BANK PRUDENTIAL REGULATION & REGULATORY CAPITAL
Federal Reserve Board Releases Results for Dodd-Frank Annual Stress Tests
The Board of Governors of the Federal Reserve System recently released results for the Dodd-Frank Annual Stress Tests for the 31 largest bank-holding companies. This is the third round of stress tests required by the Dodd-Frank Wall Street Reform and Consumer Protection Act. According to the press release, all of the largest US-based bank holding companies have passed the test and have been building capital levels at a sufficient level to withstand severe recession and financial market volatility. The quantitative results from these tests are one part of the Federal Reserve Board's annual exercise to evaluate the capital planning and adequacy of large financial institutions. Comprehensive Capital Analysis and Review results will be released on March 11, 2015.
The Federal Reserve Board press release and 2015 Supervisory Stress Test Methodology and Results are available at: http://www.federalreserve.gov/newsevents/press/bcreg/20150305a.htm; and http://www.federalreserve.gov/newsevents/press/bcreg/bcreg20150305a1.pdf.
The US Federal Reserve Board Extends Comment Period for Global Systemically Important Banks Surcharge
On February 26, 2015, the Federal Reserve Board extended until April 3, 2015 the comment period for its proposed rule to implement capital surcharges for global systemically important banks. Comments were originally due by March 2, 2015. The Federal Reserve Board extended the comment period to allow relevant parties more time to analyze the proposed rule and prepare comments. The proposal would establish a methodology to identify if a firm is a G-SIB as well as establish the size of a firm's risk-based capital surcharge. The rule is expected to strengthen the capital positions of these financial institutions and if finalized as proposed, would be higher than international standards.
The Federal Reserve Board press release is available at: http://www.federalreserve.gov/newsevents/press/bcreg/20150226a.htm.
The Shearman & Sterling Publication on the G-SIB Surcharge proposed rule is available at: http://www.shearman.com/~/media/Files/NewsInsights/Publications/2015/01/Federal-Reserve-Proposes-SuperEquivalent-Capital-Surcharge-for-Global-Systemically-Important-Banks-FIA-010815.pdf.
European Banking Authority Publishes Opinion and Report on Credit Valuation Adjustment
On February 25, 2015, the European Banking Authority published an Opinion addressed to the European Commission on Credit Valuation Adjustment. The Opinion deals with several aspects of the calculation of own funds requirements for CVA risk. Sixteen recommendations are listed in the Opinion, including: (i) clarifying by means of an amendment to the Capital Requirements Regulations that exchange-traded derivatives are included in the scope of CVA risk charge; (ii) harmonising the treatment of securities financing transactions in the EU; and (iii) clarifying the standardised method for CVA. The Opinion was published by the EBA simultaneously alongside a Report and Review on CVA and the application of CVA charges to non-financial counterparties established in a third country under the CRR. The documents have now been submitted for consideration by the European Commission.
The Opinion is available at: http://www.eba.europa.eu/documents/10180/983359/EBA-Op-2015-02+%28EBA+Opinion+on+CVA+risk%29.pdf; and the Report and Review is available at: http://www.eba.europa.eu/documents/10180/950548/EBA+Report+on+CVA.pdf.
European Banking Authority Press Release on 2015 EU-wide Stress Test
On March 2, 2015, the EBA issued a press release stating that it will not carry out an EU-wide stress test in 2015, but will instead be preparing for the next exercise in 2016. The EBA will however carry out a transparency exercise in 2015 which will provide data on the balance sheets and portfolios of EU banks.
The EBA press release is available at: http://www.eba.europa.eu/-/eba-updates-on-future-eu-wide-stress-tests.
European Banking Authority Publishes Final Draft Standards on Benchmarking Portfolio Assessment
On March 2, 2015, the EBA published final draft regulatory technical standards on benchmarking portfolio assessment standards and assessment sharing procedures under CRD IV, together with final draft implementing technical standards on benchmarking portfolios, templates, definitions and IT solutions. These final drafts specify the framework for EU institutions and national regulators on annual supervisory benchmarking. The EBA simultaneously published its technical advice, for the purposes of the report. All documents have now been submitted to the European Commission for adoption.
The report is available at: http://www.eba.europa.eu/documents/10180/997875/EBA-RTS-2015-01+and+EBA-ITS-201-501+Final+Draft+RTS+and+ITS+on+Benchmarking+Exercise.pdf; and the technical advice is available at: http://www.eba.europa.eu/documents/10180/983359/EBA-Op-2015-04+Technical+Advice+on+benchmarking+pursuant+to+Art+78%289%29.pdf.
European Banking Authority Launches Discussion Paper on Future of Internal Ratings-Based Approach
On March 4, 2015, the EBA launched a discussion paper on the future of the internal ratings-based approach under the CRR. This is the approach under which certain banks and investment firms with sophisticated risk management systems are allowed to calculate capital requirements based on internally produced parameters. The paper discusses the compromised comparability of capital requirements under the IRB approach due to the framework's high level of flexibility. The EBA believes that a review of the regulatory framework for the IRB approach is required to ensure a higher level of comparability going forward. Comments on the discussion paper may be submitted until 5 May 2015.
The discussion paper is available at: http://www.eba.europa.eu/documents/10180/1003460/EBA-DP-2015-01+DP+on+the+future+of+IRB+approach.pdf.
European Banking Authority Consults on Guidelines on Sound Remuneration Policies
On March 4, 2015, the EBA launched a public consultation on its guidelines on sound remuneration policies. The guidelines specify the criteria for allocation of remuneration components into either fixed or variable remuneration, clarify the way in which the remuneration rules in CRD IV should be interpreted by regulators and generally aim to ensure compliance with the bonus cap requirements introduced by CRD IV. The consultation period ends on June 4, 2015.
The consultation is available at: http://www.eba.europa.eu/documents/10180/1002374/EBA-CP-2015-03+%28CP+on+GLs+on+Sound+Remuneration+Policies%29.pdf.
European Banking Authority Publishes Opinion on Eligibility Conditions for Covered Bonds and Risk Weight Preferential Treatment Further to Swedish Waiver
On March 5, 2015, the EBA published an opinion on the CRR provision that deals with eligibility conditions for covered bonds in relation to risk weight preferential treatment, including the assets by which eligible covered bonds can be collateralized. Under the CRR, eligible covered bonds can be collateralized by exposures to institutions that qualify for the credit quality step 1, which must not exceed 15% of the nominal amount of outstanding covered bonds of the issuing institution. Exposures to institutions in the EU with a maturity not exceeding 100 days have no CQS 1 requirement, but must at least qualify for CQS 2. After consulting the EBA, national regulators may partially waive these specifications and allow CQS 2 for up to 10% of the total exposure of the nominal amount of outstanding covered bonds of the issuing institution. This would only apply if significant potential concentration problems in the specific member state are due to the application of the CQS 1 requirement.
In December 2014, the Swedish Financial Supervisory Authority submitted a proposal to the EBA for such a waiver. The EBA has assessed the proposal, taking into account factors such as the nature and magnitude of exposures to institutions that covered bonds assume in that jurisdiction. The EBA is of the opinion that sufficient evidence was submitted by the Swedish Regulator to document that the significant potential concentration problem derives from the application of the CQS 1 requirement specified in the CRR. The EBA has stated therefore that the establishment of a partial waiver is justified.
The EBA opinion is available at: http://www.eba.europa.eu/documents/10180/983359/EBA-Op-2015-08+Opinion+on+the+partial+waiver.pdf.
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