To mitigate the impact of COVID-19 outbreak, EBA is providing further clarity on the additional flexibility that will guide its supervisory approach in relation to market risk, Supervisory Review and Evaluation Process (SREP), recovery planning, digital operational resilience, technology risk, and securitization. To this end, EBA published draft regulatory technical standards on prudent valuation under the Capital Requirements Regulation (CRR). Additional EBA statements address the application of prudential framework on targeted aspects of market risk and outline further supervisory measures. The statement on application of prudential framework covers four areas—prudent valuation, market risk standardized approach (FRTB-SA) reporting requirements, implementation of phase V and VI of the ESAs standards on non-cleared over-the-counter (OTC) derivatives, and back-testing breaches on internal models approach.
Application of Prudential Framework on Targeted Aspects Under Market Risk
- Mitigate the increase in aggregated amounts of additional valuation adjustments (AVAs) under the prudent valuation framework. Under Article 105 of CRR, institutions are required to prudently value their fair-valued financial instruments. Regulation 101/2016 specifies how AVAs should be calculated for this purpose. To mitigate the impact of exceptional volatility triggered by the COVID-19 pandemic on the prudential requirements for market risk, EBA is proposing to adjust the capital impact by amending its standards on prudent valuation. In particular, EBA is proposing to introduce the use of a 66% aggregation factor to be applied until the December 31, 2020 under the core approach.
- Postponement of FRTB-SA reporting requirement under CRR2. Acknowledging the increased operational challenges faced by banks in the area of reporting, EBA also intends to delay reporting for the first FRTB-SA figures to September 2021.
- Postponement of final two implementation phases of the margin requirements for non-centrally cleared derivatives. BCBS-IOSCO announced its intention to allow a deferral of the final two implementation phases of the margin requirements for non-centrally cleared derivatives. In EU, the framework is implemented through the joint ESAs technical standards on risk mitigation techniques for OTC derivatives not cleared by a central counterparty. These standards will consequently need to be changed to implement the delay in EU law. These changes will postpone by one year the requirement to implement initial margins for counterparties above EUR 50 billion (phase V, which is due to start in September 2020) and for counterparties above EUR 8 billion (phase VI, which is due to start in September 2021).
- Increase in Value-at-Risk (VaR) risk metrics and multiplication factors under Internal Models Approach for market risk. EBA highlights (to competent authorities) the flexibility available in the prudential framework for banks using the internal VaR models. EBA believes that, in light of the current circumstances, the review of the stressed VaR observation period could be postponed to the end of 2020 and should not constitute a supervisory priority at the moment.
Additional Supervisory Measures Amid COVID-19 Pandemic
- EBA recognizes the need for a pragmatic approach to SREP assessments in 2020, focusing on the most material risks and vulnerabilities driven by the crisis.
- On recovery planning activities for institutions, EBA believes that the focus should be placed on understanding which recovery options are necessary and available under the current stressed conditions.
- EBA emphasizes the importance of digital operational resilience. In this respect, EBA calls on institutions to ensure business continuity, adequate Information and Communications Technology (ICT) capacity and security risk management. The ICT and security risk management guidelines of EBA will help financial institutions and supervisors to focus on priority areas.
- EBA provides further clarity on the prudential application of the definition of default and forbearance as well as on how EBA guidelines on legislative and non-legislative moratoria on loan repayments apply to securitizations.
- Press Release
- Statement on Application of Prudential Framework (PDF)
- Statement on Additional Supervisory Measures (PDF)
- Technical Standards on Prudent Valuation (PDF)
Keywords: Europe, EU, Banking, COVID-19, SREP, COVID-19, Market Risk, Securitization, Recovery Planning, CRR2 FRTB, Reporting, OTC Derivatives, Internal Model Approach, Operational Risk, Standardized Approach, EBA
Leading economist; commercial real estate; performance forecasting, econometric infrastructure; data modeling; credit risk modeling; portfolio assessment; custom commercial real estate analysis; thought leader.
Previous ArticleACPR Publishes Draft Version 2.1.0 of the CREDITHAB Taxonomy
EIOPA submitted—to the European Parliament, the Council of the European Union, and EC—its 2020, fifth, and last annual report on long-term guarantee measures and measures on equity risk.
The BIS Innovation Hub Swiss Centre, SNB, and the financial infrastructure operator SIX announced the successful completion of a joint proof-of-concept (PoC) experiment as part of the Project Helvetia.
EBA published the final draft regulatory technical standards for calculation of own funds requirements for market risk, under the standardized and internal model approaches of the Fundamental Review of the Trading Book (FRTB) framework.
EIOPA published discussion paper on a methodology for the potential inclusion of climate change in the Solvency II (sometimes also written as SII) standard formula when calculating natural catastrophe underwriting risk.
EU published, in the Official Journal of the European Union, corrigenda to the Directive and the Regulation on the prudential requirements and supervision of investment firms.
MAS proposed amendments to certain regulations, notices, and guidelines arising from the Banking (Amendment) Act 2020.
PRA published a statement that explains when to expect further information on the PRA approach to transposing the Capital Requirements Directive (CRD5), including its approach to revisions to the definition of capital for Pillar 2A.
RBNZ launched consultations on the scope of the Insurance Prudential Supervision Act (IPSA) 2010 and on the associated Insurance Solvency Standards.
SRB published the work program for 2021-2023, setting out a roadmap to further operationalize the Single Resolution Fund and to achieve robust resolvability of banks under its remit over the next three years.
EIOPA is consulting on the relevant ratios to be mandatorily disclosed by insurers and reinsurers falling within the scope of the Non-Financial Reporting Directive as well as on the methodologies to build these ratios.