Posts by: Editorial Board

EBA Amends Implementing Technical Standards on Benchmarking of Internal Approaches under CRD IV

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On August 4, 2016, the European Banking Authority (EBA) published and submitted to the EU Commission an amended version of its Implementing Technical Standards (ITS) on benchmarking of internal approaches under Article 78(8) of the CRD IV Directive (which can be found in a zip file on the EBA’s website).

The EBA has amended the ITS for the purposes of running the 2017 benchmarking exercise. The amended ITS will assist competent authorities in their 2017 assessment of internal approaches both for credit risk, and for market risk. In a related press release, the EBA explains that, given the type of changes introduced in the instructions and templates, the relevant annexes are replaced in whole so that there is a consolidated version of the updated ITS package.

The EBA plans to annually update the ITS and to maintain them on a regular basis to ensure the success and quality of future benchmarking exercises.

EBA Publishes Report on Leverage Ratio Requirements under Article 511 of the CRR

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On August 3, 2016, the European Banking Authority (EBA) published a report on the leverage ratio (LR) requirements under the Capital Requirements Regulation (CRR).

The EBA report recommends the introduction of a minimum LR requirement in the EU to mitigate the risk of excessive leverage, which is in line with the discussions held by the Group of Central Bank Governors and Heads of Supervision (GHOS) – the governing body of the Basel Committee on Banking Supervision (BCBS) – in January 2016.

The analysis suggests that the potential impact of introducing a LR requirement of 3 percent on the provision of financing by credit institutions would be relatively moderate, while, overall, it should lead to more stable credit institutions. Similarly, on the basis of econometric analysis, it has been estimated that risk taking should not be strongly affected. The EBA considers that the introduction of a 3 percent LR should lead to more stable credit institutions overall and the combined application of a risk-based ratio and a LR requirement will reduce the overall cyclicality of capital requirements.

The EBA also assessed the exposure of different categories of credit institutions to the risk of excessive leverage (REL) concluding that the results do not give a strong indication of differences in the degree of exposure to REL across different types of credit institutions. However, global systemically important institutions (GSIIs) show a higher exposure to REL and therefore a higher LR requirement may be warranted.

The report also flags that while the Basel LR standard fits well with the EU banking sector, the same cannot be said for all business models covered by other EU prudential regulations. For example, the EBA recommends that central counterparties (CCPs) and central securities depositaries (CSDs) be exempted. The report describes the characteristics of various specialized business models, such as public development banks, concluding that there is little room for differentiating the LR without opening the door to cases of circumvention of the basic principles of the LR. The report did not find evidence to exempt certain credit institutions from being subject to compliance with the LR minimum requirement of 3 percent on the basis of their limited size. However, the EBA will explore in more detail a reduced frequency and granularity of reporting requirements in the case of smaller credit institutions in future updates of the implementing technical standards (ITS) on LR reporting.

The Commission is required to submit a report on the impact and effectiveness of the LR, and potential legislative proposals, to the European Parliament and the Council of the EU by December 31, 2016.

European Commission Addendum to Draft RTS on Margin Requirements for Uncleared OTC Derivatives under EMIR

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On August 2, 2016, the European Commission published an addendum to the draft regulatory technical standards (RTS) on margin requirements for uncleared OTC derivatives under Article 11(15) of the European Market Infrastructure Regulation (EMIR).  This follows an endorsement by the European Commission on July 28, 2016 of the draft RTS with amendments.  The ESAs will have 6 weeks to respond to these amendments before resubmitting them to the Commission in the form of a formal opinion.

In the addendum, the Commission states that there are some clarifications to be made to the revised draft RTS on margins in Articles 34 and 36 on application timing and in Annex III where a formula is missing. The intention of the Commission is to have the first wave of the initial margin requirements applied from the date one month after the date the RTS enter into force. This was the intention of paragraph 1 in Article 36. However, the Commission considers that the reading of the interaction of paragraph 1 with the other paragraphs in Article 36 is not clear and that the revisions set out in the addendum are therefore necessary.

Association for Financial Markets in Europe Publishes Model Clauses for the Contractual Recognition of Bail-In under Article 55 of BRRD

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On August 1, 2016, the Association for Financial Markets in Europe (AFME) published model clauses for the contractual recognition of bail-in for the purpose of satisfying the requirements of Article 55 of the EU Bank Recovery and Resolution Directive (BRRD).

Article 55 requires financial institutions in the EU to include clauses in a range of contracts to give contractual effect to a bail-in of the relevant liability in a resolution of the institution. The package contains model contractual terms that market participants can use to comply with Article 55 when issuing debt instruments and certain other contracts governed by the law of a jurisdiction outside the EU. There are two types of model clause contained within the package: one for use with debt liabilities and one for use with “other liabilities.”

The model clauses are designed to be compliant with the BRRD and with certain relevant EU member state legislation implementing the BRRD, as well as with the BRRD Delegated Regulation. The model clauses therefore seek to support cross-border effectiveness of resolution and assist banks with complying with the requirements of Article 55 BRRD.

AFME has stressed that the model clauses are a starting point only. Users are strongly encouraged to consult counsel in the relevant non-EU jurisdiction to ensure that the clause is appropriately modified to reflect any requirements of that non-EU law, and is both effective and enforceable in that jurisdiction.

