In this week’s newsletter, we provide a snapshot of the principal US, European and global financial regulatory developments of interest to banks, investment firms, broker-dealers, market infrastructure providers, asset managers and corporates.
Bank Prudential Regulation & Regulatory Capital
European Commission Publishes Assessment of the Effect of the Revised International Accounting Standard 19 on Own Funds
On January 6, 2016, the European Commission published a report on the effect of the revised International Accounting Standard 19 on the volatility of own funds of banks and investment firms. The Capital Requirements Regulation requires the Commission to assess whether the revised IAS 19 and the requirement on firms to deduct defined-benefit pension fund assets from Common Equity Tier 1 items for the purpose of calculating own funds would impact the volatility of the firm's own funds. The Commission has concluded that the potential additional volatility of own funds introduced by the revision of IAS 19 is limited and that the impact due to initial application has been mitigated by the transitional measures included in the CRR. The Commission therefore does not intend to propose amendments to the CRR in this regard.
The report is available at: http://ec.europa.eu/transparency/regdoc/rep/1/2015/EN/1-2015-685-EN-F1-1.PDF.
Eurozone Supervisory Priorities for 2016 Published
On January 6, 2016, the European Central Bank's Banking Supervision division published its priorities for 2016. Under the Single Supervisory Mechanism Regulation, the ECB is responsible for the direct prudential supervision of the largest Eurozone banks and indirectly responsible for prudentially supervising the smaller Eurozone banks. The priorities, which aim to direct the ECB's supervision of the largest Eurozone banks, are business model and profitability risk, credit risk, capital adequacy, risk governance and data quality and liquidity. The ECB will be implementing initiatives around the priorities during 2016, including thematic reviews and holding dialogue with the banks.
The 2016 SSM Priorities are available at: https://www.bankingsupervision.europa.eu/ecb/pub/pdf/publication_supervisory_priorities_2016.en.pdf?024a0072fe923 441556e5bba7251dd6d.
Basel Committee on Banking Supervision Governing Body Endorses Revised Market Risk Framework and Other Initiatives
On January 11, 2016, the Basel Committee on Banking Supervision announced that its governing body, the Group of Central Bank Governors and Heads of Supervision, known as GHOS, endorsed the new market risk framework, which takes effect in 2019. The full text of the new framework will be published in the coming days. Improvements in the new risk framework include: (i) a revised boundary between the banking and trading books that will reduce scope for arbitrage; (ii) a revised internal models approach with more coherent and comprehensive risk capture; (iii) an enhanced model approval process and more prudent recognition of hedging and portfolio diversification; and (iv) a revised standardized approach that serves as a credible fall-back and floor to the model-based approach and facilitates more consistent and comparable reporting of market risk across banks and jurisdictions. The Basel Committee will also finalize its efforts to address the problem of excessive variability in risk- weighted assets by the end of this year. These efforts will include a proposal to remove the internal model approach for credit risk and limits on the use of internal models for credit risk (in particular, through the use of floors). The GHOS also agreed that the final design and calibration of the leverage ratio should be based on a Tier 1 definition of capital and should comprise a minimum level of 3%. Members also discussed additional requirements for global systemically important banks. The Basel Committee will finalize the calibration in 2016 to allow time for the leverage ratio to be implemented as a Pillar 1 measure by January 1, 2018.
The Bank for International Settlements press release is available at: http://www.bis.org/press/p160111.htm.
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