This article highlights the main developments that have taken place over the last month in the domestic and European banking sector.
New Mortgage Arrears Targets and Consultation on Review of the CCMA Published
On 13 March, the Central Bank of Ireland announced new measures to address mortgage arrears, including the publication of performance targets with the main mortgage banks and the proposed changes to the Code of Conduct on Mortgage Arrears (CCMA). The new approach is aimed at ensuring banks offer and conclude sustainable solutions for their customers in arrears by setting specific performance targets and proposing revisions to provisioning standards. The Central Bank is also proposing to update the CCMA so that it continues to provide protection to customers who cooperate with their bank while facilitating and promoting the resolution of arrears cases. The Bank has set out specific performance targets for banks to ensure borrowers in arrears will be put on more sustainable solutions, suitable and tailored to their individual situation. Banks will be required to meet specific targets for proposing and concluding sustainable solutions for borrowers in arrears over 90 days. These targets will include:
- quarterly targets will be set in relation to the number of sustainable solutions proposed to customers. These will become progressively more demanding over time. The first targets will apply for the quarter ending 30 June 2013 and will be enhanced in subsequent quarters.
- progressively more demanding quarterly targets will be set for the conclusion of sustainable solutions. These will be set in due course and will apply for the quarter ending 31 December 2013 onwards; and
- in addition, specific and more detailed targets will be set for individual banks, based on their capacity, systems and processes, principally focusing on the handling of early arrears. Thus the Bank will audit each bank's performance against the targets periodically, with regular reporting requirements established.
A consultation paper on the review of the CCMA has also been published detailing proposed changes to strengthen the Code's protections for borrowers, while ensuring it allows for effective and timely resolution of individual arrears situations. Issues being considered for review include:
- new safeguards to ensure borrowers are given sufficient warning before being classified as "non-cooperating";
- changes to the contact levels permitted while ensuring consumers are not subject to harassments;
- transparency on resolution options so borrowers have a full understanding before making a decision; and
- consideration of whether there is merit in allowing a lender to move a borrower in arrears off a tracker rate where the lender has offered an alternative arrangement which is more advantageous in the long term.
Fitness and Probity
The Central Bank published (5 March 2013) an updated Frequently Asked Questions (FAQ) document in relation to the Fitness and Probity Regime with the addition of Questions 3.17 (dealing with the requirement that individuals who were in-situ at the time of the introduction of the regime must go through the pre-approval process and submit an IQ when they are subject to re-election/reappointment provisions because the re-election/re-appointment of an individual constitutes a ‘break in service’) and 3.18 (dealing with the fact that this also applies to in-situ PCFs who are subject to employment contract renewals).
The Central Bank also issued its fifth issue of the IQ Bulletin which highlights:
- Consultation on Fitness and Probity for Credit Unions
- Publication of Fitness and Probity Performance Report
- Reasons an IQ application would be rejected and returned as incomplete
- Access to ONR – Self Service Password Reset
- Meeting the Minimum Competency Code 2011 - what is required?
- Upcoming dates for new ONR functionality in respect of Fitness and Probity
Central Bank Publishes Report on Retail Intermediary Sector in Ireland
The Central Bank of Ireland has published a report on the Retail Intermediary Sector in Ireland. This highlights key issues and risks for the sector and consumers, and outlines the Central Bank's regulatory approach to reducing risk and ensuring customers are protected. The report shows that although many individual firms are small in size and provide a variety of financial services, cumulatively the sector is significant, with firms supporting over 5 million policies for financial products held by their clients.
EU and International Developments
Bank for International Settlements Publishes Report on the Use and Production of Reference Interest Rate Practices
The Bank for International Settlements (BIS) has published a report entitled "Towards Better Reference Rate Practices: A Central Bank Perspective". This report reviews issues in relation to the use and production of reference interest rates from the perspective of Central Banks. These issues reflects the possible risks for monetary transmission and financial stability that may arise from deficiencies in the design of reference interest rates, market abuse, or for market participants using reference interest rates which embody economic exposures rather than the ones they actually want or need. The Group has identified an urgent need to strengthen reliability and robustness of existing reference rates and for enhancing reference rate choice.
