The need for a consistent agenda between regulators, supervisors and legislators

Tue 02 Apr 2019

With 2019 marking a move for the European Banking Authority (EBA) to Paris in April, regulatory priorities will see the EBA preparing the work of transposing the last Basel III agreements. Following a quantitative and qualitative study, the Commission will be awaiting its opinion in or after June 2019. Further, in the context of EBA mandates on level 2 texts, the finalization of the review of credit risk internal models (IRB repair) is a top priority alongside all forthcoming requests linked to the RRM (risk reduction measure) legislative package (the treatment of software and sustainable finance, the operationalization of market risk, etc.). From a general perspective, on internal models the industry calls for more consistency between the EBA, the ECB (Targeted review of internal models (TRIM) exercise) and the Commission (transposition of the finalization of Basel 3) respective agendas.

European Elections on May the 26^th will see the renewal of European Parliament and European Commission, and thus a new legislative agenda. Beforehand, legislators must prioritize the work to be finalised. Thus the RRM package (including transposition of international standards adopted between 2013 and 2017 and the new rule for provisioning non-performing loans (NPLs)) should be adopted in april 2019 at the latest. These provisions should allow banks to strengthen their solvency and liquidity still further. Besides, the sensitive issue of the European deposit insurance scheme, EDIS for short, the third pillar of the Banking Union, may receive new impetus. Nonetheless, for avoiding any moral hazards, Member States recently declared their wish to pursue discussions following an evaluation stage. The other priorities of this end of legislative period include the regulatory and supervisory framework for investment firms, the harmonization of the covered bonds market and supervision, and the reform of European supervisory authorities “ESAs” which will see the EBA be granted new powers in the area of anti-money laundering and terrorism financing.

In addition, following his appointment as the new chair of the ECB Supervisory Board, Andrea Enria took up the reins of the Single Supervisory Mechanism (SSM) as from January the 2^nd  2019. The SSM is expected to go further into important issues, notably keep monitoring the implementation of IFRS 9 and the strengthening of governance practices. Andrea Enria has stated that the first priority will consist of “completing a clean-up of the banking sector”. In particular, the SSM has already announced the application of minimum levels of provisioning for non-performing loans (NPLs), not only to new issued loans as anticipated by the Commission but also to loans already held by the banks, which is a particular concern for the Italian government.

Further, the SSM remains vigilant over leveraged finance because of the economic context: growing indebtedness of non-financial companies, a risk of an overheated residential or commercial property sector in some countries, against a backdrop of tightening monetary conditions in the more or less medium term. The leveraging observed for certain transactions suggests a significant credit risk for banks and the SSM will be paying particular attention to loan origination criteria. More generally, Interest Rate risk is still a sensitive issue for most of the banks.

Plus 2019 should also see the finalisation of the targeted review of internal models (TRIM)^[1]. Additionally, following the publication of supervisory expectations for internal capital and liquidity adequacy assessment processes (ICAAP/ILAAP) , the banks will need to continue their efforts to strengthen these processes on the basis of sensitive internal approaches: “ICAAP/ILAAP must not be a R(egulatory) CAAP”, Danièle Nouy said before she left the SSM. In addition a very new short term liquidity stress test – “LiST” – came into operation in February 2019, to support the qualitative assessment of liquidity management alongside ILAAP.

Without going into exhaustive detail, we can nonetheless cite two topics that the ECB includes in its agenda: monitoring of illiquid assets and risks relating to information systems and new technologies (ICT risk).

As far as resolution is concerned, the Single Resolution Board (SRB) is extending its perimeter to a second circle of banks for setting new minimum requirements for own funds and eligible liabilities, the so-called MREL. One should also be following closely new support mechanisms to banks by the Italian government and the development of the bail-in regime on which the regulator has been working for the last two years, including revisions to the BRRD and the SRMR[2] as part of the RRM package.

^[1]TRIM will reach completion during 2019.

[2] Banking Recovery and Resolution Directive, Singe Resolution Mechanism Regulation.