European Council published a report monitoring the risk-reduction indicators and announced the Eurogroup agreement to proceed with the reform of the European Stability Mechanism and to advance the entry into force of the common backstop to the Single Resolution Fund by the beginning of 2022. The SRB Vice Chair Jan Reinder De Carpentier welcomed the Eurogroup agreement for early introduction of common backstop to Single Resolution Fund. The earlier commitment was to introduce the common backstop before the end of 2023. The statement from Eurogroup mentions that the common backstop to the Single Resolution Fund will be in the form of a credit line from the European Stability Mechanism to replace the Direct Recapitalization Instrument, providing a financial safety net for bank resolutions in the Banking Union.
In its statement, the Eurogroup also welcomed the intent of the ECB Banking Supervision to maintain an extensive and comprehensive supervisory effort to further reduce risks, particularly for banks under stricter supervisory monitoring, still exceeding the 5% threshold in their gross nonperforming loan ratio. ECB is doing this by ensuring the implementation of nonperforming loan reduction strategies of banks and through stress testing and on–site inspection, as part of its comprehensive work to address all types of vulnerabilities in the banking sector. Eurogroup welcomed the ongoing EBA work on enhancement of the EU-wide stress test framework, taking into account the recommendations made by the European Court of Auditors in its report. It also encouraged EBA to review the scope of the recurring EU-wide stress test to ensure broader representativeness of the banking population under the remit of SRB and invites EBA to report to the Council on progress toward this by mid-2021.
Additionally, the Eurogroup welcomed the resolve of SRB to set the banks’ final individual 2024 minimum requirement for own funds and eligible liabilities (MREL) targets in 2021 in line with Bank Recovery and Resolution Directive (BRRD2) and Single Resolution Mechanism Regulation (SRMR2) and based on the current SRB policy; it also welcomed the SRB resolve to ensure steady build-up of MREL buffers in line with those targets and takes note of the significant build-up of the Single Resolution Fund during the last few years. In its statement, Eurogroup recognized the need to continuously improve the crisis management framework. In this context and in view of the eventual expiry of the temporary state-aid framework after the pandemic, it invited EC to review its state-aid framework for banks in the context of the review of the crisis management framework, both starting in 2021 and to be completed in parallel by 2023. The Eurogroup urged EC to ensure consistency between the two frameworks, adequate burden-sharing of shareholders and creditors to protect taxpayers, and preservation of financial stability. The Eurogroup invited EC to report back to the Council by October 2021.
To inform the political decisions in this context, EC, ECB, and SRB have prepared an extended risk-reduction report, which shows that all risk-reduction indicators have improved significantly, increasing resilience of the banking sector. Both gross and net nonperforming loan ratios declined significantly while progress on MREL was marked by a continued build-up of MREL-eligible liabilities against the background of increasing average MREL targets, leading to a significant decline in shortfalls as of the fourth quarter of 2019. Some vulnerabilities, however, remain, as reflected in the nonperforming loan levels and MREL shortfalls with regard to the agreed benchmarks. These will need to be addressed by a combination of additional efforts at bank, member state, and EU levels. The COVID-19 crisis is likely to temporarily interrupt or slow down the favorable trends observed over recent years. Nevertheless, tackling nonperforming loans and enhancing resolvability will remain a priority. While the outlook is subject to heightened levels of uncertainty in view of COVID-19, remedial actions are being taken at the appropriate level and by the appropriate authorities to address specific concerns.
Keywords: Europe, EU, Banking, SRF, MREL, COVID-19, BRRD2, SRMR2, Stress Testing, Credit Risk, Basel, Regulatory Capital, Resolution Framework, EC, European Council
Previous ArticleIFSB Publishes FAQs for Islamic Finance Standards
The Hong Kong Monetary Authority (HKMA) revised the Supervisory Policy Manual module CG-5 that sets out guidelines on a sound remuneration system for authorized institutions.
The European Banking Authority (EBA) published the final guidelines on the monitoring of the threshold and other procedural aspects on the establishment of intermediate parent undertakings in European Union (EU), as laid down in the Capital Requirements Directive (CRD).
In a recent Market Notice, the Bank of England (BoE) confirmed that green gilts will have equivalent eligibility to existing gilts in its market operations.
The Financial Conduct Authority (FCA) published the policy statement PS21/9 on implementation of the Investment Firms Prudential Regime.
The European Banking Authority (EBA) proposed regulatory technical standards that set out criteria for identifying shadow banking entities for the purpose of reporting large exposures.
The Board of the International Organization of Securities Commissions (IOSCO) proposed a set of recommendations on the environmental, social, and governance (ESG) ratings and data providers.
The European Securities and Markets Authority (ESMA) published recommendations from the Working Group on Euro Risk-Free Rates (RFR) on the switch to risk-free rates in the interdealer market.
The European Central Bank (ECB) published a paper as well as an article in the July Macroprudential Bulletin, both of which offer insights on the assessment of the impact of Basel III finalization package on the euro area.
The International Swaps and Derivatives Association (ISDA) published a paper that explores the impact of the Fundamental Review of the Trading Book (FRTB) on the trading of carbon certificates.
The Prudential Regulation Authority (PRA) published the remuneration policy self-assessment templates and tables on strengthening accountability.