would fall within the scope of this category.

Read more. 

The European Commission has published a legislative proposal to extend until December 15, 2018 the transitional periods related to own funds requirements for exposures to CCPs set out in the Capital Requirements Regulation and European Market Infrastructure Regulation. Thirty-two third-country CCPs have been recognized by the European Securities and Markets Authority to date. However, there are still third-country CCPs that are awaiting recognition status. Without an extension of the transitional periods, banks and investment firms in the EU (or which are subject to consolidated supervision in the EU) would need to increase their own funds requirements for their exposures to those CCPs that are not yet recognized.

Feedback on the proposal can be provided until May 15, 2018.

The proposals to amend the CRR include an amendment to these transitional provisions. The proposed amendment would remove the need for the European Commission to continuously extend the transitional period by basing the transitional deadline instead on the timing of an application for recognition by a third-country CCP.

View the proposed ITS and the consultation feedback page.

The Joint Committee of the European Supervisory Authorities has published a report on risks and vulnerabilities in the EU financial system. The ESAs are the European Securities and Markets Authority, the European Banking Authority and the European Insurance and Occupational Pensions Authority. The ESAs make recommendations for policy actions by the ESAs, national regulators and financial institutions. A summary of the risks and recommendations contained in the report is set out below.

• To combat cyber risks, the ESAs recommend that financial institutions should continue to improve IT systems, explore risks in the context of information security and take steps to resolve risks surrounding connectivity and outsourcing to third-party providers. The ESAs will continue to keep these risks under review. ESMA is launching a supervisory project on cloud computing outsourcing and will continue work to address supervisory convergence. The EBA is developing guidelines on the management of information and communication technology risks. EIOPA is conducting a qualitative exercise on cyber risk with national regulators and the industry.

Read more. 

The U.S. Board of Governors of the Federal Reserve System and U.S. Office of the Comptroller of the Currency published a joint notice of proposed rulemaking and request for comment that would modify the calculation of the enhanced supplementary leverage ratio for U.S. global systemically important bank holding companies and certain of their insured depository institutions subsidiaries regulated by the Federal Reserve Board and OCC.

Read more.

The U.S. Board of Governors of the Federal Reserve System and U.S. Office of the Comptroller of the Currency published a joint notice of proposed rulemaking and request for comment that would modify the calculation of the enhanced supplementary leverage ratio for U.S. global systemically important bank holding companies and certain of their insured depository institutions subsidiaries regulated by the Federal Reserve Board and OCC.

Read more.

The U.S. Board of Governors of the Federal Reserve System published a notice of proposed rulemaking and request for comment intended to integrate its capital and stress rules and thereby simplify the capital regime applicable to bank holding companies with $50 billion or more in total consolidated assets and to the U.S. intermediate holding companies of foreign banking organizations.

Read more.

The European Banking Authority has published a report entitled "Benchmarking of remuneration practices at the European Union level and data on high earners." The report sets out the EBA's analysis of the compensation data provided to it by national regulators for 2016, which the EBA has compared with data from 2015 and 2014. The Capital Requirements Directive requires the EBA to benchmark remuneration trends in credit institutions and investment firms at EU level and to publish aggregated data on high earners earning EUR 1 million or more per financial year. National regulators are required to collect the relevant information from credit institutions and investment firms and to submit it to the EBA.

The analysis shows a slight decrease in 2016 in the number of high earners paid EUR 1 million or more. There was also a significant decrease in the number of identified staff subject to a cap on the ratio of fixed to variable compensation, although the EBA notes that this was due to a significant reduction by two banks of their numbers of identified staff. The EBA also notes that the supervisory framework for compensation practices is still not sufficiently harmonized, with significant differences among Member States and among institutions in the application of deferral and payout in instruments.

Read more.

The Prudential Regulation Authority has published its Business Plan for 2018/19 which sets out its strategic goals and workplan to deliver those goals. The PRA also published a consultation paper on its fees and levies for 2018/19 alongside the Business Plan as well as a report to the Prudential Regulation Committee on the adequacy of PRA resources and independence of PRA functions.

Read a summary of the PRA's goals and workplan.

