The European Banking Authority, European Securities and Markets Authority and European Insurance and Occupational Pensions Authority (known as the Joint Committee of the European Supervisory Authorities) published a report identifying three main areas of risk and vulnerability affecting the stability of the EU financial system. The ESAs noted that investment funds had experienced markedly lower returns during the second half of 2015. The ESAs observed that the low interest rate environment coupled with high non-performing loans ratios in some countries, has contributed to the subdued profitability of banks in the EU. The report concludes that a proactive stance is required to address the high level of non-performing loans at some banks. The report highlighted the trend of increasing interconnectivity of bank and non-bank entities. The ESAs noted that interconnectedness could act as a potential channel for the propagation of shocks and thereby contribute to negative systematic events. The ESA recommends that the regulators should implement enhanced supervisory monitoring of concentration risks, cross-border exposures and regulatory arbitrage. The ESAs also highlights the risks associated with a potential contagion stemming from China and other emerging markets. Following a decade of strong contributions to global economic growth from emerging economies and China, the recent economic slowdown in these economies could have substantial effects on the EU in future. To forecast the risk in market exposure to these economies, the ESAs suggest that these markets should be covered in risk analysis exercises such as stress test exercises.  Supervisors are also asked by the ESAs to carefully evaluate any optimistic assumptions relating to returns on cross border activity.

View ESA report. 

US Federal Deposit Insurance Corporation Chairman Martin J. Gruenberg discussed the consolidation of community banks, noting that while many of the smallest (with assets less than $100 million) have either consolidated or ceased operations, the number of larger community banks (with assets of between $1 billion and $10 billion) has actually increased over the past 30 years. He further noted that approximately 93 percent of FDIC-insured institutions are considered “community banks” and play an important role in providing small loans to farms and businesses and deposit services to communities across the US. However, Gruenberg observed that community banks face many challenges including a decline in net interest margins.

Read more. 

US Federal Deposit Insurance Corporation Vice Chairman Thomas M. Hoenig discussed the decline of traditional community banks over the last thirty years and the resulting concentration of the US financial system in a few large financial firms. Hoenig outlined his recommendation of a model of regulatory relief that would provide greater flexibility to banks operating in the United States. Notably, Hoenig’s framework would abandon references to size thresholds, but would instead grant regulatory relief to banks that: (i) hold no trading assets or liabilities; (ii) hold no derivatives positions other than interest rate and foreign exchange derivatives; (iii) have a total notional value of all their derivatives exposures (including cleared and non-cleared derivatives) of less than $8 billion; and (iv) maintain a ratio of GAAP tangible equity-to-assets of at least 10 percent. He suggested that such banks should potentially be exempt from Basel capital standards, stress testing requirements, and certain reporting requirements.

View Vice Chairman Hoenig’s speech. 

The US Board of Governors of the Federal Reserve System's Division of Banking Supervision and Regulation and Basel Coordination Committee issued a bulletin that provides supervisory guidance with respect to the issuance of the Basel Committee on Banking Supervision’s second consultative paper published on March 4, 2016, “Standardised Measurement Approach for Operational Risk.”
The BCBS paper proposes certain revisions applicable to large, internationally active banking organizations, including a non-model-based method for calculating operational risk-weighted assets and a withdrawal of the advanced measurement approaches (AMA) for operational risk from the Basel capital framework. In its bulletin, the Federal Reserve Board states that it will consider the BCBS proposals in connection with the US advanced approaches risk-based capital rule in a manner consistent with the US notice and comment process, during which time the existing AMA capital requirements will remain in effect.

View the Federal Reserve Board guidance.   

The European Banking Authority published a consultation paper proposing amendments to the regulatory technical standards for determining proxy spread and the specification of a limited number of smaller portfolios for credit valuation adjustment risk under the Capital Requirements Regulation. On February 25, 2015, the EBA published a report on the relevance of the RTS provisions. In particular, the EBA focused on a CVA data collection exercise of 32 banks from 11 jurisdictions. The EBA concluded, based on the collection exercise, that there were difficulties in determining appropriate proxy spreads and market loss given default for a large number of counterparties because spreads may never be observed on markets. The amending RTS provides alternative approaches for the purpose of identifying appropriate proxy spread and market loss given default, in response to the issues outlined in the previous EBA report. The consultation invites responses on whether the amendments address the issues raised in the previous EBA report and whether the amendments are needed. Responses to the consultation are due by July 6, 2016. 

View the EBA consultation.

The Basel Committee on Banking Supervision published proposals to revise the existing leverage ratio framework. The proposals include amendments to the : (i) measurement of derivative exposures by adopting a modified version of the standardized approach for measuring counterparty credit risk exposures; (ii) treatment of regular-way purchases and sales of financial assets so as to achieve consistency across accounting standards; (iii) treatment of provisions; and (iv) credit conversion factors for off-balance sheet items by aligning them with the standardized approach to credit risk.  In addition, the Basel Committee proposes to impose additional requirements on global systemically important banks, setting out options, including whether the additional requirement should apply uniformly to all G-SIBs or be tailored and whether the form should be a higher minimum requirement or a buffer requirement. Responses to the consultation are due by July 6, 2016. The Basel Committee intends to finalize the revised leverage ratio requirement in 2016 so as to allow time for its implementation by January 1, 2018. 

View the consultation paper.