EBA Publishes Consumer Trends Report
On 18 March the European Banking Authority (EBA) published its annual report on consumer trends which provides a review of the consumer protection analysis carried out by the EBA. The analysis identified key issues in the area of consumer protection and financial innovation. It highlights the new trends and the key areas for concern in 2013. The report consists of two parts. The first is a description of the work done by the EBA, by other EU institutions and by the Member States to address the key issues in consumer protection in the EU banking sector which had been highlighted in the first survey of the national competent authorities. The second part focuses on a revised set of issues, trends and products for 2013 following a new survey conducted in the second quarter of 2012. The Report identified six main consumer issues:
- indebtedness and responsible credit;
- transparency and levels of charges;
- mis-selling of financial products;
- specific issues concerning certain products – notably foreign currency loans, payment protection insurance and complex products;
- security of new technologies used for banking services;
- emerging new forms of liquidity rating.
Consultation on the Data Point Model Related to the Technical Standards on Supervisory Reporting Requirements for Liquidity Coverage and Stable Funding
On 18 March, the European Banking Authority (EBA) published a Draft Point Model (DPM) based on its draft Implementing Technical Standards (ITS) on supervisory reporting requirements for liquidity coverage and stable funding (Consultation Papers CP 50 and CP 51). Interested parties are invited to provide feedback on the DPM by 13 May, 2013. In order to assist the implementation of the ITS on supervisory reporting requirements for institutions, the data items included in CP 50 and CP 51 have been translated into a DPM.
The DPM is a structured representation of the data, identifying all the business concepts and its relations, as well as validation rules. It contains all the relevant technical specifications necessary for developing an IT reporting solution. The EBA invites comments on the attached documentation of the DPM, and in particular on the proposed categorisation of the data point/template cells, which would adequately and unequivocally reflect the meaning of the business concepts found on the underlying regulations and templates.
Basel III Monitoring Results Published by the Basel Committee
On the 19 March, the Basel Committee published the results of its Basel III monitoring exercise. This study is based on rigorous reporting processes set up by the Committee to periodically review the implications of the Basel III standards for financial markets. A total of 210 banks participated in the current study, comprising 101 group one banks (i.e. those that have Tier 1 capital in excess of 3 billion and are internationally active) and 109 Group 2 banks (i.e. all other banks).
European Banking Authority Publishes Opinion on Good Practices for ETF Risk Management
On 7 March, the European Banking Authority (EBA) issued an opinion addressed to the National Supervisory Authorities (NSAs) on Good Practices for the Risk Management of Exchange Traded Funds (ETFs).
ETFs are generally securities that track a commodity, an index, or a basket of assets like an index fund, but trade like a stock of an exchange and therefore experience price changes throughout the day. The EBA Good Practices attempt to ensure that potential risks associated with ETFs are managed adequately from the perspective of the credit institution and, indirectly, from the perspective of its customers. They will ultimately contribute to the convergence of supervisory culture and practices in the EU. The good practices include a list of relevant questions to assist NSAs in giving an adequate picture of banks' involvement in the ETF business, and the adequacy of banks' management of associated risks such as liquidity and market risks. The Good Practices are adopted as an EBA opinion under Article 29(2) and are, therefore, not legally binding. This is where implementation will depend on the specific characteristics of the credit institutions concerned as well as on their involvement in ETF operations.
European Banking Authority Consultation on Technical Standards for Recovery Plans
On 11 March, the European Banking Authority (EBA) launched a consultation on Draft Regulatory Technical Standards (RTS) on the content of Recovery Plans. In doing so, the EBA starts the preparatory work for the implementation of the Recovery and Resolution Directive (RRD). The consultation runs until 11 June, 2013. These RTS will contribute to the European Single Rule Book in banking and aim to enhance financial stability and minimise the probability of banks' failure. Recovery plans shall set out the arrangements and measures a bank would adopt to restore long-term financial viability in case of severe distress. According to the proposed draft RTS, recovery plans developed at group and at individual level will need to include at least the following five key parts:
- summary of the recovery plan;
- governance, including the conditions and procedures necessary to ensure a timely implementation of the recovery options;
- strategic analysis, including a description of the institution's core business lines and critical functions together with the different recovery options designed to respond to financial stress scenarios;
- communication plan, including external and internal communication arrangements; and
- preparatory measures taken, or to be taken, to improve the implementation and effectiveness of the plan.
