Featured Product

    ECB Outlines Good Practices for Banks to Prepare for Benchmark Reforms

    July 23, 2020

    ECB published a report that outlines good practices for banks to prepare for benchmark rate reforms. The good practices address how banks can best structure their benchmark-rate-related governance, identify benchmark-rate-related risks, and create action plans and documentation in relation to the reforms. Also published were the results of an industry-wide assessment of the banks' preparedness for the benchmark interest rate reforms. One of the key findings of the assessment is that, while banks are generally well aware of the potential risks entailed in the benchmark rate reforms, they are behind schedule in developing and implementing the risk mitigation measures with respect to the benchmark reforms.

    In July 2019, ECB had surveyed certain supervised banks to assess their preparedness for the interest rate reforms under the EU Benchmarks Regulation. The assessment found that banks have focused more on the transition phase from the euro overnight index average (EONIA) to the euro short-term rate (€STR) than on the reform of the euro interbank offered rate (EURIBOR) and its associated risks. EURIBOR is the main benchmark rate in the euro area in terms of the number of contracts that reference it and is widely used in retail loans and hedging products. In light of the results of this assessment, ECB has now published the report on preparations for benchmark rate reforms, which sets out the good practices that were identified in the documentation that banks submitted to ECB in 2019.. The key areas in which the report provides examples of good practices include the following:

    • Governance. To mitigate impact of the benchmark rate reforms in a proactive and sustainable manner, banks should have a suitable organizational and operational structure in place, including an adequate segregation of duties and clear reporting lines, as set out in paragraph 67 of the EBA guidelines on internal governance.
    • Risk Identification. Internal risk assessment is a critical step, as it is the starting point for devising the action plan. It is, therefore, important to allocate the necessary resources and time to this step.
    • Action Plan. Including action plans in a dedicated risk assessment means that they can prioritize and hone risk mitigation activities in a targeted manner and thereby ensure granular coverage of all the relevant aspects identified.
    • Timeline. Setting a clear timeline can help in finding comprehensive solutions that will provide the Single Supervisory Mechanism banks with the time they need to develop, test, and implement robust mitigation measures.
    • Awareness of External Development. ECB expects banks to fully comply with the legal requirements. Given the work underway in a number of fora, banks face the challenge of ensuring that they are up-to-date with the most recent developments (for example, actions by central counterparties).

    The report highlights that, as a general principle, the assessment of legal and operational challenges is best performed holistically, taking into consideration both internal systems and external factors such as risks relating to conduct, reputation, and litigation. The report also discusses exposure-related risks with regard to valuation and regulatory treatment. While this report does not cover good practices in relation to the application of accounting standards, it is important from a prudential perspective that banks are aware of potential accounting implications stemming from the benchmark rate reforms and their potential significance.

     

    Related Links

    Keywords: Europe, EU, Banking, Securities, EONIA, €STR, Risk-Free Rates, Interest Rate Benchmarks, EURIOR, Benchmarks Regulation, IBOR Reform, ECB

    Related Articles
    News

    BCBS Proposes to Amend Rules on Minimum Haircut Floors for SFTs

    BCBS is consulting on two technical amendments to the rules on minimum haircut floors for securities financing transactions, or SFTs.

    January 26, 2021 WebPage Regulatory News
    News

    EC Consults on Crisis Management and Deposit Insurance Framework

    EC launched a targeted consultation on the review of crisis management and deposit insurance framework in EU.

    January 26, 2021 WebPage Regulatory News
    News

    EIOPA Sets Out Principles for Liquidity Stress Test for Insurers

    EIOPA published a paper that sets out the methodological principles of insurance stress testing with a focus on the liquidity component.

    January 26, 2021 WebPage Regulatory News
    News

    BIS Launches Euro Green Bond Fund for Central Banks

    BIS launched a EUR-denominated, open-ended fund for green bond investments by central banks and official institutions, following the launch of the first BIS green bond fund denominated in USD in September 2019.

    January 25, 2021 WebPage Regulatory News
    News

    EBA Announces Stress Test Timeline; ECB Sets Up Climate Change Center

    EBA announced that it will launch the 2021 EU-wide stress test exercise, with the publication of the macroeconomic scenarios on January 29, 2021.

    January 25, 2021 WebPage Regulatory News
    News

    BoE Discontinues Form CX on Capital Expenditure and Finance Leasing

    BoE announced that the reporting entities are no longer required to report Form CX after the fourth quarter of 2020 reference period, with the last collection on January 29, 2021.

    January 25, 2021 WebPage Regulatory News
    News

    PRA Updates Q&A on Branch Return, Announces End Date of COVID Facility

    PRA published Version 3 of the questions and answers (Q&A) on the Branch Return form, with this version superseding the version published in October 2020.

    January 25, 2021 WebPage Regulatory News
    News

    IAIS Consults on Application Paper on Supervision of Control Functions

    IAIS is consulting on a draft application paper on the supervision of control functions.

    January 25, 2021 WebPage Regulatory News
    News

    ECB President Answers Queries on Application of EU Taxonomy

    ECB published a letter in which the President Christine Lagarde answered questions, from a Member of the European Parliament, on the application of the EU taxonomy on sustainable finance.

    January 22, 2021 WebPage Regulatory News
    News

    PRA Issues Direction on Capital Buffers, Finalizes PS1/21 on SM&CR

    PRA published a direction for modification by consent of 5.1 to 5.3 and 5.5 of the Capital Buffers Part of the PRA Rulebook.

    January 22, 2021 WebPage Regulatory News
    RESULTS 1 - 10 OF 6499