EBA publishes final draft technical standards on specific reporting requirements for market risk

04 May 2020

The European Banking Authority (EBA) published today its final draft Implementing Technical Standards (ITS) on specific reporting requirements for market risk. These ITS introduce the first elements of the Fundamental Review of the Trading Book (FRTB) into the EU prudential framework by means of a reporting requirement. The ITS are expected to apply from September 2021.

The specific reporting requirements for market risk include a thresholds template, providing insights into the size of institutions’ trading books and the volume of their business subject to market risk, and a summary template, reflecting the own funds requirements under the alternative standardised approach for market risk (MKR-ASA). At a later stage, and in line with the mandate of Article 430b of the amended Capital Requirements Regulation (CRR), these reporting requirements will be complemented with details on the own funds requirements under the MKR-ASA and the alternative internal model approach.

As announced in EBA Statement on the application of the prudential framework on targeted aspects in the area of market risk in response to the COVID-19 outbreak, published on 22 April 2020, the reporting requirements are expected to apply from September 2021.

Those reporting requirements will become part of version 3.1 of the EBA reporting framework.

Background and legal basis

The EBA is required to develop ITS on specific reporting requirements for market risk in accordance with Article 430b of the CRR. These ITS are adopted by the EU Commission in the form of Implementing Regulations. The reporting requirements defined in these ITS will become part of the overall EBA reporting framework, currently comprising the ITS on Reporting in accordance with Article 430 of the CRR, the ITS on Supervisory Benchmarking in accordance with Article 78 of the CRD, the ITS on Resolution Planning Reporting in accordance with Article 11 of the BRRD and the Guidelines on harmonised definitions and templates for Funding Plans. 

         

ESAs consult on Environmental, Social and Governance disclosure rules

23 April 2020

The three European Supervisory Authorities (EBA, EIOPA and ESMA - ESAs) have today issued a Consultation Paper seeking input on proposed environmental, social and governance (ESG) disclosure standards for financial market participants, advisers and products.

These standards have been developed under the EU Regulation on sustainability-related disclosures in the financial services sector (SFDR), aiming to:

  • strengthen protection for end-investors;
  • improve the disclosures to investors from a broad range of financial market participants and financial advisers; and
  • improve the disclosures to investors regarding financial products.

The SFDR empowers the ESAs to develop Regulatory Technical Standards (RTS) on the content, methodology and presentation of ESG disclosures both at entity level and at product level. In addition, the consultation paper contains proposals under the recently agreed Regulation on the establishment of a framework to facilitate sustainable investment (Taxonomy Regulation), on the do not significantly harm (DNSH) principle.

Entity-level principal adverse impact disclosures 
The principal adverse impacts that investment decisions have on sustainability factors should be disclosed on the website of the entity, and the proposals set out rules for how this public disclosure should be done. The disclosure should take the form of a statement on due diligence policies with respect to the adverse impacts of investment decisions on sustainability factors, showing how investments adversely impact indicators in relation to
-    climate and the environment; and
-    social and employee matters, respect for human rights, anti-corruption and anti-bribery matters. 

The ESAs have included draft indicators for adverse impacts, based on consultations with the Joint Research Centre of the European Commission and the European Environment Agency. 

Product level ESG disclosures 
The sustainability characteristics or objectives of financial products should be disclosed in their  pre-contractual and periodic documentation and on their website. The proposals included in the draft RTS indicate the rules for how this disclosure should be carried out, ensuring transparency to investors regarding how products meet their sustainability characteristics or objectives. They also set out the additional disclosures that should be provided by products that have designated an index as a reference benchmark.

Finally, the product level proposals set out suggested provisions for disclosing how a product based on sustainable investments complies with the DNSH principle. 

Next steps
The ESAs welcome feedback to this consultation by 1 September 2020.  Following the close of the consultation the draft RTS will be finalised and submitted to the European Commission. 

Legal basis and background

On 22 March 2019, the Council published the text of the political agreement on the proposed regulation on sustainability-related disclosures in the financial services sector (SFDR). The Regulation was published in the Official Journal on 9 December 2019 as Regulation (EU) 2019/2088. 

