1. Minister for Finance announces publication of consultation on the implementation of the Capital Requirements Regulation III
On 20 August 2024, the Minister for Finance, Jack Chambers, announced the publication of a public consultation (“Consultation”) on the implementation of the Capital Requirements Regulation III (“CRR III”).
The aim of the Consultation is to obtain submissions on the implementation of the national discretions contained in CRR III. The majority of the amendments to the Capital Requirements Regulation of 2013 (“CRR”) will take direct effect from 1 January 2025. However, amendments relating to the calculation of own funds requirements for market risk regime have been postponed, by one year, to January 2026 (see update below on same).
Section 1.4 of the Consultation document sets out the national discretions contained in CRR III and are as follows:
- Member State discretion for institutions in relation to the calculation of the total risk exposure amount when calculating the own funds requirements; and
- Member State discretion in relation to the transitional arrangements for the output floor, specifically Article 465(5) allows for lower risk weights to be applied to exposures secured by mortgages on residential property.
In this regard, the Department of Finance is inviting comments on the following:
- Whether the national discretions should be availed of; and
- How the national discretions should be availed of.
Clear reasoning for any positions set out in the comments should also be included.
Further, in responding to the Consultation, the Department of Finance (“Department”) has stated that the following is welcome:
- Views on the specific questions set out in the Consultation document;
- Details of any issues or concerns a party responding feels should be considered in dealing with the particular topic being addressed in their response; and
- Where appropriate, some analysis or views on the regulatory and / or financial impact of the proposed approach.
Comments received will be taken into consideration when deciding how best to implement CRR III in Irish law.
The Department has highlighted that it does not propose to revisit discretions contained in the CRR and on which decisions were made during the previous implementation processes.
Next Steps
The consultation period will run from 20 August 2024 to 17 September 2024. The Department has stated that it may invite key stakeholders to meet with them, including representative bodies and other interested groups or individuals.
A separate consultation on the national discretions contained in the Capital Requirements Directive VI will be published in the coming months.
2. EBA publishes a no-action letter and draft technical standards regarding market risk requirements under CRR III
1. EBA publishes a no-action letter on postponement of CRR III market risk requirements in the EU
On 12 August 2024, the European Banking Authority (“EBA”) responded to the European Commission’s (“Commission”) recent adoption of a delegated act postponing the application of the market risk framework in the EU by publishing a no-action letter (“Letter”) on the boundary between the banking book and the trading book.
The Letter complements the delegated act by advising competent authorities not to prioritise any supervisory or enforcement action in relation to the application of the provisions on the boundary between the non-trading and the trading book, until the entire fundamental review of the trading book (“FRTB”) standard is implemented in the EU and is used for calculating own funds requirements for market risk. Additionally, the EBA has clarified that its no-action letter of February 2023, addressing the same topic, will continue to apply
Specifically, the EBA’s position is that the front-loaded application of the revised provisions on the boundary and internal risk transfers, taking into consideration that the rest of the FRTB framework is not yet implemented, would result in institutions having to engage in a costly, complex and fragmented two stage implementation.
The Letter also states that the Commission should introduce a legislative proposal to provide the necessary legal certainty on these issues, preferably by way of an accelerated adoption procedure by the EU co-legislators.
The EBA also published a document setting out the EBA’s stance on technical questions and issues arising from the postponement. Some of the matters addressed include:
- The calculation of risk-weighted assets;
- Disclosures;
- Reporting;
- Application of the ‘prudential boundary’ approach of the operational risk framework; and
- The implication of the FRTB postponement on the supervisory benchmarking exercise carried out under article 78 of the CRD IV Directive.
2. The EBA publishes final draft technical standards on market risk as part of its roadmap for the implementation of the Banking Package in the EU
On 13 August 2024, the European Banking Authority (“EBA”) published a final report (“Report”) on amendments to regulatory technical standards (“RTS”) on market risk. The amendments reflect reforms made to the Capital Requirements Regulation (575/2013) (“CRR”) by the CRR III Regulation relating to the fundamental review of the trading book (“FRTB”).
