ESAs published reports that examine the undue short-term pressures from the financial sector on corporations. These reports are in response to a Call for Advice from EC as part of its Action Plan on financing sustainable growth and will inform the policy areas that regulators should address. Although all three ESAs have made certain recommendations in their advice, EIOPA states that it found no clear evidence of undue short-termism in insurance and institutions for occupational retirement provision. EBA, however, provides policy recommendations advocating that policy action should aim to provide relevant information and incentives for banks to incorporate long-term time horizons in their strategies, governance, business activities, and risk management. The EBA report takes into consideration three dimensions and perspectives that relate to short-termism: the banks’ perspective, the corporates’ perspective, and the sustainable finance perspective.
EBA report identified some limited concrete evidence of short-termism, without necessarily being in a position to label it systematically as undue, and highlights the need to promote long-term approaches. In its report, EBA calls on banks to consider long-term horizons in their strategies and business activities and provides the following policy recommendations for the banking sector to EC and EU legislators:
- Maintain a robust regulatory prudential framework as a precondition for long-term investments, while continuing to monitor potential unintended consequences of financial regulations on the supply of sustainable investment financing
- Foster the adoption of longer-term perspectives by institutions through more explicit legal provisions on sustainability in the Capital Requirements Directive
- Continue enhancing disclosures of long-term risks and opportunities, by both corporations and banks, by setting principles and requirements that can ensure comparability and reliability of disclosure. through amendments to the Non-Financial Reporting Directive
- Improve information flows, data access, and support the role of the banking sector in raising awareness on sustainability challenges and environmental, social, and governance (ESG) risks.
EIOPA found no clear evidence of undue short-termism in insurance and institutions for occupational retirement provision, though it has made certain recommendations, including the following:
- Developing a cross-sectoral framework with the aim of promoting long-term investments and supporting sustainable economic growth at European level. General principles should guide the consistent implementation across the financial system of defined objectives in this matter and should help to assess performance against concrete targets as well as potential deviations at sectoral or sub-sectoral level.
- Facilitating the generation and publication of long-term performance benchmarks to increase the focus on long-term value creation rather than immediate shareholder interests or excessively short-term profitability objectives. The availability of transparent and commonly understandable long-term benchmarks should benefit both providers and customers.
ESMA recommends, to EC, action in the following key areas:
- Disclosure of ESG factors, including amending Non-Financial Reporting Directive to establish principles for high-quality non-financial information, promoting a single set of international ESG disclosure standards, and requiring the inclusion of non-financial statements in annual financial reports
- Institutional investor engagement including a review of the White List under the Takeover Bids Directive, a potential shareholder vote on the non-financial statement, and monitoring of the application of the Shareholder Rights Directive or SRD II.
Keywords: Europe, EU, Banking, Insurance, Securities, Sustainable Finance, Prudential Framework, Advice, ESG, Disclosures, EBA, EIOPA, ESMA, EC, ESAs
The European Banking Authority (EBA) launched the 2023 European Union (EU)-wide stress test, published annual reports on minimum requirement for own funds and eligible liabilities (MREL) and high earners with data as of December 2021.
The European Banking Authority (EBA) proposed implementing technical standards on the interest rate risk in the banking book (IRRBB) reporting requirements, with the comment period ending on May 02, 2023.
The U.S. Federal Reserve Board (FED) set out details of the pilot climate scenario analysis exercise to be conducted among the six largest U.S. bank holding companies.
The Board of Governors of the Federal Reserve System (FED) adopted the final rule on Adjustable Interest Rate (LIBOR) Act.
The European Central Bank (ECB) published an updated list of supervised entities, a report on the supervision of less significant institutions (LSIs), a statement on macro-prudential policy.
The Hong Kong Monetary Authority (HKMA) published a circular on the prudential treatment of crypto-asset exposures, an update on the status of transition to new interest rate benchmarks.
The European Commission (EC) adopted the standards addressing supervisory reporting of risk concentrations and intra-group transactions, benchmarking of internal approaches, and authorization of credit institutions.
The China Banking and Insurance Regulatory Commission (CBIRC) issued rules to manage the risk of off-balance sheet business of commercial banks and rules on corporate governance of financial institutions.
The Hong Kong Monetary Authority (HKMA) made announcements to address sustainability issues in the financial sector.
The European Banking Authority (EBA) published regulatory standards on identification of a group of connected clients (GCC) as well as updated the lists of identified financial conglomerates.