News

Banking and finance regulatory news, 8 February 2021

FIG Bulletin

08 February 2021

Recent regulatory developments focussing on banking and finance. See also developments of broader scope in our Related Materials links.

UK ring-fencing and proprietary trading independent reviews: Terms of Reference

HM Treasury has published the Terms of Reference for the upcoming statutory reviews of the ring-fencing regime legislation and banks' proprietary trading activities.

The Financial Services (Banking Reform) Act (FSBRA) 2013 requires the Treasury to appoint an independent panel to review the operation of the legislation relating to ring-fencing. Separately, FSBRA also requires the Treasury to appoint an independent panel to review banks' proprietary trading activities, following a statutory report that was required from the Prudential Regulation Authority (PRA) and published in September 2020. Given the inherent links between the structure of the banking sector and proprietary trading activities, the Treasury has appointed a single panel to conduct both reviews.

The terms of reference set out:

the scope of the review;
the panel's remit to make recommendations; and
the timetable.

Having conducted the review in line with the prescribed scope, the panel is required to make written reports to HM Treasury on ring-fencing and proprietary trading. The aim is for the panel to finalise its written reports to HM Treasury within one year of the beginning of the reviews. HM Treasury will lay a copy of the reports before Parliament.

COVID-19: BoE decides not to restart 2019 liquidity Biennial Exploratory Scenario

On 3 February 2021, the Bank of England (BoE) announced that it will not restart the 2019 liquidity Biennial Exploratory Scenario (BES). The liquidity BES, which was launched in July 2019, was intended to explore the implications of a severe and broad-based liquidity stress affecting major UK banks simultaneously. In March 2020, the BoE announced that, in light of COVID-19, it had paused the liquidity BES until further notice.

The BoE states that insights from the liquidity BES have already helped to shape aspects of its response to the impact of COVID-19 and that these insights will continue to help inform several strands of the BoE's work in future.

COVID-19: FCA asks banks to reconsider branch closures during lockdown

On 28 January 2021, the UK Financial Conduct Authority (FCA) published a statement asking banks to reconsider branch closures during the COVID-19 lockdown.

The FCA notes that its September 2020 guidance supports its consumer protection objective and is designed to protect consumers by setting expectation that firms should assess customer needs and consider the availability and provision of alternative arrangements where branch closures or ATM closures and conversions are planned. Despite this, and the subsequent national lockdown, some banks and building societies are intending to go ahead with branch closures already announced or are continuing to announce new branch closures.

The FCA is concerned that these activities could have significant consequences for customers. It may be harder than usual to reach all customers under the current restrictions and engage with them on closure proposals effectively (for example, small businesses that are temporarily closed). Some customers may need to access in-branch services to help them prepare for closures but may be unable to do so. Customers may also need additional help to access online banking and making payments.

The FCA wants banks and building societies to review their plans against its September 2020 guidance. Where they are unable to meet the expectations of the FCA's guidance during lockdown measures, firms should consider pausing or delaying new branch closures where possible, particularly where this could have significant impact on vulnerable customers. This would be similar to the approach firms took during lockdown measures in 2020.

Where firms consider it is appropriate to continue with plans during this period, the FCA expects them to have considered its guidance and be able to demonstrate how they have taken the concerns and expectations set out in its statement into account.

If firms are considering new closures or advancing those previously announced during this period, the FCA expects them to:

communicate with customers in a way that is clear, fair and not misleading to inform them of the closure proposals. Consideration should be given to the best way to make sure vulnerable and hard-to-reach customers are aware of the proposals and are able to contact the firm;
give customers clear information about how the firm can help them access alternatives during this period of national restrictions, for example support to use online banking; and
where appropriate, engage with customers to understand their needs and properly consider how they will be affected by the proposals.

LIBOR transition: Investment Association letter

The Investment Association (IA) has published a letter addressed to companies issuing LIBOR-linked sterling bonds, calling on them to take urgent action to transition away from GBP LIBOR referencing bonds.