The US Board of Governors of the Federal Reserve System proposed changes to various reporting forms, including FR Y-7N, FR Y‑7NS and FR Y-7Q, requiring collection of fourteen new data items to monitor compliance with enhanced prudential standards for foreign banking organizations. The new data items, adopted pursuant to Subparts N and O of Regulation YY, would be used to determine whether an FBO with total consolidated assets of $50 billion or more meets capital adequacy standards at the consolidated parent company level that are consistent with the Basel capital framework.

The proposed revisions would be effective September 30, 2016, and, for certain items, March 31, 2018. Comments to the Federal Reserve Board proposal are due by June 3, 2016.

View the proposal.   

The US Board of Governors of the Federal Reserve System released a final rule that would permit certain US general obligation state and municipal securities to count towards the high-quality liquid assets (HQLA) that large banking organizations may use to satisfy the liquidity coverage ratio (LCR) requirement. The LCR, as adopted by the federal banking agencies in September 2014, requires large banking organizations to hold a minimum amount of HQLA no less than their total net cash outflow amount over a 30-day forward-looking period of significant financial stress. Specifically, the final rule allows certain investment-grade, US general obligation state and municipal securities to qualify as HQLA up to certain levels if they meet the same liquidity criteria that currently apply to corporate debt securities. Although the LCR rule did not initially allow US municipal securities to be treated as HQLA, the Federal Reserve noted that subsequent analysis suggested that certain US municipal securities should qualify as HQLA because they have liquidity characteristics similar to other classes of HQLA, including corporate debt securities, and thus should receive similar treatment. The rule goes into effect on July 1, 2016. While the US LCR rule was an interagency rulemaking with substantively identical rules implemented by the Federal Reserve, the US Federal Deposit Insurance Corporation, and the US Office of the Comptroller of the Currency, neither the OCC nor the FDIC issued a similar rule with respect to the treatment of municipal securities as HQLA.

View the Final Rule.

In early April, the Federal Reserve Bank of New York released a staff report entitled “Organizational Complexity and Balance Sheet Management in Global Banks,” which analyzes the evolution of banks from standalone institutions to being subsidiaries of complex financial conglomerates. The paper suggests the organizational complexity of the family of a bank is a fundamental driver of the business model of the bank itself, as reflected in the management of the bank’s own balance sheet. Based on microdata on global banks with branch operations in the United States, the report shows that branches of conglomerates in more complex families have a markedly lower lending sensitivity to funding shocks. The balance sheet management strategies of banks are very much determined by the structure of the organizations the banks belong to and the complexity of the conglomerate can change the scale of the lending channel for a large global bank by more than 30 percent.

View the New York Fed staff report. 

In early April, the Board of Governors of the Federal Reserve System's Divisions of Research and Statistics and Monetary Affairs released a staff working paper entitled “Bank Regulation under Fire Sale Externalities,” addressing the optimal design of, and interaction between, capital and liquidity regulations in a model characterized by fire sale externalities. In particular, the authors analyze whether it suffices to introduce capital regulations alone and let banks freely choose their liquidity ratios or whether liquidity also needs to be regulated. The results of the study indicate that the pre-Basel III regulatory framework, with its reliance only on capital requirements, was inefficient and ineffective in addressing systemic instability caused by fire sales. The paper notes that capital requirements can lead to less severe fire sales by forcing banks to reduce risky assets, however, it also shows that banks respond to stricter capital requirements by decreasing their liquidity ratios. Anticipating this response, the regulator preemptively sets capital ratios at high levels and ultimately, this interplay between banks and the regulator leads to inefficiently low levels of risky assets and liquidity. The paper concludes that macroprudential liquidity requirements that complement capital regulations, as in Basel III, restore constrained efficiency, improve financial stability and allow for a higher level of investment in risky assets.

View the Federal Reserve Board staff working paper. 

The Basel Committee on Banking Supervision published a second report on banking book risk-weighted asset valuation. The report forms part of the Regulatory Consistency Assessment Programme with the aim of effecting full implementation of the Basel III framework. The Committee's first report in 2013 focused on probability of default and loss-given-estimates for sovereign, bank and corporate exposures. This second report examines the variability of RWA in banks that use internal models to calculate their risk regulatory capital requirements.

Read more.

The European Securities and Markets Authority published its final report on Guidelines on the sound remuneration policies under the Units in Collective Undertakings Directive and the Alternative Investment Fund Managers Directive, including the final Remuneration Guidelines under UCITS V and revised Remuneration Guidelines under the AIFMD. ESMA also published a letter addressed to the European Commission, the European Parliament and the Council of the European Union in which ESMA recommends that legislation is required to provide clarity on the application of the proportionality principle to the remuneration requirements under EU laws.  
 

A Commission Implementing Regulation which amends implementing technical standards on supervisory reporting of institutions as regards the reporting of the leverage ratio, was published in the Official Journal of the European Union. The ITS amends the requirement to report the leverage ratio to regulators under the Capital Requirements Regulation. The amending ITS updates prescribed notional values for institutions and derivatives traded to which certain reporting requirements are attached. The amending ITS provides updated leverage reporting ratio templates and instructions for completing the templates. The amending ITS enters into force on April 20, 2016. The regulation shall apply from the first reporting reference date six months from the date of publication in the Official Journal of the European Union.  

View the ITS. 

The Prudential Regulation Authority published proposals on minimum standards for firms when underwriting buy-to-let contracts. The proposals would apply to all PRA-regulated firms undertaking buy-to-let lending that are not subject to regulation by the Financial Conduct Authority. The PRA is proposing that such firms be required to use an affordability test when assessing a buy-to-let mortgage contract as an interest coverage ratio test and/or an income affordability test. In addition, a standard set of variables would be established that would need to be shown in the tests. 