The European Commission has published a report on the effects of the EU regulatory capital framework on the economic cycle. The Capital Requirements Regulation requires the Commission to assess periodically whether risk-sensitive regulatory requirements contained in the CRR and the Capital Requirements Directive create unintended procyclical effects and to consider whether it would be appropriate to implement any remedies. The report is addressed to the European Parliament and the Council of the European Union and was prepared in cooperation with the European Banking Authority, the European Systemic Risk Board and Member States.

The Commission analyzed whether capital ratio requirements are procyclical and, if so, if they have an impact of the level of capital held by banks. The Commission has concluded that there is only weak evidence of any procyclical effects resulting from the requirements in CRR and CRD. The EU regulatory framework already provides various tools that deal with procyclical effects, such as the capital conservation buffer, the countercyclical capital buffer, the leverage ratio and risk weight adjustments for specific exposures. The Commission does not consider that any major changes to the EU framework are required at this time.

View the report.

The U.S. Department of the Treasury issued recommendations to the U.S. Office of the Comptroller of the Currency, U.S. Board of Governors of the Federal Reserve System and the U.S. Federal Deposit Insurance Corporation regarding the modernization of the Community Reinvestment Act.  The report is a follow-up to Treasury’s 2017 report to the President entitled A Financial System That Creates Economic Opportunities: Banks and Credit Unions.

Read more.

The U.S. Office of the Comptroller of the Currency, U.S. Board of Governors of the Federal Reserve System and the U.S. Federal Deposit Insurance Corporation issued a final rule that exempts commercial real estate transactions of $500,000 or less from the appraisal requirements promulgated under Title XI of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989.  The final rule raises the threshold from $250,000 to $500,000, for which appraisals are not required in connection with commercial real estate transactions.  The agencies originally proposed to increase the threshold to $400,000, but they determined that an increase to $500,000 would not pose a threat to the safety and soundness of financial institutions, and would result in a material reduction in the compliance-related regulatory burden for financial institutions.  For purposes of the final rule, “commercial real estate transaction” is defined as “a real estate-related financial transaction that is not secured by a single 1-to-4 family residential property.” The final rule clarifies that construction loans of $500,000 or less secured by a single 1-to-4 family residential property are not exempted from the appraisal requirement.  In lieu of an appraisal, financial institutions are required to obtain an evaluation of the collateral that is sufficient to support the institution’s decision to engage in the transaction and consistent with safe and sound business practices.  The final rule took effect on April 9, 2018.

View full text of final rule.

Outgoing U.S. Federal Deposit Insurance Corporation Vice Chairman Thomas M. Hoenig discussed the importance of attaining meaningful regulatory relief without undermining the safety and soundness of the financial system.  Citing a few historical examples, Vice Chairman Hoenig discussed the similarities among past crises, as well as the deregulatory attitude that has followed these crises once the economy begins to recover.  Vice Chairman Hoenig noted that with a strong regulatory foundation, including strong capital and constraints on the reliance on government bail-outs, a number of costly administrative rules could be minimized or eliminated.

Read more.

The European Central Bank has begun a consultation on the first chapter of a proposed guide to internal models. The Capital Requirements Regulation requires the ECB to assess and grant permission for banks directly supervised by the ECB to use internal models for credit risk, counterparty credit risk and market risk. The ECB's proposed guide aims to set out how the ECB intends to approach the assessment of whether a firm meets the necessary requirements for the permission to be granted.

The consultation covers only the first chapter of the proposed guide. This chapter is on general topics comprising overarching principles for internal models, implementation of the internal ratings-based approach, internal model governance, internal validation and audit, model use and change management as well as third-party involvement. The ECB intends to consult on model-specific chapters, including for credit, market and counterparty credit risks, at a later date.

The consultation closes on May 25, 2018.

View the consultation paper.

Federal Reserve Bank of New York President William Dudley spoke at the U.S. Chamber of Commerce regarding the role incentives play in ensuring a resilient and robust financial system.  In his remarks, President Dudley noted the considerable progress that has been made since the financial crisis in creating a more robust and resilient financial system, including with respect to the safety and soundness of, and to the resolution process for, systemically important financial institutions.

Read more.

