On 13 November 2020, the European Banking Authority (EBA) published the final methodology, draft templates and template guidance for the 2021 EU-wide stress test along with the key milestones of the exercise. Banks are required to estimate the evolution of a common set of risks (credit, market, counterparty and operational risk) under an adverse scenario. In addition, banks are requested to project the impact of the scenarios on the main income sources. Key milestone dates of the 2021 EU-wide stress test exercise are:
Supervisory authorities adopted a comprehensive set of measures in response to the COVID-19 pandemic to avoid a procyclical decline in bank lending. Measures included temporary capital relief by allowing banks to use capital buffers, including Pillar 2 guidance (P2G) and adjustments to the composition of Pillar 2 requirements (P2R), recommendations to temporarily cancel dividends, and measures to avoid procyclical effects in IFRS9. This is only effective if banks allow their regulatory capital ratios to decline. In this publication, the European Central Bank (ECB) concludes that banks seem unwilling to adjust fully, if at all, to the recent buffer releases. Empirical evidence shows that market pressure is an impediment to the usability of buffers: banks may refrain from using their capital buffers to avoid potential increases in their funding costs. Moreover, banks tend instead to raise their target CET1 ratio when faced with an adverse economic and financial environment, offsetting the expansionary effect of buffer releases.
On 3 November 2020, the EBA published a Discussion Paper (DP) on Environmental, Social and Governance (ESG) risk management and supervision. It provides a proposal on how ESG factors and risks could be included into business strategies, governance and risk management and in the regulatory and supervisory framework for credit institutions and investment firms. The main focus of the DP is on the risks institutions are exposed to via the impact of ESG factors on their counterparties. It discusses the risks arising from environmental factors (particularly climate change) and describes ongoing initiatives and progress on this topic over the recent years. The aim of the DP is to obtain feedback for the preparation of the final report on ESG risks management and supervision. The consultation runs until 3 February 2021.
Swiss financial centre on the way to more sustainability and FINMA consultation on transparency obligations from climate risks. The Swiss Bankers Association (SBA) has recommended that its members take the voluntary climate compatibility test set by the Federal Office for the Environment (FOEN). The climate compatibility test enables banks, asset managers, insurance companies and pension funds to assess the extent to which their portfolios and loans contribute to the goals of the 2015 Paris Climate Change Agreement (i.e. reducing global warming to below two degrees Celsius). A high level of participation to the climate compatibility tests enables a representative analysis of the progress in meeting climate targets.
In addition, the Swiss Financial Market Supervisory Authority FINMA aims to increase transparency with regard to financial risks related to climate change and is therefore planning to amend its Circulars “Disclosure – banks” and “Disclosure – insurers”. FINMA’s public consultation on these amendments runs until 19 January 2021.
Please contact Pieter Klaassen for more information on climate risk.
The Financial Stability Board (FSB) has identified that reliance of global financial markets on LIBOR poses clear risks to global financial stability. The LIBOR benchmarks are not guaranteed to continue to be available after the end of 2021. Use of LIBOR in the five LIBOR currencies (USD, GBP, EUR, JPY and CHF) is widespread. As such, transition away from LIBOR by end-2021 requires significant commitment and sustained effort from both financial and non-financial institutions. For this, the FSB has setup a transition roadmap: