Capital Requirements Regulation

EBA Publishes Feedback on Review of Single Rulebook Q&A

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On August 6, the EBA published feedback following a review of the use, usefulness and implementation of its single rulebook Q&A.

The review was carried out in the second half of 2018 using questionnaires addressed to competent authorities and selected industry representatives. It was limited to Q&A relating to the Capital Requirements Regulation (CRR) ((EU) No 575/2013) and the Capital Requirements Directive (CRD) (2013/36/EU), which (at the time) accounted for about one third of final Q&A.

The EBA’s main findings include the following:

  • There are limited cases of non-application of Q&A identified by survey participants.
  • Competent authorities and institutions (to a slightly lesser extent) are, overall, satisfied with the utility of the single rulebook Q&A tool and the answers. However, they suggest various improvements relating to matters including response times, the search function and the presentation of the final answers.
  • There are similarities in terms of the measures taken by competent authorities at the institution level or by institutions internally to promote the Q&A tool and the use of answers.
  • Competent authorities use regular or ad hoc measures to encourage the use of the Q&A tool internally.

Based on its review, the EBA has provided non-prescriptive good practice guidance that institutions could adopt with respect to the use of Q&A (see chapter 4).

In addition, the EBA will consider the comments and suggestions received on the process, tool and answers, with a view to developing realistic and workable proposals for improvements. The EBA is also considering the reported cases of non-application in more detail to better understand the obstacles and issues in relation to the Q&A. It expects follow-up actions to be limited to informal exchanges and ad hoc queries to relevant competent authorities.

EU Covered Bonds Framework: Proposed Legislation

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On March 12, 2018, and further to its action plan on building a capital markets union (“CMU“), the European Commission published a draft Directive and Regulation on covered bonds in line with its aim to create an integrated EU covered bonds framework.

The Commission’s proposed Directive sets out the conditions that covered bonds must satisfy to be recognized under EU law. It also strengthens investor protection by imposing specific supervisory duties. The proposal for a Directive is complemented by a proposal for a Regulation amending Regulation (EU) No 575/2013 (the “Capital Requirements Regulation“).

European Parliament’s Committee on ECON Publishes Draft Reports on CRR II Regulation and CRD V Directive

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On December 1, 2017, Economic and Monetary Affairs (“ECON“) published its draft report on the proposed CRR II Regulation and its draft report on the proposed CRD V Directive.

The European Commission’s proposals for the CRR II Regulation and the CRD V Directive contain revisions to the Capital Requirements Regulation (Regulation 575/2013) (CRR) and the CRD IV Directive (2013/36/EU) respectively.

The draft reports contain proposed amendments to the CRR II Regulation and the CRD V Directive as well as explanatory statements by the rapporteur.

The amendments include:

  • Scope: the definition for a small, non-complex institution should be amended to include a relative component geared to the gross domestic product of a particular member state;
  • Global systemically important institutions (G-SIIs): the leverage quotas for G-SIIs should increase to 4%. Grandfathering provisions for the introduction of the total loss absorbing capacity standard for G-SIIs should be introduced in order to ensure that buffers for liabilities capable of being bailed –in are built up as quickly as possible;
  • Remuneration and transparency: large institutions should be obliged to set and disclose a figure for the salary of each individual board member representing a proportion of the median salary of the institutions’ employees; and
  • Lending to SMEs and infrastructure:  the support factor for investment in infrastructure should equally be applicable to lending to public enterprises. A set of criteria to govern the exclusion of certain institutions from the scope of the CRR should also be introduced to encourage the set up promotional banks.

The draft report on the proposed CRR II Regulation (PE613.409v02-00) (dated November 22, 2017) is available here and the draft report on the proposed CRD V Directive (PE613.410v01-00) (dated November 16, 2017) is available here.