The U.S. Federal Financial Institutions Examination Council announced an            update regarding its Examination Modernization Project.  The project initially grew out of the regulatory review process undertaken pursuant to the Economic Growth and Regulatory Paperwork Reduction Act, and is intended to identify potential improvements that can be made in the efficiency and efficacy of the community financial institutions safety and soundness examination processes.  The project has focused primarily on leveraging improved technology to streamline and simplify the examination process for community financial institutions.  As part of the project, the FFIEC has identified four key areas where the supervisory burden can potentially be reduced, including, better communication throughout the examination process, using technology to move examination tasks offsite, tailoring examinations based upon risk and improving electronic file transfer systems. While the FFIEC will first focus on these four areas, the Examination Modernization Project is envisioned as a long-term process, and the FFIEC will continue to identify new parts of the examination process that could benefit from further improvement.  To facilitate improvements in the first key area regarding transparency, the U.S. federal financial regulatory agencies have committed to issue reinforcing and clarifying guidance to examination staff about the importance of being transparent and communicative throughout the examination process.

View full tex of FFIEC press release.

The Basel Committee on Banking Supervision has published updated versions of its frequently asked questions on two aspects of the Basel III prudential framework.

The Basel Committee has updated the FAQ it published in August 2015 on the standardized approach for measuring counterparty credit risk exposures, providing answers to additional questions concerning collateral taken outside of netting sets, the treatment of Eurodollar futures, supervisory delta adjustments for negative interest rates, credit derivatives and effective notional calculations. The Basel Committee has also updated the FAQ it published in January 2017 on market risk capital requirements, with the addition of answers to three new questions on the standardized approach, the internal models approach and the trading book boundary and scope of application.

View the updated FAQ on the standardized approach for counterparty credit risk.

View the updated FAQ on market risk capital requirements.

The Basel Committee on Banking Supervision has published a consultation document on a technical amendment to the Pillar 3 disclosure requirements and the regulatory treatment of accounting provisions. The proposals are relevant in jurisdictions implementing an expected credit loss accounting model and for those adopting transitional arrangements for the regulatory treatment of accounting provisions. The Basel Committee is proposing to introduce a new requirement in the Pillar 3 standard to reflect any transitional effects for the impact of ECL accounting on regulatory capital.

The consultation closes on May 4, 2018.

View the consultation paper.

The Basel Committee on Banking Supervision has published a consultation on proposed revisions to the standard it published in January 2016 on the minimum capital requirements for market risk. The Basel Committee has been monitoring the implementation of the standard and its impact on banks' market risk capital requirements since the standard was published and has identified several issues.

Read more.

The European Banking Authority has published a compliance notification form on its website, seeking confirmation, by May 21, 2018, of compliance (or intention to comply) with the Final Guidelines on Internal Governance it published in September 2017.

The EBA was mandated under the Capital Requirements Directive to provide guidelines on the corporate governance arrangements, processes and mechanisms required under that Directive. CRD IV requires that institutions must have robust governance arrangements, which include a clear organizational structure with well-defined, transparent and consistent lines of responsibility, effective processes to identify, manage, monitor and report the risks they are or might be exposed to, adequate internal control mechanisms, including sound administration and accounting procedures and remuneration policies and practices that are consistent with and promote sound and effective risk management. The EBA consulted in October 2016 on proposed updates to its previous guidelines on internal governance, which were published in September 2011.

Read more.

The European Banking Authority has published a report following its assessment of the credit risk mitigation framework under the Capital Requirements Regulation. Credit risk mitigation is defined in the CRR as a "technique used by an institution to reduce the credit risk associated with an exposure or exposures which that institution continues to hold". The incentive for institutions in using CRM techniques is that CRM can attract a reduction in capital requirements.

This CRM report forms the fourth and final phase of the EBA's roadmap for the implementation of the regulatory review of the internal models based approach. That roadmap, launched in February 2016, favoured continued use of the IRB approach (that is, the Foundation IRB Approach and the Advanced IRB Approach) and set out plans for the introduction, in four phases, of changes which aim at harmonizing definitions and supervisory practices in the definition of default, the estimation of risk parameters and treatment of defaulted assets, credit risk mitigation techniques and disclosure in four phases.

