On 29 July 2020, the European Central Bank (ECB) announced changes to the organisational structure of its supervisory arm to ensure continued effective and efficient supervision of banks in the euro area and beyond. The organisational changes will include the creation of two additional business areas in the ECB’s banking supervision arm – bringing the total to seven – and the redistribution of tasks across business areas.
Bank-specific supervision will be organised according to banks’ business models and will be supported by teams of risk or subject matter experts. The reorganisation builds on six years of experience in European banking supervision and shifts the focus towards more risk-focused supervision. The changes are expected to be completed in the fourth quarter of 2020.
On 26 June 2020, the European Banking Authority (EBA) published a discussion paper exploring ways on how to enhance the Bank Recovery and Resolution Directive (BRRD) framework on early intervention measures. The objective is to further enhance crisis management tools available for competent authorities in addition to well-established and widely used supervisory powers laid down in the Capital Requirements Directive (CRD) and in the Single Supervisory Mechanism Regulation (SSMR).
The Board of Supervisors (BoS) of the European Banking Authority (EBA) agreed on the tentative timeline and sample of the 2021 EU-wide stress test. The exercise is expected to be launched at the end of January 2021 and its results to be published at the end of July 2021. The EBA has also agreed on the preliminary timeline for the potential future changes to the EU-wide stress test framework. A final decision on potential changes to the framework, which takes account of the feedback received on the discussion paper is expected to be taken in Q2-Q3 2021, while the implementation of any potential change will be possible for the 2023 EU-wide stress test. A summary of this discussion paper on the proposed changes was shared on this website.
On 8 July 2020, the European Central Bank (ECB) published a guideline on the definition of the so-called “materiality threshold” for banks that are directly supervised by national supervisors, following a public consultation. The materiality threshold refers to the point at which a bank decides a debtor is in default on its loan. The new definition specifies how national supervisors should exercise their discretion in this regard.
EBA consults on draft technical standards on default probabilities and loss given default for default risk model under the internal approach for market risk. On 22 July 2020, the European Banking Authority (EBA) launched a consultation on draft Regulatory Technical Standards (RTS) on default probabilities (PDs) and losses given default (LGDs) for default risk model for institutions using the new Internal Model Approach (IMA) under the Fundamental Review of the Trading Book (FRTB). These draft RTS clarify the requirements to be met for the estimation of PDs and LGDs under the default risk model. In particular, the draft RTS specify that any internal methodology used to calculate PDs and LGDs under the default risk model should meet all requirements applied for the Internal ratings‐based (IRB) approach. The consultation runs until 22 October 2020.
The Climate Financial Risk Forum publishes its guide to help the financial industry address climate-related financial risks and the Sustainable Finance Platform encourages financial institutions to discuss climate risks with customers.
On 29 June 2020, the Climate Financial Risk Forum (CFRF) published a guide written by the industry to help banks, asset managers and insurers deal with climate-related financial risks. The guide includes recommendations to firms of all sizes on four key areas (disclosure of climate-related financial risks, risk management, scenario analysis and opportunities for innovation) and is complementary to existing frameworks and initiatives such as the Taskforce on Climate-related Financial Disclosures (TCFD).
The guide sets out three ways to approach climate risk: it could be treated i) as a standalone “principal” risk type, ii) as a “cross-cutting” risk within other existing risk types or iii) both within existing risk types and as a principal risk. Firms should decide on the appropriate approach based on a materiality assessment of climate risks.
The Sustainable Finance Platform, a group of Dutch financial institutions, also published a document on climate risk. The document describes how these institutions (ABN AMRO, APG, ING, Kempen, MN, Rabobank, Robeco and Volksbank) manage climate risks in their portfolios and underlines the most important insights and challenges. It also includes specific recommendations to the government, regulators and the financial sector. One of the main conclusions is that more attention should be paid to climate risks during customer conversations.
For corporate clients this means addressing the possible impact of climate risks on their business operations and for mortgage owners the discussion will be around making houses more sustainable. Another important conclusion is that the government and supervisors should publish relevant climate data and make it easily accessible, for example via a European ESG-register. The platform intends to organize a knowledge session based on the publication after the summer.
In order to properly reflect the changes introduced in the bank recovery and resolution directive (BRRD) the European Banking Authority (EBA) has published a consultation on the reporting standard for minimum requirement for own funds and liabilities eligible for bail-in (MREL). MREL must be set for each institution based on criteria laid down in the BRRD. To enable the EBA to monitor the consistency of implementation across the Union, resolution authorities are required to inform the EBA of the minimum requirement that has been set for each institution in their jurisdiction.
Next to the reporting consultation the EBA also launched a consultation on the methodology to be used by resolution authorities to estimate the Pillar 2 (P2R) and combined buffer requirements (CBR) at resolution group level for the purpose of setting the MREL.
Also, a consultation on the so called “daisy chains of internal MREL” pattern was published by EBA. The goal is to avoid that the MREL instruments are indirectly subscribed by the resolution entity, applicable to entities that are not themselves resolution entities, hamper the smooth implementation of the resolution strategy.