Financial Regulatory Developments Focus - 21 January 2015

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In this newsletter, we provide a snapshot of the principal European, US and global financial regulatory developments of interest to banks, investment firms, broker-dealers, market infrastructures, asset managers and corporates.

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European Banking Authority's Second Report on Impact of Liquidity Coverage Ratio

On January 15, 2015, the European Banking Authority ("EBA") published its second impact assessment report for the liquidity coverage ratio ("LCR") requirements under the Capital Requirements Directive IV ("CRD IV") package. The report is based on data provided by 322 European banks and concludes that the LCR is not expected to have a material detrimental impact on the business and risk profile of EU-established institutions. This is mainly because EU institutions have significantly improved their compliance with LCR requirements and the potential for making adjustments to balance sheets to meet LCR requirements.

The report is available at: http://www.eba.europa.eu/documents/10180/950548/2014+LCR+IA+report.pdf.

Delegated Regulations under CRD IV Published in Official Journal of the European Union

On January 17, 2015, the following Delegated Regulations supplementing CRD IV were published in the Official Journal of the European Union:

Delegated Regulation on the liquidity coverage requirement for credit institutions covering matters such as stress scenarios, the composition of the liquidity buffer and the general requirements for liquid assets. This Delegated Regulation will enter into force on February 6, 2015.
Delegated Regulation on the leverage ratio covering matters such as the calculation of the leverage ratio and the exposure value of derivatives. This Delegated Regulation entered into force on January 18, 2015.

The Delegated Regulations are available at: http://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=OJ:JOL_2015_011_R_0001&from=EN; and http://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=OJ:JOL_2015_011_R_0002&from=EN.

Prudential Regulation Authority Consultation on Capital Adequacy under CRD IV

On January 19, 2015, the Prudential Regulation Authority ("PRA") published a consultation paper on assessing Pillar 2 capital adequacy under CRD IV. Pillar 2 aims to ensure that firms have sufficient capital to cover potential risks not sufficiently addressed in the prescriptive Pillar 1 requirements. The consultation paper sets out proposed changes to the current framework, rules and supervisory statements, focusing on: (i) new proposed methodologies for determining Pillar 2A capital (which aims to strengthen the relationship between an institution's risk profile, risk management and risk mitigation systems); (ii) the buffer and the form it would take; (iii) governance and risk management; and (iv) disclosure. The consultation period closes on April 17, 2015. The PRA plans to publish its policy statement and final rules together with a supervisory statement in July 2015. It is expected that the new rules would apply from January 1, 2016.

The consultation paper is available at: http://www.bankofengland.co.uk/pra/Pages/publications/cp/2015/cp115.aspx.

Capital Buffers and Macro-prudential Measures Amendment Regulations Published

On January 13, 2015, HM Treasury published the Capital Requirements (Capital Buffers and Macro-prudential Measures) (Amendment) Regulations 2015 ("the Amending Regulations") together with an explanatory memorandum. The Regulations amend the Capital Requirements (Capital Buffers and Macro-prudential Measures) Regulations 2014, which implemented all of the capital buffers under CRD IV except for the Systemic Risk Buffer ("SRB") and the Other Systemically Important Institutions buffer. The Amending Regulations introduce the SRB for banks and investment firms. Capital buffers require firms to hold additional amounts of capital on top of their minimum capital requirements. Under CRD IV, member states are able to decide which firms should meet the SRB and must notify the European Commission, European Systemic Risk Board, European Banking Authority and national regulators of the reasons for use of the SRB. The SRB would apply to banks and building societies with deposits of more than £25 billion (i.e. it will apply to ring-fenced banks under the bank structural reform requirements), The Financial Policy Committee of the Bank of England ("BoE") will be responsible for setting the SRB and the PRA will apply the SRB on an entity-by-entity basis. The SRB is applicable from January 1, 2019.

The Regulations are available at: http://www.legislation.gov.uk/uksi/2015/19/pdfs/uksi_20150019_en.pdf and the explanatory memorandum is available at: http://www.legislation.gov.uk/uksi/2015/19/pdfs/uksiem_20150019_en.pdf.

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