The Basel Committee on Banking Supervision has announced that it has agreed to allow jurisdictions discretion to lower the Net Stable Funding Ratio's treatment for derivatives liabilities. The discretion will allow jurisdictions to lower the required 20% stable funding factor for derivatives liabilities to a floor of 5%. The NSFR measures the assumed degree of stability of liabilities and the liquidity of assets over a one-year horizon. Implementation of the NSFR is expected to begin on January 1, 2018 and this agreement is intended to facilitate implementation. The Committee is considering whether any further revisions to the treatment of derivative liabilities are warranted and will carry out a public consultation on any further proposed changes.

View the announcement.

The Prudential Regulation Authority has published a consultation on proposed changes and clarifications to requirements relating to intragroup transactions in the Large Exposures (LE) Part of the PRA Rulebook. The PRA is making the proposals following its review of its framework for the prudential treatment of financial groups.

The LE framework complements the capital framework by aiming to protect firms from large losses resulting from the sudden default of a single counterparty or a group of connected counterparties. The consultation proposals aim to simplify the overall intragroup LE framework, improve the consistency of the process of granting intragroup permissions and facilitate the orderly resolution of banking groups.

Under the LE framework, firms can apply to the PRA for intragroup permissions, under which exposures to certain group members (entities within a firm's core UK group (CUG)) are exempt from the LE limit and are also excluded from a firm's leverage ratio. The LE framework also permits a firm to apply to the PRA to increase its total exposures to certain cross-border group entities (known as non-core LE group (NCLEG) entities) from 25% to 100% of its own eligible capital.

Read more. 

The Prudential Regulation Authority has published a consultation on proposals to amend the Groups policy framework it has in place for the application of prudential standards to firms on an individual and consolidated basis within banking groups. The consultation proposals are being put forward following a review by the PRA of its Groups policy framework to ensure that it remains coherent and fit for purpose in light of post-crisis financial reforms such as ring-fencing and the Basel III reforms.

The PRA proposes to amend relevant Statements of Policy and Supervisory Statements and the Internal Capital Adequacy Assessment part of the PRA rulebook to implement changes that will enable: (i) assessment and mitigation of the risks to group resilience due to the use of "double leverage" (which occurs when one or more parent entities in a group funds some of the capital in its subsidiaries by raising debt or lower forms of capital externally); (ii) assessment and mitigation of the risks highlighted by prudential requirements applied by local national regulators on overseas subsidiaries of UK consolidation groups; and (iii) improved monitoring of the distribution of financial resources across different group entities. The consultation paper also sets out some further policy proposals to refine the Groups policy framework.

Comments on the proposals are invited by January 4, 2018. The resulting policy will be implemented fully from January 1, 2019. The PRA also requests that, where practical and applicable, firms should aim to incorporate the consultation proposals in their 2018 ICAAP/Individual Liquidity Adequacy Assessment Process (ILAAP) submissions ahead of full implementation.

View the PRA consultation paper on groups policy and double leverage (CP19/17).

The European Central Bank has published for consultation an Addendum to its Guidance for banks on non-performing loans. The ECB published its final Guidance for banks on NPLs on March 20, 2017. The proposed Addendum sets out the ECB's proposal to supplement its Guidance with quantitative supervisory expectations concerning the minimum levels of prudential provisions expected for new NPLs. The ECB notes that the proposed measures should be regarded as prudential backstops which are intended to prevent the excessive future build-up of non-covered aged NPLs on banks' balance sheets. The ECB is proposing that banks would be expected to provide full coverage for the unsecured portion of new NPLs after two years at the latest and for the secured portion after seven years at the latest.

As with the Guidance, the proposed Addendum would be non-binding but would apply to all Eurozone Significant Institutions supervised by the ECB in the Single Supervisory Mechanism as well as their international subsidiaries. If a bank did not comply with the Addendum, then it would need to explain its non-compliance. Any non-compliance could lead to supervisory action being taken. The ECB intends the Addendum to become applicable as soon as it is finalized and for the backstops to apply to new NPLs classified as non-performing from January 2018.

The consultation closes on December 8, 2017. 

View the ECB's proposed Addendum.

View the ECB's Guidance on NPLs.

The UK Prudential Regulation Authority has published a Policy Statement setting out refinements to the Pillar 2A Capital Framework, under which the PRA sets capital requirements for risks that are either not captured or not fully captured under the Capital Requirements Regulation. The PRA consulted on the Pillar 2A refinements in a February 2017 consultation which closed on May 31, 2017. The PRA's proposals will be implemented largely as consulted on, save for minor amendments.

