Insights

In this issue:

• MFSA publishes Circular to Banks: Reporting of MREL and TLAC Data
• Annual Report on Sanctioning Activities in the Single Supervisory Mechanism in 2020 published by the ECB
• EBA observes an increase in the use of Digital Platforms in the EU’s Banking and Payments Sector
• EBA publishes Guidelines on the assessment of licensed institutions’ breaches of the large exposure limits
• EBA updates the list of ITS on supervisory reporting validation rules
• EBA Study results portray EU banks’ funding plans as being balanced out to return to a pre-pandemic funding composition by 2023
• The EBA, EIOPA and ESMA shed light on the risks in phasing out of crisis measures and advise financial institutions to adapt to increasing cyber risks

MFSA publishes circular to Banks: Reporting of MREL and TLAC Data

The Malta Financial Services Authority (the “MFSA”) has published a Circular addressed to Credit Institutions relating to Commission Implementing Regulation (EU) 2021/763 on the supervisory reporting and public disclosure of the Minimum Requirement for own funds and Eligible Liabilities (“MREL”) (the “CIR on the supervisory reporting and public disclosure of MREL”), which lays down the Implementing Technical Standards for the application of Regulation (EU) No 575/2013 (the “CRR”) and Directive 2014/59/EU (the “BRRD”).

The European Banking Authority (the “EBA”) set out reporting requirements for information relating to the MREL and the Total Loss Absorbing Capacity (the “TLAC”) position, to be collected by competent and resolution authorities from institutions in terms of Article 45I BRRD. As Malta’s National Competent Authority and National Resolution Authority, the MFSA will cooperate with the EBA on the obligation emanating from Article 45I BRRD and its corresponding Regulation 45I of the Recovery and Resolution Regulations (S.L.330.09) of the Laws of Malta, for the preparation of such reports to the submitted by the EBA to the European Commission concerning the application and the impact of MREL requirements.

The MFSA has already made contact with those institutions within the scope of this new reporting requirement, which institutions must submit the required information through the MFSA’s LH Portal as per the MFSA Submission Guidelines for the Reporting of MREL and TLAC data under the new project titled “MRELTLAC reporting”.

For further reading, this circular may be accessed here

Annual Report on Sanctioning Activities in the Single Supervisory Mechanism in 2020 published by the ECB

The ECB has published an Annual Report which exhaustively outlines statistics on the sanctioning activities concerning prudential requirements breaches, executed by the ECB and the national competent authorities (the “NCAs”) of participating members under the Supervisory Mechanism (the “SSM”) in 2020. The report gives an indication of the sanctioning proceedings carried out in the SSM in 2020, with 42% of the proceedings having been completed by the year-end; and the administrative penalties imposed, including both pecuniary penalties which amount to 57% of the penalties imposed, and non-pecuniary penalties concerning the remaining 43%.

The report was prepared by the SSM Network of Enforcement and Sanctions Experts, and may be accessed here

EBA observes an increase in the use of Digital Platforms in the EU’s Banking and Payments Sector

The EBA has published a Report on the Use of Digital Platforms in the EU Banking and Payments Sector In this report, the EBA identifies that there has been a large increase in the use of digital platforms being offered to ‘bridge’ customers and financial institutions. This so-called ‘Platformisation’ trend is expected to be further enhanced in line with the movement of the digitisation of the EU financial sector.

In accordance with the report, this form of Platformisation offers a multitude of opportunities for Financial Institutions and their EU customers. However, it also creates new means of financial, operational, and reputational interdependencies over which competent authorities have limited supervisory capacity. Due to this, in its report the EBA has also set out the steps required to enhance such supervisory capacity for competent authorities to be able to enhance their knowledge and understanding of platform-based business models and the opportunities and risks arising to effectively monitor market developments. The EBA also proposed that efforts in strengthening effective communication and information sharing amongst competent authorities responsible for financial sector supervision, consumer protection, data protection and competition, ought to be maintained.