In addition, the PRA has proposed clarification on the application of the small and medium-sized enterprise supporting factor on buy-to-let mortgages which would apply to all firms subject to the Capital Requirements Regulation.  Under the CRR, the SME supporting factor is used to reduce the capital requirements on loans to SMEs on qualifying retail, corporate and real estate exposures. The PRA's view is that buy-to-let borrowing is not included in that reduction and the PRA expects firms to consider the purpose of a loan before applying the SME supporting factor. The consultation closes on June 29, 2016.

View the consultation paper.

The Bank of England released details of the UK 2016 banking stress test, the first to be designed under the new approach to stress testing published in October 2015. The 2016 stress test will cover seven UK banks and building societies: Barclays plc, HSBC Holdings plc, Lloyds Banking Group plc, Nationwide Building Society, The Royal Bank of Scotland Group plc, Santander UK plc and Standard Chartered plc. These are the same firms that participated in the 2015 stress test. The stress test will consist of a macroeconomic stress scenario, a traded-risk stress scenario, a misconduct costs stress and an annual cyclical scenario. The results of the stress test will be published in Q4 2016. 

View details of the UK 2016 stress test.

The Financial Policy Committee of the Bank of England published a Statement from its policy meeting on March 23, 2016. The Statement summarizes the conclusions reached by the FPC. The FPC has decided to increase the UK countercyclical buffer rate from 0% of risk-weighted assets to 0.5% with effect from March 29, 2017. The current overlapping aspects of Pillar 2 supervisory capital buffers will be reduced at the same time as a one-off adjustment. The UK CCyB rate will apply to all UK banks and building societies as well as investment firms not exempted by the Financial Conduct Authority. According to the rules of the European Systemic Risk Board, this buffer will also apply to EU banks lending into the UK either on a cross-border basis or through a local branch. The Prudential Regulation Authority has published a Statement clarifying its approach to adjustments to firms' buffers as the CCyB, systemic and conservation buffers are implemented up to 2019. The PRA intends to ensure that the supervisory buffers will be reduced as soon as practicable after the CCyB rate comes into effect which will depend on the timing of a firm's supervisory review and evaluation process. The adjustments aim to ensure that the transition to the new capital framework avoids double counting in capital buffers covering the same risk and give firms time to transition to the requisite capital buffers by the end of 2019. 

The FPC will also assess the implementation and design of internationally-agreed post-crisis regulations to determine whether liquidity could be enhanced. The outcome of that assessment is expected later in 2016.

View the FPC Statement.

View the PRA Statement.

The Basel Committee on Banking Supervision launched a consultation on changes to the advanced internal ratings based approach and the foundation IRB approach so as to reduce variation in capital requirements for credit risk. The Basel Committee is proposing to: (i) remove the IRB approaches for certain portfolios which will then be subject to the standardized approach to credit risk; (ii) remove the option to use the advanced IRB approach for exposures to corporates that are part of consolidated groups that have annual revenues of more than EUR 200m; (iii) remove the IRB approaches for specialized lending that use banks' estimates of model parameters; and (iv) introduce a floor to the internal model method for counterparty credit risk based on a percentage of the applicable standardized approach. The consultation closes on June 24, 2016. The Basel Committee has committed to finalizing all the proposed changes to the IRB approaches by the end of 2016. 

View the consultation paper.

The European Central Bank Regulation on the exercise of options and discretions relating to the prudential requirements for credit institutions was published in the Official Journal of the European Union. The prudential treatment of options and discretions by regulators is outlined in the Capital Requirements Directive and the Capital Requirements Regulation, known collectively as CRD IV. The ECB is the prudential regulator for Eurozone banks and directly supervises the large Eurozone banks under the Single Supervisory Mechanism, designated as "significant credit institutions". The ECB Regulation sets out the waivers, options and discretions that the ECB has decided to apply to significant credit institutions in its capacity as the prudential regulator of these firms, and which will replace those adapted by the national regulators. The waivers and discretion cover own funds, capital requirements, liquidity and large exposures. The ECB Regulation will apply, subject to limited exceptions, from October 1, 2016, although transitional provisions have been included so that existing national provisions will apply until the ECB sets a common approach for those waivers and discretions not covered in this Regulation. The ECB also published its Guide to harmonizing the exercise of options and discretions regarding the prudential supervision of credit institutions. 

View the ECB Regulation.

View the ECB Guide. 

​The European Banking Authority published a report on the Small and Medium-sized Enterprise Supporting Factor. The SME SF was introduced by the Capital Requirements Regulation to counterbalance the rise in capital requirements resulting from the Capital Conservative Buffer whilst providing an adequate flow of credit to SMEs. The report provides: (i) analysis of the lending trends and conditions for SMEs; (ii) analysis of the effective riskiness of EU SMEs over a full economic cycle; and (iii) the consistency of funds requirements laid down in the CRR for credit risk to SME's. The EBA has concluded that there is currently not enough evidence to suggest that the SME SF has provided additional stimulus for lending to SMEs as compared to larger corporate entities. However, the EBA has also recognised that it may be too early to make strong conclusions based on the current analysis. The EBA makes four recommendations: (i) continued monitoring and a reassessment of the SME SF so as to understand its impact on lending; (ii) a more comprehensive approach for the review of risk weights; (iii) review of the amount owed limit criterion and in the application of the SME SF to understand its purpose and costs of application; and (iv) harmonisation of the SME definition in the CRR.

