EBA seeks input from institutions on their ESG disclosure practices

17 September 2020

The European Banking Authority (EBA) published today an online survey to receive input from credit institutions on their practices and views in the area of disclosure of information on environmental social governance (ESG) risks. The survey, which is addressed to large credit institutions that will be required to disclose prudential information on ESG risks, aims to support the EBA’s policy work on Pillar 3 disclosure and its wider efforts to develop a robust policy framework in the area of sustainable finance. The deadline for the call for input is 16 October 2020.

The disclosure of information on ESG risks is one of the key components in the policy framework of sustainable finance. There are variations across institutions on the level, type and location of information disclosed. The EBA seeks credit institutions’ input to understand their current practices in the disclosure of information on ESG risks as well as their future plans regarding Pillar 3 disclosures on ESG risks, as well as on classifications and metrics used.

This online survey is part of the EBA’s work to develop draft implementing technical standards (ITS) on Pillar 3 disclosure of prudential information on ESG risks by institutions. It will also be used to monitor the short-term expectations specified in the EBA Action Plan on Sustainable Finance, including the request for institutions to identify metrics, covering a green assets ratio, that provide transparency on how they are embedding climate change related risks into the organisation.  

Process

The EBA has set up a dedicated webpage and an email address ESG.disclosure@eba.europa.eu, to support this initiative. The responses to the online survey can be submitted via this online tool, available on the EBA’s dedicated webpage.

The survey, which is run on a voluntary basis, is addressed to large institutions that will be required to disclose prudential information on ESG risks in accordance with Article 449a of the Capital Requirements Regulation (CRR). Credit institutions may reply to the survey until 18:00 CEST on 16 October 2020.

Background information

The EBA is mandated, as per Articles 434a and 449a of the CRR, to develop draft implementing technical standards (ITS) specifying uniform disclosure formats, and associated instructions for the disclosure by institutions of prudential information on ESG risks. Those uniform disclosure formats aim to provide sufficiently comprehensive and comparable information for users of that information to assess the risk profiles of institutions.

The final ITS on the disclosure of information on ESG risks is going to be part of and complete the comprehensive  ITS on institutions’ public disclosures of the information referred to in Titles II and III of Part Eight of Regulation (EU) No 575/2013.

Furthermore, in its Action Plan on Sustainable Finance, published in December 2019, the EBA explains how it plans to implement the disclosure mandate. The EBA also specifies the short-term expectations on disclosure and asks institutions to identify metrics, including a green assets ratio that provide transparency on how they are embedding climate change-related risks into the organisation.

Other related work

In parallel, the European Supervisory Authorities (EBA, EIOPA and ESMA - ESAs) are preparing to launch a joint survey seeking public feedback on presentational aspects of financial products that promote environmental and/or social characteristics or have a sustainable objective. 

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EBA calls on the EU Commission to establish a single rulebook on fighting money laundering and terrorist financing

10 September 2020

The European Banking Authority (EBA) published today its response to a European Commission’s call for advice on how to strengthen the EU legal framework on anti-money laundering and countering the financing of terrorism (AML/CFT). The European Commission issued this call for advice to the EBA to take advantage of its technical expertise across all areas of financial services regulation and because the EBA has a legal duty to lead, coordinate and monitor the EU financial sector’s fight against ML/TF.

In its advice, the EBA sets out how the EU legal framework should be strengthened to tackle vulnerabilities linked to divergent national approaches and gaps in the EU defences against money laundering and terrorist financing (ML/TF).

Specifically, the EBA recommends that the Commission establish a single rulebook to:

  • Harmonise the EU legal framework in a directly applicable Regulation where evidence suggests that divergence of national rules and practices has had a significant, adverse impact on the prevention of the use of the EU’s financial system for ML/TF purposes.  This is the case for customer due diligence and wider AML/CFT systems and controls requirements, as well as for those rules governing key supervisory processes such as ML/TF risk assessments, cooperation and enforcement;
  • Strengthen aspects of the current AML/CFT Directive where existing provisions are insufficiently robust or specific, for example in relation to competent authorities’supervision powers in this area;
  • Review the list of obliged entities currently within the scope of the EU’s AML/CFT regime;
  • Clarify provisions in sectoral financial services legislation to ensure they are compatible with the EU’s AML/CFT objectives, for example by making sure that ML/TF risk is addressed consistently across all sectors.

