Europe

EBA Publishes Final Guidelines on Credit Insitutions’ Credit Risk Management Practices and Accounting for Expected Credit Losses

 

On May 12, 2017, the EBA published its final guidelines on credit institutions’ credit risk management practices and accounting for expected credit losses. The aim of the guidelines is to ensure sound credit risk management practices associated with the implementation and ongoing application of the accounting for expected credit losses. They are part of the EBA’s work on the implementation of IFRS 9 and its interaction with prudential requirements, and they build on the guidance published by the Basel Committee on the same matter.

Several credit institutions in the EU apply the IFRS standards, which require the measurement of impairment loss provisions to be based on an expected credit loss accounting model (IFRS 9) rather than on an incurred loss accounting model (IAS 39). The EBA welcomes this approach on credit loss provisioning, as it should also contribute to addressing the G20’s concerns about the issue of the ‘too little, too late’ recognition of credit losses, and improve the accounting recognition of credit losses by incorporating a broader range of credit information.

The guidelines set out strong credit risk management practices for credit institutions associated with the implementation and on-going application of the accounting for expected credit losses. They note that high-quality and consistent application of the accounting standards is the foundation for the effective and consistent application of the regulatory capital standards.

EBA Final Guidelines on ICT Risk Assessment Under Supervisory Review and Evaluation Process

 

On May 11, 2017, the EBA published a report (EBA/GL/2017/05) containing its final guidelines on information and communication technology (“ICT“) risk assessment under the supervisory review and evaluation process (“SREP“) required under the CRD IV Directive (2013/36/EU).

The guidelines are addressed to competent authorities and aim at promoting common procedures and methodologies for the assessment of ICT risk. They should be read in conjunction with the EBA SREP Guidelines, which continue to remain applicable as appropriate.

The guidelines are contained in section 3 of the report and are structured around three main parts:

  1. the general provisions for applying the guidelines (Title 1);
  2. the assessment of the institution’s ICT governance and strategy (Title II); and
  3. the assessment of ICT risk and the controls in place in the context of risks to capital (Title III), which reflects the same structure as the EBA SREP Guidelines on the assessment of operational risk.

Competent authorities should consider the principle of proportionality when applying the guidelines. The depth and detail of the ICT risk assessment should be proportionate to the size, structure and operational environment of the institution, together with the nature, scale and complexity of its activities.

The guidelines are to be translated into the official EU languages and published on the EBA website. They will be in effect on January 1, 2018.

BBA Brexit Quick Brief on UK WTO Profile and FTAS

 

On May 10, 2017, the British Bankers’ Association (BBA) published a Brexit quick brief: “External trade policy and a UK exit from the EU – the UK’s WTO profile and beyond”.

The UK’s decision to leave the EU means that the UK will cease to make trade policy collectively with the EU and will need to reestablish a trade policy within the context of the World Trade Organization (“WTO“). The quick brief considers issues relating to the UK’s profile at the WTO and free trade agreements (“FTAs“) arising from Brexit and, as applicable, the potential impact on financial services.

It considers issues such as the confirmation of content in the UK’s schedule of commitments under the General Agreement on Trade in Services (GATS). It also notes that the UK will need to consider the implications of losing the preferential access granted to UK-based exporters through the FTAs agreed on its behalf by the EU; it is uncertain whether these agreements can simply be translated to the UK. Further, the UK currently has framework arrangements in place with non-EEA countries that are embedded in EU legislation, including arrangements relating to financial market infrastructures and data protection. The quick brief comments on the fact that the UK will need to reestablish those arrangements in order to reflect its status outside the EU. It also notes that the UK will be able to enter into new FTAs with non-EU markets.

EMMI Report on Outcome of EURIBOR Pre-Live Verification Program

 

On May 5, 2017, the European Money Markets Institute (“EMMI“) published a report on the outcome of the Euro Interbank Offered Rate (“EURIBOR“) pre-live verification (“PLV“) program.

The PLV program has given EMMI an in-depth view of the market underpinning EURIBOR. It confirmed that market activity has changed as a result of current regulatory requirements, other sources of liquidity available to market participants, and other external factors. In this context, EMMI concluded that:

  • The rate and volatility levels under both methodologies (that is, current quote-based vs. fully transaction-based) are insufficiently similar for a seamless transition to be feasible under current market conditions.
  • The decreased level of daily market activity under current market conditions does not allow for a methodology that is fully based on transactions, as this would not yield a sufficiently sound and robust benchmark.

In its FAQs published alongside the report, EMMI stressed that there will be no immediate changes to the EURIBOR methodology and that the current quote-based EURIBOR will continue for the period necessary to develop an alternative methodology. EMMI stated that it remains committed to align the EURIBOR benchmark with the EU Benchmarks Regulation ((EU) 2016/1011). Accordingly, it will work on a hybrid methodology (that is, a model that is supported by transactions whenever available and relies on other pricing sources when necessary).

EBA Amends ITS on Benchmarking of Internal Approaches for 2018 Benchmarking Exercise

 

On May 4, 2017, the European Banking Authority (“EBA“) published an amended version of its implementing technical standards (“ITS“) on benchmarking of internal approaches under Article 78(8) of the CRD IV Directive (2013/36/EU) (EBA ITS 2017 02).

The final draft ITS are contained in a zip file that has been added to the EBA’s dedicated webpage on regulatory technical standards (RTS) and ITS on benchmarking portfolios. They are intended for use by the EBA and competent authorities in their 2018 assessment of internal approaches for credit and market risk. The ITS have been amended to reflect updates to the Single Rulebook. They also reflect updates to the benchmarking portfolios that were necessary to facilitate the 2018 benchmarking exercise for both credit and market risk so that they remain relevant for supervisors.