The IA notes that, as of early 2021, there remains many outstanding LIBOR-referencing bonds which have not yet transitioned to a new rate. The potential impact of these bonds not being transitioned to the new rate ahead of the deadline is severe, with the risk of significant market disruption and harm to investors if bonds continue to reference a non-representative rate.

The IA is aware some issuers may have found it difficult to identify bondholders to engage with them on the topic of LIBOR transition and, as a result, they may have been reluctant to launch consent solicitation processes in case those processes do not receive bondholder approval. Therefore, the IA states that its members are reaching out to issuers to encourage them to put into effect plans to transition these instruments as quickly as possible. This is critical if a broad-based market transition is to be achieved by the deadline outlined by the authorities.

IA members would like to express to issuers their support for the transition process, and, to highlight their support for past consent solicitations launched by issuers looking to transition their LIBOR bonds to a new rate. Alternatively, IA members would also be willing to consider alternative arrangements with issuers, such as buybacks.

SSM: ECB 2020 SREP outcome and 2021 supervisory priorities

The European Central Bank (ECB) has published its supervisory priorities for the single supervisory mechanism (SSM) for 2021, which are based on the outcomes of its 2020 Supervisory Review and Evaluation Process (SREP). Sources of banking sector risk are set out in a risk assessment for 2021.

In 2020, the ECB adopted a pragmatic approach to the SREP focusing on banks' ability to address the challenges and risks to capital and liquidity arising from COVID-19, which meant that SREP requirements and guidance were stable. In the light of the pandemic, the ECB postponed the deadlines of previous SREP qualitative measures. As a result, many findings remain unaddressed and unresolved from previous SREP cycles, in particular those on internal governance. Supervisory concerns were addressed mainly through qualitative recommendations rather than supervisory measures.

The SREP 2020 outcomes indicate that euro area banks started 2020 with significantly higher capital levels and far greater resilience to economic deterioration than was the case in the 2008 financial crisis. However, vulnerabilities remain in several areas. Based on the SREP analysis and the situation triggered by the pandemic, the ECB banking supervision has identified the following four priority areas for 2021:

credit risk management;
capital strength;
business model sustainability; and
internal governance.

The ECB notes that supervisory activity will also focus on action taken by banks in response to the ECB guide on climate-related and environmental risks. It will also focus on prudential threats stemming from money laundering, cyber and digitalisation-related risks and banks' preparedness for Basel III implementation.

COVID-19: EBA report on implementation of selected COVID-19 policies: January 2021

The European Banking Authority (EBA) has published an updated version of its report on the implementation of selected COVID-19 policies. The aim of the report is to provide a follow-up on the implementation issues around COVID-19 credit risk policy relief measures and to monitor how such measures are implemented. The report contains FAQs on the implementation of the requirements set out in the EBA's guidelines on moratoria and on COVID-19 reporting and disclosure. The EBA has expanded the report by including new FAQs on the two sets of guidelines.

EBA launches 2021 EU-wide stress test

The EBA has announced the launch of the 2021 EU-wide stress test for banks and released the macroeconomic scenarios. Following the postponement of the 2020 exercise due to COVID-19, the EBA notes the 2021 EU-wide stress test will provide valuable input for assessing the resilience of the European banking sector. Accordingly, the adverse scenario is based on a narrative of a prolonged COVID-19 scenario in a "lower for longer" interest rate environment, in which negative confidence shocks would prolong the economic contraction.

The EBA expects to publish the results of the exercise by 31 July 2021.

The EBA has published the following documents:

a methodology, which describes the common methodology that defines how banks should calculate the stress impact of the common scenarios and sets constraints for their calculations. It also aims to provide banks with guidance and support for performing the test;
templates and template guidance;
information on the macro-financial scenario, prepared by the European Systemic Risk Board (ESRB), together with an excel version on the scenario provided for analytical purposes;
information in pdf and excel formats relating to a market risk scenario prepared by the ESRB;
a letter from the ESRB on the preparation of the scenarios; and
FAQs on the stress test.