European Central Bank (“ECB”)

European Central Bank (“ECB”) Publishes Recommendation on Dividend Distribution Policies and a Letter on Variable Remuneration Policy

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The ECB has published a recommendation and a letter on dividend distribution policies and variable remuneration policy.

Both the recommendation and letter relate to the payment of dividends in 2018 for the financial year 2017 by any credit institutions in the single supervisory mechanism. The contents of the recommendation, as well as the letter, are largely unchanged from the versions of the same published in December 2016.

 

To view the recommendation in its entirety, please click here. For the letter, please click here.

 

 

 

 

Regulation Amending EMIR: ECB Opinion

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On October 17, 2017, the European Central Bank (“ECB“) published an opinion on the proposed Regulation amending EMIR (Regulation 648/2012) in relation to the clearing obligation, its suspension, the reporting requirements, the risk-mitigation techniques and the registration and supervision of trade repositories.

The European Commission adopted the legislative proposal, which is aimed at introducing a number of changes to EMIR in order to simplify the applicable rules and eliminate disproportionate burdens.

In its opinion, the European Commission generally supports the Commission’s initiative and makes specific observations on the following topics:

Exemption of central bank transactions.

  • Amendments to ensure the quality of data.
  • Reporting obligation.
  • CCPs’ transparency.
  • Credit institutions’ compliance with risk-management procedures, intragroup exemptions and capital requirements.
  • Classification of securitization special purpose entities as financial counterparties.
  • Changes to methodology for calculating counterparties’ positions in OTC derivative contracts.
  • The ECB’s advisory role regarding draft-delegated and implementing acts.

The opinion is available here.

ECB Publishes Interview Transcript on the Preparatory Work of Banks and Supervision as a Result of Brexit

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The European Central Bank (“ECB“) has published a transcript of an interview, given by Sabine Lautenschlager (ECB Executive Board Member and Supervisory Board Vice-Chair), on the kind of preparation affected banks will have to undertake following the UK’s decision to leave the European Union. The interview is wide ranging, but includes the following pertinent points:

  • The ECB wants euro-area banks to be proactive and well prepared and is currently in discussion with all euro-area banks under its supervision that will be affected by Brexit.
  • The ECB has suggested that all affected banks should prepare for a hard Brexit. It has also recommended that all affected banks create their strategies for Brexit quickly and pass these on to the ECB, as they only have an extremely narrow time frame in which to assess plans and applications.
  • The ECB has itself set up a project to prepare for Brexit. It will need to increase its staff as it expects a significant increase in the number of internal model applications, qualifying holding procedures and licensing applications.

To see the full interview, please click here.

EBA Publishes Final Draft RTS Report Specifying Requirements on More Secure Customer Authentication

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On February 23, 2017, the European Banking Authority (“EBA“) published a report setting out its final draft regulatory technical standards (“RTS“) on strong customer authentication and common and secure communication under Article 98 of the Directive on payment services in the internal market (“PSD2“).

The RTS were developed in close cooperation with the European Central Bank (“ECB“) and consulted on by the EBA in August 2016. The key points raised in the consultation related to the scope and technologically neutral requirements of the draft RTS, the exemptions, including scope, thresholds and the request of many respondents for an exemption for transactions identified as low risk, access to payment accounts by third-party providers and the requirements around the information communicated.

The EBA states that it had to make difficult trade-offs between the various objectives of PSD2, including enhancing security, encouraging competition, allowing for technology and business‑model neutrality, contributing to the integration of payments in the EU, protecting consumers, facilitating innovation and enhancing customer convenience.

There was extensive input to the consultation paper. The EBA summarizes responses in section 4 of the report and provides its assessment as to whether changes have been made to the RTS as a result of the response.

The final draft RTS are set out in section 3 of the report. The draft will be submitted to the European Commission (EC), after which it will be subject to scrutiny by the European Parliament and the Council of the EU before being published in the Official Journal of the European Union. The RTS will apply 18 months after their adoption by the Commission as a delegated act. The EBA states that this suggests an application date of the RTS in November 2018 at the earliest.

ECB Publishes Letter on Development of SSM Guides on ICAAP and ILAAP for Significant Institutions

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On February 20, 2017, the European Central Bank (“ECB“) published a letter from Ms. Daniele Nouy, Chair of the Supervisory Board of the ECB, to the management of significant institutions under the Single Supervisory Mechanism (“SSM“) on the development of comprehensive SSM guides on the Internal Capital Adequacy Assessment Process (“ICAAP“) and the Internal Liquidity Adequacy Assessment Process (“ILAAP“).