The PRA has made the following changes to the Reporting Pillar 2 Part of the PRA Rulebook:

· adjustments to the PRA’s Pillar 2A approach for firms using the standardised approach (SA) for credit risk;

· revisions to the PRA’s internal ratings-based (IRB) benchmark used for assessing credit risk; and

· additional considerations the PRA will make, as part of the SREP, for SA firms using International Financial Reporting Standard (IFRS) as their accounting framework.

The PRA has also made consequential changes to update:

· its Supervisory Statements "The Internal Capital Adequacy Assessment Process (ICAAP) and the Supervisory Review and Evaluation Process (SREP)" and "Pillar 2 reporting, including instructions for completing data items FSA071 to FSA082"; and

· its Statement of Policy "The PRA’s methodologies for setting Pillar 2 capital".

The revised Pillar 2A framework, which will affect banks, building societies and PRA-designated investment firms, takes effect from January 1, 2018.

View the Policy Statement (PRA PS22/17).

Following positive feedback to a combined consultation issued in June 2017, the Bank of England's Financial Policy Committee and the Prudential Regulation Authority are proceeding with proposed changes to the UK leverage ratio framework. The aim of the proposals (summarized below) was to ensure that the leverage ratio framework does not act as a barrier to the effective implementation of any monetary policy action that leads to an increase in central bank reserves.

In the June 2017 consultation, the FPC consulted on a draft Recommendation to the PRA that the PRA amend its rules on the leverage ratio to: (i) allow firms to exclude from the calculation of the total exposure measure (which serves as the denominator for the leverage ratio) those assets constituting claims on central banks, where they are matched by deposits accepted by the firm that are denominated in the same currency and of identical or longer maturity; and (ii) require a minimum leverage ratio of 3.25%. Central bank claims include reserves held by a firm at a central bank, banknotes and coins constituting legal currency in the jurisdiction of the central bank, and assets representing debt claims on the central bank with a maturity of no longer than three months.

Read more.

The Bank of England has published a consultation paper setting out proposed changes to the Statement of Policy it issued in November 2016 on its approach to setting a minimum requirement for own funds and eligible liabilities (MREL). MREL is the requirement for firms to maintain a minimum amount of loss-absorbing resources to ensure that, should the firm fail, the resolution authority can use the firm's own financial resources to absorb losses and recapitalize the business so it can continue to provide critical functions without the need to rely upon public funds. The MREL requirement is the EU implementation, in the Bank Recovery and Resolution Directive, of the standard for total loss-absorbing capacity (TLAC) set by the Financial Stability Board.

The BoE's 2016 Statement of Policy focused on "external" MREL, i.e. the calibration of the MREL of UK resolution entities. This consultation sets out the BoE's proposals on "internal" MREL, i.e. instruments that are issued to the resolution entity from other legal entities in a group. The consultation paper sets out the scope of internal MREL, how it should be calibrated, which instruments are eligible and the proposed transitional period for the application of the requirements. Internal MREL is intended to cover UK-headquartered banking groups as well as UK subsidiaries of overseas banking groups.

Read more. 

The European Banking Authority has published an Opinion on the design of a new EU prudential framework for non-bank, non-systemically important investment firms. The EBA published a report in December 2015 in response to a Call for Advice from the European Commission on the suitability of certain aspects of the EU prudential regime for investment firms. In that report, the EBA recommended that it was necessary to distinguish between investment firms for which the requirements in the Capital Requirements Directive and the Capital Requirements Regulation are appropriate and investment firms for which those requirements are inappropriate and for which a separate prudential regime should be established. The Commission issued a second CfA in June 2016 asking for: (i) advice on the criteria to identify the investment firms for which the CRD IV requirements are appropriate and which rules should apply to them; and (ii) advice on the new prudential regime for investment firms that should not be subject to CRD IV. The EBA published an Opinion on point (i) on October 19, 2016 concluding that investment firms that have been identified, according to the current EU regulatory framework contained in the relevant technical standards and EBA Guidelines, as global systemically important institutions (G-SIIs) or other systemically important institutions (O-SIIs) should be subject to the full requirements of CRD IV although these criteria might need to be revised through technical standards to take into account the specificities of investment firms. This latest Opinion is in response to the second part of the Cfa and follows the EBA's November 2016 Discussion Paper on its proposals.

Read more. 

Following its consultation earlier this year, the Prudential Regulation Authority has published a final Supervisory Statement on compliance with the European Banking Authority's Guidelines on disclosure.

The EBA published final Guidelines on compliance with the regulatory disclosure requirements in the Capital Requirements Regulation on December 14, 2016. The EBA's Guidelines aim to ensure harmonized implementation of the Basel III Pillar 3 requirements that were released in January 2015. The Guidelines introduce specific guidance and formats for Pillar 3 disclosures, including tables and templates. The Guidelines apply to Globally and Other Systemically Important Institutions. However, national regulators are able to require other firms to apply the Guidelines when complying with their Pillar 3 disclosure obligations under CRR.