The EBA considers that increased clarity of the CRM framework is an integral part of the IRB review and the EBA has analyzed, in the CRM report, whether an overhaul of the CRM framework as presented in the CRR would be beneficial.

Read more.

Following consultation in late 2017, the European Securities and Markets Authority and European Banking Authority have jointly published final Guidelines on the assessment of the suitability of members of management bodies and key function holders in credit institutions, investment firms, financial holding companies and mixed financial holding companies. These assessments are required under the Capital Requirements Directive and the revised Markets in Financial Instruments Directive.

Under the CRD and MiFID II, an assessment of the suitability of members of a management body should take into account factors such as sufficiency of time commitment, honesty, integrity and independence of mind of a member of the management body. The management body must have adequate collective knowledge, skills and experience among its members.  Firms should devote adequate human and financial resources to the induction and training of such members. Diversity is also to be taken into account when selecting members of the management body. In the case of key function holders, the Guidelines also specify requirements regarding the suitability of the heads of internal control functions and the chief financial officer of credit institutions and certain investment firms. The Guidelines apply to any other persons assessed as key function holders under the firm's risk-based approach. An Annex is provided as a template for firms to record the results of relevant assessments.

Read more.

The G20 has published a Communiqué following the meeting of Finance Ministers & Central Bank Governors in Buenos Aires on March 19 – 20, 2018.

Among other things, the Communiqué states that the G20 welcomes the finalization of Basel III and remains committed to full, timely and consistent implementation and finalization of the reforms. The G20 looks forward to the outcome of the evaluation of the reforms to identify and address any unintended consequences, which is being led by the Financial Stability Board.

The G20 also commits to continue to address the decline in correspondent banking relationships. It welcomes the FSB's March 2018 progress report on correspondent banking and calls on the FSB to monitor, with the FATF, the International Monetary Fund, the World Bank Group and the Global Partnership for Financial Inclusion, the adoption of the recommendations in the FSB's March 2018 report "Stocktake of Remittance Service Providers' Access to Banking Services."

Read more.

The Bank of England has published a report entitled "Stress testing in the U.K. banking system: key elements of the 2018 stress test," providing details of the Annual Cyclical Scenario, which is the only stress test that the BoE will conduct in 2018. The report is accompanied by detailed guidance for participating banks and building societies.

The ACS will examine the impact on participant banks and building societies of three types of severe stress, which will be assumed to be synchronized. These are: (i) a U.K. and global macroeconomic stress; (ii) a traded risk stress (linked to a financial market scenario consistent with the macroeconomic scenario); and (iii) an independent misconduct costs stress. Seven banks and building societies will participate in the 2018 ACS. The report states that these participants account for around 80% of the outstanding stock of lending to the U.K. real economy by banks regulated by the Prudential Regulation Authority.

Read more.

The European Commission has opened an exploratory consultation on implementing the final aspects of Basel III into EU law, which will require changes to the Capital Requirements Directive and the Capital Requirements Regulation. Basel III was finalized on December 7, 2017. The final package revises the standardized and Internal Ratings-Based approach for credit risk, the Credit Valuation Adjustment risk framework, the leverage ratio framework, including the introduction of a leverage buffer for Global Systemically Important Banks, the operational risk framework and the new output ratio floor. The revised standards are due to take effect from January 1, 2022 and will be phased in over five years. The European Commission is seeking feedback on the various elements of the Basel III package, including how the revisions will impact the EU banking sector and wider economy, how they compare to the current EU requirements and whether they pose any particular implementation challenges.

The Commission's consultation closes on April 12, 2018.

View the consultation paper and response form.

View the final Basel III package.

Following its consultation in late 2017, the European Central Bank has published the final Addendum to its Guidance for Eurozone banks on non-performing loans. The ECB published its final Guidance for banks on NPLs on March 20, 2017. The Addendum sets out the ECB’s supervisory expectations on the minimum levels of prudential provisions expected for new NPLs. It is intended to function as a starting point for dialogue between the ECB and individual institutions. As with the Guidance, the Addendum is not legally binding but would apply to all Eurozone Significant Institutions supervised by the ECB in the Single Supervisory Mechanism as well as their international subsidiaries. An institution that does not comply with the ECB’s supervisory expectations, as set out in the Addendum, would be able to provide its rationale to the ECB as part of the dialogue. The supervisory expectations in the Addendum will be incorporated into the 2021 Supervisory Review and Evaluation Process. In the meantime, firms are expected to review their credit underwriting policies and begin provisioning for any loan classified as a NPL.

