European Banking Authority (EBA)

EBA Opinion on Mortgage Lending Value

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On October 5, 2015, the European Banking Authority (EBA) published an opinion on mortgage lending value (MLV). The EBA has the mandate to develop the draft Regulatory Technical Standards (RTS) to specify criterial for assessment of MLV, and is currently of the opinion that the Commission should initiate legislative steps to clarify the scope of the draft RTS empowerment to exclude any implications on covered bonds.

The EBA notes that harmonizing the valuation practices in covered bond markets should be considered as part of a comprehensive review of EU covered bond frameworks.

EBA Report on Asset Encumbrance: September 2015

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On October 1, 2015, the European Banking Authority (EBA) published its first report analyzing asset encumbrance in EU banks.

The aim of the report is to monitor the extent of and the changes in the levels of asset encumbrance at an EU level and the sources for asset encumbrance. The report is based on data reported in December 2014 and March 2015 in accordance with the implementing technical standards on asset encumbrance reporting contained in European Commission Implementing Regulation 2015/79.

The EBA found there was no indication of a general increase in the level of asset encumbrance across EU banks in recent years, based on a comparison with a similar analysis performed by the European Systemic Risk Board in 2011. In March 2015, the overall weighted average encumbrance ratio was 27%, with a wide dispersion across institutions and countries.

European Commission Call For Advice From EBA on Net Stable Funding Requirements and Leverage Ratio

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On August 19, 2015, the European Banking Authority (EBA) published a call for advice (dated 26 June 2015) it has received from the European Commission on the EBA’s reports on net stable funding requirements (NSFR) and leverage ratio (LR) required under the Capital Requirements Regulation (Regulation 575/2013) (CRR).

The purpose of these reports is to assist the Commission in its own work preparing reports on the NSFR and the LR, and potentially legislative proposals, for the European Parliament and the Council of the EU.

In the call for advice, the Commission seeks the EBA’s technical advice on specific issues relating to:

  • Proportionality. The Commission asks the EBA to consider simplified LR and NSFR reporting requirements and different NSFR calibrations for certain firms.
  • Scope of application. The Commission asks the EBA to consider whether certain types of credit institution should be fully excluded from the LR and NSFR.
  • Impact of the NSFR on certain markets and activities. The Commission asks the EBA to examine the impact of the NSFR on issues including bank lending, the volume and liquidity of financial markets and business models.

EBA Final Guidelines on Passport Notifications for Mortgage Credit Intermediaries

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On August 11, 2015, the European Banking Authority (EBA) published its final guidelines (EBA/GL/2015/19) on passport notifications for mortgage credit intermediaries under the Mortgage Credit Directive (2014/17/EU) (MCD).

The guidelines specify the information that firms seeking to passport under the MCD should provide to competent authorities in their passport notifications and include templates for the notification forms that firms should complete for these purposes. The guidelines also contain guidance on the transmission of information about passport notifications to competent authorities in host member states and on the information about passporting firms that competent authorities should make publicly available.

The EBA consulted on the guidelines in June 2015.

The guidelines apply from March 21, 2016, the transposition date for the MCD, with the exception of certain information requirements for competent authorities that apply from the day after the date the guidelines are published in the official languages of the EU.

EBA Publishes RWA Assessment as the Next Step in Improving Consistency of Internal Model Outcomes

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The European Banking Authority (EBA) has published two reports on the consistency of Risk-Weighted Assets (RWAs) across large EU institutions for large corporate, sovereign and institutions’ Internal Ratings-Based (IRB) portfolios (collectively referred to as “low default portfolios”, or LDP). The LDP analysis explains how much of the variability in RWAs is led by difference in riskiness (namely, idiosyncratic portfolio features), and tries to identify residual drivers that are linked to banks’ practices. The CCR benchmarking report considers the calculation of counterparty credit risk (CCR) exposures under the Internal Model Method (IMM) and the credit value adjustments (CVA) according to the advanced approach (ACVA).

