Climate change valuation adjustment: introducing a climate change scenario extrapolation to long dated CDS curve
Perspectives
Climate change valuation adjustment: introducing a climate change scenario extrapolation to long dated CDS curve
Wed 08 Feb 2023
The global climate crisis has triggered the financial sphere to address the way in which it conducts business. Climate risk consideration is currently growing in the banking industry but should also be considered by banks in the Credit Valuation Adjustment (CVA) when pricing derivatives.
The credit risk for long dated derivatives (beyond 10 years), reflected in Credit Value Adjustment, requires CDS curves that are only traded up to 10 years. Banks must resort to extrapolating these curves based on their own assumption (occasionally corroborated with auction trades or broker quotes). As climate change impacts long predated credit risk, a CDS curve extrapolation factoring climate change can be considered for counterparties most likely to be impacted.
The methodology introduced in the article to derive the climate change impact on CVA, namely Climate Change Valuation Adjustment (CCVA), is inspired by the article of Kenyon and Berrahoui, 2021. The following offers a second methodology based on an alternative extrapolation of the CDS curve derived from the adjustment of IFRS9 credit risk models to include transition risk scenarios.
The objective is to link the long-term credit risk impacted by a behavioural change in the market in response to the implementation of various policies aiming to transition towards a carbon-neutral economy. Transition risk refers to financial losses that a corporate may incur, directly or indirectly, because of the process of a lower carbon transition and a more environmentally sustainable economy. The potential impact of this transition risk on the CVA for the banking industry is highlighted in this article mainly focusing on European Corporates. As transition risk does not affect Financials and Industrials in the same way and intensity, the following sectors have been selected to represent the latter: Automobiles, Oil companies and Insurance & reinsurance companies.
Learn more about how to account for the climate change impact in the attachment below.
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Nicolas Cerrajero Director, Market and Counterparty Credit Risk at Mazars in the UK
Mariem Bouchaala Associate Director - London
Amine Hedidou
Joseph Burrin Junior Quant Editor Analyst - London
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It is truly amazing the turmoil 88 pages can produce. Yet while the whole Banking Industry is strongly opposed to some of the new Fundamental Review of the Trading Book (FRTB) requirements, such as the Profit & Loss Attribution (PLA) test, could the EU Council now be considering to only include reporting requirements in CRR2? […]
Should we be concerned by Facebook’s launch into cryptocurrencies?
Whether the launch of Facebook’s Libra will threaten global monetary and financial stability is a question that has been on all regulators’ and politicians’ minds since Facebook announced its cryptocurrency project on June 18, 2019. Donald Trump himself tweeted that, as a virtual currency, Libra “will have little standing or dependability” and that Facebook should […]
Brexit Watch #6: Seeing past the fog of uncertainty – How are the regulators responding?
The British political landscape has been unsettled and uncertain. Boris Johnson defeated Theresa May in July 2019 to become Prime Minister with his “do or die” conviction for the UK’s exit from the EU, with or without a deal. While the Government has been successful in achieving Parliament’s support for a renegotiated withdrawal deal, MPs […]
Simplicity is a complex issue
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A good bank requires good supervision
To be a ‘good bank’, a bank must be efficient, innovative and trustworthy. Given its central role at the heart of the economy and financial system and the risks associated with fulfilling its role, banks have to operate within an environment subject to laws, regulations and directives. Outcomes can often be subject to the constraints […]
The Supervisory Answer to Hong Kong’s Worsening Economic Performance
Pierre Latrobe at Mazars discusses the measures the HKMA has taken so far to strengthen its macroprudential supervisory toolkit and address potential risks to the wider financial system. The Hong Kong economy is suffering from several lingering negative factors, the US-China trade war, the global economic slowdown and the ongoing protests, to name but a […]
EBA’s Stress Test 2020 Methodology – What’s new for the banks?
The methodology for an exercise to assess the resilience of EU banks to adverse market conditions and test the state of their capital allocations has been released by the European Banking Authority (EBA). The exercise – part of EU-wide stress testing – will apply to broadly 70% of the European banking sector[1]. Some 52 banks […]
New prudential regulation for investment firms in Europe
At the end of nearly two years of legislative work, the reform of the prudential regulation of investment firms completed its final phase with the publication in the Official Journal of the European Union of two new regulatory texts: Regulation 2019/2033 on the prudential requirements of investment firms (IFR), and Directive 2019/2034 on the prudential […]
Re-engineering the banking sector
In recent years, disruption to the banking sector has seen an increasing number of partnerships between banks and FinTechs, as banks look to acquire the digital expertise now required for 21st century banking and FinTechs look to tap into the finance knowledge and consumer reach that traditional banks enjoy. More recently, this quest for technological […]
Podcast: Basel III Implementation – May 2018
In this podcast, Greg Simpson discusses the Prudential Regulatory changes proposed by Basel 3. Together with Phuong Gomard and Bowen Lu, regulatory specialists in Mazars’ Banking Consulting practice, they highlight the impact on the standardised approach to credit risk and operational risk. Whilst relevant to all UK banks, it is particularly relevant to smaller challengers and […]
Brexit – playing for a draw?
