AUGUST 2014 ENTERPRISE RISK SOLUTIONS Regulatory Insight Key Developments at a Glance The BCBS has published a working paper explaining the foundations and calibration of the new Standardized Approach regulation for Measuring Counterparty Credit Risk Exposures (SA– CCR) that will be enforced in January 2017. It has also updated its Basel 3 Monitoring workbook (Version 2.8.1), worksheets have been added to start a QIS (Quantitative Impact Study) on the proposed Fundamental Review of the Trading Book (FRTB) regulation that shall replace the current capital requirement rules for Market Risk. KEY DEVELOPMENTS PER REGION » EU: The EBA published an updated XBRL taxonomy (version 2.2) for COREP/FINREP reports, to be used for an end of December 2014 reporting date. This update also includes changes for ASSET ENCUMBRANCE reports and a first version of an XBRL taxonomy for the new yearly FUNDING PLANS reports. The EBA also released reporting templates for the 2014 EU-wide stress test. With over 12 000 data points, such templates cover banks' composition of capital, risk-weighted assets (RWAs), profit and loss (P&L), and exposures to sovereigns, credit risk, and securitization as well as a fully loaded Common Equity Tier 1 (CET1) capital ratio. The ECB issued a manual detailing how it will incorporate findings from its asset quality review (AQR) into the stress test. The ACP in France and the PRA in UK have published updated papers on their local implementation of the CRR CRD IV and associated national discretions. » Middle East: In Bahrain, the CBB has updated its capital rules to be in line with Basel 3. The Turkish regulator BDDK has communicated a press release on stress tests to be used for banks' capital and liquidity planning. » Americas: In the U.S., regulators have approved the new liquidity risk monitoring reports (FR 2052a and FR 2052b) and have proposed updates to the DFAST 10-50 reports. In Canada, the OSFI has published updated regulation and reporting templates for Basel 3 leverage ratio. In Brazil, the BCB has released changes to its Circular No. 3644 of March 4, 2013 on standardized approach RWA rules. » APAC: In Australia, APRA released a framework for supervising conglomerates but is deferring its Implementation. In Bangladesh, the regulator has drafted capital adequacy rules in line with Basel 3 that also details specific treatments for Islamic banking products. In Hong Kong, the HKMA is starting a consultation on banking liquidity rules and banking capital amendment rules (including Countercyclical, Conservation, and Systemic banks buffers). In Singapore, the MAS has issued a consultation paper on Leverage Ratio disclosure requirements for banks incorporated in Singapore. Managing Editor Pierre-Etienne Chabanel Managing Director, Regulatory & Compliance Solutions Contact Us Americas +1.212.553.1653 [email protected]Europe +44.20.7772.5454 [email protected]Asia-Pacific (Excluding Japan) +85.2.3551.3077 [email protected]Japan +81.3.5408.4100 [email protected]Sign Up Subscribe at www.moodysanalytics.com/regulatoryinsight to automatically receive your monthly copy.
Transcript
BANKS NEWSLETTER
AUGUST 2014
ENTERPRISE RISK SOLUTIONS
Regulatory Insight
Key Developments at a Glance The BCBS has published a working paper explaining the foundations and calibration of the new Standardized Approach regulation for Measuring Counterparty Credit Risk Exposures (SA– CCR) that will be enforced in January 2017. It has also updated its Basel 3 Monitoring workbook (Version 2.8.1), worksheets have been added to start a QIS (Quantitative Impact Study) on the proposed Fundamental Review of the Trading Book (FRTB) regulation that shall replace the current capital requirement rules for Market Risk. KEY DEVELOPMENTS PER REGION
» EU: The EBA published an updated XBRL taxonomy (version 2.2) for COREP/FINREP reports, to be used for an end of December 2014 reporting date. This update also includes changes for ASSET ENCUMBRANCE reports and a first version of an XBRL taxonomy for the new yearly FUNDING PLANS reports. The EBA also released reporting templates for the 2014 EU-wide stress test. With over 12 000 data points, such templates cover banks' composition of capital, risk-weighted assets (RWAs), profit and loss (P&L), and exposures to sovereigns, credit risk, and securitization as well as a fully loaded Common Equity Tier 1 (CET1) capital ratio. The ECB issued a manual detailing how it will incorporate findings from its asset quality review (AQR) into the stress test. The ACP in France and the PRA in UK have published updated papers on their local implementation of the CRR CRD IV and associated national discretions. » Middle East: In Bahrain, the CBB has updated its capital rules to be in line with Basel 3. The Turkish regulator BDDK has communicated a press release on stress tests to be used for banks' capital and liquidity planning.
» Americas: In the U.S., regulators have approved the new liquidity risk monitoring reports (FR 2052a and FR 2052b) and have proposed updates to the DFAST 10-50 reports. In Canada, the OSFI has published updated regulation and reporting templates for Basel 3 leverage ratio. In Brazil, the BCB has released changes to its Circular No. 3644 of March 4, 2013 on standardized approach RWA rules.
» APAC: In Australia, APRA released a framework for supervising conglomerates but is deferring its Implementation. In Bangladesh, the regulator has drafted capital adequacy rules in line with Basel 3 that also details specific treatments for Islamic banking products. In Hong Kong, the HKMA is starting a consultation on banking liquidity rules and banking capital amendment rules (including Countercyclical, Conservation, and Systemic banks buffers). In Singapore, the MAS has issued a consultation paper on Leverage Ratio disclosure requirements for banks incorporated in Singapore.
Europe 6 European Union 6 France 13 Germany 13 Netherlands 14 United Kingdom 14
Middle East & Africa 15 Bahrain 15 Lebanon 15 Turkey 15
Americas 16 United States of America 16 Brazil 22 Canada 22
Asia Pacific 22 Australia 22 Bangladesh 23 China 24 Hong Kong 24 Japan 25 Philippines 26 Republic of Kazakhstan 26 Singapore 27
Glossary 28
ENTERPRISE RISK SOLUTIONS
3 AUGUST 2014
International
Key Developments
Working Paper on Foundations of the Standardized Approach for Measuring Counterparty Credit Risk Exposures
- BCBS
August 28, 2014
Type of Information: Research
This technical paper (Working Paper No. 26) explains modeling assumptions that were used in developing the standardized approach for measuring counterparty credit risk exposures (SA-CCR). The paper also clarifies certain aspects of the SA-CCR calibration that are not discussed in the final standard that was published in March 2014 (revised April 2014).
The language used to describe the SA-CCR in this paper may differ somewhat from the language used in the final standard. For example, the paper uses concepts that are not present in the final standard, such as trade-level add-ons and single-factor subsets of hedging sets. Furthermore, it does not use the concept of effective notional, which is employed in the standard. The purpose of these adaptations is to emphasize the common aggregation framework that underpins the SA-CCR add-on formulas for different asset classes.
Links: Working Paper No. 26, Final Standard Keywords: Basel III, SA-CCR
Updates for August 2014
- LEIROC
August 24, 2014
Type of Information: Report
The LEI ROC has released the following documents:
» Statutes of the Global LEI Foundation
» Additional guidance from the LEI ROC on portability
» Updated principles to be observed by pre-LOUs that wish to integrate into the Interim Global Legal Entity Identifier System (GLEIS)
» Regulatory Oversight Committee endorsement note
» Pre-LOU lists
Link: LEI ROC Homepage Keywords: GLEIS, Pre-LOU
Reports by Regional Consultative Group for the Americas and Asia
- FSB
August 22, 2014
Type of Information: Report
The FSB’s Regional Consultative Group (RCG) has published the following reports:
» RCG Americas: Report on the Effect on Host Countries of Balance Sheet Consolidation and Risk Management Practices by Global Banks; Report on Shadow Banking in the Americas
» RCG Asia: Report on the Impact of SIFI Framework on the Asia Region and Measures in Response; Report on Shadow Banking in Asia
Links: RCG Member List: Americas, Effect of Certain Practices by Global Banks: Americas, Shadow Banking: Americas, RCG Member List: Asia, Impact of SIFI Framework: Asia, Shadow Banking: Asia Keywords: Consolidation, Shadow Banking, SIFI
Are Truly Global Standards Achievable? A Speech by Ian Mackintosh, Vice Chairman of IASB
- IASB
August 13, 2014
Type of Information: Speech
In his speech, Ian Mackintosh, Vice Chairman of IASB, said that the objective of the decade-long convergence program with the U.S. was to work together to improve U.S. GAAP and IFRS, thus making a decision about adoption easier and more acceptable. “That program has had some success, and also some failures,” he said.