The reports summarize the findings obtained from two benchmarking exercises aimed at improving the comparability of EU banks’ RWAs. A key finding is that around 75% of the observed difference in global charge (GC) levels across institutions could be explained by the proportion of defaulted exposures in the portfolio and the portfolio mix. As for the CCR and ACVA analyses, the report shows that there is significant variability across banks in the calculation of CCR and ACVA, especially for equity and foreign exchange OTC derivatives.

EBA Opinion and Report on the Establishment of a European Framework for Qualifying Securitizations

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The European Banking Authority (EBA) has published an Opinion and Report on the establishment of a European framework for qualifying securitizations.

The Opinion contains five recommendations for establishing of a European framework for qualifying securitizations including a need to:

  • conduct a review of the entire regulatory framework for securitizations and other investment products;
  • create a framework for qualifying securitizations; and
  • establish criteria to define both qualifying term securitizations and qualifying asset-backed commercial paper (ABCP).

The Report proposes a more risk-sensitive approach to capital regulation for long-term securitization instruments, as well as for ABCP and illustrates how the capital charges set out in the recent revision of the Basel Committee on Banking Supervision 2014 securitization framework should be lowered to recognize the relatively lower risk of qualifying products, while at the same time maintaining restraints on regulatory capital.

EBA 2014 Annual Report

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On June 15, 2015, the European Banking Authority (EBA) published its annual report for 2014.

The report provides an overview of the EBA’s activities and achievements in 2014, including the development of the single rulebook in banking, the continued promotion of supervisory convergence and the assessment of risks, as well as continued work to increase transparency within the EU banking sector.

EBA Publishes Risk Dashboard of EU Banking Sector for Q1 2015

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On June 4, 2015, the European Banking Authority (EBA) published its risk dashboard for the first quarter of 2015, summarizing the main risks and vulnerabilities in the banking sector, together with a press release.

The risk dashboard is based on data from the fourth quarter of 2014 and takes into consideration the evolution of a set of key risk indicators from 55 EU banks. It confirms, among other things, that:

  1. EU banks’ capital positions remained strong, with a common equity tier 1 (CET1) ratio of 12.1%. This is an increase of 50 basis points compared to 2013.
  2. The quality of banks’ loan portfolios remained weak but bottoming out.
  3. Profitability showed a mildly positive trend on a year over year comparison, but return on equity remained subdued and materially below banks’ average cost of equity.
  4. In 2014, at an EU level, deposits increased more than loans. The EU average loan‐to‐deposit ratio therefore decreased further in Q4 2014 to 108.6%, which is the lowest ratio since 2009.

The EBA risk dashboard is part of the regular risk assessment carried out by the EBA and complements the EBA’s risk assessment report.

EBA Publishes Guidance on How to Determine Whether a Firm is Failing or Likely to Fail Under the BRRD

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On May 26, 2015, the European Banking Authority (EBA) published its final guidelines (EBA/GL/2015/07) on how to determine whether an institution is failing or likely to fail for the purposes of the BRRD.

Under Article 32(1) of the BRRD, the relevant authority must determine that the firm is failing or likely to fail before resolution action can be taken. The guidelines provide separate guidance for competent authorities and resolution authorities. Competent authorities should base their determination on their assessment of the firm’s viability under the supervisory review and examination process set out in the CRD IV Directive (2013/36/EU).  Resolution authorities must consider the firm’s capital and liquidity position, as well as other requirements set out in the BRRD. The guidelines will apply from January 1, 2016.

EBA Issues Guidelines on Management of Interest Rate Risk Arising from Non-Trading Activities

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On May 22, 2015, the European Banking Authority (EBA) published its final guidelines on the management of interest rate risk arising from non-trading activities (EBA/GL/2015/08). The guidelines cover the management of interest rate risk in the balance book and provide detailed guidance relating to scenarios and stress-testing, measurement assumptions, methods for measuring interest rate risk, the governance of interest rate risk and the identification, calculation and allocation of capital to interest rate risk. The guidelines will apply from January 1, 2016.