The Malta Financial Services Authority (MFSA) published a circular that provides an update on the status of the transposition of the fifth Capital Requirements Directive or CRD5 into national legislation. MFSA has been working on the transposition of the CRD5 into national legislation, which is now in the final stages. The relevant Bill amending various financial services legislation, including the Banking Act, will shortly be tabled in Parliament and are expected to be published in the coming months. The publication of the relevant amendments to the subsidiary legislation and to Banking Rules that are issued under the Banking Act will then follow in order to transpose the remaining CRD5 provisions.
Moreover, the circular provides credit institutions with an overview of the key changes that were brought about by the revised Capital Requirements Regulation and Directive (CRR2 and CRD5) and provide guidance on the supervisory expectations. The key changes include the following:
- Standardized approach to counterparty credit risk (SA-CCR). A simplified version of the SA-CCR has been introduced for credit institutions that meet predefined eligibility criteria and for credit institutions that form part of a group which meets those criteria on a consolidated basis. Where the SA-CCR proves too complex to implement, subject to certain conditions, credit institutions with limited derivative exposures can use an adjusted Original Exposure Method as an alternative approach. In view of this, credit institutions are required, among others, to identify to what extent the capital buffer is released, to consider how it will be using the capital, and whether it would be investing it in risky positions.
- Large exposures framework. One of the key changes under the new prudential framework is that the 25% exposure limit will be calculated on the capital base of the Tier 1 capital instead of eligible capital. Credit institutions are required to report the exposures to MFSA, including the 20 largest exposures, exposures larger than or equal to EUR 300 million but less than 10% of Tier 1 capital and the top ten exposures to shadow banks. Credit institutions are required to inform MFSA if they are in breach of the large exposures regime and submit a plan for timely return to compliance.
- Net Stable Funding Ratio or NSFR. The credit institutions are bound to maintain an NSFR of 100% or above. In line with the proportionality principle, the new requirements provide the option for small and non-complex credit institutions to use a simplified version of the NSFR requirement; this is subject to the prior approval of MFSA.
- Revisions to standardized and internal ratings based approach for credit risk. Small and medium-size enterprises (SMEs) supporting factor and Infrastructure supporting factor, which allow preferential treatment, have been included in the CRR2. Credit institutions are required to assess the impact that this would have on their business plans and incorporate the revised risk weighting factors in their reporting and ICAAP. Where it is relevant, they should set out how they will be using any freed-up capital.
- (Mixed) Financial Holding Companies. The CRD5 framework introduces a new approval requirement for holding companies that fall within the definitions of Financial Holding Companies and Mixed Financial Holding Companies, as set out in the CRR. Furthermore, the CRD5 provides for the exemption from the approval of those holding companies that are set up for the purpose of holding participations in undertakings. (Mixed) Financial Holding Companies which have a credit institution as a subsidiary and fulfil the conditions stipulated in the CRD5, are required to seek the approval or the exemption from approval of the consolidating supervisor, or the competent authority, as applicable. The company is also required to ensure compliance with the conditions for approval or exemption on an ongoing basis; and adhere to any supervisory measure that may be imposed by the competent authority or the consolidating supervisor.
- Pillar 2 Capital. The CRD5 clarifies a number of requirements related to the Supervisory Review and Evaluation Process (SREP) as well as the supervisory measures based on such process. Banks are required to meet their applicable Pillar 2 requirement and are expected to hold Pillar 2 Guidance to align capital requirements to risks where a quantitative methodology is not laid down in CRD5 so as to ensure that banks hold enough capital to cover losses arising from stress events. In view of this, credit institutions should have, in place adequate appropriate controls and internal governance arrangements, processes, and mechanisms with respect to each risk.
- Anti-money laundering. The CRD5 package strengthens the anti-money laundering dimension in authorization, fit and proper assessments, and SREP functions. Pursuant to the CRD5, MFSA may remove directors of credit institutions if, inter alia, it suspects that money laundering or terrorist financing has been committed or attempted. Furthermore, competent authorities shall consistently factor money laundering and terrorist financing concerns in their supervisory activities, including SREP, assessments of adequacy of governance arrangements, processes and mechanisms, and assessments of suitability of directors.
In addition, MFSA has published its authorization process service charter and launched a new dedicated authorizations webpage together with a new set of authorization forms and supporting guidelines for persons looking to obtain an authorization falling within the regulatory perimeter of MFSA. The purpose of the service charter is to guide applicants in preparing and submitting applications, aiming to facilitate the authorization process by engaging with applicants and setting out the expectations of MFSA in terms of regulatory standards. Finally, MFSA and CSIRTMalta published a joint communication on cyber threats and vulnerabilities. CSIRTMalta is the National Computer Security Incident Response Team within the Malta Critical Infrastructure Protection Directorate.
- Circular on CRD5 Transposition (PDF)
- Press Release on Authorization Process
- Service Charter (PDF)
- Joint Communication (PDF)
Keywords: Europe, Malta, Banking, CRD5, CRR2, Basel, Regulatory Capital, SA-CCR, Banking Act, Large Exposures, NSFR, Credit Risk, AML, Governance, SREP, Transposition of CRD5, Cyber Risk, MFSA
The UK authorities have published consultations with respect to the Basel requirements for banks. The Prudential Regulation Authority (PRA) published the consultation paper CP16/22 on rules for the implementation of Basel 3.1 standards.
The three European Supervisory Authorities (ESAs) issued a letter to inform about delay in the Sustainable Finance Disclosure Regulation (SFDR) mandate, along with a Call for Evidence on greenwashing practices.
The Financial Stability Board (FSB) and the Network for Greening the Financial System (NGFS) published a joint report that outlines the initial findings from climate scenario analyses undertaken by financial authorities to assess climate-related financial risks.
The Financial Stability Board (FSB) published a letter intended for the G20 leaders, highlighting the work that it will undertake under the Indian G20 Presidency in 2023 to strengthen resilience of the financial system.
The International Sustainability Standards Board (ISSB) of the IFRS Foundations made several announcements at COP27 and with respect to its work on the sustainability standards.
The International Organization for Securities Commissions (IOSCO), at COP27, outlined the regulatory priorities for sustainability disclosures, mitigation of greenwashing, and promotion of integrity in carbon markets.
The European Banking Authority (EBA) issued a statement in the context of COP27, clarified the operationalization of intermediate EU parent undertakings (IPUs) of third-country groups
The European Union has finalized and published, in the Official Journal of the European Union, a set of 13 Delegated and Implementing Regulations applicable to the European crowdfunding service providers.
The Office of the Superintendent of Financial Institutions (OSFI) published an annual report on its activities, a report on forward-looking work.
The Australian Prudential Regulation Authority (APRA) finalized amendments to the capital framework, announced a review of the prudential framework for groups.