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    EBA Publishes Annual Report for 2018

    May 29, 2019

    EBA published its annual report for 2018. The report provides a detailed account of the achievements in 2018 and anticipates the key areas of focus in the coming year. The key focus areas for EBA for 2019, as highlighted in the annual report, are addressing nonperforming loans (NPLs), implementing the final Basel III standards from December 2017, contributing to the prudential regime for investment firms, and understanding risks and challenges posed by fintech.

  • The information to be provided by a third party seeking authorization to assess the compliance of securitizations with the STS criteria provided for in Securitization Regulation should enable a competent authority to evaluate whether and, to what extent, the applicant meets the conditions of Article 28(1) of the Securitization Regulation. An authorized third party will be able to provide STS assessment services across EU. The application for authorization should, therefore, comprehensively identify that third party, any group to which this third party belongs, and the scope of its activities. With regard to the STS assessment services to be provided, the application should include the envisaged scope of the services to be provided as well as their geographical scope, particularly the following:

    • To facilitate effective use of the authorization resources of a competent authority, each application for authorization should include a table clearly identifying each submitted document and its relevance to the conditions that must be met for authorization.
    • To enable the competent authority to assess whether the fees charged by the third party are non-discriminatory and are sufficient and appropriate to cover the costs for the provision of the STS assessment services, as required by Article 28(1)(a) of Securitization Regulation, the third party should provide comprehensive information on pricing policies, pricing criteria, fee structures, and fee schedules.
    • To enable the competent authority to assess whether the third party is able to ensure the integrity and independence of the STS assessment process, that third party should provide information on the structure of those internal controls. Furthermore, the third party should provide comprehensive information on the composition of the management body and on the qualifications and repute of each of its members.
    • To enable the competent authority to assess whether the third party has sufficient operational safeguards and internal processes to assess STS compliance, the third party should provide information on its procedures relating to the required qualification of its staff. The third party should also demonstrate that its STS assessment methodology is sensitive to the type of securitization and that specifies separate procedures and safeguards for asset-backed commercial paper (ABCP) transactions/programs and non-ABCP securitizations.

    The use of outsourcing arrangements and a reliance on the use of external experts can raise concerns about the robustness of operational safeguards and internal processes. The application should, therefore, contain specific information about the nature and scope of any such outsourcing arrangements or use of external experts as well as the third party's governance over those arrangements. Regulation (EU) 2019/885 is based on the draft regulatory technical standards submitted by ESMA to EC.

     

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    Effective Date: June 18, 2019

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  • Proposed Rule 1
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  • Presentation on Regulatory Framework (PDF)
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  • EBA, in 2018, had focused on the developing and maintaining the Single Rulebook, promoting convergence of supervisory activities, ensuring preparedness for Brexit, and publishing a package of three revised guidelines to further enhance institutions’ risk management and convergence in the supervisory review and evaluation process (SREP). The key priority areas for 2019 include:

    • NPLs in Europe. In 2019, EBA plans to finalize its consultation paper on guidelines on loan origination and monitoring to prevent newly generated loans becoming non-performing and, therefore, the build-up of new NPLs in the future. To this end, EBA is acting to promote improved underwriting standards for new loans. EBA will also contribute to the work of other bodies and institutions of the EU, such as the analysis of the insolvency and debt recovery frameworks, and will work together with the EU authorities on tools to develop secondary markets for NPLs.
    • Implementation of final Basel III reforms and revision of CRR, CRD, and BRRD. The finalization of risk-reduction package, including revisions to CRR, CRD, and BRRD, is a priority area. In addition, in accordance with the mandates given by the CRR 2 and BRRD 2, EBA will develop and/or modify reporting requirements on several topics, such as MREL, the net stable funding ratio, the internal ratings-based approach for credit risk, the standardized approach for market risk, the leverage ratio, and counterparty credit risk. EBA will also prioritize technical standards and guidelines that facilitate the use of internal models for banks investing in securitization positions. MREL is another focus area for EBA. In light of the progress in MREL setting, EBA has been updating its methodology for quantitative monitoring of MREL resources. This will feed into regular updates to EC on the impact of MREL on the European Financial Sector, with a first report expected by the end of 2019.
    • Standardized and integrated reporting system. EBA will prepare a feasibility report regarding the development of a consistent and integrated system for collecting statistical, resolution, and prudential data and report its findings to EC. EC will, if appropriate, and taking into account the EBA feasibility report, submit to the European Parliament and the Council a legislative proposal for the establishment of a standardized and integrated reporting system for reporting requirements. 
    • Prudential regime for investment firms. EU is considering a new prudential regime for investment firms. Investment firms will be subject to a more tailored, simpler and more proportionate set of prudential requirements than the current ones based on the CRD and CRR. A first consultation paper covering all the aspects concerning the categorization of investment firms, capital composition, the capital requirements calculations, consolidated supervision and the reporting framework is expected during the fourth quarter of 2019. EBA is expected to consult the industry on the proposed technical standards, splitting them into several batches and staggering their publication. EBA will also outline a precise work plan for the forthcoming public consultations on the remaining technical standards and guidelines.
    • Risks and opportunities arising from financial innovation.  EBA aims in 2019 to establish an "innovation radar" to identify and track a broad range of financial innovations—for example, the launch of new products or innovative uses of existing products and services. A focus on the licensing process will also be part of the core mandates conferred upon EBA by the CRD V, which will relate to the development of guidelines on a common assessment methodology for the granting of authorizations to credit institutions and a report on the treatment of third-country branches under the national laws of member states. EBA expects to publish a thematic report in 2019 to better understand the use of big data and data analytics in financial services, identify any potential regulatory and supervisory areas of attention, and formulate best practices and principles when it comes to the application and implementation of data analytics by institutions. 
    • Implementation of IFRS 9. Understanding the practices followed by banks with regard to IFRS 9 modeling will be a key area of focus for EBA in 2019 and the following years. This is because the results of the IFRS 9 modeling performed by banks are ultimately reflected in the expected credit losses calculations, thus impacting prudential figures. EBA is investigating how to better plan its activities in this area, with a focus on the possibility of developing a benchmarking exercise for IFRS 9.

     

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    Keywords: Europe, EU, Banking, Annual Report, CRR, Basel III, IFRS 9, Brexit, Securitization, EBA

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