With this Opinion, the EBA complements its response to the European Commission’s consultation on its AML/CFT Action Plan, which advises on how to be effective and efficient in establishing a new EU AML/CFT supervisor by building on existing AML/CFT infrastructures.

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EBA publishes its 2019 Annual Report on resolution colleges

01 September 2020

The European Banking Authority (EBA) published today its Annual Report on resolution colleges for 2019. The Report sets out the EBA’s observations on the efficiency, effectiveness and consistency of the functioning of resolution colleges during the year and the progress achieved in key areas of resolution planning. It also highlights the main areas that the EBA will monitor in 2020, which primarily address responses to the effects of the Covid-19 pandemic. Overall, the Report shows that resolution colleges continue to be an active forum for resolution authorities in the development of resolution plans for cross-border banking groups, where the intensity and quality of cooperation and dialogue has also improved.

Key findings of the Report

In 2019, most of the resolution colleges focussed on the practical steps needed to make their individual plans more operational. In this respect, the Report shows that work should continue in areas such as the operationalisation of the bail in tool, determining and planning for liquidity and funding in resolution, operational continuity arrangements, maintenance of access to financial market infrastructures and introduction of management information capabilities to support resolution.

In addition, the Report highlights that the written arrangements that underpin the functioning of each college should be reviewed to assess their suitability, in particular to reflect the increased prevalence of remote working and the accuracy of emergency contact details.

Finally, the joint decision making process generally functioned well with decisions being take n within the prescribed timelines.

Areas to be monitored in 2020

For the 2020 cycle of resolution college meetings, the EBA intends to monitor discussion and engagement on:

  • The credibility and feasibility of the preferred resolution strategy in the current environment and the analysis of alternative resolution strategies;
  • The extent to which supervisory authorities, finance ministries and administrators of deposit guarantee schemes are actively involved in consideration of their respective roles;
  • Analysis of the suitability of written arrangements underpinning colleges;
  • The extent to which colleges undertake reviews of ‘Business Reorganisation Plans’ to assess if changes are required in response to the economic effects of Covid-19.

Note to the editors 

Resolution colleges are fora for ongoing interactive engagement between the relevant authorities (home and host resolution authorities, supervisors, finance ministries, administrators of deposit guarantee schemes) in order to plan and be ready to execute the effective resolution of cross-border banking groups. Their role is wider and more significant than the simple process of holding physical meetings or conference calls.

Joint decisions on resolution plans, impediments to resolvability and MREL represent core deliverables of the resolution college work as required by the BRRD.

In line with its mandate to promote the effective and consistent functioning of resolution colleges across the EU, the EBA monitored the activities of colleges established for large cross-border banking groups.

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The EBA updates data used for the identification of global systemically important institutions (G-SIIs)

20 August 2020

The European Banking Authority (EBA) published today 12 indicators and updated the underlying data from the 37 largest institutions in the EU, whose leverage ratio exposure measure exceeds EUR 200 bn. This end-2019 data contributes to the internationally agreed basis on which a smaller subset of banks will be identified as global systemically important institutions (G-SIIs), following the final assessments from the Basel Committee on Banking Supervision (BCBS) and the Financial Stability Board (FSB). The EBA, acting as a central data hub in the disclosure process, will update this data on a yearly basis and will provide a user-friendly platform to aggregate it across the EU. For the first time this year, the EBA is including the Legal Entity Identifier (LEI) of each institution, which will facilitate peer review exercises and broader data analyses.

