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.

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 Prudential Regulation Authority published proposed rules on the implementation of the UK leverage ratio framework. The Financial Policy Committee directed the PRA on July 1, 2015, to implement a UK leverage ratio framework applying: (i) a minimum leverage requirement immediately to UK Global Systemically Important Institutions, and from 2018 (subject to a review in 2017) to all banks, building societies and PRA-regulated investment firms; (ii) a supplementary leverage ratio buffer of 35 percent. of corresponding risk weighted systemic buffer rates to UK G SIIs, phased in from 2016, and to domestically systemically important banks, building societies and PRA regulated investment firms from 2019, referred to as the additional leverage ratio buffer or ALRB; and (iii) a countercyclical leverage ratio buffer of 35 percent. of a firm’s institution-specific countercyclical capital buffer rate which will apply immediately to UK G SIIs and other major domestic UK banks and building societies and from 2018 (subject to a review in 2017) to all banks, building societies and PRA regulated investment firms, including any ring fenced banks, large building societies and any other banks that become subject to a countercyclical capital buffer. The PRA’s consultation sets out how it intends to implement that framework and includes proposed rules, templates for reporting, a supervisory statement on which firms would be expected to report leverage ratio information and a supervisory statement on the PRA’s expectations on the application of the UK leverage ratio framework. Responses to the consultation must be submitted by October 12, 2015. 
 

View the PRA’s consultation paper.

The European Banking Authority published a consultation paper on draft Regulatory Technical Standards relating to the conditions that national regulators must consider when tightening capital requirements for mortgage exposures and determining higher risk‑weights and higher minimum Loss Given Default values under the Capital Requirements Regulation. The draft RTS set out the conditions and financial stability considerations that would promote harmonization in setting higher risk weights and higher minimum LGD values. The proposed conditions set out in the consultation paper include a requirement for national regulators to specify the LGD expectation on property segments in property markets. The consultation states that forward‑looking analyses should be made and consideration given to developments in the property markets. The consultation also seeks views on the levels of indicative benchmarks for loss expectations when higher risk weights are set. Responses to the consultation are due by October 6, 2015.

View the consultation.

The Joint Committee of the European Supervisory Authorities (consisting of the European Banking Authority, the European Securities and Markets Authority and the European Insurance and Occupational Pensions Authority) published new proposals and draft guidelines for the prudential assessment of acquisitions and increases of qualifying holdings in the financial sector. The new guidelines will replace previous guidelines published by the ESAs’ predecessors. The draft guidelines aim to provide legal certainty and clarity on assessment processes relating to increases of control and acquisitions in banks, investment firms and insurance firms, bringing a more harmonized, clear and transparent process in prudential assessments by national regulators, as well as clearer details on what information is required from proposed acquirers. The guidelines cover questions related to: (i) indirect acquisitions of qualifying holdings; (ii) assessment periods; and (iii) financial soundness of acquirers. Responses to the consultation are due by October 2, 2015.

View the consultation and draft guidelines.

The European Banking Authority published an Opinion on the European Commission’s intention to amend draft Regulatory Technical Standards on derogations for currencies with constraints on the availability of liquid assets under the Capital Requirements Regulation. The CRR allows firms to apply derogations where a justified need for liquid assets exists owing to the Liquidity Coverage Requirement, and exceeds the availability of those liquid assets in certain currencies. Measures in the draft RTS were introduced to prevent the unnecessary use of derogations by firms, such as a general 8% haircut to be applied to foreign currency liquid assets, and a requirement that the value of the collateral posted at a central bank is subject to a haircut of at least 15%. The EBA states in its Opinion that it agrees with the Commission’s suggestion to remove from the RTS the requirement for a haircut of at least 15%. The EBA also agrees with other amendments suggested by the Commission, such as providing more detail on what is considered to be an exceptional circumstance, conditions for derogations, and the process for notification of exceptional circumstances. The EBA has amended and resubmitted the draft RTS, and these are included in the Opinion.

View the Opinion.

