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."

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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.

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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.

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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.

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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.

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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.

Read more. 

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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The Basel Committee on Banking Supervision has published a Consultation on its proposals for the third phase of the Pillar 3 Framework. Pillar 3 comprises a set of quantitative and qualitative disclosure requirements applicable to banks in relation to capital, risk exposures and risk assessment processes, which are designed to allow other market participants to assess each bank’s capital adequacy.

The Pillar 3 framework was last updated in March 2017, following a Basel Committee review. The Basel Committee now proposes some revisions and additions to the Pillar 3 framework which result from the finalization of the Basel III framework in December 2017.

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The U.S. Office of the Comptroller of the Currency issued a final rule that makes certain technical amendments to its annual stress testing regulation.  The stress testing regulation provides that the OCC may require an institution to include trading and counterparty components in its adverse and severely adverse scenarios if the institution has significant trading activities.  Under the final rule, the date range of this position data has been expanded from between January 1 and March 1 of the current calendar year to between October 1 of the preceding calendar year and March 1 of the current calendar year.  The final rule notes that this will provide the OCC with greater flexibility in establishing an appropriate as-of date and that the U.S. Board of Governors of the Federal Reserve System has made a similar change to its corresponding regulations.  The final rule also amends and clarifies the transition period for institutions that meet the $50 billion asset threshold, which subjects the institution to different stress testing requirements.  Under the final rule, if an institution crosses the $50 billion threshold in the fourth quarter of a calendar year, it will not be subject to the supervisory stress testing requirement until the third calendar year after it crossed the threshold.  Otherwise, institutions become subject to the over $50 billion stress testing requirements two calendar years after crossing the threshold.  The final rule also makes definitional and other technical changes.  The final rule will become effective 30 days from its publication in the Federal Register.

View full text of final rule.

The U.K. Prudential Regulation Authority has published a Policy Statement on Pillar 2 liquidity, following two consultations in May 2016 and July 2017. The Capital Requirements Directive gives national regulators discretion to set additional Pillar 2 liquidity requirements. The Pillar 2 framework complements the Pillar 1 Liquidity Coverage Ratio requirements by capturing those liquidity risks that are either not captured or not fully captured under Pillar 1. In its May 2016 and July 2017 consultations, the PRA set out proposals for liquidity assessments, the introduction of a framework for cashflow mismatch risk (CFMR) and survival guidance on the granular liquidity coverage requirement stress within the CFMR framework.

The PRA received a number of consultation responses. The Policy Statement sets out the PRA's feedback and explanation of a number of changes it has made to its original proposals.

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The U.K. Financial Conduct Authority has published a new "Dear CEO" letter that it has sent to the Chief Executive Officers of certain firms for which it acts as prudential regulator.

The letter is addressed to the CEOs of "IFPRU Firms" (firms solo-regulated by the FCA that fall within the definition of "investment firm" in the Capital Requirements Directive and which are subject to the requirements of CRDIV) and "BIPRU Firms" (firms solo-regulated by the FCA that fall outside the definition of "investment firm" for CRD IV purposes). The FCA has observed that the prudential returns (in particular the Common Reporting (COREP) and Financial Reporting (FINREP) returns) submitted by these firms often contain inaccurate or incomplete data. The FCA stresses that, while errors or omissions can appear minor in isolation, they can materially distort data that are aggregated and used to analyse a sector or a group of firms.

Examples of the issues the FCA has observed include; failure to submit certain returns, such as the FINREP return; failure to complete underlying templates; inaccurate calculations; inconsistent submissions; reporting using incorrect units; and failure to report cumulatively where that is required.

The FCA instructs CEOs of IFPRU and BIPRU firms to review their firm’s regulatory reporting practices to ensure that they are fit for purpose, comply with the relevant reporting provisions and produce materially accurate data. The FCA plans to conduct a review of a sample of firms' returns as of October 1, 2018 and, should the same issues persist at that time, it will consider taking further steps to improve reporting standards.

View the Dear CEO letter.

