Financial Services Regulation & Compliance - Banking April 2018

DOMESTIC

CBI Deputy Governor: resolving long-term arrears key in tackling NPLs

CBI Deputy Governor Sharon Donnery noted the progress made by the CBI in resolving NPLs through durable restructuring. However, significant challenges continue to be posed by loans in long term arrears. New data indicate that 44% of loans are over five years past their due date. Of these, 39% of borrowers had not engaged with their lender. Deputy Governor Donnery stressed that NPLs remain a source of economic vulnerability.

Minister Donohoe outlines voting intentions at forthcoming bank AGMs & review of remuneration policy:

Minister for Finance and Public Expenditure Pascal Donohoe outlined that Government policy on banking remuneration has remained unchanged since the financial crisis. Extensive restrictions limit total remuneration for staff in AIB, Bank of Ireland and PTSB to €500,000 (excluding a standard pension contribution). Policy also dictates that bonuses and many other benefits cannot be paid to any staff.

Minister Donohoe outlined his commitment to making no change in policy in this area at this stage and reiterated that all remuneration restrictions remain in place. Arising from this, the Minister stated his intention to abstain from voting on the remuneration resolution which was being put to the AGM of Bank of Ireland.

EUROPEAN

EBF broadly backs proposed Financial Union

The European Banking Federation (EBF) has issued a statement of qualified support for the Commission's proposed Financial Union, comprising of a Banking Union and a Capital Markets Union, and entailing supervisory convergence. While the EBF supports integrated EU capital markets and the removal of cross-border barriers, it expressed concerns about differing levels of supervisory harmonisation, the power to remove or temporarily suspend particular obligations, and changes to funding arrangements.

EBA opens consultations on designation of high risk exposures and securitisation STS criteria

The EBA has launched a consultation on its Guidelines concerning which exposures are to be considered high risk, aside from those listed in Article 128 of the Capital Requirements Directive. The Guidelines, which the EBA aims to implement in January 2019, will elaborate on which types of exposure are considered high risk and under what circumstances. It also seeks to specify a method by which institutions can inform supervisors about high risk items in their portfolios. Additionally, it seeks to clarify the status of investments in venture capital and private equity. 

The EBA has begun a separate consultation on its Guidelines interpreting the simple, transparent, and standardised (STS) criteria for securitisation. The Guidelines aim to create a harmonised interpretation of the STS criteria for originators, sponsors, investors, and competent authorities across the EU.

SRB Chair sets out 2018 agenda

Elle König, Chair of the Single Resolution Board (SRB), stressed that future SRB resolutions must be preventative. This will entail a Working Programme made up of five elements:

  • Strengthening resolvability for SRB entities and smaller banks;
  • Fostering a robust resolution network;
  • Preparing and carrying out effective crisis management;
  • Operationalising the Single Resolution Fund; and
  • Ensuring the SRB is an efficient organisation.

She added that this will entail the SRB adopting resolution plans for most banking groups under the SRB's remit and identifying the main impediments to resolution.

ECB Supervisory Board: Europe moving towards financial integration

Pentti Hakkarainen, Member of the ECB Supervisory Board, stressed the benefits of financial convergence at the European Bank Executive Committee Forum. Europe's financial system has been integrating more closely since Europe's emergence from the financial crisis, evidenced by standardisation of financial products and facilitated by the uptake of digital banking. Hakkarainen called for common deposit insurance system as a third pillar to the EU's banking union – a necessary development in Europe's increasingly interdependent financial system.

ECB proposes framework for euro area common insurance deposit scheme

The ECB published an Occasional Paper that set out its position on the functioning of the European Deposit Insurance Scheme (EIDS), proposed by the Commission in November 2015. The ECB concluded that a properly-funded scheme would cover payouts to failing institutions even in a severe crisis. However, contributions should take account of the particular circumstances of banks and national banking systems. What banks pay into the fund should be proportionate to the deposits in their balance sheets, while banking systems facing greater risk levels should contribute more. Moreover, the fund should be made up of both national and European deposit insurance funds, with national funds stepping in first and the European fund intervening afterwards if necessary.  

EBA updates reporting frameworks

The EBA provided an overview of supervisory reporting requirements and the technical information related to the Validation rules was gathered, the EBA Data Point Model(s) (DPM) as well as the XBRL Taxonomies.

The objective is to provide a comprehensive overview of the reporting requirements applicable for each reference date. These reporting requirements cover information on own funds requirements, financial information, large exposures, leverage ratio, liquidity, asset encumbrance, funding plans and benchmarking of internal models.

ECB executive assesses regulatory response to CCPs

Benoît Cœurè, a member of the ECB's Executive Board, discussed the growing significance of central counterparties (CCPs) in clearing. By centralising clearing, CCPs simplify risk management and provide greater protection through multilateral netting of exposures and predictable loss mutualisation. On the other hand, loss mutualisation can spread losses to other participants if one of them defaults. Different regulations for CCPs among EU member states also poses the risk of regulatory arbitrage. Mr. Cœurè warned banks to carry out robust due diligence and risk assessment in relation to CCPs. He added that strict capital and liquidity requirements on banks' exposure to CCPs will be needed.

EBA publishes amendments to the Implementing Technical Standards on supervisory reporting These changes form part of the EBA reporting framework version 2.8, which will be applicable for submissions of data as of December 2018.

The EBA has published amendments to the Implementing Technical Standards (ITS). The changes are part of the EBA reporting framework version 2.8.

The final draft ITS amends the European Commission's Implementing Regulation (EU) No 680/2014 on supervisory reporting to keep reporting requirements in line with changes in the regulatory framework and with the evolving needs for Supervisory Authorities' risk assessments. The updated ITS include:

  • new information on prudent valuation for fair-valued items and supplementary information on credit risk,
  • high-level information on securitisation subject to the revised securitisation framework introduced by Regulation (EU) 2017/2401 amending the CRR and revised information on selected Pillar 2 items (COREP) and
  • Q&A- based changes and other minor amendments.
  • Final Report - Draft Implementing Standards amending Implementing Regulation (EU) No 680/2014 with regard to prudent valuation (EBA/ITS/2018/01)

European Parliament draws insight from recent money laundering cases

The European Parliament published a briefing that summarised recent cases in which banks supervised under the Single Supervisory Mechanism (SSM) were implicated in or accused of money laundering. From this analysis the briefing concludes that supervisory indicators such as ratios of NPLs, capital, and leverage are inappropriate for identifying potential money laundering issues. A more illuminating question is whether ownership of shares in the bank is highly concentrated. Factors such as the proportion of non-resident clients, non-euro deposits, and the loan-to-deposit ratio held by the bank can also point to potential money laundering issues.

While national authorities are primarily responsible for supervising compliance with anti-money laundering rules, the ECB has identified money laundering as a threat to financial stability. As such, the ECB says that non-compliance could influence its decisions on imposing additional liquidity requirements or supervisory measures on SSM banks.

Commission and ESM agree on principles of cooperation

The European Commission and the European Stability Mechanism (ESM) signed a Memorandum of Understanding that sets out how the two institutions will cooperate in seeking to preserve Eurozone stability. The Memorandum formalises working arrangements under EMS financial assistance programmes and post-programme surveillance. It also establishes joint operational arrangements on exchanges of information and confidentiality, and on matters concerning training programmes and staff exchange. The Memorandum does not change the existing competences of the respective institutions – which are governed by EU law such as the ESM Treaty.

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

Date published: 4 May 2018