ECB Publishes Results of Financial Stability Review in May 2019

By Regulatory News

May 29, 2019

Basel III, Systemic Risk

ECB published results of the financial stability review in May 2019. The financial stability review assesses developments relevant for financial stability, including identifying and prioritizing the main sources of systemic risk and vulnerabilities for the euro area financial system. This review contains three special features related to macro-prudential policy, climate change, and contagion risks. The review highlights that bank profitability prospects are subdued, given the slow progress in addressing structural issues.

The information to be provided by a third party seeking authorization to assess the compliance of securitizations with the STS criteria provided for in Securitization Regulation should enable a competent authority to evaluate whether and, to what extent, the applicant meets the conditions of Article 28(1) of the Securitization Regulation. An authorized third party will be able to provide STS assessment services across EU. The application for authorization should, therefore, comprehensively identify that third party, any group to which this third party belongs, and the scope of its activities. With regard to the STS assessment services to be provided, the application should include the envisaged scope of the services to be provided as well as their geographical scope, particularly the following:

To facilitate effective use of the authorization resources of a competent authority, each application for authorization should include a table clearly identifying each submitted document and its relevance to the conditions that must be met for authorization.
To enable the competent authority to assess whether the fees charged by the third party are non-discriminatory and are sufficient and appropriate to cover the costs for the provision of the STS assessment services, as required by Article 28(1)(a) of Securitization Regulation, the third party should provide comprehensive information on pricing policies, pricing criteria, fee structures, and fee schedules.
To enable the competent authority to assess whether the third party is able to ensure the integrity and independence of the STS assessment process, that third party should provide information on the structure of those internal controls. Furthermore, the third party should provide comprehensive information on the composition of the management body and on the qualifications and repute of each of its members.
To enable the competent authority to assess whether the third party has sufficient operational safeguards and internal processes to assess STS compliance, the third party should provide information on its procedures relating to the required qualification of its staff. The third party should also demonstrate that its STS assessment methodology is sensitive to the type of securitization and that specifies separate procedures and safeguards for asset-backed commercial paper (ABCP) transactions/programs and non-ABCP securitizations.

The use of outsourcing arrangements and a reliance on the use of external experts can raise concerns about the robustness of operational safeguards and internal processes. The application should, therefore, contain specific information about the nature and scope of any such outsourcing arrangements or use of external experts as well as the third party's governance over those arrangements. Regulation (EU) 2019/885 is based on the draft regulatory technical standards submitted by ESMA to EC.

Related Links

Effective Date: June 18, 2019

Press Release

Proposed Rule 1

Proposed Rule 2

Proposed Rule 3

Presentation on Regulatory Framework (PDF)

Presentation on Resolution Plan Rules (PDF)

In addition to its usual overview of current developments relevant for euro area financial stability, this review includes three special features aimed at deepening the financial stability analysis of ECB and broadening the basis for macro-prudential policymaking. The first special feature assesses financial stability risks stemming from climate change, with focus on examining the exposure of financial institutions to climate-risk-sensitive assets. The second special feature sets out new ways to model the risk of contagion spreading through the euro area banking sector, while the third feature considers how macro-prudential policy responses might take account of changes in macroeconomic conditions. By providing a financial system-wide assessment of risks and vulnerabilities, the review provides key input to the macro-prudential policy analysis of ECB.

The review highlights that bank profitability is expected to remain low in the euro area. However, capital adequacy of euro area banks remains strong, implying widespread resilience to plausible adverse scenarios. To return to sustainable profitability, euro area banks need to tackle a number of structural challenges—such as low cost-efficiency, limited revenue diversification, and still high stocks of legacy assets in some countries. Additionally, the review reports on continued high risk-taking in the non-bank and fund sector. There are signs that more funds are increasing their leverage and their exposure to higher-yielding assets with commensurately higher credit risk. The global leveraged loan sector, which has grown significantly in recent years, is susceptible to weaker corporate earnings. The review sets out how this sector could pose risks to financial stability, particularly given uncertainties about ultimate exposures to the riskiest parts of collateralized loan obligations.

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Keywords: Europe, EU, Banking, Securities, Financial Stability Review, Macro-Prudential Policy, Capital Adequacy, Systemic Risk, ECB

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ECB Publishes Results of Financial Stability Review in May 2019

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