The Report contains final draft RTS amending three Commission Delegated Regulations as follows:
- The profit and loss attribution requirements in accordance with Article 325bg CRR3:
These amendments aim to reflect the new wording included in Article 325bg CRR. The amendments also remove the formulae for aggregating the own funds requirements for market risk from the delegated regulation as they now been included directly in Article 325ba CRR; - The modellability assessment of risk factors to be classified as modellable or as non-modellable in accordance with Article 325be CRR3:
Amendments in this regard include documentation requirements supporting the competent authority in assessing whether to allow institutions to use market data provided by third-party vendors in the assessment of modellability of risk factors. This has been introduced in line with the new provision in Article 325be stating that a competent authority may allow institutions to use market data from third-party vendors to perform the modellability assessment; and - The treatment of foreign-exchange (“FX”) and commodity risk in the banking book in accordance with Article 325 CRR3:
These amendments relate to requirements ensuring that institutions can identify positions that are subject to FX risk only because of the translation risk resulting from the consolidation process. The amendments also ensure that institutions using internal models have clear policies in place clarifying which positions are managed by classical trading desks, and which positions that are managed in the context of a notional trading desk.
Next Steps
The EBA will submit the final draft RTS to the Commission for endorsement, after which they will be subject to scrutiny by the European Parliament and the Council of the EU before being published in the Official Journal of the European Union.
3. Interpretation of the scope of professional secrecy requirements under CRD IV Directive (EFTA Court)
The European Free Trade Association (“EFTA”) considered the scope of the obligation of professional secrecy imposed on national competent authorities (“NCAs”) under the CRD IV Directive (“Directive”) in the case X v Finanzmarktaufsicht.
In this case, the appellant who was a majority shareholder and a chair of the board of directors of a bank established in Liechtenstein, proposed to acquire a qualifying holding in a bank established in the Grand-Duchy of Luxembourg. In relation to the acquisition, an exchange of information took place between the Financial Market Authority (“FMA”) of Liechtenstein and the competent Luxembourg authority (“CSSF”). The appellant claimed that the negative information provided by the FMA to the CSSF resulted in the counterparty stepping back from the planned sale to the appellant of the holding in the Luxembourg bank. The appellant requested access to the files containing the information that was provided to the CSSF but this was denied, which raised the issue of the scope of the professional secrecy obligation imposed on national competent authorities under the Directive.
In accordance with Article 53(1) of the Directive, all individuals working, or who have previously worked for an NCA are bound to professional secrecy surrounding any confidential information that has been exposed to them. Articles 53 to 61 deal with specific admissible uses of confidential information, but the Directive does not define which information held by NCAs should be considered confidential.
In open Court on 9 August 2024, the Court held that:
- confidential information that is covered by the obligation of professional secrecy under Article 53 shall be classified as any information in the possession of NCAs which is not available to the public and that will presumably have an adverse effect on the interests of the natural or legal person who provided that information, or of third parties, or the proper operating of the system for supervising the actions of credit institutions and investment firms; and
- the protection of the confidentiality of the information covered by the requirement of professional secrecy under Article 53(1) must be carried out in accordance with the general principles of EEA law. This includes:
- the principle of effective judicial protection;
- the rights of the defence; and
- the protection against arbitrary or disproportionate intervention by public authorities in the sphere of private activities.
In order to come to a decision, the Court used the judgement in Bundesanstalt für Finanzdienstleistungsaufsicht v Baumeister, which dealt with the equivalent provisions in the Markets in Financial Instruments Directive.