In many important areas, the IASB and the U.S. have managed to align disparate requirements, such as in the accounting for business combinations, fair value measurement, and, most recently, in the all-important Revenue Recognition project. These achievements should not be overlooked, because they have improved the quality and comparability of financial information worldwide. Meanwhile, “we have also seen failures in convergence in other important areas, such as in the Financial Instruments project. In various aspects of this project, including the netting of derivatives, loan loss provisioning, and the classification and measurement of financial instruments, we have seen the boards sit around the table and reach a converged outcome, only to see that agreement melt away. It’s not altogether surprising that this happens when you have two boards with different imperatives—one prioritizing the feedback from their national constituents and the other striving to understand and carefully balance feedback from around the world, including the U.S.”
“Independent boards with different imperatives considering finely balanced questions of judgment have a nasty habit of reaching different and often incompatible conclusions. Moreover, there are many dangers in pretending that converged national standards can serve as a substitute for global standards. The devil is always in the detail. Small differences in accounting requirements can have a substantial effect on reported performance.”
According to Mr. Mackintosh, “These are the reasons why full convergence can probably never be achieved, and why adoption of IFRS is the only viable approach to achieving global accounting standards. There really is no shortcut to meeting the challenges of economic globalization, other than by providing a single set of high quality, global accounting standards. That is what IFRS does.”
Link: Homepage Keywords: Accounting Convergence
Macro-Prudential Frameworks: (Too) Great Expectations?
- BIS
August 13, 2014
Type of Information: Speech
In his speech, Claudio Borio, Head of the Monetary and Economic Department, BIS, spoke about the macro-prudential frameworks implemented after the great financial crisis. The debt-to-income ratios and, to a lesser extent perhaps, loan-to-value ratios are comparatively more effective than increases in loan provisions or capital requirements.
He said that “the recent activation of the Basel III countercyclical capital buffer in Switzerland seems to have had little impact on pricing and credit extension. It is no coincidence that the explicit objective of this buffer, as clarified in the Basel III framework, is to increase resilience, not to restrain the boom: restraining the boom is regarded simply as a desirable side benefit if it materializes. The limited effectiveness of the tools should not be that surprising. The main reason is regulatory arbitrage. Money, like water, has a nagging habit of finding the point of least resistance. This suggests that macro-prudential policy cannot bear the whole burden.”
It is worth thinking of ways to maximize the size of the buffer once the bust occurs. One option is to more actively use restrictions on dividend payments. If the restrictions are applied to the sector as a whole, rather than to specific institutions, the risk of unwelcome pro-cyclical effects would be mitigated, as this would eliminate any stigma (the so-called “signaling effect”). No stigma can apply if everyone is in the same boat and the decision is taken by supervisors, not banks themselves. Three governance issues merit special attention:
» The extent of insulation from political cycles
» The tension between micro-prudential and macro-prudential perspectives
» International coordination
According to Mr. Borio, “…the essence of good macro-prudential policy is to take the punchbowl away just as the party gets going.” He also said that “the authorities may naturally put less weight on the dangers of financial booms as long as financial institutions appear well capitalized. This, too, can heighten the risk of an inaction bias. For instance, in Switzerland, the supervisory authority (FINMA) openly opposed the central bank’s proposal to activate the countercyclical buffer. And similar differences of view have emerged in Sweden. This suggests that assigning a core role to central banks should be a priority.”
He also said that “a lack of coordination can make arrangements especially vulnerable to cross-border arbitrage. One of the most underestimated achievements of Basel III’s countercyclical capital buffer is that it addresses this question head-on. The relevant exposure measure is a weighted average of an institution’s exposure to different jurisdictions. And specific reciprocity clauses tackle the inaction bias.... Such reciprocity clauses could be a model for a broader set of macro-prudential tools.”
Link: Speech Keywords: Basel III, Governance, Macro-Prudential Policy
Launch of Public Information Repository for Central Clearing Requirements
- IOSCO
August 05, 2014
Type of Information: Report
IOSCO unveiled an information repository for central clearing requirements for OTC derivatives. The repository provides regulators and market participants with consolidated information on the clearing requirements of different jurisdictions. The information in the repository will be updated quarterly.
Links: Media Release, Information Repository Keywords: CCP, Information Repository
Basel III Monitoring Version 2.8.1
- BCBS
August 04, 2014
Type of Information: Report
Compared to the versions 2.7.x of the reporting template, the following main changes have been implemented:
» The worksheets for the QIS on the fundamental review of the trading book (FRTB) and the “OpRisk” worksheet have been added
» The worksheets “TBHPE,” “IRRBB,” “CSRBB,” and “Partial Use” have been removed
» The items from panel D on the “General Info” worksheet have been moved to a separate “Requirements” worksheet
» Some additional market risk exposure information is collected. Furthermore, banks are now requested to provide a breakdown for foreign exchange and commodities risk subject to the standardized approach to market risk
» A new row 40 has been inserted on the “LCR” worksheet
» The instructions for rows 48 and 257 of the “NSFR” worksheet have been amended
Links: Basel III Monitoring Update, DNB Updated Templates: V.2.8.1 Keywords: Basel III, FRTB, Monitoring
New Features and Updates to Single Rulebook Q&A Tool
- EBA
August 29, 2014
Type of Information: Report
The EBA introduced some important changes in the way the Q&A tool is operated. The new features to the Q&A tool include:
» Submitted questions will no longer be published while under review, but only after an answer has been finalized
» Rejected questions will be published for two months and with the purpose of illustrating the types of questions that are not suitable
» The Q&A pages have been reorganized in a way that encourages users to use the “Search for Q&A” function
» A compilation of all final Q&A is made available grouped by topics, such as own funds, credit risk (note that the ITS on Supervisory Reporting have been compiled in a separate file). The compilations are updated on a quarterly basis
The August 2014 updates include 1 answer on August 14, 2014; 26 answers on August 22, 2014; and 8 answers on August 29, 2014.
Adoption of Regulation on Improving Securities Settlement and on Central Securities Depositories and Amendment of Directive 98/26/EC and EU Regulation No. 236/2012
- ECB
August 28, 2014
Type of Information: Regulation
Regulatory Status: Final Rule
The ECB is adopting regulation on improving securities settlement in the EU and on central securities depositories (CSDs) and amending Directive 98/26/EC and EU Regulation No. 236/2012. Article 1 (titled “subject matter and scope”) of the EU Regulation No. 909/2014 lays down uniform requirements for the settlement of financial instruments in the EU and rules on the organization and conduct of CSDs to promote safe, efficient, and smooth settlement.
Article 22 (review and evaluation) states that the competent authority shall, at least on an annual basis, review the arrangements, strategies, processes, and mechanisms implemented by a CSD with respect to compliance with this regulation and evaluate the risks to which the CSD is, or might be, exposed or which it creates for the smooth functioning of securities markets.
In addition, Article 26 (general provisions) lays down the following key points:
» A CSD shall have robust governance arrangements, which include a clear organizational structure with well-defined, transparent and consistent lines of responsibility, effective processes to identify, manage, monitor and report the risks to which it is or might be exposed, and adequate remuneration policies and internal control mechanisms, including sound administrative and accounting procedures.
» Where a CSD is part of a group of undertakings including other CSDs or credit institutions referred to in Title IV, it shall adopt detailed policies and procedures specifying how the requirements laid down in this Article apply to the group and to the different entities in the group.
» ESMA shall, in close cooperation with the members of the ESCB, develop draft regulatory technical standards (RTS) specifying at the CSD level and at the group level as referred to in paragraph 7:
a) The monitoring tools for the risks of the CSDs referred to in paragraph 1
b) The responsibilities of the key personnel in respect of the risks of the CSDs referred to in paragraph 1
c) The potential conflicts of interest referred to in paragraph 3
d) The audit methods referred to in paragraph 6
e) The circumstances in which it would be appropriate, taking into account potential conflicts of interest between the members of the user committee and the CSD, to share audit findings with the user committee in accordance with paragraph 6
ESMA shall submit the draft RTS to the EC by June 18, 2015.
Comments Due Date: N/A Effective Date: September 17, 2014 First Reporting Date: N/A Links: Regulation No. 909/2014, Directive 98/26/EC, Regulation No. 236/2012 Keywords: CSD, Securities Settlement, Short-Selling
Identification of Systemically Important Payments Systems
- ECB
August 21, 2014
Type of Information: Regulation
Regulatory Status: Final Rule
The ECB has identified four key payment systems that are now under the new ECB regulation on oversight requirements for systemically important payment systems (SIPS), which entered into force on August 12, 2014 (compliance date one year later).
The regulation covers large-value and retail payment systems in the euro area operated by both central banks and private entities. It aims to ensure efficient management of legal, credit, liquidity, operational, general business, custody, investment and other risks as well as sound governance arrangements, namely with a view toward promoting the smooth operation of safe and efficient payment systems in the euro area.