Read more.

The Financial Conduct Authority has published a statement reminding firms that the Guidelines of the Joint Committee of the European Supervisory Authorities on the prudential assessment of acquisitions and increases of qualifying holdings will apply with effect from October 1, 2017. The Prudential Regulation Authority has provided a similar statement by way of notification on its website.

Read more.

The European Banking Authority has published a Discussion Paper on significant risk transfer in securitization, seeking views on proposals to strengthen the regulatory and supervisory framework of significant risk transfer. The EBA's proposals are based on the newly agreed European securitization framework, comprising the Securitization Regulation and amendments to the Capital Requirements Regulation, which is due to come into effect in 2018. The Securitization Regulation includes new requirements on risk retention, due diligence, transparency and a new regime for simple, transparent and standardized securitizations (known as STS securitizations). STS securitizations will provide preferential regulatory capital treatment for investors, in particular, for bank investors through the related CRR amendments.

The EBA is proposing to strengthen the supervisory treatment of structural features used in securitizations that may impede the ability of originators to meet the SRT requirements on a continuous basis. The structural features are those that are not covered in the EBA's 2014 Guidelines on SRT for securitization - amortization structure, call options, excess spread and synthetic securitization. The EBA proposes a set of safeguards for each structural feature and a requirement that originators submit a risk transfer self-assessment to the national regulator when submitting their SRT notification.

Read more.

The European Banking Authority has published Guidelines for national regulators aimed at ensuring the convergence of supervisory practices in the assessment of the information and communication technology (ICT) risk under the supervisory review and evaluation process (SREP).

Read more.
 

The European Banking Authority has published final draft Implementing Technical Standards setting out the common templates to be used and the procedures to be followed by resolution authorities when reporting to the EBA the minimum requirement for own funds and eligible liabilities (MREL) that has been set for each financial institution in their jurisdiction. The MREL requirement is the EU equivalent, in the Bank Recovery and Resolution Directive, of the standard for total loss-absorbing capacity (TLAC) set by the Financial Stability Board. The TLAC standard is the minimum amount of loss-absorbing capital an institution needs to hold so that bail-in tools can be deployed successfully on a resolution.

Read more.

The Financial Conduct Authority has launched a consultation on changes to its client money rules (CASS 7) 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 FCA introduced the 30-Day Rule in July 2014 to restrict the practice of some firms of depositing client money in unbreakable deposits for periods of up to years. The placing of client money in lengthy unbreakable terms attracts the risk of diminution if a firm is unable to withdraw that money in response to market events and the risk that client money may not be available for distribution in the case of a firm insolvency. Therefore, the FCA was (and remains) of the view that placing client money in unbreakable deposits for long periods is incompatible with the purpose of the client money regime. However, it is now proposing to allow the use of 31-90 day unbreakable deposits following feedback from firms about an increasing reluctance of banks to provide 30-day unbreakable deposits.

The reduced appetite from banks appears to have arisen due to the interaction between the 30-Day rule and the liquidity requirements of the prudential regime. 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.

Read more.

The Financial Conduct Authority has published a Policy Statement and final rules following its January 2017 consultation on proposed changes to the client money distribution rules (CASS 7A) affecting the return of client assets following a firm's failure or other pooling events. The rule changes, which come into effect on July 26, 2017, are designed to speed up the distribution of client assets, improve consumer outcomes and reduce the market impact of an investment firm failure. Following consultation feedback, the FCA is introducing the majority of the proposed changes in the form consulted on. However, minor changes have been made to the proposals on post-transfer client notifications (a 14-day deadline will be introduced rather than the 7-day deadline originally proposed) and on the proposed guidance on reconciliations that follow a primary pooling event. The FCA also provided new guidance concerning the need for firms to designate as client transaction accounts those accounts which the CCP makes available as customer accounts for such purposes. The FCA will not be proceeding with its original proposal to require firms to provide annotated samples of their client statements.

View the FCA Policy Statement (PS 17/18).

The Prudential Regulation Authority has launched a consultation on an update to its November 2016 Supervisory Statement, "The minimum requirement for own funds and eligible liabilities (MREL) - buffers and Threshold Conditions". The Supervisory Statement (SS 16/16) set out the PRA';s expectations on the relationship between the minimum requirement for own funds and eligible liabilities (MREL) and both capital and leverage ratio buffers, as well as the implications that a breach of MREL would have for the PRA's consideration of whether a firm is failing, or likely to fail, to satisfy the Threshold Conditions. The Supervisory Statement states that the PRA expects firms not to count Common Equity Tier 1 (CET1) capital towards both MREL and the buffer requirements.