Read more.

The U.S. House of Representative passed the Financial Institutions Examination Fairness and Reform Act (H.R. 4545) by a vote of 283-133.  The bill would amend the Federal Financial Institutions Examination Council Act of 1978 to require federal financial institution regulatory agencies to issue final examination reports within 60 days of the later of a financial institution’s exit report or the provision of additional information by a financial institution regarding its examination.  The bill would also permit financial institutions to obtain an independent review of material supervisory determinations contained in a final report of examination, including the right to an Administrative Law hearing.  The bill would also establish the Office of Independent Examination Review, which, among other things, would receive and investigate complaints from financial institutions with respect to examinations, examination practices and examination reports, review written examination procedures of federal financial regulatory agencies and conduct supervisory appeals.

View full text of the bill.

The U.S. Board of Governors of the Federal Reserve System adopted a proposal to extend for three years, with revisions, certain forms, including the Interagency Notice of Change in Control (FR 2081a), Interagency Notice of Change in Director or Senior Executive Officer (FR 2081b), Interagency Biographical and Financial Report (FR 2081c) and the Interagency Bank Merger Act Application (FR 2070) forms. The revisions to the Interagency Bank Merger Act Application form include additional requested items, such as projected financial statements and capital figures as of the end of each of the first three years of operation following consummation of the merger.  In doing so, the Federal Reserve Board noted that the form’s prior requirement of one year of projected financial statements was not viewed as sufficient.  The Federal Reserve Board also explained that the additional requested items in the revised Bank Merger Act Application form are typically requested in follow-up questions in connection with the application, and that the changes will increase the efficiency with which Bank Merger Act applications are processed. The revisions to the Bank Merger Act Application form also include clarifications, the deletion of certain requested items, definition updates and minor editing changes. The notice highlights that the Federal Reserve Board worked with the U.S. Office of the Comptroller of the Currency and U.S. Federal Deposit Insurance Corporation in drafting the revisions to these forms.

View full text of the Federal Reserve Board notice.

The European Banking Authority has published its advice to the European Commission on the use of statutory prudential backstops to prevent the building up of new non-performing loans. The Commission consulted in November 2017 on proposals for statutory prudential backstops to address insufficient provisioning for newly originated loans that turn into non-performing loans and requested the EBA to provide technical advice on its proposals by November 27, 2017. On March 14, 2018, the Commission published its legislative proposals to amend the Capital Requirements Regulation to require minimum loss coverage for non-performing exposures.

The EBA’s advice provides an overview of the Commission’s November 2017 proposal and discusses certain technical aspects, such as the interaction of the proposals with the introduction of IFRS 9 as well as the existing prudential framework. The EBA’s advice also provides a quantitative assessment of the proposal which, the EBA stresses, is a conservative impact analysis given the data available and time constraints under which the report was produced.

Read more.

The European Commission has launched a package of legislative and non-legislative measures to address remaining and future non-performing loans in the EU. Since the 2007/8 financial crisis, there has been a build-up of NPLs in the EU, which impacts banks’ viability and lending capabilities. NPLs are loans where the borrower has difficulties in making scheduled payments to cover interest and/or capital reimbursements. A loan is classified as an NPL when it is either more than 90 days past due or the loan is assessed as unlikely to be repaid by the borrower.

The package comprises:

• A proposed Regulation amending the Capital Requirements Regulation to introduce a statutory prudential backstop, which will require banks to have minimum loan loss coverage for newly originated loans;
• A proposed new Directive on credit services, credit purchasers and the recovery of collateral which seeks to enable banks to deal more efficiently with NPLs by introducing an accelerated extrajudicial collateral enforcement mechanism and facilitating the outsourcing of servicing of loans to specialized credit servicers; and
• A Technical Blueprint for Member States to set up National Asset Management Companies where NPLs have become a significant issue in a particular Member State. It is intended for use in restructuring of banks in compliance with the EU Bank Recovery and Resolution Directive and State Aid rules.