In January 2016, the ECB published a letter setting out its expectations as to the ICAAP and ILAAP information that institutions are expected to submit. Ms. Nouy explains that it has since become clear that there are still several areas in which improvements are needed across banks. To help move banks towards an adequate level of information provision, the ECB has started a multi-year project to develop comprehensive SSM guides on the ICAAP and ILAAP. The first step in this regard is to receive feedback from recipients of the letter on the two draft guides that are attached to the letter. The draft guides set out more detailed ICAAP and ILAAP principles, which provide a road map that the ECB intends to follow.

The ECB seeks comments on the guides by May 31, 2017. It will then review the guides in the light of the comments received and will publish the guides for consultation at the start of 2018.

In the meantime, institutions are expected to comply with the 2016 expectations and to submit corresponding documentation in accordance with the EBA guidelines on ICAAP and ILAAP information collected for the purposes of the supervisory review and evaluation process by April 30, 2017.

The full text of the letter can be found here.

ECB Consults on Changes to the Regulation on Oversight Requirements for Systemically Important Payment Systems

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On January 3, 2017, the ECB published a consultation paper on the revision of the Regulation on oversight requirements for SIPS (“SIPS Regulation“).

There are four payment systems that fall under the SIPS Regulation, which are TARGET2, EURO1, STEP2-T and CORE(FR). The SIPS Regulation aims to ensure the efficient management and smooth operation of SIPS in the euro area.

A press release published with the consultation paper states that, under the SIPS Regulation, the general application of the SIPS Regulation must be reviewed every two years and amended if needed. Among other things, the revised version sets clearer requirements on liquidity risk mitigation and new requirements on cyber resilience, and assigns additional powers to the competent authorities.

As part of the revision, the ECB has also published a consultation paper on its decision relating to the methodology used to calculate sanctions that can be imposed in cases of non‑compliance with the SIPS Regulation.

The consultation closes on February 20, 2017.

European Systemic Risk Board (ESRB) Publishes Country-Specific Warning on Vulnerabilities in the Residential Real Estate Sector

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On November 28, 2016, the European Systemic Risk Board (“ESRB“) published a report on vulnerabilities in the EU residential real estate sector, together with eight country-specific warnings and a Q&As document.

The warnings on medium-term vulnerabilities in the residential real estate sector are addressed to the relevant ministers in eight Member States: Austria, Belgium, Denmark, Finland, Luxembourg, the Netherlands, Sweden and the UK. The ESRB decided to issue the warnings following a forward-looking EU-wide assessment of vulnerabilities relating to residential real estate. These vulnerabilities may be a source of systemic risk to financial stability in the medium term. As a result, on September 22, 2016, the ESRB adopted warnings addressed to the eight member states and decided to make the warnings public. The member states were given a period of time to respond.

For the remaining member states, the ESRB has either not identified a build-up of any material vulnerabilities relating to the residential real estate sector, or such vulnerabilities have been identified but the current policy stance is sufficient to address them. The ESRB advises that the latter is the case for Estonia and Slovakia. It also advises that, for the UK, it has not assessed whether policies in place are appropriate and sufficient given the uncertain impact of the vote to leave the EU on the medium-term outlook for the UK housing market.

The ESRB has also published a recommendation on closing real estate data gaps (Recommendation ESRB/2016/14), which it adopted on October 31, 2016. The recommendation, which covers both the residential and commercial real estate sectors, aims to establish a more harmonized framework for monitoring developments in EU real estate markets. It provides a common set of indicators that national authorities are recommended to monitor in assessing risks originating from the real estate sector, along with working definitions of these indicators. The deadline for implementing the recommendation is the end of 2020. ESMA will monitor compliance with the recommendation via an “act of explain” mechanism. As follow-up work to the recommendation, the ESRB believes that a regular data collection on these indicators should take place at the EU level, and considers that the European Central Bank (ECB) is well placed to play a leading role in this.

European Parliament Adopts Resolution on Finalization of Basel III

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On November 23, 2016, the European Parliament published a provisional version of the text of the resolution it has adopted on finalization of Basel III.

