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    EBA Proposes SREP Framework and Endorses Equivalence Decision of EC

    November 17, 2021

    As part of the recent regulatory announcements, the European Banking Authority (EBA) acknowledged the decision of European Commission to consider the supervisory and regulatory framework applicable to credit institutions in Bosnia and Herzegovina and North Macedonia as equivalent to that applied in the European Union (EU). According to the Capital Requirements Regulation (CRR), this would imply that credit institutions in EU can apply preferential risk-weights to relevant exposures to entities located in these countries. Additionally, EBA and the European Securities and Markets Authority (ESMA) launched a consultation on their guidelines on common procedures and methodologies for the supervisory review and evaluation process (SREP). As part of SREP, EBA is also consulting on the regulatory technical standards on the additional own funds requirements that could be determined by competent authorities for investment firms. Both regulatory proposals are based on the Investment Firms Directive (IFD) and are being consulted on till February 18, 2022.

    Proposed Guidelines on SREP. The draft guidelines from EBA and ESMA set out the process and criteria for assessment of the main SREP elements such as business model, governance arrangements, and firm-wide controls, risks to capital and capital adequacy, and liquidity risk and liquidity adequacy. As part of this assessment, a scoring system is planned to be introduced to facilitate comparability across firms. In addition, the proposed joint guidelines provide clarifications on the monitoring of key indicators, the application of SREP in the cross-border context, and the use of supervisory measures. The guidelines also link the ongoing supervision and the gone-concern concept, by determining whether the investment firm is "failing or likely to fail." The link is made to resolution processes under the Bank Recovery and Resolution Directive (BRRD) for the investment firms that are subject to it, while, in other cases, investment firms assessed as "failing or likely to fail" are expected to undergo an orderly wind-down.

    Proposed Regulatory Standards on Own Funds Requirements. For the determination of additional own funds requirements for risks not covered or not sufficiently covered by Pillar 1 requirements, the joint SREP guidelines refer to the draft technical standards. The draft standards propose a number of indicative qualitative metrics to support competent authorities in the identification, assessment, and quantification of material risks and elements of risks not covered or not sufficiently covered by own funds requirements set out in Article 11 of the Investment Firms Regulation (IFR). The proposed metrics reflect size, complexity of activities, and business models of various investment firms across EU. The draft regulatory standards clarify how competent authorities should measure risks or elements of risks that investment firms face or pose to others and that are not covered or not sufficiently covered by the own funds requirements set out in Part Three or Four of IFR. These technical standards are relevant for class 2 and class 3 investment firms and aim to ensure a consistent and proportionate application of supervisory practices across EU, providing granular guidance embedding different sizes, business models, and risk profiles of the investment firms, while maintaining risk-sensitivity of the calculation of capital requirements under Pillar 2. Given that the application of additional own funds requirements results from a comprehensive SREP, these draft standards should be read together with the SREP guidelines. The finalization of the draft technical standards and communication to the European Commission is planned by June 30, 2022.


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    Comment Due Date: February 18, 2022

    Keywords: Europe, EU, Banking, Securities, Investment Firms, IFR, IFD, SREP, Regulatory Technical Standards, Own Funds Requirement, Regulatory Capital, CRR, Basel, Pillar 2, ESMA, EBA

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