EC Amends Rule for Prudent Valuation Under CRR Amid COVID-19 Pandemic
EC published the Delegated Regulation 2020/866 with regard to regulatory technical standards for prudent valuation under the Capital Requirements Regulation or CRR. Regulation 2020/866 amends Regulation 2016/101, which supplements CRR (575/2013). In the light of extreme volatility in market prices and systemic shock due to the COVID-19 pandemic, amendments have been made to the formulae to be used for aggregating additional valuation adjustments (AVAs) under the Article 9(6), Article 10(7), and Article 11(7) of Regulation 2016/101. Regulation 2020/866 shall enter into force on the day following that of its publication in the Official Journal of the European Union.
Regulation 2016/101 provides that individual AVAs related to market price uncertainty, close-out costs, and model risk are to be determined with reference to a 90% level of certainty based on the applicable market conditions at the time of the calculation. Regulation 2016/101 also specifies an aggregation approach for the calculation of the total category level AVAs based on those individual AVAs; this approach takes account of overlaps among individual AVAs that occur in the aggregation of the categories of AVAs. The ongoing COVID-19 pandemic has triggered levels of extreme volatility throughout financial markets worldwide. It is, therefore, expected that individual AVAs computed at the level of valuation exposures will significantly increase in comparison with their levels in normal times. It is to be expected that due to the COVID-19 pandemic and the decisions of public authorities to halt economic activity in a large number of areas, the aggregation of significantly increased individual AVAs will have a disproportionate impact on the aggregated AVA amounts.
The rules for prudent valuation have, therefore, been revised so that, in addition to providing for an aggregation factor to be used under normal market conditions, they also provide that institutions should apply a higher aggregation factor for this period of extreme volatility in market prices and systemic shock due to the COVID-19 pandemic. The higher aggregation factor should only apply for the expected duration of extreme market volatility combined with systemic shock, which has been assessed to last until December 31, 2020. Therefore, the Annex of Regulation 2016/101 containing formulae to be used for the purpose of aggregating AVAs has been replaced by the Annex of Regulation 2020/866.
Related Links
Effective Date: June 26, 2020
Keywords: Europe, EU, Banking, COVID-19, Prudent Valuation, CRR, AVA, Regulation 2016/101, Regulation 2020/866, Basel, Regulatory Capital, EC
Featured Experts
María Cañamero
Skilled market researcher; growth strategist; successful go-to-market campaign developer
Nicolas Degruson
Works with financial institutions, regulatory experts, business analysts, product managers, and software engineers to drive regulatory solutions across the globe.
Paul McCarney
Insurance product strategist; insurance domain expert; extensive experience developing risk assessment frameworks for insurers
Previous Article
FFIEC Issues Statement on Management of LIBOR TransitionRelated Articles
OSFI Issues Phase2 Consultation on Climate Scenario Exercise for Banks
The Office of the Superintendent of Financial Institutions (OSFI) recently announced a consultation on the second phase of the Standardized Climate Scenario Exercise (SCSE) for banks and other financial institutions it regulates in Canada.
BIS and Central Banks Experiment with GenAI to Assess Climate Risks
A recent report from the Bank for International Settlements (BIS) Innovation Hub details Project Gaia, a collaboration between the BIS Innovation Hub Eurosystem Center and certain central banks in Europe
Nearly 25% G-SIBs Commit to Adopting TNFD Nature-Related Disclosures
Nature-related risks are increasing in severity and frequency, affecting businesses, capital providers, financial systems, and economies.
Singapore to Mandate Climate Disclosures from FY2025
Singapore recently took a significant step toward turning climate ambition into action, with the introduction of mandatory climate-related disclosures for listed and large non-listed companies
SEC Finalizes Climate-Related Disclosures Rule
The U.S. Securities and Exchange Commission (SEC) has finalized the long-awaited rule that mandates climate-related disclosures for domestic and foreign publicly listed companies in the U.S.
EBA Proposes Standards Related to Standardized Credit Risk Approach
The European Banking Authority (EBA) has been taking significant steps toward implementing the Basel III framework and strengthening the regulatory framework for credit institutions in the EU
US Regulators Release Stress Test Scenarios for Banks
The U.S. regulators recently released baseline and severely adverse scenarios, along with other details, for stress testing the banks in 2024. The relevant U.S. banking regulators are the Federal Reserve Bank (FED), the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC).
Asian Governments Aim for Interoperability in AI Governance Frameworks
The regulatory landscape for artificial intelligence (AI), including the generative kind, is evolving rapidly, with governments and regulators aiming to address the challenges and opportunities presented by this transformative technology.
EBA Proposes Operational Risk Standards Under Final Basel III Package
The European Union (EU) has been working on the final elements of Basel III standards, with endorsement of the Banking Package and the publication of the European Banking Authority (EBA) roadmap on Basel III implementation in December 2023.
EFRAG Proposes XBRL Taxonomy and Standard for Listed SMEs Under ESRS
The European Financial Reporting Advisory Group (EFRAG), which plays a crucial role in shaping corporate reporting standards in European Union (EU), is seeking comments, until May 21, 2024, on the Exposure Draft ESRS for listed SMEs.