On 18 December 2019 the Council and European Parliament announced that they had reached a political agreement on a Regulation on the establishment of a framework to facilitate sustainable investment. On 15 April the Council adopted the Regulation paving the way for adoption in the European Parliament and subsequent publication in the Official Journal. This regulation sets out additional empowerments in SFDR for the ESAs to develop technical standards on disclosure.

 

EBA provides further guidance on the use of flexibility in relation to COVID-19 and calls for heightened attention to risks

22 April 2020

Following up on its strategic communications of 12th, 25th, 31st March and 2nd April, the European Banking Authority (EBA) provides today further clarity on how additional flexibility will guide supervisory approaches in relation to market risk, the Supervisory Review and Evaluation Process (SREP), recovery planning, digital operational resilience and ICT risk and securitisation.  At the same time, the EBA notes the need for stringent attention by supervisors and financial institutions in relation to key risks in these areas. 

To mitigate the impact of exceptional volatility triggered by the COVID-19 pandemic on the prudential requirements for market risk, the EBA is proposing to adjust the capital impact by amending its standards on prudent valuation. In particular, the EBA is proposing to introduce the use of a 66% aggregation factor to be applied until the 31 December 2020 under the so-called core approach. Furthermore, acknowledging the increased operational challenges faced by banks in the area of reporting, the EBA also intends to delay reporting for the first FRTB-SA figures to September 2021. Finally, the EBA highlights the flexibility in the prudential requirements available to competent authorities for banks using internal VaR models.

The EBA also recognises the need for a pragmatic approach to SREP assessments in 2020, focusing on the most material risks and vulnerabilities driven by the crisis. 

On recovery planning activities for institutions, the EBA believes the focus should be placed on understanding which recovery options are necessary and available under the current stressed conditions.

The EBA emphasises the importance of digital operational resilience. In this respect, the EBA calls on institutions to ensure business continuity, adequate ICT capacity and security risk management. The new EBA ICT and security risk management Guidelines will guide financial institutions and supervisors to focus on priority areas. 

Finally, the EBA provides further clarity on the prudential application of the definition of default and forbearance as well as how the EBA Guidelines on legislative and non-legislative moratoria on loan repayments apply to securitisations.
 

EBA updates its list of risk indicators, IMF-FSI mapping and respective guides

20 April 2020

The European Banking Authority (EBA) published today an updated guide on how to report the International Monetary Fund (IMF) Financial Soundness Indicators (FSIs) and a revised methodological guide on how to compile risk indicators and detailed risk analysis tools. FSIs provide insight into the financial health and soundness of countries’ financial institutions as well as corporate and household sectors, thus supporting the economic and financial stability analysis.

 

These updates are mainly driven by the recently published 2019 IMF FSI Guide, as well as, by the review of the EBA reporting framework, that entails, amongst other, changes in securitisations information and in non-performing and forborne exposures.

The IMF FSI guide provides a mapping of the IMF FSI indicators to the Implementing Technical Standards (ITS) on Supervisory Reporting, ensuring a harmonised methodology in reporting, relevant also for peer reviews. The guidance on risk indicators shows how they are computed in EBA publications, thus allowing competent authorities and users of EBA data to interpret key bank figures and to have a consistent approach in their risk assessments.

EBA agrees with the European Commission’s amendments to standards on risk weights to specialised lending exposures

17 April 2020

The European Banking Authority (EBA) published today an Opinion in response to the European Commission’s intention to amend the EBA’s final draft regulatory technical standards (RTS) on assigning risk weights to specialised lending exposures before endorsing them. The EBA is of the view that the proposed changes, despite their substantive nature, do not alter the draft RTS in a significant manner, as they still maintain a good balance between the flexibility and risk sensitivity required for the IRB approach and the need for a harmonised regulatory framework.

The EBA’s Opinion identifies three substantive changes introduced by European Commission. The first two changes allow a certain flexibility in relation to the incorporation of risk drivers. In particular, the first change introduces the possibility for institutions to consider a sub-factor or a sub-factor component as irrelevant a certain type of specialised lending exposures. The second change allows institutions to consider additional relevant information (an ‘additional risk driver’) for a type of specialised lending exposures, jointly with the sub-factor which most closely corresponds to that additional risk driver. The EBA is of the view that the flexibilities introduced through these two substantive changes only marginally reduce the harmonisation across institutions since they should be applied consistently for the same type of exposure, and duly justified and documented.