A stable sample of 33 institutions shows that the aggregate amount for total exposures, as measured for the leverage ratio, increased during 2019 by 3.2%, the fastest pace after 2014, and stood at EUR 25.6 trillion at the end of 2019. Underwriting and payments activities increased by 11.6% and 6.1%, respectively while aggregate values for trading and available-for-sale-securities increased by 7.6%. Similarly, total value for assets under custody increased by 6.2% reaching the highest combined value since 2013 (EUR 30 trillion). Conversely, the outstanding amount for level 3 assets decreased by 1% from end-2018, mildly offsetting the significant increase observed last year.

Background legal basis and next steps

The EBA Implementing Technical Standards (ITS) and Guidelines on disclosure of G-SIIs define uniform requirements for disclosing the values used during the identification and scoring process of G-SIIs, in line with the internationally agreed standards developed by the FSB and the BCBS.

To promote a level playing field in the EU regarding these requirements and to increase transparency on the internal financial market, the current level of disclosure goes beyond the minimum standards required by the BCBS, both in terms of granularity of the disclosed information and applicable scope of institutions. Consequently, some of the group-specific templates currently published belong to institutions that have not contributed directly to the BCBS's G-SIB exercise.

The Regulatory Technical Standards (RTS) on the specification of the methodology for the identification and definition of subcategories of G-SIIs, and the ITS and Guidelines on disclosure of  G-SIIs have been developed in accordance with Directive 2013/36/EU (Capital Requirements Directive - CRD IV) on the basis of internationally agreed standards, such as the framework established by the FSB and the BCBS.

The identification of a G-SII, which leads to a higher capital requirement, falls under the responsibility of national competent authorities and will be updated by December 15 every year. The identification will be based on the disclosure of global denominators and G-SIB exercise results, which are expected to be published by the BCBS and the FSB in November each year. The higher capital requirement will then apply after about one year from the publication by competent authorities of banks' scoring results, thus allowing institutions enough time to adjust to the new buffer requirement. 

EBA supports the EU Commission’s call for a more efficient and effective framework to tackle money laundering and terrorism financing

19 August 2020

The European Banking Authority (EBA) published today its response to the European Commission’s Action Plan for a comprehensive Union policy on preventing money laundering and terrorism financing (ML/TF). In its response, the EBA sets out technical points that policy-makers should consider when deciding on the scope and powers of an EU-level supervisor for Anti-Money Laundering/Combating the Financing of Terrorism (AML/CFT).

The EBA is of the view that a comprehensive assessment of the current EU AML/CFT framework is necessary to ensure that the EU and its component parts are equipped to tackle ML/TF more effectively and efficiently.

Specifically, the EBA recommends that the Commission:

    • harmonise the EUs legal framework to reduce the risk of gaps created by divergent approaches to incorporating EU AML/CFT law into national law;
    • combine an ongoing role for national AML/CFT authorities with an EU-level AML/CFT supervisor in a hub and spoke approach that builds on national AML/CFT authorities’ expertise and resources, and complement this with effective EU-level oversight for a consistent approach with comparable outcomes;
    • leverage on the EU’s existing AML/CFT infrastructure, including the EBA’s policy, data and information technology resources as well as the EBA’s European and international supervisory cooperation networks.

The EBA will continue to provide technical input into the debate as it progresses, including on the details of the new supervisory architecture.  

The EBA will provide additional technical input through its forthcoming response to the Commission’s separate call for advice in which the EBA is asked to define the scope of application and the enacting terms of a Regulation to be adopted in the field of preventing AML/CFT.

Notes for editors

On 7 May 2020, the European Commission published its ‘Action Plan for a comprehensive Union policy on preventing money laundering and terrorist financing’. In this Action Plan, the Commission sets out its view of a future anti-money laundering and countering the financing of terrorism (AML/CFT) framework that promotes the integrity of the EU’s financial system and invites stakeholders to respond by 26 August 2020.

The EBA leads, coordinates and monitors the EU financial sector’s fight against money laundering and terrorist financing. For further information on the EBA’s role in this field, please refer to our factsheet.