View the EBA's Report. 

The European Banking Authority launched a consultation on reporting financial information across EU jurisdictions using national Financial Supervisory Reporting Generally Accepted Accounting Practices (GAAP). The EBA reported that institutions across the EU have identified issues with current templates. The consultation has been decentralised so that all questions and feedback on the draft template are provided to jurisdiction specific Regulators and not through the EBA. The EBA believes it will benefit from the expertise of authorities from different jurisdictions given their knowledge of the local GAAP. The consultation follows from a previous consultation in December, 2015, on proposed changes to the FINREP based on the IFRS 9 requirements. Responses to the consultation are due by April 15, 2016. The EBA stated that it will release a subsequent updated version of the FINREP. 

View the EBA press release.

View the draft FINREP GAAP template.

The European Council announced that it had agreed to extend an exemption for commodity dealers under the Capital Requirements Regulation, until December 31, 2020. The CRR currently exempts commodity dealers from large exposures requirements and own fund requirements until December 31, 2017. That date was set on the basis that the Commission would have conducted a review of the prudential regime applicable to commodity dealers and to investment firms by the end of 2015 and, if appropriate, proposed a legislative regime adapted for the risk profile of commodity dealers and investment firms. The Commissions' review is still in progress. The European Commission published its proposed legislative amendments to the CRR in December 2015 on the basis that the extension will avoid the need for relevant firms to temporarily comply with the full CRR requirements in 2018 before being subsequently moved to a tailored regime within two to three years.

The European Banking Authority published a consultation paper on standardised methods to compute capital requirements for general interest rate risk under the Capital Requirements Regulation. The CRR provides for two standardised methods, the so-called Maturity-Based calculation for general interest risk and the Duration-Based calculation of general risk. The Duration-Based calculation uses the concept of Modified Duration which is valid only for instruments not subject to repayment risk. Modified Duration is used to measure the sensitivity in price for a unit change in its internal rate of return of any financial asset that consists of fixed cash flows. A correction to the duration is necessary to reflect the repayment risk. The CRR provides the mandate for the EBA to issue guidelines on how the Modified Duration for debt instruments which are subject to repayment risk should be corrected. The EBA proposes two approaches to correct the Modified Duration calculation: (i) treat the debt instrument with repayment risk as if it was a combination of a plain vanilla bond and an embedded bond; or (ii) calculate directly the change in value of the whole instrument subject to repayment risk resulting from a 100 basis point movement in Interest Rates. Submissions to the consultation are due by June 22, 2016.

View the Consultation Paper. 

The US Board of Governors of the Federal Reserve System approved the application by Goldman Sachs Bank USA under the Bank Merger Act to assume substantially all (approximately $17 billion) of the deposit liabilities and certain assets of GE Capital Bank, a subsidiary of General Electric Corporation, including assets GE Bank uses to manage its online deposit-taking platform. The acquisition was announced in August 2015, and the Federal Reserve Board extended processing of GS Bank’s application in light of numerous public comments that challenged the transaction on various grounds, including that GS is already too big to fail. In approving the transaction, among other findings, the Federal Reserve Board concluded that the transaction would have a negligible impact on the systemic footprint of GS (which has approximately $860 billion in total assets) and would improve the stability of funding available to GS Bank by diversifying its sources of funding.

View the Federal Reserve Board order.  

As part of the Federal Reserve Bank of New York’s Conference on Bank Supervision, senior officials of several US bank regulatory agencies delivered remarks regarding the effectiveness of bank supervision and key components of the bank supervisory process. In the conference’s opening remarks, NY Fed President William Dudley noted the importance of distinguishing between effective and ineffective supervision, particularly given the confidential nature of the bank supervisory process. Federal Deposit Insurance Corporation Vice Chairman Thomas Hoenig subsequently noted several critical features of successful oversight of financial institutions including: (i) subjecting commercial banks of all sizes to full-scope examinations, (ii) having regulators require that the largest banks disclose important supervisory findings to allow the public to better understand their financial condition and (iii) recognition by supervisors of their limits and emphasizing that banks hold sufficient capital to backstop management mistakes and bad luck.

View President Dudley’s speech.

View Vice Chairman Hoenig’s speech.   

The Federal Deposit Insurance Corporation adopted a final rule to increase the Deposit Insurance Fund to the statutorily required minimum level of 1.35 percent. Subject to certain minor changes, the rule largely mirrors the proposed rule, which was published for comment in November.

The primary purposes of the DIF are to protect the depositors of insured banks and to resolve failed banks. The Dodd-Frank Act increased the minimum for the DIF reserve ratio, the ratio of the amount in the fund to insured deposits, from 1.15 percent to 1.35 percent and required that the ratio reach that level by September 30, 2020. The reserve ratio at the end of 2015 was 1.11 percent, with a DIF balance of $72.6 billion.

The DIF is funded mainly through quarterly assessments on insured banks. Pursuant to a 2011 FDIC rule, regular assessment rates for all banks will decrease when the reserve ratio reaches 1.15 percent, which the FDIC anticipates will occur in the first half of 2016. Banks with total assets of less than $10 billion will have substantially lower assessment rates under the 2011 rule. The final rule will impose on banks with at least $10 billion in assets a surcharge of 4.5 cents per $100 of their assessment base, after making certain adjustments. The FDIC expects the reserve ratio will likely reach 1.35 percent after approximately two years of payments of the surcharges.

