Financial Service Regulation and Compliance - Banking December 2018

DOMESTIC

New research on Shadow Banking and Special Purpose Entities published

The CBI has published a suite of research on the shadow banking sector in Ireland and the role of SPEs. This research aims to shed light on the industry as party of a wider initiative to increase transparency in the area. In addition to this an economic letter by Brian Golden and Patrick Hughes: 'Shining a Light on Special Purpose Entities in Ireland': provides a broad overview of the sector. This included detail on interconnectedness of other financial entities, common business models, taxation and an assessment of the impact of the Irish economy.

EUROPEAN

ECB adopts new capital key

The Governing Council of the ECB has adopted legal acts on the regular five-yearly adjustment to its capital key and the contributions paid by the NCBs of the European Union. The new key for subscription to the ECB’s capital will enter into force on 1 January 2019.

The shares of the NCBs in the ECB’s capital are weighted according to the share of the respective Member States in the total population and gross domestic product of the European Union, in equal measure. The weightings are based on data provided by the European Commission. NCBs will transfer capital shares among themselves to the extent necessary to ensure that the distribution of the shares corresponds to the adjusted key.

Completing the Banking Union: Commission welcomes political agreement to further reduce risks in the EU banking sector

The European Parliament and the Council of the European Union has reached a provisional political agreement on the banking package, a comprehensive set of reforms that the Commission proposed to further strengthen the resilience and the resolvability of EU banks. This agreement marks an important milestone in reducing risk in the Union banking sector and reinforcing the resilience of banks.

It also prepares the path for further progress on the common backstop to the Single Resolution Fund and on the completion of the Banking Union at the December Euro Summit in inclusive format. This package contributes significantly to further reducing risks in EU banks and it is an essential element for the completion of Banking Union. It builds on existing banking rules, implements international standards. It also aims to complete the post-crisis regulatory agenda, making sure that outstanding challenges to financial stability are addressed.

EBA publishes final guidelines on disclosure of non-performing and forborne exposures

EBA has published its final guidelines on disclosure of non-performing and forborne exposures. The disclosure will allow market participants and stakeholders to have a better picture of the quality of the banks' assets and the main features of their non-performing and forborne exposures. In the case of more troubled banks, the distribution of the problematic assets and the value of the collateral backing those assets.

The guidelines set enhanced disclosure requirements and uniform disclosure formats applicable to credit institutions' public disclosure of information regarding non-performing exposures, forborne exposures and foreclosed assets. The proportionality principle applies to these guidelines and is based on the significance of the credit institution and the level of non-performing loans.

Speech by Luis de Guindos, Vice-President of the ECB, at the 6th Frankfurt Conference on Financial Market Policy, Frankfurt, 14 December 2018

During his speech, Mr Guindos spoke about how banks still play an important role in many areas of Europe’s financial system, notably in the financing of small and medium-sized enterprises. He also noted that a healthy banking sector remains crucial to financing the economy. He also noted that despite the progress made in improving the resilience of European banks, some legacy issues from the crisis continue to weigh on the system.

ECB will directly supervise 119 banks in 2019

The number of significant institutions that will be directly supervised by the ECB from 1 January 2019 stands at 119 following the annual review of significance and ad hoc assessments. The changes in significance statuses are the result of new group structures, license withdrawals, mergers and other developments. Several large banking groups have also relocated their activities to the euro area.

This has increased the overall complexity and size of directly supervised banks. Two of the changes were the result of the annual assessment of significance. Barclays Bank Ireland was newly classified as significant and will be directly supervised by the ECB from 1 January 2019. This follows a request by the CBI, which anticipates an expansion of the bank’s activities due to Brexit.

Speech by Sabine Lautenschläger: The banking sector - where did we end up after all the reforms?

In her opening statement at the 6th Frankfurt Conference on Financial Market Policy, Ms Lautenschläger spoke about how the financial crisis prompted an overhaul of banking regulation not just at national and European level. She also discussed how through the G20 and the Basel Committee on Banking Supervision, the reforms became a common project at the global level.

She then explained the general idea behind the reforms and that the primary aim was to address specific issues that had been laid bare by the crisis. The secondary aim was to enhance the general resilience of banks and to make them strong enough to withstand any adversity. Finally, she explained that this idea underpins the three main building blocks of the reforms: capital, liquidity and governance.

EBA sees further improvements in EU banks resilience but highlights challenges connected to profitability, funding and operational risk

The EBA has published its annual report on risks and vulnerabilities in the EU banking sector. The report is accompanied by the results of the EBA's 2018 EU-wide transparency exercise, which provide detailed information, in a comparable and accessible format, for 130 banks across the EU. Overall, the EU banking sector has continued to benefit from the positive macroeconomic developments in most European countries.

These developments contributed to the increase in lending, further strengthening the capital ratios and improvements of asset quality of banks. Profitability remains low on average and has not yet reached sustainable levels.

Commission reaches agreement on Banking Union: Measures to prevent the accumulation of non-performing loans

The Commission has welcomed the political agreement reached by the European Parliament and the Council on prudential measures to further address non-performing loans (NPLs) in Europe. This political agreement is an important step in further reducing risks in the EU banking sector and strengthening its resilience.

This has been highlighted in this month's Euro Summit conclusions. The agreed measures will ensure that banks set aside funds to cover the risks associated with loans issued in the future that may become non-performing. This will prevent the accumulation of non-performing exposures on banks' balance sheets and will ultimately enable banks to perform their indispensable role in financing the economy and supporting growth.

Prudential backstop for NPLs: EBF notes EU trilogue deal

The European Banking Federation (EBF) has noted that European Union trilogue discussions coordinated by the Austrian EU presidency this month have led to an agreement on a prudential provisioning backstop for future NPLs. Gonzalo Gasos, Head of Banking Supervision at the EBF said that: “At a European level, banks in recent years have significantly reduced their NPL exposure through enhanced loan selling activities…the NPL ratio for the European banking sector is now less than half what it was at its peak.”

EBA to run its next EU-wide stress test in 2020

In its meeting on 12 December 2018, the Board of Supervisors of the EBA has decided to carry out its next EU-wide stress test in 2020, in line with its previous decision to aim for a biennial exercise. The EBA will immediately start to prepare the methodology for the 2020 stress test exercise. This decision has been communicated to the European Parliament, the Council and the Commission.

In 2019, the EBA will perform its regular annual transparency exercise. The decision to run the next EU-wide stress test in 2020 was driven by an acknowledgement of the ongoing progress that EU banks are making in strengthening their capital positions. Competent Authorities as well as market participants will, in the meantime, be required to use the significant quantitative and qualitative information generated by the 2018 EU-wide stress test.

ESAs publish statement clarifying securitisation disclosure requirements and consolidated application of securitisation rules for credit institutions

The ESA's have published a statement in response to industry concerns. These relate to severe operational challenges both in meeting the transitional provisions of the Securitisation Regulation disclosure requirements. They also relate to the compliance with EU requirements on risk retention, transparency, re-securitisation and criteria for credit-granting obligations on a consolidated basis by EU credit institutions engaged in local securitisation activities in third countries.

For further information please contact a member of the Financial Regulation team.

Date published: 15 January 2019