1. Governor of the Central Bank of Ireland’s observations on the 2024 IMF annual meeting
On 31 October 2024, Governor of the Central Bank (“Central Bank”), Gabriel Makhlouf, published a blog post detailing some of the key themes discussed at the annual meeting of the international monetary fund (“IMF”), at which he was an attendee.
The Governor noted that the meeting took place against a background where economic activity has proven to be resilient, global growth has remained steady and inflation is continuing to stabilise. However, he sounded a note of caution and pointed out that growth prospects over the medium term horizon are weak. This stems from low growth, high debt and increasing geoeconomic fragmentation. Governor Makhlouf also referenced the IMF’s Global Financial Stability Report, noting its conclusions that near term financial stability risks remain contained but increasing vulnerabilities could worsen future downside risks.
Governor Makhlouf set out some of the key themes that were discussed at the IMF meeting, from a financial services perspective, the following should be noted:
the need for continued and close monitoring of risks in the financial sector for banks and non – banks with an emphasis on the importance of implementation of internationally agreed financial sector reforms;
- improving the efficiency of financial markets with a focus on progress in the area of payments innovation;
- the Capital Markets Union was also an important theme in the context of its progression in light of an expected increase in financing demands due to the green and digital transitions; and
- the importance of international cooperation in the face of increased global fragmentation.
Governor Makhlouf also detailed that the Central Bank’s work on the role played by non – banks in the financial system was of considerable interest to the IMF including the role that Ireland and its financial sector plays in delivering global financial stability.
The increasing interconnectedness of the funds sector to the wider financial system was also highlighted as an increasing area of focus at an international level.
2. European Council adopts legislation amending Solvency II and introducing new rules on IRRD
On 5 November 2024, the Council of the European Union (“Council”) adopted two pieces of legislation that amend the Solvency II directive and introduce new rules by way of a directive on insurance recovery and resolution (“IRDD”).
The amendments to the Solvency II directive are aimed at increasing the role of the insurance and reinsurance sector in the provision of long – term private sources of investments to European businesses and will make the economy more resilient by supplying protection against a wide range of risks. Such an approach supports the strengthening of the capital markets union, finances the green and digital transitions and boosts Europe’s economic growth.
High market volatilities and prolonged low levels of interest rates could be particularly harmful for the profitability and the solvency position of insurance and reinsurance undertakings. The sensitivity of insurance and reinsurance undertakings to market and economic developments calls for particular caution and an adequate framework to manage potential deteriorations of the financial position of such undertakings. Some recent failures and near - failures, in particular of a cross - border nature, illustrated weaknesses of the current framework that need to be addressed to organise the orderly exit from the market of insurance or reinsurance undertakings. IRDD aims to address these matters by protecting policy holders while minimising the impact on the economy, the financial system and avoiding recourse to taxpayers’ money.
Next Steps
Both directives are expected to be published shortly in the Official Journal of the European Union and will enter into force 20 days after such publication. The directives will apply two years after their entry into force.
3. Delegated Regulation amending CRR postponing application date of own funds requirements for market risk published in official journal of the EU
On 31 October 2024, Commission Delegated Regulation (“Delegated Regulation”) amending the Capital Requirements Regulation (“CRR”) as regards the application date of the own funds requirement for market risk, was published in the Official Journal of the European Union (“OJEU”).
Article 1 of the Delegated Regulation amends the CRR with the insertion of Article 520a which states that until 1 January 2026, institutions are required to continue to apply Part Three, Title IV as well as the market risk requirements of Articles 430, 430b, 445 and 455 of the CRR. Accordingly, current market risk requirements, which incudes the calculation of own funds requirements for market risk and market risk reporting and disclosure requirements, will continue to apply until 1 January 2026.
From 1 January 2026, the market risk requirements as per the Basel Committee on Banking Supervision’s (“BCBS”) fundamental review of the trading book (“FRTB”) will apply as binding requirements for the calculation of own funds requirements for market risk.
The European Commission has considered it necessary to delay the application date of the own funds requirements for market risk due to the fact that there have been delays in the implementation of the FRTB standards in BCBS member jurisdictions with a large number of internationally active banks. Consequently, there is a significant risk of distortions to the international level playing field. For more detail on this point, please see the FIG Top 5 at 5 dated 22 August 2024.
Next Steps
The Delegated Regulation shall enter into force the day after its publication in the OJEU, being 1 November 2024, and will apply from 1 January 2025.
4. European speeches: (1) Statement of the Eurogroup on competitiveness and (2) Frank Elderson of the ECB reflects on 10 years of the SSM
1. Eurogroup issues statement on the competitiveness of the European economy
On 4 November 2024, the Eurogroup issued a statement (“Statement”) on the competitiveness of the European economy. The Statement summarises the work that the Eurogroup undertook in respect of considering Europe’s competitiveness challenges and the sources that informed its approach as ultimately set out in the Statement. As a result of this work, the Eurogroup have formulated a set of policy priorities and actions in order to address both emerging and persistent competitiveness challenges. These priorities and actions are set out in detail in the Statement. From a financial services perspective, one of the priorities is of direct relevance - “Coordinating investment strategies to finance EU priorities”. The Statements notes that the necessary funding required to advance EU priorities should primarily come from private sources and further states that this cannot fully happen without deepening the Capital Markets Union.
2. Frank Elderson of the ECB delivers speech reflecting on the first decade of the SSM
On 4 November 2024, Frank Elderson, member of the executive board of the European Central Bank (“ECB”) and vice - chair of the supervisory board of the ECB, delivered a speech (“Speech”) at a conference entitled “10 Years of SSM – Looking back and looking forward”.
