EBA

EU-wide Stress Tests Launched by EBA

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The EBA has published a methodological note and the macroeconomic scenarios for the 2016 EU-wide stress test for banks. The stress test is designed to provide supervisors, banks and other market participants with a common analytical framework to consistently compare and assess the resilience of EU banks to economic shocks. The test is to be conducted on a sample of 51 EU banks and will cover 70% of the EU banking sector.

The methodological note explains the methodology by which the banks are intended to calculate the stress impact of the provided scenarios and sets constraints for their bottom-up calculations. It also aims to provide banks with guidance and support for performing the test. The EBA has also published a press release containing related technical documents, including a set of frequently asked questions (FAQs) on the stress tests.

Results from the stress-test are expected in the third quarter of 2016.

EBA Publishes Final Report on Guidelines on Co-operation Agreements Between DGSs Under Recast DGSD

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The European Banking Authority (“EBA“) has published a final report on guidelines on cooperation agreements between deposit guarantee schemes (“DGSs“). The guidelines have been developed to promote a common and consistent approach to co-operation agreements between DGSs throughout the EU, as provided under the recast Deposit Guaran-tee Schemes Directive (“DGSD“).

To promote a consistent approach and facilitate entry into co-operation agreements between DGSs across the EU, the guidelines specify the objectives and minimum content of co-operation agreements, and provide further guidance on the sequence and timing of events when the local DGS performs a pay-out of depositors on behalf of the DGS in another member states. The guidelines also include a multilateral framework co-operation agreement to which the DGSs or, where relevant, the designated authorities should adhere, although they allow DGSs or designated authorities to enter into bilateral or multilateral agreements where it is intended that co-operation agreements will go beyond the level of detail required by the guidelines.

EBA to Assess the Potential Impact of IFRS 9 on EU Banks

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In a press release dated 27 January 2016, the European Banking Authority (EBA) launched an impact assessment of IFRS 9 (dealing with financial Instruments) which is due to be implemented in the EU in 2018. The impact assessment is designed to assist the EBA to understand the likely impact of IFRS 9 on regulatory own funds, the interaction between IFRS 9 and other prudential requirements, and the way institutions are preparing for the application of IFRS 9. The assessment will be based on a sample of approximately 50 EU institutions. The EBA contemplates that the assessment process will need to be repeated in the run up to the implementation date for IFRS 9 as institutions are still developing their response to IFRS 9.

European Supervisory Authorities Request Response from European Commissioner to Inconsistencies in Cross-Selling Legislation

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On 26 January 2016, the Chairpersons of the European Supervisory Authorities (ESAs) (i.e. EBA, EIOPA and ESMA) sent a letter to the European Commissioner for the Directorate General Financial Stability, Financial Services and Capital Markets Union.

The letter flags up that differences in primary legislation currently preclude the ESAs from developing consistent guidelines on cross selling across the investments, insurance and banking sectors in the EU and asks that the Commission look into the differences in financial services legislation and consider the steps required in order to guarantee that the ESAs are fully equipped to regulate these practices, to the benefit of consumers, financial institutions and supervisory authorities. The ESAs suggest that the Commission may have an opportunity to review these matters as part of its follow up to its September 2015 call for evidence on the EU framework for the regulation of financial services and its December 2015 green paper on retail financial services.

EBA Consults on Draft Guidelines on Implicit Support for Securitization Transactions

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On January 20, the EBA published a consultation paper (EBA/CP/2016/01) on draft guidelines on implicit support for securitization transactions under Article 248(2) of the Capital Requirements Regulation (Regulation 575/2013) (“CRR”).

