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    EBA Issues Multiple Regulatory Updates for Banking Sector

    As part of its recent publications, EBA provided clarity on the applicability of guidelines that have been replaced or modified by the Pillar 3 disclosure standards, published a report on standards related to the financial product disclosures under the Sustainable Finance Disclosure Regulation (SFDR), and issued the list of third-country groups and branches of credit institutions in the European Union and European Economic Area (EU/EEA). EBA also issued an opinion on the European Commission (EC) proposal on Pillar 3 disclosures on environmental, social, and governance (ESG) risk, a report on monitoring of the total loss-absorbing capacity and minimum requirement for own funds and eligible liabilities (TLAC/MREL), a thematic note on residential real estate exposures of banks, and a peer review on the implementation of the guidelines on information and communications technology (ICT) risk management.

    Below are the key highlights of the recently issued regulatory developments and reports:

    • EBA provided clarity on the applicability of several EBA disclosure guidelines that have been replaced totally or partially by the implementing technical standards on Pillar 3 disclosures. As part of this effort, EBA revised the scope of application of the guidelines on disclosure of non-performing and forborne exposures and repealed the guidelines on the disclosure requirements under Part Eight of the Capital Requirements Regulation (CRR or Regulation No 575/2013), the liquidity coverage ratio (LCR) disclosure to complement the disclosure of liquidity risk management (EBA/GL/2017/01), and the disclosure of encumbered and unencumbered assets (EBA/GL/2014/03). The EBA amending guidelines on disclosure of non-performing and forborne exposures adjust the scope of application of existing guidelines to clarify that these guidelines will continue to apply to listed small- and non-complex institutions and to other medium-size institutions that are non-listed. The amending Guidelines will apply from December 31, 2022.
    • The three European Supervisory Authorities (ESAs), which include EBA, the European Insurance and Occupational Pensions Authority (EIOPA), and the European Securities and Markets Authorities (ESMA), have delivered to the European Commission (EC) their final report with draft regulatory technical standards on the disclosure of financial products’ exposure to investments in fossil gas and nuclear energy activities under the SFDR. ESAs consider the existing disclosures in the SFDR Delegated Regulation sufficient for fossil gas or nuclear energy investments by financial products that are not covered by the European Union Taxonomy. EC will scrutinize the draft standards and endorse them within three months of their publication. Due to the urgency of the matter and the challenging application timeline of the Complementary Climate Delegated Act (which will apply from January 01, 2023), ESAs have left it to EC to include an expected application date when they endorse the draft regulatory technical standards.
    • EBA published the list of third-country groups operating in EU/EEA with the intermediate EU parent undertakings (IPU), where applicable. EBA also published the list of all third-country branches of credit institutions authorized to operate in the EU/EEA.
    • EBA issued an opinion in response to the amendments proposed by EC to the EBA final draft implementing technical standards on Pillar 3 disclosures on ESG risks. In the opinion, while accepting the two substantive changes proposed by EC to enhance proportionality, EBA insists that institutions should make every effort to collect and disclose the very relevant information reflected in the Banking Book Taxonomy Alignment Ratio (BTAR). EC has proposed amendments to emphasize that institutions "may" choose to disclose this information, instead of being required to do it on a "a best effort basis" and that the collection of the information from the counterparties will be on a "voluntary basis", including that institutions need to inform the counterparties about the voluntary nature of this request of information. In the opinion, EBA recognizes the importance of proportionality and, therefore, although favoring the original wording requesting institutions to disclose this information on a best effort basis, EBA accepts the amendments proposed by EC.
    • EBA published an updated report on monitoring of TLAC/MREL. Following the first TLAC-MREL monitoring report, EBA has observed that its recommendations have been, overall, well implemented. However, it has identified the need for a few new notable provisions to be recommended and for some others to be avoided. This report provides policy views based on TLAC/MREL instruments assessed up to February 2022, with a view to continue strengthening the quality of the instruments and to have more standardized information across the EU.
    • EBA published a thematic note on EU banks’ residential real estate exposures. EU banks reported more than EUR 4.1 trillion of loans and advances collateralized by residential immovable property. House prices across the EU have increased substantially during 2021 and this has raised concerns about overheating and the potential for significant price declines in residential real estate markets. Higher interest rates driven by increased inflation combined with the prospect of slower economic growth will likely put financial pressure on lower income and over-indebted households; these developments clearly point to higher risks in mortgage portfolios of banks. Banks should follow prudent loan origination policies and enhance their monitoring of mortgage loan portfolios to identify promptly pockets of risks.
    • EBA published the conclusion of its peer review of how competent authorities supervise institutions’ ICT risk management and have implemented the EBA guidelines on ICT risk assessment under the supervisory review and evaluation process (SREP). Overall, the analysis suggests that the competent authorities across the EU have applied a risk-based approach to the supervision of ICT risk management. EBA has not identified any significant concerns regarding the supervisory practices but makes some general recommendations for further improvements. The peer review also includes recommendations to the EBA to incorporate a number of identified good practices into the guidelines on ICT risk assessment under the SREP, when the latter will be reviewed in the future.

     

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    Keywords: Europe, Banking, Basel, Pillar 3, Disclosures, ICT Risk, Lending, Regulatory Capital, TLAC, MREL, RRE, ESG, SDFR, Sustainable Finance, Financial Product Disclosures, Third Country Groups, Third Country Branches, EBA

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