The four systems identified are as follows:
» TARGET2, operated by the Eurosystem
» EURO1 and STEP2-T, operated by EBA CLEARING
» CORE(FR), operated by STET, a joint initiative of six major French banks
The systems were identified according to the combination of at least two of four main criteria, that is, the value of payments settled, market share, cross-border relevance, and provision of services to other infrastructures. The Eurosystem will review this list annually on the basis of updated statistical data.
This is the first time that the ECB makes use of its regulatory powers in the field of payment systems oversight. The SIPS Regulation is stricter than previous oversight standards and provides for sanctions and corrective measures for system operators in case of non-adherence. Furthermore, it implements and is consistent with CPSS/IOSCO's “Principles for financial market infrastructures” (PFMIs).
Competent authorities, that is, Eurosystem central banks with primary oversight responsibilities for one or more payment systems, are expected to regularly assess compliance of these systems with the SIPS Regulation. For consistency with international practice and to take account of the increased integration of retail payment systems in the Single Euro Payments Area (SEPA), the Eurosystem has also undertaken a comprehensive review of the oversight standards for euro retail payment systems that are not SIPS initially adopted in June 2003. As the result of this review, the ECB has published the “Revised Oversight Framework for Retail Payment Systems.”
Comments Due Date: N/A Effective Date: August 12, 2015 First Reporting Date: N/A Links: Press Release, SIPS Regulation, CPSS/IOSCO's PFMIs Keywords: PFMI, SIPS
The EBA issued the templates to be used for the publication of data in the context of the EU-wide stress test in the banking sector. In its role of coordinator of the stress test, the EBA will be publishing up to 12,000 data points per bank across the EU, acting as the single hub for all information related to stress test outcomes of EU banks, as determined by competent authorities.
The data to be disclosed in the EBA templates will cover banks' composition of capital, risk-weighted assets (RWAs), profit and loss (P&L), and exposures to sovereigns, credit risk, and securitization. In addition, for the first time, the EBA will disclose a fully loaded CRR/CRD IV common equity tier 1 (CET1) capital ratio for each bank. The disclosure will be based on the outcome of the stress test from the end of 2013 to the end of 2016.
These templates will help market participants to better understand the data that banks will disclose. The EBA is assisting all competent authorities in their quality assurance process by providing them with benchmarks that support the robustness and reliability of this process. The EBA provides a common methodology, benchmarks, and scenarios, along with assisting participants through the Q&A helpdesk for the EU-wide stress test. However, it is the responsibility of competent supervisors to check the credibility and quality of the results and to decide on any supervisory action.
Once the stress test is finalized later this year, the EBA will act as a single hub gathering all information received. In this capacity, the EBA will have a pan-EU overview on the resulting data and will be able to promptly flag any issues or statistical differences to national supervisors, while also allowing public disclosure of all data on EU banks.
Comments Due Date: N/A Effective Date: N/A First Reporting Date: N/A Link: News Release Keywords: AQR, Comprehensive Assessment, Stress Testing
New XBRL Taxonomy for Remittance of Supervisory Reporting
- EBA
August 18, 2014
Type of Information: Regulation
Regulatory Status: Final Rule
The EBA published a new eXtensible Business Reporting Language (XBRL) taxonomy to be used by competent authorities for remittance of data under the EBA Implementing Technical Standards (ITS) on supervisory reporting. The updated taxonomy incorporates corrections to the common reporting (COREP), financial reporting (FINREP), and asset encumbrance reporting structures so as to be more in line with the recently published ITS amendments as well as the new reporting structures for funding plans. The published documents include:
» The set of XML files forming the XBRL taxonomy
» A description of the architecture of the XBRL taxonomy
» The data point model, of which the taxonomy is a standardized technical implementation, including both database and document representations, along with a description of the formal modeling approach on which it is based
Reports with reference dates as of December 31, 2014 onward are to use the new taxonomy set (2.2), which is related to the July 2014 framework release. The existing taxonomy set version (2.0.1), which is related to the September 2013 framework release, is to be used for remittance to the EBA of reports with reference dates prior to September 30, 2014.
Remittance of reports with reference dates between September 30, 2014 and December 30, 2014 are to use the existing taxonomy set version (2.1.0.1) related to the March 2014 framework release. Remittance of FINREP reports will start using the 2.1.0.1 taxonomy set.
Comments Due Date: N/A Effective Date: December 31, 2014 First Reporting Date: N/A Link: News Release Keywords: COREP, FINREP, XBRL, CRD IV, Regulatory Reporting, Asset Encumbrance, Funding Plans
New International Standards in Statistics: Enhancements to Methodology and Data Availability
- ECB
August 14, 2014
Type of Information: Report
European macroeconomic statistics will be updated in line with the new international statistical standards in the second half of 2014. The changes concern important economic indicators such as GDP, external trade, and the net international investment position, as well as government deficit and debt. The changes will also have an impact on the recording of debt of non-financial corporations and the saving ratio of households. The ECB was involved in the work to revise the standards and, for the statistics for which it is responsible, is implementing amended reporting requirements in cooperation with the National Central Banks (NCBs). Relevant, timely, and harmonized statistics are key for monetary policymaking. The changeover to the new statistical standards will also lead to improvements in data availability in terms of timeliness and content.
The report explains the reasons for revision and merits of the new standards. It also provides a broad assessment of the expected impact on the main economic variables and describes the improvements to the availability of euro area statistics. The data collection frameworks of monetary and financial statistics (MFS) have been adapted to reflect the new international statistical standards. In particular, new regulations have been adopted in the area of Monetary Financial Institution (MFI) balance sheet statistics and statistics on the assets and liabilities of investment funds and financial vehicle corporations engaged in securitization transactions.
The changes reflect the revised international statistical standards, as well as new user requirements. The new data requirements notably cover more granular breakdowns in counterparty sectors and instrument categories. As reporting agents and NCBs need to be given enough time to prepare, reporting under these new legal acts will begin with data for the reference period December 2014, and the resulting statistics will be published in 2015, when annual growth rates can be produced for the new breakdowns.
More detailed information on these changes will be made available at a later stage, after the new data are published. It is worth noting that several other initiatives are ongoing with regard to MFS. In particular, new statistics on insurance corporations are being prepared. Securities issues statistics have also been reviewed to align the breakdowns of sectors and instruments with the new standards.
Links: Report, New Standards Keywords: MFI, Statistics
EBA Welcomes Publication of European Commission Report on Operation of European System of Financial Supervision
- EBA
August 08, 2014
Type of Information: Report
The European Commission published its report on the operation of the ESAs and the European System of Financial Supervision (ESFS). The report recognizes the overall effectiveness and efficiency of the three ESAs in contributing to restoring confidence in the financial sector and promoting the Single Rulebook. It also identifies areas where adjustments might be needed to improve and strengthen the functioning of the current institutional set up, also in light of the establishment of the Banking Union.
The EBA welcomes this assessment and emphasizes that a more pronounced increase in resources, further clarifications in roles and responsibilities on supervisory matters, and possibly greater involvement in the developments of primary legislation would enable it to more effectively perform its role as guardian of the single rulebook in the banking sector as well as promoter of supervisory convergence.
Links: Press Release, Index on Financial Supervision Keywords: ESA, ESFS, Single Rulebook
The ECB published a manual detailing how it will incorporate findings from its asset quality review (AQR) into stress test projections. It also describes the stress test quality assurance process, which is vital to ensuring that the exercise is robust and credible. The ECB’s comprehensive assessment differs from previous EU-wide stress test exercises in that it comprises a thorough AQR and includes a “join-up” of the AQR and stress test outcomes. This enables a more accurate assessment of bank balance sheet conditions as well as of credit and other risks on banks’ books.
The quality assurance of the stress test focuses on delivering results that are accurate, consistent, and credible. Various quality checks will be performed in cooperation with national competent authorities. The ECB will compare findings for individual banks with those of their peers and will apply its own top-down stress test model. Banks may be required to provide further evidence as part of a “comply or explain” approach, in addition to providing further analysis and, if necessary, resubmitting their stress test projections.
The “join-up,” and thereby the impact of the AQR on the stress test calculations, will work through multiple channels. Findings from the portfolios examined in the AQR will be used to determine the starting point of the stress test and, for the purpose of the exercise, may lead to an adjustment to the year-end 2013 balance sheet. Where evidence from the AQR points to a bank having insufficient provisions, this will be reflected in adjustments to the bank’s simulated projected losses in 2014, 2015, and 2016 for both the baseline and adverse scenarios. In addition, it will have an impact on the simulated profits and losses under stress test scenarios.
The final results from the comprehensive assessment will be published in the second half of October.