European Commission Adopts Delegated Regulation on Waiver of Own Funds Requirements for Certain Covered Bonds Under the CRR

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On August 21, 2017, the European Commission published the text of a Delegated Regulation that amends the Capital Requirements Regulation (Regulation 573/2013) (“CRR“). The main amendment pertains to Article 496(1) of the CRR. Currently, Article 496(1) allows competent authorities to waive, for certain covered bonds, the threshold of 10% referred to in Article 129 CRR until December 31, 2017.

The Commission has stated, however, that, given that some institutions rely in their business models on the use of this threshold waiver, it is appropriate for legal certainty to amend Article 496(1) to make the waiver permanent without the time limitation.

The Commission adopted the Delegated Regulation on August 11, 2017, and it is now for the Council of the EU and European Parliament to consider the Delegated Regulation. If neither objects, it will be published in the Official Journal of the EU and enter into force 20 days after its publication in the same. It will then start to apply from January 1, 2018.

To see the Delegated Regulation in full, please click here.

European Commission Adopts Implementing Regulation on Its Own Supervisory Reporting to Reflect IFRS 9 Changes to FINREP

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On July 5, 2017, the European Banking Authority (“EBA“) published a press release announcing that the European Commission (EC) adopted an Implementing Regulation on June 29, 2017, which amends the Implementing Regulation on supervisory reporting of institutions (Regulation 680/2014) under the Capital Requirements Regulation (Regulation 575/2013) (CRR). The text of the Implementing Regulation and its Annexes has been published by the Commission.

The changes relate to the provisions in Regulation 680/2014, which concern financial reporting (“FINREP“) and are intended to align these provisions with International Financial Reporting Standard 9 (IFRS 9). Regulation 680/2014 includes FINREP requirements that are founded on international accounting standards and must be updated in line with any updates made to the relevant accounting standards.

It is now time for the Implementing Regulation to be published in the Official Journal of the EU (OJ). It will apply from March 1, 2018.

Council of EU Agrees on Approach to Legislative Proposals for Insolvency Hierarchy Directive and IFRS 9 Regulation

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The Council of the EU has agreed on a general approach to the legislative proposals for a directive (which will relate to the ranking of unsecured debt instruments in insolvency) amending the Bank Recovery and Resolution Directive (2014/59/EU) (“BRRD“) and a Regulation amending the Capital Requirements Regulation (Regulation 575/2013) (“CRR“) (which concerns transitional periods under the International Financial Reporting Standard 9 (“IFRS 9“)).

A press release published on June 16, 2017, by the Council of the EU (in its configuration as the Economic and Financial Affairs Council (ECOFIN)) outlined the following general approach on the legislative proposals:

  • In relation to BRRD, the Council agreed on the text set out in the Council’s final compromise proposal dated May 31, 2017 (9479/17).
  • In relation to CRR, the Council agreed on the text set out in the Council’s final compromise proposal dated May 31, 2017 (9480/17).
  • On June 12, 2017, the Council’s Permanent Representatives Committee recommended that the Council agree on these texts as their general approach.

The press release states that EU ministers have asked the Council Presidency to start talks with the European Parliament on these proposals as soon as the Parliament has approved its own negotiating stance. It quotes the finance minister of Malta (which currently holds the Council Presidency), stating that the Council hopes that “the Parliament will be able to start negotiating by the end of this year.”

The draft Insolvency Hierarchy Directive and the IFRS 9 Regulation form part of the package of banking reforms that were adopted by the European Commission in November 2016. The EU authorities have decided to fast-track these relatively discrete measures ahead of their consideration of the remainder of the reforms.

Econ Draft Report on Proposed Regulation Amending CRR as Regards Transitional Period for Mitigating Impact on Own Funds of Introduction of IFRS 9

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On June 8, 2017, the European Parliament’s Committee on Economic and Monetary Affairs (“ECON“) published its draft report on the proposed Regulation amending the Capital Requirements Regulation (Regulation 575/2013) (“CRR“) regarding the transitional period for mitigating the impact on own funds of the introduction of International Financial Reporting Standard 9 (“IFRS 9“) and the large exposures treatment of certain public sector exposures denominated in non-domestic currencies of member states.

