The priorities of regulators within the European Union will continue to focus on strengthening board oversight, risk appetite framework, anti-money laundering and strong risk data aggregation capabilities in order to identify pricing anomalies and credit concentrations, writes Nicos Kynicos, a senior regulatory specialist at Wolters Kluwer’s Finance, Risk and Reporting business.

At the heart of the regulatory focus will be non-performing loans in terms of underwriting standards, pricing and credit terms with a view to mitigating risks that may arise due to macro-prudential and political events such as Brexit.

From a regulatory reporting perspective, the themes for 2019 will be plentiful and demanding. Not least for those active in the UK, facing continued uncertainty over Brexit (at least at the time of writing).

Brexit: In the UK, the Bank of England (BoE), The Prudential Regulation Authority (PRA) and The Financial Conduct Authority (FCA) have published several communications and consultation papers (CPs) outlining proposals to the financial services industry that will take effect from March 29, 2019 when the UK’s withdrawal from the EU occurs. The UK’s withdrawal from the EU is a large and complicated process that has significant implications for the UK’s regulatory framework. The comprehensive package that has been published includes providing guidance on:

  • The process for authorisation and recognition for incoming European Economic Area (EEA) firms undertaking cross-border activities into the UK, including the new temporary permissions and recognition regimes
  • The general approach to changing the binding technical standards arising from Brexit, including the use of new temporary transitional powers to phase in onshoring of regulatory changes after Brexit
  • The new temporary permissions regime (TPR) post-Brexit, including eligibility, entry and exit from the regime and the rules the PRA expect to apply to firms in the TPR
  • Changes to binding technical standards on resolution
  • Changes to binding technical standards on financial market infrastructure

As much as the UK regulators are trying to smooth the transition in the midst of significant political uncertainty, firms, especially those that have cross border activity with the EU as well as those that will be viewed as 'third country' firms post-Brexit will need to pay close attention to the developments in order to be able continue to service their customers and markets. In addition, in December the European Banking Authority (EBA) called for more action by financial institutions within the EU in their Brexit-related communication to customers, again highlighting the risks to business continuity.

Basel III Finalisation / Capital requirements directive (CRD) V: The latest expectation for this, meanwhile, is that Basel Committee on Banking Supervision (BCBS) will publish final fundamental review of the trading book (FRTB) rules (calibration) in January 2019. The industry felt that the original calibration was too costly and as such is looking forward to the revisions.

A further unforeseen/unintended consequence that is being monitored is with respect to specialised lending, where under proposed rules loss given defaults (LGD) may increase by up to four times their current level and as a result we are already starting to see non-bank finance coming into markets such aircraft, large building and infrastructure projects where the costs are far less, since from a banking perspective it is actually less expensive to invest in unsecured lending.

So perversely, specialised lending/project finance style lending is disincentivised under the proposed rules. From a European perspective the latest sense is that the proposed legislation for CRD V will be finalised by June 2020, which would then mean an implementation by January 1, 2022, but even that is still ambitious given the forthcoming European elections and a resultant new European Parliament. Couple that with a reluctant industry to implement the new rules as it will raise their costs, then you can see that a lot of work still lies ahead.

Recovery & resolution reporting: 2019 will see the first 'formal' reporting in accordance with EBA Bank Recovery and Resolution Directive. Through the implementation of the Data Point Model (DPM) 2.8 firms within the Eurozone, where the Single Resolution Board acts as the resolution authority, will need to report annually 15 new templates across 10 reports. The first reference date for reporting is 31/12/2018 with an extended remittance deadline through to 31/05/2019 for the first submission, but a deadline of  April 30 for subsequent years. In the future the resolution templates will fully replace the Single Resolution Board liability data report, but initially both will co-exist further increasing the reporting requirements of firms.

In the UK, the Bank of England and PRA will phase in resolution reporting (minimum requirement for own funds and eligible liabilities or MREL) depending on whether a firm is subject to simplified obligation (SO) which they would have been advised by their regulator. All non-SO firms will not have to report phase 1 requirements until 2020, while all SO firms will need to follow the timelines specified in SS19/13 for phase 1.

Pillar 2 Liquidity Reporting: On July 1, 2019, the UK Pillar 2 liquidity reporting template, PRA110 will go live. Firms with assets of more than €30bn will need to report on a weekly basis with a 1-day remittance period, while all other firms will need to report monthly, with a 15-day remittance period. The template focuses on assessing the 4 key risks; low-point risk, high quality liquidity assets (HQLA) monetization risks, cliff risk and FX mismatch risk through a cashflow mismatch risk analysis.

Furthermore, specific stress tests and scenarios are introduced that will allow the PRA to provide Pillar 2 liquidity guidance to firms through the application of the granular liquidity leverage ratio (LCR), benchmark and enhanced stress tests tools that differentiation between retail and wholesale books. To smooth the implementation of PRA110 the PRA has announced that firms will have to continue to report the existing FSA047-048 liquidity reports through to the end of 2019. In a related move, in 2019 the EBA will conduct a liquidity stress test similarly focusing on survival period (beyond 30 days) and idiosyncratic stress.

Data Point Model 2.9: The EBA has begun consultation on the next iteration of the DPM. With the implementation of DPM 2.9 the EBA will move to a modular based approach which means that different requirements will be published and applied at different points in time. This approach is intended to provide institutions with as much implementation time as possible, but it will also mean that change will be more constant.

The EBA has proposed four packages – again there is plenty for those active in regulatory reporting to keep an eye on:

  • Package 2.9.1: Expected publication 12/18; application 12/19
    • Changes to existing resolution reporting requirements (adjustments and additional templates)
  • Package 2.9.2: Expected publication 04/19; application 03/20
    • Changes to the common reporting framework or COREP to align with new securitisation framework
    • Changes to financial reporting or FINREP concerning non-performing and forborne exposures reporting, P&L and IFRS16
    • Integration of remuneration benchmarking into DPM and taxonomy
  • Package 2.9.3: Expected publication 04/19; application 04-05/20
    • Changes to LCR to align with the LCR amending Act
  • Package 2.9.4: Expected publication 06/19; application 12/19
    • Changes to reporting requirements as specified in the ITS on supervisory benchmarking of internal models
    • Review of Guidelines on Funding Plans