The Financial Sector Supervisory Commission of Luxembourg (CSSF or Commission de Surveillance du Secteur Financier) published Regulation No. 21-02 to set the countercyclical buffer rate for banks at 0.50%, for the third quarter of 2021. Annex 1 to the regulation lays out elements that have been considered in setting the applicable countercyclical buffer rate while Annex 2 presents the text of the Systemic Risk Committee recommendation. The regulation shall come into force on the day of its publication in the Official Journal of the Grand Duchy of Luxembourg. CSSF also published Circular 21/774 on supervisory reporting requirements applicable to credit institutions. Circular 20/745 modifies Circular 14/593 by incorporating certain latest developments in reporting requirements.
The changes relate to updation of certain legal references, following the publication of EU Regulation 2021/451 on implementing technical standards for prudential information to be provided by institutions, EU Regulation 2021/453 on implementing technical standards for specific reporting requirements for market risk, and the ECB Regulation 2021/943 on reporting of supervisory financial information. Additionally, CSSF published the law of May 20, 2021 (Law), which, among others, transposes the fifth Capital Requirements Directive (CRD5 or Regulation 2019/878) and amends the law of April 05, 1993 on the financial sector (LFS). CSSF highlighted the following developments in connection with the Law.
- The existing provisions of the CSSF related to the supervisory review and evaluation process (SREP), which applies to institutions under the Capital Requirements Regulation (including to Luxembourg branches of such institutions incorporated in a third country) have now been fully integrated into the LFS. The Law clarifies conditions for the application of Pillar 2 capital add-ons and the distinction between Pillar 2 requirements (P2R) and supervisory expectations to hold additional capital, also known as Pillar 2 Guidance (P2G). In addition, the Law introduces the application of Pillar 2 measures for the risk of excessive leverage.
- Although the capital conservation measures are not fundamentally amended by the Law, further flexibility has been provided in the use of systemic risk buffer and the other systematically important institution (O-SII) buffer. The changes to the O-SII buffer include an increase of the overall buffer rate to 3% as well as an increase of the cap for subsidiaries.
- New dispositions related to variable remuneration have been introduced into the LFS. Articles 38-6(2) and (3) of the Law introduce some waivers for smaller and non-complex institutions in the application of a limited number of remuneration requirements. The EBA guidelines on sound remuneration policies, which are under revision—in particular Section 4 of these guidelines, on proportionality—shall be taken into account when applying such waivers. Articles 38(5) and (6) of the Law clarify the application of the remuneration requirements in a group context and with regard to institutions that are subject to a specific remuneration framework.
Finally, CSSF published Circular 21/773 on the management of climate-related and environmental risks. The purpose of this Circular is to raise awareness of credit institutions on the need to consider and assess climate-related and environmental risks and to increase awareness of members of the management body and institutions’ staff about these risks. The Circular describes how CSSF expects credit institutions to consider and integrate, into their operations, climate-related and environmental risks as drivers of existing categories of risks. The expectations in this Circular are consistent with those in the ECB guide on climate-related and environmental risks, which was published in November 2020, as well as with the guide for supervisors on integrating climate-related and environmental risks into prudential supervision, which the Network of Central Banks and Supervisors for Greening the Financial System (NGFS) published in May 2020. The circular applies to all credit institutions designated as less significant institutions under the Single Supervisory Mechanism and to all branches of non-EU credit institutions. This circular was scheduled to become applicable as of its date of publication. CSSF expects institutions to start reviewing their business models and operational frameworks by mid-year 2021 with a view to progressively implement the operational arrangements that incorporate climate-related and environmental risk factors.
- Regulation on Setting CCyB Rate (in French)
- Circular on Reporting Requirements (in French)
- Communication on Transposing CRD5 (in English)
- Circular on Management of Climate-Related Risks (in English)
Keywords: Europe, Luxembourg, Banking, CCyB, Reporting, CRD5, CRR, Basel, Transposition of CRD5, Regulatory Capital, Climate Change Risk, ESG, Systemic Risk, Remuneration, SREP, Pillar 2, EBA, CSSF
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