Since its publication of the Supervisory Statement in November 2016, the PRA has been asked about the approach to be taken in the situation where MREL is calibrated on the basis of one capital regime (e.g. leverage, in circumstances where the leverage requirement is larger than the risk-weighted requirement), but the largest requirement for buffers derives from the other regime (e.g. risk-weighted capital). The PRA is consulting on revisions to SS 16/16 to clarify that the expectations set in SS16/16 are not intended to create a different buffer requirement from that which is usable in the going-concern regime.

The PRA invites responses to the consultation by September 29, 2017. The PRA aims to publish a revised supervisory statement by the end of 2017.

View the PRA's consultation paper.

The European Banking Authority has published its final draft Regulatory Technical Standards setting out a comprehensive list of the information that must be provided to national regulators by firms applying for authorization as a credit institution under the Capital Requirements Directive. The final draft RTS are accompanied by final draft Implementing Technical Standards which set out the various procedures and requirements for making applications, along with a template to be used and guidance on how national regulators should deal with incomplete applications. The next step is for the European Commission to consider the draft RTS and ITS with a view to making a decision whether to endorse them via delegated legislation. In an accompanying press release, the EBA urges the Commission to consider adopting the RTS and ITS at the earliest opportunity to enable processing of applications from entities seeking to relocate to continental Europe in the context of the UK's withdrawal from the European Union.

View the EBA Final Report.

View the Press Release.

The UK Prudential Regulation Authority has published a consultation setting out its proposals on a cashflow mismatch risk (CFMR) framework and other methodologies it will use to assess firms' liquidity risk under the Pillar 2 liquidity framework.  CFMR is the risk that a firm has insufficient liquidity from liquid assets and other liquidity inflows to cover liquidity outflows on a daily basis.

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. The PRA has previously set out, in a consultation in May 2016, a non-exhaustive list of Pillar 2 risks. This consultation builds on the proposals in, and feedback received on, the May 2016 consultation and proposes updates to the Supervisory Statements "The PRA's approach to supervising liquidity and funding risks" and "Guidelines for completing regulatory returns".

Read more.

The Prudential Regulation Authority is consulting on proposals to change its Supervisory Statement "The Internal Capital Adequacy Assessment Process (ICAAP) and the Supervisory Review and Evaluation Process (SREP)" and its Statement of Policy "The PRA's methodologies for setting Pillar 2 capital". The PRA's proposals are intended to bring greater clarity, consistency and transparency to the PRA's capital-setting approach and to promote a greater level of transparency and disclosure.

Read more.

The Prudential Regulation Authority has launched a consultation on compliance with the European Banking Authority's guidelines on disclosure of the composition of collateral for exposures to counterparty credit risk.

The EBA published final Guidelines on compliance with the regulatory disclosure requirements in the Capital Requirements Regulation on December 14, 2016. The EBA's Guidelines aim to ensure harmonized implementation of the Basel III Pillar 3 requirements that were released in January 2015. The Guidelines introduce specific guidance and formats for Pillar 3 disclosures, including tables and templates. The Guidelines apply to Globally and Other Systemically Important Institutions. However, national regulators are able to require other firms to apply the Guidelines when complying with their Pillar 3 disclosure obligations under CRR.

Read more.

A Commission Implementing Regulation on the extension of the transitional periods related to own funds requirements for exposures to central counterparties set out in the Capital Requirements Regulation and European Markets Infrastructure Regulation was published in the Official Journal of the European Union.

Read more.

The European Banking Authority has published for consultation draft Recommendations on outsourcings by financial institutions to cloud service providers.

The EBA has identified the need for specific guidance for outsourcing to cloud service providers to address uncertainty regarding supervisory expectations in this area. The draft Recommendations build on the existing outsourcing guidelines by the Committee of European Banking Supervisors, published in 2006, which the EBA intends to update in due course.

The draft Recommendations address five key areas: the security of data and systems, location of data and data processing, access and audit rights, chain outsourcing, and contingency plans and exit strategies. The draft Recommendations would apply to banks and investment firms subject to the Capital Requirements Directive as well as and national regulators. The EBA will consider whether to extend the applicability of the draft Recommendations to other regulated firms.

The consultation closes on August 18, 2017.

View the Recommendations.

View the CEBS Guidelines.

