EBA

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 Publishes Final Draft RTS Report Specifying Requirements on More Secure Customer Authentication

 

On February 23, 2017, the European Banking Authority (“EBA“) published a report setting out its final draft regulatory technical standards (“RTS“) on strong customer authentication and common and secure communication under Article 98 of the Directive on payment services in the internal market (“PSD2“).

The RTS were developed in close cooperation with the European Central Bank (“ECB“) and consulted on by the EBA in August 2016. The key points raised in the consultation related to the scope and technologically neutral requirements of the draft RTS, the exemptions, including scope, thresholds and the request of many respondents for an exemption for transactions identified as low risk, access to payment accounts by third-party providers and the requirements around the information communicated.

The EBA states that it had to make difficult trade-offs between the various objectives of PSD2, including enhancing security, encouraging competition, allowing for technology and business‑model neutrality, contributing to the integration of payments in the EU, protecting consumers, facilitating innovation and enhancing customer convenience.

There was extensive input to the consultation paper. The EBA summarizes responses in section 4 of the report and provides its assessment as to whether changes have been made to the RTS as a result of the response.

The final draft RTS are set out in section 3 of the report. The draft will be submitted to the European Commission (EC), after which it will be subject to scrutiny by the European Parliament and the Council of the EU before being published in the Official Journal of the European Union. The RTS will apply 18 months after their adoption by the Commission as a delegated act. The EBA states that this suggests an application date of the RTS in November 2018 at the earliest.

EBA Requests European Commission to Revise Deadlines for the Submission of Certain Draft Technical Standards Under the CRD IV and the CRR

 

On January 3, 2017, the EBA published a letter (dated December 23, 2016) that was sent to the Director-General Financial Stability, Financial Services and Capital Markets Union (“FISMA“), by Andrea Enria, EBA Chairman, requesting the revision of deadlines for the submission of certain draft technical standards required under the CRD IV and the CRR.

In the letter, the EBA states that it cannot deliver on all the mandates required under the CRD IV and the CRR due to a “significant workload” and “considerable resources constraints” and goes on to request submission within new time limits for the following mandates, which were due to be delivered by the end of December 2016:

  • Regulatory technical standards (“RTS”) and implementing technical standards (ITS) on the authorization of credit institutions. The EBA currently expects to be able to accomplish these mandates during 2017, most likely around mid-2017.
  • RTS on consolidation methods under Article 382(5) of the CRR. The EBA currently expects to deliver on this mandate by the end of 2017, subject to developments relating to revisions of the CRR.
  • RTS on the exclusion of transactions with non-financial counterparties established in third countries under Article 382(5) of the CRR. The EBA expects to submit the RTS during Q1 2017.
  • RTS on disclosure of encumbered and unencumbered assets under Article 443 of the CRR. The EBA intends to deliver these during Q1 2017.

The letter goes on to address some of the remaining mandates given to the EBA under the CRD IV and the CRR, which, in the light of EU and international developments, were assessed as less meaningful by the supervisory community. Mr. Enria notes that these are continuously re‑prioritized due to scarce EBA resources. He highlights the following:

  • With regard to the credit risk mitigation (“CRM”) framework, in particular the RTS on immaterial portfolios for the internal ratings approach, RTS on conditional guarantees and RTS on eligible collateral within the CRM framework.

With regard to the operational risk area, in particular the RTS on the combined use of different approaches.

EBA Final RTS on Cooperation and Exchange of Information for Passporting under PSD2

On December 14, 2016, the European Banking Authority (“EBA“) published the regulatory technical final draft on passport notifications under the revised Payment Services Directive ((EU) 2015/2366) (“PSD2“) (EBA/RTS/2016/08).

Article 28 of PSD2 requires an authorized payment institution to inform the competent authorities of its home member state if it wishes to provide payment services for the first time in one or more member states other than its home member state. Article 28(5) gives the EBA a mandate to develop draft RTS, specifying method, means and details of the cross-border cooperation between competent authorities in the context of passport notifications of payment institutions. The RTS must include the scope of information to be submitted, a common terminology and standard templates, to ensure that the process is consistent and efficient.

