News

Banking and finance regulatory news, 23 November 2020

FIG Bulletin

23 November 2020

Recent regulatory developments focussing on banking and finance.

CRD V and BRRD II-derived UK legislation: PRA statement on application of temporary transitional power

The UK Prudential Regulation Authority (PRA) has published a statement on the application of its temporary transitional power (TTP) to legislation implementing the Capital Requirements Directive (CRD) V and the Bank Recovery and Resolution Directive (BRRD II).

The PRA states that it and the Bank of England (BoE) have not identified any further exceptions to their transitional directions necessary as a result of onshoring amendments to CRD V and BRRD II-derived legislation. This means that transitional relief will apply to the small number of relevant obligations that are changed by onshoring amendments made to CRD V and BRRD II-derived legislation at the end of the Brexit transition period.

The PRA emphasises that firms must ensure that they are ready to comply with changes to legislation and the PRA rules that are being made to implement CRD V and BRRD II to the extent that these are relevant to firms. This is because these amendments are not onshoring amendments made under the European Union (Withdrawal) Act 2018 (EUWA) and consequently the TTP will not apply.

The PRA's intention remains not to grant transitional relief in respect of the rules in its Contractual Recognition of Bail-in (CROB) and Stay in Resolution Parts, except in relation to phase two liabilities as referenced in relation to CROB. This policy will remain the same irrespective of any changes to PRA rules made due to BRRD II.

The PRA states that it may need to reconsider its approach if it makes changes to the final rules following responses to its consultations on CRD V and BRRD II, which were published in July 2020 and October 2020.

Prudential regime for small banks and building societies: PRA speech

The BoE has published a speech given by Sam Woods, BoE Deputy Governor for Prudential Regulation and PRA CEO, on introducing a simpler prudential regime for small banks and building societies. The PRA is considering introducing a graduated regime in which firms can migrate from a very simple regime through a series of steps to the full Basel-based regime as they become larger or involved in more complex activities, or both. In his speech, Mr Woods considers which firms should be in the regime and how requirements could be made simpler.

The PRA is considering publishing a discussion paper in spring 2021.

2021 Climate Biennial Exploratory Scenario: BoE information

The BoE has published information on the Climate Biennial Exploratory Scenario (CBES), which it plans to launch in June 2021. It lists the financial institutions that have been invited to take part in the CBES, sets out a timeline and its planned engagement with participants ahead of launch.

CRR: PRA Dear CFO letter on treatment of legacy instruments

The PRA has published a letter it has sent to the chief financial officers of UK deposit-takers on the remediation of prudential treatment of legacy instruments before the end of the transition period specified in the Capital Requirements Regulation (CRR). The PRA is communicating its position in light of a related European Banking Authority (EBA) opinion published on 21 October 2020.

The CRR contains provisions grandfathering certain capital instruments that did not, at the time the CRR was adopted, comply with the new definition of own funds, with the aim that these instruments would be gradually phased out from own funds. These grandfathering provisions will expire at the end of the transition period on 31 December 2021. In its opinion, the EBA highlights the risks from certain features in these legacy instruments to the eligibility of other capital and eligible liabilities instruments and advises firms to take appropriate remedial actions before the end of the CRR transition period.

The PRA states that it shares the EBA's concerns on issues relating to subordination provisions and flexibility of distribution payments, as these pose risks to the eligibility of firms' own funds and eligible liabilities instruments. As explained in its Supervisory Statement 7/13, the PRA expects firms to avoid complex features and capital structures that may complicate prudential assessment and may also undermine capital instruments' loss-absorbing properties and CRR compliance. The PRA notes that firms are responsible for compliance with applicable regulations, such as the CRR and binding technical standards, taking into account relevant guidance. The PRA also refers firms to the BoE's minimum requirement for own funds and eligible liabilities (MREL) Statement of Policy.

In light of this established policy, the PRA expects affected firms to undertake a risk-based approach and assess appropriate remedial actions before the end of the CRR transition period. A firm’s choice of remedial action may depend on a number of factors, including call options, governing law, issuing entity, and market conditions.

The PRA requests that firms share an action plan with their usual PRA supervisory contact by 31 March 2021. If a firm intends to keep affected legacy instruments as non-regulatory capital, and non-eligible liability instruments beyond the end of the CRR transition period, the action plan should include a reasoned analysis of any prudential risks, including concerns for resolvability or insolvency, and potential actions to mitigate those risks.

EU-wide banking sector stress test: EBA publishes methodology and key milestones

The EBA has published the final version of its methodology for the 2021 EU-wide banking sector stress test, together with draft templates and template guidance for the test, and the key milestone dates for the exercise. The EBA states that the draft version of the templates and template guidance may be subject to minor technical adjustments before its final publication.

The EBA intends to launch the stress test in January 2021, with results to be submitted to it in four stages between the start of April 2021 and mid-July 2021. It intends to publish the results by 31 July 2021.

Liquidity coverage ratio: EBA report on unwind mechanism

The EBA has published a report on the unwind mechanism of the liquidity coverage ratio (LCR) under Commission Delegated Regulation (EU) 2015/61 (LCR DR). The LCR DR amended the LCR Delegated Regulation ((EU) 61/2015) to require the EBA to report to the European Commission, by 19 November 2020, on the technical suitability and possible unwarranted side effects of the unwind mechanism envisaged in the computation of the LCR.

Sustainable finance: UK Finance white paper

UK Finance has published a white paper on sustainable finance, which sets out a principles-based framework for the way in which credit institutions measure and report multi-year commitments to sustainable finance.

The paper recognises that legislators, regulators and business leaders have signalled their intention that greater definition be given to environmental, social and governance (ESG) reporting. One of the aims of the paper is to provide an opportunity for pre-positioning in advance of the ESG framework being more clearly defined by standard setters and others.