The Bank of England (BoE) published its first assessment of the eight major UK banks’ preparations for resolution under the Resolvability Assessment Framework (RAF). BoE is also proposing to modify the scope of contracts that are subject to the clearing obligation, by adding Overnight Index Swaps (OIS) that reference the Secured Overnight Financing Rate (SOFR) and, subsequently, removing the contracts referencing USD LIBOR; this consultation is open until July 21, 2022.
Resolvability assessment of major UK banks
The eight major UK banks in scope of RAF reporting are Barclays, HSBC, Lloyds Banking Group, Nationwide, NatWest, Santander UK, Standard Chartered, and Virgin Money UK. These eight banks have made a great deal of progress in enhancing their preparations for resolution and embedding these within their organizations. The assessment of resolvability shows that even if a major UK bank were to require resolution, customers would be able to keep accessing their accounts and business services as normal. Shareholders and investors, not taxpayers, would be first in line to bear banks’ losses and the costs of recapitalization. However, BoE has identified a number of thematic and firm-specific areas where further work is needed for firms to meet the expectations of BoE and ensure they remain ready for resolution. Funding in resolution and restructuring planning, in particular, are areas requiring relatively more work across the sector. BoE has identified “shortcomings” for three firms (HSBC, Lloyds Banking Group, and Standard Chartered) and “areas for further enhancement” for six firms (Barclays, HSBC, Nationwide, NatWest, Standard Chartered, and Virgin Money UK). The findings are specific to individual firms, their business models, and resolution strategies and cannot be compared directly with one another. BoE will repeat its assessment of the major UK banks in 2024 and every two years thereafter. Future assessments are likely to be focused on particular areas of importance or weakness and will include more detailed verification of firms’ preparations by BoE, building on the review of firms’ own assurance arrangements considered as part of this first assessment.
Consultation on derivatives clearing obligation
BoE is proposing to modify the contract types that are subject to the clearing obligation in the onshored Binding Technical Standards (BTS) 2015/2205; it proposes to:
- add OIS contracts that reference SOFR, to come into force on October 31, 2022
- subsequently remove contracts that reference USD LIBOR, to come into force around the same time as a number of central counterparties contractually convert these contracts and remove them from their list of contracts eligible for clearing
The SOFR OIS contract type in the clearing obligation will broadly cover the same maturity range as the USD LIBOR contracts currently cover. BoE proposes a minimum maturity for the SOFR OIS contract type of 7 days (as opposed to 28 days for the USD LIBOR contracts currently subject to the clearing obligation). This reflects the differences in the types of transactions these contract types have historically been used in. The consultation forms part of the work of BoE to reflect the reforms to interest rate benchmarks and, in particular, the discontinuation of the USD LIBOR benchmark in June 2023. The proposed changes will be implemented using a single standards instrument (proposed technical standards). The proposed technical standards will be split into two parts to reflect different dates for the relevant modifications. The draft technical standards can be found in the Appendix of the consultation paper.
- Press Release on Resolvability Assessment
- Resolvability Assessment
- Consultation on Derivatives Clearing Obligation
Keywords: Europe, UK, Banking, Resolution Framework, Resolvability Assessment Framework, Clearing Obligation, Interest Rate Benchmarks, LIBOR, SOFR, Overnight Index Swaps, Benchmark Reforms, Basel, Credit Risk, BoE
The Australian Prudential Regulation Authority (APRA) has published the findings of its latest climate risk self-assessment survey conducted across the banking, insurance, and superannuation industries.
The French Prudential Supervisory Authority (ACPR) published a notice related to the methods for calculating and publishing prudential ratios under the Capital Requirements Directive (CRD IV) and the minimum requirement for own funds and eligible liabilities (MREL).
The Financial Stability Institute (FSI) of the Bank for International Settlements recently published a paper proposing a framework for classifying financial stability regulation as either entity-based or activity-based.
The European Insurance and Occupational Pension Authority (EIOPA) published the risk dashboard based on Solvency II data and the final version of the application guidance on climate change materiality assessments and climate change scenarios in the Own Risk and Solvency Assessment (ORSA).
The European Banking Authority (EBA) and the European Central Bank (ECB) published their responses to the consultations of the International Sustainability Standards Board (ISSB) and the European Financial Reporting Advisory Group (EFRAG) on sustainability-related disclosure standards.
A Consultative Group on Risk Management (CGRM) at the Bank for International Settlements (BIS) published a report that examines incorporation of climate risks into the international reserve management framework.
The European Banking Authority (EBA) published the final guidelines on liquidity requirements exemption for investment firms, updated version of its 5.2 filing rules document for supervisory reporting, and Single Rulebook Question and Answer (Q&A) updates in July 2022.
The European Insurance and Occupational Pensions Authority (EIOPA) published Version 2.8.0 of the Solvency II data point model (DPM) and XBRL taxonomy.
The European Union published, in the Official Journal of the European Union, an opinion from the European Economic and Social Committee (EESC); the opinion is on the proposal for a regulation to amend the Capital Requirements Regulation (CRR).
HM Treasury published a draft statutory instrument titled “The Financial Services (Miscellaneous Amendments) (EU Exit) Regulations 2022,” along with the related explanatory memorandum and impact assessment.