European Systemic Risk Board

ESRB Recommendation Amending 2015 Recommendation on EU Macroprudential Policy Framework Published in OJ

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On December 15, 2017, the Recommendation of the European Systemic Risk Board (“ESRB“) (ESRB/2017/4) (dated October 20, 2017) amending Recommendation ESRB/2015/2 on the assessment of cross-border effects of, and voluntary reciprocity for, macroprudential policy measures was published in the Official Journal of the EU (OJ).

The recommendation states that the framework on the voluntary reciprocity for macroprudential measures set out in the 2015 recommendation should ensure that all exposure-based macroprudential policy measures activated in one member state are reciprocated in the other member states to the greatest extent possible. Relevant authorities in member states may exempt an individual firm with nonmaterial exposure from the application of the reciprocating measures. (the “De Minimis Principle“).

The 2015 recommendation provided no guidance on the threshold to be used by relevant authorities to determine the materiality of exposure. Consequently, where a relevant authority has exempted a firm with nonmaterial exposure, the authority has been able to adopt the threshold it considers appropriate, creating potential divergences in the application of the de minimis principle.

As a result, the 2017 recommendation amends the 2015 recommendation by stating that the relevant authority should propose a maximum materiality threshold at the firm level when requesting reciprocation.

 

 

EBA Opinion on Nonbank Financial Intermediaries and Regulatory Perimeter Issues Under CRD IV and CRR

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On November 9, 2017, the European Banking Authority (“EBA“) published an own-initiative opinion (EBA/Op/2017/13) addressed to the European Parliament, the Council of the EU and the European Commission on nonbank financial intermediaries and regulatory perimeter issues under the Capital Requirements Directive IV (2013/36/EU) (“CRD IV Directive“) and the Capital Requirements Regulation (Regulation 575/2013) (“CRR“).

Publication of the opinion is part of the EBA’s work to regularly monitor credit intermediation activities outside the traditional banking system. This work takes account of other developments, including the emergence of FinTech. The opinion is based on the results of a detailed assessment across the EU of the prudential treatment of “other financial intermediaries” (“OFIs“). (OFIs are entities carrying out credit intermediation activities that are not credit institutions or other specified types of financial entity.) The results of the assessment are set out in a report, which the EBA has published alongside the opinion.

In terms of the overall scope of the CRD IV Directive and the CRR, the EBA observes that Article 2(5) of the CRD IV Directive (which lists entities excluded from the scope) remains valid and requires minor updating. Also, Article 9(2) of the CRD IV Directive (which sets out other exclusions) appears to continue to have relevance in member states, so any amendment should be substantiated by a prior and thorough impact assessment.  READ MORE →

ESRB Reports on Revision of EMIR

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On April 21, 2017, the European Systemic Risk Board (“ESRB“) published a report on the revision of the European Market Infrastructure Regulation (the “EMIR“).

The report welcomes the European Commission’s November 2016 report on the outcome of its EMIR review, which the Commission carried out under Article 85(1) of EMIR. The ESRB supports the Commission’s plan to revise EMIR to include an emergency mechanism for quickly suspending the clearing obligation and to increase the transparency and predictability of margin requirements.

The ESRB agrees with the Commission that no fundamental change to EMIR is currently required, although it does recognize that some aspects of EMIR could be improved, such as improving the trade data reporting framework and transparency by obliging central counterparties (“CCPs“) to publish qualitative and quantitative information consistent with the Committee on Payments and Market Infrastructures – Board of International Organization of Securities Commissions disclosure framework.

In addition, the report suggests that enhancing tools in EMIR that restrict procyclicality would reduce risks to financial stability and could simplify EMIR requirements and make them more efficient.

Although the ESRB recognizes the difficulties faced by some counterparties in meeting the clearing obligation, it supports a broad application of the obligation, including for pension scheme arrangements and large nonfinancial counterparties that are active in the derivatives market.

A comprehensive review of EMIR will be needed in the future. This comprehensive review should address issues such as the potential use of margins and haircuts to meet macroprudential objectives when the analysis needed to develop these tools has progressed.

The ESRB restates its previous proposals, including revising the determination mechanism of dedicated resources and interoperability arrangements. The ESRB reported on CCP interoperability arrangements in January 2016, and published two earlier reports on EMIR to assist the Commission with its Article 85 review of the Regulation in July 2015.

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.

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.

New Structure for European Financial Supervision

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On September 22, the European Parliament approved a new structure for financial supervision. Three European Supervisory Authorities are established with broader powers than the current supervisory committees they replace, including the power to settle disputes among national financial supervisors and to impose temporary bans on risky financial products and activities. A European Systemic Risk Board is also established to monitor and warn about the general build-up of risk in the EU economy. Press Release.