Final Technical Standards on Treatment of Equity Exposures Under IRB Approach
- EBA
August 05, 2014
Type of Information: Regulation
Regulatory Status: Final Rule
The EBA published its final draft Regulatory Technical Standards (RTS) specifying the treatment of equity exposures under the internal ratings-based (IRB) approach. The RTS establish that competent authorities are allowed to grant institutions a temporary exemption from the IRB treatment for certain equity exposures, provided such exemption was being applied on the last day of application of the Capital Requirements Directive I (CRD I)—December 31, 2007.
This exemption will end on December 31, 2017 and is deemed to have immaterial impact on most institutions.
Comments Due Date: N/A Effective Date: [OJ Date] + 20 days First Reporting Date: N/A Link: News Release Keywords: CRR, Equity Exposure, RTS
Consultation on Criteria for Intervention on Structured Deposits Under Markets in Financial Instruments Regulation
- EBA
August 05, 2014
Type of Information: Regulation
Regulatory Status: Proposed Rule
In accordance with the Markets in Financial Instruments Regulation (MiFIR), the EBA is tasked with monitoring the market for structured deposits across the European Union. Under certain circumstances, either specified by the regulation or by the EBA, the EBA can also temporarily prohibit or restrict the marketing, distribution, or sale of certain structured deposits.
The European Commission recently requested the EBA to provide technical advice on the criteria and factors to be taken into account when exercising these powers. As the MiFIR establishes an identical framework for the intervention powers of ESMA on financial instruments, the EBA based its own work on the criteria identified by ESMA.
In its paper, the EBA proposes a set of criteria and factors and includes explanatory notes to provide the rationale for each deviation from the criteria published by ESMA. The EBA considered that some of those criteria were not applicable to structured deposits, while others needed to be adapted. However, in some cases, new criteria had to be introduced to take into account characteristics that are specific to structured deposits.
Comments Due Date: October 05, 2013 Effective Date: N/A First Reporting Date: N/A Link: News Release Keywords: MiFIR, Structured Deposit
Quarterly Report on Progress in Operational Implementation of Single Supervisory Mechanism Regulation
- ECB
August 05, 2014
Type of Information: Report
The third quarterly report to the European Parliament, the EU Council, and the EC on progress in implementing the SSM Regulation covers the three months between May 04 and August 03, 2014. The key messages of the report include:
» The ECB will assume the tasks conferred on it by the SSM Regulation within three months, on November 04, 2014.
» The Supervisory Board largely finalized the process of determining which credit institutions in the euro area should be deemed “significant” and therefore subject to direct supervision by the ECB. About 120 credit institutions or groups were determined as significant, most of which are already undergoing the comprehensive assessment. The final decisions are being notified to the credit institutions, and the final lists of significant and less significant banks will be published on the ECB’s website before September 04, 2014.
» The establishment of Joint Supervisory Teams (JSTs), which will be the main operational structure for the conduct of supervision by the SSM, has reached certain milestones. The SSM will establish a JST for each significant institution or group, leading to the establishment of 117 JSTs. By September, the target number of ECB staff needed for the JSTs to be operational (around 200) will have been met.
» Significant progress has been made in the conduct of the comprehensive assessment. The ECB is now finalizing methodology for the join-up of the AQR and the stress test, which will be published in the first half of August.
» The SSM Supervisory Manual and the public Guide to the SSM’s approach to banking supervision are being finalized (to be published before November 04, 2014).
Moreover, significant progress has been made in implementing the Supervisory Banking (SUBA) data system required for the collection, storage, quality analysis/enhancement, and dissemination of supervisory data and metadata. The user requirements have been prioritized so that the first wave of supervisory data can be collected from the significant institutions as of July 31, 2014. The SUBA data system will be further developed to enhance its reporting capabilities and improve the quality of the data collected. From 2015, the ECB will also collect data using the templates of the EBA implementing technical standards for the less significant institutions. Over time, the SUBA data system will gradually accommodate other supervisory data needs.
Datasets that have been developed for monetary and other policy purposes will also support supervisory tasks. Examples include the Register of Institutions and Affiliates Database (RIAD), which supports the mapping of significant banking groups, and a large dataset on granular credit data, “Analytical Credit,” which is being developed as a multi-purpose tool.
Update on Rules for Calculating Capital Adequacy Ratios Under CRD IV
- ACPR
August 06, 2014
Type of Information: Regulation
Regulatory Status: Final Rule
A new update on the 2014 notice on the rules for calculating capital adequacy ratios under the CRD IV version is available. A version with outlined revisions is available on request.
The notice addresses specificities of CRD IV/CRR implementation in France; for example, national discretion options.
Comments Due Date: N/A Effective Date: [OJ Date] + 20 days First Reporting Date: N/A Link (to original language material): News Release Keywords: CRD IV, National Discretion
Germany
Key Developments
Information on Revision of Reports from December 2014 Onward
- Bundesbank
August 05, 2014
Type of Information: Regulation
Regulatory Status: Final Rule
The reports for banks’ (MFIs’) monthly balance sheet statistics, the external position of banks (MFIs), and the MFI interest rate statistics are being revised.
The recast regulation concerning the balance sheet of the monetary financial institutions sector (ECB/2013/33) and the recast regulation concerning statistics on interest rates applied by monetary financial institutions (ECB/2013/34) have made it necessary to adapt the reporting requirements for the Bundesbank’s banking statistics surveys.
The reporting requirements deriving from the recast Guideline ECB/2007/9 on monetary and financial statistics, which will soon be adopted, will also be incorporated. An accompanying Bundesbank regulation was adopted on April 09, 2014. The Bundesbank will post information on the intermediate phases of the German implementation process on its website and update it constantly.
Comments Due Date: N/A Effective Date: N/A First Reporting Date: N/A Links: News Release, News of Revision (to original language material) Keywords: MFI, Statistics
The Basel III monitoring templates to be used by banks are updated at least every half year and can be found on the DNB website. The latest version is v.2.8.0. Institutions are advised that this version is subject to potential updates and a later version might be required for the final submission on September 25, 2014.
Link: Factsheet, BCBS Basel III Monitoring Keywords: Basel III, Monitoring
United Kingdom
Key Developments
Restriction on Distribution of CoCos to Retail Investors
- FCA
August 05, 2014
Type of Information: Statement
In the first use of new consumer protection powers, the Financial Conduct Authority (FCA) will restrict firms from distributing contingent convertible securities (CoCos) to the mass retail market from October 01, 2014. CoCos are highly complex and the FCA believes they are unlikely to be appropriate for the mass retail market; therefore, the FCA has stepped in to temporarily restrict their distribution only to professional, institutional, and sophisticated or high net worth retail investors, ahead of consulting on permanent rules later this year.
CoCos can be written off (in part or entirely) or converted into equity when the issuer’s capital position falls, while issuers can have unusually broad discretion in relation to coupon payments. At present, there is little experience of how CoCos operate in practice. The announced restriction will apply from October 01, 2014 to October 01, 2015.
The PRA and the FCA are required, as competent authorities, to publish information on rules and guidance, options and discretions, supervisory review and evaluation process (SREP), and aggregate statistical data, alongside submitting the information to the EBA in line with Article 143 of CRD IV and Commission Implementing Regulation 650/2014.
The purpose of publishing such information is to enable a comparison of the approaches adopted by the competent authorities of the different member states. Consolidated data can be found on the EBA's website.
Comments Due Date: N/A Effective Date: N/A First Reporting Date: N/A Links: PRA Disclosures Required, Article 143 of CRD IV, Commission Implementing Regulation 650/2014, EBA Guidelines on Supervisory Disclosure Keywords: CRD IV, National Discretion, Supervisory Disclosure
Basel III Updates: Conventional and Islamic Banking
- CBB
August 18, 2014
Type of Information: Regulation
Regulatory Status: Proposed Rule
CBB is issuing the final version of Module CA, which will come into effect in January 2015. Changes to Module CA are in respect of Pillar 1 (Capital Adequacy) of IFSB 15 and Basel III. Other draft changes to Rulebook Modules will be sent out in due course (Supervisory Review Process, Liquidity, Leverage Ratio, and Public Disclosure).
Comments Due Date: N/A Effective Date: January 01, 2015 First Reporting Date: N/A Link: CBB Consultations Keywords: Basel III, Islamic Banking, Pillar 1
Lebanon
Key Developments
2014 Article IV Consultation and Selected Issues
- IMF
July 31, 2014
Type of Information: Report
The IMF published its staff report and selected issues report on Lebanon in the context of Article IV consultation.
The report reveals that the capital buffers should be further strengthened given banks’ large exposure to the sovereign. By the end of 2015, the Banque du Liban (BdL) requires an additional capital buffer of 1.5% on top of the Basel III minimum plus a 2.5% conservation buffer. This measure is welcomed, though the authorities are urged to have a consistent approach to banks’ exposures to the government and the central bank, in accordance with the Basel capital adequacy framework. The risk weight on foreign currency deposits with the BdL has been recently reduced from 100% to 50%, while holdings of the Lebanese government debt in foreign currency still carry a 100% risk weight. Exposures in pound to both the BdL and the government carry a zero risk weight.