The final rule will become effective on July 1. If the reserve ratio reaches 1.15 percent before that date, surcharges will begin July 1. If the reserve ratio has not reached 1.15 percent by that date, surcharges will begin the first quarter after the reserve ratio reaches 1.15 percent.

View the final rule. 

At an American Bankers’ Association Conference in Washington, DC, US Senate Banking Committee Chairman Richard Shelby and US House of Representatives Financial Services Committee Chairman Jeb Hensarling both raised concerns regarding the current regulatory regime and certain requirements under the Dodd-Frank Wall Street Reform and Consumer Protection Act. Among other things, Chairman Shelby addressed the costs and burdens of financial regulation under the Dodd-Frank Act, specifically criticizing the $50 billion threshold for identifying systemically important financial institutions, and noted plans to continue to push his regulatory relief bill, The Financial Regulatory Improvement Act of 2015, through the Senate. Chairman Hensarling also outlined proposed legislation that would reform the Dodd-Frank Act, including eliminating certain Dodd-Frank Act and Basel III requirements for banks that hold higher levels of capital.

View Chairman Shelby’s remarks.

View coverage of Chairman Hensarling’s remarks.   

The US Office of the Comptroller of the Currency issued a notice of proposed rulemaking that would remove outdated or unnecessary provisions of certain OCC rules to reduce the regulatory burden on national banks and federal savings associations subject to the rules. The proposed rulemaking is part of the OCC’s review of its rules required by the Economic Growth and Regulatory Paperwork Reduction Act (EGRPRA) every ten years. The proposed rule was developed following outreach to the industry conducted by the OCC individually and in connection with other US banking regulators. The proposed rule would make the following changes to OCC rules, among others: remove notice and approval requirements for certain changes in permanent capital involving national banks; remove certain financial disclosure requirements for national banks and remove certain unnecessary regulatory reporting, accounting and management policy requirements for federal savings associations. The proposed rule is open for comment for 60 days.

View proposed rule. 

The Basel Committee on Banking Supervision launched a proposed consolidated and enhanced framework for Pillar 3 disclosures under Basel III. The Basel Committee announced in June 2014 that it was undertaking a review of Pillar 3.  In January, it issued its revised Pillar 3 disclosure requirements, completing the first phase of the review. 
 

Commission Implementing Regulation was published in the Official Journal of the European Union, which amends the Implementing Technical Standards on supervisory reporting by providing for significant changes to the existing Liquidity Coverage Ratio reporting requirements under the Capital Requirements Regulation. The amending ITS introduce the templates and a large number of new data items necessary following the LCR requirements being implemented for credit institutions in January 2015. The European Banking Authority published its final draft amending ITS in June 2015. The changes include new templates and instructions for banks on capturing and reporting all necessary LCR items. The new templates cover liquid assets, outflows, inflows, collateral swaps and calculation of the LCR. The new instructions will only apply to banks; investment firms will continue to use current instructions and templates, at least for now. The amended ITS on supervisory reporting will apply from September 10, 2016. 

View the amending ITS.

The US Office of Financial Research (OFR) published a working paper using data on the credit default swap (CDS) market to assess the impact of a counterparty default on banks and the financial system as a whole. Using data from the Depository Trust & Clearing Corporation, the paper applies the supervisory scenarios of the Federal Reserve’s Comprehensive Capital Analysis and Review (CCAR) to CDS markets as a proxy for banks’ trading books. The working paper finds that the indirect effects of the default of a bank’s largest counterparty on the bank’s other counterparties are more significant than the impact on the bank itself. Moreover, the paper finds that, when looking at the financial system as a whole, banks may realize greater losses from the failure of a counterparty shared by the industry when compared to losses from the failure of the individual bank’s largest counterparty. The report concludes that CCAR does not take into account the losses that occur to other counterparties of a banking organization as a result of the default of its largest counterparty, nor does it take into account the large counterparty exposures that exist for the core financial system as a whole.

View working paper.

The European Banking Authority published final draft Implementing Technical Standards to amend the ITS on supervisory reporting under the Capital Requirements Regulation. The amending ITS make changes to the reporting templates and instructions in Annexes I to VII and IX of the ITS on supervisory reporting which cover financial reporting, solvency (own funds requirements), large exposures and losses resulting from lending collateralized by immovable property. Given the scope of the changes, the EBA is proposing to replace entirely the affected annexes. The EBA considers that the amendments are necessary to align the ITS with the answers in the Single Rulebook Q&As, to correct legal references and a few clerical errors. There has been no public consultation on the proposed changes. The amending ITS will need to be approved by the European Commission, European Parliament and Council of the European Union before they can come into effect. The EBA expects that the amendments will be applicable from the December 31, 2016 reporting reference date.

View the amending ITS.

View the revised annexes and the annexes in tracked changes. 

An open letter from Mark Carney, Governor, Bank of England, to Andrew Tyrie, Chairman, Treasury Select Committee, on the effect of UK's EU membership on the Bank of England's statutory objectives was published. The letter was in response to the Committee's request for comment on the recent settlement agreement between the UK and the EU. The letter summarizes the findings that were made in a BoE report and the possible future impact of the settlement agreement. The BoE's primary objectives are monetary and financial stability. The three main areas in which the BoE's objectives are currently effected by EU membership are: (i) it provides dynamism in the UK economy through increased economic and financial openness; (ii) it increases the UK’s exposure to economic and financial shocks from other nations, in particular the EU; and (iii) the BoE is required to implement EU law, regulations and directives in its regulations and policy instruments. Mr Carney concludes that the settlement agreement provides a number of protections and additional tools that would protect the BoE's ability to achieve its statutory objectives. Implementation of the settlement agreement, through changes to various EU regulations and directives, is proposed to take place only if the outcome of the UK referendum on EU membership (so called "Brexit") is a vote to remain. The referendum is scheduled for June 23, 2016.