The European Central Bank has published a final Guide on fitness and propriety assessments for the suitability of members of the management body and key function holders in significant banks. The final Guide differs from the consultation version published in January, with several clarifications being made, including a requirement that fit and proper assessments are confidential. The ECB Guide is based on six Principles, namely: the primary responsibility of banks in carrying out due diligence and assessments, the role of the ECB as a "gatekeeper", the harmonization of assessments across the euro area, proportionality and case-by-case assessment, due process and fairness, and interaction with ongoing supervision. The Guide sets out the five assessment criteria against which the fitness and propriety of members of the management body is assessed: experience, reputation, conflicts of interest and independence of mind, time commitment and collective suitability. The Guide provides information on the purpose, scope and type of interviews conducted by the ECB of appointees. The Guide highlights how a decision is taken by the ECB after every fit and proper assessment and the various types of decisions that may be taken. The Guide also notes that under the Single Supervisory Mechanism Regulation, the ECB has the power to remove, at any time, members from the management body of a significant supervised entity who do not fulfill the fit and proper requirements.

View the ECB Guidance.

The European Banking Authority has published final Guidelines on banks' credit risk management practices and accounting for expected credit losses. These final Guidelines are a result of a consultation that ended on October 26, 2016, and build on the related Guidance by the Basel Committee on Banking Supervision, published in December 2015. The Guidelines will apply at the start of the first accounting period beginning on or after January 1, 2018.

Many banks in the EU apply the International Financial Reporting Standards. IFRS 9, which will apply 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 use of an ECL accounting model involves some discretion in its application. The Guidelines set out supervisory expectations for credit institutions related to sound credit risk practices associated with implementing and applying an ECL accounting model.

These Guidelines should be read in conjunction with the provisions of the Capital Requirements Regulation and the Capital Requirements Directive IV as well as the relevant technical standards.

View the final Guidelines.

View the Consultation Paper.

View the Basel Committee Guidance.

The European Banking Authority has published final Guidelines on the assessment of the Information and Communication Technology (ICT) risk in the context of the Supervisory Review and Evaluation Process (SREP). These final Guidelines are a result of a consultation that ended on January 6, 2017. The Guidelines will apply to national EU regulators and aim to promote common procedures and methodologies for their assessment of ICT risk. The Guidelines will apply from January 1, 2018.

Read more.

On May 8, 2017, the US Financial Stability Oversight Council issued a readout of its meeting in which FSOC discussed efforts to assess the efficacy of the Volcker Rule. Reportedly, at the closed-door meeting, Treasury Secretary Mnuchin directed the various agencies with oversight over the Volcker Rule to re-examine the scope of permissible activities under the rule.

View text of the FSOC readout.

US Federal Reserve Board Governor Jerome Powell gave a speech at the Global Finance Forum assessing the “core reforms” of the post-crisis financial regulatory framework. Although Governor Powell generally defended such reforms, he acknowledged that some aspects of the framework could be better tailored and less burdensome, in particular with respect to regulations that have been applied to small and medium-sized institutions.  In addition, Governor Powell acknowledged that the post-crisis framework was, in many cases, excessively complex, and called for, among other things, a reassessment of the Federal Reserve’s supervisory expectations of the boards of directors of banking firms.

View text of the speech.

The US OCC announced that its Office of Innovation will host two days of office hours for national banks, federal savings associations (FSAs) and fintech companies to discuss the OCC’s perspective on responsible innovation. This initial round of meetings will be held in the OCC’s San Francisco Field Office on May 16 and 17, 2017. The OCC anticipates holding office hours in other designated cities at a later date.

The OCC’s Acting Chief Innovation Officer Beth Knickerbocker noted that the office hours are an opportunity for attendees to have candid discussions with OCC staff regarding financial technology, new products or services, partnering with a bank or fintech company or other matters related to financial innovation. OCC staff will provide feedback and respond to questions during the one-hour meetings. The OCC expects to meet with up to fifteen companies over the two-day period.

View more information regarding the meetings.

US FDIC Vice Chairman Thomas M. Hoenig delivered remarks regarding the semi-annual report of the Global Capital Index released that day.

Read more.

The European Central Bank has published a Guideline and Recommendation to harmonize the way in which Euro member state national regulators of "less significant" banks exercise discretions available to them under the Capital Requirements Regulation and Capital Requirements Directive. This follows a public consultation on the draft Guideline and Recommendation, which was launched on November 3, 2016 and ended on January 5, 2017. The ECB has already harmonized the application of options and discretions for the banks that it directly prudentially supervises under the Single Supervisory Mechanism.

Read more.

The European Banking Authority has published a final report and final draft Implementing Technical Standards amending the existing ITS on supervisory reporting. The ITS on supervisory reporting collate the prudential reporting requirements of banks under the Capital Requirements Regulation, related technical standards and other financial information required by national regulators. The ITS on supervisory reporting are updated when prudential or supervisory requirements change. The EBA consulted on the amending ITS at the end of 2016.

Read more.