The European Commission’s November 2016 legislative proposal for a Regulation amending the CRR (“CRR II Regulation“) contained transitional provisions relating to IFRS 9 and the large exposures treatment of certain public sector exposures. The explanatory statement to the draft report explains that the Presidency of the Council of the EU proposed that these provisions should be split from the proposed CRR II Regulation and dealt with in a separate draft Regulation “to allow for a timely entering into force of these transitional provisions.” The European Parliament’s Conference of Presidents approved the proposed split in May 2017. On June 1, 2017, the Council of the EU published the final Presidency compromise proposal relating to the split-out Regulation.

The draft report contains a European Parliament legislative resolution on the Regulation, the text of which sets out suggested amendments to the proposed CRR II Regulation that reflect the splitting out of the transitional provisions into a separate Regulation. The amendments delete provisions in the CRR II Regulation that do not relate to the transitional provisions. The report states that the deleted parts will be covered in a separate ECON report. It also contains an explanatory statement by the rapporteur, Peter Simon.

European Commission Publishes Inception Impact Assessment on New Prudential Framework for Investment Firms

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The European Commission has published an inception impact assessment on its review of the appropriate treatment for investment firms.

The impact assessment relates to the Commission’s review of the prudential framework for investment firms, as required by Articles 293(2), 498(2), 508(2) and 508(3) of the Capital Requirements Regulation (“CRR“) (Regulation 575/2013). In November 2016, the European Banking Authority (“EBA“) published a discussion paper on a new prudential framework, with the aim of submitting an opinion and report to the European Commission by June 30, 2017.

The impact assessment provides an overview of the background to the initiative and the European Commission’s ongoing work. The European Commission states that, in light of the EBA’s consultation on the prudential framework, it does not intend to launch its own public consultation. It is, however, carrying out a consultation with industry stakeholders on the proposal. In particular, it intends to liaise with the industry on aspects of the proposal, such as the calibration and impact of any changes to the regime and foreseeable potential costs.

The European Commission states that the bulk of any new rules will take the form of a Regulation. This will be accompanied by a Directive covering elements that need to take the form of a directive for legal reasons, such as organizational and authorization requirements and corporate governance.

The impact assessment indicates that the European Commission will adopt a legislative proposal in the fourth quarter of 2017.

The European Commission is seeking feedback on the impact assessment. The European Commission’s website on impact assessments states that the deadline for comments is April 19, 2017.

Implementation Regulation Specifying Main Indices and Recognized Exchanges under CRR Published in OJ

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On September 14, 2016, Commission Implementing Regulation (EU) 2016/1646 laying down implementing technical standards with regard to main indices and recognized exchanges in accordance with the Capital Requirements Regulation (Regulation 575/2013), was published in the Official Journal of the EU (OJ). The Implementing Regulation will enter into force on October 4, 2016.

Addendum to ECB Guide on Harmonizing Options and Discretions Available in Union Law

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On August 10, 2016, the European Central Bank (ECB) published an addendum to its guide on options and discretions (O&Ds) available in Union law.

The addendum complements the guide and ECB Regulation that were published in March 2016. It lays down the ECB’s approach to the exercise of eight O&Ds provided for in the Capital Requirements Regulation (Regulation 575/2013) (CRR) and the CRD IV Directive (2013/36/EU). The objective is to provide coherence, effectiveness and transparency regarding the supervisory policy that will be applied in the supervisory assessment of applications from significant supervised entities within the scope of the single supervisory mechanism (SSM).

A press release also published on August 10, highlights that the publication of the addendum signals the end of the consultation process. A consolidated version of the guide, including the addendum and the approach for the recognition of institutional protection schemes, is to be published on the ECB’s website later in 2016.