The European Banking Authority published its seventh semi‑annual report on risks in the European banking sector. The report is based on 2014 data. The report does not cover the current situation in Greece. However, an addendum to the report notes that based on the most recent supervisory data, the exposure towards Greek borrowers by non‑Greek banks in Europe appears to be less than €20 billion or 1.4% of Common Equity Tier 1. The report sets out the main developments and trends that have affected the EU banking sector since mid‑2014 until June 12, 2015 as well as the EBA’s view of the key micro‑prudential risks in the near future.

View the report.

The Basel Committee on Banking Supervision published a report on the impact and accountability of banking supervision. The report analyzes how global supervisors define and evaluate the impact of their policies and actions and discusses: (i) supervisory trends and their development over time since the financial crisis; (ii) the objectives of supervision and how these are transformed into supervisory actions; (iii) developments in how to measure the impact of supervision through quality assurance mechanisms and feedback loops within the supervisory process; and (iv) internal and external accountability arrangements in the wake of the financial crisis.

View the consultation paper.

The Basel Committee on Banking Supervision announced a review of the Credit Valuation Adjustment Risk Framework. The objectives of the review include ensuring that all important drivers of CVA risk and CVA hedges are covered in the Basel regulatory capital standard. Further, the review will align the capital standard with the fair value measurement of CVA employed under a number of accounting regimes and ensure consistency with the proposed revisions to the market risk framework under the Basel Committee’s Fundamental Review of the Trading Book.

View the consultation paper.

The Bank of England published a Policy Statement on the Financial Policy Committee’s powers over leverage ratio tools. The BoE was given powers of direction over leverage ratio requirements and buffers for banks, building societies and Prudental Regulation Authority‑regulated investment firms in April this year. The FPC intends to direct the PRA to apply: (i) a minimum leverage requirement immediately to UK Global Systemically Important Banks and other major domestic UK banks and building societies, and from 2018 (subject to a review in 2017) to all banks, building societies and PRA‑regulated investment firms; (ii) a supplementary leverage ratio buffer of 35% of corresponding risk‑weighted systemic buffer rates to UK G‑SIBs, phased in from 2016, and to domestically systemically important banks, building societies and PRA‑regulated investment firms from 2019; and (iii) a countercyclical leverage ratio buffer of 35% of a firm’s institution‑specific countercyclical capital buffer rate which will apply immediately to UK G‑SIBs and other major domestic UK banks and building societies and from 2018 (subject to a review in 2017) to all banks, building societies and PRA‑regulated investment firms, including any ring‑fenced banks, large building societies and any other banks that become subject to a systemic risk‑weighted capital buffer. The FPC cannot direct the means by which or the time within which the PRA must implement a direction but the PRA is now expected to take the proposals forwards. The implementation of the UK leverage ratio framework for G‑SIBs and other major domestic UK banks and building societies is ahead of the internationally agreed standards which are expected to introduce a minimum leverage ratio requirement by January 1, 2018. A consultation paper on implementation of the FPC’s direction is due to be published on July 10, 2015.

View the Policy Statement.

The Bank of England published its Financial Stability Report which identifies the main current risks in the UK financial system. The report sets out recommendations made by the Financial Policy Committee on Additional Tier 1 capital for the purposes of the minimum leverage ratio requirement. The report recommends to the Prudential Regulation Authority that AT1 capital should be counted towards Tier 1 capital only if the relevant capital instrument specifies a trigger event that occurs when the Common Equity Tier 1 capital ratio of the institution falls below 7%. The report also directs the BoE, PRA and Financial Conduct Authority to work with firms to complete cyber‑attack resilience assessments (also known as CBEST tests), adopt cyber‑resilience action plans and establish arrangements for CBEST tests to become regular cyber resilience assessments within the UK financial system. The report also refers to recommendations on the new UK leverage ratio framework which are discussed in further detail below.

View the report.