In his Speech, Mr Elderson details the history of the Single Supervisory Mechanism (“SSM”) ultimately noting that banks under SSM supervision have shown remarkable resilience, even under very challenging circumstances, highlighting that rather than being shock propagators, they have become shock absorbers, stabilising the economy rather than destabilising it.
Mr Elderson discusses the many challenges, risks and uncertainties that exist today, noting that they are all happening at the same time, requiring supervisors and banks to be able to react effectively to these many unprecedented, converging challenges.
In order to address those challenges, Mr Elderson details the reforms that the SSM has introduced such as:
- the implementation of a supervisory risk tolerance framework allowing SSM supervisors to focus on those risks that are most pertinent and the supervisory actions that are most impactful;
- the reform of its supervisory review and evaluation process (“SREP”) to make it more targeted and risk – based; and
- the use of supervisory technology tools, known as suptech, to detect risks early on and move closer to real - time supervision.
In order to demonstrate the effectiveness of the SSM’s improvements, Mr Elderson points to the cyber resilience test carried out by supervisory board of the ECB earlier this year. For more detail please see the FIG Top 5 at 5 dated 1 August 2024.
Mr Elderson highlights the area of risk data aggregation, reported as being the lowest - scoring sub - category of internal governance in the 2023 SREP, noting that despite the work done by supervisors over the years, too many banks still do not have adequate risk data aggregation and reporting capabilities. In this regard, Mr Elderson states that “ECB Banking Supervision is stepping up the escalation ladder, using more intrusive supervisory tools to ensure that banks have adequate risk data aggregation capabilities.”
The contention that regulation and supervision have become too conservative, to the point that they may constrain growth, was also addressed by Mr Elderson. In this regard, Mr Elderson was clear, stating that such an argument is misguided. He emphasised that safety and competitiveness are not opposing forces and that resilient and well - capitalised banks are a pre - condition for competitiveness and sustainable growth.
Mr Elderson also highlighted the need to deepen the capital markets union to meet the financial demands in respect of the green transformation and digitalisation, ultimately fostering EU competitiveness. He also pointed out the following:
- the banking union should be completed;
- the crisis management and deposit insurance framework must be enhanced so that the failures of small and medium - sized banks can be dealt with more effectively;
- discussions as regards the setting up of a European level public backstop to provide temporary liquidity funding to banks following resolution should be resumed; and
- the introduction of a common European deposit insurance scheme should be prioritised.
5. Further European Updates: (1) European Commission adopts six delegated regulations under MiCA and (2) ESAs publish joint guidelines on oversight cooperation and information exchange between the ESAs and competent authorities under DORA
1. European Commission adopts six delegated regulations under MiCA
On 31 October 2024, the European Commission (“Commission”) adopted six Delegated Regulations under the regulation on markets in crypto – assets (“MiCA”). The Delegated Regulations are as follows:
- Commission Delegated Regulation C(2024) 6914 with regard to regulatory technical standards (“RTS”) specifying the procedure for the approval of a crypto - asset white paper.
- Commission Delegated Regulation C(2024)6910 with regard to RTS specifying the methodology to be applied by issuers of asset - referenced tokens (“ARTs”) and of e - money tokens (“EMTs”) in a non - EU currency for estimating the number and value of transactions associated to uses of such tokens ‘as a means of exchange’, for the purpose of the reporting in Article 22(1)(d) of MiCA. This includes provisions on the scope of the transactions to be reported by issuers under Article 22(1)(d) of MiCA, including the geographical scope of such transactions, and on how issuers should estimate the number and value of such transactions.
- Commission Delegated Regulation C(2024)6903 with regard to RTS specifying the information to be included by certain financial entities in the notification of their intention to provide crypto - asset services.
- Commission Delegated Regulation C(2024)6904 with regard to RTS specifying the information to be included in an application for authorisation as a crypto - asset service provider.
- Commission Delegated Regulation C(2024)7523 with regard to RTS on continuity and regularity in the performance of crypto - asset services.
- Commission Delegated Regulation C(2024)6911 with regard to RTS specifying the conditions for the establishment and functioning of consultative supervisory colleges.
Next Steps
The Council of the European Union and the European Parliament will now examine all the above Delegated Regulations. If they do not have any objections, the Delegated Regulations will be published in the Official Journal of the European Union and enter into force twenty days after such publication.
2. ESAs publish joint guidelines on oversight cooperation and information exchange between the ESAs and competent authorities under DORA
On 6 November 2024, the European Supervisory Authorities (“ESAs”) published the final version of the joint guidelines (“Guidelines”) regarding the oversight cooperation and information exchange between the ESAs and the competent authorities under the regulation on digital operational resilience (“DORA”).
The Guidelines are issued pursuant to Article 32(7) of DORA and address the following:
- the detailed procedures and conditions for the allocation and execution of tasks between competent authorities and the ESAs; and
- the details on the exchanges of information which are necessary for competent authorities to ensure the follow–up of recommendations addressed to ICT third party service providers to financial entities designated as critical.
The Guidelines seek to ensure that the ESAs and competent authorities have:
- an overview of the areas where cooperation and/or exchange of information between competent authorities and the ESAs is needed in accordance with Article 32(7) of DORA;
- a coordinated and cohesive approach between the ESAs and competent authorities in the exchange of information, and when cooperating for the purpose of oversight activities, to ensure efficiency and consistency as well as the avoidance of duplications; and
- a common approach to the rules of procedure and timelines that apply in relation to cooperation and information exchange, including roles and responsibilities and the means for cooperation and information exchange.
The Guidelines set out that they do not hinder the exchange of further information and extended oversight cooperation between the ESAs and competent authorities.
The scope of the Guidelines relates only to Section II of Chapter V (Articles 31-44) of DORA.
Next Steps
The Guidelines are applicable from 17 January 2025. The Guidelines will be subject to ongoing review by the ESAs.