The EBA consulted on the draft RTS in December 2015. Changes to the final version of the RTS in light of responses to the consultation include:

  • More clarity for when a payment institution uses an agent or an e-money institution uses a distributor.
  • New provisions so that payment institutions will be informed when the notification is transmitted from the competent authority in the home member state to the authority in the host member state.
  • A new field in a number of templates to include the legal entity identifier (LEI) as an identification number where available.
  • Deletion of information relating to governance arrangements and internal control mechanisms, outsourcing and the agent structural organization.

The EBA has also published a flowchart providing a guide to competent authorities on which notification templates to use, a copy of which can be found here.

The final draft RTS will now be submitted to the European Commission for endorsement. The draft Delegated Regulation states that it shall enter into force 20 days after it is published in the Official Journal of the EU (OJ).

EBA Final Guidelines on Disclosure Requirements for EU Banking Sector

On December 14, 2016, the European Banking Authority (“EBA“) published a final report (EBA/GL/2016/11) containing guidelines on regulatory disclosure requirements following its consultation in June 2016.

The guidelines follow an update of the Pillar 3 requirements by the Basel Committee on Banking Supervision (BCBS) and do not change the substance of the regulatory disclosures regarding the requirements defined in Part Eight of the Capital Requirements Regulation (Regulation 575/2013) (“CRR“).

They provide further guidance and support to institutions in complying with both the CRR and the Pillar 3 requirements. In particular, the guidelines cover the entire content of the Pillar 3 framework, with the exception of:

  • Securitization requirements, which are currently under discussion at the EU level following the finalization of a revised securitization framework at the international level.
  • Other disclosure requirements in Part Eight of the CRR for which there are already EBA delegated or implementing regulations or guidelines, such as own funds and leverage ratio.

The guidelines apply to globally and other systemically important institutions (“G-SIIs” and “O-SIIs“). Competent authorities may still require institutions that are neither G-SIIs nor O-SIIs to apply some or all the guidance provided for in the guidelines when complying with the requirements in Part Eight of the CRR.

The guidelines apply from December 31, 2017. However, an accompanying press release states that G‑SIIs are encouraged to comply with a subset of the guidelines as soon as December 31, 2016.

European Commission Report on Benchmarking of Diversity Practices Under CRD IV

 

On December 8, 2016, the European Commission published a report on benchmarking of diversity practices under the CRD IV Directive (2013/36/EC).

Article 161(5) of the CRD IV Directive requires the Commission to review and report to the Council of the EU and the European Parliament on the results reached under the diversity benchmarking, including the appropriateness of benchmarking diversity practices.

The Commission discusses the EBA’s report and reaches the conclusion that:

  1. It would not be useful at this stage to envisage putting forward a legislative proposal to amend the provisions of the CRD IV Directive diversity provisions, given that it is satisfied with the added value of the benchmarking diversity practices;
  2. There is still considerable room for improvement both in having diversity policies in place and achieving greater diversity of the management bodies of institutions;
  3. The majority of the sampled institutions were not compliant with the CRD IV Directive requirement of putting in place a policy promoting the diversity of their management bodies; and
  4. The majority of the institutions that had set a gender diversity target had not yet met it or had not set a timeline for doing so (or both).

European Parliament Writes to EBA About the Development of Regulatory Technical Standards (RTS) on Strong Customer Authentication and Secure Communication

 

On November 11, 2016, the EBA published a letter (dated October 24, 2016) from the European Parliament in relation to the development of regulatory technical standards (“RTS“) on strong customer authentication (“SCA“) and secure communications under the Revised Directive on Payment Services (“PSD2“) in the internal market ((EU) 2015/2366).

The European Parliament’s negotiating team is of the view that payment initiation service providers and account information service providers should have direct access to the payer’s account without being required by an account servicing payment service provider to use a particular business model. In its letter, the European Parliament therefore raised its concerns surrounding the EBA’s proposal for a dedicated interface that could give rise to account servicing payment service providers excluding or limiting direct access to a payer’s account via existing online banking facilities. Article 98(2) of PSD2 mandates that the EBA develop RTS in order to secure and maintain fair competition among all payment service providers and to ensure technology and business model neutrality, and the introduction of the dedicated interface will go against this principle.

