Banking and Financial Regulatory News July 2021 # 3 | Hogan Lovells

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  • UK CRR: Draft Regulations for the Capital Requirements Regulation (Amendment) 2021
  • Implementation of the Basel III standards in Great Britain: PRA PS17 / 21
  • COVID-19: PRA removes guard rails for shareholder distributions by large banks
  • GBP LIBOR Loan Agreements: Sterling Working Group publishes schedules and deliberations for borrowers
  • BRRD: RTS to estimate Pillar 2 and combined buffer requirements for setting MREL
  • CRR: EBA guidelines on criteria for the use of data entries in the risk measurement model
  • Effective Islamic Deposit Insurance Systems: Core Principles of IADI and IFSB

UK CRR: Draft Regulations for the Capital Requirements Regulation (Amendment) 2021

A draft of the Capital Requirements Regulation (Amendment) Regulations 2021 was published together with a draft explanatory memorandum. The regulations contain changes to the UK Capital Requirements Regulation (UK CRR) related to the implementation of certain standards in the UK that were developed by the Basel Committee on Banking Supervision (BCBS) and implemented in the EU through the Capital Requirements Regulation (CRR) II. HM Treasury intends to transfer the provisions of the UK CRR and related laws that are affected by the implementation of the BCBS provisions to the Prudential Regulation Authority (PRA) framework. Therefore, once the regulations are in place, the PRA can set final rules in PS17 / 21 (see below).

These regulations also contain additional changes to the UK’s withdrawal-related CRR that are needed to ensure that this legislation continues to function effectively after the UK leaves the EU.

Implementation of the Basel III standards in Great Britain: PRA PS17 / 21

Following its consultation in CP5 / 21, the PRA published a policy statement (PS17 / 21) providing feedback on the responses to its consultation and its almost definitive policy on implementing certain Basel III standards. The PRA will also enact rules that reformulate elements of the EU CRR and related onshore EU Level 2 regulations that have been enacted under the EU CRR and are revoked by the UK Treasury (see point above). The PRA has not yet created the regulatory tools as the UK Treasury Department must first revoke the relevant parts of the UK CRR, as provided for in the Financial Services Act 2021, before the PRA can replace them in the PRA rules.

In response to feedback, the PRA has amended some of the guidelines it has consulted, details of which are described in PS17 / 21. She believes the changes will lower the overall costs for businesses while maintaining the regulatory benefits of implementing Basel III.

The guideline material is contained in the appendices to PS17 / 21, many of which have been published separately and are accessible via the PRA website for the implementation of the Basel standards.

This guideline is intended to come into force at the same time as HM Treasury’s revocation of the relevant parts of the UK CRR on January 1, 2022.

COVID-19: PRA removes guard rails for shareholder distributions by large banks

On July 13, 2021, the PRA issued a statement updating its December 2020 statement on its temporary approach to shareholder distributions by major UK banks in light of the COVID-19 pandemic. In the statement, the PRA announced that the framework of the temporary “guard rails” that applied to banks’ distributions to ordinary shareholders in relation to their results for 2020 has been lifted with immediate effect. The PRA believes that given developments such as progress in vaccination programs and the banks’ capital position and development based on the Bank of England (BoE) 2021 interim results of the 2021 Solvency Stress Test, these guard rails are no longer necessary.

The PRA states that bank officers should continue to exercise a reasonable level of caution with regard to the level of distributions to shareholders. In their view, this would be in line with their standardized approach to capital adequacy and shareholder distributions through 2021. Under this framework, the banks’ boards of directors are responsible for making distribution decisions subject to the standard constraints of the regulatory framework, including the regular annual stress test.

GBP LIBOR Loan Agreements: Sterling Working Group publishes schedules and deliberations for borrowers

The Sterling Risk Free Reference Rates Working Group (RFRWG) has released a paper titled GBP LIBOR Loan Agreements – Borrowers’ Timetables and Considerations to help borrowers meet the end of the third quarter milestone related to active conversion of existing ones Understanding and achieving sterling LIBOR credit. The paper sets out, among other things, why market participants should try to convert their loans by the end of the third quarter of 2021 instead of waiting until the end of 2021, when most of the LIBOR currency tenor adjustments will end.

BRRD: RTS to estimate Pillar 2 and combined buffer requirements for setting MREL

The Commission’s delegated regulation (EU) 2021/1118 with regulatory technical standards (RTS) defining the methodology to be used by the resolution authorities to estimate Pillar 2 and the combined buffer requirements at the resolution group level was published in the Official Journal of the European Union (OJ). This is used to determine the minimum requirement for own funds and eligible liabilities (MREL) in accordance with the directive on the restructuring and resolution of credit institutions (BRRD).

The delegated regulation comes into force on July 28, 2021.

CRR: EBA guidelines on criteria for the use of data entries in the risk measurement model

The European Banking Authority (EBA) has published a final report on guidelines on criteria for the use of data inputs in the risk measurement model in accordance with Article 325bc in accordance with Article 325bh (3) CRR.

The guidelines apply from January 1, 2022.

Effective Islamic Deposit Insurance Systems: Core Principles of IADI and IFSB

The International Association of Deposit Insurers (IADI) and the Islamic Financial Services Board (IFSB) have published Basic Principles for Effective Islamic Deposit Insurance Systems (CPIDIS). The CPIDIS consists of 17 core principles for the development and implementation of an effective Islamic deposit insurance system (IDIS). The principles take into account the peculiarities of Islamic banks and complement existing international standards in this area, especially the IADI’s core principles for effective deposit guarantee systems.

It is envisaged that jurisdictions will use the CPIDIS and its compliance assessment methodology as a benchmark for assessing the quality of their IDIS and identifying gaps in their Islamic deposit insurance practices, including measures to address them.

IADI and IFSB state that their work on this issue will continue with a series of pilot tests for the CPIDIS that will serve to develop a joint IADI-IFSB manual for assessing compliance with the CPIDIS.


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