On 20th October, I was delighted to chair an event in collaboration with OMFIF on the implications of Brexit for the financial services industry. We had an excellent panel of experts representing banks and asset managers as well as the City of London in general. The event was badged as a 100 days post referendum […]
Overview of the US Stress Test Scenarios Vs. the European Scenarios
On February 1, 2018, just one day after the European Banking Authority (EBA) officially kicked off its EU-wide stress test exercise, the Federal Reserve Board (FRB) released the applicable scenarios for its own US stress test. 2018 US Stress Test Scenarios Overview The annual stress test exercise is required by a provision of the Comprehensive […]
Unilateral deregulation by the USA would lead banks to seek new trade-offs
Solvency, liquidity, transparency and oversight requirements: as the Basel Committee meeting in Santiago, Chile in November 2016 demonstrated, there is still much to be discussed on the finalisation of the Basel III agreements. However, the inauguration of the new President of the USA could change the condition of the international dialog. Some might decide to […]
Podcast: Why banks need to address cyber security
In this podcast Greg Simpson discusses cyber security with our expert Francisco Sanches. They discuss major threats such as emerging risks, FCA guidance on cloud data storage and the cyber security skill gaps to name a few. Podcast player
BCBS’ amendments on Simple, Transparent and Comparable (STC) securitisations
As implied in the BCBS consultative document on November 2015, the BCBS published new standards on 11 July 2016 to include amendments on STC securitisations and thus make its final decision for their calibration. The securitisation framework was highlighted in the 2008 financial crisis because of the major role of subprimes in the collapse of […]
Four routes to better mobilisation of capital in Europe
Efficient supervision of capital markets is a priority of the Capital Markets Union (CMU) given its role in facilitating market integration and European cross-border transactions. But there are currently a number of supervisory barriers halting progress of European mobilisation of capital that now need to be addressed urgently. Following discussions at the CMU’s mid-term conference […]
Italian banking – a Brexit-fueled calamity
Brexit continues to dominate the political and financial world across Europe and beyond as people wrestle with its impact. But there’s another massive storm on the horizon for the EU that has been brewing for some time and Brexit may well have brought forward its impact: The Italian Banking Crisis. As reported in the Wall […]
Ifs and Buts
The Brexit debate last week was overshadowed by Theresa May becoming the UK’s new Prime Minister and some of her more radical appointments to her Cabinet. On top came the horrific terror attack in Nice and the failed coup d’état in Turkey. Understandably, the core Brexit debate did not take centre stage but instead provided […]
Podcast: Implications of Banks Implementing IFRS 9
Greg Simpson, Head of Banking UK and banking experts Paul Hodgett and Pierre Latrobe discuss the implications of IFRS9, more specifically they share some of their experience on helping banks implement IFRS 9. As the standard starts on 1 January 2018, they will also comment on some of the areas that banks need to consider […]
Evolving role of AI with cyber risk
Cyber as an organsational risk In 93% of data breaches, the targeted systems were compromised within minutes. 83% of the time, those breaches were not discovered for weeks, leaving the attackers with plenty of time to do their damage and exfiltrate data[1]. The average consolidated total cost of a U.S. data breach in 2016 was […]
IFRS 9 new provisioning and the phase-in period of regulatory capital: a discretionary approach
In about nine months, IFRS 9 will replace IAS 39 and the new accounting environment won’t be the only element to be impacted. In recent months, the Basel Committee on Banking Supervision (BCBS), the EU Commission and the European Banking Authority (EBA) have also been tackling the impact of the new IFRS 9 provisioning on […]
Podcast: Banking Regulatory Outlook
Along with Mazars banking regulatory advisory specialists Pauline Pelissier and Audrey Cauchet, Greg Simpson provides an overview of the banking regulatory outlook in the UK and Europe over the next 12 to 18 months. They also discuss IFRS9 in the context of regulatory treatments, credit risk management, non-performing loans, CRD5 and CRR2. Podcast player
Permanent tsb: Digitalisation’s role in the ethical banking mix
The arrival of technology has been a game changer for Ireland’s banking industry. Niall O’Grady Commercial Director of permanent tsb (PTSB) talks to Liam McKenna Partner Consulting Services – Mazars Ireland, about how the bank is using digitalisation to create more meaningful relationships with customers. Liam McKenna: Where does technology fit into PTSB’s proposition – as an […]
Brexit: opportunities for smaller overseas banks
The impact of Brexit on foreign banks, and especially the larger ones, has already been the subject of extensive media coverage and speculation. Discussions on the advantages and disadvantages of Brexit for larger overseas banks have been wide-ranging. Will the uncertainty over business models be solved in the short or mid-term? Would relocation bring cost […]
EBA opinion on IFRS 9 and the impact on regulatory capital
After the Basel Committee consultation in October and then the European Commission’s legislative proposal of the package CRR II / CRD V in November 2016, the EBA has now given its opinion on the management impact of IFRS 9 on regulatory capital, notwithstanding a second impact study has just been completed. This opinion, primarily addressed […]
Empower your people to protect the bank
Cyberattacks aren’t just getting more frequent, they are also becoming significantly more vicious and sophisticated. The majority of today’s data breaches result from human error, making cybersecurity a “people problem” as well as a technology issue. The solution to this people problem can’t be solved by purchasing new hardware or software or implementing sophisticated network […]
Are you prepared? New York State issues new BSA/AML/OFAC transaction monitoring and filtering program regulation
Recently released guidelines require institutions to adopt risk-based programs to monitor and filter transactions for potentially suspicious activity. Beginning January 1, 2017, financial institutions registered under the New York banking law are responsible for complying with anti-terrorism transaction monitoring and filtering program regulations, established by the New York Department of Financial Services (NYDFS). Last month, […]
BREXIT! – Not GREXIT?