On June 25, 2015, the Federal Reserve Board issued a supervisory letter implementing changes to the "name check" process for banking applications. Under the previous process, a name check was conducted on all proposed officers and/or new principle shareholders of a supervised financial institution involved in an application under consideration by the Federal Reserve Board. The new name check process will only be conducted for individuals that will become principal shareholders or one of the top two policymakers of the organization upon consummation of the process. In the case of a group acting in concert, name checks generally will be initiated on all individual group members with five percent or greater individual ownership interests. A completed name check will remain current for five years; individuals and companies with current name checks will generally not be rechecked unless circumstances indicate otherwise. In addition, the Federal Reserve Board will obtain credit bureau reports in certain limited situations to supplement and corroborate financial information provided in the application process. The guidance is applicable to all financial institutions supervised by the Federal Reserve Board, including those with $10 billion or less in consolidated assets.

View the Federal Reserve Board supervisory letter.

The Monetary Authority of Singapore released its Consultation Paper on Proposed Enhancements to Resolution Regime for Financial Institutions in Singapore.  In the paper, MAS proposed enhancements to the resolution regime in Singapore by strengthening its powers to resolve distressed institutions while maintaining continuity of their critical economic functions. Among other topics, the policy proposals cover: (i) recovery and resolution planning; (ii) temporary stays and suspensions; (iii) statutory bail-in powers; (iv) cross-border recognition of resolution actions; (v) creditor safeguards; and (vi) resolution funding. The proposed policy changes will be introduced primarily through amendments to the MAS Act, supported by the necessary regulations. MAS will also consult on the legislative amendments, after considering the feedback received on the policy proposals in this consultation.  The submission deadline for comments on the proposal is July 22, 2015.

View the consultation paper.

The European Banking Authority published its final draft Implementing Technical Standards under the Capital Requirements Regulation, amending the existing ITS on supervisory reporting on the Liquidity Coverage Ratio. The final draft ITS make significant changes to the existing LCR reporting templates and a large number of new data items need to be introduced further to the requirements of the LCR delegated regulation published in the Official Journal of the European Union in January 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. 

View the ITS.

The Basel Committee on Banking Supervision released final Net Stable Funding Ratio disclosure standards. The NSFR was introduced by the Basel Committee to reduce funding risk over a period of one year by requiring banks to fund their activities with sufficiently stable sources to mitigate the risk of future funding stress. The NSFR and the Liquidity Coverage Ratio are intended to increase a bank's resilience to liquidity shocks, ensure more stable funding and enhance liquidity risk management. Similar to the LCR disclosure framework, the goal of the NSFR disclosure standards is to improve transparency of funding requirements and reduce uncertainty in the markets as the NSFR is implemented. The NSFR disclosure requirements are applicable to internationally active banks on a consolidated basis although jurisdictions may choose to apply the requirements to other banks. Banks will be required to publish their NSFR disclosures at the same time as they publish their financial statements, either within those statements or linked to their websites. Banks will also need to make archived disclosures publicly available on their websites for a retention period to be determined by national regulators. The NSFR disclosure requirements will be adopted in parallel to the NSFR and banks will be required to comply with the new disclosure requirements from the date of the first reporting period after January 1, 2018.

View the press release.

View the final standards.

An Amending Regulation which amends the Regulatory Technical Standards on assessing the materiality of extensions and changes of internal approaches when calculating own funds requirements for market risk was published in the Official Journal of the European Union. The Amending Regulation adds standards to the original RTS on the conditions for assessing materiality of extensions and changes to Internal Model approaches used for the calculation of own funds requirements for market risk. The amendments mean that all of the provisions regulating extensions and changes to internal approaches are set out in a single legal text. The original RTS only included provisions for the Internal Rating Based Approach and the Advanced Measurement Approaches used for calculating capital requirements for credit and operational risk. The Amending Regulation enters into force on July 9, 2015.

View the Amending Regulation.

