Regulatory updates from CACIB DCM solutions


SRB updates banks on MREL post Banking Package adoption

In light of the recent adoption of the Banking Package (7 June) — comprising CRR2, CRDV, BRRD2 and SRMR2 — the Single Resolution Board organised its eighth industry dialogue with banks under its remit, in which the authority clarified how it intends to apply MREL and resolution planning under the new legislation.

The SRB clarified that until the BRRD2 transposition (28 December 2020), it will issue MREL decisions based on the current legal framework (SRMR1/BRRD1) implemented via the SRB 2018 MREL policy, while resolution entities of G-SIIs and material subsidiaries of third country G-SIIs will be subject to the external and internal TLAC requirements, based on CRR2, in parallel with the SRB MREL decisions based on BRRD 1/SRMR1.

Additionally, the SRB announced the introduction of an authorisation process with institutions being required to seek approval to call, redeem, repay or repurchase eligible liabilities instruments before they reach their contractual maturity. The permission regime is applicable to G-SIIs and institutions with MREL decisions, while the two types of permissions announced are an instrument-by-instrument permission regime and a general prior permission regime.

Regarding the new Banking Package, the SRB intends to publish the new MREL policy in March 2020, with banks receiving their MREL targets under BRRD2/SRMR2 by March 2021.

Following the eighth industry dialogue, the SRB also published on 25 June an addendum to the 2018 SRB MREL policy for the second wave of resolution plans, which applies to all institutions for which MREL decisions have or will be taken for the 2018 and 2019 resolution planning cycles.

One of the addendum’s key elements is that no prior permission will be required in order to perform market-making and other secondary market activities in own eligible liabilities instruments until 31 December 2019 (subject to specific conditions). In order to continue performing these activities as of 1 January 2020 without an instrument-by instrument approval, banks must have obtained a general prior permission.

Finally, the SRB communicated that an allowance for senior instruments may be granted for external TLAC purposes, of up to 2.5% of RWA until 31 December 2021, 3.5% of RWA from 1 January 2022 and where excluded liabilities ranking pari passu or lower do not exceed 5% of the amount of the own funds and eligible liabilities of the institution. As a transitional arrangement in the CRR, an allowance of 2.5% of RWA will be applicable for G-SIIs until the SRB assesses if there is any material risk of successful legal challenge or valid compensation claims in relation to the no creditor worse off (NCWO) principle.


FSB publishes technical review of TLAC standard

On 2 July, the Financial Stability Board (FSB) released a review of the technical implementation of the FSB principles and term sheet on the adequacy of total loss-absorbing capacity (TLAC) for globally systemically important banks (G-SIBs).

According to the review, progress has been steady and significant in both the setting of external TLAC requirements by authorities and the issuance of TLAC by G-SIIs, while all relevant G-SIBs meet or exceed the TLAC target ratios of at least 16% of RWAs and 6% of the Basel III leverage ratio denominator. Additionally, the FSB concluded that there is no need to modify the TLAC standard.

Finally, the FSB aims to support the implementation of the TLAC standard, among other actions, by continuing to monitor implementation and issuance of TLAC instruments, reporting annually on progress, and considering, as part of ongoing work on bail-in execution, any technical issues relating to bail-inability of TLAC, including TLAC issued under third country law and securities law issues.

EBA publishes updated risk dashboard

On 4 July, the European Banking Authority (EBA) updated its risk dashboard for the first quarter of 2019. The key findings show that the fully-loaded and transitional CET1 ratios remained unchanged, at 14.5% and 14.7%, respectively, non-performing loans (NPLs) improved, while only 25% of banks expect improved profitability in the next six to 12 months.

Countercyclical buffer on an upward trend in Europe

The National Bank of Belgium and Germany’s Federal Financial Supervisory Authority (BaFin) introduced in June Countercyclical Buffer (CCyB) requirements of 0.50% and 0.25%, respectively. Additionally, Denmark’s Systemic Risk Council announced that it expects to recommend a further increase of the CCyB requirement to 2% in the 3rd quarter of 2019 unless the build-up of risks slows down considerably, while it stated that “it is the Council’s opinion that the buffer rate should be gradually increased to a level of 2.5%”.

EIOPA consults on harmonisation of national insurance guarantee schemes

On 12 July, the European Insurance & Occupational Pensions Authority (EIOPA) issued a consultation on the harmonisation of national insurance guarantee schemes to assist with preparing its advice to the European Commission. EIOPA is calling for the establishment of a European network of national insurance guarantee schemes to protect policyholders in the event of a failure of an insurer.

EIOPA launches consultation on opinion on sustainability within Solvency 2

On 3 June, EIOPA launched a consultation on a draft opinion on sustainability within Solvency 2. The draft opinion aims at integrating sustainability risks, in particular those related to climate change, in the investment and underwriting practices of insurance companies. The opinion addresses the valuation of assets and liabilities, assesses current investment and underwriting practices, and seeks to contribute to the integration of sustainability risks in market risks and natural catastrophe underwriting risks for the solvency capital requirements for standard formula and internal model users.

According to the report, stakeholders generally argue that sustainability considerations, in particular climate change, could not usefully be reflected in Pillar 1 requirements. Firstly, a prudential framework for capital requirements, based on a one year time horizon, would be too short for solvency capital requirements to reflect climate change risks. Secondly, specifically for traditional non-life business, the insurance cover period (during which claims can occur) only spans the next 12 months, at the end of which insurers can theoretically adjust the pricing for the future, based on claims experience.

EIOPA publishes recommendations following the 2018 insurance stress test

On 26 April, EIOPA published its recommendations to National Competent Authorities (NCAs) of how to address vulnerabilities identified by the 2018 Insurance Stress Test. EIOPA recommends that NCAs:

- strengthen supervision of the groups identified as facing greater exposure to Yield Curve Up and/or Yield Curve Down scenarios

- carefully review and, where necessary, challenge the capital and risk management strategies of the affected groups

- evaluate the potential management actions to be implemented by the affected groups

- contribute to enhancing the stress test process

- enhance cooperation and information exchange with other relevant authorities, such as the ECB/SSM or other national authorities, concerning the stress test results of the affected insurers that form part of a financial conglomerate.

EIOPA will support NCAs and undertakings through guidance and other measures, if necessary.

Main photo: SRB headquarters, Brussels