Greece’s financial systems have been tightly monitored by the institutions – once called the Troika – of ECB, IMF and EU Commission in recent years. The systemically relevant Greek banks are under close control of the Joint Supervisory Team (JST), consisting of staff from the European Central Bank and members of the Bank of Greece, […]
SEC Adopts Amendments to Investment Adviser Act Rules
On August 25, 2016, the Securities and Exchange Commission (the “SEC” or the “Commission”) adopted amendments to various rules under the Investment Advisers Act of 1940 (the “Act”). The amendments will be effective 60 days after the date of publication in the Federal Register, but investment advisers are expected to comply with the amendments after […]
How insurers can make sense of risk
With Solvency II fully in force, the insurance industry has entered a new phase of transformational development. For many insurance companies, Solvency II has provided the opportunity to make better sense of risk and yet, insurance companies continue to operate using risk management programs that have not evolved and may not protect them from the […]
The Evolution of Banking
Over a decade ago looking at the state banking webpage for my home state of New Jersey, there were approximately 250 banks doing business in the state then. A similar check today would yield a list of less than 150 or so; a more than 40% decline. With banking regulation at an all-time high, the […]
SFCR: Review of narrative reports, good practices and EIOPA recommendations
The Solvency II Directive increases the requirements for transparency vis-à-vis both the regulatory authorities and the stakeholders, including policyholders, financial analysts and investors. In this context, insurance undertakings and groups were, for the first time, required to publish a narrative report no later than 19 May 2017, known as the Solvency and Financial Condition Report […]
Managing Operational Risk
In recent years, we have seen a tremendous surge of interest in measuring and managing operational risks, both as a result of regulatory developments in corporate governance and capital adequacy, as well as due to a growing realisation that an enterprise-wide view of risk management is simply good business (those familiar with ISO9001 Quality Management […]
Quantified impacts of IFRS 9 : initial findings
At the end of February 2018, all the major European banks published information on the impact of the implementation of the new standard IFRS 9. IFRS 9 introduces numerous changes (classification, impairment, hedging, etc.). Their impacts at the transition date vary widely from one bank to another. They are negative in most cases, but for […]
Arkéa Banking Services : Innovation in Banking
Arkéa Banking Services began life in 2009 by offering white label banking services on behalf of third parties. CEO, Christophe Bitner tells Mazars why offering support to Fintechs is now an important next step. What’s the driving force behind the evolution of Arkéa Banking Services and what are the levers for growth? Christope Bitner: when the […]
Ultimate Forward Rate (UFR): Why we are seeing a change to the rate curve
On 6 February 2018, EIOPA published its latest risk-free interest rate curve to be taken into account for the purposes of Solvency II calculations. Based on calculations for January 2018, the curve is slightly different from previously published curves. This is reflecting significant changes in the long-term expectations of interest rates in recent years which calculates […]
Capital Markets Union: The Impact on Banks
Business funding diversification, helping to increase options for savers and making the economy more resilient are some of the main objectives set out in the European Commission’s Action Plan on Building a Capital Markets Union (CMU) published on 30 September 2015. While a better spread of financing sources over the capital markets, insurers, households and […]
Innovation in payments with Compte Nickel
Compte Nickel is a current account service accessible to all. Operated by the Financial Supervisory Committee of electronic payments (EPF), this new payment account which has been launched recently in France can be opened in 5 minutes at a newsagent/tobacconist by anyone regardless of income requirement. Ryad BOULANOUAR, President of the the French Financial Supervisory […]
Data governance : the key to reconciling contradictory requirements
Confronted with legislation that is becoming increasingly constrictive, banks must optimize the management of their data. It’s a challenge that is compounded by the fact that data is often dispersed throughout information systems – a fact that aggregators are capitalising on to offer new multi-bank applications. Banks have a role to play in detecting abnormal […]
Digital transformation and integration with Enterprise Risk Management
Digital transformation has expanded the need for security, continuity and resilience. Today’s business must embrace an enterprise risk management strategy that includes legal, regulatory and political considerations. Enterprises today face a significant level of security challenges across their organizations. IT is no longer a secondary priority; it is now at the very heart of the […]
Whistleblowers: a path to combatting fraud
While whistleblowing laws and initiatives might differ from country to country, whistleblowers in the financial industry are now well recognized and have gained international attention. Here we analyse the steps taken in the USA to strengthen whistleblowing procedures and practices. Recent allegations of impropriety on several levels have rekindled whistleblowers as a mechanism for identifying […]
Bank of Ireland: Placing ethics at the heart of banking
Customers trust their banks with an increasing amount of data that paints a picture not just about their financial situation and preferences, but about their lifestyles. Bank of Ireland’s Garvan Callan, Director, Customer, Digital & Innovation talks to Liam McKenna Partner, Consulting Services – Mazars Ireland, about how ethics and good principles are essential in shaping […]
The Basel Committee finalises the Basel III agreements
On 7 December, after several years of negotiations (starting in 2012 with the market risk review), Mario Draghi, chair of the Basel Committee’s Group of Governors and Head of Supervision (G-HOS), announced the finalisation of the Basel III agreements. These represent the final stage in the post-financial crisis reforms to the prudential regulations. For the […]
Interview with Nadia Filali, Head of Blockchain Programs at Caisse des Dépôts et Consignations: Is collaboration the key to developing a strong blockchain eco-system?
Nadia Filali is director of blockchain programmes and founder of LaBChain at the French public group Caisse des Dépôts et Consignations. Here Mazars partner Jean Latorzeff and senior managers Emilie Legroux and Christophe Bonnefoy talk to Nadia about the pioneering role Caisse des Dépôts is taking in the development of blockchain technology. Why and how […]
The banks’ business model – between function and transformation
The vast array of legal and supervisory requirements for determining a business model draws attention away from the inherent and indispensable need that a successful entrepreneur has for such a model. In the past, was an entrepreneur who had decided to run a bank ever asked about their business model? What is a business model? […]
Embracing a pattern of change: business model innovation across banking, insurance and asset management
