European Banking Authority

European Commission Adopts Implementing Regulation on ITS for Reporting Results of Internal Approach Calculations under Article 78(2) CRD IV Directive

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On September 19, 2016, the European Commission adopted an Implementing Regulation implementing technical standards (ITS) for templates, definitions and IT solutions to be used by institutions when reporting the results of their internal approach calculations to the European Banking Authority (EBA) and to competent authorities under the CRD IV Directive (2013/36/EU).

The Implementing Regulation is based on the draft ITS submitted by the EBA to the Commission in March 2015 to which the EBA published an opinion agreeing to the Commission’s amendments to the ITS in May 2016. Once the Implementing Regulation has been published in the Official Journal of the EU (OJ) it will enter into force on the 20th day following its publication.

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.

EBA Publishes Interim Report on MREL

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The European Banking Authority (EBA) has published an interim report on the minimum requirement for own funds and eligible liabilities (MREL). Under the Bank Recovery and Resolution Directive (2014/59/EU) (BRRD) the EBA is required to submit a report to the European Commission on the implementation of MREL by October 31, 2016.  This report will assist the Commission in its work on a legislative proposal on the harmonized application of MREL as well as a legislative proposal to review MREL and implement the total loss absorbing capacity standard in the EU.

The EBA’s interim report is intended to provide input into the Commission’s deliberations ahead of the preparations of the EBA’s final report and contains a number of provisional recommendations. Preliminary quantitative findings on the financing capacity and needs of EU banking groups are also available in the interim report, although these are subject to several methodological caveats.  In the absence of MREL decisions for institutions to date, and given the limited information related to the resolution authorities’ MREL policy approach, the EBA was required to make assumptions on the likely scope and calibration of MREL.  These assumptions are by definition different from the actual levels of MREL which will ultimately be determined by resolution authorities in relation to each institution and group.

The interim report is available here.

2015 Annual Reports

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The following bodies have released their 2015 annual reports in the past week:

  • EIOPA (European Insurance and Occupational Pensions Authority)
  • ESMA (European Securities and Markets Authority)
  • EBA (European Banking Authority)

Each report contains a review of achievements from 2015 as well as looking forward to the objectives and challenges which will be relevant in the coming year.

EBA Releases Final Draft Regulatory Technical Standards

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On June 13, the European Banking Authority (EBA) released the final draft regulatory technical standards on assigning risk weights to specialized lending exposures under article 153(9) of Regulation (EU) No 575/2013 (Capital Requirements Regulation – CRR).

The Capital Requirements Directive requires the EBA to develop draft regulatory technical standards setting out how institutions should take into account financial strength, political and legal environment, transaction and/or asset characteristics, strength of the sponsor and developer, and security package in assessing risk weights to specialized lending exposures.

EBA Publishes Decision on Unsolicited Credit Assessments

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On May 17, 2016, the European Banking Authority published a decision confirming that the unsolicited credit assessments of certain external credit assessment institutions (“ECIAs”) do not differ in quality from their solicited credit assessments with regard to the Capital Requirements Regulation (Regulation 575/2013).

The published decision annexes 22 ECIAs and confirms that in respect of those listed, the quality of the unsolicited credit assessments does not differ from the solicited credit assessments.

The decision will enter into force 20 days after publication in the Official Journal of the EU.

EBA Publishes Discussion Paper on Use of Consumer Data by Financial Institutions

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On May 4, 2016, the EBA published a discussion paper on innovative uses of consumer data by financial institutions, in line with its mandate to monitor financial innovation.  The EBA report notes that although general provisions apply to financial institutions regarding secrecy, conduct and data protection, which impose restrictions on the use of consumer data, EU legislation specific to the financial sector contains few requirements that address the use of consumer data by financial institutions.

In recent years, some financial institutions have started using consumer data in innovative ways across the EBA’s regulatory remit (that is, mortgages, personal loans, payment accounts, payment services, and electronic money). The paper identifies risks and benefits for consumers and financial institutions of such uses, as well as for financial integrity in general. Feedback received on this discussion paper will inform the EBA’s decision on which, if any, further actions may be required to mitigate the risks arising from this innovation, while also allowing market participants to harness its benefits.

EBA Amends Historical Look-Back Approach Method for Calculating Additional Collateral Outflows

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On May 3, 2016, the European Banking Authority (EBA) issued an opinion to the European Commission supporting the Commission’s proposed amendment to the historical look-back approach (HLBA) methodology used in the draft Regulatory Technical Standards (RTS) on additional collateral outflows.

The amendment by the EBA followed a request by the European Commission that the draft RTS be amended so that the calculation of the additional collateral outflows was based on the HLBA for market valuation changes developed by the Basel Committee on Banking Supervision (BCBS). The BCBS’s HLBA focuses on the largest net difference in collateral posted instead of the largest gross difference which had been the focus of the EBA’s approach.  In December 2015, the Commission had raised concerns that the EBA’s HLBA approach could have a significant impact on credit institutions and international derivative markets.  Therefore, it decided not to adopt the draft RTS as it had been submitted by the EBA, but signalled it was open to endorsing an amended draft RTS based on the BCBS’s HLBA approach.

EBA Publishes Report on Benchmarking of Remuneration Practices at the European Union Level and Data on High Earners in 2014

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On March 30, the European Banking Authority (“EBA”) published aggregated data on high earners earning €1 million or more per financial year.

The EBA has analyzed the data provided to it for the year 2014 and compared it to the 2013 data. The main results of its analysis are:

  • the number of high earners increased significantly between 2013 and 2014 (+22 per cent);
  • there is now a higher overlap of the population of high earners with that of staff identified as having a material impact on the institution’s risk profile. This percentage increased significantly after the regulatory technical standards on identified staff entered into force in 2014;
  • the supervisory framework for remuneration is still not sufficiently harmonized with the application of deferral and payout in instruments differing significantly among Member States and among institutions;
  • following the introduction of a limitation on the ratio between the variable and the fixed remuneration of 100 per cent (or 200 per cent with shareholders’ approval), the ratio for all identified staff decreased to 65.5 per cent in 2014 from 104 per cent in 2013; and
  • the increase in fixed remuneration for identified staff is not material compared to the overall administrative costs.

The report forms part of the work that the EBA does with the European Commission to review the effectiveness of remuneration provisions. Report.