Read more.

The U.S. Senate passed a significant financial services reform bill 67-31 on a bipartisan basis that would eliminate certain requirements of the Dodd-Frank Act, including, most notably, increasing, from $50 billion to $250 billion, the threshold at which a large banking organization automatically becomes a systemically important financial institution that is subject to stricter supervisory standards.  The Economic Growth, Regulatory Relief, and Consumer Protection Act (S. 2155) would also (i) exempt banks with less than $10 billion total consolidated assets from the Volcker Rule; (ii) exempt certain funds placed on deposit with certain central banks by a custodial bank from the calculation of the supplementary leverage ratio; (iii) reduce certain reporting and supervision requirements applicable to community banks; and (iv) ease certain securities law requirements.  A number of the provisions of the bill track legislation that has been passed by the U.S. House of Representatives over the past year, the most significant of which is the Financial Choice Act of 2017, which would amount to an omnibus revision of the Dodd-Frank Act.  The House will now have to consider the Senate bill, and the differences between the two bills will likely be negotiated and resolved in a Conference Committee of the House and Senate.

View full text of the bill.

The U.S. Financial Stability Oversight Council approved certain amendments to its procedures for hearings under Titles I and VIII of the Dodd-Frank Act.  The amendments add Section 117 of the Dodd-Frank Act to the scope of its hearing procedures, and make other conforming technical and streamlining amendments. Section 117 of the Dodd-Frank Act (the so-called Hotel California provision) applies to certain bank holding companies and provides that in the event one of these entities ceases to be a bank holding company, it shall thereupon be treated as a nonbank financial company subject to supervision by the U.S. Board of Governors of the Federal Reserve System. Section 117 also provides that an entity designated as a nonbank financial company pursuant to this section may request a hearing before the FSOC to appeal this treatment.  The amendments are effective immediately, but the FSOC will accept written comments received within 30 days of the publication of the amendments in the Federal Register.

View full text of the FSOC resolution.

The European Commission has published legislative proposals for a new EU covered bonds framework. The legislative package consists of a proposed Directive on the issue of covered bonds and covered bond public supervision and a proposed Regulation to amend the prudential treatment of covered bonds under the Capital Requirements Regulation. The proposals are part of the EU's Capital Markets Union project and follow from the work of the European Banking Authority in this area, in particular, its 2016 recommendations for an EU covered bonds framework.

The proposed Covered Bonds Directive will apply to covered bonds issued by EU credit institutions, which means that only EU credit institutions will be able to issue covered bonds governed by the framework. Issuers using the EU covered bonds label will need to comply with the proposed Directive but can also use the label with national labels. Covered bonds are debt obligations issued by credit institutions and secured against a ring-fenced pool of assets to which bondholders have direct recourse as preferred creditors. The proposed Directive provides requirements for issuing covered bonds and the structural features of covered bonds, including dual recourse and bankruptcy remoteness. There are also provisions to address liquidity risk through the imposition of a liquidity buffer related to the cover pool and transparency provisions requiring information to be disclosed to covered bond investors. In addition, the proposed Directive provides for supervision at national level of covered bonds.

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The U.S. Board of Governors of the Federal Reserve System published updates to its Comprehensive Capital and Analysis Review and Dodd-Frank Act Stress Tests questions and answers guide.  The Federal Reserve Board provided additional questions and answers with respect to a number of topics, including general CCAR considerations, range of practice and supervisory expectations, FR Y 14-A report supporting documentation and the remediation of supervisory findings.

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The European Banking Authority has commenced a consultation on draft Guidelines on the management of non-performing and forborne exposures. The Capital Requirements Directive requires in-scope banks and investment firms to have robust governance arrangements and effective processes to identify, manage, monitor and report the risks to which the firm is exposed. The EBA is responsible for issuing related guidelines to further harmonize across the EU how firms implement these obligations.

Since the 2007/08 financial crisis, there has been a build-up of non-performing loans in the EU, which impacts banks’ viability and lending capabilities. In March 2017, the European Central Bank finalized its Guidance on managing NPLs, which applies to all Eurozone Significant Institutions supervised by the ECB in the Single Supervisory Mechanism as well as their international subsidiaries. The EBA’s draft Guidelines similarly aim to reduce the build-up of non-performing exposures (NPEs) in a bank’s balance sheet.