In this third article of our thought leadership programme around the transformation of Financial Services, we are focusing on how new business models are emerging. “THIS IS A WORLD OF SIX-MONTH PRODUCT DEVELOPMENT CYCLES AND CONSTANT UPDATES, PRIMARILY OF SOFTWARE, WITH A HUGE PREMIUM ON SIMPLE USER INTERFACES AND TRUSTED SECURITY.” Christine Lagarde, Managing Director […]
The Six Key Themes of Internal Governance Harmonisation
As recent as 26 September 2017, the European Banking Authority (EBA) under the Directive 2013/36/EU published its revised guidelines on harmonising the internal governance arrangements of banks across the European Union. The EBA Guidelines will apply as of 30 June 2018 to competent authorities across the EU, as well as to institutions on an individual […]
Rethinking Compliance for the Protection of Personal Data
A holiday photo on Instagram, a “like” on Facebook, a PayPal transfer to pay for your Airbnb, or just a bank card payment or an ATM withdrawal: every day, we feed data into greedy and enthusiastic algorithms that are gathering our personal information. A new European regulation adopted in response to this irrational frenzy, the […]
Action Plan for Banks in the West African Monetary Union
A new prudential framework applicable to banks and credit institutions in the West African Economic and Monetary Union (WAEMU) is set to come into force on 1 January 2018. However, a significant delay has been observed in implanting reforms in the majority of banks, where the scale and implications of the necessary work are widely […]
Implications of the Revised Banking Chart of Accounts for the West African Financial System
Reforms to an accounting system that has been in force for nearly 20 years will help to increase the security and robustness of the West African financial system, while improving the quality of financial reporting. The Revised Banking Chart of Accounts has been adopted by the monetary authorities in the course of convergence towards Basel […]
Latest consultation puts systemically important banks (G-SIBs) under the microscope
On 6 April 2016, the Basel Committee published a new consultative document outlining revision plans for the calculation of the leverage ratio and submit proposals for additional requirements applicable to systemically important banks (G-SIBs). This new consultation comes as no surprise. Since 2014 the leverage ratio, calculated by dividing Tier 1 capital by the bank’s […]
UK supervision of international banks post Brexit
Around one-fifth of global banking activity is undertaken in the UK. Almost half of the UK’s banking assets are held by international banks. The PRA currently supervises approximately 250 international banks, both branches and subsidiaries, which are part of around 180 international groups. Background On 11 January 2021, the PRA shared in a Consultation Paper […]
COVID-19, banks and regulation: the road ahead in the UK and Europe
The Covid-19 outbreak and the unprecedented emergency it presents has created a unique threat to the world’s economy. Like all sectors, banking has been impacted, and its stakeholders have felt excessive pressure over the last few weeks to get things right. Regulators in financial markets around the globe have all announced Covid-19 action plans, which […]
Sustainable finance regulations signal a sea change for insurance sector
The European Green Deal aims to achieve climate neutrality by 2050 and create a modern, competitive and resource-efficient economy. To meet its objectives, the European Commission has begun to restructure the non-financial reporting requirements for companies. Although some of the requirements were partially implemented in 2021, this is only the beginning of a real sea […]
Reliable information key to the insurance sector’s ability to apply Green Taxonomy
The objective of the European Union’s Taxonomy regulation, in force since 1 January 2022, is twofold for the insurance and reinsurance sector. First, to measure the share of investments devoted to financing economic activities eligible for the taxonomy, known as the Investment Ratio. Second, to measure the share of gross premiums written in eligible non-life […]
Banks grapple with GAR objectives
In force since 1 January 2022, the European Union’s Taxonomy regulation aims to support the market for green finance. More specifically, greater transparency in the market will help prevent greenwashing by providing information to investors about the environmental performance of assets and economic activities of financial and non-financial information. For the banking sector, the target […]
Russian sanctions: what implications for financial institutions?
Following Russia’s annexation of Crimea in March 2014, the United States (US) and the European Union (EU), together with other countries, imposed mainly economic sanctions on Russia. Since Russia’s recognition of the self-proclaimed autonomous republics of Donetsk and Lugansk, followed by Russia’s attack on Ukraine on 24 February 2022, these sanctions have taken on new […]
Quarterly SSM briefing: stable supervisory priorities and the ECB’s green agenda
The last few weeks have been marked by an ongoing review of the supervisory priorities initially listed by the Single Supervisory Mechanism (SSM) for 2022-24, and developments in the climate agenda outlined by the European Central Bank (ECB). ECB’s supervisory priorities for 2022-24 remain stable despite geopolitical instabilities and challenges At the beginning of 2022, […]
France steps up sustainable transformation with mission-led business law
France’s innovative and incentivising Action Plan for Business Growth and Transformation (PACTE) law lays the legal foundations for corporate social responsibility. With more than 400 companies established as “sociétés à mission” – mission-led businesses – by the end of 2021, this new scheme is an undeniable success. The number of mission-led companies has doubled in […]
The digital euro: the future of central banking in Europe?
Central Bank Digital Currencies (CBDCs) continue to receive increasing attention not only from the ECB but all over the world. So far, 10 countries [1] have already deployed CBDC programmes with another 15 countries [2] currently conducting pilot programmes. In total, 105 countries are considering using CBDC programmes, representing over 95% of global GDP and […]
Leveraged transactions: supervisory expectations in the Eurozone
The chair of the European Central Bank’s Supervisory Board, Andrea Enria, has voiced several times in the past months the supervisor’s concern with the increasing growth of the leveraged finance sector, which deals with loans to highly indebted borrowers. By mid-2021, the combination of a strong global loan moratoria policy and the long-standing low interest […]
European crisis management framework: ripe for reform?
Since the European crisis management framework was established in 2014, there have not been many failing banks in Europe. However, the recent global health pandemic, combined with the ongoing conflict in Europe between Russia and Ukraine, could easily change this. The EU crisis management framework was established in response to the global financial crisis and […]
IFRS series on sustainability-linked financing
As environmental, social and governance concerns are becoming more and more prevalent, sustainable finance is now under the spotlight. The financial sector has a key role to play in achieving the ESG transition. One of the levies developed by the financial industry is to propose new kinds of financing that promote ESG practices and projects […]
Can markets in crypto-assets (MiCA) give banks a regulatory edge?