The third substantive change simplifies the rules on overlapping criteria at the level of the sub-factor or of the sub-factor components. The EBA is of the view that this change does not jeopardise significantly the risk sensitivity of the approach and has the merit of simplifying the RTS.

Legal basis and background

The EBA has delivered this Opinion in accordance with Article 10(1), subparagraph 6, of Regulation (EU) No 1093/2010, which requires the EBA to submit its response in the form of an opinion to amendments proposed by the European Commission.

The EBA had submitted its final draft RTS to the European Commission on 13 June 2016.

EU banks sail through the Corona crisis with sound capital ratios

14 April 2020

The European Banking Authority (EBA) published today its quarterly Risk Dashboard covering Q4 2019 data and summarising the main risks and vulnerabilities in the EU banking sector. Ahead of the Corona crisis, EU banks’ capital ratios and asset quality have improved. However, return on equity (RoE) has further worsened.

The CET1 ratio reached 14.8% on a fully loaded basis, up from 14.4% in Q3 2019. This trend was supported by higher capital, but also contracting risk exposure amounts (REA). The latter came in parallel to declines in total assets as well as total loans. Sound capital positions should enable EU banks to weather expected upcoming impacts stemming from the Coronavirus crisis and to provide lending to the economy at the time of need. The recent supervisory measures will also ensure that banks can efficiently deploy their capital buffers during the unfolding crisis. In addition, the suspension of dividends and variable remuneration aim at maintaining banks’ sound capital base.

The ratio of non-performing loans (NPLs) further declined from 2.9% to 2.7% in Q4 2019, continuing a trend of small contractions similarly seen in the last three quarters. The NPL ratio contracted even though its denominator (total loans and advances) declined. Similar to the NPL ratio, IFRS 9-related figures showed an improvement in asset quality. The share of stage 2 assets declined from 6.9% to 6.8%, and the share of stage 3 assets from 3.3% to 3.1%. Looking forward, it is expected that asset quality will deteriorate in the quarters to come, even though extensive monetary and fiscal stimulus programmes as well as policy responses such as guidance on debt moratoria might provide some relief to banks and their customers.

Banks' RoE declined by 80bps in Q4 to 5.8%, well below EU/EEA banks' average cost of equity. Banks' cost to income ratio increased from 63.3% in Q3 to 64% as of year-end 2019. Despite their slight widening from 1.43% to 1.45%, EU banks’ net interest margin remained at a very low level. These trends, in addition to presumably strongly rising costs of risks and expectations of reduced fee income, will significantly increase the pressure on banks’ profitability.

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 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). Stage 2 loans as referred to above are exposures for which the credit risk has increased significantly after their initial recognition, and Stage 3 loans are those, which are credit impaired. The Risk Dashboard’s Q4 2019 data does not reflect the impact from the COVID-19 pandemic. This includes that reported capital ratios do not fully reflect decisions to suspend dividends or other types of distributions recently taken by banks as a follow-up to competent authorities’ statements and recommendations.

EBA updates impact of the Basel III reforms on EU banks’ capital and compliance with liquidity measures

08 April 2020

The European Banking Authority (EBA) published today two Reports, which measure the impact of implementing the final Basel III reforms and monitor the current implementation of liquidity measures in the EU. Being based on June 2019 reporting date, these results do not reflect the economic impact of the coronavirus disease (Covid-19) on participating banks. Overall, the EBA estimates that the Basel III reforms, once fully implemented in 2028 after the additional delay of one year agreed by the Basel Committee, would determine an average increase by 16.1% of EU banks' Tier 1 minimum required capital.  The liquidity coverage ratio (LCR) of EU banks, which was fully implemented in January 2018, stood at around 147% on average in June 2019.

Basel III capital monitoring results

The Basel III monitoring Report assesses the impact on EU banks of the final revisions of credit risk, split into four sub-categories, operational risk, and leverage ratio frameworks, as well as of the introduction of the aggregate output floor. It also quantifies the impact of the new standards for market risk (FRTB) and credit valuation adjustments (CVA). 