The Prudential Regulation Authority is consulting on its expectations regarding the eligibility of guarantees as unfunded credit protection for the purposes of a firm's Pillar 1 regulatory capital requirements. The PRA is intending to add a new section to the Supervisory Statement 'Credit risk mitigation'.

The EU Capital Requirements Regulation allows firms to recognize certain forms of credit risk mitigation when calculating their regulatory capital requirements. Unfunded credit protection can be attained through a guarantee where a third party becomes obliged to pay out in the event of non-payment or default of the credit obligor. The CRR sets out the eligibility criteria for a guarantee to qualify for CRM.

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The FDIC adopted amendments to its international banking regulations that primarily impact the asset pledge requirements applicable to FDIC-insured branch offices of non-U.S. banks (of which there are only 10) as well as certain securities-related powers of foreign branch offices of state nonmember banks, which depend in part on whether the branch is transacting in investment grade securities.  The amendments implement Section 939A of the Dodd-Frank Act, which generally requires the removal of reliance on credit ratings in banking (and other) regulations for determining the creditworthiness of a security or money market instrument.  Under the amended regulation, an investment grade security is one “whose issuer has adequate capacity to meet all financial commitments under the security for the projected life of the exposure.”

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The U.S. Board of Governors of the Federal Reserve System issued a letter permitting Deutsche Bank AG to establish a second U.S. intermediate holding company to hold its asset management business pursuant to Regulation YY.

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The European Banking Authority has published a letter, dated February 9, 2018, from the EBA Chairperson, Andrea Enria, to Olivier Guersent, Director-General of DG-FISMA at the European Commission, relating to the regulatory perimeter of the Capital Requirements Regulation and the Capital Requirements Directive. The letter is in response to the January 22, 2018 letter to the EBA from the European Commission regarding the EBA's Opinion on regulatory perimeter issues under the EU capital requirements framework and the proposed changes under CRD V.

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A Commission Delegated Regulation on Regulatory Technical Standards for the materiality threshold for credit obligations past due has been published in the Official Journal of the European Union. The Delegated Regulation supplements the Capital Requirements Regulation with regard to the conditions for use of the internal ratings-based approach. The CRR 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 European Banking Authority was obliged to prepare draft RTS specifying the conditions for setting that threshold by a national regulator.

The Delegated Regulation sets out those conditions for retail exposures and for exposures other than retail exposures as well as providing for notification of materiality thresholds to the EBA, the updating of the thresholds and the applicable date for thresholds.

The Delegated Regulation applies from May 7, 2018.

View the Delegated Regulation.

The US Office of the Comptroller of the Currency, the US Board of Governors of the Federal Reserve System, the US Federal Deposit Insurance Corporation, the US Farm Credit Administration and the US Federal Housing Finance Agency issued a joint notice of proposed rulemaking seeking comment regarding the minimum margin requirements for covered swap entities (the “Swap Margin Rule”).  The proposed rule would amend swap margin requirements to ensure conformity with rules recently adopted by the Federal Reserve Board, the OCC and the FDIC, which impose restrictions on certain swap and other financial contracts that are deemed to be qualified financial contracts.  The proposed rule would amend the definition of “Eligible Master Netting Agreement” to align with the revised definition of “Qualifying Master Netting Agreement” in the recent rules adopted by the Federal Reserve Board, the OCC and the FDIC, and would ensure that a netting agreement for a firm subject to the Swap Margin Rule is not excluded from the definition of “Eligible Master Netting Agreement” solely on the basis of the firm’s compliance with the recently promulgated qualified financial contract rules.  The proposed rule would also provide that certain legacy agreements would not become subject to the Swap Margin Rule solely on the basis of their amendment to comply with the qualified financial contract rules recently promulgated by the Federal Reserve Board, the OCC and the FDIC.  Comments to the proposed rule are due no later than 60 days following publication in the Federal Register.

View interagency notice of proposed rulemaking.

