In this week's newsletter, we provide a snapshot of the principal U.S., 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
EU Authorities Raise Concerns About Proposed Data Waiver for Non-Performing Loans
On June 1, 2018, the European Banking Authority and the European Central Bank wrote to the European Commission, the European Parliament and the Council of the European Union expressing concerns about the impact of proposed data waivers for non-performing loans. The letter refers to a proposal put forward by certain stakeholders, in particular the Bank of Italy, that losses due to the sale of NPLs should be permanently eliminated from the dataset used for the Loss Given Default (LGD) estimation for the firm disposing of the NPLs. The proposal is based on the belief by some stakeholders that the disposal of NPLs and the corresponding capital release is hindered by the regulatory framework for internal models, in particular the requirements in the Capital Requirements Regulation for LGD estimation.
The EBA and the ECB do not support the introduction of such data waivers and argue that the losses should be appropriately reflected in the assessment of risk. The EBA and ECB do not consider that the build-up of NPLs in the EU banking sector is extraordinary because it has taken place in other cyclical downturns. Furthermore, the EBA and the ECB are of the view that the introduction of the proposed waiver would lead to an underestimation of LGD and inadequate capital requirements. This would provide preferential treatment to banks which have accumulated high levels of NPLs, creating regulatory arbitrage. Finally, the EBA and ECB highlight that the current regulatory regime already allows waivers where appropriate.
European Central Bank Updates Guide to Management Body Fit and Proper Assessments
On May 28, 2018, the ECB published an updated Guide to Fit and Proper assessments for the suitability of members of the management body and key function holders in significant institutions. The ECB is responsible for direct prudential supervision of certain significant banks based in the Eurozone as part of the Single Supervisory Mechanism.
The ECB Guide covers fit and proper assessments of members of management bodies, both in their management function (executives) and supervisory function (non-executives). It applies to all institutions under the direct supervision of the ECB, namely in-scope credit institutions, financial holding companies and mixed financial holding companies. In the context of licensing or qualifying holdings, the ECB Guide will also apply to less significant institutions.
The ECB Guide has been updated following the publication of the joint EBA and European Securities and Markets Authority Guidelines on the suitability of management body members and key function holders, which will apply from June 30, 2018, and the EBA Guidelines on Internal Governance.
The ECB Guide sets out the supervisory policies, processes and practices the ECB follows when conducting fit and proper assessments and is based on six Principles, namely:
- the primary responsibility of ECB-supervised institutions in carrying out due diligence and assessments;
- the role of the ECB as a "gatekeeper";
- the harmonization of assessments across the Euro area;
- proportionality and case-by-case assessment;
- due process and fairness; and
- interaction with ongoing supervision.
A fit and proper assessment can be triggered by a new appointment, a change of role, a renewal or a resignation, new facts (or any other issue) or a licensing or qualifying holding procedure. The ECB Guide sets out the criteria against which the ECB will assess the fitness and propriety of appointees to the management body. These are experience, reputation, conflicts of interest and independence of mind, time commitment and collective suitability.
The ECB Guide provides information on the purpose, scope and type of interviews conducted by the ECB of appointees. The ECB Guide then explains how a decision is taken by the ECB after every fit and proper assessment and the various types of decisions that may be taken.
The ECB Guide also notes that under the SSM Regulation, the ECB has the power to remove, at any time, members from the management body of a significant supervised entity who do not fulfill the fit and proper requirements.
The Updated Guide to Fit and Proper Assessments (May 2018) is available at: https://www.bankingsupervision.europa.eu/ecb/pub/pdf/ssm.fap_guide_201705_rev_201805.en.pdf, details of the joint EBA/ESMA Guidelines on the suitability of management body and key function holders are available at: https://finreg.shearman.com/european-securities-and-markets-authority-and-eur and details of the EBA Guidelines on internal governance are available at: https://finreg.shearman.com/european-banking-authority-final-guidelines-on-in.
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