The European Banking Authority published the details of its 2016 EU-wide stress test exercise that will be launched in the first quarter of 2016. The names of the 53 EU banks that will take part in the exercise have been published, of which 39 fall under the jurisdiction of the Single Supervisory Mechanism. The stress test will cover broadly more than 70% of the EU banking sector and will assess the ability of EU banks to meet relevant supervisory capital ratios in the event of adverse economic conditions. The EBA also published its draft methodological note for discussion together with a draft template to be used as part of the stress test exercise.  The results of the stress tests will be published in the third quarter of 2016.

View the press release.

The Financial Stability Board published an updated list of banks identified by the FSB and the Basel Committee on Banking Supervision as Global Systemically Important Banks. The list, which is updated on an annual basis, sets out 30 banks that are considered to be G-SIBs. Compared to the list of G-SIBs identified in 2014, China Construction Bank has been added and Banco Bilbao Vizcaya Argentaria has been removed. The next updated list will be published in 2016.
 
View the list of G-SIBs. 

The US Comptroller of the Currency, Thomas J. Curry, once more discussed the issue of increased credit risk confronting the federal banking system during the Risk Management Associations' Annual Risk Management Conference. He argued that credit quality issues are a rising concern because banks are beginning to increase their risk appetite and are taking on additional credit risk. He notes that credit risk is increasing in two forms: relaxed credit underwriting and increased loan concentrations. In his statement, Comptroller Curry recommended that banks take initiative to address concentration risk on their own and also review more closely their loan loss allowance levels to determine whether it is appropriate in relation to the level of credit risk within the bank's loan portfolio.

View Comptroller Curry's remarks.

The US Board of Governors of the Federal Reserve System proposed a rule, in consultation with the US Federal Deposit Insurance Corporation, requiring the largest US Global Systemically Important Banking Organizations (known as G-SIBs) and the US Intermediate Holding Companies of foreign G-SIBs to maintain a minimum amount of unsecured long-term debt and a minimum amount of “Total Loss-Absorbing Capacity” as a percentage of total risk-weighted assets. Generally, TLAC is intended to increase the resiliency of an organization by providing a significant capital buffer comprised of regulatory capital and certain eligible debt, together with related capital buffers. The long-term debt, once converted to equity, is aimed at absorbing losses and recapitalizing the covered entity's subsidiaries in resolution. There are four major components of the proposed rule: (i) external long-term debt and related TLAC requirements applicable to the top holding company of a US G-SIB; (ii) internal long-term debt and related TLAC requirements applicable to covered US IHCs; (iii) clean holding company requirements; and (iv) regulatory capital deductions applicable to certain investments in long term debt of covered G-SIBs. Additionally, the Federal Reserve Board is requesting comment on internal TLAC requirements for US G-SIBs. Once finalized, the rules would apply to 8 US G-SIBs and their related entities as well as IHCs controlled by non-US G-SIBs. Banking organizations covered by the rule would be required to comply with most of the proposed requirements by January 1, 2019. The calibration of the risk-weighted assets component of the external TLAC requirement would be phased in over a three-year period commencing on January 1, 2019.

View the proposed rulemaking.

The Federal Deposit Insurance Corporation issued for public comment a proposal to increase the reserve ratio of the Deposit Insurance Fund to the statutorily required minimum level of 1.35 percent. The Dodd-Frank Wall Street Reform and Consumer Protection Act increased the minimum for the reserve ratio from 1.15 percent to 1.35 percent and required the ratio to reach the new minimum by September 30, 2020. Moreover, the Dodd-Frank Act made this increase the responsibility of large banks with $10 billion or more in total assets. In effect, the proposed rule, if finalized, would impose upon banks a quarterly surcharge of 4.5 cents per $100 of their assessment base, with certain adjustments. It is expected that the surcharges will commence in 2016 and the reserve ratio would reach 1.35 percent following approximately eight quarters of payments of such surcharges (i.e. in advance of the required 2020 date). Comments on the proposed rule will be due 60 days after the rule is published in the Federal Register.

View the proposed rule.

View the FDIC Chairman’s statement.

The European Commission published a consultation on the possible impact of the maximum remuneration ratio rule for variable and fixed remuneration required by the Capital Requirements Directive. The consultation also addresses the overall efficiency of the remuneration rules as set out in the CRD and Capital Requirements Regulation, together known as CRD IV. The consultation aims to obtain views on the remuneration provisions of CRD IV, including on: (i) the efficiency, implementation and enforcement of the principle of proportionality, as well as the identification of any gaps arising from the application of the principle; (ii) compliance with the maximum ratio rule for variable and fixed remuneration as prescribed by the CRD; and (iii) the impact of the maximum ratio rule on competitiveness, financial stability and staff in non-EEA countries. The Commission must report back to the European Parliament and Council by June 30, 2016. Responses are due by January 14, 2016.
 
View the European Commission's consultation page.

View the consultation.