Crypto-asset markets have been on banks’ radar for some time. While interest and involvement have varied, regulatory developments have been a driving force. In September 2020, the European Union (EU) published a proposal for the regulation of Markets in Crypto-assets (MiCA), offering a uniform legal framework for crypto-assets in the EU. On 14 March 2022, […]
Eurofi financial summit addresses EU’s ecological and digital transition
As a setting for exchange between European Union (EU) economic and financial regulators and senior financial sector executives from the industry, one of the world’s largest financial services conferences, Eurofi, took place in Paris in February. Established in 2000, the Eurofi meetings occur bi-annually* alongside the Economic and Financial Affairs Council configuration (ECOFIN) meetings. The […]
EBA launches a central database for AML/CFT
A central database to strengthen the anti-money laundering and counter-terrorist financing (AML/CFT) framework was launched by the European Banking Authority (EBA) on 31 January 2022. Called EuReCA, the new database will be essential to coordinate efforts by national competent authorities and the EBA to prevent and fight money laundering and terrorist financing (ML/TF) risks throughout […]
Embarking on an ambitious common climate framework
As part of the European Green Deal, the European Union intends to encourage green investments and prioritise the revision of the Non-Financial Reporting Directive (NFRD). The European or Green Taxonomy, which sets out a precise classification of sustainable activities with the strategic objective of redirecting capital flows towards those activities from 2022, is a result […]
Positive behavioural and cultural change: the implementation of an accountability framework
As regulated entities execute their post-Brexit strategies and relocate their European Union (EU) operations from the UK to other EU states, a key issue to be addressed for those relocating to Ireland remain to be the impending legislative changes surrounding increased accountability standards for executives and non-executives. Not least, the breaking of the participation link, […]
The long road to proportionality in prudential regulation and supervision
The great financial crisis triggered a massive wave of bankruptcies in the worldwide banking sector, affected not only large international banks such as Lehman Brothers but also local ones such as Northern Rock in the UK. Basel prudential standards are designed to cope with financial risks stemming from the global banking system without taking into […]
Implications of Covid-19 for the LSIs and the supervisory focus: an interview with Patrick Amis, ECB
On 19 January 2022, Mr Patrick Amis, the head of ECB Directorate General Specialised Institutions and Less Significant Institutions (DG/SPL) had a formal meeting with Mazars to discuss the implications of the pandemic for the LSIs and the supervisory focus. The main risks outlined by Mr Amis, were in the areas of NPLs, digitalisation, IRRBB, […]
Quarterly SSM briefing: spotlight on supervisory priorities, banking union and liquidity ratio
Supervisory priorities 2022-2024 In December 2021, the European Central Bank (ECB) and the national supervisory authorities of the Eurozone countries published their supervisory priorities for 2022-2024. The three-year coverage enables the ECB banking supervision to achieve good progress in addressing the identified vulnerabilities while at the same time affording enough flexibility in any corresponding actions […]
Green taxonomy trends facing the real estate sector
The European Union (EU) has taken the first step in directing capital investments toward so-called sustainable activities with the introduction of the Green Taxonomy on 1 January 2022. For the real estate sector, the objective is to measure the share of eligible activities contributing to the first two climate objectives – the mitigation of climate […]
EBA considers bottom-up stress testing with top-down elements
The European Banking Authority (EBA) is tasked, in cooperation with the European Systematic Risk Board (ESRB), to initiate and coordinate biennial EU-wide stress testing exercises to assess the resilience of institutions to adverse market developments. The objective is to provide supervisors, banks, and other market participants with a common analytical framework to consistently compare and […]
Can banks balance the opportunities and challenges of digitalisation?
The Covid-19 pandemic has amplified technology’s impact on the banking sector, helping to prove that technology now stands at the core of business sustainability for banks. In their constant search for convenience, digitally-savvy customers have pushed banks’ focus towards providing global business solutions more than ever. A new normal has emerged: an environment where banks’ […]
The European Parliament devises a new agreement to restrict access and abuse of financial services information
New measures to combat money laundering and terrorist financing The European Parliament has adopted a set of stringent measures to strengthen the fight against money laundering and terror financing, alongside circumventing sanctions within EU. These regulations are presented by EU in the form of a “legislative package” comprising three key measures which provide various practical […]
SSM supervisory priorities for 2024-2026: addressing identified vulnerabilities in banks
On 19 December 2023, the European Central Bank (ECB) published its updated Single Supervisory Mechanism (SSM) strategic supervisory priorities for the period 2024 to 2026. The priorities indicate what banks should expect in terms of supervisory activities in 2024. For 2024-2026, the ECB supervisory priorities are built upon three main pillars: These priorities were informed […]
How financial institutions can move sustainability reporting to real-world application
The increased demand for sustainable finance shows that awareness of environmental, social and governance (ESG) issues is generally high among financial institutions. Indeed, for many of the larger players subject to the EU’s Non-Financial Reporting Directive (NFRD), there has been a requirement to include ESG information in annual reports for some time. Others have incorporated […]
Transitioning to greener practices in the real estate sector
In 2022, the European Union implemented the green taxonomy for the second year, requiring companies to disclose indicators related to climate objectives. The green taxonomy aims to guide capital investment towards environmentally sustainable activities, making companies assess their alignment with the EU’s sustainable transition and enabling financial institutions to prioritise funding for projects contributing the […]
DORA: how to move from operational risk management to operational resilience?
DORA (the Digital Operational Resilience Act) is the key regulatory outlook for IT and Cyber risk between now and 2025. The European Supervisory Agencies have sought to strengthen the resilience of institutions by emphasising the need to evolve the approach to operational risk management, of which information and communication technology risks are a part. DORA […]
Equipping NEDs to challenge private investment valuations
A recent major board reshuffle in one of Europe’s largest listed investment companies has focused attention on private investment valuations. It follows concerns raised by an ex-director over the robustness of the directors’ processes for approving investment valuations. The issues primarily question whether the Board of Directors has sufficient training and experience and whether governance […]
EU bodies update country lists of uncooperative and high-risk countries for financial services
Revised list of uncooperative countries and territories for tax purposes published by the European Council The list of uncooperative countries and territories about tax is an important part of the external tax strategy of the EU. Globally, this strategy intends to contribute to the ongoing efforts to advance good governance practices in the tax domain. […]
New reports on transaction monitoring systems and risk analysis published by the ACPR and COLB
ACPR publishes report on automated AML/CFT transaction monitoring systems In 2022, the ACPR conducted a comprehensive thematic review, focussed on the automated systems utilised by the entities under its supervision. This entails entities implementing their obligations in terms of transaction monitoring. The primary objective of this review was to assess the efficiency of the operation and […]
EU regulatory framework on the establishment of the digital euro: from investigation to realisation
With the approaching end of the investigation phase of the ECB’s digital euro project in October 2023, and the expectance of a decision on starting a realisation phase by the end of this year, the pros and cons of a potential digital euro have been widely discussed in the past months. The topic became even […]
Asset managers and ESG implementation: turning regulatory and operational compliance into commercial opportunities
ESG-related regulatory requirements, and scrutiny, show no signs of abating. Asset managers have a pivotal role in financing the transition towards low-carbon economic systems. Hence, governments have introduced several ESG-related regulatory requirements that apply to asset managers. Some examples of these are the Sustainable Finance Disclosure Regulation (SFDR) in the EU and the mandatory disclosures […]
Results of the ECB 2022 thematic review on climate-related and environmental risks
The European Central Bank (ECB) has expressed a significant supervisory concern surrounding more than half of supervised banks in terms of the progress made on fulfilling the expectations specified in the Guide on climate-related and environmental risks. The ECB recently concluded its 2022 thematic review of the banking sector’s alignment with supervisory expectations. This review […]
What lessons can be drawn from recent events in the banking sector?
