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Reformed banking package

European Council reformed Banking Package

European Council reformed Banking Package

Six years on from the entry into force of CRD IV and CRR, the Council of the EU announced that it has finalised the next wave of prudential banking regulation by adopting the reformed Banking Package consisting of CRD V, CRR II, BRRD II and SRMR II.

The adopted legislation, first published in draft form in November 2016, was published on the Official Journal on 7 June 2019 and will enter into force on 27 June 2019. Most of the new rules apply from 28 June 2021.

Banks, if they have not already begun to do so, will need to assess the impact of these new measures on their business model and operations, capital and liquidity requirements, reporting processes and risk management and monitoring. 

The new reforms include the following key measures:

Leverage Ratio

The CRR II makes the 3% Leverage ratio binding minimum requirements for banks. In addition:

  • A buffer for GSIIs is introduced (this buffer may be extended to DSIIs in due course);
  • Downward adjustments for certain entities and exposures.

NSFR (Net Stable Funding Ratio)

The NSFR is also made a binding requirement. Key points to note include:

  • The Basel rules have been amended for some EU specificities;
  • 5% Stable Funding Requirement for gross derivative liabilities introduced;
  • Less complex institutions will be subject to simplified version of the NSFR (fewer data points).

Market Risk

The CRR 2 is based on the Basel Committee’s January 2016 Market Risk Framework and as such does not reflect the so-called “Basel IV” changes introduced in 2019. These are expected to be introduced in due course.

Large Exposures

Calculation of Large Exposures will now be based on a higher quality of capital (Tier 1 as opposed to just “eligible capital”). 

MREL

The BRRD 2 outlines MREL requirements. Key points to note include:

  • MREL is to be set on a bank-by-bank basis and is to be based on both Total Risk Exposure amount and the leverage measure;
  • Structured Notes are permitted to be included in MREL. In addition, there is some scope to included unsubordinated debt instruments;
  • Limits in place with regard to retail investors purchasing MREL instruments;
  • Disclosure requirements to supervisors, resolution authorities and public disclosures include firms’ MREL requirements, the levels of eligible and bail-inable liabilities and the make-up of those liabilities.

Other areas covered

  • Preferential capital requirements for certain SME exposures, Infrastructure lending and Salary and pension backed loans;
  • Exemption from Own Funds deductions on certain intangible software assets;
  • Proportionality – reduced reporting and disclosure requirements for certain small, non-complex banks. EBA have been charged to reduce reporting costs by 10%;
  • Anti-Money Laundering – AML concerns to be factored into SREP decisions and Internal Governance Assessments;
  • Remuneration – banks should operate a gender neutral remuneration policy embedding the principle that there should be equal pay for male and female workers for equal work;
  • The concept of resolution entities and resolution groups  under single and multiple point of entry resolution strategies is established;
  • Standardised approach for Counterparty Credit Risk (including a simplified standardised approach).

It should be noted that the package does not however address the majority of the recommended reforms published by the Basel Committee on Banking Supervision in December 2017. The recommendations, known as ‘Basel IV’, include revisions to the standardised approach to Credit Risk, the IRB approach to Credit Risk, Market Risk and Operational Risk. Banks should ensure that developments related to these further are considered as part of any implementation plan of the reformed Banking Package.

Considerations for Institutions

Larger banks will face higher capital and liquidity requirements, loss absorbency requirements as well as increased reporting and control requirements. Smaller banks should see a benefit in terms of reduced reporting, disclosure and capital requirements.

In order to navigate and comply with the new directives and regulations, firms will need to:

  • Quickly develop a detailed understanding of all the new directives and regulations;
  • Assess where they stand vis-à-vis the new requirements applicable to their own institution and ensure that a thorough gap-analysis is carried out;
  • Identify all areas of the firm that are impacted (e.g. Capital and liquidity planning, Products, Regulatory Reporting, Risk Management) including other ongoing regulatory projects; and
  • Develop and execute an implementation plan in line with the timelines outlined in the respective texts. 

How can KPMG Ireland help?

We are helping firms navigate all the required aspects discussed above, from the interpretation of the legislative text to carrying out impact assessments and developing and executing implementation plans. Our specialists have worked extensively with many firms on areas that are to be impacted and has vast experience in all areas including:

  • Capital and liquidity requirements and planning;
  • Recovery planning;
  • Resolution and operational continuity;
  • Regulatory reporting; and
  • Risk management frameworks.

Our specialist team in Ireland combined with our extensive European network of firms ensures that we bring unparalleled expertise to you.

For more information, please contact:

Ian Nelson
Head of Banking & Capital Markets
KPMG in Ireland
+353 87 744 1989
ian.nelson@kpmg.ie

Declan Keane
Partner
KPMG in Ireland
+353 87 744 1335
declan.keane@kpmg.ie

Eric Cloutier
Head of Regulatory Banking
KPMG in Ireland
+353 87 744 1839
eric.cloutier@kpmg.ie

Billy Fitzgerald
Director Regulatory Banking
KPMG in Ireland
+353 870 504 776
billy.fitzgerald@kpmg.ie

 (For further reading, please also see an article from KPMG Belgium on the agreed package).

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