The European Central Bank (ECB) published its annual report for 2021, which was presented by ECB Vice President Luis de Guindos at the ECON Committee of the European Parliament. Another ECB publication is the Information Technology Risk Questionnaire (ITRQ) 2022, under the Supervisory Review and Evaluation Process (SREP), covering the period from January 01, 2021 to December 31, 2021. The ITRQ forms an integral part of the risk assessment methodology developed by the ECB Banking supervision, together with the national competent authorities and include thematic reviews, horizontal analyses on information technology risk topics, and a reporting framework for any significant cyber incidents affecting the supervised credit institutions. ECB also published an opinion on a proposal for a Directive to amend the Capital Requirements Directive (CRD IV or Regulation 2013/36/EU) regarding the supervisory powers, sanctions, third-country branches, and environmental, social and governance (ESG) risks.
In its opinion, ECB sets out the following key observations:
- ESG risks. ECB strongly welcomes the proposal of the European Commission (EC) to enhance the requirements with respect to ESG risks for credit institutions and the respective mandate for competent authorities. ECB stands ready to collaborate with European Union (EU) agencies to monitor credit institutions’ progress in developing their specific plans and stresses the need for timely action on this front. ECB sees a need to prioritize the resilience and adaptation of institutions to the long-term negative impacts of ESG risks.
- Output floor. With regard to the systemic risk buffer, ECB has strong concerns with regard to the proposed requirement for a mandatory review of its calibration, which includes a dynamic cap on the buffer, freezing it at pre-output floor levels until such a review has been concluded and the outcome published. ECB has similar concerns regarding the proposed requirement to review the calibration of the other systemically important institutions (O-SII) buffer when the output floor becomes binding. Instead of the proposed review mechanism of the systemic risk buffer when the output floor becomes binding for a credit institution, ECB proposes the insertion of an explicit clarification specifying that the systemic risk buffer may not be used to address the risk that is captured by the output floor, regardless of whether the output floor becomes binding for a specific institution or not. The same reasoning and clarification could also be implemented in relation to the O-SII buffer.
- Pillar 3 Disclosures. ECB highlights that applying a different approach in relation to the quantitative public disclosure of small and non-complex institutions, also known as SNCIs, and larger credit institutions does not feel justified. The timeline for EBA to publish Pillar 3 information on the centralized hub does not allow for the reconciliation between supervisory reporting and Pillar 3 disclosure information to be performed. This could lead to additional workload for supervisors and lack of clarity for investors and other users of Pillar 3 information. Moreover, qualitative disclosures and some quantitative disclosures cannot be extracted from supervisory reporting on the basis of the predefined mapping. This issue concerns both small and non-complex institutions and other institutions. Therefore, the process to submit such disclosures to EBA should be clarified.
- Supervisory benchmarking. ECB welcomes the proposal to give EBA the flexibility to conduct the benchmarking exercises on a biannual basis. ECB recommends giving even more flexibility to EBA to set the frequency of these exercises. ECB also proposes that the exercises are more clearly defined. ECB also suggests that institutions should not be required to submit the results of their calculations to the competent authorities annually—specifically in years when EBA does not conduct the exercise. Instead, ECB proposes alignment of the frequencies for submission and assessment, thus reducing the reporting burden for institutions.
- Fit and proper. ECB considers that an adequate level of proportionality should be embedded in the new framework, which would also benefit from an even more proportionate approach to fit and proper assessments by competent authorities. ECB proposes the introduction of an additional clarification to Recital 38, which aims at reassuring members states that any statutory rights based in applicable national law shall not be affected by the proposed amendments to the CRD IV. Recital 38 highlights the importance of the suitability assessment of large institutions’ members of the management body before those members take up their position.
- Third-country branches requirements. The proposed amendments to the CRD IV include a mandate for the European Banking Authority (EBA) to develop regulatory technical standards on booking arrangements. ECB considers that it would be more effective to include in the CRD IV a direct clarification as to how to calculate the assets of a branch for the purposes of assessing thresholds. Furthermore, ECB proposes that the aggregated information on the assets and liabilities held or booked by a third country group’s subsidiaries and third-country branches in EU should also be made available to the competent authorities that are responsible for the supervision of the subsidiaries of that third country group.
Keywords: Europe, EU, Banking, Annual Report, SREP, IT Risk, Opinion, CRD IV, Basel, ESG, Climate Change Risk, Regulatory Capital, Output Floor, Disclosures, Proportionality, Pillar 3, Cyber Risk, Operational Resilience, Compliance Risk, ITRQ, ECB
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