Regulatory updates: Parliament adopts SRM, BRRD and DGS

The plenary vote of the European Parliament on the Single Resolution Mechanism, Bank Resolution & Recovery Directive (BRRD) and the Deposit Guarantee Schemes (DGS) took place on April 15. The European Parliament (EP) and the Council had reached a provisional agreement on 24 March on the proposed Single Resolution Mechanism (SRM) after long negotiations. The SRM would enter into force on 1 January 2015, whereas bail-in and resolution functions would apply from 1 January 2016, as specified under the BRRD. (For more details, please see here).

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EBA launches discussion on impact of the deduction of defined benefit pension plans: The European Banking Authority (EBA) (pictured) published on 17 February a discussion paper on the impact on the volatility of own funds of the revised International Accounting Standard for employee benefits (IAS 19) and the deduction of defined benefit pension assets from own funds in accordance with the Capital Requirements Regulation (CRR). The discussion paper gives the EBA’s preliminary views based on: (i) a qualitative analysis of the accounting and prudential changes and their impact on the volatility of own funds; (ii) a quantitative analysis of this impact for a sample of EU institutions; and (iii) a qualitative analysis of the factors that may impact the volatility of own funds in the future. Following the outcome of this consultation, the EBA will deliver its report to the Commission by 30 June 2014.

EBA publishes final draft RTS on instruments used for variable remuneration: The EBA published on 19 February its final draft Regulatory Technical Standards (RTS) on classes of instruments that can be used for the purposes of variable remuneration, which responds to the mandate contained in Article 94(2) of CRD IV. The document introduces the requirements for Additional Tier 1, Tier 2, and a sundry category defined as “Other Instruments”, and specifies the write-down, write-up and conversion loss absorption mechanisms.

EBA reports on impact of possible leverage ratio definitions: The EBA published on 5 March a report recommending the alignment of the CRR leverage ratio definition to the Basel Committee on Banking Supervision (BCBS) January 2014 standard. Overall, the EBA assessment indicates that the revised Basel III framework leads to leverage ratios that are broadly in line with, or possibly slightly higher than, leverage ratios calculated according to the current CRR. Through its delegated act, the European Commission is empowered to amend, as per the CRR, the capital measure and total exposure measure before the start of public disclosure of leverage ratios in 2015.

EBA consults on revised guidelines on remuneration benchmarking and data collection for high earners: The EBA launched on 7 April consultations on its revised Guidelines on the data collection exercise for high earners and on its Guidelines on the remuneration benchmarking exercise. The updates to these two Guidelines, which had originally been published on 27 July 2012, follow on from changes in reporting requirements as laid down in CRD IV and CRR. Both public consultations will run until 7 May.

BCBS finalises capital standard for bank exposures to central counterparties: The Basel Committee published on 10 April a final standard for calculating regulatory capital for banks’ exposures to central counterparties (CCPs), which will replace the interim capital requirements published in July 2012. The final standard will take effect on 1 January 2017, with the interim requirements applying until then.

BCBS releases new progress report on Basel implementation: The Basel Committee published an updated version of the Progress report on implementation of the Basel regulatory framework, which provides a high level view of Basel Committee members’ progress in adopting Basel III, as of end-March. The document also states that the Regulatory Consistency Assessment Programme (RCAP) assessment for the EU and the US is currently underway, and a report will be published in September 2014.

European Central Bank publishes the manual for the “Phase 2” (on-site inspections) of the Asset Quality Review (AQR) on 11 March: This manual has been issued to the National Competent Authorities (NCAs) and details technical instructions on how to perform the Phase 2 on-site inspections of the AQR. This review will cover Eu3.7tr of assets, which represents 58% of the total Risk Weighted Assets (RWAs) of the 128 selected banks. It will focus particularly on the riskiest assets, including Level 3 exposures assets that have the higher potential for misstatement. The AQR is a key component of the Comprehensive Assessment, which aims to enhance the transparency of the balance sheets of significant banks, trigger balance sheet repair where necessary, and rebuild investor confidence prior to the ECB taking over its supervisory tasks in November 2014. Phase 2 must be completed by the end of July and the Stress Tests will follow during the summer. The results will be published in October. The AQR adjusted minimum CT1 threshold for banks is 8% for the “baseline scenario” and 5.5% for the “adverse stress test scenario”.

FSB publishes report to G20 on reform priorities: In a document addressed to the G20, the Financial Stability Board (FSB) reviewed what remains to be completed in terms of financial reforms ahead of the Brisbane Summit in November. The priorities for international regulators include:

  • The Basel Committee plan to address excessive variability in RWA calculations, to improve consistency and comparability in bank capital ratios;
  • The finalisation of the proposed Net Stable Funding Ratio (NFSR), which is designed to improve the resilience of bank funding and to complement the Liquidity Coverage Ratio (LCR) that has already been agreed;
  • A global standard for a minimum level of gone-concern loss-absorbing capacity that global systemically important banks should hold to be proposed by the FSB;
  • Proposals for contractual or statutory approaches for cross-border recognition of resolution actions, including bail-in and temporary stays on the close-out of financial contracts, and cross-default rights when a firm enters resolution.