In recent weeks, we have witnessed the successive bankruptcies of three banks in the United States, as well as the hasty takeover of Credit Suisse by UBS. This chain of events inevitably calls into question whether this trajectory echoes the leadup to the financial crisis of 2008. In reality, whilst these crises have stark similarities, […]
New DORA regulation: the challenge for insurers to strengthen their IT and cyber risk management
Since the onset of 2023, regulatory news has been adorned with the latest European legislation, under the acronym DORA, adopted on 10 November 2022 by the European Parliament. Standing for the Digital Operational Resilience Act, it will apply to the members of the European Union from 2025, and concerns companies in the financial sector specifically. […]
Governance, operational resilience, and business models remain crucial for banks in an environment of rising rates and digital banking
In an interview, Korbinian Ibel, Director General at the European Central Bank (ECB), shares insight on how bank-specific direct supervision works, what the current risks and challenges are, and priorities to look out for in the coming years. What does the Banking Supervision arm of the European Central Bank do? Find out about its policies, […]
The digital euro as we know it today
“I see digital as the future of finance”. These are the words of the Executive Vice President of the European Commission (EC), Valdis Dombrovskis, voiced in the summer of 2020. He has undoubtedly been proven right as governments and central banks around the world have heightened their efforts to keep oversight of the digital transition […]
The Fed shares instructions on its first pilot climate scenario analysis exercise
The Federal Reserve Board (Fed) has shared instructions on its pilot climate scenario analysis exercise (CSA). Six of the largest U.S. banks, i.e., Bank of America, Citigroup, Goldman Sachs, JPMorgan Chase, Morgan Stanley, and Wells Fargo are participating in the exercise and are requested to submit their results along with documentation by July 31, 2023. […]
Why ESG-linked features impact financial assets classification under IFRS?
In our last article on sustainability-linked financing, we highlighted the accounting issues related to these contracts that are currently being debated between stakeholders. The most critical issue is the classification of loans or bonds that reference the borrower or issuer’s environmental, social and governance (ESG) key performance indicators (KPIs) on the balance sheet of lenders […]
Spotlight on main European banks’ credit risk
After two years marked by the Covid-19 crisis, the first half of 2022 offered the prospect of a return to a certain economic normality. However, the outbreak of war in Ukraine combined with a deteriorating economic environment have reshuffled the cards and once again brought banks into a zone of turbulence and uncertainty. So how […]
COP27: stepping up implementation and the role of finance
A lot of attention at COP27 was focused on the likelihood of keeping global warming to 1.5 °C, in line with the goals of the 2015 Paris Climate Agreement. The consensus was that we are in real danger of falling off track. Few nations revised their nationally determined contributions to reduce their carbon footprint compared […]
The imperative of expanding the traditional MRM function
Financial institutions and non-bank financial technology companies (FinTechs) alike make extensive use of various machine learning models (MLOps) in core and non-core areas of their business. Banks, for example, rely on such models for a range of risk assessments, including predictive underwriting, credit risk management, suspicious and/or fraudulent activity management, fair lending compliance, derivative and […]
New European authority aims to strengthen framework to fight money laundering
The creation of a new Anti-Money Laundering Authority will transform the supervision of money laundering and financing terrorism (AML/CFT) in the EU. Proposed reforms also extend the AML/CFT rules to all crypto-asset service providers, as well as include specific rules concerning due diligence on customers and beneficial ownership. It is expected that some of these […]
COVID-19: Phase 1 of SFTR delayed
The European Securities and Markets Authority (ESMA) has issued a public statement to announce the delay of the industry’s compliance with phase one of the Securities Financing Transactions Regulation (SFTR). This is in response to ESMA’s awareness of the financial industry’s struggle to devote resources to comply with the new reporting obligation, as firms face […]
Federal reserve board publishes 2020 stress testing results and additional sensitivity analysis
The Federal Reserve Board released stress test results for DFAST 2020 including additional sensitivity analysis, considering the COVID19 outbreak, to assess the resiliency of large banks under three hypothetical recessions, or downside scenarios, that could result from the coronavirus event. Furthermore, the Board provides guidance for large banks to maintain resiliency during economic uncertainties from […]
Can regulatory systems come to terms with Facebook’s stablecoin?
