EBA Consults on Role of Environmental Risks in Prudential Framework
The European Banking Authority (EBA) is consulting on the incorporation of environmental risks in the prudential framework (Pillar 1) for credit institutions and investment firms until August 02, 2022. Meanwhile, the European Supervisory Authorities (ESAs) are also seeking feedback on the draft regulatory technical standards on sustainability disclosures for Simple, Transparent, and Standardized (STS) securitizations, with the comment period ending on July 02, 2022.
The EBA consultation initiates the discussion on the appropriateness of the current prudential framework to address environmental risk drivers and considers the potential justification for a dedicated prudential treatment of exposures substantially associated with environmental and/or social objectives and those subject to environmental and/or social impacts. The consultation is issued in relation to the mandates in certain articles of the Capital Requirements Regulation (575/2013) and the Investment Firms Regulation (IFR or Regulation 2019/2033). EBA plans to publish the final report in 2023 and formulate its policy recommendations after considering feedback received and insights gained from available data and policy developments at the European Union and international levels. The consultation specifically:
- provides an analysis of the extent to which environmental risks are already reflected in the Pillar 1 own funds requirements via internal and external ratings, valuation of financial instruments and collateral, and scenario analysis.
- notes that the potential for the existing framework to capture environmental risks, but the way in which such risks translate into financial risks over time remains an area of significant uncertainty.
- suggests as an alternative to recognizing environmental risks within the structure of the framework, the potential introduction of specific risk-weighted adjustment factors is considered. However, it is noted that the initial analysis indicates that targeted amendments to the existing prudential requirements would address these risks more accurately than such adjustment factors, given the various challenges associated with their design and implementation.
- discusses the use of forward-looking methodologies and highlights the importance of reliable information collection environmental risks and their impact on financial losses of institutions.
- highlights the broader work of EBA in the area of environmental, social, and governance (ESG) risks, including transparency, risk management, Pillar 2 supervision, and macro-prudential capital buffers.
The ESAs' are also consulting on the draft regulatory technical standards, which lay down the content, methodologies, and presentation of principal adverse impacts on sustainability factors of the assets financed by the underlying exposures for both non-ABCP [Asset-Backed Commercial Paper] traditional securitizations and on-balance-sheet STS securitizations. The proposed standards aim to facilitate disclosures by the originators of the principal adverse impact of assets financed by STS securitizations on ESG factors. The proposed standards further aim to supplement the Single Rulebook under the Securitization Regulation, as amended by the Capital Markets Recovery Package (CMRP), and draw on the ESAs’ work in respect of sustainability-related disclosures under the Sustainable Finance Disclosure Regulation (SFDR). As required in the mandate for these draft regulatory standards, ESAs have aimed to ensure a high degree of consistency with the disclosure framework developed under SFDR and the associated regulatory technical standards. Following the consultation period, the draft standards will be finalized and submitted to the European Commission.
- Press Release on Environment Risks
- Discussion Paper on Environment Risks (PDF)
- Press Release on STS Securitizations
- Consultation on STS Securitizations (PDF)
Keywords: Europe, EU, Banking, STS Securitization, Basel, Regulatory Capital, Reporting, ESG, Climate Change Risk, Disclosures, Pillar 1, Regulatory Technical Standards, Securitization Regulation, SFDR, CRR, IFR, EBA, ESAs, Headline
Skilled market researcher; growth strategist; successful go-to-market campaign developer
Works with financial institutions, regulatory experts, business analysts, product managers, and software engineers to drive regulatory solutions across the globe.
Applies proficiency and knowledge to regulatory capital and reporting analysis and coordinates business and product strategies in the banking technology area
NGFS Updates Address Short-Term Climate Scenarios and Transition Plans
The Network for Greening the Financial System (NGFS) is exploring the development of short-term climate scenarios to complement its existing scenario framework of long-term climate scenarios.
ISSB Updates Address ESG Issues while IASB Consults on Impairments
The International Sustainability Standards Board (ISSB) is seeking feedback, until August 09, 2023, on the exposure draft that sets out the methodology proposed by ISSB to amend the Sustainability Accounting Standards Board (SASB) Standards' metrics
OSFI to Review Liquidity Adequacy Guidelines and Policy Architecture
The Office of the Superintendent of Financial Institutions (OSFI) is consulting, until June 21, 2023, on a review of the liquidity treatment provided in the Liquidity Adequacy Requirements (LAR) Guideline for wholesale funding sources with retail-like characteristics.
ESRB Publishes Report on Cryptos and DeFi; ECB Updates on Digital Euro
The European Systemic Risk Board (ESRB) published a report that outlines the systemic implications of crypto markets and proposes policy options to address the risks stemming from crypto-assets and decentralized finance or DeFi.
EU Agencies Issue Updates on DORA, ESAP, and Crowdfunding Regulation
The European Supervisory Authorities (ESAs) published a discussion paper on their joint advice to the European Commission (EC) on proposals to specify criteria for critical information and communication technology (ICT) third-party service providers
ESAs Propose ESG Disclosure on STS Securitization, Issue Other Updates
The Joint Committee of the three European Supervisory Authorities (ESAs) proposed to amend the Implementing Regulation 2016/1799 on the mapping of External Credit Assessment Institutions' (ECAIs) credit assessments.
UK Authorities Issue Updates, Finalize Policy on Model Risk Management
The Prudential Regulation Authority (PRA) finalized the model risk management principles for banks, the policy statement PS5/23 on risks from contingent leverage, and PS4/23 on moving senior managers regime forms from the PRA Rulebook.
APRA Revises Implementation Timeline for Operational Risk Standard
The Australian Prudential Regulation Authority (APRA) updated the implementation date of the new cross-industry prudential standard CPS 230 on operational risk management
BCBS Consults on Basel FAQs and Amendments, Issues Other Updates
The Basel Committee on Banking Supervision (BCBS) published a report assessing implementation of the global Basel standards on net stable funding ratio (NSFR) and large exposures (LEX) in South Africa
EBA Announces Multiple Regulatory and Reporting Updates in April 2023
The European Banking Authority (EBA) published consultations on the amendments to the guidelines on risk-based anti-money laundering and countering the financing of terrorism (AML/CFT) supervision