Daniel Tarullo’s resignation from the US Federal Reserve Board became effective, and he was succeeded by Governor Powell as the Chairman of the Board of Governors’ Committee on Supervision and Regulation. In a speech given on April 4, 2017, Mr. Tarullo reviewed the Federal Reserve’s development of the capital regulation and stress testing regime in the period since the financial crisis, and expressed support for strong capital requirements and strict supervisory stress testing, as well as for raising the $50 billion asset threshold as the trigger for application of enhanced prudential standards under Section 165 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, stating that “the time may be coming when the qualitative objection in CCAR should be phased out." In contrast, Mr. Tarullo criticized the Volcker Rule, citing it as an area where “the case for change has become fairly strong."

View full text of the speech.

The European Securities and Markets Authority has published a consultation paper on updating the Guidelines on the application of the endorsement regime under the Credit Rating Agencies Regulation. Endorsement is a regime that allows credit ratings issued by a third-country CRA and endorsed by an EU CRA to be used for regulatory purposes in the EU. The consultation paper proposes two main changes to the existing Guidelines. First, where a third-country legal and supervisory framework has been positively assessed by ESMA, ESMA will no longer assume that compliance of the third-country CRA with this framework equates to compliance with requirements as stringent as those under the CRA Regulation. The endorsing CRA is expected to verify and be able to demonstrate that the third-country CRA has established internal requirements which are at least as stringent as the corresponding requirements in the relevant provisions of the CRA Regulation. Secondly, the consultation paper clarifies that ESMA has the power to request information directly from the endorsing CRA about the conduct of the third-country CRA. The consultation closes on July 3, 2017.

View the consultation paper.

The Basel Committee on Banking Supervision has launched a consultation proposing a revised assessment framework for global systemically important banks. The framework, first published in July 2013, identifies G-SIBs by assessing their contribution to systemic risk and imposes higher capital requirements on G-SIBs to reduce the likelihood of their failure. Identified G-SIBs are placed into buckets based on their score of systemic importance. G-SIBs are also subject to Total Loss Absorbing Capacity requirements and higher supervisory expectations on risk management, risk data aggregation capabilities, risk governance and internal controls. The Basel Committee is proposing to amend the framework by, among other things, removing the cap on the substitutability category, expanding the scope of consolidation to include insurance subsidiaries for three categories, amending the definition of cross-jurisdictional activity, revising disclosure requirements and including further guidance on bucket migration. In addition, the Basel Committee is also asking for feedback on the introduction of a new indicator for short-term wholesale funding.

Responses to the proposals are requested by June 30, 2017. The Basel Committee is proposing a transitional schedule for implementing any revised assessment framework so that any changes announced in November 2017 would take effect in 2019 and the resulting higher loss absorbency requirement would apply from January 2021.

View the consultation paper.

View the existing G-SIB assessment framework.

View the current list of G-SIBs.

The Judiciary Committee of the US House of Representatives marked up and passed HR 1667, the Financial Institution Bankruptcy Act of 2017. The bill would amend Title II of the Dodd-Frank Act and would create a new subchapter V to chapter 11 of the Bankruptcy Code, to establish a new bankruptcy process for certain financial institutions with assets of $50 billion or more. The legislation now goes to the US Senate for full consideration.

Read HR 1667.

The Basel Committee on Banking Supervision has published details of interim regulatory treatment of accounting provisions and standards for transitional arrangements under Basel III capital framework.

Read more.

The Basel Committee on Banking Supervision has published a consolidated and enhanced Pillar 3 disclosure framework standard. The Basel Committee announced in June 2014 that it was undertaking a review of Pillar 3. In January 2015, it issued its revised Pillar 3 disclosure requirements, completing the first phase of the review. This latest publication represents the second phase of the review. The new standard includes enhancements to the revised Pillar 3 framework, such as key regulatory metrics to provide an overview of a bank's prudential position, and a new disclosure requirement for prudent valuation adjustments. It also includes revisions arising from recent developments, such as the new disclosure requirements arising from the total loss-absorbing capacity regime for global systemically important banks and the revised standard on market risk issued on January 14, 2016. The new standard consolidates all Basel Committee disclosure requirements into the Pillar 3 framework, covering the composition of capital, the leverage ratio, the liquidity ratios, the indicators for determining globally systemically important banks, the countercyclical capital buffer, interest rate risk in the banking book and remuneration.

Read more.

US Federal Reserve Board Governor Jerome Powell provided remarks regarding the history and structure of the Federal Reserve System. Against calls for reform of the Federal Reserve System, Governor Powell defended its current structure, which he noted is essentially unchanged since it was modified by the Banking Act of 1935.  He emphasized the importance of avoiding a concentration of power over US monetary policy and financial system, and the need to address national and regional interests. Pointing to reforms in the Dodd-Frank Act, Powell noted that while the governance structure of the Federal Reserve continues to evolve, the independence of a central bank is paramount. On April, 2015 the US House Financial Services Committee’s monetary policy subcommittee held a hearing on the Federal Reserve's mandate and governance structure.

