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.

The US Office of the Comptroller of the Currency, the Federal Reserve Board and the FDIC issued a proposal to remove two items from Schedule B of form FFIEC 101, the report entitled Risk-Based Capital Reporting for Institutions Subject to the Advanced Capital Adequacy Framework. The two items proposed for removal collect exposure at default (EAD) information related to credit valuation adjustments (CVAs) that already is captured in a separate item on FFIEC 101 Schedule B. No other changes are proposed to the FFIEC 101.  Comments are due by May 1, 2017.

View the Proposal.

The European Banking Authority published a consultation paper on the specification of the nature, severity and duration of an economic downturn under the Capital Requirements Regulation. The CRR requires firms to use loss given default (LGD) and conversion factor (CF) estimates appropriate for an economic downturn if those are more conservative than the respective long-run average. The EBA consultation paper includes proposed draft Regulatory Technical Standards and amended Guidelines on probability of default (PD) and LGD estimation. The proposed draft RTS set out the downturn conditions that firms must use to estimate the downturn LGDs and conversion factors. In addition, the EBA is proposing to amend the proposed Guidelines on PD and LGD estimation and the treatment of defaulted assets to include a method for firms to use to reflect the downturn conditions into downturn LGD and CF factors. The consultation closes on May 29, 2017.

View the consultation paper.

View the proposed Guidelines on PD and LGD estimation and the treatment of defaulted assets.

The European Central Bank launched a sensitivity analysis of the banking books of directly supervised banks with a focus on interest rate changes. The analysis will be used to inform the ECB’s annual Supervisory Review and Evaluation Process and stress test. Under the Single Supervisory Mechanism, the ECB directly supervises significant banks, and indirectly supervises smaller or “less significant” banks, located in the Eurozone. The ECB is required to organize annual supervisory tests under the Capital Requirements Directive. The ECB will apply six hypothetical interest rate shocks, as set by the Basel Committee on Banking Supervision in the “Standards – Interest rate risk in the banking book”, which was published in April 2016. The ECB notes that the shocks will capture various scenarios with changes in the level and shape of the interest rate curve and will give the supervisors information on how the economic value of the banking book equity and the net interest income projections will change under each shock test. The exercise commenced on February 28, 2017 and the results will be used as part of the SREP assessment in calibrating the Pillar 2 guidance.

View the press release.

View 2017 stress test FAQs.

The European Banking Authority announced that the 2018 EU stress test would be launched at the beginning of 2018 and results would be published mid-2018. The EBA is currently preparing the methodology and templates and intends to discuss these with the industry in Q3 2017.

View the EBA's announcement.

The Prudential Regulation Authority launched a consultation on proposed changes to the Pillar 2A capital framework. The Pillar 2A framework is effectively a layer of regulatory capital beyond standard requirements based on firm-specific quantitative requirements rather than regulatory discretion.

The PRA is proposing to revise the IRB benchmark, adjust the Pillar 2A approach for firms using the standardized approach for credit risk and include additional considerations for firms using both the standardized approach and IFRS as their accounting framework. The proposals are relevant to banks, building societies and PRA-designated investment firms. Responses to the consultation are due by May 31, 2017. The proposed implementation date for the updated Pillar 2A capital framework is January 1, 2018. The PRA will consider whether further changes are needed to the Pillar 2 framework as a result of the Basel Committee on Banking Supervision and the European Commission's related proposals.

View the consultation paper.

The US Federal Reserve Board announced the annual adjustment to the asset-size threshold in Regulation I, which determines the dividend rate that certain member banks earn on their Federal Reserve Bank stock. The updated total consolidated asset threshold is $10,122,000,000.

The Fixing America’s Surface Transportation (FAST) Act of 2015 provides that depository institution stockholders with total consolidated assets above the asset-size threshold shall receive a dividend on paid-in capital stock equal to the lesser of (i) 6 percent or (ii) the most recent 10-year Treasury auction rate prior to the dividend payment. The dividend rate for other member banks remains at 6 percent.

View notice.

The US Federal Reserve Board, the US Office of the Comptroller of the Currency and the US Federal Deposit Insurance Corporation each released revised economic scenarios for use by certain financial institutions with total consolidated assets of more than $10 billion for the 2017 stress tests as required under the Dodd-Frank Act. The agencies had previously issued scenarios on February 6, 2017 however, these scenarios contained incorrect historical values for the BBB corporate yield in 2016.