As the proposed consultation is based on the draft RRD, the text of which is still being discussed by the Parliament and Council, the draft RTS might be amended after the consultation to take into account possible changes in the final RRD.
Draft Report on Reforming the Structure of the EU Banking Sector
The European Parliament has published a Draft Report on Reforming the Structure of the EU's Banking Sector. The Parliament has urged the Commission to come forward with a proposal for mandatory separation of banks' retail and investment activities. It also suggests that such mandatory separation should be achieved through the establishment of a thorough, transparent and credible "ring fence" around bank activities that are vital to a real economy, such as those relating to credit functions, payment systems and deposits. It also takes the view that in the event of a bank failure, the ring fence must ensure that the retail entity continues business unaffected by operational problems, financial losses, funding shortages or reputation damage resulting from the resolution or insolvency of the investment entity.
The report also suggests that the Commission ensure that trading activities do not benefit from implicit guarantees, the use of insurance deposits or taxpayer bailouts and that these activities do not pose a risk to the delivery of ring fence retail services. It urges the Commission to ensure that where banks undertake trading activities, the risk and costs associated with those activities are borne by their trading arm and not by their ring fence retail arm. The report spells out in more detail what this separation will look like in the context of sources of bank funding with the banks retail investment entities and also limits on the extent to which the two entities are reliant on each other for funding and/or resources. The report also deals with corporate governance issues. Measures to enhance competition are also addressed.
European Central Bank Working Paper, "A Dynamic Limit Order Market with Fast and Slow Traders"
During the past ten years or so, trading in financial markets has become increasingly automated, with recent estimates suggesting that high frequency trading (HFT) now accounts for more than half of all transactions in US equity markets. This has given rise to a debate among academics, practitioners and regulators about the benefits and concerns associated with an increasing automation of the trading process. This paper contributes to this debate representing a stylized model of trading in a limit order market where agents differ in their trading speed which is thought to capture the difference between (fast) HFT and slow human market participants. The paper argues that proposed regulatory changes such as limits on order cancellations or minimum order resting times are likely to lead to optimum outcome because they precisely address the source of potential efficiency gains derived from HFT. The taxation of HFT high frequency activity may improve upon rules that lead this type of activity to disappear completely.
EBA Interim Report on the Consistency of Risk-Weighted Assets in the Banking Book
On 26 February, the European Banking Authority (EBA) released the interim results of its investigation on Risk-Weighted Assets in the Banking Book aimed at identifying any material difference in risk-weighted asset outcomes and at understanding the sources of such differences. This report, which illustrates the outcome of the first phase of the investigation, is part of a wider EBA analysis on the consistency of risk-weighted analysis, whose ultimate objective is to better understand the difference in the calculation of risk-weighted assets and, if need be, to formulate the necessary policy solutions to enhance conversions between banks and to improve disclosure.
EBA Report Helps to Raise Confidence in EU Banking Risk Models
The European Banking Federation (EBF) has welcomed the interim report of the European Banking Authority (EBA) which is aimed at restoring confidence in the methods used to measure the varying degrees of risks inherent to the banking business. The EBF supports the objective to better understand the differences in the calculation of unexpected losses or so called risk weighted assets (RWAs) in a bid to restore confidence in banks risk models. The main finding is that at least 50% of the differences in RWA's are due to reasons that can easily be explained and stem from the structure of the balance sheet and regulatory approaches. The other half of the difference may also be caused by a different interpretation or practical application of the regulation and is not within the scope of the report. It is envisaged that a deeper analysis by the EBA will reveal the causes of those differences.
European Parliament Places Cap on Bankers' Bonuses
The European Parliament and Council have reached agreement on a proposal whereby bankers' annual bonuses must not normally exceed their annual salaries and banks must hold more high quality capital to increase stability. The only possible exception, allowing bonuses of up to twice annual salary, would have to be authorised by holders of a half of a bank's shares.
