ECB Banking Supervision published its response to the comments and suggestions provided by the European Parliament in its resolution on Banking Union. The key topics covered are risks in the financial system, crisis management procedures, stress tests, supervisory approach of ECB, transparency in decision making, and proportionality in the banking sector in EU.
The following are the key highlights of the ECB response to European Parliament:
- Brexit—ECB supports the call of European Parliament call to deepen common regulation and common supervision. The authorization and supervision of branches of third-country institutions, for example, is still based on national legislation. ECB believes that there is a need for harmonization in this area to ensure that material risks are addressed consistently and to prevent regulatory arbitrage.
- Nonperforming loans (NPLs)—European Parliament welcomes the reduction in the volume of NPLs over the past years and reiterates its concern that the total number, and proportion, of nonperforming loans and of Level 2 and Level 3 instruments remains well above the average in some member states. ECB continues to fully support initiatives of the July 2017 Council conclusions on the action plan to tackle NPLs, welcomes the progress made, and encourages all stakeholders to complete the remaining parts of the action plan. ECB welcomes the proposed steps to harmonize rules on how non-credit institutions can buy credit agreements from banks, which should remove obstacles preventing the transfer of NPLs from banks to non-credit institutions. This would contribute to addressing the risks related to high stocks of NPLs in Europe.
- Internal models—The resolution expresses concern about the wide use of internal models by banking institutions and calls on the Single Supervisory Mechanism (SSM) and EBA to continue their work on the adequacy of internal models, to establish their credibility and achieve a level playing field across institutions. ECB continues to fulfill its regular responsibilities in the field of internal model supervision. ECB can further foster a level playing field in the area of internal models through a number of other activities while complementing and reinforcing the work done within the targeted review of internal models or TRIM.
- Shadow banking—European Parliament remains concerned about the extent of shadow banking in EU. European Parliament recalls that, at the end of 2017, shadow banking was estimated to account for nearly 40% of the EU financial system. ECB highlights that it is aware of this need and closely monitors leverage, liquidity, procyclicality, and interconnectedness in the non-bank financial sector.
- “Failing or likely to fail” assessments—In the resolution, European Parliament stresses the need to improve response times of European banking supervision in the context of “failing or likely to fail” assessments. Regarding the issue of early intervention measures, ECB agrees that there is a need to enhance the effective use of such measures, which has proven to be challenging under the current legal framework.
- Liquidity in resolution—European Parliament stresses the importance of access to liquidity for banks in resolution, both during and immediately after resolution proceedings, and follows with interest the ongoing debates on a possible tool for the provision of liquidity in resolution. ECB has, on several occasions, stressed the importance of addressing liquidity provision to banks in resolution.
- Stress tests and Level 2 and Level 3 instruments—European Parliament believes that stress tests should be interpreted in combination with the other ongoing supervisory monitoring activities, calling on the SSM, EBA, and ESRB to use consistent methodologies when defining stress tests in order to ensure a high level of transparency and to prevent possible distortions. ECB notes that EBA defines a common methodology as well as minimum quality assurance guidance for competent authorities.
- Proportionality—The resolution stresses that BCBS standards should not be enacted wholesale into European law, without taking proper account of the specific characteristics of the European banking system and of the proportionality principle. ECB supports the full, timely, and consistent implementation of the Basel standards while agreeing that regulation that is proportionate and well-aligned to the size and complexity of banks allows for a diverse and sound banking sector. Proportionality is already embedded in the current framework, in the form of simpler approaches to measuring risks and reduced reporting requirements.
- Transparency of ECB decisions—European Parliament believes that decisions by the supervisory and resolution authorities must be coherent, properly explained, transparent, and public. ECB Banking Supervision is fully committed to transparency and fulfilling its accountability obligations and has made significant efforts to increase the transparency of ECB decisions within the constraints of confidentiality and professional secrecy requirements.
Keywords: Europe, EU, Banking, Banking Union, Brexit, NPLs, Internal Models, Shadow Banking, Stress Testing, Proportionality, Transparency, Resolution, TRIM, SSM, EBA, European Parliament, ECB
Previous ArticleBoE Publishes Version 3.2.0 of XBRL Taxonomy for PRA110 Reporting
EBA published a report analyzing the impact of the unwind mechanism of the liquidity coverage ratio (LCR) for a sample of European banks over a three-year period, from the end of 2016 to the first quarter of 2020.
In response to questions from a member of the European Parliament, the ECB President Christine Lagarde issued a letter clarifying the possibility of amending the AnaCredit Regulation and making targeted longer-term refinancing operations (TLTROs) dependent on the climate-related impact of bank loans.
IASB started the post-implementation review of the classification and measurement requirements in IFRS 9 on financial instruments and added the review as a project to its work plan.
FSB published a report that examines progress in implementing policy measures to enhance the resolvability of systemically important financial institutions.
EBA published a report on the benchmarking of national loan enforcement frameworks across 27 EU member states, in response to the call for advice from EC.
FSB published a letter from its Chair Randal K. Quarles, along with two reports exploring various aspects of the market turmoil resulting from the COVID-19 event.
RBNZ launched a consultation on the details for implementing the final Capital Review decisions announced in December 2019.
The Trustees of the IFRS Foundation, which are responsible for the governance and oversight of IASB, have announced the appointment of Dr. Andreas Barckow as the IASB Chair, effective July 2021.
HKMA issued a letter to consult the banking industry on a full set of proposed draft amendments to the Banking (Capital) Rules for implementing the Basel standard on capital requirements for banks’ equity investments in funds in Hong Kong.
ESRB published an opinion assessing the decision of Swedish Financial Supervisory Authority (FSA) to extend the application period of a stricter measure for residential mortgage lending, in accordance with Article 458 of the Capital Requirements Regulation (CRR).