Recent regulatory developments focussing on banking and finance. Includes updates relating to COVID-19 regulatory response, CRR, and more.

Contents

• Pillar 2A: PRA PS15/20 on reconciling capital requirements and macroprudential buffers
• COVID-19: PRA CP6/20 on FSCS temporary high balances coverage extension
• COVID-19: ECB blog on supervising the new normal
• CRR materiality threshold for credit obligations past due for less significant institutions: ECB Guideline
• COVID-19: EBA report on implementation of selected COVID-19 policies
• Basel regulatory framework: BCBS progress report on adoption
• Credit valuation adjustment risk framework: BCBS targeted revisions
• Business Banking Resolution Service reports on live pilot perspectives and insights

Pillar 2A: PRA PS15/20 on reconciling capital requirements and macroprudential buffers

Following its consultation in CP2/20, the UK Prudential Regulation Authority (PRA) has published feedback and a policy statement, PS15/20, on reconciling capital requirements and macroprudential buffers under Pillar 2A. The policy is relevant to PRA-authorised UK banks, building societies and PRA-regulated investment firms.

In December 2019, the Financial Policy Committee (FPC) increased the UK countercyclical capital buffer (CCyB) rate that it expects to set in a standard risk environment from in the region of 1% to in the region of 2%. As a result, in CP2/20, the PRA proposed to reflect the additional resilience associated with these higher macroprudential buffers with a reduction in Pillar 2A capital requirements.

The PRA states that no changes have been made to the proposals as consulted on in CP2/20.

The Appendix to PS15/20 provides a link to the revised version of supervisory statement, SS31/15: The Internal Capital Adequacy Assessment Process (ICAAP) and the Supervisory Review and Evaluation Process (SREP).

The revisions to SS31/15 applied from 6 July 2020. The PRA states that it will assess the appropriateness of any reduction to ensure that the remaining Pillar 2A provides sound management and coverage of the risks to which each firm is exposed. It will apply the Pillar 2A reduction, where applicable, on or before 16 December 2020 and for efficiency align the assessment to related processes.

The PRA notes that in March 2020, the FPC reduced the CCyB rate to 0% in response to COVID-19. In light of the pandemic, the PRA will temporarily increase the PRA buffer for all firms that receive a Pillar 2A reduction. The PRA buffer will increase by 56% of the firm’s total Pillar 2A reduction (that is, the minimum amount of core equity tier 1 (CET1) the PRA requires for firms to meet Pillar 2A requirements) until the UK CCyB rate begins to increase towards 2%.

The PRA intends to review its Pillar 2A methodologies in more detail by 2024 in light of changes in buffers and improvements in the way risk-weighted assets (RWAs) are measured following the Basel III standards.

COVID-19: PRA CP6/20 on FSCS temporary high balances coverage extension

On 9 July 2020, the PRA published a consultation paper, CP6/20, on a proposal to extend coverage under the Financial Services Compensation Scheme (FSCS) for temporary high balances (THBs) from six to 12 months from the date of the deposit, or the first date the THB becomes legally transferable to the depositor.

The proposed extension of coverage would be for a temporary period in response to the impact of COVID-19 on residential property and investment markets, and access to banking services for some depositors. THB coverage would revert back to six months from 1 February 2021.

The proposed extension in THB coverage would be accompanied by consequential changes to the Depositor Protection Part of the PRA Rulebook and to paragraphs 30, 47a, and 47b of the Deposit Guarantee Scheme Statement of Policy.

The short consultation ends on 23 July 2020.

COVID-19: ECB blog on supervising the new normal

On 7 July 2020, the European Central Bank (ECB) published a blog post, by Kerstin af Jochnick, ECB Supervisory Board Member, on "Supervising the new normal".

Ms af Jochnick shares her views on the following questions:

• in the near term, how can we maintain effective supervisory engagement with banks during the crisis; and
• as the immediate effects of the crisis fade away and a new normal sets in, which aspects will be crucial in determining the shape of the European banking sector in the medium term?

CRR materiality threshold for credit obligations past due for less significant institutions: ECB Guideline

Guideline (EU) 2020/978 of the ECB on the exercise of the discretion under Article 178(2)(d) of the Capital Requirements Regulation ((EU) No 575/2013) (CRR) by national competent authorities (NCAs) in relation to less significant institutions (LSIs) with regard to the threshold for assessing the materiality of credit obligations past due, has been published in the Official Journal of the EU (OJ). The materiality threshold refers to the point at which a bank decides a debtor is in default on its loan.

The CRR had required the competent banking supervision authorities to determine this threshold, although the ECB had already defined it for the banks that it supervises directly in a regulation published in November 2018.

The new Guideline specifies how national supervisors should exercise their discretion in this regard for less significant banks, aligning it with the threshold defined in the ECB regulation for significant banks. The ECB states that the alignment of the materiality threshold for credit obligations past due for all banks, regardless of whether they are supervised directly by the ECB or by national supervisors, contributes to the consistent application of supervisory standards to both significant and less significant credit institutions.

This Guideline takes effect on the day of its notification to the NCAs of the participating member states. These NCAs must comply with the guideline no later than 31 December 2020.

COVID-19: EBA report on implementation of selected COVID-19 policies

On 7 July 2020, the European Banking Authority (EBA) published a report on implementation of selected COVID-19 policies. It is the EBA's first "COVID-19 implementation report", in which the EBA provides clarifications on questions raised in the context of its monitoring of the implementation of COVID-19 policies. The EBA notes that, given that new issues may continue to arise, it might update the report at a later stage.

The report includes:

• questions and answers brought to the attention of the supervisory community on the Guidelines on legislative and non-legislative moratoria on loan repayments;
• a summary overview of the general payment moratoria in place in the EU; and
• considerations of criteria that institutions should adopt with regard to operational risk in the context of COVID-19, with the aim of reducing possible inconsistencies in the calculation of capital requirements calculations related to operational risk.

Basel regulatory framework: BCBS progress report on adoption

The Basel Committee on Banking Supervision (BCBS) has published its eighteenth progress report on BCBS members' adoption of the Basel regulatory framework, as at the end of May 2020.

Credit valuation adjustment risk framework: BCBS targeted revisions

The BCBS has published an updated standard for the regulatory capital treatment of credit valuation adjustment (CVA) risk for derivatives and securities financing transactions.

The revisions include:

• recalibrated risk weights;
• different treatment of certain client cleared derivatives; and
• an overall recalibration of the CVA standardised (SA-CVA) and basic (BA-CVA) approaches.

These revisions will be reflected in the consolidated Basel III framework. The updated standard comes into effect on 1 January 2023 and replaces the previous version of the standard, which was published in December 2017.

Business Banking Resolution Service reports on live pilot perspectives and insights

The Business Banking Resolution Service (BBRS) has published a report, "BBRS: Live Pilot Perspectives" in which it provides a summary of interviews conducted with four of the key individuals working on the development of the BBRS' service. The BBRS is a dispute resolution service set up to resolve disputes between eligible small and medium sized enterprises (SMEs) and participating banks. It is being established following Simon Walker's independent review of the scale and complexity of banking complaints from SMEs.

During the live pilot, the BBRS has reviewed over 40 real cases and how they can be resolved. The report notes that this is a critical part of the work to ready the BBRS for the launch of its service in autumn 2020.

The interview summaries included in the report cover the perspectives and insights that have been obtained regarding the practical operation of the BBRS and the lessons learned so far.

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