To curb excessive risk-taking, the basic salary to bonus-ratio will be 1:1 but could be raised to a maximum of 1:2 with the approval of shareholders. This higher ratio would require the votes of at least 65% of shareholders owning half the shares represented, or of 75% of votes if there is no quorum. In order to encourage bankers to take a long term view, if the bonus is increased above 1:1 then a quarter of the whole bonus will be deferred for at least five years. The rules will allow minimum thresholds of high quality capital to be retained. Banks will be required to hold a minimum of 8% good quality capital (mostly Tier 1, the lowest risk form). The legislation would also require banks to disclose profits made, taxes paid and subsidies received country by country, as well as turnover and number of employees. From 2014, these should be reported to the Commission and in 2015 made fully public.
European Banking Federation Welcomes the Breakthrough on CRR (CRD IV)
The European Banking Federation (EBF) has welcomed the Agreement by the Irish Presidency and the European Parliament about eliminating the final obstacles to the adoption of the Basel III Agreement into European Law. It welcomes the understanding this Agreement will bring between co-legislators and agrees that these rules will generally lead to a more robust banking sector as a whole.
LMA publishes note discussing IBOR definitions in LMA primary document
On 11 March, the Loan Market Association (LMA) published a note discussing the IBOR definitions in the LMA primary document. The note includes suggested changes and guidance in relation to:
- the definition of screen rate
- the discontinuance of BBA LIBOR for certain tenors and currency and definition of "LIBOR"
Provisional Agreement on Single Bank Supervisor
On 19 March, the Irish Presidency reached provisional agreement with the European Parliament on the single EU Bank Supervisor. This is seen as a major step towards banking union as well as restoring confidence in the European banking system and building stability across Europe. The establishment of the supervisor will pave the way for the European Stability Mechanism (ESM) to take on the direct recapitalisation of banks. The European Banking Federation has welcomed the agreement and issued a statement saying that it believed that this is a central element within the effort to achieve financial stability. However, the EBF stressed that there is an imperative need to clarify without delay the practical details of the proposal which would make it very clear to the supervised banks who is the main supervisor inside the mechanism of central and local co-operation.
British Bankers' Association helps banks categorise derivatives trades for EU regulations
On 19 March a cross-industry agreement between banks setting out common standards for derivatives trades was published by the British Bankers Association (BBA) so as to bring clarity and certainty to a major reform of Europe's financial market infrastructure. The agreement helps banks and their clients ensure the consistent classification of counterparties undertaking derivatives trades – a crucial step as industry moves to meet the requirements of the European Market Infrastructure Regulation (EMIR). Consistent classification of the financial counterparties or non-financial counterparties is crucial in assessing and mitigating the risks involved in over-the-counter-derivative trades. Under EMIR certain classes of derivatives trades may need to be cleared through an authorised central counterparty.
EACB Position Paper Revisions to the Basel Securitisation Framework
The European Association of Co-operative Banks has published a position paper on proposed revisions to the Basel Securitisation Framework. The EACB has expressed a number of concerns about the proposed methodology:
- the proposed risk rates for securitisation positions are a multiple as compared to the case of the portfolio where held directly (risk rates in RRBA are excessively high, in particular for investment grade ratings). The proposed rating does not seem to reflect the actual risk but imposes excessive capital charges for the securitisation positions;
- cliff effects are not removed, especially for highly rated assets, especially in the case of alternative B;
- the credit enhancements do not seem to be taken into consideration;
- the assumption that securitisation positions performed poorly does not hold for EU securitisation market, which actually performed in line with expectations from most asset classes and geographic areas, even during the crisis;
- some regulatory changes already address the shortcomings of securitisation: risk retention rules, Basel III liquidity requirements and regulation aimed at improving the supervision, control and performance of rating agencies.
Decisions taken by the Governing Council of the European Central Bank
On 21 March 2013, the Governing Council of the European Central Bank (ECB) decided to maintain the current level of Emergency Liquidity Assistance (ELA) until 25 March 2013. Thereafter, ELA could only be considered if an EU/IMF programme is in place that would ensure the solvency of the concerned banks.