View the letter.

View the settlement agreement. 

View the report. 

Commission Implementing Regulation was published in the Official Journal of the European Union, which amends the Implementing Technical Standards on supervisory reporting by providing for additional monitoring metrics for liquidity reporting.  Under the Capital Requirements Regulation, banks are subject to liquidity reporting requirements.  To increase effective liquidity supervision, the amended ITS provide for additional monitoring metrics to enhance regulator's view of a bank's liquidity position, proportionate to the nature, scale and complexity of the bank's activities. Additional monitoring metrics to be reported now include those metrics based on the concentration of funding by counterparty and product type and metrics based on the concentration of counterbalancing capacity by issuer or counterparty. In addition, the frequency of reporting can be reduced, depending on the nature of the bank. The amended ITS enters into force on March 25, 2016.

View the Regulation. 

The US Federal Deposit Insurance Corporation, Office of the Comptroller of the Currency, Board of Governors of the Federal Reserve System, Securities and Exchange Commission and Commodity Futures Trading Commission (VR Agencies) issued a Frequently Asked Question (FAQ) to clarify the capital treatment of certain collateralized debt obligations backed by trust preferred securities (TruPS CDOs). Specifically, the FAQ clarified that a banking entity is not required to deduct from its tier 1 capital a qualifying TruPS CDO that is retained under section 248.16(a) of the January 2014 interim final rule published by the VR Agencies. The January 2014 interim final rule provides an exemption that would permit a banking entity to retain an interest in, or act as sponsor of, a covered fund that issues TruPS CDOs subject to certain requirements, including that the issuer must have been established prior to May 19, 2010, and the banking entity’s interest must have been acquired on or before December 10, 2013. However, a banking entity would be required to deduct from tier 1 capital its interests in qualifying TruPS CDOs when it acts as a market maker for the interests of such TruPS CDOs and investments in TruPS CDOs that are covered funds but are otherwise not qualifying TruPS CDOs.

View the FAQ.

The US Board of Governors of the Federal Reserve System re-proposed rules that would establish single counterparty credit limits for domestic and foreign bank holding companies, as well as US intermediate holding companies, with $50 billion or more in total consolidated assets. The Federal Reserve also released a quantitative impact study that sets out the conceptual and quantitative foundations for the tighter limits on exposures between systemically important financial institutions. The proposed rule implements section 165(e) of the Dodd-Frank Act which authorizes the Federal Reserve to establish limits on the amount of credit exposure that large domestic banking organizations, foreign banking organizations and US intermediate holding companies (covered institutions) can have to a single unaffiliated counterparty in order to limit the risks in the event of a failure at any such individual firm. The proposed rule builds on earlier proposals for single counterparty credit limits for domestic and foreign banking organizations issued by the Federal Reserve in December 2011 and December 2012 and the Basel Committee on Banking Supervision’s 2014 large exposures framework. Comments on the proposed rule are due by June 3, 2016.

View proposed rule.

View quantitative impact study.

The European Banking Authority launched a consultation on proposed amendments to the Implementing Technical Standards on supervisory reporting to incorporate the new requirements for prudent valuation reporting and supplementary requirements for reporting of credit risk information. Under the Capital Requirements Regulation, firms are subject to requirements on prudent valuation adjustments of fair-valued positions. The Regulatory Technical Standards on prudent valuation came into force on February 16, 2016 and cover the methodology for calculating Additional Valuation Adjustments, consideration to be given to available market data and the simplified and core approaches for the determination of AVA. According to the EBA, the entry into force of the RTS justifies more detailed reporting requirements for prudent valuation than have been required to date. In addition, the EBA is proposing that firms report credit risk on a total level as well as on a country level only. Responses to the consultation are due by March 30, 2016. 

View the EBA consultation paper.
 
View the ITS on supervisory reporting.
 
View the RTS on prudent valuation. 

The Basel Committee on Banking Supervision published proposals to revise the standards for operational risk for internationally active banks. The Basel Committee consulted in 2014 on a revised Standardized Approach to operational risk and simultaneously undertook a review of the Advanced Measurement Approach for operational risk. The Basel Committee is proposing to replace the AMA from the Basel framework as well as the three existing Standardized Approaches with a Standardized Measurement Approach. The new SMA is not based on any modelling and would set a standardized approach for measuring operational risk for regulatory capital purposes which would include risk sensitivity by using a bank's financial statement information and its internal loss experience. The Basel Committee introduced the AMA for operational risk in 2006 as part of the Basel II framework. The AMA allows regulatory capital to be estimated using a range of internal modelling practices subject to approval by the bank's regulator. Comments on the proposals are due by June 3, 2016. The Basel Committee intends to provide further details on the timeline for withdrawal of the AMA and implementation of the SMA during the course of 2016. 

View th consultation paper. 