The Comptroller of the Currency, Thomas J. Curry, in a speech before the Exchequer Club, discussed the increasing credit risk in the federal banking system. Comptroller Curry believes the financial system is currently at a point in the market cycle where loan underwriting standards are weakening and credit risk is becoming an increasing point of focus. He stated, “...we should be asking whether banks have the appropriate risk management processes and structures in place to measure, monitor and control the increased credit risk they are taking on.”  In his remarks, the Comptroller mentioned leveraged lending and auto lending as two specific products of concern.

View the  press release.

View the Comptroller’s remarks.

The Bank of England published its approach to stress testing and evaluating the resilience of the UK banking system and set out its plans in this regard for the next three years. The BoE's approach will include the introduction of an annual cyclical scenario, assessing risks to the banking system that derive from financial cycles, taking into account domestic, global and markets elements. This annual cyclical scenario will include all PRA-regulated banks and building societies with total retail deposits greater than £50 billion, on an individual or consolidated basis, at a firm's financial year end date. Currently, this means the following firms will be included: Barclays plc, HSBC Holdings Group, Lloyds Banking Group, Nationwide Building Society, Royal Bank of Scotland Group, Santander UK plc and Standard Chartered Bank Group. UK subsidiaries of foreign-owned investment banks will be excluded. Every other year, the BoE will also biannually explore scenarios that are unrelated to the financial cycle and for which risks to financial stability and individual banks are deemed to be emerging. Therefore, in 2016, there will be a European Banking Authority stress test and a UK cyclical scenario test. In 2017, there will be both a UK cyclical and exploratory scenario test (for the first time). In 2018, the BoE intends to only run a UK cyclical scenario test. The results of the 2015 UK stress test are expected to be published on December 1, 2015.

View the BoE's approach to stress testing.

The European Commission published its report to the European Parliament and the Council on the capital requirements for covered bonds as incorporated in the Capital Requirements Regulation. Under CRR, for banks investing in covered bonds that meet certain criteria a preferential risk weights is applied. The Commission is required to report on the appropriateness of: (i) the preferential risk weights taking into account types of cover assets, level of transparency on the cover pool and the impact of the covered bond issuance on the issuer's unsecured creditors; (ii) extending the preferential risk weights to covered bonds secured by certain aircraft loans; (iii) including covered bonds guaranteed by residential loans as eligible assets; (iv) the derogation for covered bonds backed by securitization instruments; and (v) the derogation for covered bonds backed by other covered bonds. The Commission considers the European Banking Authority's recommendations on the EU covered bond framework published in 2014 and sets out where it agrees with those recommendations and its proposed steps to implement them, including consulting with stakeholders on proposed changes to the legislative requirements. The Commission's recent consultation on the EU's covered bond framework under the Capital Markets Union initiative is also relevant and will impact on how the capital treatment for covered bonds is revised.

View the Commission's Report.

View the EBA's Report.

 
The Prudential Regulation Authority launched a consultation on its proposed criteria and methodology for identifying other systemically 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. According to the Capital Requirements Directive, national regulators are required to identify O-SIIs that are banks, investment firms or mixed financial holding companies incorporated in their jurisdiction. That requirement derives from the Basel Committee on Banking Supervision framework for domestic systemically important banks or D-SIBs. In developing its proposals, the PRA states that it has to take into account the relevant EBA Guidelines on the assessment of O-SIIs. The PRA must identify as O-SIIs those firms whose distress or failure would have a systemic impact on the UK or EU economy or financial system due to size, importance, complexity, cross-border activity and interconnectedness. Firms that are designated as O-SIIs by the PRA will be subject to enhanced supervision by the PRA. However, the PRA considers that O-SIIs are likely to be those firms that are currently subject to PRA supervision as a Category 1 firm and therefore there will be minimal impact on the firms. The PRA intends to publish the first list of O-SIIs in Q1 2016 and thereafter annually by December 1, each year. The consultation is open until January 18, 2016. The PRA will publish its final Statement of Policy in Q1 2016.
 
View the PRA consultation paper.

The US Board of Governors of the Federal Reserve System issued guidance intended to clarify the criteria and process used by the Federal Reserve Board in determining whether to waive or to conduct pre-membership safety-and-soundness and consumer compliance examinations of insured depository institutions that are looking to either: (i) become state chartered member banks of the Federal Reserve System; or (ii) merge with another institution where a state member bank would be the surviving entity, including those with $10 billion or less in total consolidated assets. Specifically, the Federal Reserve Board stated that a state nonmember bank, national bank, or savings association seeking to convert its status to a state member bank will not generally be required to complete a safety-and-soundness or consumer compliance examination prior to the conversion if the institution seeking membership meets the criteria for "eligible bank," as set forth in the Federal Reserve Board’s Regulation H, together with certain additional safety and soundness criteria set forth in the guidance (collectively, the "eligibility criteria"). Under circumstances where an insured depository institution is looking to merge with another institution where a state member bank would be the surviving entity, a safety-and-soundness or consumer compliance examination of the insured depository institution will not be required so long as the state member bank meets all of the eligibility criteria on an existing and pro-forma basis.

View the guidance.