The Board of Governors of the Federal Reserve System adopted a final rule amending Regulation D (Reserve Requirements of Depository Institutions), changing the calculation of interest payments on certain balances maintained by eligible institutions at Federal Reserve Banks. In contrast to the previous rule, which based interest payments on the average rate over the two-week reserve maintenance period, the final rule bases interest payments on a daily rate. The amendment is intended to enhance the effectiveness of changes in such rates of interest in moving the Federal funds rate into the target range established by the Federal Open Market Committee, especially when changes in those rates do not coincide with the beginning of a maintenance period. The amendments to Regulation D will be effective July 23, 2015.

View text of amended Regulation D.

A regulation which amends the regulatory technical standards for own funds requirements was published in the Official Journal of the European Union. The amending regulation aims to ensure a harmonized approach across the EU to the deduction from own funds items of indirect and synthetic holdings in firms' own funds instruments and indirect and synthetic holdings in financial sector entities. The amending regulation adds provisions to the original RTS which: (i) explain what intermediate entities mean for the purpose of deducting holdings in financial sector entities held indirectly through intermediate entities; (ii) expand upon the different investments which should be considered as synthetic holdings and the amount to be deducted from Common Equity Tier 1 items in each case; (iii) set out the calculation for firms to determine the percentage held indirectly in a financial sector entity; (iv) include criteria required for indices to be qualify as broad market indices; and (v) explain the calculation of minority interests. The amending regulation enters into force on July 7, 2015.

View the amending regulation.

The US Federal Deposit Insurance Corporation approved a Notice of Proposed Rulemaking and request for comment on proposed refinements to the deposit insurance assessment system for small insured depository institutions that have been federally insured for at least five years (referred to as “established small banks”). The FDIC is proposing to refine the deposit insurance assessment system by: (i) revising the financial ratios method so that it would be based on a statistical model estimating the probability of failure over three years; (ii) updating the financial measures used in the financial ratios method consistent with the statistical model; and (iii) eliminating risk categories for established small banks and using the financial ratios method to determine assessment rates for all such banks (subject to minimum or maximum initial assessment rates based upon a bank’s composite rating). The FDIC proposes that the refinements would become operative the quarter after the reserve ratio of the Deposit Insurance Fund reaches 1.15 percent. and that a final rule would go into effect the quarter after a final rule is adopted; however, as stated above, the proposed amendments would not become operative until the quarter after the DIF reserve ratio reaches 1.15 percent.
 

View the FDIC press release.

View the Noticed of Proposed Rulemaking.

The FDIC proposed an amendment to the methods used by the FDIC in assessing small banks for deposit insurance. Under the proposal, only banks with less than $10 billion in assets that have been insured by the FDIC for at least five years would be affected. Specifically, the FDIC will (i) revise the financial ratios method to be based on a statistical model estimating the probability of failure over three years; (ii) update the financial measures used in the financial ratios method to be consistent with the statistical model; and (iii) eliminate risk categories for established small banks and use the financial ratios method to determine assessment rates for all such banks. As the proposal seeks to be revenue neutral, the aggregate assessment revenue collected from small banks affected by the revisions is expected to remain approximately the same as it would have been otherwise. To assist banks in understanding the potential effect of the proposed rule and in estimating assessment rates under the proposal, the FDIC has published an online assessment calculator. Comments on the proposal are due within 60 days from publication of the proposed rule in the Federal Register.

View the notice of proposed rulemaking.

View the proposed assessment calculator.

View statement by FDIC Chairman, Martin J. Gruenberg.

The Federal Reserve Board, the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency issued final revisions to the regulatory capital rules adopted in July 2013. The final rule is applicable to large, international banking organizations that calculate their regulatory capital ratios using the advanced approaches rule (generally, institutions with more than $250 billion in total consolidated assets or more than $10 billion in total on-balance sheet foreign exposures). The final rule substantially adopts the changes to the rule as proposed on December 18, 2014, and corrects and updates certain aspects of the advanced approaches rule, including the calculation requirements for risk-weighted assets for banking organizations using the advanced approaches method. The revisions also enhance the consistency of the advanced approaches rule with international capital standards. The final rule will be effective October 1, 2015.

View the final rule.