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    ESAs, ECB, & EC Issue Multiple Regulatory Updates for Financial Sector

    Among its recent publications, the European Banking Authority (EBA) published the final standards and guidelines on interest rate risk arising from non-trading book activities (IRRBB), provided answers to 7 single rulebook questions, set out examination program priorities for national prudential and resolution authorities for 2023, and issued an initial assessment of the integration of environmental, social, and governance (ESG) risks in the supervision of investment firms under the Investment Firms Directive or IFD. Among other key updates from European Union (EU) authorities, the European Securities and Markets Authority (ESMA) issued announcements related to credit rating agencies and ESG disclosures, the European Commission (EC) adopted the work program for 2023, the Joint Committee of European Supervisory Authorities (ESAs) outlined its key deliverables for the year, and the European Central Bank (ECB) published results of the bank lending survey, along with Version 5.1 of the taxonomy to be used by national competent authorities when submitting supervisory financial reporting data points (SFRDP).

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

    • EBA issued the guidelines on IRRBB and credit spread risk arising from non-trading book activities (CSRBB), the final draft regulatory technical standards on the IRRBB standardized approach, and the regulatory standards on IRRBB supervisory outlier tests. The recently issued guidelines and standards specify technical aspects of the revised framework capturing IRRBB positions. These regulatory products complete the onboarding into EU law of the Basel standards on IRRBB and are of crucial importance given the current interest rate environment. The guidelines apply at June 30, 2023, with the exception of sections 4.5 and 4.6 that apply at December 31, 2023. The draft regulatory technical standards, however, will be submitted to the EC for endorsement, following which they will be subject to scrutiny by the European Parliament and the Council before being published in the Official Journal of the European Union.
    • EBA published a report that is addressed to competent authorities and sets out the foundations for integrating ESG risks-related considerations in the supervisory process of investment firms and covers the main SREP elements, including business model analysis, assessment of internal governance and risk management, and assessment of risks (risk to capital and liquidity). The report also provides an initial assessment of how ESG factors and ESG risks could be included in the supervisory assessment of investment firms. Proportionality is a key element of the report, which highlights the need to embed ESG considerations in a proportionate manner where the ESG factors and risks could affect the risk profile of the investment firm. 
    • EBA issued a call for expression of interest to join two Technical Expert Groups—on crypto assets service providers and anti-money laundering and countering the financing of terrorism (TEG-CASPs/AML) and on restrictive measures regimes (TEG-RMRs)—and a call for input on the Joint Guidelines to prevent the abuse of fund transfers for money laundering and terrorist financing purposes (issued in 2017 by the European Supervisory Authorities or ESAs). These will provide technical advice to EBA on those aspects of the revised Regulation on information accompanying transfers of funds (TFR) that relate to the EBA mandates. The deadline to submit the expression of interest to join one of these expert groups is November 04, 2022 while the call for input on the joint guidelines to prevent the abuse of fund transfers for money laundering and terrorist financing purposes ends on November 15, 2022
    • This month, the Questions and Answers (Q&A) on the EBA single rulebook address 6 queries received on COREP reporting templates and a query related to the information on the host member state in which Third Party Providers provide services under the second Payment Services Directive or PSD2. 
    • EBA published the European Supervisory Examination Program (ESEP) for 2023, which identifies key topics for supervisory attention across the EU. The selection of the key topics for supervisory attention for 2023 is based on the EU-wide risk analysis of EBA and the key topics include macroeconomic and geopolitical risks; operational and financial resilience; transition risks toward sustainability and digitalization; and money-laundering and terrorist financing risks in the supervisory review and evaluation process (SREP) and internal controls/governance.
    • EBA published the European Resolution Examination Program (EREP) for 2023, which identifies key topics for resolution attention across the EU. The topics for resolution authorities to consider when developing their 2023 priorities are how minimum requirement for own funds and eligible liabilities (MREL) shortfalls are being addressed; the development of management information systems for valuation in resolution; preparations for managing liquidity needs in resolution; and operationalization of the bail-in strategy.