A Delegated Regulation correcting the text of the Regulatory Technical Standards on requirements for investor, sponsor, original lenders and originator institutions for exposures to transferred credit risk under the Capital Requirements Regulation was published in the Official Journal of the European Union. Minor errors were made in the RTS published in various languages of the EU, and the revisions correct such errors, including clarifying that materially relevant data does not have to be provided to investors at an individual loan level in all circumstances and that it may be sufficient to provide such data on an aggregate basis in certain circumstances. The Delegated Regulation enters into force on October 28, 2015.
 
View the Delegated Regulation.

The US Board of Governors of the Federal Reserve System announced the approval of the applications by Royal Bank of Canada and its subsidiary, RBC USA Holdco Corporation, to acquire City National Corporation and its wholly owned subsidiary, City National Bank, under section 3 of the Bank Holding Company Act. City National is a $33 billion banking organization. The Federal Reserve Board’s approval comes approximately seven months after submission of the application, which was the subject of comments opposing the application. On the same day, the Federal Reserve Board approved the application by Royal Bank of Canada to establish a limited federal branch in New Jersey. As a limited federal branch, it will only take deposits permitted to be taken by an Edge corporation under section 25A of the Federal Reserve Act.

View the press release announcing the approval of the acquisition.

View the Federal Reserve Board order approving the acquisition.

View the Federal Reserve Board press release approving the limited branch.

View the Federal Reserve Board order approving the limited branch.

The European Banking Authority published final translations of its Guidelines on the management of interest rate risk arising from non-trading activities, also known as interest rate risk in the banking book or IRRBB, which is the risk to firms arising from adverse movements in interest rates. Under the Capital Requirements Directive, national regulators must require a firm to take measures if its economic value declines by more than 20 per cent of their own funds as a result of a sudden and unexpected change in interest rates of 200 basis points which is termed supervisory "standard shock". National regulators must also take steps when a change occurs, as defined by the EBA in these Guidelines. The Guidelines set out the definition of such change and the methods for the calculation of the outcome of the supervisory "standard shock", which is the shock applied to a firm's portfolio to determine the impact on the economic value of the firm, as well as specify the identification, management and mitigation of IRRBB. The Guidelines apply from January 1, 2016. They will repeal the Guidelines of the Committee of European Banking Supervisors published in 2006. The Guidelines are addressed to national regulators and relevant credit institutions and investment firms. National regulators must notify the EBA by December 7, 2015 as to whether they comply or intend to comply with the Guidelines.
 
View the Guidelines.

The Basel Committee on Banking Supervision published a report relating to the regulatory consistency of Risk-Weighted Assets for counterparty credit risk. This report is part of the BCBS’s wider Regulatory Consistency Assessment Program, which is intended to ensure consistent implementation of the Basel III framework. The report examines variability in banks’ modeling of derivatives, specifically exposure modeling, by presenting findings from a hypothetical test portfolio exercise. The report concentrates on the internal models method and the advanced credit valuation adjustments risk capital charge for OTC derivative trades. This report completes the BCBS’s review, in respect of trading-related internal models, and follows two earlier exercises that focused on market risk RWAs that were published in January 2013 and December 2013. In the report, the BCBS presents key findings, lists a number of observed good practices, and highlights areas where banks and supervisors may seek to harmonize practices to reduce variability in outcomes.

View the report.

William C. Dudley, President and Chief Executive Officer of the US Federal Reserve Bank of New York, delivered a speech at the SIFMA Liquidity Forum reiterating the need to strike a proper balance between sound regulation and liquidity in financial markets. Specifically, his remarks examined market liquidity in two important fixed-income markets: the US Treasury market and the US corporate bond market. He discussed, among other things, methods on how to measure liquidity, evidence of how liquidity has changed in recent years, factors that could influence liquidity provision, and costs associated with shifts in liquidity. Dudley expressed his support for the recommendations in the recently issued interagency report on the October 15, 2014 Treasury market flash rally, including the need to better understand the implications of the evolving Treasury market structure and liquidity and how changes in regulation and market structure influence liquidity conditions more generally. Specifically, he called for study and data analysis as to whether there is a decrease in liquidity and/or an increase in liquidity risk that is costly or poses a risk to financial stability and whether regulation can be altered to improve the balance between enhancing financial stability and the costs of such regulation, including adverse impacts on liquidity.

View the speech.

The US Board of Governors of the Federal Reserve System announced its approval of the applications by: (i) M&T Bank Corporation to acquire Hudson City Bancorp, Inc.; and (ii) by M&T’s subsidiary bank, Manufacturers and Traders Trust Company, to merge with Hudson City Savings Bank. Upon consummation of the transactions, M&T will have consolidated assets of approximately $132.5 billion, making it the 25th largest insured depository organization in the United States (currently it is 31st). M&T agreed to purchase Hudson City and submitted applications to the Federal Reserve Board in respect of the transaction in 2012. However, the Federal Reserve Board initially identified weaknesses in M&T’s risk management program, including issues in M&T’s Bank Secrecy Act/anti-money laundering compliance management program and its consumer compliance program and thus postponed consideration of the deal at M&T’s request until M&T was able to remediate these concerns.

View the press release.

View the Order.