Examples of implicit support include the purchase of deteriorating credit risk exposures from the underlying pool, improving the quality of credit enhancements, the sale of discounted credit risk exposures into the pool of securitised credit risk exposures, the purchase of underlying exposures at above market price, ad hoc credit enhancements or an increase in the first loss position according to the deterioration of the underlying exposures. The provision of implicit support undermines the achievement of significant risk transfer, hence, under Article 248 of the CRR, there are restrictions on providing implicit support to securitisations. The draft guidelines recognise the fact that implicit support should not cover support that institutions are contractually obliged to provide. Such explicit support is assessed under guidelines EBA/GL/2014/05 on significant risk transfer.

Originator institutions and sponsor institutions which have failed to comply with the relevant requirements shall, at a minimum, must hold own funds against all of the securitised exposures as if they had not been securitised. Article 248(2) of the CRR sets out a mandate for the EBA to issue guidelines on what constitutes arm’s length conditions and when a transaction is not structured to provide support. A transaction is not considered to provide support if it is executed at arm’s length conditions and is taken into account in the assessment of significant risk transfer.

The draft guidelines include (i) the conditions to be satisfied in order to determine that a relevant transaction is not structured to provide support, depending on whether the relevant transaction is entered into by a sponsor institution or by an originator institution, (ii) an objective test for assessing whether a relevant transaction is entered into at arm’s length terms, (iii) clarifications regarding the notification requirements for relevant transactions and (iv) further guidance on how the conditions for assessing whether a transaction is structured to provide support, including the factors set out in points (a)-(e) of Article 248(1) CRR, should be assessed.

To ensure that the test is applied correctly, the assessment is to be made with due regard to the information available to each of the parties at the time when the transaction is entered into, and not to such information that is available at a later date.

The EBA will hold a public hearing on the draft guidelines on February 18, 2016.

EBA Releases Key Information on EU G-SIIs

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On July 28, the European Banking Authority (EBA) published a chart setting out the key metrics used to identify global systemically important institutions (G-SIIs) in the EU. The chart contains information on the size, interconnectedness, substitutability, complexity and cross-jurisdictional activity of the 37 EU institutions whose leverage ratio exposure measure exceeded EUR 200 billion in 2014. Under the CRD IV Directive, additional capital buffers apply to firms that are systemically important. Identification of G-SIIs is the responsibility of national competent authorities and took place for the first time in January 2015.

ESRB Reports on EMIR

The European Systemic Risk Board (ESRB) has published two reports relating to EMIR (the Regulation on OTC derivative transactions, central counterparties and trade repositories) to assist the European Commission in fulfilling its obligation under Article 85 of EMIR to review and provide a report on the Regulation.

1.  Margining Requirements

The ESRB explains in its report that although Article 85 of EMIR refers specifically to margining requirements, given the significant economic features in common between margins and the determination of haircuts, the report also considers haircut requirements and focuses on margins and haircut settings for central counterparties (CCPs), as the regulatory technical standards on bilateral margin requirements have not yet been endorsed. The ESRB proposes a further review of EMIR in 2018, specifically on the use of margining and haircuts to address and prevent systemic risks.

2.  Issues to be considered other than efficiency of margining requirements

In its second report, the ESRB recommends that the Commission considers the following additional topics when preparing its report to the European Parliament and Council of the EU:

  • A swift process for the removal or suspension of mandatory clearing obligations.
  • The evaluation of systemic risks for mandatory clearing purposes.
  • Replenishment of default funds and the skin-in-the-game design.
  • Transparency requirements consistent with guidance developed at the international level.
  • Publication of a list of approved interoperability arrangements by the European Securities and Markets Authority (ESMA).
  • Access to trade repository data.

ESMA Consults on Draft RTS under ELTIF Regulation

On July 31, the European Securities and Markets Authority (ESMA) published a consultation paper on draft regulatory technical standards (RTS) under the Regulation on European Long-Term Investment Funds (ELTIF Regulation).

In accordance with the ELTIF Regulation, ESMA is consulting on draft RTS to determine the criteria for establishing the following:

  • Circumstances in which the use of financial derivative instruments solely serves hedging purposes.
  • Circumstances in which the life of an ELTIF is considered sufficient in length.
  • Criteria to be used for certain elements of the itemised schedule for the orderly disposal of the ELTIF assets.
  • Costs disclosure.
  • Facilities available to retail investors.