The authorities felt that staff’s assessment underplayed ongoing progress in the prudential framework. They stressed both the high quality of banks’ capital (mostly core Tier 1) and the strict bank capital requirements, which go beyond the Basel III minimum. The authorities justified the different weighting system on the basis of BdL’s conservative investment strategy for the international reserves. They also emphasized the efforts made to assess capital adequacy with respect to banks’ cross-border exposures through ongoing stress tests.
Links: Staff Report, Selected Issues Report Keywords: Article IV Consultation, Basel III, Stress Testing
Turkey
Key Developments
Press Release and Guide on Stress Testing to be Used for Banks' Capital and Liquidity Planning
- BDDK
August 06, 2014
Type of Information: Statement
The Turkish regulator BDDK issued a press release on stress tests to be used for banks' capital and liquidity planning:
» Strategic three-year plan and budget forecasting and scenario analysis
» Stress tests using both internal and BDDK-defined scenarios
» Risk appetite and risk limits to be based on the results of the stress tests
Links(to original language material): Press Release, Guide Keywords: Basel III, Capital Planning, Stress Testing
The SEC adopted revisions to rules governing the disclosure, reporting, and offering process for asset-backed securities (ABS) to enhance transparency, better protect investors, and facilitate capital formation in the securitization market.
The new rules, among other things, require loan-level disclosure for certain assets, such as residential and commercial mortgages and automobile loans. The rules also provide more time for investors to:
» Review and consider a securitization offering
» Revise the eligibility criteria for using an expedited offering process known as “shelf offerings”
» Make important revisions to reporting requirements
The revised rules become effective 60 days after publication in the Federal Register. Issuers must comply with new rules, forms, and disclosures other than the asset-level disclosure requirements no later than one year after the rules are published in the Federal Register. Offerings of ABS backed by residential and commercial mortgages, auto loans, auto leases, and debt securities (including re-securitizations) must comply with the asset-level disclosure requirements no later than two years after the rules are published in the Federal Register.
Comments Due Date: N/A Effective Date: [FR Date] + 60 Days First Reporting Date: N/A Link: Press Release, Final Rule Keywords: ABS, Asset-Level Disclosures, Loan-Level Disclosures
Adoption of Credit Rating Agency Reform Rules
- SEC
August 27, 2014
Type of Information: Regulation
Regulatory Status: Final Rule
The SEC adopted new requirements for credit rating agencies to enhance governance, protect against conflicts of interest, and increase transparency to improve the quality of credit ratings and increase credit rating agency accountability.
The new rules and amendments, which implement 14 rulemaking requirements under the Dodd-Frank Act, apply to credit rating agencies registered with the Commission as nationally recognized statistical rating organizations (NRSROs). The new requirements for NRSROs address:
» Internal controls
» Conflicts of interest
» Disclosure of credit rating performance statistics
» Procedures to protect the integrity and transparency of rating methodologies
» Disclosures to promote the transparency of credit ratings
» Standards for training, experience, and competence of credit analysts
Certain amendments will become effective 60 days after publication in the Federal Register. The amendments with respect to the annual report on internal controls and the production and disclosure of performance statistics will be effective on January 01, 2015, which means that the first internal controls report to be submitted by an NRSRO would cover the fiscal year that ends on or after January 01, 2015, and the first annual certification on Form NRSRO relating to performance statistics is required for the annual certifications filed after the end of the 2015 calendar year.
Comments Due Date: N/A Effective Date: [FR Date] + 60 Days First Reporting Date: N/A Link: Press Release Keywords: CRA, Governance, Transparency
The OFR has released a working paper titled “Design of Risk Weights.” Banking regulations set minimum levels of capital for banks. These requirements are generally formulated through a ratio of capital to risk-weighted assets (RWAs). A risk-weighting scheme assigns a weight to each asset or category of assets and effectively functions as a linear constraint on a bank’s portfolio choice; it also changes the incentives for banks to hold various kinds of assets. In this paper, we investigate the design of risk weights (RWs) to align regulatory and private objectives in a simple mean-variance framework for portfolio selection.
By setting risk weights proportional to profitability rather than risk, the regulator can induce a bank to reduce its overall level of risk without distorting its asset mix. Because the regulator is unlikely to know the true profitability of assets, an adaptive formulation is introduced, in which the regulator sets weights by observing a bank’s portfolio. The adaptive scheme converges to the same combination of weights and portfolio choice that would hold if the regulator knew the asset profitability. We also investigate other objectives, including steering banks to a target mix of assets, adding robustness, mitigating pro-cyclicality, and reducing system-wide risk in a setting with multiple heterogeneous banks.
Link: Report Keywords: RW, RWA
Agencies Provide Additional Guidance for Certain Resolution Plans
- FED/FDIC
August 15, 2014
Type of Information: Statement
The FED and FDIC provided additional guidance to firms that in December will be filing resolution plans for the second time. Each plan must describe the company's strategy for rapid and orderly resolution under the U.S. Bankruptcy Code in the event of material financial distress or failure of the company. One hundred and seventeen U.S. bank holding companies with less than $100 billion in total nonbank assets and foreign-based firms with less than $100 billion in U.S. nonbank assets were required to file their initial resolution plans with the agencies in December 2013.
Following review of the initial resolution plans, the agencies are providing each firm with guidance, clarification, and direction for their second resolution plans based on the relative size and scope of each firm's U.S. operations:
» Thirty-one of the more complex firms are required to file a full resolution plan that takes into account and discusses potential obstacles to resolvability identified by the agencies. The obstacles include global issues, financial market utility interconnections, and funding and liquidity.
» Twenty-five firms with less complex U.S. operations are permitted to file tailored plans again this year and can use the model template issued by the agencies or follow the guidelines previously released by the agencies.
» Sixty-one firms with limited U.S. operations may focus their plans on material changes to their initial plans as well as actions taken to strengthen the effectiveness of their initial plans.
The second plans are due to the agencies on or before December 31, 2014. The agencies also released the tailored resolution plan template for 2014 plans. A tailored resolution plan focuses on the nonbanking operations of the firm and on the interconnections and interdependencies between the nonbanking and banking operations. The optional template is intended to facilitate the preparation of tailored resolution plans.
Links: Press Release, 2014 Model Template Keywords: Dodd-Frank Act, Recovery and Resolution Plan, RRP Model Template
Final Approval of Complex Institution Liquidity Monitoring Report and Liquidity Monitoring Report: FR 2052a and FR 2052b
- FED
August 15, 2014
Type of Information: Statement
The FR 2052a and FR 2052b reports collect quantitative information on selected assets, liabilities, funding activities, and contingent liabilities on a consolidated basis and by material entity subsidiary. These reports will be used to monitor the overall liquidity profile of certain U.S. bank holding companies (BHCs) and foreign banking organizations (FBOs), with the frequency and form of collection determined by the asset size of the organization. On September 19, 2013, the FED published a notice in the Federal Register (78 FR 57634) on the implementation of the FR 2052a and FR 2052b. The comment period expired on November 18, 2013 and the Federal Reserve had received eight comment letters.
For research purposes and for anticipated future enhancements of the FR 2052a, additional ad-hoc reporting of items not included on the proposed FR 2052a would be requested of up to 16 respondents, with a reporting schedule provided 30 days prior to the first data submission.
FBOs that do not currently report liquidity data similar to what is required on the FR 2052a and FR 2052b would have to build new reporting systems to comply with the proposed requirements. To the extent individual U.S. BHCs that are subsidiaries of FBOs and that meet the threshold for application of the final reporting requirements have not been regularly submitting similar liquidity information to its supervisors, the Federal Reserve will consider individual requests for extensions of time prior to the first required submission, in order to allow institutions to submit the reports without undue burden. The Federal Reserve notes that any future FR 2052 reporting requirements to ensure consistency with the final LCR rule and Regulation YY as fully implemented would be proposed at a later date.
The reporting frequency for FR 2052a will be daily, twice a month, and on occasion while the reporting frequency for FR 2052b is to be monthly and quarterly. The effective dates will be September 11, 2014 for FR 2052a and November 30, 2014 for FR 2052b for monthly reporters and December 31, 2014, for quarterly reporters. The respondent data are as follows:
» FR 2052a: Respondents include U.S. BHCs that the FSB designated as Global Systematically Important Banks (G–SIBs) and FBOs with U.S. broker-dealer assets > $100 billion. The number of respondents is estimated to be 8 U.S. BHCs that FSB designated as G–SIBs, 8 FBOs with U.S. broker-dealer assets >$100 billion complete form, 8 FBOs with U.S. broker-dealer assets >$100 billion abbreviated form, and 16 Ad-Hoc.