The Prudential Regulation Authority published an updated Supervisory Statement on reports provided by skilled persons under the Financial Services and Markets Act 2000. Under FSMA, the PRA may appoint, or may require a firm or a certain individual to appoint a skilled person to provide the PRA with a report giving an independent view of a firm's activity. This is part of the PRA's supervisory approach to firms, to identify, assess or prevent risks, track the development of previously identified risks or to use as part of possible remedial measures. The Supervisory Statement is to be read alongside the Use of Skilled Persons Part of the PRA Rulebook, which specifies the rules on contracts entered into with skilled persons. The updated Supervisory Statement provides greater clarity on the use of a skilled person as part of the PRA's supervisory approach and in particular as a discretionary supervisory tool. The Supervisory Statement includes: (i) the PRA's considerations when appointing a skilled person; (ii) the PRA's considerations when determining whether it should use its powers under FSMA to obtain a report by a skilled person or to appoint a skilled person to collect or update information; and (iii) the PRA's expectations of an appointed skilled person.

View the Supervisory Statement.

The European Banking Authority published its first analysis on asset encumbrance for EU banks, using data received from the 200 banks that provide it with such data. This first analysis initiates the regular monitoring of levels of asset encumbrance at EU level and future reports will be published annually. The analysis aims to assist supervisors in assessing how banks manage funding stress as well as the impact that switching from unsecured to secured funding might have on banks in conditions of stress. The report is based on data received for December 2014 and March 2015 further to a requirement under the Capital Requirements Regulation for banks to report levels of repurchase agreements, securities lending and all forms of asset encumbrance to national regulators. The analysis shows that the overall weighted average encumbrance ratio was 27% in March 2015, with ratios at country level that range from 0% for Estonia and 44% in Denmark and Greece. The report shows there has been no increase in levels of asset encumbrance over the past four years, based on a comparison with a similar report released by the European Systemic Risk Board in 2011. 

View the report.

The European Commission published two proposed Regulations as part of its Capital Markets Union initiative which aim to revive the EU securitization markets. The proposed Regulation on common rules on securitization and creating a European framework for simple, transparent and standardized securitization (referred to as STS Securitization) sets out the eligibility criteria for STS securitizations such as risk retention rules, due diligence and disclosure requirements. The proposed Regulation also includes requirements for supervisory requirements, amendments to other EU legislation to ensure consistency, an exemption, subject to certain criteria being met, from the clearing obligation for OTC derivative contracts entered into by covered bond entities and securitization special purpose entities and rules on third country securitizations. The second proposed Regulation would amend the Capital Requirements Regulation to revise capital requirements for banks and investment firms originating, sponsoring or investing in securitizations. The objective of the proposals is to align the CRR provisions with the revised Basel framework of 2014 as was recommended by the European Banking Authority in its report on qualifying securitizations in July. The proposed revisions to CRR seek to adopt a more risk-sensitive approach to STS securitization which is currently in the early stages of development at international level. Both legislative proposals are subject to the European legislative process. 

View the proposed STS Securitization Regulation.
 
View the proposed CRR Amendment Regulation.

The Bank of England announced the timetable for publication of the results of the 2015 UK stress test, which aims to evaluate the resilience of the UK banking system. The stress test covers seven major UK banks and building societies, namely Barclays, HSBC, Lloyds Banking Group, Nationwide, Royal Bank of Scotland, Santander UK, and Standard Chartered. The Financial Policy Committee and Board of the Prudential Regulation Authority will make their final decisions on the results of the stress tests on November 30, 2015 and will revert to the relevant firms on the same day. The results will then be published on December 1, 2015.

View the press release.

The European Banking Authority published final translations of its Guidelines on common procedures and methodologies for the Supervisory Review and Evaluation Process under the Capital Requirements Directive. The Guidelines include: (i) an overview of the common SREP framework; (ii) details on how regulators are to apply the principle of proportionality in their supervisory engagements with different types of firms; (iii) overall risk management and governance arrangements; and (iv) regular monitoring of key financial and non-financial indicators for changes in financial conditions and risk profiles of firms. National regulators must notify the EBA by February 20, 2016 as to whether they comply or intend to comply with the Guidelines.

View the Guidelines.

The US Office of the Comptroller of the Currency released its bank supervision operating plan for fiscal year 2016. Generally, the operating plan identifies the OCC's bank supervision priorities and objectives for the year and guides the development of supervisory strategies for national banks and federal savings associations. According to the plan, supervisory strategies for fiscal year 2016 will focus on: (i) business model and strategy changes; (ii) compliance; (iii) credit risk and loan underwriting; (iv) cybersecurity and resiliency planning; and (v) interest rate risk.

View the press release.

View the operating plan.