The US Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency and the Board of Governors of the Federal Reserve System issued interagency guidance on funds transfer pricing (FTP) practices related to funding risk and contingent liquidity risk for large financial institutions (i.e., domestic institutions with $250 billion or more in assets and foreign institutions with $250 billion or more in US assets). The interagency guidance describes four overarching principles that banks should use to develop, implement and maintain an effective FTP framework: (i) allocate FTP costs and benefits on funding risk and contingent liquidity risk; (ii) have a consistent and transparent FTP framework for identifying and allocating FTP costs and benefits on a timely basis and at a sufficiently granular level, commensurate with the firm’s size, complexity, business activities and overall risk profile; (iii) have a robust FTP governance structure including the production of a report on FTP and oversight from a senior management group and central management function; and (iv) align business incentives with risk management and strategic objectives by incorporating FTP costs and benefits into product pricing, business metrics and new product approval. The guidance notes that an institution’s FTP framework should be adequately tailored to its size, complexity, business activities and overall risk profile.

View interagency guidance.

The European Banking Authority published its report on the functioning of supervisory colleges in 2015. The report sets out the EBA's annual assessment of how well the supervisory colleges have met the action plan for 2015. The EU supervisory colleges make joint decisions on capital, liquidity and recovery plans for EU cross-border banking groups. The EBA considers that, generally, there were significant improvements, particularly when it came to the reorganization of supervisory colleges following the introduction of the Single Supervisory Mechanism in 2014, the frequency of interaction and the quality of supervisory colleges. However, the EBA notes that some areas still require work, such as the joint decision processes, quality of joint decision documents and requests for individual recovery plans outside the joint decision process. The report also includes the EBA's action plan for supervisory colleges in 2016. The plan sets out the focus areas for supervisory colleges which are: on going balance sheet cleaning, reduction of non-performing loans for legacy portfolios, the sustainability of banks' business models, conduct risk and IT risk.
 
View the EBA's Report.

The US Office of the Comptroller of the Currency, the US Board of Governors of the Federal Reserve System and the US Federal Deposit Insurance Corporation jointly issued and requested public comment on interim final rules to implement section 83001 of the Fixing America’s Surface Transportation Act, or FAST Act, which permitted the agencies to expand the on-site examination schedule for qualifying insured depository institutions with less than $1 billion in total assets to once every 18 months from once every 12 months. The interim final rules make parallel changes to the regulations of the federal agencies regarding on-site examination cycles for US branches and agencies of foreign banks with total assets of less than $1 billion. Under the interim final rules, the number of institutions that may qualify for an expanded 18-month examination cycle increased by 617, to close to 5,000 banks and savings associations. In addition, the number of US branches and agencies of foreign banks that may qualify for the 18-month examination cycle increased by 26 branches and agencies to a 89 branches and agencies. The interim final rules are effective on February 29, 2016. Comments on the rules must be received by April 29, 2016.

View the full text of the rules.
 

The US Office of the Comptroller of the Currency published a bulletin summarizing its process for initiating and proceeding with any enforcement action for noncompliance with Bank Secrecy Act compliance program requirements or repeated or uncorrected BSA compliance problems. The OCC bulletin supplements the “Interagency Statement on Enforcement of Bank Secrecy Act/Anti-Money Laundering Requirements” and rescinds OCC Bulletin 2005-45, “Process for Taking Administrative Enforcement Actions Against Banks Based on BSA Violations,” dated December 23, 2005. The revised OCC bulletin describes the OCC’s process for conducting administrative enforcement actions based on BSAcompliance issues, which, in each case, begins with a cease-and-desist order issued by the OCC. Pursuant to the OCC bulletin, the enforcement action process now includes a provision which requires the OCC to give any bank investigated by the OCC for noncompliance with BSA or anti-money laundering requirements an opportunity to respond before the
decision to issue a cease-and-desist order is finalized. In each case, the OCC will notify the Financial Crimes Enforcement Network of all formal and informal enforcement actions.

View the OCC bulletin.
 

The Prudential Regulation Authority and Financial Conduct Authority jointly announced that they will comply with all aspects of the European Banking Authority's Guidelines on Sound Remuneration Policies published in December 2015, save for the approach related to the Bonus Cap. The Bonus Cap approach relates to provisions that establish that the limit on awarding variable remuneration to 100% of fixed remuneration, or 200% with shareholder approval must be applied to all firms subject to the Capital Requirements Directive. The PRA and FCA favor a risk-based approach in the application of the Bonus Cap, which under CRD principles allows for firms to comply in a way that is proportionate and appropriate to the firm's size, internal organisation, nature, scope and complexity of business. As the EBA Guidelines represent an interpretation of the CRD with which the PRA and FCA do not agree, the PRA and FCA will continue to use the current approach which requires smaller firms to determine an appropriate ratio between fixed and variable remuneration. The Guidelines are applicable to banks and investment firms and cover all staff, with particular aspects focusing on staff whose professional activities have a material impact on a firm's risk profile. The Guidelines set out detailed requirements for remuneration policies and related governance arrangements for implementing remuneration policies and apply from January 1, 2017.
 
View the EBA's Guidelines on Sound Remuneration Policies.
 
View the PRA and FCA's joint statement.

The US Office of the Comptroller of the Currency published revisions to its policy for assessing civil money penalties as set forth in its Policies and Procedures Manual. The revised PPM, titled “Civil Money Penalties,” replaces the PPM of the same title issued in June 1993. The revised PPM sets forth the OCC’s policies and procedures when assessing civil money penalties against entities such as institution-affiliated parties, national banks, federal savings associations, federal branches and agencies, and bank service companies and service providers.

View the full text of the OCC PPM.
 

