Recent regulatory developments of interest to financial institutions.
Contents
- COVID-19: PRA letter to credit unions and direction modifying minimum provisioning requirements
- COVID-19: BCBS additional measures to alleviate impact
- COVID-19: FCA welcomes BCBS-IOSCO one-year deferral of global initial margin requirements
- Basel III monitoring exercise: BCBS and EBA reports
- CRR: EBA report on EU banks' compliance with liquidity measures
Following a seasonal break, the next update will be published on 27 April 2020.
COVID-19: PRA letter to credit unions and direction modifying minimum provisioning requirements
On 8 April 2020, the Prudential Regulation Authority (PRA) published a letter to directors, staff members and volunteers of PRA-regulated credit unions on COVID-19 detailing the following:
- a PRA rule modification by consent – the PRA has published a direction modifying a PRA rule on minimum provisioning requirements, which is available to all credit unions from 8 April 2020 until 1 January 2021. Credit unions can consent to the modification so that the minimum provisioning requirements for bad debt will be reduced in line with the rates set out in the letter. The PRA warns that credit unions should consider carefully if and how they want to consent to the modification, and highlights some pertinent considerations;
- the PRA's current supervisory focus and priorities for credit unions – among other things, the PRA states that at a time where meeting face-to-face is a challenge, credit union boards should think carefully about how board decisions can be made. They should also consider what management information is collected and provided for board members so that they are able to identify, prioritise and focus on the risks their credit union is facing. Credit unions are expected to act reasonably, prudently and in the best interests of members. The PRA also refers to capital and liquidity requirements; and
- delays for regulatory reporting – as previously announced, the PRA will accept delayed submission for regulatory reports due on or before 31 May 2020. In addition, a two-month extension is granted for annual returns and accounts and a one-month extension is granted for quarterly returns. The PRA reminds credit unions that a timely submission is still encouraged and asks that they only use the extensions if they are experiencing particular challenges.
COVID-19: BCBS additional measures to alleviate impact
On 3 April 2020, the Basel Committee on Banking Supervision (BCBS) announced additional measures to alleviate the impact of COVID-19 on the global banking system. The BCBS's technical clarifications, in the form of Q&A, aim to ensure that banks reflect the risk-reducing effect of national measures when calculating their regulatory capital requirements.
- Expected credit loss accounting – the BCBS reiterates the importance of expected credit loss (ECL) accounting frameworks as a forward-looking measure of credit losses, and expects banks to continue to apply the relevant frameworks for accounting purposes. Banks should use the flexibility inherent in these frameworks to take account of the mitigating effect of the extraordinary support measures related to COVID-19. In addition, the BCBS has agreed to amend its transitional arrangements for the regulatory capital treatment of ECL accounting. The adjustments will provide jurisdictions with greater flexibility in deciding whether and how to phase in the impact of expected credit losses on regulatory capital.
- Margin requirements for non-centrally cleared derivatives – the BCBS and the International Organization of Securities Commissions (IOSCO) have agreed to defer the final two implementation phases of the framework for margin requirements for non-centrally cleared derivatives by one year. The BCBS explains that, with this extension, the final implementation phase will take place on 1 September 2022. The BCBS and IOSCO have published a revised version of the margin requirements to reflect this revision. The revised document features no other substantive changes to the margin requirements framework.
- Global systemically important banks annual assessment – the BCBS will conduct the 2020 global systemically important bank (G-SIB) assessment exercise as planned, based on end-2019 data, but has agreed not to collect the memorandum data included in the data collection template. It has also decided to postpone the implementation of the revised G-SIB framework by one year, from 2021 to 2022.
The BCBS will continue to monitor the banking and supervisory implications of Covid-19, and actively coordinate its response with the Financial Stability Board (FSB) and other standard-setting bodies. It reiterates its view that capital resources should be used by banks to support the real economy and absorb losses.
COVID-19: FCA welcomes BCBS-IOSCO one-year deferral of global initial margin requirements
On 8 April 2020, the Financial Conduct Authority (FCA) published a statement in which it welcomes the BCBS and IOSCO joint statement published on 3 April 2020 (see above) which announced a one-year deferral of the September 2020 and September 2021 phase-ins of the global initial margin requirements for non-centrally cleared derivatives.
The FCA states that it will consider, together with other authorities, how to implement the changes.
Basel III monitoring exercise: BCBS and EBA reports
The BCBS has published a report summarising the aggregate results of its latest Basel III monitoring exercise, based on data as of 30 June 2019.
The report sets out the impact of the Basel III framework that was initially agreed in 2010 as well as the effects of the BCBS's December 2017 finalisation of the Basel III reforms and the finalisation of the market risk framework published in January 2019. Given the June 2019 reporting date, the results do not reflect the economic impact of COVID-19 on participating banks. Nevertheless, the BCBS believes that the information contained in the report will provide relevant stakeholders with a useful benchmark for analysis.
An accompanying press release summarises the results of the monitoring exercise. It also states that to provide additional operational capacity for banks and supervisors to respond to the immediate financial stability priorities resulting from the impact of COVID-19, the BCBS will not collect Basel III monitoring data for the end-June 2020 reporting date. Therefore, it will not publish a report in spring 2021. The BCBS aims to publish the next Basel III monitoring report based on end-December 2019 data in autumn 2020.
The European Banking Authority (EBA) has also published its report on the Basel III capital monitoring exercise, based on the data as of 30 June 2019.
CRR: EBA report on EU banks' compliance with liquidity measures
The EBA has published a report providing an update on liquidity measures under Article 509(1) of the Capital Requirements Regulation (CRR).
The report evaluates the liquidity coverage requirements currently in place in the EU. The EBA notes that the results show that EU banks have continued to improve their compliance with the liquidity coverage ratio (LCR). At the reporting date of 30 June 2019, EU banks' average LCR was 147% and 78% of the banks in the sample had an LCR above 140%. The aggregate gross shortfall amounted to EUR4.7 billion, corresponding to three banks that had monetised their liquidity buffers during the financial crisis.
The EBA highlights that the report is based on data before COVID-19.
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