The scenarios represent baseline, adverse and severely adverse scenarios and include key variables that reflect economic activity, including unemployment, exchange rates, prices, income, interest rates and other relevant aspects of the economy and financial markets. While the baseline scenario represents expectations of private sector economic forecasters, the adverse and severely adverse scenarios are hypothetical scenarios designed to assess the strength and resilience of financial institutions and their ability to continue to meet the credit needs of households and businesses under stressed economic conditions.

View Federal Reserve Board’s revised stress test scenarios.

View OCC’s stress test scenarios.

View FDIC’s revised stress test scenarios.
 

The European Banking Authority published final draft Regulatory Technical Standards on the procedures for excluding transactions with non-financial counterparties established in a third country (which do not hold positions over the clearing threshold, or so called NFC-s) from the own funds requirement for credit valuation adjustment risk. The final draft RTS will supplement the requirements of the Capital Requirements Regulation. The EBA consulted on proposed draft RTS in August 2015. Firms' transactions with any NFC- will be excluded from the own funds requirements for CVA risk under the CRR, whether or not the NFC- is established in the EU. As NFC-s established in non-EU countries are not subject directly to EU regulation, the final draft RTS clarify that firms are responsible for: (i) taking the necessary steps to identify all NFC-s under this exemption and calculating accordingly their own funds requirements for CVA risk; (ii) ensuring that exempt counterparties established outside the EU would qualify as NFC-s if they were established in the EU; and (iii) ensuring that counterparties calculate the clearing threshold according to the relevant provisions in EMIR and do not exceed those thresholds. The EBA has also included an option for firms to verify the status of third country counterparties at the time of trade inception or on a periodic basis to take account of the situation that firms frequently enter into trades with NFC-s established in a third country. The final draft RTS align the treatment of NFC-s established in a non-EU country with the treatment of NFC-s established in the EU as recommended by the EBA in its February 2015 report. The final draft RTS has been submitted to the European Commission for endorsement. 

View the RTS.

A Commission Delegated Regulation, in the form of Regulatory Technical Standards, on additional liquidity outflows corresponding to collateral needs resulting from the impact of an adverse market scenario on an institution's derivatives transactions was published in the Official Journal of the European Union. The Capital Requirements Regulation requires firms to add an additional outflow for collateral needs that would result from an adverse market scenario on a firm's derivatives transactions, financing transactions and other contracts if material. Due to materiality considerations, the EU has adopted the RTS for derivatives transactions first. The rules apply only to collateralized derivative transactions, including those that mature within 30 days. The RTS require that the calculation of the additional collateral outflows be based on the Historical Look Back Approach for market valuation changes developed by the Basel Committee on Banking Supervision. The text of the final RTS does not materially differ from the revised draft RTS, which the European Banking Authority submitted to the European Commission on May 3, 2016. The RTS will enter into force on February 28, 2017 and will apply directly across the EU. 

View the RTS. 

The US Board of Governors of the Federal Reserve System released the scenarios to be used by banks and supervisors for the 2017 Comprehensive Capital Analysis and Review and stress test exercises (DFAST) mandated by the Dodd-Frank Act. The Federal Reserve Board concurrently issued instructions to firms participating in CCAR. For the 2017 cycle, a total of 13 of the largest and most complex bank holding companies will be subject to both the quantitative evaluation of their capital adequacy as well as a qualitative evaluation of their capital planning capabilities. The Federal Reserve Board had announced earlier, on January 30, 2017, that 21 firms with less complex operations will no longer be subject to the qualitative portion of CCAR.

Read more.

A Commission Delegated Regulation in the form of Regulatory Technical Standards for benchmarking portfolio assessment standards and assessment-sharing procedures was published in the Official Journal of the European Union. The RTS supplement the Capital Requirements Directive. The CRD requires that national regulators monitor the range of risk-weighted exposure amounts or own funds requirements (except as regards operation risk) for the exposures or those relating to transactions in benchmark portfolios resulting from the internal approaches adopted by firms. Regulators are also required to assess, at least annually, the quality of the relevant approaches adopted by firms. The EBA is required to assist regulators in their assessments. The RTS set out the standards for the assessment by national regulators and procedures for sharing of those assessments with other relevant EU national regulators and with the EBA. The RTS enter into force on February 23, 2017 and will apply directly across the EU. 

View the RTS.