The European Banking Authority published an opinion on the European Commission's proposal to amend the final draft Implementing Technical Standards on additional liquidity monitoring metrics under the Capital Requirements Regulation. The metrics aim to provide regulators with a more comprehensive liquidity risk profile of a firm according to the nature, scale and complexity of its activities. The Commission had proposed for the maturity ladder templates and instructions to be removed, due to these being based on the provisional approach to reporting requirements under the CRR and so that the ITS are adapted to the new and more detailed definition of liquid assets which becomes applicable from October 1, 2015. The EBA's opinion states that the benefits of having the maturity ladder as initially proposed rather than not having a harmonised tool at all for the next two years (which is the estimated time required to update the ITS and have them adopted by the Commission and implemented by institutions) are greater. If the maturity ladder is kept in the final ITS, the EBA will proceed promptly with an updated ITS, bringing them into line with the new liquidity provisions. The EBA also supports the Commission's suggestion to amend the date of application of the ITS from July 1, 2015 to January 1, 2016. A revised draft of the ITS is included in the annex to the Opinion.

View the Opinion.

The European Banking Authority published a consultation paper on its draft 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. The draft Guidelines aim to harmonise the definition of default across the EU framework so that EU banks apply regulatory requirements to their capital positions in a more consistent, comparable and uniform way. The draft Guidelines provide clarification for the definition of default, also covering issues such as indications of unlikeliness to pay, the days past due criterion for default identification and the conditions for a return to non-default status. Comments are due by January 22, 2016.

View the consultation paper.

Two delegated regulations on Regulatory Technical Standards under the Capital Requirements Regulation were published in the Official Journal of the European Union:

• The delegated regulation for the disclosure of information for the compliance of institutions with the requirement for a countercyclical capital buffer which sets out the specifications for the disclosures required by firms for compliance with their requirements for a countercyclical capital buffer; and

• The delegated regulation for the transitional treatment of equity exposures under the Internal Ratings-Based approach which states that national regulators may grant certain firms with exemptions from the IRB treatment where the categories of the firm's equity exposures were already benefiting from an exemption from the IRB treatment on December 31, 2013.

Both delegated regulations enter into force on October 9, 2015.

View the Delegated Regulation for Disclosure.

View the Delegated Regulation for Transitional Treatment of Equity Exposures.

The European Banking Authority published the new taxonomy for national regulators to provide data to the EBA under the Implementing Technical Standards on supervisory reporting. The new taxonomy will be used for the first reports under the revised Liquidity and Leverage Ratio requirements and includes revised reporting structures for leverage ratio, and new parallel reporting structures for liquidity ratio for banks.
 
View the EBA announcement and taxonomy.

The European Banking Authority published a revised list of validation rules for submitting supervisory reporting data. The rules detail the standards and formats that are to be used for submissions of data by national regulators under the Capital Requirements Directive IV. The revised list displays the rules that have been deactivated due to technical issues or incorrectness.
 
View the EBA announcement and revised rules.

The US Board of Governors of the Federal Reserve System and the US Office of the Comptroller of the Currency announced their approval of Bank of America and its subsidiary national banks to use the “advanced approaches” capital framework. The advanced approaches framework requires banks to meet certain criteria for risk-measurement and risk-management when calculating risk-based capital standards as developed by the Basel Committee on Banking Supervision. In order to use the advanced approaches framework, banks are required to conduct a satisfactory “parallel run” under the framework in order to show the relevant regulators that the bank is able to comply with the framework for at least four consecutive calendar quarters. Bank of America, along with its subsidiary national banks, fulfilled the parallel run requirement and will begin using the advanced approaches framework to calculate and disclose their risk-based capital measures beginning in the fourth quarter of 2015.

View the FRB press release.

View the OCC press release. 

The European Banking Authority issued a press release stating that it will conduct an analysis on the Net Stable Funding Requirements and Leverage Ratio under the Capital Requirements Regulation. This analysis is further to a recent call for advice issued by the European Commission to the EBA, seeking the EBA’s guidance so that it can prepare legislative proposals, if necessary, on technical issues that are not explicitly mentioned in the CRR. The Commission is seeking the EBA’s analysis on whether it is adequate to establish different NSFR and LR requirements for different types of institutions. This analysis would consider whether different firms could have, depending on their risk profile, size and business model: (i) different NSFR calibrations; (ii) simplified NSFR and LR requirements; or (iii) exemptions from the NSFR and LR requirements. The Commission also seeks analysis on other issues including: (i) the costs and benefits of excluding certain types of firms from the NSFR and LR requirements; (ii) the effects of the NSFR requirements on bank lending in the EU; and (iii) the impact of the NSFR on clearing, settlement and custody activities, on underwriting and market making, on business models and financing structures of institutions as well as on its interaction with risk-based capital requirements. The EBA must submit the reports on the NSFR and LR to the Commission by December 31, 2015 and October 31, 2016 respectively, although it plans to submit the LR report by July 2016.
 

View the EBA's press release.

View the European Commission's Call for Advice.

The Prudential Regulation Authority published a consultation paper on proposals to transfer additional parts of the PRA rules that are in the FS Handbook into the stand-alone PRA Rulebook. The PRA is reshaping the materials inherited from the Financial Services Authority to create a Rulebook which contains PRA rules only and follows the split of the FSA into the PRA and the Financial Conduct Authority. The current consultation covers rules for financial conglomerates, third country groups, group risk systems and regulatory reporting. The consultation closes on November 13, 2015. It is expected that the new online PRA Rulebook will be available before the end of 2015.