The deadline for responses to the consultation is October 14, 2015.

EBA Issues Guidelines and Standards Under BRRD

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Over the last week the EBA has published final draft regulatory technical standards (RTS), implementing standards (ITS) and guidelines on a number of Articles of the Bank Recovery and Resolution Directive (2014/59/EU) (BRRD). The materials published by the EBA include:

  • final draft regulatory technical standards, implementing standards and guidelines relating to group financial support under Article 23;
  • final draft implementing standards and guidelines relating to the application of simplified obligations under Article 4;
  • final draft implementing technical standards on procedures, forms and templates for the provision of information for resolution plans under Article 11(3);
  • final draft regulatory technical standards on the contractual recognition of write-down and conversion powers under Article 55(3);
  • final draft regulatory technical standards on resolution colleges under Article 88(7);
  • final draft regulatory technical standards on independent valuers under Article 36(14); and
  • final draft regulatory technical standards on criteria to set the minimum requirement for own funds and eligible liabilities under Article 45.

The EBA has submitted the RTS and the ITS to the European Commission for endorsement. The guidelines will be translated into all EU languages and apply two months and one day after their publication in all EU languages.

EBA Issues Guidelines Under Recast Deposit Guarantee Schemes Directive (DGSD)

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On May 28, 2015, the EBA published its final guidelines (EBA/GL/2015/10) on methods for calculating contributions under the recast DGSD.

Article 13 of the recast DGSD requires contributions to deposit guarantee schemes (DGSs) from their members to be risk-based. The guidelines specify the objective and principles for DGS contributions and provide guidance on specific elements that should be taken into account in developing and assessing the methods for calculating risk-based contributions.

The EBA also published its final guidelines (EBA/GL/2015/09) on payment commitments under the DGSD. Article 10(3) of the recast DGSD states that the available financial means of a deposit guarantee schemes (DGSs) may include “payment commitments”. These are defined as payment commitments of a credit institution towards a DGS that are fully collateralized, providing that the collateral consists of low risk assets and is unencumbered by any third-party rights and is at the disposal of the DGS.

The guidelines provide guidance on the legal instruments that should be entered into by DGSs and credit institutions, providing for the terms and conditions for the inclusion of payment commitments within the available financial means of the DGS. These guidelines also provide criteria on the eligibility and management of the collateral.

The EBA expects competent authorities and designated authorities to implement both sets of guidelines by December 31, 2015.

EBA Issues Guidance on the Implementation of Resolution Tools

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The EBA has published three sets of final guidelines aimed at facilitating the implementation of resolution tools in the banking sector across the EU. The guidelines have been developed under Articles 39, 42 and 65 of the EU Bank Recovery and Resolution Directive, which mandates the EBA to promote the convergence of supervisory and resolution practices on the effectiveness of the sale of business tool, on the conditions for applying the asset separation tool and on the power to require the provision of services following a transfer under resolution. The guidelines are addressed to Competent Authorities, and provide detailed guidance on the circumstances they should assess when taking their resolution decisions. The guidelines will apply from August 1, 2015.

EBA Publishes Risk Dashboard of EU Banking Sector for Q3 2014

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On December 11, the European Banking Authority (“EBA“) published its risk dashboard for the third quarter of 2014, summarizing the main risks and vulnerabilities in the EU banking sector.

The data reflected in this version of the dashboard shows that, among other things:

  • Capital positions in EU banks reached the highest level since 2009, driven by capital issuances ahead of the stress test and assets quality review exercises;
  • Levels of non-performing loans remained stable, but were still high;
  • Profitability levels were volatile;
  • Shifting of balance sheet structure continued; and
  • Loan-to-deposit ration remained fairly unchanged during H1 2014.

 The EBA also published an interactive tool.