The US Board of Governors of the Federal Reserve System issued a cease-and-desist order against a large US financial institution.  The order requires the institution to utilize its resources to ensure compliance with consent orders issued by other US federal financial regulators.  The order also requires the institution to submit written plans to its applicable Federal Reserve Bank that are designed to further enhance board-level oversight and governance of the institution and further improve the institution’s compliance and operational risk management program.  These plans must be approved by the relevant Federal Reserve Bank and are subject to third-party review once implemented.  In addition, the institution may not grow until the requirements of the cease-and-desist order are satisfied, absent specific Federal Reserve Board approval.  Concurrently with the release of the cease-and-desist order, the Federal Reserve Board sent letters addressed to the institution’s board of directors, its former lead independent director, and its former Chair describing governance deficiencies identified by the Federal Reserve Board.  The Federal Reserve Board press release accompanying the publication of the order also noted upcoming changes in the composition of the institution’s board of directors.

View the Federal Reserve Board announcement.

The US Office of the Comptroller of the Currency and the US Board of Governors of the Federal Reserve System released the 2018 scenarios for the Dodd-Frank Act Stress Test (DFAST), and the Federal Reserve Board issued its instructions to the firms participating in the 2018 Comprehensive Capital Analysis and Review (CCAR).

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The US House of Representatives passed five bills focused on regulatory reform for financial institutions.  The bills passed by the House include:  the Housing Opportunities Made Easier Act (H.R. 2255), which amends the Truth in Lending Act to allow mortgage appraisal services to be donated to organizations eligible to receive tax-deductible contributions;

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Treasury Secretary Steven Mnuchin testified before the US Senate Committee on Banking, Housing, & Urban Affairs at the committee’s Financial Stability Oversight Council annual report to Congress hearing.  In his prepared statement, Secretary Mnuchin noted that the FSOC annual report recommended that member agencies review existing rules and regulations to reduce overlap and duplication, modernize regulations that have become outdated and tailor regulations to fit the size and complexity of the financial institutions for which the regulations are applicable.  Secretary Mnuchin praised Congress for the bipartisan Economic Growth, Regulatory Relief, and Consumer Protection Act, a legislative proposal that seeks to ease the regulatory burden on smaller community-based financial institutions, and urged both the US Senate and the US House of Representatives to take quick action to reduce regulatory burdens.  Secretary Mnuchin also stressed that cybersecurity is a key risk identified in the FSOC annual report. While Secretary Mnuchin stated that progress has been made with regard to cybersecurity, he highlighted the danger that a large-scale cybersecurity incident could significantly disrupt the financial system, especially given the ever-increasing reliance on technology.

View full text of Secretary Mnuchin’s statement.

The US Government Accountability Office released a report that details the compliance of six US federal financial institution regulators (the US Board of Governors of the Federal Reserve System, the US Office of the Comptroller of the Currency, the US Federal Deposit Insurance Corporation, the US Securities and Exchange Commission, the US Commodity Futures Trading Commission and the US Consumer Financial Protection Bureau) with the requirements of the Regulatory Flexibility Act (RFA).  Under the RFA, regulators must either consider a proposed rule or regulation’s impact on smaller financial institutions and consider potential alternatives, or certify that the proposed rule or regulation will not have a significant impact on a large percentage of small financial institutions.  The GAO report identified a number of weaknesses with the agencies’ compliance with both aspects of the RFA, including a lack of transparency with respect to documentation supporting an agency’s regulatory flexibility analysis, and missing information in certifications. The GAO report makes 10 recommendations—each tailored to respond to perceived weaknesses at specific regulators—with each of the 6 reviewed agencies receiving at least 1 recommendation. The recommendations include enhancing transparency, developing policies and procedures that better document and explain the respective agency’s analysis, and requiring the agencies to review existing evaluation frameworks to ensure harmonization with the requirements of the RFA.

View full text of the GAO report.

The US Consumer Financial Protection Bureau published a notice in the Federal Register requesting public comment regarding the agency’s Civil Investigative Demands (CID) processes.  Further to statements issued by CFPB Acting Director Mick Mulvaney, the request for information provides an opportunity for the public to provide comments aimed at improving and streamlining the CID processes for consumers and financial institutions.  The request for information asks for comment regarding a number of aspects of the CFPB’s CID processes, including suggestions for modifying or updating CID processes, proposed improvements to how information is conveyed to entities that receive CIDs and suggestions regarding the timing and deadlines under the existing CID framework.  Comments are due by March 27, 2018.