The EBA’s proposed Guidelines set out sound risk management practices for banks for managing NPEs, forborne exposures (FBE) and foreclosed assets and apply to all exposures that fall within the definition of non-performing and forbearance in the ITS on Supervisory Reporting (Commission Implementing Regulation (EU) No 680/2014). The finalized Guidelines will also apply to national regulators responsible for assessing firms’ risk management of NPEs and FBEs, as part of the Supervisory Review and Evaluation Process. National regulators must also ensure that firms comply with the Guidelines on an individual, sub-consolidated and consolidated basis.

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The U.S. House of Representatives passed four bills from the U.S. House Financial Services Committee, all by voice vote, which are primarily designed to reduce the regulatory burden on financial institutions.

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The U.S. Board of Governors of the Federal Reserve System published a proposed rule for that would amend Regulation J (Collection of Checks and Other Items by Federal Reserve Banks and Funds Transfers through Fedwire).  The proposed amendments are intended to better harmonize Regulation J with the Federal Reserve Board’s recent amendments to Regulation CC (Availability of Funds and Collection of Checks), and to reflect a transition from a paper-based check collection system to one that is essentially entirely electronic.  The proposed amendments are designed to clarify and simplify provisions of Subpart A of Regulation J, while removing obsolete provisions, and to better reflect the rights of stakeholders, including with respect to the Federal Reserve Banks.  The amendments also include proposed clarifications to Subpart B of Regulation J to reinforce that terms used in financial messaging standards do not confer legal status or responsibilities.  Comments to the Federal Reserve Board’s proposal are due 60 days from its publication in the Federal Register.

View full text of the Federal Reserve Board proposal.

HM Treasury has directed the Prudential Regulation Authority to conduct an independent investigation into the prudential regulation of the Co-operative Bank plc during the period 2008 to 2013. HM Treasury is empowered to require the Financial Conduct Authority or PRA to undertake investigations where it considers that such an investigation is in the public interest and the relevant regulator has not launched an investigation on its own initiative. The investigation will consider the actions, policies and approach of the Financial Services Authority and one of the successors to its functions, the PRA, during their respective periods in charge of prudential supervision, including the withdrawal by the Co-operative Bank from the bidding process to purchase bank branches from Lloyds Banking Group (known as Project Verde).

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Randal Quarles, U.S. Board of Governors of the Federal Reserve System Vice Chairman for Supervision, discussed the need to examine post-crisis reforms.  Focusing on post-crisis regulations that impact foreign banking organizations operating in the U.S., he noted that regulations should be reviewed to ensure not only efficacy, but also efficiency and transparency.

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The European Central Bank has published two consultations on draft guides on the internal capital adequacy assessment process (ICAAP) and the internal liquidity adequacy assessment process (ILAAP). The draft Guides, which will be relevant to institutions within the Single Supervisory Mechanism, are designed to assist institutions in strengthening their ICAAPs and ILAAPs and encourage the use of best practices by explaining in greater detail the ECB’s expectations.

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The U.S. House of Representatives voted 245-169 in favor of passing H.R. 4296.  The bill prohibits federal financial regulators from establishing operational risk capital requirements for financial institutions unless the requirements are based upon, and appropriately sensitive to, the risks posed by the institution’s current business and operations.  The requirements also must be forward-looking, rather than focused on historical losses of the financial institution, and provide for adjustment to capital requirements based upon the operational risk mitigating activities of the financial institution.  The bill was originally part of the larger Financial CHOICE Act, which passed the House in June 2017.  The bill was read in the U.S. Senate and referred to the U.S. Senate Committee on Banking, Finance, & Urban Affairs.

View full text of the bill.

The European Systemic Risk Board has published a final report setting out proposed amendments to the ESRB Handbook on Operationalising Macroprudential Policy and policy proposals on the legal framework of the systemic risk buffer and the structural buffers for global systemically important institutions (G-SIIs) and O-SIIs. Alongside the final report, the ESRB has also published an Opinion to the European Commission on structural macroprudential buffers.

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