PRA releases consultation on approach to supervising international banks: The UK Prudential Regulation Authority (PRA) is seeking views on its proposed approach to supervising international banks (CP4/14), with a specific focus on branches from outside the European Economic Area (EEA). It will be relevant to all PRA-supervised deposit-takers and designated investment firms operating in the UK that are not UK-headquartered. The consultation ends on 27 May. The document includes the following draft new rules:

  • The requirement for all deposit-taking and/or designated investment firms that operate through EEA and non-EEA branches to complete a new data collection return to be effective from 2015. The purpose is to enhance the PRA’s understanding of the potential impact that branches could have on UK financial stability, consistently with Article 40 of CRD IV.
  • The requirement for all non-EEA firms to have adequate provision made in resolution plans for UK branches, which should be read alongside the recently announced CP2/14. A firm that does not comply with the proposed rule would likely fail to satisfy the Threshold Condition requiring that the firm have adequate non-financial resources.

US regulators prepare to approve rules limiting biggest banks’ leverage: The Federal Reserve, Federal Deposit Insurance Corporation and Office of the Comptroller of the Currency are set to finalise a leverage ratio proposal under which eight of the biggest US banks must retain at least 5% capital against their total assets. The limit, which would affect firms including JPMorgan Chase and Bank of America, is tougher than the 3% standard agreed by the Basel Committee. The agencies will also propose a revision to the leverage rule. The proposed rule will be open for public comment.

Tarullo defends Foreign Banking Organization (FBO) rules: During a speech at a Harvard Law School Symposium on 27 March, Federal Reserve Board governor Daniel Tarullo defended the Fed’s new capital regulations applicable to FBOs. According to Tarullo, the US capital requirements for FBOs are structurally similar to those that apply to foreign banks in the EU, with the new US rules being somewhat more favourable to foreign institutions in that they only apply once the non-branch US assets of an FBO exceed $5bn (Eu3.61bn). The observations came as a response to a “curious” charge of “Balkanization” that has been levelled at the US.

Germany clears tax treatment for AT1: The German Federal Ministry of Finance released on April 10 the details of the tax regime for banks’ AT1 instruments, clearing the legal uncertainty over the deductibility of the notes. The Association of German Banks welcomed the decision. (For more details, please see here)


European Parliament adopts Omnibus II Directive: The European Parliament on 11 March adopted in plenary session the Omnibus II Directive, by 560 votes to 113 against, thus avoiding the risk of a delay to the new legislation. The Omnibus II Directive completes the Solvency II Directive and finalises the new framework for insurance regulation and supervision in the EU. The Solvency II Directive should apply as of 1 January 2016. After adoption by the European Parliament, the directive will need to be formally adopted by the Council and be published in the Official Journal. It will enter into force the day after publication.

The Joint Committee of the European Supervisory Authorities publishes consultation paper on Financial Conglomerates Directive: The consultation paper is seeking to provide guidelines on the cooperation between NCAs for Financial Conglomerates. The consultation period will take place until 12 June and final guidelines will be published in the second half of the year.

IAIS releases summary of feedback from consultation on BCR for G-SIIs: The International Association of Insurance Supervisors (IAIS) has published the summary of the feedback received on the consultation on Basic Capital Requirements (BCR) for Global Systemically Important Insurers (G-SIIs), launched in Dec. 2013. Among the main feedback:

  • Objective of the BCR: Concerns about a lack of clarity of the BCR’s objective, with a general discomfort with focus on “going-concern” as a goal. Some believe it should focus on gone-concern only. A large number of respondents believe BCR should be a minimum (MCR);
  • Capital resources: Many expressed the view that BCR should not have tiering of capital. Several also believe qualification of capital resources should be principles-based rather than rules-based There was some concern that supervisory discretion on transferability/fungibility of capital reduces comparability and should be minimised;
  • Interaction with other capital requirements: Many respondents expressed concern that BCR should not increase or conflict with existing group capital requirements on insurers. Many also pointed out that the intended interaction between BCR and other standards/policy measures (HLA; ICS; ICP 17) lacked clarity;
  • Timing: While nearly all agreed the timeframe was tight, several respondents explicitly requested IAIS reconsider the timeframe for BCR. Several suggested implementing a phase-in period for BCR to allow for further calibration. Two respondents urged IAIS to seek FSB agreement to deliver the framework by November and calibrate during 2015.

EIOPA releases the first set of Implementing Technical Standards (ITS) for Solvency II: On 1 April, European Insurance & Occupational Pensions Authority (EIOPA) invited stakeholders to comment on the first set of ITS. It defines the procedures for the approval processes of the Matching Adjustment, Ancillary Own Funds, Undertaking-Specific Parameters, Internal Models and Special Purpose Vehicles, as well as the joint decision process on Group Internal Models. Comments are due by 30 June. EIOPA will then submit the ITS to the European Commission by 31 October 2015 for final endorsement.

Council approves amending rules for the insurance industry: On 14 April, the Council approved amendments to EU rules for the insurance industry in respect of the powers of two EU-level supervisory authorities. The amendments include the provision of specific tasks for EIOPA and the European Securities & Markets Authority (ESMA). In particular, they clarify the role of EIOPA in ensuring harmonised technical approaches for the calculation of technical provisions and capital requirements.