Read Governor Powell’s speech.

The Prudential Regulation Authority has published a consultation paper outlining the Prudential Regulation Authority's proposed changes to the Internal Ratings Based approach. The proposed changes are to clarify the PRA's expectations for UK banks, building societies and PRA designated investment firms applying for IRB approval as outlined in its Supervisory Statement. First, with regard to how a firm can demonstrate that they meet the requirements of the Capital Requirements Regulation on the "prior experience" of using IRB approaches. Second, clarifying the use of external data to supplement internal data for estimating Probability of Default and Loss Given Default for residential mortgages. The PRA has also proposed two reference points for estimating Probability of Possession Given Default for residential mortgages for firms that lack significant possession data. Responses to the consultation are due by June 28, 2017. The PRA aims to publish an updated Supervisory Statement in October 2017.

View the consultation paper.

The Bank of England has published the key elements of its 2017 stress test. The 2017 test will comprise two scenarios, the annual cyclical scenario and, for the first time, a biennial exploratory scenario. The stressed outcome for UK activity and unemployment is the same as in the 2016 annual cyclical scenario. However for the global economy, the stressed outcome is worse than 2016, largely reflecting the continued and rapid growth of credit in China. The current cyclical scenario will incorporate a sudden increase in the rate of return investors demand for holding pounds sterling with an associated fall in the value sterling. This is particularly relevant due to the vulnerability created by the UK's large current account deficit. The 2017 scenario also differs from the 2016 exercise as it incorporates a rise in the bank rate (in 2016 the bank rate was cut to zero). The purpose of the exploratory scenario is to consider how the UK banking system might evolve if the recent headwinds to bank profitability persist or intensify. The Bank of England will publish the results of the stress test sometime between October and the end of December 2017.

View the stress test scenarios and elements.

Member agencies of the Federal Financial Institutions Examination Council (FFIEC), including the Federal Reserve Board, FDIC, OCC and the National Credit Union Administration issued a joint report to Congress detailing their review of rules affecting financial institutions.  The review was conducted as part of the Economic Growth and Regulatory Paperwork Reduction Act of 1996 (EGRPRA) as part of the agencies’ continued efforts to reduce regulatory burdens while ensuring the safety and soundness of US financial institutions. EGRPRA requires the federal banking agencies, along with the FFIEC, to conduct a review of their rules at least every 10 years to identify outdated or unnecessary regulations.

The report describes several joint actions planned or taken by the federal financial institutions regulators, including: (i) simplifying regulatory capital rules for community banks and savings associations; (ii) streamlining reports of condition and income (call reports); (iii) increasing the appraisal threshold for commercial real estate loans; and (iv) expanding the number of institutions eligible for less frequent examination cycles.  The report also describes the individual actions taken by each agency to update its own rules, eliminate unnecessary requirements, and streamline supervisory procedures.

View the report.

The European Central Bank has published final Guidance to banks on non-performing loans. The Guidance applies immediately to all Eurozone Significant Institutions supervised by the ECB in the Single Supervisory Mechanism as well as their international subsidiaries. The Guidance is not legally binding but a bank will need to explain, upon request, why it does not comply. Any non-compliance could lead to supervisory action being taken. Eurozone banks are expected to apply the Guidance proportionately with those banks that have a high level of NPLs taking greater actions. The ECB emphasizes that an NPL strategy should outline the bank's approach and objectives regarding the effective management and ultimate reduction of NPL stocks in a clear, credible and feasible manner for each relevant portfolio.

View the final Guidance.

Final EU Implementing Technical Standards on common procedures, forms and templates for the consultation process between national regulators when carrying out prudential assessments relating to proposed acquisitions of qualifying holdings in credit institutions have been published. The Capital Requirements Directive requires regulators to consult each other when assessing a proposed acquirer of qualifying holdings. The ITS supplements the CRD by setting out requirements on the designation of contact points by regulators, and the timeframe and process for submitting the consultation notice and responding. The ITS also prescribes the templates for the response from the regulator from whom information has been requested. It also outlines language requirements, methods of communication and the mutual feedback process. The ITS enter into force on April 6, 2017.

View the ITS.

The US Board of Governors of the Federal Reserve System announced that it was raising the asset threshold for bank mergers that it considers unlikely to pose systemic. In an order approving the merger of People’s United Financial Inc. and Suffolk Bancorp, the Federal Reserve stated that in its experience, proposals involving an acquisition of less than $10 billion in assets, or that result in a firm with less than $100 billion in total assets, were generally unlikely to create institutions that pose systemic risks. The previous thresholds were $2 billion and $25 billion, respectively.  Proposals below the threshold generally receive a more streamlined regulatory review.

