Spring has arrived and the EU-UK Trade and Cooperation Agreement has been concluded. Even with this agreement ratified and implemented in full from May 1, 2021, divisions continue to rumble on both sides of the rift between the now fairly familiar topics. Divergent views on fishing quota vaccine shipments, prospects for overall building of new bridges on financial regulatory cooperation or, at least, on the mutual coexistence of markets are still fragile. The efforts on the planned regulatory memorandum of understanding are still not equivalent. Divergent standards on everything from the future direction of crypto-asset oversight, artificial intelligence (see our coverage on these new rules) to ESG methodology, as well as UK adjustments to MiFID research rules or the EU ‘quick fixes’ legislation that was previously on-shored in the UK is leading to fragmentation.
Economic growth across Europe currently diverges as the different stages of foreclosure take different directions, making it potentially difficult for the ECB to communicate and signal so clearly in terms of its toolbox. Most importantly, the German Constitutional Court has given the green light to approve national legislation ratifying the EU Recovery Fund after dismissing court challenges against the debt-financed joint investment plan which is supported by the EU’s budget. the EU.
Meanwhile, the European Commission and the European Insurance and Occupational Pensions Authority (EIOPA) as well as the industry on April 29 began discussing options to improve protection for businesses affected by the COVID-19 pandemic, including as the withdrawal of state-led support measures will likely reveal the extent of the damage caused by the health and economic crisis that the EU and its Member States have gone through. Insurers and reinsurers are like banks, supposed to be part of the solution. The European Systemic Risk Council warned on April 28 that “the threat of a wave of insolvency is imminent, unless member states manage to smoothly shift from liquidity support to more targeted solvency support and successful restructuring of viable corporate debt.
This is not the first time that the ESRB (with almost monthly statements from the ECB) has called for increased fiscal action and coordination and is particularly timely as most Member States have sent in their National Recovery and Resilience Plans to the European Commission (today 30 April) as well as to their national parliaments. France and Germany have presented a joint plan and, taken together, these national plans, which are essential to the achievement of the 750 trillion euro from the EU Recovery Fund, include ambitious structural reforms. These range from taxation to improving the national labor market, as well as promoting improved infrastructure, increased digitization and greening of the economy, thus providing new components of the economy. Green Deal. As soon as each member state’s plans are approved, countries are entitled to receive up to 13% of the allocated funds as an advance payment – possibly in early summer. All of this goes hand in hand with the unveiling by the EU of its new industrial strategy, which in turn should further complete the single market as well as the road to recovery.
The beginning of spring and the publication of the ECB-MSU Report on its focused review of internal models (GARNISH), the multi-year review that started in 2016, which was carried out with 65 major credit institutions during more than 200 on-site investigations, can lead to numerous spring cleanings across the banking sector and not just in those who were concerned. The SSM concluded that “TRIM has confirmed that the internal models of [systemic institutions] may continue to be used for the calculation of capital requirements, subject to supervisory measures aimed at ensuring at all times an appropriate level of capital requirements ”. However, the “relevant supervisory measures” that banks must now implement are based on prudential “findings” – elements requiring immediate attention from supervisors – the ECB-SSM identifying over 5,800 findings for all types of risks, of which about 30% were considered to be of high or very high severity.
The ECB-MSU report also provides, perhaps more revealingly, a detailed overview of findings on general topics; credit risk; market risk; and counterparty credit risk. To respond to these findings, the ECB-MSU is able to issue binding supervisory decisions containing obligations or corrective actions necessary to comply with a legal requirement.
Since 75% of all obligations have an implementation period of more than 12 months, certain limitations (which restrict or modify the permitted use of a template) may be necessary in cases where non-compliance leads an underestimation of capital requirements. A total of 253 supervisory decisions have been or are in the process of being made. Of these, 74% contain at least one limitation and 30% contain an approval of a significant model change.
In summary, the ECB-SSM said that the TRIM project had “fully achieved” its main objectives of reducing the variability of un-risk-weighted assets (RWAs) and supporting future oversight of internal models through the MSU. Overall, monitoring decisions are expected to “… lead to a 12% increase in aggregate RWAs covered by the models assessed in the respective TRIM surveys. This corresponds to an overall absolute increase in RWAs of around 275 billion euros following TRIM and a median impact of -51 basis points and an average impact of -71 basis points on the CET1 ratios of institutions in the field of investigation. TRIM was the first major ECB-SSM project which now has the potential to have a big impact. It is quite conceivable, and in particular in view of the priorities of the ECB and the SSM for 2021 and 2022, that the “success” of TRIM will push similar types of projects in the future.
We hope you enjoy this month’s edition. A more in-depth analysis of some of the above developments is available in this month’s Thought Leadership section and available on our Eurozone hub. If you find yourself reading someone else’s copy and would like to be added to the mailing list, please email [email protected] and we will do our best to get you the next edition and all future editions. It goes without saying that if you have any comments for us on this monthly newsletter – positive or negative – we would love to hear from you.
We present to you a selection of the main regulatory developments in the EU.