» FR 2052b: U.S. BHCs (excluding G–SIBs) with total consolidated assets >$50 billion (including FBO subsidiaries) and U.S. BHCs (not controlled by FBOs) with total consolidated assets of $10 billion–$50 billion. The number of respondents is estimated to be 24 U.S. BHCs (excluding G–SIBs with total consolidated assets >$50 billion (including FBO subsidiaries) and 47 U.S. BHCs (not controlled by FBOs) with total consolidated assets of $10 billion–$50 billion.
Links: Federal Notice, Reporting Forms Keywords: Liquidity Risk, FR 2052a, FR 2052b
The SEC is adopting (17 CFR Parts 230, 239, 270, 274, and 279; RIN 3235–AK61) amendments to the rules that govern money market mutual funds (MMFs) under the Investment Company Act of 1940. The amendments are designed to address MMFs’ susceptibility to heavy redemptions in times of stress, improve their ability to manage and mitigate potential contagion from such redemptions, and increase the transparency of their risks, while preserving, as much as possible, their benefits.
The SEC is removing the valuation exemption that permitted institutional non-government MMFs (whose investors historically have made the heaviest redemptions in times of stress) to maintain a stable net asset value per share (NAV), and is requiring those funds to sell and redeem shares based on the current market-based value of the securities in their underlying portfolios rounded to the fourth decimal place (for example, $1.0000), that is, transact at a ‘‘floating’’ NAV.
The SEC also is adopting amendments that will give the boards of directors of MMFs new tools to stem heavy redemptions by giving them discretion to impose a liquidity fee if a fund’s weekly liquidity level falls below the required regulatory threshold, and giving them discretion to suspend redemptions temporarily, that is, to ‘‘gate’’ funds, under the same circumstances. In addition, the SEC is adopting amendments designed to make MMFs more resilient by increasing the diversification of their portfolios, enhancing their stress testing, and improving transparency by requiring MMFs to report additional information to the SEC and to investors.
The proposed Amendments to Form PF apply only to large liquidity fund advisers, which generally are SEC-registered investment advisers that advise at least one liquidity fund and manage, collectively with their related persons, at least $1 billion in combined liquidity fund and MMF assets. They would be required to provide, quarterly and with respect to each portfolio security, the following information for each month of the reporting period:
» The name of the issuer
» The title of the issue
» Certain security identifiers
» The category of investment
» If the rating assigned by a credit rating agency played a substantial role in the liquidity fund’s (or its adviser’s) evaluation of the quality, maturity or liquidity of the security, the name of each credit rating agency, and the rating each credit rating agency assigned to the security
» The maturity date used to calculate weighted average maturity
» The maturity date used to calculate weighted average life • the ultimate legal maturity date
» Whether the instrument is subject to a demand feature, guarantee, or other enhancements, and information about any of these features and their providers
» The value of the fund’s position in the security and, if the fund uses the amortized cost method of valuation, the amortized cost value, in both cases with and without any sponsor support
» The percentage of the liquidity fund’s assets invested in the security
» Whether the security is categorized as a level 3 asset or liability on Form PF
» Whether the security is an illiquid security, a daily liquid asset, and/or a weekly liquid asset, as defined in rule 2a–7
» Any explanatory notes
Comments Due Date: N/A Effective Date: October 14, 2014 First Reporting Date: N/A Link: Federal Register Keywords: MMF, Form PF, Stress Testing
Removal of Certain References to Credit Ratings and Amendment to the Issuer Diversification Requirement in the Money Market Fund Rule
- SEC
August 14, 2014
Type of Information: Regulation
Regulatory Status: Proposed Rule
The SEC (17 CFR Parts 270 and 274; RIN 3235–AK61) is re-proposing certain amendments, initially proposed in March 2011, related to the removal of credit rating references in rule 2a–7, the principal rule that governs money market funds, and Form N–MFP, the form that money market funds use to report information to the Commission each month about their portfolio holdings. The re-proposed amendments would implement provisions of the Dodd-Frank Act. This re-proposal is being issued in consideration of comments received on the March 2011 proposal.
In addition, the SEC is proposing to amend rule 2a–7’s issuer diversification provisions to eliminate an exclusion from these provisions that is currently available for securities subject to a guarantee issued by a non-controlled person.
Comments Due Date: October 14, 2014 Effective Date: N/A First Reporting Date: N/A Links: Proposed Rule in Federal Register, e-CFR: MMFs Keywords: Credit Ratings, MMF, Form N-MFP
Proposed Revisions to Company-Run Annual Stress Test Reporting Template and Documentation for Covered Institutions with Total Consolidated Assets of $10 Billion to $50 Billion under the Dodd-Frank Act
- FDIC
August 13, 2014
Type of Information: Regulation
Regulatory Status: Proposed Rule
To reflect the requirements of the revised capital framework, the FDIC proposes to revise (OMB Control No. 3064–0189) the FDIC DFAST 10–50:
» Summary Schedule by adding a CET1 capital data item
» Balance Sheet Schedules (baseline, adverse, and severely adverse scenarios) by adding a CET1 risk-based capital ratio data item
These revisions would be effective for the 2015 stress test cycle (with reporting in March 2015). In addition, the FDIC proposes to clarify the FDIC DFAST 10–50 reporting form instructions to emphasize that a covered bank should transition to the revised capital framework requirements in its bank-run stress test projections in the quarter in which the requirements become effective.
The FDIC also proposes several clarifications to the FDIC DFAST 10–50 reporting form instructions, including:
» Indicating that the Scenario Variables Schedule would be collected as a reporting form in Reporting Central (instead of as a file submitted in Adobe Acrobat PDF format)
» Clarifying what covered banks should include in line items 32 and 33 (retail and wholesale funding) on the Balance Sheet Schedule, with reference to relevant Reports of Condition and Income (Call Report) line items
» Clarifying how the supporting qualitative information should be organized
The FDIC recognizes that many covered banks with total consolidated assets of $10 billion to $50 billion are part of a holding company that is also required to submit relevant Dodd-Frank Annual Stress Test (DFAST) reports to the Board (FR Y–16, OMB No. 7100–0356). The FDIC, Office of Comptroller of the Currency, and Board have coordinated the preparation of stress testing templates to make the templates as similar as possible and thereby minimize the burden on affected institutions. These agencies have coordinated in a similar manner regarding these proposed modifications to the stress testing templates. Therefore, the revisions by the FDIC to its reporting requirements will remain consistent with the modifications that the Board proposes to make to the FR Y–16. The estimated number of respondents is 22.
Comments Due Date: October 14, 2014 Effective Date: March 01, 2015 First Reporting Date: N/A Link: Proposed Rule Keywords: Dodd-Frank Act, DFAST 10-50, FR Y-16, Stress Testing
Feedback on Second Round Resolution Plans of "First-Wave" Filers
- FED/FDIC
August 05, 2014
Type of Information: Statement
The FED and FDIC announced the completion of reviews of the second round of resolution plans submitted by 11 large, complex banking organizations (Bank of America, Bank of New York Mellon, Barclays, Citigroup, Credit Suisse, Deutsche Bank, Goldman Sachs, JPMorgan Chase, Morgan Stanley, State Street Corp., and UBS) in 2013. The agencies have issued letters to each of these banking organizations, detailing the specific shortcomings of each firm's plan and the expectations of the agencies for the 2015 submission.
The agencies will require that the annual plans submitted by the first-wave filers on or before July 1, 2015, demonstrate that the firms are making significant progress to address all the shortcomings identified in the letters and are taking actions to improve their resolvability under the U.S. Bankruptcy Code. These actions include:
» Establishing a rational and less complex legal structure that would take into account the best alignment of legal entities and business lines to improve the firm's resolvability
» Developing a holding company structure that supports resolvability
» Amending, on an industry-wide and firm-specific basis, financial contracts to provide for a stay of certain early termination rights of external counterparties triggered by insolvency proceedings
» Ensuring the continuity of shared services that support critical operations and core business lines throughout the resolution process
» Demonstrating operational capabilities for resolution preparedness, such as the ability to produce reliable information in a timely manner
Based on the review of the 2013 plans, the FDIC Board of Directors determined pursuant to section 165(d) of the Dodd-Frank Act that the plans submitted by the first-wave filers are not credible and do not facilitate an orderly resolution under the U.S. Bankruptcy Code. The Federal Reserve Board determined that the 11 banking organizations must take immediate action to improve their resolvability and reflect those improvements in their 2015 plans.
The BCB has released changes to Circular No. 3644 of March 4, 2013. The circular establishes the procedures for calculating the portion of risk weighted assets (RWA) for exposures subject to credit risk to the calculation of capital requirements by standardized approach.
