Malta: Being Better Informed: Banking And Capital Markets – Regulation

Last Updated: 28 November 2012
Article by Fabio Axisa, Joseph Camilleri and Christine Pace

EBA publishes 2013 work programme

The EBA published its 2013 work programme on 4 October 2012. The EBA's priority is to develop a single rule book, the key components of which are the technical standards required under the next CRD IV/CRR framework including capital, liquidity, remuneration and leverage ratio rules. The single rule book will provide a critical underpinning to the proposed new Single Supervisory Mechanism and improve the functioning of the EU single market overall.

The EBA will focus its oversight activities on identifying, analysing and addressing key risks in the EU banking sector. Its assessment will include analysing the consistency of outcomes in terms of risk weighted assets (RWAs), the sustainability of banks' business models, and banks' asset quality.

The EBA will also seek to promote supervisory co-operation and convergence and continue its work supporting the college of supervisors. It will develop a Single Supervisory Handbook which will underpin the SSM.

On consumer protection, the EBA intends to develop guidelines on responsible mortgage lending and mortgage arrears. The EBA also intends to draft technical standards on professional indemnity insurance, which will be subject to the proposed RMD.

Helpfully, the EBA has published a list of tasks that it expects to deliver between 2013 and 2018, consisting mainly of technical standards under CRD IV and the proposed European bank recovery and resolution legislation.

Structural reform

Liikanen finds EU banking sector needs structural reforms

On 2 October 2012, Bank of Finland Governor Erkki Liikanen published the findings of his high level expert group's (Expert Group) investigation into whether the current EU banking regulatory reform agenda should include structural reforms to increase stability and customer protection.

The Expert Group recommended legal separation of proprietary trading and other significant trading activities from core retail bank operations. The split would ensure that risky trading activities, beyond a certain threshold, are no longer supported by deposit-taking business in terms of funding or the implicit guarantee. The group believes that the long-standing universal banking model and the efficiencies it generates should not be threatened by these reforms; both trading and deposit-taking would still be allowed in the same group.

The Expert Group stressed the importance of recovery and resolution planning, as proposed in the EC's Crisis Management Directive. The resolution authority should have discretion to request further structural reforms to ensure the resolvability and operational continuity of critical banking functions.

Non-structural reform proposals, such as bail-in instruments, could help resolvability. The bail-in instrument is attractive because it applies losses at the beginning of a stressed period (based on a valuation) rather than when assets are sold, avoiding unnecessary destruction of value The report recommends that banks start building-up a sufficiently large layer of clearly identified bail-in debt. Better disclosure will help creditors identify the position of bail-in instruments within the hierarchy of debt commitments in bank's balance sheet.

But structural reforms will not work in isolation. The Expert Group calls on banks to apply more robust risk weights in calculating minimum capital standards and more consistent treatment of risk in internal models. The EBA is considering undertaking a review of asset quality in the EU to examine the consistency of firms' risk-weighted asset calculations.

The Expert Group also recommended improvements to EU corporate governance regulations:

  • strengthening boards and management
  • promoting the risk management function
  • eliminating inappropriate incentive structures at banks
  • improving risk disclosure under Pillar III
  • strengthening enforcement and sanctioning powers.

The EC has not published a consultation document, but announced on 3 October 2013 that it would seek public feedback on the Expert Group's report. The consultation closes on 13 November 2012.

The Liikenan Report recommendations are similar to the ICB recommendations, but not identical. The ICB recommended separating a wide range of retail banking activities from investment banking activities, whereas Liikanen would separate only deposit-taking from proprietary trading functions. Both Liikenan and the ICB called for higher capital requirements and better loss absorbency provisions. The ICB suggested strong measures to promote competition but Liikenan avoided this area.

Liikenan believes that the EU and UK reforms need to be compatible. Speaking to a UK Parliamentary Commission on Banking on 22 October 2012, he warned the Government against fully separating retail and investment activities.

Following review of public comments, the EC will likely publish its legislative proposals on structural reform in early 2013. The Government accepted the majority of the ICB's recommendations in June 2012, which will come into force under the Financial Services (Banking Reform) Bill 2012-13.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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