View the consultation paper.
 

The European Commission issued a press release dated July 24, 2015 announcing its intention to amend the draft Implementing Technical Standards on additional monitoring metrics for liquidity reporting under the Capital Requirements Regulation. The draft ITS set the amount and quality of capital that a bank must hold to absorb losses and also sets a general liquidity requirement for banks. The main amendment to the draft ITS concerns the removal of the “maturity ladder” template and its related instructions. This template lists the maturity of liquid assets as well as the expected timing of cash inflows and outflows for firms according to 22 timelines ranging from overnight to over 10 years. The amendment will ensure that the draft ITS aligns with the definition of “liquid assets” in the Commission’s Delegated Regulation on the liquidity coverage requirement for banks which includes the liquidity coverage ratio and the liquidity buffer. The Commission also intends to amend the proposed date of application of the draft ITS from July 1, 2015 to January 1, 2016.

View the press release.

The European Banking Authority published a consultation paper including draft Regulatory Technical Standards on the procedures for excluding a firm’s transactions with Non-Financial Counterparties established in non-EU countries from the own funds requirements for Credit Valuation Adjustment risk under the Capital Requirements Regulation. A firm’s transaction with a NFC is excluded from the own funds requirements for CVA risk under the CRR, whether or not the NFC is established in the EU. This is the case as long as transactions do not exceed the clearing threshold specified in the European Market Infrastructure Regulation. As NFCs established in non-EU countries are not subject directly to EU regulation, the draft RTS clarify that firms are responsible for: (i) taking the necessary steps to identify all NFCs 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 NFCs 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 draft RTS align the treatment of NFCs established in a non-EU country with the treatment of NFCs established in the EU. Comments are due by November 5, 2015.

View the consultation paper.

The European Commission published a report on its assessment of the appropriateness of the rules governing the levels of application of the prudential requirements under the Capital Requirements Directive and the Capital Requirements Regulation, together CRD IV. In the EU, subject to certain exceptions, the supervision of a banking group which includes several banks or investment firms is undertaken at the level of the entire banking group (so called consolidated supervision) as well as at the individual level. The outcome of the assessment is that the Commission does not think that it is appropriate to propose amendments to the rules at this time as consideration needs to be given to the impact of the Single Supervisory Mechanism, implementation of the liquidity coverage requirement and the application of the Bank Recovery and Resolution Directive. 

View the report.

The European Banking Authority published a call for evidence under the Capital Requirements Regulation on Small and Medium Enterprises and the related capital reduction for loans to SMEs, also known as the Supporting Factor. The Supporting Factor allows banks to counterbalance the rise in capital resulting from the capital conservation buffer. Under the CRR, banks should use the capital relief produced through the Supporting Factor exclusively to provide an adequate flow of credit to SMEs in the European Union. The call for evidence aims to collect views from stakeholders and the industry to contribute to the report to the European Commission on lending trends and lending conditions for SMEs, as well as the potential risks associated with SMEs in the context of capital reduction. The final report on SMEs and the Supporting Factor will be published by the EBA in the first quarter of 2016. Responses to the call for evidence are due by October 1, 2015.

View the call for evidence.

An Amending Regulation which amends the Regulation with Implementing Technical Standards on instructions, templates and definitions for the supervisory reporting of institutions under the Capital Requirements Regulation was published in the Official Journal of the European Union. The amendments do not include any substantive changes to the original Regulation and relate only to the replacement of templates in the annexes of the Regulation. The changes aim to enhance precision in the submission, definitions and instructions relating to the supervisory reporting of institutions.

View the Amending Regulation.

The US Federal Financial Institutions Examination Council, a formal interagency body that prescribes reporting standards for financial institutions, of which the US Board of Governors of the Federal Reserve System, the US Office of the Comptroller of the Currency and the US Federal Deposit Insurance Corporation (the "agencies") are members, approved for publication a proposal to extend, with certain revisions (including revisions to the officer declaration requirement), the Foreign Branch Report of Condition (FFIEC 030 and FFIEC 030S).

The FFIEC 030 collects information regarding the structure and geographic distribution of assets, liabilities and off-balance-sheet data of foreign branches of insured US banks and savings associations. The FFIEC 030S (the Abbreviated Foreign Branch Report of Condition) collects financial data items for smaller, less complex branches. Included in the proposed revisions is an amendment to the officer declaration requirement. Currently, the report must be signed by an officer who states that the report is true and correct to the best of his or her belief. The amendments would make explicit a requirement that the officer who signs the declaration must be an officer of the parent US institution, and the new form of declaration would state not only that it is true and correct to the best of the officer’s knowledge and belief, but also that the report has been prepared in conformance with FFIEC instructions. Other amendments would reduce the required information if the single-country consolidation option is elected and add a field on the cover page for the institution to indicate whether the branch meets the criteria for annual or quarterly filing. The proposal would be effective as of the December 31, 2015 report date. Comments are due by September 28, 2015.

View the proposal.