Comments Due Date: N/A Effective Date: August 20, 2014 First Reporting Date: N/A Link (to original language material): Updated Circular Keywords: CCR, RWA, SA
Canada
Key Developments
Leverage Requirements Return
- OSFI
August 11, 2014
Type of Information: Regulation
Regulatory Status: Final Rule
This return provides the leverage ratio of the reporting institution, as well as details of the calculation. This return applies to all banks, bank holding companies, trust and loan companies, and cooperative retail associations. This includes institutions that are subsidiaries of federally regulated financial institutions (FRFIs). Foreign bank branches are not required to complete this return.
The return must be completed on a quarterly fiscal basis and filed within 30 days of fiscal quarter end (starting in 2015) by institutions with:
» Fiscal year-ends in October and quarters ending in January, April, July, and October
» Fiscal year-ends in December and quarters ending in March, June, September, and December
Comments Due Date: N/A Effective Date: Fiscal Quarter End + 30 days First Reporting Date: N/A Link: LRR: Reporting Manual Keywords: Basel III, Leverage Ratio, LRR
Asia Pacific
Australia
Key Developments
Response of APRA to Interim Report of the 2014 Financial System Enquiry (Murray Inquiry)
- APRA
August 29, 2014
Type of Information: Report
The Financial System Inquiry’s Interim Report sets out a diverse set of observations and policy options. In this submission, the APRA responds to the issues most relevant to APRA and its mandate, with the intention of providing further information and perspectives to aid the Inquiry as it proceeds to develop its final recommendations.
Detailed responses on specific questions and policy options are provided in the second part of this submission, presented in the order in which they appear in the ten chapters of the Interim Report. With regard to the response on data collection, the authority explains that the infrastructure that supports APRA’s data collection, the electronic system “Direct to APRA” (D2A) is now 15 years old. D2A is Standard Business Reporting (SBR) compliant, but SBR is not integrated into D2A. APRA considers the future life of D2A to be limited; any replacement data collection system is likely to cost in the tens of millions of dollars. While the benefits are likely to be substantial, APRA does not currently have funding for such a major capital project.
Links: Response, Interim Report Keywords: Financial System Inquiry
APRA Releases Framework for Supervising Conglomerates but Defers Implementation
- APRA
August 15, 2014
Type of Information: Statement
The APRA released its planned framework for the supervision of conglomerate groups. Conglomerate groups, referred to as Level 3 groups, comprise APRA regulated institutions that have material operations across more than one APRA-regulated industry and/or in one or more non-APRA-regulated sector.
The planned framework has been designed to assist APRA to ensure that its supervision adequately captures the risks to which APRA-regulated institutions within conglomerate groups are exposed and which are not adequately covered by existing prudential arrangements for stand-alone entities (Level 1 supervision) and single industry groups (Level 2 supervision). The package released includes:
» Updated prudential standards in relation to governance, exposure management, risk management, and capital adequacy
» A response paper that addresses the submissions APRA has received on the December 2012 and May 2013 Level 3 consultation packages
» A number of draft prudential practice guides that, when finalized, are intended to accompany the prudential standards
When implemented, APRA intends to apply the Level 3 framework to the following conglomerate groups:
» AMP Limited
» Australia and New Zealand Banking Group Limited
» Challenger Limited
» Commonwealth Bank of Australia
» Macquarie Group Limited
» National Australia Bank Limited
» Suncorp Group Limited
» Westpac Banking Corporation
APRA is committed to ensuring the affected groups have a minimum of 12 months’ transition time before any new standards come into force.
Links: Media Release, Supervision of Conglomerate Groups Keywords: Conglomerate Groups, Level 3 Supervision
Bangladesh
Key Developments
Draft Guidelines on Risk-Based Capital Adequacy in Line With Basel III
- BB
August 19, 2014
Type of Information: Regulation
Regulatory Status: Proposed Rule
The draft guidelines revising regulatory capital framework for banks are in line with the Basel framework, including transitional arrangements for Basel III implementation. However, liquidity coverage ratio and net stable funding ratio are not covered yet, but according to Table 1 with transitional arrangements, coverage should start in September 2015.
Bank-level disclosure of the leverage ratio and its components will start from January 01, 2015. However, banks should report their tier 1 leverage ratio, along with capital to risk-weighted asset ratio (CRAR) report from the quarter ending March 2015. Based on the results of the parallel-run period, any final adjustments to the definition and calibration of the leverage ratio will be made by the BB in 2017, with a view to setting the leverage ratio requirements as a separate capital standard from January 01, 2018.
In addition, Annex 12 in the document covers risk factors relating to Islamic mode of investment while Annex 14 addresses credit rating methodology for small and medium enterprises.
Comments Due Date: N/A Effective Date: January 01, 2015 First Reporting Date: N/A Link: Guidelines Keywords: Basel III, Leverage Ratio, Regulatory Capital
Commercial Bank Consolidated Reporting Management and Compliance Guideline
- CBRC
August 27, 2014
Type of Information: Regulation
Regulatory Status: Proposed Rule
This guideline outlines how banking groups can prevent risk that may arise due to their own activities. The banking group could be using subsidiaries as channels to perform financing activities that may lead to risks such as regulatory arbitrage, hidden risks, risk transfers from one to another (but actually still within the group), and contagion risks.
The chapters in the document are structured as follows:
Comments Due Date: N/A Effective Date: September 27, 2014 First Reporting Date: N/A Link: Guideline Keywords: ERM, RAF
Hong Kong
Key Developments
Consultation on Draft Banking Liquidity Rules and Related Code of Practice
- HKMA
August 18, 2014
Type of Information: Regulation
Regulatory Status: Proposed Rule
The consultation is on a draft set of Banking Liquidity Rules (BLR) and on a draft Code of Practice for the purpose of providing guidance on the calculation of “total net cash outflows,” the denominator of the Basel III liquidity coverage ratio (LCR). The purpose of the BLR is to implement both the LCR and the liquidity maintenance ratio (LMR), a modified version of the existing statutory liquidity ratio, from January 01, 2015 (in line with the timetable set by the Basel Committee).
The replacement of the liquidity ratio by the LMR will result in the repeal of Part XVIII of, and the Fourth Schedule to, the Ordinance on January 01, 2015. It is APRA’s intention to publish the BLR in the Gazette and table them in Legislative Council in October 2014, in line with its plan to implement the LCR and LMR from January 01, 2015.
Comments Due Date: September 15, 2014 Effective Date: January 01, 2015 First Reporting Date: N/A Link: hkma.gov.hk/eng/key-functions/banking-stability/basel-3/consultation_on_draft_banking_liquidity_rules.shtml Keywords: Basel III, LCR
Consultation on Draft Banking Capital Amendment Rules 2014
- HKMA
August 14, 2014
Type of Information: Regulation
Regulatory Status: Proposed Rule
For the purpose of implementing the second phase of the Basel III standards in Hong Kong, the HKMA is preparing a set of amendments to the Banking Capital Rules (BCR) to incorporate the Basel III capital buffer requirements (that is, the capital conservation buffer (CCB) and the countercyclical capital buffer (CCyB) and, for authorized institutions considered as systemically important (G-SIBs or D-SIBs), the higher loss absorbency (HLA) requirements.
Similar consultation exercises will soon be undertaken for the proposed rules to implement the Liquidity Coverage Ratio and the disclosure requirements. Once HKMA has had an opportunity to consider and address any responses received in respect of this consultation, it intends to publish the BCAR in the Gazette and table them in Legislative Council in October 2014. The amendments in the BCAR are intended to come into operation from January 01, 2015, in line with the timetable set by the Basel Committee.
Comments Due Date: September 11, 2014 Effective Date: January 01, 2015 First Reporting Date: N/A Link: hkma.gov.hk/eng/key-functions/banking-stability/basel-3/consultation_on_draft_banking_capital_rules_2014.shtml Keywords: Basel III, CCB, CCyB
Japan
Key Developments
2014 Article IV Consultation
- IMF
July 31, 2014
Type of Information: Report
The IMF published its staff report in the context of Article IV consultation with Japan. The report reveals that financial sector health in the country has improved, but further gains could prove more challenging.
Banks have benefitted from higher equity market valuations and growing loan books. Amid low credit costs and declining loan-loss provisioning, capital positions have strengthened and internationally active banks remain on track to meet Basel III capital requirements. As banks plan to rebalance their portfolios, they may incur new risks in a number of areas.
The authorities also highlighted that financial system soundness had further improved, pointing to rising capital adequacy ratios and low nonperforming loan (NPL) ratios. Major banks continue to expand abroad, suggesting that securing stable and long-term dollar funding will increasingly become a challenge. Supervisors should continue to encourage these banks to strengthen their funding sources.