View CFPB’s Information Request.

The US Consumer Financial Protection Bureau published a final rule that amends the regulations implementing the Electronic Funds Transfer Act (Regulation E), and the Truth in Lending Act (Regulation Z), and corresponding official interpretations.  The final rule makes a number of modifications to these regulations, including changes to error resolution requirements and limited liability provisions, which will now apply after a consumer’s identity has been verified, designed to promote prompt registration of prepaid cards by individuals.  In addition, the final rule clarifies how the prepaid rule applies to credit cards linked to digital wallets, which promotes consumer use of digital wallets, while providing the same protections that apply to traditional credit card accounts.  The final rule also delays the effective date of these provisions until April 1, 2019.

View the CFPB’s final rule.

The US Board of Governors of the Federal Reserve System, the US Office of the Comptroller of the Currency and the US Federal Deposit Insurance Corporation announced that the agencies will give favorable consideration under the Community Reinvestment Act for bank activities that helped with revitalization and stabilization of the US Virgin Islands and Puerto Rico, which were designated as major disaster areas because of Hurricane Maria.  The agencies announced that financial institutions located anywhere in the United States, including outside of the affected areas, will receive favorable CRA consideration for their community development activities concerning affected areas and individuals, provided that the institution has been responsive to the CRA needs of its own assessment area.  The agencies clarified that favorable CRA consideration will be given to institutions that aid affected areas and individuals—including those who have been displaced and relocated outside of the affected areas—regardless of census information or the personal income of the individual being assisted.  The agencies did, however, note that greater weight will be given to activities that assist areas and individuals that are of low and moderate income.

View the interagency statement regarding the announcement.

The UK Financial Conduct Authority has published a Policy Statement and final rules to introduce changes to its client money rules to amend the existing 30-Day Rule, under which firms are prevented from placing client money in bank accounts with unbreakable terms of longer than 30 days. The client money rules require firms to deposit client money in an account opened with an authorised bank, a central bank or in a qualifying money market fund. An unbreakable deposit is one where the firm placing the deposit has no contractual ability to request the return of the monies prior to the end of the agreed term.

The rule changes have been made following feedback from firms that banks have been increasingly reluctant to provide 30-day unbreakable deposits. This reluctance appears to have been due to the interaction of the client money and prudential regimes. All client money is subject to the Liquidity Coverage Ratio which requires banks to have highly liquid assets to cover 100% of their potential net cash outflows over 30 days. Unbreakable deposits of a maximum of 30 days are therefore capital inefficient for banks.

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Vice Chairman of the US Board of Governors of the Federal Reserve System, Randal Quarles, delivered remarks at the American Bar Association Banking Law Committee’s annual meeting. In his remarks, Mr. Quarles discussed his approach as Vice Chair of Supervision and outlined a number of items that were areas of focus. Mr. Quarles noted that the post-crisis regulatory framework was largely complete—with the exception of the implementation of the Basel III framework—and noted that this provided an opportunity to reflect on these regulations and assess their utility and move towards efficient and transparent regulation. Mr. Quarles reiterated the need to reduce the regulatory burden for smaller financial institutions and echoed prior comments from Federal Reserve Board Chairman-nominee Jerome Powell that key regulatory areas that need improvement include resolution planning, stress testing and simplification of the Volcker Rule. Specifically, he noted that the relevant agencies have begun work on a proposal to streamline the Volcker Rule and “congeal around a thoughtful Volcker rule 2.0.”  Mr. Quarles also discussed a few emerging areas for consideration, including (i) tailoring regulation to match    an institution’s size, footprint, risk profile and business model, (ii) a re-evaluation of loss absorbency requirements, (iii) a recalibration of the leverage ratio and (iv) the Federal Reserve Board’s framework for control determinations under the Bank Holding Company Act, which he generally views as too opaque.