 

 

 

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EBA consults on the use of RegTech solutions and ways to support the uptake of RegTech across the EU

12 August 2020

The European Banking Authority (EBA) launched today a RegTech industry survey to invite all relevant stakeholders, such as financial institutions and ICT third party providers, to share their views and experience on the use of RegTech solutions, on a best effort basis. The aim of the survey is to better understand the ongoing activity in this area, raise awareness on RegTech within the regulatory and supervisory community, and inform any relevant future policy discussion. The EBA is also seeking ways to facilitate the adoption and scale up of RegTech solutions across the EU whilst acknowledging and looking to address the underlying risks. The consultation runs until 30 September 2020.

Feedback from financial institutions and ICT third party providers is essential to better understand the extent and the impact of the use of technology-enabled innovation (RegTech) for regulatory, compliance and reporting requirements by regulated institutions.  In its survey, the EBA is focusing in particular on (i) mapping and understanding the existing RegTech solutions; (ii) identifying the main barriers and risks related to the use of RegTech solutions; and (iii) identifying potential ways to support the uptake of RegTech across the EU.

Consultation and next steps

The EBA has prepared two separate RegTech questionnaires. One is to be completed by the financial institutions, and the other one by ICT third party providers. The questionnaires are available at the following links:

  1. Survey addressed to financial institutions
  2. Survey addressed to ICT third party providers

Both questionnaires are composed of a general part, aimed at collecting an aggregate information on all types of RegTech solutions in use, and a more detailed part, aimed at having a closer look at individual RegTech solutions in four specific areas of focus:

  • Anti Money-Laundering /Combating the Financing of Terrorism (AML/CFT) – on going monitoring of the business relationship and/or transaction monitoring
  • Creditworthiness assessment
  • Compliance with security requirements and standards (information security, cybersecurity, payment services) and/or
  • Supervisory reporting

The surveys should be completed online, in accordance with the instructions available in the section of the EBA website dedicated to the RegTech industry survey.

After the review of the responses, the EBA may further investigate specific areas of RegTech via follow-up interviews with financial institutions and ICT third party providers.

The responses to the survey will not be published on a stand-alone basis, but will be only referred to in an aggregate form, in compliance with confidentiality requirements.

The EBA expects to report on the use of RegTech solutions in the first half of 2021.

Legal basis and background

Article 31 of the EBA Founding Regulation Regulation (EU) No 1093/2010 mandates the Authority to promote supervisory convergence and facilitate entry into the market of actors or products relying on technological innovation, in particular through the exchange of information and best practices. The aim of this mandate is to contribute to the establishment of a common European approach towards technological innovation. In this context, the EBA identified RegTech as an area to be explored and better understood, taking into account the relevant risks and opportunities. The results of this RegTech industry survey will inform the EBA’s work, with the aim of building and sharing knowledge on RegTech and, if relevant, of providing recommendations.

EBA publishes guidance on impact of CRR adjustments in response to the COVID‐19 pandemic on supervisory reporting and disclosure

11 August 2020

The European Banking Authority (EBA) published today a revised version of its Implementing Technical Standards (ITS) on supervisory reporting v3.0 and two sets of Guidelines on disclosures and supervisory reporting requirements. These products provide clarifications on the application of certain adjustments (“quick fix”) on institutions’ disclosures and supervisory reporting introduced in the Capital Requirements Regulation (CRR) in response to the COVID19.

In particular, the Guidelines on supervisory reporting and disclosure requirements provide clarity on how to report the ITS on supervisory reporting versions 2.9 and 2.10, and on the existing ITS on disclosure of leverage ratio.

The amending Guidelines on disclosure clarify whether institutions are going to apply or not the temporary treatment included in the new Article 468 of the CRR for unrealised gains and losses measured at fair value through other comprehensive income and adjustments to the provisions on IFRS 9 transitional arrangements in accordance with Article 473a of the CRR.