The Prudential Regulation Authority published: (i) a Policy Statement on assessing capital adequacy under Pillar 2; (ii) a Statement of Policy on the PRA’s methodologies for setting Pillar 2 capital; (iii) a Supervisory Statement on Pillar 2 reporting; and (iv) a Supervisory Statement on the Internal Capital Adequacy Assessment Process that must be undertaken by firms and the Supervisory Review and Evaluation Process conducted by the PRA. The documents are applicable to banks, building societies and PRA-designated firms. Pillar 2 aims to ensure that firms have sufficient capital to cover potential risks not sufficiently addressed in the prescriptive Pillar 1 requirements. The Pillar 2 framework enters into force on January 1, 2016. The PRA's Policy Statement on assessing capital adequacy under Pillar 2 contains feedback received on its consultation paper of January 2015 on proposals to enhance transparency and accountability in setting Pillar 2 capital requirements. The Policy Statement explains that firms must carry out an ICAAP in accordance with the PRA's rules and it is not sufficient to only replicate the PRA's methodologies as the ICAAP is the responsibility of a firm's management body.

View the Policy Statement.

View the Statement of Policy.

View the Supervisory Statement on Pillar 2 reporting.

View the Supervisory Statement on the ICAAP and SREP.

The European Banking Authority published a table setting out metrics to identify Global Systemically Important Institutions in the EU. The table sets out the size, interconnectedness, substitutability, complexity and cross-jurisdictional activity of the largest 37 banks in the EU whose leverage ratio exposure measure exceeded €200 billion in 2014. This information is disclosed annually by the EBA. G-SIIs are subject to higher capital requirements and their identification as G-SIIs is the responsibility of their national regulator. A higher capital requirement applies one year after the publication by the national regulator of a bank’s scoring result, allowing the bank sufficient time to adjust to the new buffer requirement. 

View the EBA press release and chart.

The European Banking Authority published two reports on the findings of two benchmarking exercises conducted under the Capital Requirements Directive IV. The exercises aim to assess and improve the consistency and comparability of Risk-Weighted Assets across large EU banks. The first report deals with findings on internal approaches applied for the calculation of RWAs for Low Default Portfolios across large EU firms. The study found that 75 percent of the observed differences in Global Charge levels across institutions can be explained by the proportion of defaulted exposures in a portfolio and portfolio mix. When each portfolio is looked at separately, the impact of defaulted exposures explains around 50 percent of GC differences for both large corporate and institutions portfolios. The remaining 50 percent could be attributed to bank-specific issues such as Internal Ratings-Based parameters or risk management practices. Data was collected from 41 institutions for this study. The study was based only on draft technical standards. The report states that more in-depth analysis is required on the impact of collateral on internal loss-given-default estimates as well as comparisons between the IRB and standardized approaches. The second report deals with the internal approaches applied for Counterparty Credit Risk exposures under the Internal Model Method and Credit Valuation Adjustment Risk according to the Advanced Approach. This study was carried out using data collected by the Basel Committee for Banking Supervision and shows significant variability in the calculation of CCR and CVAR when using the IMM across banks, especially where equity and foreign exchange OTC derivatives are concerned.

View the press release and both reports.
 

The European Banking Authority published a report, dated June 16, 2015, following a peer review of the EBA Guidelines on the assessment of the suitability of members of the management body and key function holders in banks. The EU Capital Requirements Directive provides that a bank must have at least two suitable persons who effectively direct the business. The EBA Guidelines set out the criteria and processes for banks and their supervisors to follow when assessing the suitability of proposed and appointed members of the management body and provisions for the assessment of key function holders. The peer review results show that national regulators mostly apply the EBA Guidelines, that best practices have been identified but that there is no harmonized practice amongst EU Member States in many areas of the Guidelines. The EBA intends to set out best practices in a revised version of the EBA Guidelines and to recommend a legislative initiative on certain points to ensure further alignment of practices among Member States.

View the report.

View the EBA Guidelines.

The US Board of Governors of the Federal Reserve System issued a final rule under Section 165 of the Dodd-Frank Wall Street Reform and Consumer Protection Act requiring all US bank holding companies with $250 billion or more in consolidated total assets or $10 billion or more in consolidated total on-balance sheet foreign exposures to annually calculate their systemic importance using the methodology in the final rule. BHCs that meet the “G-SIB threshold” will be required to hold additional common equity tier 1 capital (the “G-SIB surcharge”) as an addition to the capital conservation buffer under the Federal Reserve’s minimum risk-based capital requirements. Eight US firms are currently expected to qualify as G-SIBs under the final rule. Similar to the proposed rule, under the final rule, estimated surcharges for the eight G-SIBs range from 1.0 to 4.5 percent of each firm’s total risk-weighted assets. Failure to meet the G-SIB surcharge will result in limitations on a G-SIB’s ability to make certain capital distributions and discretionary bonus payments. The Final Rule is generally similar to the proposed rule issued in December 2014 and is largely based on, but stricter than, an international standard adopted by the Basel Committee on Banking Supervision. The G-SIB surcharge will be phased in starting in 2016, and will become fully effective on January 1, 2019.

View the press release.

View the final rule.

