EU Agencies Call for Climate Disclosure on Structured Finance Products
The European Supervisory Authorities (ESAs), together with the European Central Bank (ECB), published a Joint Statement on climate-related disclosures for structured finance products, encouraging the development of disclosure standards for securitized assets through harmonized climate-related data requirements. In addition, the European Banking Authority (EBA) published an annual assessment of banks’ internal approaches for the calculation of capital requirements. EBA also issued a revised list of validation rules for its reporting standards, highlighting the rules that have been deactivated either for incorrectness or for triggering IT problems. Additionally, EBA published a report on diversity practices and the gender pay gap at the level of the management body, highlighting that women’s representation on boards has gradually improved (depicting the situation as of December 31, 2021).
The joint call from ECB and ESAs on the development of disclosure standards for securitized assets comes amid growing concerns over the impact of climate change on the global economy and financial system. Structured finance products typically include investment products in which returns are linked to underlying assets, created through a securitization process. Assets involved in the securitization transactions often include real estate mortgages or auto loans. ECB and ESAs have emphasized the importance of transparency and disclosure in the structured finance market, particularly with regard to climate risks. The European Securities and Markets Authority (ESMA), with the contribution of the European Banking Authority (EBA), the European Insurance and Occupational Pensions Authority (EIOPA), and the ECB is working toward enhancing disclosure standards for securitized assets by including new, proportionate, and targeted climate change-related information. The following are the key action points discussed in the joint statement:
- Develop advice and regulatory technical standards under the EU Taxonomy Regulation and the Sustainable Finance Disclosure Regulation (SFDR)
- Review the SFDR Delegated Regulation to enhance ESG disclosures by financial market participants, including requiring additional disclosures on decarbonization targets
- Develop templates for voluntary sustainability-related disclosures for simple, transparent, and standardized (STS) securitizations
- Undertake a review of the loan-level securitization disclosure templates, with a view to not only simplifying the reporting templates where possible, but also consider (with engagement with originators/investors/regulatory bodies) whether new, proportionate, and targeted climate change-related metrics should be introduced that will be useful for investors and supervisors
- Encourage originators and sponsors to collect the climate-related data needed by investors, even if no mandatory disclosure requirements are in place yet
EBA published reports on the annual market and credit risk benchmarking exercises conducted in 2022. The exercises are intended to monitor the consistency of risk weighted assets across all EU institutions authorized to use internal approaches for the calculation of capital requirements. EBA also published a document (Annex) presenting a chart pack that analyzes the credit risk benchmarking metrics. The report on credit risk benchmarking exercise provides in-depth analysis of the observed and potential impact of the COVID-19 pandemic on the internal ratings-based (IRB) parameters used to calculate own funds requirements. The analyses imply that the support measures continue to significantly influence the observed default rates and the average Probability of default (PD) estimates. The average PDs seem to revert to pre-crisis levels for large corporate exposures. In addition, the horizontal analyses reveal a notable decrease in defaulted exposures and a notable increase in non-defaulted exposures. The report on credit risk-related exercise also provides an analysis of the share of energy firms in the IRB portfolio of the institutions in the benchmarking sample. The report on market risk exercise summarizes the conclusions drawn from a hypothetical portfolio exercise conducted by EBA during 2021/22. The report noted that foreign exchange and commodity portfolios exhibit a lower level of dispersion than the interest rate, equity, and credit spread asset classes. This is likely to be due to a decrease in market volatility, which impacted the level of the risk measures. T
Keywords: Europe, EU, Banking, Credit Risk, Market Risk, CRR, Basel, Benchmarking Exercise, Regulatory Capital, Internal Models, SFDR, Structured Finance, Reporting, Diversity, Gender Pay, ESG, Disclosures, Climate Change Risk, ESA, EBA, ECB, EIOPA, ESMA
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