Finally, the revised final draft ITS on reporting for v3.0 replace the final draft ITS submitted in June (EBA/ITS/2020/05) to accommodate the CRR “quick fix” and impact Annexes I, II, X, XI of the final draft ITS.

Legal basis and background

These Guidelines have been drafted in accordance with Article 16 of Regulation (EU) No 1093/2010 (EBA Founding Regulation), which mandates the Authority to issue guidelines addressed to all competent authorities or all financial institutions and recommendations to one or more competent authorities or to one or more financial institutions, with a view to establishing consistent, efficient and effective supervisory practices within the ESFS, and to ensuring the common, uniform and consistent application of Union law.

The ITS on supervisory reporting have been developed in accordance with the mandate included in Article 430 of Regulation (EU) No 575/2013.

Regulation (EU) 2020/873 of the European Parliament and of the Council of 24 June 2020 amending Regulations (EU) No 575/2013 and (EU) 2019/876 as regards certain adjustments in response to the COVID-19 pandemic (CRR “quick fix”), introduced amendments to regulatory requirements, which have an impact on supervisory reporting in the EBA reporting frameworks v2.9, v2.10, v3.0, and on disclosures requirements, mainly on leverage ratio and on EBA/GL/2018/01.

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EBA provides clarity on the implementation of the reporting and disclosure framework in the context of COVID-19 measures

07 August 2020

The European Banking Authority (EBA) published today some frequently asked questions related to the implementation of its Guidelines on reporting and disclosure of exposures subject to measures applied in response to the COVID-19 crisis. The technical clarifications provided by the EBA will assist supervisors and credit institutions in the implementation of the Guidelines. The implementation questions and technical clarifications have been included in a newly added section 4 to the EBA Report on the implementation of selected COVID-19 policies, first published on 7 July 2020.

Since the publication of the Guidelines on COVID-19 reporting and disclosure, several points including, technical questions, have been brought to the EBA’s attention by supervisors and credit institutions. In section 4 of the Report, the EBA provides clarification to these points.

As a significant number of issues have arisen and may continue to arise in the context of the EBA’s monitoring of the implementation of COVID-19 policies, the EBA expects to update the Report at a later stage.

EBA updates on 2021 EU-wide stress test timeline, sample and potential future changes to its framework

30 July 2020

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 2021 EU-wide stress test will be carried out at the highest level of consolidation on a sample of 51 banks, of which 39 from the Euro Area, covering broadly 70% of the banking sector in the euro area, each non-Eurozone Member States and Norway[1].

The tentative sample, which is also made available today, includes the banks that were going to participate in the postponed 2020 stress test, with some adjustments to ensure sufficient coverage in terms of total assets as well as to reflect changed conditions for specific institutions. UK banks are excluded from the sample while, their EU27 subsidiaries are included when necessary. The final sample can still be subject to adjustments, depending on possible mergers, divestments, restructuring, etc.

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.


[1] Since the EU-wide stress test is run at the highest level of consolidation, lower representativeness is accepted for countries with a wide presence of subsidiaries of non-domestic EU banks.

EBA sees first impact of COVID-19 materialising in EU banks’ Q1 data

30 July 2020

The European Banking Authority (EBA) published today its quarterly Risk Dashboard together with the results of the Risk Assessment Questionnaire (RAQ). The updated data shows that the impact of COVID-19 was mainly reflected in a contraction of banks’ capital ratios and profitability, the cost of risk increased, whereas non-performing loans (NPL) ratios remained stable, confirming that the impact of the pandemic on asset quality can be delayed. The EBA also published a thematic note on leveraged finance, which highlights that the expansion of this market segment in recent years has come along with a significant easing of credit standards.

