At the end of each month, the SAFE Regulatory Radar highlights a selection of important news and developments on financial regulation at the national and EU level. In June 2020, the European Commission and the European Banking Authority (EBA) set up new rules on the Capital Markets Union (CMU).
Central clearing counterparties: New rules regarding the systemic importance, fees, and compliance of non-EU clearing houses
On 11 June 2020, the European Commission published three draft delegated regulations supplementing the European Markets Infrastructure Regulation (EMIR) regarding third-country central counterparties (CCPs). On 1 January 2020, the revised rules for clearing counterparties following Brexit became applicable. The details of the reform were outlined in the SAFE Regulatory Radar in October 2019. The latest proposals aim to provide legal certainty on the new supervisory regime.
The first regulation specifies the criteria the European Securities and Markets Authority (ESMA) has to apply when determining whether a third-country CCP is systemically important or likely to become systemically important for the financial stability of the EU or its member states. In detail, the regulation defines a core set of elements to be assessed by ESMA, including the nature, size and complexity of a CCP, the effect of its failure, and other interactions. It further provides quantitative indicators allowing ESMA to estimate the exposure of clearing members. The second regulation considers the types of fees, the matters for which fees are due, the amount of fees, and the manner in which fees are to be paid by third-country CCPs. The last regulation establishes the minimum elements ESMA has to evaluate when non-EU CCPs request for comparable compliance, i.e. whether a clearing house may comply with EMIR through its compliance with its domestic law.
After the consultation period, the drafts are expected to be adopted by the European Commission and shall be binding and directly applicable in all member states.
Financial supervision: EBA presents guidelines on loan origination and monitoring
On 29 May 2020, the European Banking Authority (EBA) published guidelines on loan origination and monitoring. The guidance was prepared in response to the European Council Action Plan on tackling high levels of non-performing loans in bank balance sheets.
Addressing shortcomings in institutions’ credit-granting policies and practices after the recent financial crisis, the guidance aims to strengthen future lending and asset quality by establishing prudential standards and ensuring consumer protection.
The guidelines specify the internal governance arrangements, processes and mechanisms laid down in Capital Requirements Directive (CRD), introduce requirements for assessing the borrowers’ creditworthiness and set out supervisory expectations for the risk-based pricing of loans. The document also specifies the ongoing monitoring of credit risk and credit exposures, including regular credit reviews of borrowers.
In the context of the COVID-19 pandemic, the EBA is setting out a three-phase implementation of the guidelines to give the institutions additional time to deal with any COVID-19 related immediate operational priorities. The guidelines will apply from 30 June 2021, whereby the transitional period ends on 30 June 2024.
Banking Union: Commission revised regulatory technical standards for prudent valuation under CRR following the COVID-19 pandemic
On 28 May 2020, the European Commission adopted a delegated regulation supplementing the Capital Requirements Regulation (CRR) with regard to regulatory technical standards (RTS) for prudent valuation.
The delegated act introduced a temporary increase of the aggregation factor from 50 percent to 66 percent that is used to calculate the aggregated amounts of additional valuation adjustments (AVA). The purpose of this temporary adjustment is to mitigate the excessive effect of the current extreme market volatility on AVA amounts deducted from banks’ own funds. Further, the increased aggregation factor may reduce the amount deducted from institutions’ common equity tier 1 capital (CET1). CET1, the highest quality of regulatory capital, absorbs losses immediately when they occur. The provision should apply until 31 December 2020 in all member states.
Anastasia Kotovskaia is Research Assistant at the SAFE Policy Center and currently pursuing a Ph.D. in Law at Goethe University.