Commission published Frequently Asked Questions in relation to CRD IV - CRR
The European Commission has published Frequently Asked Questions in relation to CRD IV – CRR. Basel Committee publishes consultative document on recognising the cost of credit protection purchased The Basel Committee on banking supervision has published a proposal that would strengthen capital requirements when banks engage in certain high cost credit protection transactions. The Committee has previously expressed concerns about potential regulatory capital arbitrage related to certain credit protection transactions. At that time it noted that that it would continue to monitor developments with respect to such transactions and would consider imposing a globally harmonised minimum capital pillar 1 requirement if necessary. After further consideration, the Committee decided to move forward with a more comprehensive pillar 1 proposal. While the Committee recognises that the purchase of credit protection can be an effective risk management too, the proposed changes are intended to ensure that the cost and not just the benefits, of purchase credit protection are appropriately recognised in regulatory capital. It does this by requiring that banks, under certain circumstances calculate the present value of premia paid for credit protection, which should be construed as an exposure amount of the protection purchasing bank and be assigned a 1.1, 250% risk weight. Feedback on the proposals is invited by Friday 21 June 2013.
ESAs Joint Letter to the European Commission on the Possible Regulatory Framework for Benchmark Activities
On 7 March the EBA, ESMA and EIOPA sent a joint letter to the European Commissioner for Internal Market and Services, on the possible Regulatory Framework for Benchmark Activities. It was sent following the European Commission Public Consultation on a possible framework for the regulation of the production and use of indices serving as benchmarks in financial and other contracts.
Public Consultation on the Coherence of EU Financial Services Legislation
The European Parliament has launched a public consultation on ways to enhance coherence of EU Financial Services legislation. Given the transition to a single rule book in financial services across the EU and EU legislator's willingness to have all financial markets, products and acts encouraged by regulation, it is increasingly important to ensure that legislation fits together seamlessly. This consultation will feed into a programme of reflection to determine future priorities for the remainder of this mandate and to reform the parties for the incoming Parliament in 2014. The consultation runs to Friday 14 June.
ESMA and the EBA Warn Investors about Contracts for Difference
The European Securities and Markets Authority (ESMA) and the European Banking Authority (EBA) have published a warning to retail investors about the dangers of investing in contracts for difference (CFDs). The two authorities are concerned that during the current period of low investment returns, inexperienced retail investors across the EU are being tempted to invest in complex financial products which they may not fully understand and which can end up costing them money they cannot afford to lose. They decided that investors should only consider trading in CFD's if they have extensive experience of trading in volatile markets, fully understand how these operate and have sufficient time to manage their investment on an active basis. Investors should also carefully reach their agreement or contract with the CFD provider before making a trading decision.
ISDA 2013 EMIR MFC Representation Protocol and Timely Confirmation Amendment Agreement
On 8 March 2013, ISDA published its EMIR MFC representation protocol and related documents, including a form of adherence letter and Frequently Asked Questions. It also published a timely confirmation amendment agreement. The protocol allows parties to amend the terms of their ISDA master agreement so as to reflect certain risk mitigation requirements imposed by EMIR.
EU Data Protection – Parliament backs Uniformed Data Protection Rules
On 19 March the European Commission welcomed the adoption of an opinion by the European Parliament's Legal Affairs Committee on the Commission's proposal for a Data Protection Regulation reforming the EU's data protection rules. The Opinion on the proposed Data Protection Regulation keeps up the momentum that is building towards the rapid adoption of new EU data protection rules. The key elements of the Commission's data protection reform are as follows:
- the need to replace the current 1995 Data Protection Directive with a directly applicable regulation that covers the processing of personal data. A single set of rules on data protection, valid across the EU will remove the unnecessary administrative requirements for companies and can save businesses around €2.3 billion a year.
- the need to maintain a broad definition of "personal data".
- the need to give "explicit consent" as one of the legitimate grounds for processing data. The current directive states that consent has to be unambiguous. The Commission proposals foresee that if and when consent is used a ground for processing, then it has to be real and valid consent. It cannot be presumed that when a person remains silent or does not act, this means consent.
- the need to have a "one stop shop" for companies that operate in several EU countries. The proposal cuts red tape by introducing a one stop shop for businesses to deal with regulators.
- the scope of the data protection law enforcement directive. A new directive will apply to general data protection principles and rules to police and judicial authorities in criminal matters. These rules will apply to both domestic processing and cross border transfers of data and enhance trust between law enforcement authorities.