On 16 December 2020, the European Banking Authority (EBA) welcomed the European Commission’s (EC) comprehensive action plan to tackle the expected rise of non-performing loans (NPLs) on banks’ balance sheets. The Commission’s action plan is focused on secondary markets for distressed assets, assets management companies and insolvency and debt recovery frameworks. Furthermore, the action plan requires the EBA’s support:
An important part of the action plan are the so-called ‘NPL data templates’. These templates are to be reviewed by EBA to reassess the criticality of the data fields and to make them more user friendly for the purpose of financial due diligence and the valuation of NPL transactions. The EBA has announced that it is going to act swiftly to support the initiatives.
Further, the EBA continues to call on banks to apply a conservative approach on dividends and other distributions in light of the COVID-19 pandemic, effectively repeating its message from 12 March 2020. The EBA expects that the COVID-19 crisis and the uncertainty of its impact on the economy are likely to continue. The EBA urges banks to refrain from distributing capital outside the banking system when deciding on dividends and other distribution policies, including share buybacks.
Lastly, on 21 December 2020, the EBA published additional clarifications on the application of the prudential framework in response to issues raised as a consequence of the COVID-19 pandemic. They mainly cover the EBA Guidelines on moratoria and COVID-19 reporting, operational risk, downturn LGD estimation and the credit risk mitigation framework.
On 17 December 2020, the EBA published its final draft Regulatory Technical Standards (RTS) on the capitalisation of non-modellable risk factors (NMRFs). These apply to institutions using the internal model approach (IMA) of the Fundamental Review of the Trading Book (FRTB). One of the key features of the FRTB is the classification of risk factors as modellable or non-modellable. The FRTB standards set out that NMRFs have to be capitalised, outside the expected shortfall (ES) measure, under a stress scenario risk measure (SSRM). This scenario is not specified, except that it should be calibrated to be at least as prudent as the ES calibration used for modelled risk factors. These draft RTS set out the methodologies that institutions are required to use for determining the SSRM for NMRFs. Based on an identified stress period and any data collected, institutions can either use the ‘direct method’ or the ‘stepwise method’. The RTS also specifies a regulatory extreme scenario of future shocks in case both methods are not feasible.
Please contact Martijn de Groot for more information.
On 14 December 2020, the EBA published an Opinion on the amendments proposed by the EC regarding its RTS specifying the assessment methodology competent authorities are to follow when assessing the compliance of institutions applying the Internal Ratings Based (IRB) approach. One of the EC amendments, which the EBA does not object to, is that they make it mandatory for third parties involved in model development to provide input into the validation process. An example where they do object, is the requirement to use the “same” (instead of “consistent”) defaults in PD and LGD estimation.
Please contact Sjoerd Blijlevens for more information on this topic.
According to a study by BlackRock for the European Union, Europe’s banks are not integrating climate change and other sustainability concerns into their risk management systems as quickly as regulators expect. Although interviewed banks often claim that they work on initiatives to enhance the integration of ESG risks, most of these banks do not have a formalised ESG risk integration with clear timelines and responsibilities in place yet. The study moreover concluded that only few regulators provide guidance to banks on ESG risks or include it in their oversight processes (e.g. through climate-related stress tests).
Please contact Pieter Klaassen for more information.
The EBA has published final technical standards on the estimation of Pillar 2 (P2R) and combined buffer requirements (CBR) for setting the Minimum Requirement for own funds and Eligible Liabilities (MREL). Resolution entities must comply with MREL on a consolidated basis at the level of the resolution group. MREL, however, is calibrated on the basis of going-concern capital requirements that are, for some, set at group level, with a perimeter that differs from the resolution group’s perimeter. The difference can in some cases be significant and thus lead to group capital requirements that may under- or overestimate the risks within a resolution group. Currently, resolution authorities typically use group capital requirements to calibrate MREL at resolution group level. The RTS set out the methodology, which, first, introduces a threshold to capture only resolution groups that differ sufficiently from the prudential group. Second, the methodology aims to be pragmatic by combining top-down and bottom-up approaches to estimating the additional P2R and CBR.
Please contact Gijs Immerman for more information on this topic.