View the Shearman & Sterling client publication.

The Prudential Regulation Authority published a Supervisory Statement setting out the liquidity coverage requirement reporting standards which firm's will need to comply with on an interim basis between October 1, 2015, the date the LCR applies under the original implementing technical standards, and the date of the new LCR requirements come into effect following the adoption by the European Commission of revised ITS on liquidity reporting. Firms are required to submit LCR data to national regulators under the CRR and CRD. The PRA considers that firms should report their LCR positions in the interim period so that their liquidity resilience can be monitored. However, if firms report their LCR positions according to the provisions of the original ITS, their LCR positions will not be properly determined. Therefore, the PRA has set out in the Supervisory Statement the data that firms are required to submit in the interim period.
 

View the Supervisory Statement.

The US Board of Governors of the Federal Reserve System issued a final order establishing enhanced prudential standards for General Electric Capital Corporation. GECC is a nonbank financial company designated by the Financial Stability Oversight Council for supervision by the Federal Reserve Board. The final order establishes the application of enhanced prudential standards in two phases due to the recent announcement by General Electric – the parent company of GECC – of its plan to shrink GECC’s systemic footprint and only retain businesses that support GE’s core business. Enhanced prudential standards for GECC are similar to those applicable to large bank holding companies with certain alterations to reflect GECC’s unique business model. Enhanced prudential standards include capital requirements, capital-planning and stress-testing, liquidity requirements, and risk-management and risk-committee requirements. GECC must begin compliance with relevant requirements from January 1, 2016.

View the press release.

The US Board of Governors of the Federal Reserve System proposed a rule modifying its regulations for capital planning and stress testing. Specific changes include altering the timing for several requirements that have not yet been integrated into the stress testing framework. Notably, banks subject to the supplementary leverage ratio would not be required to incorporate the ratio into their stress testing until the 2017 cycle. Additionally, all banks would continue to use standardized risk-weighted assets for capital planning and stress testing while the use of advanced approaches risk-weighted assets (applicable to banks with more than $250 billion in total consolidated assets or $10 billion in on-balance sheet foreign exposures) would be delayed indefinitely. The proposal would also remove the requirement that banking organizations calculate a tier 1 common capital ratio. Currently, banks are required to project post-stress regulatory capital ratios in their stress tests using the tier 1 common capital ration, but as the common equity tier 1 capital ratio becomes fully phased in under the Federal Reserve Board’s regulatory capital rule, it would generally require more capital than the tier 1 common capital ratio. The Federal Reserve Board only expected the tier 1 common capital ratio to remain in force until the common equity tier 1 capital requirement was adopted. The proposed changes would take effect for the 2016 capital plan and stress testing cycles. Comments on the proposal will be accepted through September 24, 2015. The Federal Reserve Board is also currently considering several issues related to its capital plan and stress testing rules and any modifications relating to these issues will be effected through a separate rulemaking, with changes thereunder taking effect no earlier than the 2017 cycle.

View the press release.
 
View the proposed rule.

The EBA published (i) amending Regulatory Technical Standards on the treatment of non-delta risk of options in the standardized market risk approach; and (ii) amending RTS on the criteria to identify categories of staff whose professional activities have a material impact on a firm’s risk profile. According to the EBA, the amendments are necessary corrections following changes introduced by the European Commission during the legal adoption process of the original RTS. The RTS were prepared under the CRR and CRD.
 

View the amending RTS.

The Basel Committee for Banking Supervision published guidelines for identifying and dealing with weak banks. The guidelines revise and update the 2002 Basel Committee guidance for dealing with weak banks to take into account the changes in regulatory expectations and practices on early intervention, resolution frameworks, recovery and resolution planning, stress testing and macroprudential oversight. The revised guidelines are directed to supervisors and resolution authorities as well as international financial institutions advising supervisors.

View the guidelines.

The European Commission launched a consultation on the possible impact of the Capital Requirements Regulation and the Capital Requirements Directive on bank financing of the economy. Under the CRR, the European Commission must conduct an analysis of how the CRR may impact the ability of banks to provide lending to the wider economy. The consultation aims for a better understanding of the impact of the CRR requirements on the availability of financing, particularly for infrastructure and other investments that support long-term growth as well as corporate borrowers, including small and medium enterprises. Responses to the consultation will form part of the Commission’s report to the European Parliament and the Council of the EU. The report will also consider the analysis being conducted by the European Banking Authority on SME lending and independent research. The consultation is open until October 7, 2015.
 

View the consultation paper.

The EBA published a draft list of banks that would be participating in the EU-wide transparency exercise at the end of 2015, together with draft templates showing the type of data that will be disclosed covering composition of capital, leverage ratio, risk weighted assets by risk type, sovereign exposures, credit risk exposures and asset quality, market risk and securitization exposures as of December 2014 and June 2015. The EBA also announced certain features of the 2016 EU-wide stress test, which is expected to launch in the first quarter of 2016. The assessment and quality checks of the 2016 stress tests are expected to be concluded by the third quarter of 2016 which is when the results of individual banks will also be published.

View the EBA’s announcement.