EBA published the annual report for 2020. The report details work done by EBA in the past year and anticipates the key areas of focus in the coming year. Despite all the challenges posed by the COVID-19 pandemic, during 2020, EBA delivered on its key mandates and executed most of its 2020 Work Program. It also advanced on the work on enhancing transparency in data and took steps toward becoming an integrated data hub, in addition to focusing on new and upcoming areas such as anti-money laundering (AML) and countering the financing of terrorism (CFT), sustainable finance, and digital innovation. The key strategic priority areas for 2021 include the deployment of risk reduction measures package, the review of the stress-testing framework, implementation of the mandates in the domain of AML and CFT, financial innovation, and sustainable finance.
The following are the key priority areas for 2021:
- With focus on improving and updating guidance for the Supervisory Review and Evaluation Process (SREP) of credit institutions and investment firms, EBA is planning to propose SREP guidelines by July 2021, with the final guidelines expected at the beginning of 2022. EBA is planning to provide additional guidance on the assessment of aspects such as AML/CFT, risk of excessive leverage, and liquidity and funding risk. EBA is also developing equivalent guidance for the assessment of investment firms. This guidance will be provided in two regulatory products as mandated by Investment Firms Directive (IFD), which includes guidelines and regulatory technical standards. The consultation papers for both the deliverables are planned to be published by September 2021, with the finalization expected by mid-2022.
- The Capital Requirements Directive mandates EBA to draft the regulatory technical standards to specify a standardized approach (including a simplified methodology for small and non-complex institutions), to manage the interest rate risk in the banking book (IRRBB), to specify the criteria to be used in the supervisory tests carried out in the context of the SREP. EBA is also mandated to draft guidelines to specify the criteria to be used by banks’ internal systems for managing IRRBB and by banks’ systems
for assessing and monitoring credit spread risk in the banking book (CSRBB). EBA aims to carry out a public consultation before Summer and expects to publish the draft technical standards and guidelines in March 2022.
- With respect to the new prudential framework for investment firms, EBA will work on finalization of technical standards on the calculation of the threshold for an investment firm to be required to apply for a credit institution’s authorization and on technical standards on the scope and methods of prudential consolidation of investment firm groups. In addition, EBA will develop the regulatory products envisaged for phase 2 of the EBA roadmap on investment firms, which will be submitted to EC by June 2021. During this phase, EBA will consult on the implementing technical standards on supervisory disclosures. EBA and ESMA, will also jointly publish a list of instruments and funds that the smallest investment firms can use as qualifying own funds. IFD and Investment Firms Regulation (IFR) will, for the first time, introduce mandatory liquidity requirements for investment firms across EU. EBA will also develop guidelines on the criteria under which an exemption of liquidity requirements will be granted for certain investment firms, together with technical standards on liquidity risk measurement. In addition, EBA will implement systems and standardized templates for the information that competent authorities must provide to EBA according to the IFD and IFR notification requirements. Finally, EBA will launch a Single Rulebook Q&A tool for the questions related to the IFD and IFR and EBA technical standards.
- EBA has been developing the draft regulatory standards envisaged in phase 3 of the EBA roadmap for the new market risk approaches, namely the standards on instruments exposed to residual risks, the standards on emerging markets and advanced economies, and the standards on gross jump-to-default (JTD) amounts. These complete the specifications needed for calculating capital requirements under the Fundamental Review of Trading Book (FRTB) standardized approach (SA). EBA plans to finalize these draft standards during 2021 to ensure the smooth introduction of the FRTB-SA reporting requirements in EU.
- EBA is finalizing the draft regulatory technical standards on the methods of prudential consolidation to reflect the amendments introduced in the Level 1 text as well as the feedback received during the public consultation launched in November 2017. The final draft regulatory technical standards are expected to be submitted to EC by the beginning of the second quarter of 2021.
- EBA will review and upgrade EU-wide EBA stress-testing framework. A final decision on potential changes to the framework is expected in the second to third quarter of 2021 and any potential changes may be implemented in the 2023 EU-wide stress test.
- EBA intends to make the Basel III monitoring exercise mandatory, which has so far been conducted on a voluntary basis, and to expand the exercise to include a broader and more stable set of credit institutions.
- EBA plans to progress further in 2021 on fulfilling the mandates set out in its action plan on sustainable finance. These mandates relate in to making proposals and recommendations on the management and supervision of environment, social, and governance (ESG) risks, defining sustainability-related disclosure standards, initiating an analysis on a specific prudential treatment, and developing a framework for sustainable securitization. On the basis of its CRD and IFD mandates, EBA will also publish its final report on the management and supervision of ESG risks for credit institutions and investment firms. EBA will contribute toward defining sustainability disclosure standards as mandated by the CRR through a consultation paper and final technical standards for Pillar 3 disclosures of ESG risks. EBA is also mandated under the CRR to assess whether a dedicated prudential treatment of exposures associated substantially with environmental objectives would be justified. It will begin this assessment in 2021 and aims to issue a first discussion paper on the topic. EBA plans to deliver a report to develop a specific framework for sustainable securitization as mandated by the Securitization Regulation and will advise EC toward finalizing the EU taxonomy and how it could be used for transition purposes.
- EBA will be awaiting the upcoming EC proposal for a new EU regulatory framework for artificial intelligence in 2021. Subsequently, in line with the digital finance strategy, EBA expects to work with the other ESAs to explore the possibility of developing regulatory and supervisory guidance on the use of artificial intelligence applications in finance.
- EBA will finalize and publish its comprehensive research into regtech, building on the extensive work started in 2019 with the initial overview of regtech developments across EU. The EBA regtech report (to be published by mid-2021) will draw on multiple regtech use cases across EU, particularly in the fields of AML/CFT, fraud detection, regulatory reporting, ICT security and creditworthiness assessments.
- EBA will build on the preparatory work carried out in 2020 to develop its AML/ CFT infrastructure, continuing to fulfil its mandate to lead, coordinate and monitor the fight against money laundering and terrorist financing in EU. To that end, EBA will focus on finalizing the technical standards on the central AML/CFT database, build the database, and make it operational from early 2022 onwards, among other things.
Keywords: Europe, EU, Banking, Annual Report, Stress Testing, ESG, Securitization, Sustainable Finance, Regtech, COVID-19, AML/CFT, Investment Firms, IFR, CRR, IRRBB, FRTB, Market Risk, Regulatory Capital, Basel, SREP, EBA
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