The US Federal Reserve Board adopted a final rule amending the capital plan and stress test rules effective for the 2017 cycle. The final rule removes large and noncomplex firms, specifically those with total consolidated assets of at least $50 billion but less than $250 billion, nonbank assets of less than $75 billion, and that are not deemed, pursuant to the Federal Reserve’s Regulation Q, to be US global systemically important banks, from the qualitative assessment of the Federal Reserve’s Comprehensive Capital Analysis and Review, thereby significantly reducing the burden on such firms. Accordingly, the qualitative review in CCAR is now focused on the 13 largest, most complex financial institutions.

View text of the final rule.

The OCC issued examination procedures to supplement OCC Bulletin 2013-29 entitled “Third-Party Relationships: Risk Management Guidance,” which was originally issued October 30, 2013. These procedures use the concepts and definitions in OCC Bulletin 2013-29 but are designed to help examiners: (i) tailor the examination of each bank commensurate with the level of risk and complexity of the bank’s third-party relationships; (ii) assess the quantity of the bank’s risk associated with its third-party relationships; (iii) assess the quality of the bank’s risk management of third-party relationships involving critical activities; and (iv) determine whether there is an effective risk management process throughout the life cycle of the third-party relationship. The procedures include detailed questions examiners can ask when examining covered national banks and federal savings associations.

View the examination procedures.

The European Banking Authority published translations of the final Guidelines specifying the application of the definition of default in relation to the Internal Ratings Based Approach and the Standardized Approach under the Capital Requirements Regulation. Publication of the translations triggers the date by which national regulators must inform the EBA as to whether they intend to comply with the Guidelines. That notification is due by March 20, 2017. The Guidelines will apply to national regulators and firms from January 1, 2021. However, national regulators have discretion to accelerate implementation of the Guidelines. The CRR sets out the definition of default of an obligor that is used for the purposes of the IRB and Standardized Approaches. The purpose of the Guidelines is to harmonize the definition of default across the EU framework so that EU banks apply regulatory requirements to their capital positions in a more consistent and comparable way, especially in the context of IRB models. 

Read more.

The US Board of Governors of the Federal Reserve System finalized a rule increasing the maximum civil money penalty limits for 2017, as required by law. A civil money penalty is a fine imposed by a federal agency to penalize misconduct.

In November 2015, a law was passed that requires all federal agencies to adjust their maximum civil money penalty limits annually for inflation, rather than every four years as previously required. The maximum civil money penalty limits depend on several factors, including the severity and type of violation. Additionally, the law dictates the annual adjustment formula for federal agencies.

The new penalty amounts apply as of January 15, 2017.

View the final rule.

The European Banking Authority and the European Securities and Markets Authority published a Report on the joint functioning of the Capital Requirements Regulation and the European Market Infrastructure Regulation. The focus of the Report is on capital requirements for central counterparties that also hold a banking license, leverage and liquidity for CCPs, large exposures, difference in application of the margin period of risk and the requirements on a client's exposures to clearing members.

The EBA and ESMA note that although the EMIR and CRR requirements may appear to be redundant for CCPs holding a bank license, because some aspects of the EMIR requirements are more stringent, they are in fact based on different definitions of capital and take into account different types of risks. Therefore, CCPs holding a banking license are subject to both capital requirements as matter of principle, with some exemptions when they are properly justified. There are currently 17 authorized CCPs, of which three hold a banking license - Eurex Clearing AG, LCH Clearnet SA and European Commodity Clearing AG.

Read more.
 

A Commission Delegated Regulation, in the form of Regulatory Technical Standards specifying conditions for data waiver permissions, was published in the Official Journal of the European Union. The Capital Requirements Regulation outlines the requirements specific to own-loss given default (“own-LGD”) for regulators when quantifying the risk parameters to be associated with rating grades or pools. The RTS lays down the mandatory conditions under which national regulators may grant firms permissions to use data covering a period of two years, rather than five years, for probability of default, own-LGD and own-conversion factor estimates as set out in the CRR. The RTS stipulates that exposures to central governments, central banks, banks and investment firms would be eligible for data waiver permissions, subject to certain additional requirements being met. First, exposures to corporates would be eligible for data waiver permissions where they are not structurally characterized by few or no observed defaults. Second, types of exposures which were not included in the bank or investment firm’s portfolio at the time when the firm started to implement the Internal Ratings Based Approach should not be eligible for a data waiver permission. 

Read more.

The European Banking Authority published a Decision of the Board of Supervisors of the EBA, dated December 23, 2016, adopting Rules of Procedure for the investigation of a breach of EU law. The Regulation establishing the EBA gives the EBA the power to investigate an alleged failure by a national regulator to apply the requirements of the Capital Requirements Regulation or the Capital Requirements Directive or their application in a way which appears to be a breach of EU law. The Decision sets out factors, criteria and other related matters that the EBA will take into account when it receives a request from a third party to initiate an investigation or to EBA own initiative investigations.

