Capital Requirements Regulation

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.

EBA Final Draft RTS on Assessment Methodology for Internal Ratings-Based Approach

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The European Banking Authority (EBA) has published final draft regulatory technical standards (RTS) on the specification of the assessment methodology for competent authorities regarding compliance of an institution with the requirements to use the internal ratings-based (IRB) approach in accordance with Articles 144(2), 173(3) and 180(3)(b) of the Capital Requirements Regulation (Regulation 575/2013) (CRR).

The final draft RTS provide a mapping of the minimum IRB requirements as laid down in Chapter 3, Title II, Part Three of the CRR, into fourteen chapters. Each chapter starts with a brief description of the assessment criteria to be used by competent authorities relating to verification requests and of the methods to be used by competent authorities in this context.  Under the IRB approach, institutions determine their own funds requirements for credit risk, taking into account their own estimates of risk parameters.  Competent authorities may, under the CRR, permit institutions to use the IRB approach, provided that the relevant conditions set out in the CRR are met.

The draft RTS are available here and will now be submitted to the European Commission for endorsement.

Council of EU Adopts Regulation Extending Exemptions for Commodity Dealers under CRR

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On May 30, 2016, the Council of the EU published a press release confirming that it has adopted a Regulation amending the Capital Requirements Regulation (Regulation 575/2013) (CRR) to extend an exemption from certain requirements for commodity dealers.

The expiry date for the exemption of commodity dealers from large exposure requirements and from own funds requirements has been pushed back under the amending Regulation from December 31, 2017 to December 31, 2020.

The CRR requires the European Commission to prepare reports on the prudential supervision of commodity dealers and of investment firms in general. Since the review is still underway, it is likely that new legislation that may be required would only be adopted after the initial expiry date for the exemption. The purpose of the extension is therefore to provide commodity dealers with a stable regulatory environment in the meantime.

The European Parliament adopted the amending Regulation on May 11, 2016. It will enter into force 20 days after its publication in the Official Journal of the EU (OJ).

European Commission Issues Call for Advice on Own Fund Requirements for Market Risk

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On April 22, 2016, the European Banking Authority published a call for advice it had received from the European Commission regarding revisions to the own fund requirement for market risk as part of the CRR review.

The call for advice sets out that the EC is undertaking a review of the Capital Requirements Regulation and is considering the impact of implementing the agreed Basel Committee on Banking Supervision framework detailed in the document “Minimum capital requirements for market risk.” The EC notes that to date there has been no EU-specific assessment of the convenience and impact of updating these rules in the ways proposed by the BCBS.

Council of EU Grants Exemptions for Commodity Dealers under CRR

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On March 23, 2016, the Council of the EU published an approved final compromise text of a proposed Regulation extending the Capital Requirements Regulation (Regulation 575/2013) (CRR) to extend certain exemptions for commodity dealers.

Under the CRR commodity dealers are exempt from large exposure and own funds requirements until December 31, 2017, the Council has agreed to extend these exemptions until December 31, 2020. The measure is designed to protect commodity dealers from an unstable regulatory environment in the short term. The Council considered that the application of large exposure and own funds requirements to commodity dealers should come as the result of a thoroughly reasoned decision rather than as a result of a lapsed exemption.

The proposed regulation now requires approval from the European Parliament and adoption by the Council. The Council Presidency confirmed with member states that they will support the extension, which was approved by the Parliament’s Committee on Economic and Monetary Affairs (ECON) on March 7, 2016. Press release.

ECB Publishes Opinion on Proposed Regulation Extending Exemptions for Commodity Dealers under CRR

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On March 4, the European Central Bank (“ECB”) published an opinion on the European Commission’s legislative proposal for a Regulation amending the Capital Requirements Regulation (CRR) to extend certain exemptions for commodity dealers. The opinion is a response to a request made by the Council of the European Union on January 12, 2016.

The ECB stated that it had not identified any concrete indications of systemic risk created by commodity dealers that would make it strictly necessary to remove the exemption for requirements concerning large exposures and own funds that apply at present. The EBA explained that given commodity dealers active in Europe are generally less leveraged and have more resilient capital structures than banks. However, the ECB regards a detailed impact analysis as a necessary step in terms of taking the most appropriate decision regarding the removal or the temporary extension of the exemption. In particular, consideration should be given to level playing-field issues relative to credit institutions which trade in commodities.

The ECB believes that the exemption should be of a temporary nature given the European Commission is expected to present a proposal for a comprehensive review of the prudential regulation of investment firms.  Opinion.

European Commission Publishes Secondary Implementing Decision on Third Country Equivalence for Purposes of Treatment of Exposures under CRR

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A European Commission Implementing Decision on the lists of third countries considered equivalent for the purposes of the treatment of exposures under the Capital Requirements Regulation (“CRR“) has been published in the Official Journal of the EU on February 18.

Under the CRR, certain categories of exposures to entities located in third countries can benefit from more favourable prudential treatment if the Commission has determined that a third country’s prudential supervisory and regulatory requirements are at least equivalent to those applied in the EU for the purposes of the treatment of exposures under the CRR. The latest Implementing Decision adds Australia, Hong Kong, Indonesia, Japan and South Korea to the list of third countries.

The Implementing Decision will enter into force on March 9.

ESMA Opinion Highlights Differences with the European Commission on the Main Indices and Recognized Exchanges Under CRR

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On 19 December 2014, the European Securities and Markets Authority (ESMA) submitted to the European Commission draft implementing technical standards (ITS), pursuant to the Capital Requirements Regulation 575/2013, specifying a list of main indices and recognized exchanges. On 17 December 2015, the European Commission informed ESMA of its intention to amend the draft ITS by including two additional equity indices (the Russell 3000 Index and the Hang Send Composite Index). In an opinion (ESMA/2016/163), published on 29 January 2016, ESMA made recommendations in response to this intention.

ESMA argues that the Russell 3000 Index and the Hang Send Composite Index should not be included in the ITS on the grounds that these indices do not contain relatively liquid instruments in an EEA economy, given that they are mainly composed of US and Asian Stocks. Instead, ESMA suggests adding four other additional indices (Russell 1000 Index, Shanghai Shenzhen CSI 300, the S&P BSE 100 Index and FTSE Nasdaq Dubai UAE 20 Index), and replacing the Nikkei 225 with the Nikkei 300 and the NZSE 10 with the S&P NZX 15 Index. ESMA’s opinion recognizes the value of incorporating a large number of indices as this will cast a wider net of eligible collateral that European banks can use.

Finally, given the frequency with which updates to ITS are needed, ESMA suggests that the Commission reviews the regime to avoid each modification requiring a full legislative cycle.