Key parameters and trends of the Risk Dashboard and RAQ

The average CET1 ratio fell to 14.6%, which is 40bps down compared to EU27 pro forma data for Q4 2019. The contraction was driven by a 1.8% increase in risk-weighted assets (RWAs) and a 1.4% decline in capital. The latter was mainly due to a reduction in the other comprehensive income (OCI) reserve as a result of valuation effects. The increase in RWAs was largely due to a rise in its credit risk component, not least supported by an increase in loans and advances, in particular those to non-financial corporates (+3% quarter over quarter [QoQ]). Loans to households fell by 1.3%.

Banks’ average return on equity (RoE) decreased to 1.3% (5.9% for EU27 pro forma data in Q4 2019). Total net operating income dropped by 5.4%, not least driven by a contraction in net trading income, and operating expenses increased by 5.2% QoQ. This resulted in a rise of the cost to income ratio to 71.7% (64.4% for EU27 pro forma data in Q4 2019), which is the highest value for years. According to the RAQ results, the outlook is similarly bleak, with nearly half of the banks not expecting any improvement in their profitability in the next 6 to 12 months, despite the already subdued RoE level.

Costs of risk grew significantly from 50bps to 81bps on an annualised basis, showing a rising dispersion among banks. It came in parallel to a rise in stage 2 loans (from 6.5% for EU27 pro forma data in Q4 2019 to 7%) and in banks’ coverage ratio of NPLs (from 45.8% for EU27 pro forma data in Q4 2019 to 46%).

The non-performing loan (NPL) ratio remained broadly unchanged, at 3% in Q1 2020, slightly down from 3.1% for EU27 pro forma data in Q4. On a segment level, the NPL ratio for non-financial corporates (NFC) exposures was 5.1%, with CRE and SME loans at 7.6% (down from 7.7%) and 7.7% (down from 7.9%; all for EU27 pro forma data in Q4 2019), respectively. For mortgage loans, the NPL ratio was stable at 2.8%. The RAQ results show a substantial increase of banks’ responses pointing to a deterioration in asset quality. This holds for all asset classes, with around 60% of banks expecting a worsening in the asset quality of SMEs followed by corporate, consumer credit and CRE (around 50% of the banks).

Banks’ liquidity positions did not show any deterioration in Q1 2020. Despite the increase in drawings of credit lines and market tensions, the liquidity coverage ratio (LCR) remained roughly stable at 148.9% (148.2% for EU27 pro forma data in Q4 2019). The massive use of central bank funding, for which collateral needs to be provided, has brought up the asset encumbrance ratio to 26.7% (25% for EU27 pro forma data in Q4 2019). Focusing on the next 12 months, banks intend to attain mainly more senior non-preferred and senior holding company (HoldCo) debt (both as one single category in the survey) and senior unsecured (around 40% of respondents for both categories), according to the RAQ results.

Thematic note on leveraged finance

The note highlights that borrowers’ indebtedness has risen materially while loan maintenance covenants have been relaxed. These vulnerabilities and the inherent risks of leveraged finance led to a sharp contraction in the market during the COVID-19 outbreak.

For a sample of 26 large EU/EEA banks, the overall exposure to leveraged finance amounts to EUR 400bn (2.5% of their total assets), concentrated in a few large and highly interconnected institutions. The main exposure is through leveraged loans while exposures to high yield bonds and CLOs are comparatively small. Banks might also be directly or indirectly exposed to leveraged finance investors to which they provide credit lines or prime brokerage services or to which they have legal or reputational ties.

Notes to editors

The figures included in the Risk Dashboard are based on a sample of 147 banks, covering more than 80% of the EU/EEA banking sector (by total assets), at the highest level of consolidation, while country aggregates also include large subsidiaries (the list of banks can be found here). The figures related to the Risk Dashboard refer to the EU27 for Q1 2020 and are compared, where appropriate, to EU27 pro forma data for Q4 2019.

The results of the RAQ are significantly influenced by the timing of submission of the responses. In particular, some of the respondents prepared their answers at the beginning of the outbreak of COVID-19 in Europe, while others responded at a time when the outbreak was rapidly spreading across Europe. As a result, some banks already partially considered the impact of the pandemic in their responses, whereas others did not.