Financial Services Regulation and Compliance – Banking Oct 2020

DOMESTIC

Gabriel Makhlouf addresses the Joint Oireachtas Committee on Finance, Public Expenditure and Reform

The Governor of the CBI, Gabriel Makhlouf, has addressed the Joint Oireachtas Committee on Finance, Public Expenditure and Reform commenting on issues such as the economic outlook, payment breaks and the tracker mortgage examination.

In relation to payment breaks, Makhlouf noted that it is the CBI’s expectation that lenders engage effectively and sympathetically with distressed borrowers. In particular, Makhlouf commented that the CBI expects lenders to adopt interim measures to support borrowers experiencing temporary income shocks. In relation to the tracker mortgage examination, Makhlouf noted that the CBI continues to monitor the outcome of all decisions of the Financial Services and Pensions Ombudsman and the Irish courts to identify systemic issues with wider customer impact.

EUROPEAN

Opinion piece – Yves Mersch: ECB raises bar on bank governance

In an opinion piece published by several European media outlets, Yves Mersch, vice-chair of the ECB’s supervisory board, noted that the integrity and competence of a bank’s directors are one of the most important lines of defence against mismanagement and fraud. In particular, Mersch indicated that the ECB will be implementing a stricter and more intrusive approach to future fit and proper assessments. Mersch also noted that the ECB expects to publish an updated guide on fit and proper assessments in due course.

EBA publishes final guidelines on the appropriate subsets of sectoral exposures in the application of a systemic risk buffer

Following the entry into force of the fifth Capital Requirements Directive (CRD V), the EBA has published a set of guidelines on the appropriate subsets of sectoral exposures to which a competent or designated authority may apply a systemic risk buffer. The guidelines suggest a common framework of dimensions and sub-dimensions from which a competent authority can define a subset of exposures and include detailed definitions of elements used in each dimension and sub-dimension, along with examples of application.

EBA publishes quarterly risk dashboard

The EBA has published its quarterly risk dashboard. The updated dashboard covers data from Q2 2020 and summarises the main risks and vulnerabilities in the EU banking sector.

Notable statistics covered in this latest dashboard include:

  • the CET1 ratio increased on a fully loaded basis by 30bps to 14.7%
  • non-performing loans (NPLs) stopped their multi-year declining trend
  • return on equity (RoE) declined further to 0.5% from 1.3% in Q1
  • revenues in the sector remain under pressure, driven by the prolonged low rate environment and publicly-guaranteed new lending

ECB publishes supervisory banking statistics for the second quarter of 2020

The ECB has published a range supervisory statistics for Q2 2020.

Notable statistics include:

  • capital ratios of significant institutions increased in the second quarter of 2020, with aggregate total capital ratio back to year-end levels at 18.64% (up from 18.11% in first quarter of 2020)
  • aggregate non-performing loan ratios declined further to stand at 2.94%, the lowest level since such data was first published in 2015
  • liquidity coverage ratio increased significantly to 165.46% (up from 146.57% in first quarter of 2020)
  • annualised return on equity fell to an aggregate level of 0.01% at the end of the second quarter of 2020, down from 6.01% a year earlier

Interview – Kerstin af Jochnick: ECB Banking Supervision priorities amid the pandemic

In an interview, Kerstin af Jochnick, a member of the ECB’s supervisory board, commented that the COVID-19 pandemic will likely accelerate trends which were already under way before the crisis. Af Jochnick indicated that low profits at European banks continues to be one of the ECB’s biggest challenges and that banks must find the right business model to ensure their sustainability and protect investor interests.

In addition, af Jochnick noted that the pandemic has triggered a decisive push for digital products with digitalisation becoming an integral part of banks’ business models. In this regard, af Jochnick commented that banks will need to revise their costs structures or consider other revenue sources that will permit a higher investment in technology while keeping profits afloat.

EBA supports harmonisation of creditworthiness assessment for consumer credit across the EU

The EBA has responded to a European Commission consultation on the proposed new consumer agenda by expressing its support for harmonisation of creditworthiness for consumer lending across the EU. The EBA’s response also calls for the introduction of binding principles on responsible lending, including an obligation to take into account target consumer interests, objectives and characteristics when designing credit products.

EBA publishes draft regulatory technical standards specifying the prudential treatment of software assets

The EBA has published its final draft regulatory technical standards (RTS) on the prudential treatment of software assets. The RTS will replace the current upfront full deduction regime. The RTS seek to strike an appropriate balance between the need to maintain sufficient conservatism in the prudential treatment of software assets and the increasing relevance of such assets from a business and economic perspective. The RTS propose a prudential amortisation of software assets calibrated over a period of a maximum three years.

EBA consults on the revision of guidelines on major incident reporting under PSD2

The EBA has launched a public consultation to propose revising the guidelines on major incident reporting under PSD2. The proposal aims to optimise and simplify the reporting process by capturing additional relevant security incidents and reducing the number of operational incidents that are reported. The revision of the guidelines also aims to reduce the reporting burden on payment service providers.

The consultation is open until 14 December 2020.

EBA issues opinion to address possible infection risk stemming from legacy instruments

The EBA has issued an opinion to clarify the prudential treatment of the so-called ‘legacy instruments’ in view of the end of the grandfathering period on 31 December 2021. In the opinion, the EBA proposes policy options to address so-called infection risk created by such instruments. The EBA recommends that institutions can either call, redeem, repurchase or buyback the relevant instrument or, alternatively, amend its terms and conditions. These recommendations aim to ensure a high quality of capital for EU institutions and a consistent application of rules and practices across the Union.

EBA issues first monitoring report on TLAC-MREL instruments

The EBA has published its first monitoring report on minimum requirements for own funds and eligible liabilities (MREL) and total loss absorbing capacity (TLAC) instruments. The report is based on the EBA’s review of 27 transactions issued in 14 jurisdictions for the total amount of €22.75bn. The report covers five main areas of assessment to determine the quality of the MREL/TLAC instruments: availability, subordination, capacity for loss absorption, maturity and other aspects, such as governing law. The report contains 15 recommendations in total, four in the area of subordination, seven in the area of capacity for loss absorption, three in the area of maturity and one in the area of tax gross-up.

EBA launches consultation on revised guidelines on sound remuneration policies

The EBA has launched a public consultation on its revised guidelines on sound remuneration policies. The review takes into account the amendments introduced by the fifth Capital Requirements Directive (CRD V) with a particular focus on the requirement that remuneration policies should be gender neutral.

The consultation runs until 29 January 2021.

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