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    EBA Continues Momentum Toward Strengthening Prudential Rules for Banks

    A few years down the road from the last global financial crisis, regulators are still issuing rules and monitoring banks to ensure that they comply with the regulations. One such example is the European Banking Authority (EBA) that has been particularly active in this regard, with several regulatory announcements for banks in January 2024. To name a few key ones, these announcements address issues in the areas of environmental, social, and governance (ESG) risks; market, liquidity, and other risks under Basel III; technology risks under the Digital Operational Resilience Act (DORA); and data collection rules under the European Single Access Point (ESAP). One issuance that is most recent, has a far-reaching impact, and is quite talked about is the proposed guidelines on management of ESG risk.

    The proposed ESG risk guidelines set out requirements for the identification, measurement, management, and monitoring of ESG risks, including through plans aimed at addressing the risks arising from the transition toward an EU climate-neutral economy. The consultation period for these guidelines ends on April 18, 2024. The proposed guidelines aim to provide guidance on how institutions will incorporate ESG risks into their risk management processes, including defining how ESG risks should be considered when defining business and risk strategies, risk appetites levels, and internal controls. They specify the content of plans to be prepared in accordance with Article 76(2) of the Capital Requirements Directive (CRD). These plans should include specific timelines, intermediate quantifiable targets, and milestones to monitor and address the financial risks stemming from ESG factors. The guidelines also provide qualitative and quantitative criteria for assessing the impact of ESG risks on the financial resilience and risk profile of institutions in the short, medium, and long term.

    The guidelines document also discusses various policy options considered by EBA in nine main areas: the scope of the ESG risks guidelines, frequency of the materiality assessment of ESG risks, consideration of ESG risks in bank’s business and strategies, data processes, features of reference methodologies for the identification and measurement of ESG risks, materiality assessment and (transition) plans, data and engagement with counterparties in relation to their transition plans, time horizons considered for banks’ (transition) plans, and plans’ targets. The document concludes with a series of questions for consultation, seeking feedback on various aspects of the guidelines, including the EBA's understanding of the plans required by Article 76(2) of the CRD, the proportionality approach taken by EBA for these guidelines, and the approach taken by EBA regarding the consideration of climate and ESG risks. Feedback from the public consultation will be taken into account when finalizing the guidelines.

    Below is a brief recap of the other recent developments from EBA:

    • The recently revised reporting requirements, which exclude the reporting on reclassifications, are expected to apply, for the first time, for the reporting as of the reference date of March 31, 2025.
    • The recently issued first set of rules under the DORA have been endorsed by all three European Supervisory Authorities (ESAs) and these standards include the regulatory technical standards (RTS) on ICT risk management framework and on simplified ICT risk management framework; RTS on criteria for the classification of ICT-related incidents; RTS to specify the policy on ICT services supporting critical or important functions provided by ICT third-party service providers; and the implementing technical standards (ITS) to establish the templates for the register of information. The final draft technical standards have been submitted to the European Commission, which will now start working on their review with the objective to adopt these first standards in the coming months.
    • The proposed targeted amendments to the RTS on prudent valuation set out the requirements that institutions operating in the EU should apply for the valuation of their fair-valued assets and liabilities for prudential purposes. The comment period for these ends on April 16, 2024.
    • Comments are being sought, until March 08, 2024, on the proposed ITS under ESAP, which set out the requirements that are designed to enable future users to be able to effectively harness the comprehensive financial and sustainability information centralized on the ESAP. 
    • EBA also issued an Opinion on Bank of Italy's decision to introduce a certain waiver for cover bonds under the Capital Requirements Regulation or CRR and an Opinion to Latvijas Banka on a measure adjusting the risk weight for commercial immovable property.
    • Additional updates from EBA include proposed amendments to the data collection for the benchmarking exercise in 2025, guidance to crypto-asset service providers to effectively manage their exposure to money laundering and terrorist financing risks, report analyzing specific aspects of the net stable funding ratio (NSFR) framework, updates to technical standards of supervisory colleges, a quarterly risk dashboard assessing key risks in the banking sector, and response to a law firm on the prudential treatment of a BNP Paribas legacy instrument.

    Monitoring and compliance with ESG risk requirements is a relatively uncharted and challenging territory for banks. ESG solutions market is evolving fast, with ESG risk being an area of emerging opportunities for regtech vendors and banks alike. Visit Moody's Analytics Climate and ESG Risk Microsite to learn how you can proactively incorporate climate and ESG insights into your risk assessment process.


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    Keywords: Europe, EU, Banking, ESG, Climate Risk, Basel, Reporting, DORA, Operational Resilience, RegTech, EBA

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