View full text of VC Quarles' speech.

The US House Financial Services Committee announced that it had advanced 15 bills, many of which would alter the regulatory framework for financial institutions.

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The US Federal Reserve Board issued a notice finalizing its revisions to the Form FR Y-7 (Annual Report for Foreign Banking Organizations), regarding how a foreign banking organization should certify its compliance with US risk committee and home country capital stress testing requirements under Regulation YY.

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The European Commission has published a Communication to the European Parliament, the Council of the European Union and the European Central Bank, setting out its first progress report on the implementation of the "Action Plan To Tackle Non-Performing Loans in Europe" that was adopted by the Council in July 2017. The Communication discusses addressing NPLs as part of risk reduction in the financial sector and reports that the general improvement in NPL ratios over recent years continued in 2017. The ratio of NPLs is at its lowest level since Q4 2014. The Communication concludes by stressing the importance of maintaining the pace of NPL reduction and the need, not only for continued action by individual banks and by Member States, but also for concerted action at EU level by the Commission and other EU institutions, including the ECB.

A Commission Staff Working Document, published jointly with the Communication, provides further detail on the workstreams identified as necessary to deliver the Action Plan and on developments in selected Member States.

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The UK Prudential Regulation Authority has announced that it is postponing by six months the introduction of a new liquidity reporting template, PRA110. PRA110 is intended to capture information on cashflow mismatch risk within the Pillar 2 framework.

The Capital Requirements Directive gives national regulators discretion to set additional Pillar 2 liquidity requirements. The Pillar 2 framework involves additional capital requirements set through regulatory discretion and complements the Pillar 1 Liquidity Coverage Ratio requirements, by capturing those liquidity risks that are either not captured or not fully captured under Pillar 1. The PRA consulted in July 2017 on a draft liquidity reporting template for CFMR, to be numbered PRA110. PRA110 will build on the European Banking Authority's maturity ladder reporting template, which will apply from March 2018, by including additional columns and rows to capture additional information. The PRA originally proposed that the PRA110 template would be implemented on January 1, 2019 and that, on implementation of PRA110, it would terminate the old FSA047 and FSA048 returns.
 

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The European Banking Authority has published a final Report and final Guidelines on uniform disclosures under the Capital Requirements Regulation regarding the transitional period for mitigating the impact of the introduction of International Financial Reporting Standard 9 (known as IFRS 9) on own funds.

IFRS 9, which applies for accounting periods beginning January 1, 2018, will require the measurement of impairment loss allowances to be based on an expected credit loss accounting model rather than on an incurred loss accounting model. The application of IFRS 9 could lead to a sudden significant increase in expected credit loss provisions and consequently to a sudden decrease in an institution's Common Equity Tier 1 capital. For this reason, institutions that prefer not to recognize the full impact of IFRS 9 (or analogous ECL models) immediately have the option of phasing in implementation of IFRS 9 over a transitional period.

IFRS 9 is being implemented in the EU through a regulation amending the CRR which sets out transitional provisions. The amending Regulation applied directly across the EU from January 1, 2018. A firm that uses the transitional arrangements must publicly disclose its own funds, capital ratios and leverage ratios both with the application of the transitional arrangements and also on a "fully-loaded" basis, i.e., as if the transitional arrangements had not been applied.

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The US Senate Committee on Banking, Housing and Urban Affairs held a full committee hearing entitled “Combating Money Laundering and Other Forms of Illicit Finance: Opportunities to Reform and Strengthen BSA Enforcement.” Chairman Mike Crapo and ranking member Sherrod Brown each delivered opening statements at the hearing. Mr. Crapo highlighted the vital importance of robust anti-money laundering laws, rules and regulations, and their implementation through financial institution policies and procedures. Mr. Crapo also noted, however, that much has changed since the Bank Secrecy Act was enacted nearly 50 years ago, and stressed the need for its modernization. Mr. Brown also emphasized the importance of a robust AML regime, and noted that many large US and international financial institutions have been penalized for AML deficiencies. Mr. Brown noted that broadening information-sharing may make sense but that important questions about privacy protections must also be addressed.