The full report may be accessed here.

EBA publishes Guidelines on the assessment of licensed institutions’ breaches of the large exposure limits

In line with the CRR, if a licensed institution is in breach of the large exposure limits set out therein, the institution is required to promptly report the value of the exposure to the competent authority. The competent authority then has the power to grant a limited time period for the institution to comply with the limits imposed.

In order to support all competent authorities in carrying out assessments of the said breaches in a simple approach and to ensure that the CRR is applied prudently and in a harmonised manner, the EBA has published the Final Guidelines outlining the criteria for assessing:

1. The exceptional instances when institutions exceed large exposure limits; and
2. The time and measures to be taken for an institution to be back in compliance with the CRR.

For further reading, the report on the Final Guidelines may be found here.

EBA updates the list of ITS on supervisory reporting validation rules

The EBA has issued an updated list of validation rules in its Implementing Technical Standards on supervisory reporting (the “ITS”). In doing so, the EBA highlights those rules which it has deactivated either due to incorrectness or because they used to trigger IT issues. Consequently, the EBA informs Competent Authorities across the EU not to formally validate any information submitted with those deactivated rules in line with the revised ITS.

EBA Study results portray EU banks’ funding plans as being balanced out to return to a pre-pandemic funding composition by 2023

The EBA has published a Report on EU Banks’ Funding Plans as it aims to help EU supervisors assess the sustainability of banks’ main sources of funding.

The report is comprised of the EBA’s analysis of 160 banks’ funding plans for the years 2021-2023. The results of this analysis convey the effects of COVID-19 on banks’ funding; for instance, the banks’ total assets increased by 8% in 2020, which increase mainly concerned cash balances at central banks due to central bank support measures provided as a response to the pandemic; and while there was barely any loan growth in 2020 due to the pandemic, banks expect an increase of 4% in loans (mostly to non-financial corporates and households) per year for the next three years. Generally, the funding plans are targeted at the gradual “normalisation” of banks funding sources for the coming three years. Ultimately, this particularly means that throughout this period, central bank funding shall be gradually replaced by market-based funding.

The EBA’s report may be accessed through this link.

The EBA, EIOPA and ESMA shed light on the risks in phasing out of crisis measures and advise financial institutions to adapt to increasing cyber risks

While the European Financial sector has proven to be resilient despite the strong economic impact of COVID-19, several crisis measures were necessary to keep the effects of the crisis to a minimum. Today, as the financial sector undergoes economic recovery and starts to phase out of these crisis measures, the expectations of such recovery remains uncertain and imbalanced across the Member States. While there are multiple economic vulnerabilities which remain on the rise, the financial sector is also increasingly exposed to cyber-risk and Information and Communication Technology (“ICT”) vulnerabilities. Not only has the financial sector been the subject of cyber-attacks, but throughout the digital economy, cyber-criminals are constantly finding new ways of exploiting vulnerabilities in the system. Due to this, financial institutions must continuously adapt their technical infrastructure not only because of the pandemic, but also since such crisis has given rise to more enhanced generic digital transformations.

Considering these observations, all three European Supervisory Authorities (the “ESAs”) have issued the Joint Committee Autumn 2021 Report on Risks and Vulnerabilities, setting out the following policy actions, which are advised to be taken on by the NCAs, financial institutions and market participants. These are namely that:

1. financial institutions and supervisors should continue to be prepared for a possible deterioration of asset quality in the financial sector, notwithstanding the improved economic outlook;
2. as the economic environment gradually improves, the focus should shift to allow a proper assessment of the consequences of the pandemic on banks’ lending books, and banks should adequately manage the transition towards the recovery phase;
3. disorderly increases in yields and sudden reversals of risk premia should be closely monitored in terms of their impacts for financial institutions as well as for investors;
4. financial institutions and supervisors should continue to carefully manage their ICT and cyber risks.

Further information on the report may be found here.