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    EU Authorities Issue Updates on CCyB, Digital Euro, MREL, and Others

    May 15, 2023

    The European Central Bank (ECB) published a progress report on the digital euro, the findings of ECB-commissioned focus groups on people’s views on the features of a potential digital wallet, an article on positive neutral rate for the countercyclical capital buffer (CCyB), and an updated list of supervised entities in the European Union. Additionally, the General Board of the European Systemic Risk Board (ESRB), at its March 2023 meeting, published the quarterly risk dashboard while the Single Resolution Board (SRB) published the minimum requirement for own funds and eligible liabilities (MREL) dashboard. SRB also welcomed the proposed legislative changes of the European Commission to the bank crisis management and deposit insurance framework and published the 2023 MREL policy, which has been revised as a result of the experience obtained during the 2020 resolution planning cycle.

    Below are the key highlights of the recent developments:

    • The number of significant supervised entities reached 110 as of the March 01, 2023 cut-off date. Out of the nine specified changes since the last update, name of one supervised entity has changed, license or authorization of one supervised entity has lapsed (thus name was deleted from the list), and the remaining entities have either merged into or have been acquired by the parent entity. 
    • The report on digital euro sets out the progress made during the investigation phase of the digital euro project and elaborates on a third set of design and distribution options that were recently endorsed by the Governing Council of ECB. The Eurosystem proposal is to make the digital euro available to euro area residents, merchants, and governments in its initial releases. Non-resident euro area citizens may also have access, provided they hold an account with a euro area-based payment services provider. Access for consumers in the wider European Economic Area and selected third countries could be part of the subsequent releases.
    • ECB also published the findings of a commissioned study using focus groups to evaluate people’s views on specific features of a potential digital wallet. The study found that most participants were interested in trying some of the digital wallet features. The study shows that person-to-person money transfers—available throughout the euro area—are considered an essential feature for a digital wallet. With the approval of the latest set of design choices, the foundations have been laid for finalization of the investigation phase and for building a proposal for a possible next phase. Going forward, the Governing Council will assess the outcome of the investigation phase in the Autumn of 2023 and subsequently decide whether to move to the next phase.
    • The article on CCyB discussed the possible implementation of a positive neutral rate for CCyB as a means of enhancing macro-prudential policy in the Banking Union. The article also describes recent progress on the application of this tool worldwide and concludes with some remarks on the calibration and potential future application of the tool in the Banking Union. Key issues warranting further consideration are the calibration of potential positive neutral buffers and the degree of harmonization in the use of positive neutral rates across the Banking Union countries.
    • The ESRB risk dashboard released at the time of the ESRB General Board meeting shows that the capital and liquidity ratios in the banking sector are much higher than before the global financial crisis, with the average Common Equity Tier 1 ratio standing at 15.3% and the average Liquidity Coverage Ratio (LCR) ratio at 161% at the end of the fourth quarter of 2022. At the meeting, the General Board also discussed developments in the crypto-asset market and their possible systemic implications. The General Board welcomed the forthcoming report on crypto-assets and decentralized finance, which explores these implications and the potential policy responses and which the ESRB plans to publish in the second quarter of 2023. 
    • The MREL dashboard shows that both resolution and non-resolution entities reported a significant reduction of the overall MREL shortfall, including the Combined Buffer Requirement, against their final targets in the fourth quarter of 2022. After improving between the last quarter of 2022 and the beginning of 2023, the cost of funding spiked in mid-March following the turmoil generated by the crises of SVB and Credit Suisse. Going forward, SRB plans to launch a public consultation on MREL for the 2024 cycle and beyond in the second half of 2023.
    • EC recently proposed legislative changes to the bank crisis management and deposit insurance framework, which has been defined through amendments to three legislative texts: the Bank Recovery and Resolution Directive, the Single Resolution Mechanism Regulation, and the Deposit Guarantee Schemes Directive. ECB notes that EC has recommended that the European Parliament and the EU Council consult ECB on the proposed legislative changes. The proposals contain many positive developments. For example, these changes clarify the scope of application of a resolution in relation to national liquidation procedures; they also enhance the toolkit for managing bank failures in a way that protects critical functions and citizens effectively.

     

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    Keywords: Europe, EU, Banking, Basel, CCyB, Regulatory Capital, Digital Euro, Reporting, Significant Credit Institutions, Supervised Entities, Risk Dashboard, MREL, MREL Dashboard, Crisis Management, Deposit Insurance, Resolution Framework, SRB, ESRB, ECB

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