In an associated press release, AFME expressed its continued concerns with the scope of Article 55 BRRD which is very broad, and requires banks to include contractual recognition clauses in contracts giving rise to all liabilities governed by non-EEA law, save where these are expressly excluded from bail-in under the BRRD. The requirement gives rise to significant challenges, such as where banks are unable to unilaterally amend contracts, as in relation to trade finance and membership of financial market infrastructures. A number of authorities have acknowledged that, in many cases, inserting such a clause is impracticable. However, while several authorities have sought to adopt a pragmatic approach to implementation, there remains some uncertainty and potential inconsistency in application.

AFME therefore believes that a clear and consistent approach across the EU is required to provide banks and counterparties with a clear and workable solution. It considers that the scope of Article 55 should be amended to align it with that agreed at the international level through the Financial Stability Board (FSB). The FSB’s Principles for Cross-border Effectiveness of Resolution Actions propose that the scope should cover instruments eligible for loss-absorbing capacity requirements and any other “debt instruments.” AFME considers that this would provide a much clearer scope of liabilities and significantly reduce the impact on firms, while meeting the objective of ensuring resolvability. It believes that alignment with the FSB’s key attributes is particularly important where inconsistencies in approach could severely impact on the competitiveness of EU banks operating in global markets.

New York Court Dismisses Repurchase Claims Against UBS as Untimely

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On July 27, 2016, Justice Marcy Friedman of the New York Supreme Court for New York County, in accordance with other recent decisions (covered here and here) dismissed an action against UBS Real Estate Securities, Inc.  The case was initially brought by Federal Housing Finance Agency (“FHFA”), as conservator of an RMBS certificateholder.  It was then pursued by the trustee after the limitations period expired.  Because FHFA lacked standing to bring claims for breaches of loan-level representations and warranties, the Court held that the trustee’s claims do not “relate back” to the date of FHFA’s initial filing for statute of limitations purposes.  The court will permit briefing on the viability of claims for failure to notify the trustee of alleged breaches of representations and warranties.  Decision.

Agencies Issue Proposal on Method to Adjust Thresholds for Exempting Certain Consumer Credit and Lease Transactions

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On July 22, 2016, the Federal Reserve Board and the Consumer Financial Protection Bureau issued a proposal with respect to the method that will be used to “adjust the thresholds for exempting certain consumer credit and lease transactions from the Truth in Lending Act and Consumer Leasing Act”. Comments on the proposal will be due thirty days from the date of publication in the Federal Register. Release.

Agencies Issue Proposal on Method to Adjust Threshold for Exempting Small Loans from Special Appraisal Requirements

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On July 22, 2016, the Consumer Financial Protection Bureau, the Federal Reserve Board and the Office of the Comptroller of the Currency issued a proposal with respect to the method for making “annual inflation adjustments to the threshold for exempting small loans from higher priced mortgage loan appraisal requirements”. Comments on the proposal will be due thirty days from the date of publication in the Federal Register. Release.

EBA Clarifies Use of 2016 EU-Wide Stress Test Results in SREP Process

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On July 1, 2016, the EBA published additional information on how the results of the EU-wide stress test will inform the Supervisory Review and Evaluation Process (“SREP”).

The focus of the update is to explain how additional capital guidance can be used to cover potential shortfalls in own funds based on the outcomes of supervisory stress tests. Although capital guidance does not constitute any form of minimum capital requirement, institutions are expected to incorporate it in their risk management frameworks. Competent authorities should also monitor its fulfillment.

The 2016 EU-wide stress test does not contain a pass fail threshold and instead is designed to be used as a crucial piece of information for SREP in 2016. The results will allow competent authorities to assess banks’ abilities to meet applicable minimum and additional own funds requirements under stressed scenarios based on a common methodology and assumptions. If competent authorities identify capital shortfalls leading to potential breaches of applicable own funds requirements revealed by the stress tests, they can employ the capital guidance to address their concerns.

The results of the EU-wide stress test, which was launched by the EBA in February 2016, are expected to be published in the early part of the third quarter of 2016.

EIOPA Publishes Final Report on Identification and Calibration of Infrastructure Corporates under Solvency II

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On June 30, 2016, The European Insurance and Occupational Pensions Authority (“EIOPA”) published a final report providing technical advice to the European Commission on the identification and calibration of other infrastructure investment risk categories (that is, infrastructure corporates) under the Solvency II Directive.  An infrastructure corporate is an entity or corporate group that carries out infrastructure activities (such as energy generation, social housing, healthcare or hospitals).

On October 14, 2015, EIOPA received a request from the European Commission for further technical advice on the issue of infrastructure corporates. In response, in November 2015, EIOPA published a call for evidence on the treatment of infrastructure corporates.  The final report follows EIOPA’s April 2016 consultation on the issues.

In the report, EIOPA recommends that the asset class is extended in two ways:

  1. To allow certain infrastructure corporates to qualify for the treatment for infrastructure projects provided that there is an equivalent level of risk.
  2. To create a separate differentiated treatment for equity investments in high-quality infrastructure corporates.

For those corporates that have a lower risk profile, EIOPA proposes reduction in the risk charges for equity investments.

EIOPA also recommends that insurers are required to conduct adequate due diligence, establish written procedures to monitor the performance of their exposures and perform stress testing on the cash flows and collateral values supporting their investment.