View the Decision.

The European Banking Authority published an updated recommendation on the equivalence of the confidentiality regimes of third country supervisory authorities. The EU Capital Requirements Directive provides that third country supervisory authorities may participate in a college of supervisors set up for an international cross-border bank if: (i) it is considered appropriate for that authority to participate; and (ii) the authority is subject to confidentiality requirements that are equivalent to those set out in the CRD. The EBA's recommendations only relate to the equivalence of the confidentiality regimes. The appropriateness issue is to be determined by each college of supervisors.

In April 2015, the EBA recommended that the confidentiality regimes of the supervisory authorities in the following countries should be considered as equivalent to the CRD IV requirements: Bosnia-Herzegovina, Brazil, Canada, China, FYR Macedonia, Mexico, Montenegro, Serbia, Singapore, Switzerland, Turkey and the United States. Those recommendations applied from April 2, 2015. The EBA updated the recommendations to include Albania from September 12, 2015.

The EBA has updated the recommendations again adding Australia, Hong Kong, Japan and Kosovo. The latest recommendations applied from January 12, 2017.

View the updated recommendations.

The US Office of the Comptroller of the Currency released its Semiannual Risk Perspective for Fall 2016, which highlights key risks facing national banks and federal savings associations. The report highlighted that strategic risk remains high as banks make changes to their business models and adopt innovative products. The OCC also noted that banks continue to ease underwriting practices to boost loan volume and to respond to competition from bank and nonbank lenders in commercial, commercial real estate and auto lending, according to the report. The credit risk associated with such practices is increasing due to increased risk layering, rising loan policy exceptions and weaker covenant protection. The report cited operational risk as another key risk, particularly cybersecurity threats, increased reliance on third-party relationships and the need for sound governance over sales practices. The report is based on data received from national banks and federal saving associations through June 30, 2016.

View Report.

The European Banking Authority published translations of the final Guidelines on the correction required for the calculation of Modified Duration for debt instruments subject to prepayment risk under the Capital Requirements Regulation. The Guidelines will apply from March 1, 2017.

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

View the Guidelines.

The Basel Committee on Banking Supervision announced that it had, along with the Group of Central Bank Governors and Heads of Supervision, made progress towards completing the Basel Committee’s post-crisis regulatory reforms, known as Basel III. However, despite the progress, more time is needed to finalize some areas, including the final calibration, before those proposals can be reviewed by the GHOS. This impacts the meeting of the GHOS which had been scheduled for early January, which has been postponed accordingly. The Basel Committee gave no specific date as to when the work would be completed, saying only that it expects to complete the work in the near future.  

View the press release.

The European Banking Authority published a letter, dated December 23, 2016, in which it requests an extension of time from the European Commission for delivering certain draft technical standards which were due to be delivered by December 31, 2016 under the Capital Requirements Regulation and the Capital Requirements Directive. The EBA is requesting an extension for the Regulatory Technical Standards and the Implementing Technical Standards on the authorization of banks because of a combination of its significant workload and considerable resource constraints and issues arising in respect of new entrants and FinTech companies in addition to the need to achieve a balance between allowing Member States to retain their own authorization processes whilst harmonizing the information required. The EBA expects to be able to deliver the ITS and RTS by mid-2017. 

The EBA is also requesting an extension for the RTS on consolidation methods which it has experienced difficulties with because of the interactions with the Basel framework and with the European Commission's recent adoption of legislation to amend CRR. The EBA expects to be able to finalize the draft RTS by the end of 2017. 

Read more.

The US Federal Reserve Board, the OCC and the Federal Deposit Insurance Corporation announced the annual adjustment to the asset-size thresholds used to define small bank, small savings association, intermediate small bank and intermediate small savings association under the Community Reinvestment Act (CRA) regulations.

Read more.

The OCC issued a final rule, 12 C.F.R. § 7.1022, that prohibits national banks and federal savings associations (FSAs) from dealing or investing in industrial or commercial metals.

The final rule covers metal, including alloy, in a physical form primarily suited to industrial or commercial uses, such as copper cathodes and aluminum T-bars. The final rule supersedes a prior OCC determination permitting national banks to trade copper. The rule, however, still recognizes that national banks and FSAs may hold industrial or commercial metal under authorities that are distinct from dealing and investing. For example, national banks and FSAs may acquire industrial or commercial metal through foreclosures on loans and then sell the metal to mitigate loan losses.

