Banking agency in Europe advocates and responds on changing prudential standards

European Banking Authority issues views on future prudential requirements and standards across the industry

With the EBA having issued its detailed work programme for 2017, it has formally responded to a European review of the framework for large exposures forming part of the Capital Requirements Regulation (CRR). Not surprisingly, it has proposed a number of changes and new measures to create a regime which advocates a more harmonised and simplistic approach.
In particular, it suggests that the requirements and standards in place across the EU could still be better co-ordinated and aligned (e.g. with Basel Committee on Banking Supervision ‘BCBS’ standards). This could involve some strengthening of the appropriate capital-base calculations and methodology, but also the refinement or removal of certain exceptions and discretions applied by member states and their competent authorities to deliver a clearer and more consistent application of the framework across the relevant jurisdictions. Within its own report issued towards the end-October it has sought to highlight various operational inconsistencies and weaknesses, as well as how the techniques and approaches to breach management, reporting and treatment of Group/connected entities etc. might help enhance the quality of this area of capital-management, and risk-control and business-modelling. It might also help better balance the assessment and working limits around large exposures, such as that required for Global Systemically Important Institutions (G-SII’s). Where certain current exemptions are considered to have a limited practical pan-EU use (e.g. overnight interbank exposures on minor trading currencies, or exposures to recognised exchanges) then the EBA has proposed these are deleted and argued these steps would have little or no resulting impact.

More recently, the EBA has issued consultation on guidelines for payment and e-money institutions looking to seek authorisation and registration under the revised Payment Services Directive (PSD2), future information standards and requirements for the future authorisation of credit institutions, and also new standards on the reporting of information for supervisory purposes. But it has also responded or issued reports on other topical matters too including the planning and impact on banks of the new International Financial Reporting Standards (IFRS9), and continued EU developments towards new ‘counterparty’ (CRR) and ‘market’ (MKR) risk frameworks. Finally, the EBA has also issued consultation, running to early February 2017, on the need and scope for a new prudential regime for investment firms which better reflects and accounts for the associated and varied risks and business-models of investment firms, and could see new and alternatives ways for setting the capital and liquidity requirements of such firms.

Management representatives from both the European Central Bank (ECB) and European Banking Authority (EBA) have met during H1 November with members of the European Parliaments’ Committee on Economic and Monetary Affairs (ECON). They discussed plans and also exchanged views on potential reforms of prudential standards and risk frameworks impacting banking/credit institutions, as well as the finalisation of Basel III/Basel IV. Whilst an objective to avoid and mitigate any materially raised capital requirements whilst delivering a fair and risk-based framework remains, an underlying momentum of course exists for reinforcing a single supervisory mechanism (SSM) approach underpinning the ECB’s supervisory role of banking since 2014.