The European Banking Authority (EBA) issued a revised list of validation rules for its reporting standards and proposed implementing technical standards for the 2024 internal models benchmarking exercise, guidelines on the overall recovery capacity in recovery planning, and guidelines on the effective management of money laundering and terrorist financing (ML/TF) risks. EBA also published (jointly with ESAs) advice on the review of the securitization framework, the annual risk assessment report, and a thematic review on the transparency and level of charges levied by financial institutions for retail banking products.
Below are the key highlights of the recent developments:
- The proposal on benchmarking exercise would amend the Implementing Regulation on the internal model benchmarking for credit risk, market risk, and IFRS 9 models for the 2024 exercise. The most significant change is the roll out of the data collection for the benchmarking of accounting metrics (IFRS 9) to high default portfolios (HDP). EBA proposed to introduce changes to the Annexes of the implementing technical standards to specify the new portfolios that will fall under the scope of the 2024 exercise and the set of quantitative templates that will be used to collect all the relevant quantitative information. With regard to credit risk, EBA proposed to add a limited number of high default portfolios to ensure that the credit risk and the IFRS 9 templates relate to a common list of portfolios for which the metrics specified in the different templates should be reported. For market risk, the proposal adds new templates for the collection of additional information, notably the Default Risk Charge (DRC) and the Residual Risk Add-On (RRAO). The consultation period ends on February 28, 2023.
- The proposed guidelines on the overall recovery capacity (ORC) in recovery planning address the relevant steps to set-up a reliable ORC framework and complement the framework by harmonizing the core elements of the competent authorities’ assessment of the ORC from both a quantitative and qualitative perspective. The guidelines aim to set up a consistent framework for the determination of the ORC by institutions in their recovery plans and the respective assessment by competent authorities. The consultation runs until March 14, 2023.
- The proposal on guidelines to address ML/TF risks relates to two new sets of guidelines. The first set is adding a new section to the EBA ML/TF risk factors guidelines, which set out what financial institutions should do to identify and tackle ML/TF risk. This new section will help financial institutions understand how the not-for-profit organizations are organized, how they can be different from other customers, and what they can do to manage ML/TF risks associated with such customers effectively instead of denying them access to financial services. The second set tackles the issue of effective management of ML/TF risks by financial institutions when providing access to financial services. These guidelines clarify the interaction between the access to financial services and institutions’ anti-money laundering and counter-financing of terrorism (AML/CFT) obligations, including in situation where customers, including the most vulnerable, have legitimate reasons to be unable to provide traditional forms of identity documentation. In addition, they set out the steps institutions should take when considering whether to refuse or terminate a business relationship with a customer based on ML/TF risk or AML/CFT compliance grounds. The consultation period for these two sets of guidelines expires on February 06, 2023.
- The advice on the review of the securitization prudential framework, which EBA and the other European Supervisory Authorities, or ESAs, jointly published in response to the EC request, presents targeted proposals to improve the consistency and risk-sensitivity of the capital framework for banks while proposing that the liquidity framework for banks and the prudential framework for insurers should be maintained as it stands. ESAs believe that changing the securitization prudential framework would not be a solution that would ensure the revival of the securitization market. However, for the capital framework on banks, ESAs issue a recommendation for some technical quick fixes to improve consistency and clarity, a recommendation on general issues on the securitization risk-weight formulas where further work is needed to reach conclusions, and a targeted recommendation that recognizes the reduced model and agency risk associated with the securitization originators by reducing the risk-weight floor for senior tranches retained by originators under a set of appropriate safeguards.
- The annual risk assessment report is accompanied by the publication of the 2022 EU-wide transparency exercise, which provides detailed information for 122 banks across 26 European Economic Area countries. The report finds that lending growth has declined in the second quarter of 2022 while capital and liquidity ratios of banks remain high, despite the slight year-on-year decline. Despite the low non-performing loan volumes, banks classify 9.5% of loans in stage 2 (the highest level since 2018 when reporting was initiated) and credit spreads have widened for bank debt instruments. Information and Communications Technology (ICT) risks also remain high. One conclusion is that banks should prepare for a likely deterioration in asset quality and strengthen their screening systems and controls to ensure a strict compliance with sanctions to prevent legal and reputational risks.
- The thematic review on fees and charges on retail banking products finds that fees and charges vary greatly in terms of level and type not only across the EU market, but also across financial institutions within the same jurisdiction. Furthermore, the variety of types for fees and charges cause different levels of detriment to consumers, and, with the exception of payment accounts, fees and charges are difficult to compare between providers. The covered banking products are consumer credit, mortgages, deposits, payment accounts, payment services, and electronic money services. The report uses information provided by 26 national competent authorities, a sample of five national and one EU consumer association, which represented a large number of national associations, as well as 149 financial institutions from across EU, most of which were credit institutions.
- Revised Validation Rules for Reporting
- Revised Validation Rules (XLSX)
- Proposal on Model Benchmarking Exercise
- Proposal on Recovery Planning
- Guidelines on Money Laundering Risks
- Advice on Review of Securitization Framework
- Report on Risk Assessment
- Review of Charges on Retail Banking Products
Keywords: Europe, EU, Banking, Basel, Benchmarking Exercise, Internal Models, IFRS 9, ML TF Risk, Risk Assessment Report, Reporting, Lending, Transparency Exercise, Securitization Framework, Liquidity Risk, Validation Rules, Resolution Framework, Recovery Planning, EBA
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