The European Parliament also stated in its letter that it is of the view that the RTS are unclear in relation to the exemptions from the SCA (notably, whether the exemptions are optional or mandatory).

EBA Report on Appropriate Reference Point for Target Level of Resolution Financing Arrangements Under BRRD

 

On October 31, 2016, the EBA published a report (“EBA-OP-2016-18“) on the appropriate point for the target level for resolution financing arrangements. The EBA produced the report under Article 102(4) of the Bank Recovery and Resolution Directive (“BRRD“) (2014/59/EU).

In the report, dated October 28, 2016, the EBA recommends changing the basis from covered deposits to a total liabilities‑based measure and, in particular, “total liabilities excluding own funds less covered deposits.” Following a qualitative and quantitative assessment of various criteria, the EBA believes that this is the most appropriate target level basis for resolution financing arrangements. It considers this basis to be simple and transparent, and also consistent with the regulatory framework and calculation methodology for individual contributions.

A further recommendation in the report is that if the European Commission issues a legislative proposal on amending the target level basis for national resolution financing arrangements, it should also consider adjusting:

  • The percentage of the target level.
  • The target level basis for the single resolution fund (“SRF“).

The European Commission will consider the EBA’s recommendations, and decide whether to submit a legislative proposal to amend the target level basis for resolution financing arrangements, by December 31, 2016.

EBA Provides Final RTS and Guidelines on the Definition of Default under CRR

On September 28, 2016, the European Banking Authority (“EBA“) published final reports on the documents relating to the definition of default under Article 178 of the Capital Requirements Regulation (Regulation 575/2013) (“CRR“):

  • Guidelines on the application of the definition of default under Article 178 (EBA/GL/2016/07) – the guidelines clarify all aspects related to the application of the definition of default, which is used for the purpose of both the internal ratings based approach (IRB approach) and for the standardized approach. The guidelines apply from January 1, 2021, although the EBA is encouraging firms to implement relevant changes in their internal procedures and IT systems before that date.
  • Draft regulatory technical standards (RTS) on the materiality threshold for credit obligations past due under Article 178 (EBA/RTS/2016/06) – Article 178 specifies that a default shall be considered to have occurred when an obligor has past more than 90 days on any material credit obligation to the firm, the parent undertaking or any of its subsidiaries. The draft RTS, which were mandated by Article 178(6) of the CRR, specify the conditions according to which a competent authority should set the materiality threshold for credit obligations that are past due.

The EBA has also published a report setting out the results of a qualitative and quantitative impact study (“QIS“) that assessed the impact on the regulatory capital requirements of selected policy options to harmonize the definition of default. The EBA states that the results of the QIS are the basis for the impact assessment carried out on the guidelines and the draft RTS.

The EBA consulted on these draft RTS and guidelines in October 2014 and September 2015 respectively (see Legal updates, EBA consults on draft RTS on materiality threshold of credit obligation past due and EBA consults on draft guidelines on application of default definition under CRR). According to an EBA press release, they form part of the EBA’s broader regulatory review of the internal ratings based (IRB) approach announced in February 2016.

 

EBA Consults on Guidelines on Minimum Professional Indemnity Insurance under PSD2

 

On September 22, 2016, the European Banking Authority (EBA) published a consultation paper (EBA/CP/2016/12) on draft guidelines in relation to professional indemnity insurance (PII) and the criteria competent authorities should follow when stipulating the minimum monetary amount of the PII or comparable guarantees for undertakings that apply to provide payment initiation services or account information services under PSD2 (the Directive on payment services in the internal market ((EU) 2015/2366)). The EBA was mandated to produce the guidelines under Article 5(4) of PSD2. The consultation on the draft guidelines closes on November 30, 2016.

As well as setting out the proposed criteria, the EBA also:

  • Sets out with explanations its proposal to use a formula for the calculation of the minimum monetary amounts.
  • Provides details on indicators for the criteria set out in PSD2 along with the calculation method proposed for some of those indicators.
  • Provides circumstances in which the lowest tier, or default value, should be used.

The EBA also provided practical examples to assist in the calculation of the minimum amount of PII or comparable guarantee.