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The UK Prudential Regulation Authority has published a "Dear CFO" letter that was sent to the Chief Finance Officers of larger UK-headquartered credit institutions. The "Dear CFO" letter sets out the PRA's expectations as to the minimum disclosures those firms should be making on transition to the new standard for loan loss provisioning based on "expected credit losses" that forms part of standard 9 of International Financial Reporting Standards. The ECL requirements will replace the old "incurred loss" provisioning model that was contained in standard 39 of the International Accounting Standards. ECL will require banks to provision for expected credit losses from the time a loan is originated, rather than awaiting "trigger events" signalling imminent losses. IFRS 9 has been implemented through Commission Regulation (EU) 2016/2067, which requires credit institutions and investment firms that use IFRS to prepare their financial statements to apply IFRS 9 as of the starting date of their first financial year starting on or after 1 January 2018. The Regulation permits banks and investment firms that are required to use IFRS 9 to apply transitional provisions where the application of IFRS 9 leads to a significant increase in credit loss provisions and a decrease in the firm's Common Equity Tier 1 capital. Firms that use these transitional arrangements must publicly disclose their own funds, capital ratios and leverage ratios with and without the application of those arrangements.

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The US Board of Governors of the Federal Reserve System requested comment regarding revisions to the FR Y-9C, FR Y-9LP, FR Y-9SP, FR Y-9ES and FR Y-9CS call reports for holding companies. The notice requests comment with respect to, among other things, the utility of the reports, the accuracy of agency assumptions with regard to the burden imposed by the data collection activities, and means to enhance the quality of information collected or reduce the burden of the information collection activities. The proposed revisions include deletions or combination of certain sections of the reports, reducing the reporting frequency and increasing/adding reporting thresholds for certain data items. Comments to the Federal Reserve Board’s proposed revisions are due March 5, 2018.

View the Federal Reserve Board’s notice and request for comment.
 

Two new EU Regulations introducing the new EU securitization framework for simple, transparent and standardized securitizations have been published in the Official Journal of the European Union - the STS Regulation and a Regulation amending the existing Capital Requirements Regulation. The two Regulations implement the Basel Committee on Banking Supervision's amended Securitization Framework for alternative regulatory capital treatment for simple, transparent and comparable securitizations in 2014 as part of Basel III.

The STS Regulation provides the criteria for identifying which securitizations will be designated as STS securitizations, a system to monitor the application of those criteria as well as common requirements on risk retention, due diligence and disclosure. Originators and sponsors will be required to notify the European Securities and Markets Authority of any securitization that meets the STS criteria and ESMA will maintain a list of all such securitizations on its website. The STS Regulation allows (but does not require) originators, sponsors and securitization special purpose entities to use third-party firms to assess whether a securitization meets the STS criteria, provided that those firms are authorized by the relevant national regulator.

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An EU Regulation amending the Capital Requirements Regulation as regards transitional measures for mitigating the impact of the introduction of International Financial Reporting Standards (known as IFRS 9) has been published in the Official Journal of the European Union. IFRS 9, which applies for accounting periods beginning January 1, 2018, will require the measurement of impairment loss allowances to be based on an expected credit loss accounting model rather than on an incurred loss accounting model. The amending Regulation allows banks and investment firms that are required to use IFRS 9 to apply transitional provisions where the application of IFRS 9 leads to a significant increase in credit loss provisions and a decrease in the firm's Common Equity Tier 1 capital.  A firm that uses the transitional arrangements must publicly disclose their own funds, capital ratios and leverage ratios with and without the application of those arrangements.

The amending Regulation also provides for transitional arrangements for the exemption from the large exposure limit available for exposures to certain public sector debt of Member States denominated in the currency of that Member State. A transitional period of three years from January 1, 2018, will apply to these exposures incurred on or after December 12, 2017. Exposures incurred before that date will continue to be exempt from the large exposures requirements.

The amending Regulation applies directly across the EU from January 1, 2018.

View the CRR IFRS Regulation.