The rule carries out an OCC recommendation included in its report to Congress and the Financial Stability Oversight Council under section 620 of the Dodd-Frank Act. Section 620 required the federal banking agencies to conduct a study of the activities and investments that banking entities may engage in under state and federal law and to consider the associated risks and how banking entities mitigate those risks.

The effective date of the final rule is April 1, 2017. Banks with existing holdings of industrial and commercial metal acquired through dealing or investing activities must divest of such metal as soon as reasonably practical, but no later than one year after the effective date of the final rule, subject to four one-year extensions available from the OCC in particular cases.

View the final rule.

The US Federal Reserve published the aggregate global indicator amounts for the purposes of calculating the “Method 1” G-SIB Surcharge for 2016. The Federal Reserve Board’s G-SIB surcharge rule establishes a methodology to identify global systemically important bank holding companies in the United States based on certain indicators that are correlated with systemic importance. Under the G-SIB surcharge rule, a firm must calculate its G-SIB score using a specific formula (“Method 1”).

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The European Banking Authority published a report on the cyclicality of banks' capital requirements. The report examines whether the EU's risk-sensitive capital requirements create unintended pro-cyclical effects and whether any remedial steps are necessary or justified. The EU's capital requirements framework is set out in the Capital Requirements Regulation and the Capital Requirements Directive, together known as CRD IV. CRR requires the European Commission to prepare a biennial report for the European Parliament and the Council of the European Union on the issue. This report from the EBA is intended to feed into that report. 

The EBA concludes that the impact of the EU capital requirements framework on the EU economic cycle is limited and that there are no strong reasons for shifting from the risk-sensitive framework. The EBA notes that EU banking legislation provides tools for regulators to respond to any pro-cyclicality concerns, as appropriate, and recommends periodic monitoring of the potentially cyclical impact of the EU bank regulatory framework (not only regulatory capital) and further research into the effectiveness and efficiency of counter-cyclical instruments. 

View the EBA's report.

The FDIC released a handbook, developed to facilitate the process of establishing new banks, by offering guidance for navigating the phases of establishing an insured institution. The handbook, titled “Applying for Deposit Insurance—A Handbook for Organizers of De Novo Institutions,” is part of recent efforts by the FDIC to increase transparency and clarity regarding the deposit insurance application process. The standards in the Handbook relax certain requirements that had been imposed as a result of the financial crisis. Comments on the handbook are due February 20, 2017.

View handbook.

A Commission Implementing Decision was published in the Official Journal of the European Union, updating the list of third countries with equivalent regulatory arrangements in relation to prudential requirements for banks and investment firms for the purpose of the treatment of exposures. The Decision lists the countries whose arrangements for supervision and regulation of banks and investment firms are deemed by the European Commission to be equivalent to the standards of the EU as set out in the Capital Requirements Regulation. The Decision is based on assessments that reviewed the supervisory and regulatory arrangements in each country for: (i) banks; (ii) investment firms; and (iii) exchanges. The following nations and territory are now equivalent across categories (i) and (ii): Turkey, New Zealand, the Faroe Islands and Greenland. This Decision will enter into force on January 10, 2016.

View the list of equivalent third countries and territories.

The European Banking Authority published its third impact assessment report for the liquidity coverage ratio requirements under the Capital Requirements Directive and Capital Requirements Regulation, together known as CRD IV. CRR mandates the EBA to prepare the LCR impact assessment report annually. The aim of the report is to assess the impact of the EU's LCR regulation on the EU banking sector. The report indicates a constant improvement of the average LCR across EU banks since 2011. In addition, it states that the average LCR for EU banks at the end of December 2015 was approximately 134%, with an aggregate gross shortfall of EUR 10.9 billion. This increase has been attributed to an increase in liquid assets.

The EBA is also required to report to the European Commission on whether the EU's timeframe should be amended to fit with the Basel III timeline. The report reviews the phasing-in of the liquidity coverage requirements, in particular, assessing whether there is a case for deferring the introduction of the 100% minimum binding standard from January 1, 2018 until January 1, 2019. Under the CRR and related secondary legislation, the EU LCR minimum requirement was set at 60% from October 1, 2015 and is gradually increasing to 100% in January 2018, a year ahead of the Basel implementation date. The EBA concludes that there is no significant evidence to recommend amending the current transitional framework because the existing level of non-compliance with the LCR under full implementation is low.

View the report.