Overall, the results of the Basel III capital monitoring exercise, based on data as of 30 June 2019, show that European banks' minimum Tier 1 capital requirement would increase by 16.1% at the full implementation date (2028) and without taking into account EU-specific adjustments. The impact of the risk-based reforms is 20.2%, of which the leading factors are the output floor (6.5%) and operational risk (5%). The fact that the leverage ratio is currently the constraining (i.e. the highest) Tier 1 requirement for some banks in the sample but would not be as constraining under the final Basel III, explains why part of the increase in the risk-based capital metric (-4.1%) is not to be accounted for as an actual increase in the overall Tier 1 requirement. This offsetting effect (-4.1%) is attributed to the leverage ratio contribution to the total impact. 

 

Change in total T1 MRC, as percentage of the overall current Tier 1 MRC, due to the full implementation of Basel III (2028) (weighted averages, in %)

Bank group

Credit risk

Market risk[1]

CVA

OpRisk

Output floor

Other Pillar 1

Total risk-based

Revised LR

Total

SA
IRB
Securitisation
CCPs

All banks

1.8

1.8

0.4

0.0

0.5

4.3

5.0

6.5

0.0

20.2

–4.1

16.1

Group 1

1.5

1.5

0.4

0.0

0.6

4.6

5.5

6.8

0.0

20.8

–3.5

17.3

Of which:

G-SIIs

1.7

1.7

0.6

0.0

0.8

4.7

6.3

6.7

0.0

22.4

0.3

22.7

Group 2

4.0

3.9

0.0

0.0

0.4

2.3

1.4

4.1

0.0

15.9

–7.7

8.1


To comply with the new framework under the more realistic scenario, EU banks would need EUR 21.1 billion of additional Tier 1 capital. These estimates are based on the assumption that Basel III requirements are implemented in full, relying on data prior to the Covid-19 episode.

EBA report on liquidity measures

The semi-annual update of the EBA Report on liquidity measures, based on data prior to the Covid-19 epidemics, shows that EU banks have continued to improve their compliance with the LCR. At the reporting date of 30 June 2019, EU banks' average LCR was 147% and 78% of the banks in the sample had an LCR above 140%. The aggregate gross shortfall amounted to EUR 4.7 billion corresponding to three banks that had monetised their liquidity buffers during the financial crisis.

Notes to the editors

  • The cumulative impact analysis of the Basel III monitoring exercise report uses a total sample of 105 banks.
  • The results of the Basel III capital monitoring report are presented separately for Group 1 and Group 2 banks. Group 1 banks are those with Tier 1 capital in excess of EUR 3 billion and are internationally active. All other banks are categorised as Group 2 banks. 
  • The analysis of the Basel III capital monitoring report provides separate figures for the sample of global systemically important institutions (G-SIIs). Where applicable, the analysis takes account of G-SIIs capital buffer for the risk-based capital requirements and the leverage ratio requirements.
  • The results of the report on liquidity measures are presented separately for G-SIIs and O-SIIs and other banks (non G-SIIs or O-SIIs). Some figures are presented by country.
  • Article 412(1) of the CRR foresees the possibility of monetising liquid assets during times of stress (resulting in an LCR below 100%) as maintaining the LCR at 100%, under such circumstances, could produce undue negative effects on the credit institution and other market participants.

 


[1]  For two G-SIBs that are outliers owing to overly conservative assumptions under the revised market risk framework, zero change from the revised market risk framework has been assumed for the calculation of 30 June 2019 results showing ‘reduced estimation bias’. According to the “conservative estimation”, based on the original conservative assumptions, the total impact would be 17%, with a total risk-based impact of 21.2% and market risk impact of 1.6%.

EBA publishes Guidelines on treatment of public and private moratoria in light of COVID-19 measures

02 April 2020

Following the publication of its statement on the application of the prudential framework regarding default, forbearance and IFRS9 in light of COVID-19 measures, the European Banking Authority (EBA) published today more detailed guidance on the criteria to be fulfilled by legislative and non-legislative moratoria applied before 30 June 2020. The aim of these Guidelines is to clarify the requirements for public and private moratoria, which if fulfilled, will help avoid the classification of exposures under the definition of forbearance or as defaulted under distressed restructuring. 