    Additional regulatory and supervisory updates from the European authorities addressed the following key topics:

    • ECB has published Version 5.1 of the taxonomy to be used by national competent authorities when submitting supervisory financial reporting data points (SFRDP) to the ECB, in accordance with the Regulations on supervisory reporting. The taxonomy provides a uniform technical format for data collection (templates), defining the data items, business concepts, relations, visualizations, and validation rules; it uses “eXtensible Business Reporting Language” (XBRL). The SFRDP XBRL taxonomy is an extension of the FINREP (FINREP 9) EBA implementing technical standards XBRL taxonomy included in the EBA 3.2 framework release; it references the applicable tables of the EBA taxonomy, but limits their scope to the cells identified in the ECB Regulation. ECB also published the results of the banking lending survey and the survey on credit terms and conditions in euro-denominated securities financing and over-the-counter derivatives markets (SESFOD). In the October 2022 bank lending survey, euro area banks indicated that they have further tightened their credit standards for loans or credit lines to enterprises in the third quarter of 2022—that is. the percentage of banks reporting a tightening of credit standards was considerably larger than the percentage of banks reporting an easing.
    • ECB and the Single Resolution Board (SRB) have reached an “in principle” agreement on the margin for redeeming eligible liabilities under the Capital Requirements Regulation or CRR. The new “in principle” agreement is applicable to authorizations granted as of January 01, 2023, including the General Prior Permission (GPP) renewals. To redeem eligible liabilities institutions need to demonstrate that they would meet their Minimum Requirement for Own Funds and Eligible Liabilities (MREL) and the Combined Buffer Requirement plus a margin after the transaction has been performed. The margin is set by the resolution authority in agreement with the relevant competent authority. SRB has reached an “in principle” agreement with ECB on the margin that institutions will have to comply with in order to be authorized to redeem eligible liabilities. The margin will be set at the lower value of either the requested GPP predetermined amount or the Pillar 2 Guidance of an institution. Nonetheless, a different margin may be set depending on the circumstances of the case. This applies for institutions under the supervision of ECB.
    • EC adopted the work program for 2023. EC has put forward a series of regulatory reforms in the area of investment, disclosure of information, banking, and insurance. It will seek further progress in building the Capital Markets Union. During the year, among other initiatives, EC will also propose a package of measures to facilitate retail investment, while data access in financial services will be further improved with an initiative for a framework on open finance. It will also revise the Payment Services Directive, to support innovation while ensuring easier and safer use of online payment services and better protecting users against fraud and abuse. To ensure that the EU’s common currency is fit for the digital age, EC will table a proposal to lay down the principles of a digital euro before its potential issuance by ECB.
    • ESMA withdrew the credit rating agency (CRA) registration of Rating-Agentur Expert RA, GmbH (RAEX), published guidelines on the scope of the CRA Regulation, announced a change its Union Strategic Supervisory Priorities (USSPs) to include ESG disclosures alongside market data quality. and has been recognized for its environmental management system under the European Eco-Management and Audit Scheme (EMAS) and ISO 14001 by the French Ministry for the Ecological Transition for a duration of three years.
    • The Chair of the Joint Committee of ESAs issued a statement summarizing the main activities and key achievements of the Joint Committee since the last ECON hearing in the areas of risk assessment, sustainable finance, digitalization and consumer protection. The Joint Committee of ESAs also published a list of deliverables for the past 12 months, including publications on the Sustainable Finance Disclosure Regulation (SFDR), digital finance, digital operational resilience, and the annual work program.

     

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    Keywords: Europe, EU, Banking, Basel, Reporting, ESG, Lending, FINREP, PSD2, Open Finance, Regtech, Disclosures, Sustainable Finance, Resolution Framework, IRRBB, SFRDP Taxonomy, Single Rulebook, CRA, Work Program, ESA, EBA, ESMA, ECB, EC, SRB

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