With regard to regional banks, the authorities should continue to strengthen capital standards of domestically active banks, including by reassessing the treatment of unrealized losses in capital. On the treatment of unrealized losses on security holdings for domestically active banks, the authorities reiterated their view that the treatment is necessary for mitigating pro-cyclicality of capital levels as gains and losses vary over the cycle.
The authorities also stated that they recognized the need for each regional bank to consider its mid- and long-term business strategy in response to structural challenges.
Staff Report and Selected Issues Report for 2014 Article IV Consultation
- IMF
August 08, 2014
Type of Information: Report
The IMF published its staff report in the context of Article IV consultation with the Philippines. The report revealed that, during 2013, the Philippine banks achieved robust profits, low nonperforming loans, and maintained capital adequacy ratios well above the newly introduced Basel III requirements.
Furthermore, minimum capital requirements in the Philippines are higher than the BIS recommendations. From January 01, 2014, the Philippine banks must maintain a minimum CET1 ratio of 6.0% (BIS recommends 4.0% by January 01, 2014 and 4.5% by January 01, 2015). Including the 2.5% capital-conservation buffer, the minimum required CET1 ratio is 8.5% (BIS recommends 7%). The minimum total capital adequacy ratio (CAR) is 10.0% (BIS recommends 8.0%).
The Financial Stability Coordination Council, established in early 2014, will help to bridge the gaps in financial oversight mandates across the different member agencies. Nonetheless, financial deepening and search for yield in the context of low interest rates and migration of credit provision to less regulated and less closely supervised lenders raises re-pricing and credit-quality risks and reduces transparency.
With regard to loan concentration, in view of the conglomerate structure of the economy, large bank exposures to single borrowers can create systemic risks. Recent measures to roll back exemptions to single borrower limits (SBLs) and tighten related conditions are welcome.
Specifically, the temporary exemption to the SBL (the standard limit is 25% of bank capital) for purchases of oil (an additional 15% points) lapsed in March 2014. While the temporary exemption to finance PPPs (an additional 25%) was kept until 2016, new provisions were added excluding affiliates of the lending bank from the SBL exemption.
Widening the BSP’s (the Central Bank of Philippines) mandate to include financial stability is recommended to help prevent diversion of systemic risk to the shadow-banking sector.
Staff Report and Selected Issues Report for 2014 Article IV Consultation
- IMF
August 05, 2014
Type of Information: Report
The IMF published its staff report and selected issues report in the context of Article IV Consultation with Kazakhstan.
It was revealed in the report that the authorities expressed commitment to fully implement the recommendations of the Financial Sector Assessment Program (FSAP). The key priority areas, in addition to the single pension fund, insurance and securities market oversight, and financial infrastructure, include (Appendix II):
» Bolstering the financial safety net
» Moving to risk-based oversight
» A faster transition from granular compliance supervision toward more risk-based oversight is also needed
Staff welcomed the recent deployment of macro-prudential measures aimed at halting the rapid growth in consumer lending:
» A 50% cap applied to the debt-to-income ratio
» An increase in capital adequacy requirements on unsecured consumer loans to 10% (from 75%)
» A 30% ceiling on the growth in consumer loans for each bank
Consultation Paper on Leverage Ratio Disclosure Requirements for Banks Incorporated in Singapore
- MAS
August 06, 2014
Type of Information: Regulation
Regulatory Status: Proposed Rule
The consultation paper sets out amendments, proposed by the MAS, to Parts II, IV, XI, and XII of MAS Notice 637 on Risk Based Capital Adequacy Requirements for Banks Incorporated in Singapore (the Notice), to implement the leverage ratio disclosure requirements for Singapore-incorporated banks that are consistent with the requirements issued by the BCBS.
The key amendments include:
» Replacement of existing Annex 4A with new Annex 4A (Leverage Ratio)
» Insertion of new Annexes 4B/4C (CCFs, off-balance-sheet and securitization items)
» Insertion of new Schedule 1C (disclosure template)
Comments Due Date: September 05, 2014 Effective Date: January 01, 2015 First Reporting Date: N/A Link: mas.gov.sg/~/media/MAS/News and Publications/Consultation Papers/6 Aug 2014 Consultation Paper on Leverage Ratio Disclosure Requirements for Banks Incorporated in Singapore.pdf Keywords: Basel III, Disclosure, Leverage Ratio
ENTERPRISE RISK SOLUTIONS
28 AUGUST 2014
Glossary ABS Asset-Backed Securities ACP ACPR
Autorité de Contrôle Prudentiel (French Prudential Supervisory Authority) French Prudential Supervisory Authority
APRA Australian Prudential Regulation Authority AQR Asset Quality Review BB Bangladesh Bank BCB Central Bank of Brazil BCBS Basel Committee on Banking Supervision BDDK Turkish Banking Regulation and Supervision Agency BdL BHC BIS
Banque du Liban Bank Holding Company Bank for International Settlements
BLR BOE
Banking Liquidity Rules Bank of England
BSP Bundesbank
Bangko Sentral Ng Pilipinas (Philippines) German Central Bank
CAR CBB
Capital Adequacy Ratio Central Bank of Bahrain
CBRC China Banking Regulatory Commission CCB Capital Conservation Buffer CCP Central Counterparty CCyB Countercyclical Capital Buffer CET1 Common Equity Tier 1 CFR CoCos
Code of Federal Regulations Contingent Convertible Securities
COREP Common Reporting CPSS Committee on Payment and Settlement Systems CRA Credit Rating Agency CRAR CRD IV
Capital to Risk-Weighted Asset Ratio EU Capital Requirements Directive IV
CRR Capital Requirements Regulation EU CSD Central Securities Depository CSRBB D2A DFAST
Credit Spread Risk in the Banking Book Direct To APRA Dodd-Frank Annual Stress Test
DNB De Nederlandsche Bank EBA European Banking Authority EC European Commission ECB European Central Bank EIOPA European Insurance and Occupational Pensions
Authority ERM Enterprise Risk Management ESAs European Supervisory Authorities ESCB ESFS
European System of Central Banks European System of Financial Supervision
ESMA European Securities and Monetary Authority EU European Union FAQ Frequently Asked Questions FASB Financial Accounting Standards Board FBO FCA
Foreign Bank Organization Financial Conduct Authority
FDIC Federal Deposit Insurance Corporation FED Board of Governors of the Federal Reserve System FINMA Swiss Financial Market Supervisory Authority FINREP Financial Reporting
FR FRFI FRTB
Federal Reserve Federally Regulated Financial Institution Fundamental Review of the Trading Book
FSAP Financial Sector Assessment Program FSB Financial Stability Board GAAP GDP GLEIS
Generally Accepted Accounting Practices Gross Domestic Product Global Legal Entity Identifier System
HKMA Hong Kong Monetary Authority HLA IASB
Higher Loss Absorbency International Accounting Standards Board
IFRS International Financial Reporting Standards IOSCO International Organization of Securities Commissions IMF International Monetary Fund IRRBB ITS
Interest Rate Risk in the Banking Book Implementing Technical Standards
JST LCR
Joint Supervisory Team Liquidity Coverage Ratio
LEI ROC Legal Entity Identifier Regulatory Oversight Committee
LMR LOU
Liquidity Maintenance Ratio Local Operating Unit
LRR Leverage Requirements Return MAS Monetary Authority of Singapore MFI Monetary Financial Institution MFS MiFIR
Monetary and Financial Statistics Markets in Financial Instruments Regulation
MMF Money Market Mutual Fund NAV NCB NPL NRSRO NSFR
Net Asset Value (Per Share) National Central Bank Nonperforming Loan Nationally Recognized Statistical Rating Organization Net Stable Funding Ratio
OCC Office of the Comptroller of the Currency OFR Office of Financial Research OSFI Office of the Superintendent of Financial Institutions P&L PFMI
Profit and Loss Principles for Financial Market Infrastructure
PRA Prudential Regulation Authority Q&A Questions and Answers QIS Quantitative Impact Study RAF Risk Appetite Framework RCG Regional Consultative Group RIAD Register of Institutions and Affiliates Database RIN RRP
Regulation Identifier Number Recovery and Resolution Plan
RTS Regulatory Technical Standards RW Risk Weight RWA Risk-Weighted Asset SA Standardized Approach SA-CCR Standardized Approach for Measuring Counterparty
Credit Risk Exposures SBL Single Borrower Limit SBR SEC
Standard Business Reporting Securities and Exchange Commission
SEPA Single Euro Payments Area
ENTERPRISE RISK SOLUTIONS
29 JULY 2014 REGULATORY UPDATES: BANKING SECTOR
SIFI Systemically Important Financial Institution SIPS Systemically Important Payment Systems SREP SSM
Supervisory Review and Evaluation Process EU Single Supervisory Mechanism
SUBA Supervisory Banking XBRL XML
eXtensible Business Reporting Language Extensible Markup Language
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