The Prudential Regulation Authority published a final Policy Statement, Supervisory Statement and Rules for the internal governance of branches of non-EEA banks and PRA-designated investment firms. The PRA consulted in 2015 on its proposed changes, which centre around creating a separate PRA Rulebook. These changes follow the split of the Financial Services Authority into the PRA and the FCA, after which the PRA inherited materials from the FSA to create a Rulebook which contains only PRA rules. The new Rules and Supervisory Statement set out how third country branches should comply with PRA requirements for internal governance of third country branches and cover general organizational requirements, responsibility of personnel, skills, knowledge and expertise of individuals, risk control, outsourcing and record keeping. The PRA has also aligned the final Rules and Supervisory Statement with the requirements for third country branches under the Senior Manager and Certification Regimes.  The Rules on internal governance of third country firms will apply from March 7, 2016, the same date from which the SM&CR applies for all firms.
 
View the PRA's Policy Statement.
 
View the PRA's Supervisory Statement.

The Payment Systems Regulator published an interim report following its market review into bank ownership and payment infrastructure competitiveness in the UK. The PSR's motivation to conduct the review stems from its statutory objective to promote competition and innovation in the market for payment systems and the services that the systems provide. The Report outlines the PSR's provisional finding that there is no effective competition in the central payment infrastructure market.

Read More.

The European Banking Authority has launched the next round of EU-wide bank stress tests and released the associated methodology and macroeconomic scenarios for its application. The test will involve a sample of 51 EU banks, covering 70% of the region's banking sector. The purpose of the test is to provide a common analytical framework for supervisors, banks and other market participants to assess and compare the stress of EU banks when faced with economic shocks. The common methodology of the test is to assess solvency and the main types of risk faced by EU banks: credit and securitization, market, sovereign, funding and operational and conduct risk. The adverse scenario posed by the test highlights the most material threats to the stability of the EU banking sector: (i) sudden increased risk compounded by a reduction in secondary market liquidity; (ii) weak profitability prospects; (iii) low nominal growth and rising debt sustainability concerns; and (iv) stress in the growing shadow banking sector fueled by liquidity risk. An EU-wide asset quality review will not be conducted before the 2016 test, as was the case in 2014. National regulators regularly assess asset quality as part of their supervisory work. The EBA has not set a single capital threshold. The EBA expects the results of the stress test to be published in the third quarter of 2016. The results will be used to assist the Supervisory Review and Evaluation Processes when determining appropriate capital resources. National regulators will review the results and determine whether any supervisory measure is necessary to address any capital shortfall. 

View the EBA press release and related documents.

The US Federal Deposit Insurance Corporation issued the “Quarterly Banking Profile” which summarized financial results for the fourth quarter of 2015 for commercial banks and savings institutions insured by the FDIC. As a general matter, FDIC-insured institutions reported aggregated net income of $40.8 billion in the fourth quarter of 2015, an increase of 11.9% (or $4.4 billion) from the previous year. In a statement, FDIC Chairman Martin J. Gruenberg noted that the banking industry improved on both revenue and income from the previous year, but noted that banks should remain vigilant to continued interest-rate risk, credit risk and evolving market conditions.

View more information on the FDIC Quarterly Banking Profile.

View the full text of Chairman Gruenberg’s statement.
 

The Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency jointly issued interim final rules that will allow certain well-capitalized and well‑managed insured depository institutions with less than $1 billion in total assets to qualify for an 18-month examination cycle, rather than a 12-month cycle. Institutions are considered to be well-capitalized and well-managed if they have a composite examination rating of 1 or 2—the top ratings in the five-point scale indicating the safety and soundness of a bank or savings association. 

The rules are estimated to increase the number of institutions that may qualify for an 18-month examination cycle by approximately 617, to nearly 5,000 insured depository institutions. In addition, the rules increase the number of US branches and agencies of foreign banks that may qualify for an 18-month examination cycle by 26 branches and agencies, to a total of 89. The changes are intended to reduce regulatory compliance costs for smaller institutions, while still maintaining safety and soundness protections. Comments to the rules will be accepted for 60 days from publication in the Federal Register.

View the interim final rules and request for comments. 

The Prudential Regulation Authority published policy statement outlining approach to identifying other systematically important institutions (i.e. institutions that are not classed as globally systematically important financial institutions but whose failure would have a significant negative effect on the UK financial system). The PRA is required to identify O-SIIs pursuant to the Capital Requirements Directive which implements the framework for domestic systemically important institutions developed by the Basel Committee for Banking Supervision.

Read More.

The European Central Bank launched a consultation on its proposed guide to the recognition of institutional protection schemes for prudential purposes. Under the Capital Requirements Regulation an IPS is a contractual or statutory liability arrangement of a group of banks which protects member institutions, in particular, by ensuring their liquidity and solvency. Certain waivers or relaxation of capital requirements are available for IPS member institutions under CRR.  In particular, CRR provides that the ECB may, subject to certain exceptions, allow credit institutions to apply a 0% risk weight to exposures to other counterparties whichare members of the same IPS. The ECB directly supervises the largest Eurozone banks for prudential purposes and overseas the prudential supervision by national regulators of the smaller Eurozone banks. The ECB's proposed guidelines set out how it intends to assess compliance of an IPS and its members with the requirements set out in the CRR. Responses to the consultation should be submitted by April 15, 2016. Once finalized, the final guidelines will be incorporated into the ECB Guide on options and discretions available in Union law (which is currently being finalized).
 
View the proposed guide.
 
View the ECB's consultation webpage.