Facebook’s ambition to create a transferable global digital coin between users on the social media giant’s messaging platforms WhatsApp and Messenger has been controversial from the outset. Perhaps not surprisingly, the backlash from regulators around the world was substantial from day one. The world’s leading economies were less than enthusiastic of the possibility of a […]
Building a more inclusive tax model
Michael Lennard, Chief of International Tax Cooperation and Trade in the Financing for Sustainable Development Office (FSDO) of the United Nations, discusses, from a personal perspective, a range of key issues on the UN’s approach to transfer pricing. In 2019 the United Nations Tax Committee issued draft guidance on financial transactions. It was finalized in […]
2021 Stress testing the UK banking system: the Bank of England’s approach
March 2020 marked the first time – since its inception in 2014 – that the Bank of England (BoE) cancelled its annual stress tests for the UK’s biggest lenders. Instead, they undertook a desktop analysis of the UK banking sector resilience. In late 2020, the Financial Policy Committee (FPC) judged that most banks have capital […]
Reducing reporting burden for European banks while increasing data quality: a challenge for the EBA
Under article 430c of the updated Capital Requirements Regulation (CRR 2), the European Parliament and the Council of the European Union mandate that the European Banking Authority (EBA) perform a feasibility study on reducing the reporting burden for the European banking sector while ensuring data collection for monetary policy, resolution and supervisory purposes and take […]
Addressing the challenges of the new sustainable finance regulations
As the world gears up for the transition to net-zero, the European Union is setting ambitious targets with respect to its own environmental footprint. For instance, by 2030 the EU is looking to reduce European greenhouse gas emissions by at least 55% compared to 1990 levels; increase the share of renewables within Europe’s total energy […]
Bank stress tests – the post Covid agenda
In the early 1990s, stress tests became a popular internal tool for international banks to examine risks and gain a better understanding of threats to the institutions’ balance sheet. From there, the Basel Accord was amended in the mid- ’90s and required banks and investment firms to conduct stress tests. However, these were more internal […]
Acceleration in changing the prudential treatment for Software Assets: Covid-19 impact
Over recent years, technology and software have become strategic assets for competitiveness and resilience in the banking sector. Institutions have no choice but to invest to develop and deliver innovative services whilst managing ever greater IT and cybersecurity risks. The pandemic and announcement of lockdown measures posed a significant challenge for banks’ technology teams as […]
New measures by the European Central Bank aim to improve gender diversity
American entrepreneur, Malcolm Forbes, once described diversity as “the art of thinking independently together”. Today, diversity is beginning to emerge as a quintessential workforce norm and institutions have started to acknowledge the differences in their staff compositions that are deeply ingrained in the fabric of their organisational culture. With many challenges remaining, the independent think […]
Injecting noise into the discussion
Michael Lennard, Chief of International Tax Cooperation and Trade in the Financing for Sustainable Development Office (FfDO) of the United Nations, examines the role of tax toolkits for developing countries from a personal perspective. The Platform for Collaboration on Tax (PCT) involving the UN, OECD, IMF and the World Bank, is certainly a good example […]
Are banks underestimating the risks of Covid Emergency Loans?
During the last few weeks, the volume of loans issued by banks has snowballed as governments release programmes to bail out businesses affected by Covid-19. As a result of these higher volumes, the exceptional increase in underwriting activity raises several issues for banks. Most notably, banks, like all commercial institutions, are also having to cope […]
Are more stringent gender diversity measures required?
Gender equality, while not systematically embedded in national laws, is clearly set in European law. The Capital Requirements Regulation (CRR) requires financial institutions to adopt a policy promoting diversity within their management bodies and, for the most significant ones, to set targets to reach gender-balanced boards. Despite these regulatory requirements, the conclusions of the European […]
How banks can demonstrate responsible banking during the pandemic
What is the purpose of a bank? Does it have a responsibility to society at large, over and above its duties to its shareholders, customers and employees? The purpose of banks – to make a profit or be socially useful? What is the purpose of a bank? Does it have a responsibility to society at […]
HKMA Support Measures and the Impact to the Banking Industry
Pierre Latrobe at Mazars discusses recent HKMA initiatives taken in response to Covid-19 and their implications for Hong Kong banks, highlighting credit risk as a growing threat. The Hong Kong economy has been confronted by several downside factors over the last two years. The first hit was the initiation of the US trade war with […]
How will COVID-19 affect the financial regulatory response to climate change?
At first glance, regulatory authorities appear to have deprioritised the issue of climate change. However, a closer look would suggest otherwise and climate change in reality remains a key long-term priority of national and European regulators. In some areas, regulatory action on climate change has been delayed Central banks around the world have taken steps […]
Rebuilding Credit Card Profitability post COVID-19
The current pandemic is having far reaching consequences across all aspects of society. Compared to other industries the impact on the credit card industry is relatively mild and from a customer perspective the value of on-demand liquidity is now clearer than ever. However, there will be significant impacts on industry profitability. Reduced international travel will […]
How banks can prepare for life after containment
Covid-19 disruption to the banking sector is widespread, including changes to working patterns, changes in customer behaviour, changes to partner-supplier dynamics and direct impacts on profit and loss accounts. The phase of immediate action to ensure business continuity is now largely complete. As infection curves flatten, restrictions are gradually eased and light starts to emerge […]
Regulatory flexibility gives banks the tools to support the economy during the Covid-19 pandemic
With banks no longer the weak link in the financial system, they now have a key role to play in supporting the real economy to survive the crisis caused by the Covid-19 pandemic. The significant strengthening of prudential regulation over the past decade since the 2008 financial crisis has enabled banking institutions to post solid levels […]
Mazars’ banking regulatory radar: 2020-2025
In this edition of our Banking Regulatory Radar, we cover the key regulatory developments in the banking sector for 2020-2025. The latest version of the Mazars’ Regulatory Radar has been updated with all the Level 2 legislation published in 2020, as well as the measures that were taken in the context of the Covid-19 pandemic. […]
Assessing the impact of sustainable finance on insurance entities
This article is part of the series covering the impact of sustainable finance on the insurance sector. Read further:Part 2: How the insurance sector is meeting ESG challengesPart 3: Developing a toolkit for responsible investment decisions Amid a global pandemic and a rising threat of climate change, today’s society expects financial organisations to uphold strong […]
The FSOC weighs in on climate risk
The Financial Stability Oversight Council (FSOC) was established under the Dodd-Frank Wall Street Reform and Consumer Protection Act as a result of the 2007-2008 US financial crisis. A first of its kind, the 15-member council is tasked primarily with identifying growing systemic risks to US financial stability and proposing coordinated regulatory responses to both preempt […]
Benchmark study of approaches to estimate probability of default in the context of climate risk
Recently, initiatives to tackle climate-related and environmental risks in the financial services industry have begun across the world. These initiatives followed the adoption of the United Nations Paris Agreement on climate change, the 2030 agenda for Sustainable Development and the European Green Deal. Stress testing and scenario analysis are a common framework proposed by different […]
Remote working: A growing target for hackers
The widespread use of working from home (WFH) during the pandemic, regardless of sector or geographical location has required organisations and their information systems (IS) management to be very agile in deploying or increasing their capacity for remote collaboration. Some institutions were already prepared – for example, following the wave of strikes at the end […]
Regulated firms: A matter of life and death
As the PRA transitions from a “rule-taker” to a “rule-maker”, small and medium-sized banks operating in the UK can expect to benefit from a more “streamlined” regulatory regime that could be easier to interpret, implement and maintain; but at the same time, they can also expect the PRA to be progressively more involved in scrutinising […]
The road to implementing the final Basel agreements
The unveiling of the new banking package “CRR3 – CRD6” on 27 October 2021 presents a further landmark on the road to implementing the final Basel III agreements. The regulatory scheme will also focus on the revision of the market risk framework from January 2019, as well as the latest developments in pillar 3 requirements. […]
Banking consolidation in Europe: What can we expect?