View text of Federal Reserve order approving the merger.

The Basel Committee on Banking Supervision has published draft Guidelines on the identification and management of step-in risk. The draft Guidelines follow a previous Basel Committee consultation that was launched in December 2015. Step-in risk relates to the risk that a bank might support unconsolidated entities, beyond the bank's contractual obligations, in order to protect itself from any reputational damage that may result from connections to such entities. The materialization of such risk, if not appropriately anticipated, could result in the erosion of bank's capital and liquidity position. The Committee has expanded its identification criteria by building on the comments received during the first consultation to take into account the risk characteristics of entities involved in addition to the banks' relationships with them. The Basel Committee has adopted a tailored approach in formulating its prudential response and is seeking comments by May 15, 2017.

View the consultation page.

View the draft Guidelines.

Comptroller of the Currency Thomas J. Curry gave a speech at the Institute of International Bankers’ Annual Washington Conference, discussing the value of international collaboration and bank supervision. In his comments, Comptroller Curry noted that “the fundamentals of [sound] banking remain the same—strong capital, ample liquidity, controlled leverage, and limited concentrations.”

View the text of speech.
 

The European Commission published a report on market developments over the past year that would potentially have created the need for stricter requirements for the level of banks' own funds, large exposures and public disclosure. The Capital Requirements Regulation allows the Commission to impose stricter conditions if measures are necessary to address changes in micro-prudential and macro-prudential risks arising from market developments, in or outside the EU, affecting all Member States, and if the tools provided for in the CRR and the Capital Requirements Directive are not sufficient to address these risks. Such stricter requirements could be based on the recommendation or the opinion of the European Stability Risk Board or the European Banking Authority. The Commission's report concludes that no such circumstances have transpired.  The EU financial stability risks identified in the report include: (i) the possible risk re-pricing of risk premia in global financial markets, amplified by low liquidity; (ii) risks of further weakening of banks’ and insurers’ balance sheets; (ii) risks of deterioration of debt sustainability in sovereign, corporate and household sectors; and (iv) risks posed by contagion and exposures to shadow banking entities.

View the report. 

The European Banking Authority published final Guidelines on liquidity coverage ratio disclosure to complement the disclosure requirements of liquidity risk management under the Capital Requirements Regulation. The CRR provides a general disclosure framework for firms for each category of risk where liquidity risk should be considered. The disclosure of key ratios and figures to regulators required under the CRR specifies the liquidity coverage ratio. The LCR is the only regulatory ratio to cover liquidity and is crucial for disclosure, as it provides essential information for the assessment of liquidity risk management and for the decision-making processes of market participants.

The Guidelines set out the general disclosure framework of risk management in relation to liquidity risk, providing a harmonized structure for the disclosure of information and detailing the information on the LCR that is required to be disclosed within the key ratios and figures. The Guidelines include: (i) a qualitative and quantitative harmonized table for the disclosure of key information; and (ii) quantitative and qualitative harmonized templates for the disclosure of the LCR composition and levels. 

Read more.

The European Banking Authority published an Opinion on improving the decision-making framework for supervisory reporting requirements under the Capital Requirements Regulation. The CRR imposes an obligation on the EBA to prepare Implementing Technical Standards on supervisory reporting requirements. Once the final draft ITS is sent to the European Commission, there are timeframes (usually three months, extendable by one month) built into the relevant EU legislation for the Commission to endorse the ITS. However, there has often been a gap between the EBA providing the final draft ITS and the Commission’s final endorsement. The ITS on supervisory reporting requirements needs to be updated regularly and corrections and clarifications are needed too. The delayed finalisation of changes made to the ITS have caused problems for financial institutions, national regulators and the EBA. 

Read more.

The European Banking Authority has published a report and final draft Regulatory Technical Standards on the disclosure of encumbered and unencumbered assets. The final draft RTS will supplement the Capital Requirements Regulation. The CRR requires the EBA to develop draft RTS on the requirements on firms to disclose balance sheet value per exposure class, broken down by asset quality and the total amount of unencumbered assets on the balance sheet. The final draft RTS set out the data required to be disclosed, the format, and timing of the disclosure. In developing the final draft RTS, the EBA has taken into account the European Systematic Risk Board's recommendations, which included that the EBA and regulators should monitor the level, evolution and types of asset encumbrance. The final draft RTS prescribes a harmonized definition of encumbrance. This will enable market participants to compare firms in a clear and consistent manner. The final draft RTS provides four disclosure templates and a box for narrative information to be completed by firms on the importance of the encumbrance in their funding model. The final draft RTS have been submitted to the European Commission for endorsement.

View the report and final draft RTS.