The EBA sees the payment moratoria as effective tools to address short-term liquidity difficulties caused by the limited or suspended operation of many businesses and individuals resulting from the impact of COVID-19.  

In this context, the Guidelines clarify that payment moratoria do not trigger classification as forbearance or distressed restructuring if the measures taken are based on the applicable national law or on an industry or sector-wide private initiative agreed and applied broadly by the relevant credit institutions.

In addition, the Guidelines recall that institutions must continue to adequately identify those situations where borrowers may face longer-term financial difficulties and classify exposures in accordance with the existing regulation. The requirements for identification of forborne exposures and defaulted obligors remain in place. 

Legal basis

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 issue 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.

EBA provides additional clarity on measures to mitigate the impact of COVID-19 on the EU banking sector

31 March 2020

Following its call for flexibility in the prudential framework and supervisory approaches to support lending into the real economy, the European Banking Authority (EBA) clarified today its expectations in relation to dividend and remuneration policies, provided additional guidance on how to use flexibility in supervisory reporting and recalled the necessary measures to prevent money laundering and terrorist financing (ML/TF).

The EBA supports all the measures taken so far to ensure banks maintain a sound capital base and provide the needed support to the economy. In this respect, the EBA reiterates and expands its call to institutions to refrain from the distribution of dividends or share buybacks for the purpose of remunerating shareholders and assess their remuneration policies in line with the risks stemming from the economic situation.

In addition, the EBA provides details on its call for competent authorities to offer leeway on reporting dates, urging one-month flexibility for reports with remittance dates between March and the end of May 2020. The EBA also called for flexibility in assessing deadlines of institutions’ Pillar 3 disclosures. This flexibility would not put at risk the access to crucial information on banks’ capital, risks and liquidity, which is needed to monitor closely their financial and prudential situation. Furthermore, the EBA decided, in coordination with the Basel Committee on Banking Supervision (BCBS), to cancel the Quantitative Impact Study based on June 2020 data.

Finally, as measures to prevent money laundering and terrorist financing (ML/TF) remain crucial in this challenging time, the EBA calls on competent authorities to support financial institutions’ ongoing efforts by sharing information on emerging ML/TF risks, setting clear regulatory expectations and using supervisory tools flexibly. 

Note to the editors 

All the EBA statements in relation to its response to the COVID-19 are available here.

EBA identifies trends and lessons learned in financial education and literacy initiatives in its second Financial Education Report

30 March 2020

•    The Report identifies lessons learned from more than 120 national financial education and literacy initiatives across the EU as well as key trends and developments that could shape future initiatives.
•    The Report includes a focus on FinTech-related education initiatives 

The European Banking Authority (EBA) published today its second edition of the Financial Education Report (FER). The Report is based on the EBA financial education repository, which consists of more than 120 financial education initiatives taken by the national authorities. The FER describes the most common approaches used by the national authorities and the lessons learned and experiences gained in the area of financial education and financial literacy. It identifies, for example, that awareness-raising campaigns remain among the key tools used by national authorities to reach wide audiences and, in certain cases, to alert consumers to potential risks they may face regarding the use of financial products and services (e.g. crypto-assets). 

Compared to the 2018 edition, this Report includes new aspects such as on the interplay between financial education and financial conduct regulation and supervision of the financial system. In addition, it highlights the increasing role of financial innovation and the growing focus on specific target groups for financial education and literacy initiatives, such as children, youth and elderly. It also identifies a number of developments that could influence future financial education initiatives, including behavioural economics, sustainable finance, and advanced analytics and big data.

The Report provides an opportunity for national authorities to share and compare experiences, and for other organisations and individuals interested in financial education to learn about, and possibly build on, the work carried out so far in this area.

Legal basis

The EBA has developed its Financial Education Reports in line with Article 9(1)(b) of the EBA's Founding Regulation, which requires the Authority “to take a leading role in promoting transparency, simplicity and fairness in the market for consumer financial products or services across the internal market, including by reviewing and coordinating financial literacy and education initiatives by the competent authorities”.