The amendments are expected to apply to the submission of initial market valuation data in November 2017 and of other market and credit risk data in April 2018. The EBA has submitted the updated ITS to the European Commission, but the Commission has not yet adopted them.

The EBA aims to annually update the ITS to ensure future benchmarking exercises are relevant and successful.

Brexit – European Council Adopts EU Negotiating Guidelines

 

On April 29, 2017, a Special European Council, meeting as 27 member states, adopted the Article 50 guidelines to formally define the EU’s position for the Brexit negotiations with the UK.

The guidelines are set out under six headings that cover core principles, a phased approach to the negotiations, an agreement on arrangements for an orderly withdrawal, preliminary and preparatory discussions on a framework for the EU-UK future relationship, the principle of sincere cooperation, and the procedural arrangements for negotiations under Article 50.

On May 22, 2017, the General Affairs Council is expected to authorize the opening of the negotiations, nominate the European Commission as the EU negotiator, and adopt the negotiating directives. The guidelines and the negotiating directives may be updated in the course of the negotiations as necessary.

ESRB Reports on Revision of EMIR

 

On April 21, 2017, the European Systemic Risk Board (“ESRB“) published a report on the revision of the European Market Infrastructure Regulation (the “EMIR“).

The report welcomes the European Commission’s November 2016 report on the outcome of its EMIR review, which the Commission carried out under Article 85(1) of EMIR. The ESRB supports the Commission’s plan to revise EMIR to include an emergency mechanism for quickly suspending the clearing obligation and to increase the transparency and predictability of margin requirements.

The ESRB agrees with the Commission that no fundamental change to EMIR is currently required, although it does recognize that some aspects of EMIR could be improved, such as improving the trade data reporting framework and transparency by obliging central counterparties (“CCPs“) to publish qualitative and quantitative information consistent with the Committee on Payments and Market Infrastructures – Board of International Organization of Securities Commissions disclosure framework.

In addition, the report suggests that enhancing tools in EMIR that restrict procyclicality would reduce risks to financial stability and could simplify EMIR requirements and make them more efficient.

Although the ESRB recognizes the difficulties faced by some counterparties in meeting the clearing obligation, it supports a broad application of the obligation, including for pension scheme arrangements and large nonfinancial counterparties that are active in the derivatives market.

A comprehensive review of EMIR will be needed in the future. This comprehensive review should address issues such as the potential use of margins and haircuts to meet macroprudential objectives when the analysis needed to develop these tools has progressed.

The ESRB restates its previous proposals, including revising the determination mechanism of dedicated resources and interoperability arrangements. The ESRB reported on CCP interoperability arrangements in January 2016, and published two earlier reports on EMIR to assist the Commission with its Article 85 review of the Regulation in July 2015.

The ESAs Published a Joint Committee Report on Cross-Sector Risks Facing EU Financial System

 

On April 20, 2017, the Joint Committee of the European Supervisory Authorities (the “ESAs“) published its April 2017 report on risks and vulnerabilities in the EU financial system.

The ESA highlights the following main risks to the financial system:

The banking sector is being affected by high levels of non-performing loans (“NPLs“), high litigation costs, overcapacity and lack of focus in strategies to return to sustained profitability. Addressing low profitability challenges includes increasing supervisory action, making progress in structural reforms and improving the efficiency of secondary markets. Insurers face substantial challenges arising from prolonged low interest rates, and the fund industry’s rates of returns are subdued and remain mostly negative.

Increased asset price volatility and liquidity concerns have heightened risks relating to adequate valuation of asset prices. This has been exacerbated by political uncertainties.

Interconnectedness adds to financial sector risks. This includes concentration risk caused by highly correlated equity price movements for insurers and banks and high exposures of EU insurers to EU banks. Interconnectedness with the wider financial system is also increasing.

Cyber risk appears as a major risk and is on the rise. Currently, denial-of-service attacks, data theft or manipulation, malicious software, misinformation and false identification are the most relevant forms. Operational risks related to ICT risks also appear to be on the rise across the financial sector. The ESAs are responding to cyber and IT-related risks by, for example, drafting guidelines on ICT risk assessment for supervisors, assessing cybersecurity capabilities of central counterparties and assessing the potential accumulation of risk for insurers deriving from newly developed cybersecurity coverages.

ESMA Signs Memorandum of Understanding on CCPs with New Zealand Regulators Under EMIR

 

On April 18, 2017, the European Securities and Markets Authority (“ESMA“) published a memorandum of understanding that it has entered into with the Reserve Bank of New Zealand and the Financial Markets Authority of New Zealand under Article 25 of the European Market Infrastructure Regulation (“EMIR“).

Article 25(2)(c) of EMIR requires the establishment of cooperation arrangements as a precondition for ESMA to recognize central counterparties (“CCPs“) established in New Zealand to provide clearing services to clearing members or trading venues established in the EU. The memorandum of understanding is designed to:

  • Ensure the fulfillment of the conditions set out in Article 25(2)(c) of EMIR.
  • Provide ESMA with adequate tools to monitor the ongoing compliance by the relevant CCPs with the recognition conditions set out in Article 25 of EMIR.

The memorandum of understanding is effective as of February 28, 2017, which is the date it was signed by the relevant authorities.

European Commission Publishes Speech on Reducing Uncertainty in the Financial Services

 

On April 6, 2017, the European Commission published a speech that considered a number of areas in the financial services sector where action can be taken to reduce uncertainty and strengthen recovery. The speech, given by Vice President Valdis Dombrovskis, touched on a number of interesting points, including nonperforming loans, the Capital Markets Union and the effect of Brexit on the central clearing of derivatives. The full speech is available here.