4. The EBA publishes results from its first fact finding exercise on creditworthiness assessment practices of non-bank lenders
On 7 August 2024, the European Banking Authority (“EBA”) published the results of a fact finding exercise (“Exercise”) on the creditworthiness assessment (“CWA”) practices of non – bank lenders (“NBLs”). One of the key drivers behind the need for the Exercise was the Consumer Trends Report published in April 2023, which displayed a persistent increase in over – indebtedness and arrears of borrowers across the European Union (“EU”). The objective of the Exercise was to gain a deeper understanding of the degree to which NBLs contribute to over - indebtedness and arrears.
National competent authorities (“NCAs”) across the EU selected 125 NBLs to take part in the fact finding exercise, using the period between 2020 and 2023 as a reference. The EBA evaluated the CWA of each NBL and their compliance with the regulatory frameworks of their Member State, along with the types of loans offered and their organisational setup.
The EBA concluded that some NBLs provide services for those who may not be able to access traditional banks for credit, however, a remarkable number of the surveyed NBLs seemed to apply insufficient practices for information gathering and verification during their CWAs. The revised Consumer Credit Directive (“CCD”) establishes more transparent and strict CWA requirements which are expected to address the issue of consumer credit. These requirements will be applicable from November 2026.
The Exercise identified an inconsistent definition of NBLs and an inconsistency in the regulatory framework for authorisation at EU level. This the EBA explained can result in an uneven set of rules applying throughout EU Member States, something which the CCD will address through rules for the admission, registration and supervision of creditors and credit intermediaries that are non - credit institutions and non - payment institutions. The CCD has also established rules on the requirement to evaluate the creditworthiness of the consumer.
The Exercise also highlighted that there has been an increase in the number of supervisory actions taken against NBLs by NCAs which demonstrates the need for specialised resources committed to the supervision of non – bank lending activities.
In the area of market trends, the Exercise outlined that:
- the proportion of credit granted under the CCD during the reporting period increased, with a peak of 43%; and
- the proportion of loans granted under the Mortgage Credit Directive by the surveyed NBLs decreased from 58% to 45%.
Next Steps
The EBA explains that it will continue with supervising the activities of NBLs through the biennial Consumer Trends Report and when necessary, the EBA will initiate new ad hoc action to ensure effective protection of EU consumers.
5. The EBA amends technical standards specifying the data collection for the 2025 benchmarking exercise
On 9 August 2024, the European Banking Authority (“EBA”) published its final draft Implementing Technical Standards (“ITS”) which outlines the data collection for the 2025 benchmarking exercise. For the 2025 benchmarking exercise, the following changes are proposed:
- For market risk
- Due to the one year postponement of the implementation of the new Alternative Internal Model Approach (“AIMA”) framework announced by the European Commission, the templates and instructions for the AIMA framework were removed and the previous templates were brought back into force;
- An extension to the current set of instruments and portfolios is proposed to benchmark banks’ applications of the regulatory sensitivities-based-method aggregation logic. In order to provide banks with additional time to prepare for the exercise, the 2025 exercise timeline was proposed; and
- The most consequential change introduced by the draft ITS is the EBA suggesting that the alternative standardised approach (“ASA”) validation portfolios should be extended to all asset classes.
- For credit risk
- Insignificant changes have been suggested, particularly for the instructions associated with the five columns of the templates C.102 and C.103 and 2 columns of the template C.105.
The main aims of the EBA supervisory benchmarking are as follows:
- the supervisory evaluation of the quality of internal approaches;
- to act as a powerful tool in explaining and monitoring risk weighted assets' variability over a period of time, as well as specifying related implications for prudential ratios and the relevant policy; and
- to allow banks to compare their own risk assessment with other banks’ assessment on comparable portfolios.
Next Steps
This draft ITS replaces or adds to the existing templates, which are set out in the Annexes in an attempt to create a consolidated version of the updated draft ITS package.
These draft ITS will be submitted to the European Commission for review before they are published in the Official Journal of the European Union. The technical standards will be applicable 20 days following the publication in the Official Journal.