The low level of banking consolidation in Europe compared to other countries is raising concerns among the supervisory community in Europe. It is a trend further reinforced after the financial crisis of 2007/2008 that produced a noticeable slowdown in consolidation operations in the EU. So what has been the impact, and what can we expect […]
First ACPR climate stress test pilot exercise results
Climate change introduces considerable economic challenges. On the one hand, financial institutions must contribute to the transition to a low-carbon and balanced economy to effectively combat global warming. On the other hand, the financial sector is exposed to climate-related and environmental risks and therefore needs to implement appropriate risk management practices within a financial stability […]
The Single Supervisory Mechanism: Post-pandemic actions and expectations
On 30 July, the European Central Bank unveiled the 2021 supervisory stress test results, which demonstrated that the region’s banking system is resilient in an unfavourable environment. The Common Equity Tier 1 (CET1) ratio has fallen 5.2% to 9.9% under the 3-year adverse scenario, while under the baseline scenario the CET1 ratio will reach 15.8% […]
ESG investing: Three risks to consider
The continued popularity of funds with an environmental, social and governance (ESG) focus has put global ESG assets on track to exceed $53tn by 2025, up from nearly $38tn at the end of 20201. As growth continues, expectations for effective compliance policies and controls in place are expected to become more rigorous as political and […]
ESG investing: From buzzword to mainstream
A growing interest in environmental, social and governance (ESG) issues is driving record inflows into the ESG-led investment sector. During 2020, sustainable funds available to European investors attracted net inflows of €233bn1, which saw assets under management hit the $1.1tn milestone, accounting for almost 10% of total European fund assets. A similar growth story in […]
Achieving digital operational resilience
The digitalisation of banking processes and the introduction of AI-led technology impact the central and strategic role of information systems within the banking system. The growing use of information and communication technology (ICT) exposes all financial institutions to an increasing level of digital risk that could weaken their operational resilience, in particular, due to more […]
How the insurance sector is meeting ESG challenges
This article is part of the series covering the impact of sustainable finance on the insurance sector. Read further:Part 1: Assessing the impact of sustainable finance on insurance entitiesPart 3: Developing a toolkit for responsible investment decisions When taking environmental, social, and long-term asset portfolio issues into consideration, insurance companies must assess the specific risks […]
Key takeaways & industry challenges following the ECB TRIM project – a focus on CCR (Part 1)
Click here to read ‘Key takeaways & industry challenges following the ECB TRIM project – a focus on credit risk (Part 2)’ As articulated by the ECB in its recent TRIM reporting, the 236 findings cover different key aspects of supervised entities Internal Model Method (IMM) models & frameworks. Remediation actions are underway in all […]
The Basel Committee: updated guidance on the external audit of banks
Against the background of a new year still severely affected by the persistence of the pandemic throughout the world and economies facing an unprecedented global macro-economic shock, the Basel Committee has felt it necessary to address the audit of the expected credit loss (ECL) accounting estimate within the overall financial statement audit. With IFRS 9 […]
Shaping the future of banking with 5G
Over the past decade, the financial services industry has been disrupted by the arrival of new players whose rise to prominence has pushed traditional banks – previously faced with little competition – to transform themselves. In this context, technology and innovation, particularly 5G, will allow the most skilful and agile banking organisations to take advantage […]
Managing an increase in bank credit risk
While 2020 went relatively smoothly for the banking sector, uncertainties remain on the potential effects of Covid-19 on the real economy. Any negative impact could lead to heavy losses for the sector, especially when support measures are gradually phased out. These measures have not only contained the anticipated increase in credit risks, but have also […]
The impact of credit risk on 2021 stress tests
On 13 November 2020, the EBA published the final methodological note for the 2021 EU-wide stress-testing exercise. The aim of the stress tests is to assess the resilience of financial institutions to adverse economic and financial developments, in particular in the event of an increase in credit risk due to the default of the borrower. […]
2021 stress tests planned as banks face worsening crisis
The publication on 29 January of baseline and adverse scenarios, output templates, instructions and market assumptions required to carry out stress tests signals the go-ahead by the European Banking Association (EBA) for the 2021 regulatory exercise. Because of the Covid-19 pandemic, these tests, originally planned for 2020, will take place between now and 31 July […]
Resolvability is now the SRB’s key focus
With the economic repercussions of the Covid-19 crisis yet to be fully assessed, a robust resolution framework is essential to ensure the stability of the banking system. While the banks were given leave to postpone the reporting of some less urgent information in spring 2020, the Single Resolution Board (SRB) has reiterated the importance of […]
Developing a toolkit for responsible investment decisions
This article is part of the series covering the impact of sustainable finance on the insurance sector. Read further:Part 1: Assessing the impact of sustainable finance on insurance entitiesPart 2: How the insurance sector is meeting ESG challenges Clarity of information provided to various stakeholders is a growing issue for financial organisations. Despite the efforts […]
Looking ahead – ECB and NCA focus 2016, and what does it mean for the market participants?
The last five years have been a time of much challenge and change for the Central Banking Fraternity in Europe. Crisis, both economic and political, has been followed by much adjustment and change, including both practical economic and policy interventions, structural change in the form of Banking Union, much new regulation and most recently the […]