Among other things, in the resolution, the Parliament:

  • Underlines the importance of sound global standards and principles for the prudential regulation of banks and welcomes the post-crisis work of the Basel Committee on Banking Supervision (“BCBS“) in this area. The Parliament notes the BCBS’ ongoing work to finalize the Basel III framework and underlines the need for greater transparency and accountability to enhance the legitimacy and ownership of the BCBS’ deliberations.
  • Stresses that the current revision should respect the principle of not significantly increasing overall capital requirements, while at the same time strengthening the overall financial position of EU banks. The Parliament also underlines the equally important principle to be respected of promoting the level playing field at the global level, by mitigating rather than exacerbating the differences between jurisdictions and banking models, and by not unduly penalizing the EU banking model.
  • Is concerned that early analysis of recent BCBS drafts indicates that the reform package at its current stage might not comply with the principles mentioned above. As a result, the Parliament calls on the BCBS to revise its proposals accordingly, and calls on the European Central Bank (“ECB“) and the Single Supervisory Mechanism (SSM) to ensure respect of the principles in finalizing and monitoring the new standard. The Parliament underlines that this approach would be instrumental in ensuring consistent implementation of the new standard by the Parliament as co-legislator.
  • Calls for dialogue and an exchange of best practices among regulators concerning the application of the principle of proportionality to be established at EU and international levels.
  • Calls on the European Commission to prioritize work on a “small banking box” for the least risky banking models. The Parliament also calls on the Commission to extend this work to an assessment of the feasibility of a future regulatory framework consisting of less complex and more appropriate and proportional prudential rules specifically adapted to different types of banking models.
  • Stresses the importance of the role of the Commission, the ECB and the EBA in engaging in the BCBS’ work, and in providing transparent and comprehensive updates on developments in the BCBS’ discussions. The Parliament calls for this role to be given stronger visibility during meetings of the European Economic and Financial Affairs Council (ECOFIN), and for enhanced accountability to its Economic and Monetary Affairs Committee (ECON).

The Parliament has instructed its President to forward the resolution to the Commission.

European Court of Auditors Special Report on Single Supervisory Mechanism

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On November 18, 2016, the European Court of Auditors published a report on the Single Supervisory Mechanism (“SSM“) (No 29/2016). The SSM was set up by the European Central Bank (“ECB“) to ensure the consistent application of prudential rules across the euro-zone countries. The report examines the setup and workings of the SSM and concludes that the complexity of the new system is a challenge, especially because it relies too heavily on the resources of national supervisors. This means that despite the ECB’s overall responsibility, the ECB has insufficient control over some important aspects of banking supervision.

The full report can be found here, but, in brief, specific concerns identified in the report relate to:

  • Under resourcing of internal audit for its work on the SSM, which is given less attention than other audit tasks.
  • Efforts to ensure transparency and accountability for the SSM towards the European Parliament and the general public are potentially weakened by the lack of a proper process for assessing and then reporting on supervisory effectiveness.
  • The independence of the ECB’s work relating to monetary policy and supervision functions.
  • Insufficient staffing levels and overdependence on staff appointed by national authorities leading to the ECB having insufficient control over the composition and skills of supervision and inspection teams.
  • Insufficient allocation of resources to joint off-site supervisory teams.
  • Inspection teams for on-site supervision include insufficient ECB staff. There are also concerns over missing guidance on prioritization for inspection requests, IT shortcomings and the qualifications of national competent authority on-site inspectors.

The report sets out a number of recommendations on how the SSM could be improved in relation to issues outlined above and explains that the ECB was not willing to share a number of documents needed for the audit to be completed. As a result, the report only reflects a partial assessment of whether the ECB is managing the SSM efficiently in the areas of governance, off-site supervision and on‑site inspections.

ECB Publishes Regulation and Guidance on Options and Discretions Available in Union Law

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On March 24, 2016, Regulation ((EU) 2016/445) of the European Central Bank (ECB) on the exercise of options and discretions (ODs) was published in the Official Journal of the EU (OJ). The ECB has also published a guide on the ODs available under Union law.

The Regulation details the legal obligations of the significant credit institutions within the scope of the single supervisory mechanism (SSM) regarding the prudential treatment of certain “general” ODs available to competent authorities under EU banking law (that is, the CRD IV Directive (2013/36/EU), the Capital Requirements Regulation (Regulation 575/2013) (CRR) and delegated acts).

The guide sets out the ECB’s approach concerning the exercise of the ODs. It aims to provide coherence, effectiveness and transparency regarding the supervisory policies that will be applied in supervisory processes within the SSM as far as the significant credit institutions are concerned. In particular, it is designed to assist the joint supervisory teams (JSTs) in the performance of their tasks regarding the principles the ECB intends to follow in supervising significant credit institutions.

A related ECB press release advises that, soon, the ECB will launch a consultation on how to harmonise a second, smaller group of identified ODs. Regulation. Guide.