Featured Product

    ECB Outlines Good Practices for Banks to Prepare for Benchmark Reforms

    July 23, 2020

    ECB published a report that outlines good practices for banks to prepare for benchmark rate reforms. The good practices address how banks can best structure their benchmark-rate-related governance, identify benchmark-rate-related risks, and create action plans and documentation in relation to the reforms. Also published were the results of an industry-wide assessment of the banks' preparedness for the benchmark interest rate reforms. One of the key findings of the assessment is that, while banks are generally well aware of the potential risks entailed in the benchmark rate reforms, they are behind schedule in developing and implementing the risk mitigation measures with respect to the benchmark reforms.

    In July 2019, ECB had surveyed certain supervised banks to assess their preparedness for the interest rate reforms under the EU Benchmarks Regulation. The assessment found that banks have focused more on the transition phase from the euro overnight index average (EONIA) to the euro short-term rate (€STR) than on the reform of the euro interbank offered rate (EURIBOR) and its associated risks. EURIBOR is the main benchmark rate in the euro area in terms of the number of contracts that reference it and is widely used in retail loans and hedging products. In light of the results of this assessment, ECB has now published the report on preparations for benchmark rate reforms, which sets out the good practices that were identified in the documentation that banks submitted to ECB in 2019.. The key areas in which the report provides examples of good practices include the following:

    • Governance. To mitigate impact of the benchmark rate reforms in a proactive and sustainable manner, banks should have a suitable organizational and operational structure in place, including an adequate segregation of duties and clear reporting lines, as set out in paragraph 67 of the EBA guidelines on internal governance.
    • Risk Identification. Internal risk assessment is a critical step, as it is the starting point for devising the action plan. It is, therefore, important to allocate the necessary resources and time to this step.
    • Action Plan. Including action plans in a dedicated risk assessment means that they can prioritize and hone risk mitigation activities in a targeted manner and thereby ensure granular coverage of all the relevant aspects identified.
    • Timeline. Setting a clear timeline can help in finding comprehensive solutions that will provide the Single Supervisory Mechanism banks with the time they need to develop, test, and implement robust mitigation measures.
    • Awareness of External Development. ECB expects banks to fully comply with the legal requirements. Given the work underway in a number of fora, banks face the challenge of ensuring that they are up-to-date with the most recent developments (for example, actions by central counterparties).

    The report highlights that, as a general principle, the assessment of legal and operational challenges is best performed holistically, taking into consideration both internal systems and external factors such as risks relating to conduct, reputation, and litigation. The report also discusses exposure-related risks with regard to valuation and regulatory treatment. While this report does not cover good practices in relation to the application of accounting standards, it is important from a prudential perspective that banks are aware of potential accounting implications stemming from the benchmark rate reforms and their potential significance.

     

    Related Links

    Keywords: Europe, EU, Banking, Securities, EONIA, €STR, Risk-Free Rates, Interest Rate Benchmarks, EURIOR, Benchmarks Regulation, IBOR Reform, ECB

    Related Articles
    News

    UK Authorities Consult on Implementation of Basel 3.1 Standards

    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.

    November 30, 2022 WebPage Regulatory News
    News

    ESAs Issue Multiple Regulatory Updates for Financial Sector Entities

    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.

    November 15, 2022 WebPage Regulatory News
    News

    FSB and NGFS Publish Initial Findings from Climate Scenario Analyses

    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.

    November 15, 2022 WebPage Regulatory News
    News

    FSB Issues Reports on NBFI and Liquidity in Government Bonds

    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.

    November 14, 2022 WebPage Regulatory News
    News

    ISSB Makes Announcements at COP27; IASB to Propose IFRS 9 Amendments

    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.

    November 10, 2022 WebPage Regulatory News
    News

    IOSCO Prioritizes Green Disclosures, Greenwashing, and Carbon Markets

    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.

    November 09, 2022 WebPage Regulatory News
    News

    EBA Finalizes Methodology for Stress Tests, Issues Other Updates

    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

    November 09, 2022 WebPage Regulatory News
    News

    EU Finalizes Rules Under Crowdfunding Service Providers Regulation

    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.

    November 08, 2022 WebPage Regulatory News
    News

    OSFI Sets Out Work Priorities and Reporting Updates for Banks

    The Office of the Superintendent of Financial Institutions (OSFI) published an annual report on its activities, a report on forward-looking work.

    November 07, 2022 WebPage Regulatory News
    News

    APRA Finalizes Changes to Capital Framework, Issues Other Updates

    The Australian Prudential Regulation Authority (APRA) finalized amendments to the capital framework, announced a review of the prudential framework for groups.

    November 03, 2022 WebPage Regulatory News
    RESULTS 1 - 10 OF 8597