Banking and finance regulatory news, 19 July 2021

Content 

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• UK CRR: Draft Capital Requirements Regulation (Amendment) Regulations 2021
• UK implementation of Basel III standards: PRA PS17/21
• COVID-19: PRA removes guardrails on shareholder distributions by large banks
• GBP LIBOR loan contracts: Sterling Working Group publishes timelines and considerations for borrowers
• BRRD: RTS on estimating Pillar 2 and combined buffer requirements for setting MREL
• CRR: EBA guidelines on criteria for use of data inputs in risk-measurement model
• Effective Islamic deposit insurance systems: IADI and IFSB core principles

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

A draft version of the Capital Requirements Regulation (Amendment) Regulations 2021 has been published, together with a draft explanatory memorandum. The Regulations contain amendments to the UK Capital Requirements Regulation (UK CRR) relating to the implementation in the UK of certain standards developed by the Basel Committee on Banking Supervision (BCBS) that were implemented in the EU through the Capital Requirements Regulation (CRR) II. HM Treasury intends to transfer to the Prudential Regulation Authority (PRA) Rulebook those provisions of the UK CRR and related legislation that are affected by the implementation of the BCBS provisions. Therefore, once the Regulations are made, the PRA will be able to make final rules in PS17/21 (see below).

These Regulations also contain additional EU Exit-related amendments to the UK CRR which are required to ensure that these pieces of legislation continue to operate effectively now the UK has left the EU.

UK implementation of Basel III standards: PRA PS17/21

Following its consultation in CP5/21, the PRA has published a policy statement, PS17/21, providing feedback on the responses to its consultation and giving its near-final policy on implementing certain Basel III standards. The PRA will also make rules that restate elements of the EU CRR and related onshored EU level 2 regulations made under the EU CRR that are being revoked by HM Treasury (see item above). The PRA has not made the rule instruments at this stage because HM Treasury must first revoke the relevant parts of UK CRR, as provided for in the Financial Services Act 2021, before the PRA can replace them in PRA rules.

In response to feedback, the PRA has made changes to some of the policy it consulted on, the details of which are outlined in PS17/21. It considers that the changes will reduce the overall costs to firms, while maintaining the prudential benefits of implementing Basel III.

The policy material is set out in Appendices to PS17/21, many of which have been published separately and are accessible via the PRA's implementation of Basel standards webpage.

This policy is intended to take effect at the same time as HM Treasury's revocation of the relevant parts of the UK CRR, which will be on 1 January 2022.

COVID-19: PRA removes guardrails on shareholder distributions by large banks

On 13 July 2021, the PRA published a statement updating its December 2020 statement on its temporary approach to shareholder distributions by large UK banks in the light of the COVID-19 pandemic. In the statement, the PRA announces that the framework of temporary "guardrails" that applied to banks' distributions to ordinary shareholders in respect of their 2020 results has been removed with immediate effect. The PRA's view is that these guardrails are now no longer necessary, in the light of developments including the progress of vaccination programmes and banks' capital positions and trajectories, based on the interim results of the Bank of England's (BoE) 2021 solvency stress test.

The PRA states that bank boards should continue to exercise an appropriate degree of caution around the level of any shareholder distributions. Its view is that this would be consistent with its standard approach to capital-setting and shareholder distributions through 2021. Under this framework, bank boards are responsible for making distribution decisions subject to the standard constraints of the regulatory framework, including the regular annual stress test.

GBP LIBOR loan contracts: Sterling Working Group publishes timelines and considerations for borrowers

The Working Group on Sterling Risk-Free Reference Rates (RFRWG) has published a paper, GBP LIBOR loan contracts – Timelines and considerations for borrowers, to help borrowers understand and achieve the end of Q3 milestone relating to actively transitioning legacy sterling LIBOR loans. Among other things, the paper sets out why market participants should aim to convert their loans by the end of the third quarter of 2021 rather than waiting until the end of 2021 when most LIBOR currency-tenor settings will be discontinued.

BRRD: RTS on estimating Pillar 2 and combined buffer requirements for setting MREL

Commission Delegated Regulation (EU) 2021/1118 containing regulatory technical standards (RTS) specifying the methodology to be used by resolution authorities to estimate the Pillar 2 and combined buffer requirements at resolution group level has been published in the Official Journal of the European Union (OJ). This is for the purpose of setting the minimum requirement for own funds and eligible liabilities requirement (MREL) under the Bank Recovery and Resolution Directive (BRRD).

The Delegated Regulation will enter into force on 28 July 2021.

CRR: EBA guidelines on criteria for use of data inputs in 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 referred to in Article 325bc under Article 325bh(3) of the CRR.

The guidelines will apply from 1 January 2022.

Effective Islamic deposit insurance systems: IADI and IFSB core principles

The International Association of Deposit Insurers (IADI) and the Islamic Financial Services Board (IFSB) have published core 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 account of the specificities of Islamic banks, while complementing existing international standards in this area, primarily IADI's core principles for effective deposit insurance systems.

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

The IADI and IFSB state that their work on this issue will continue with a series of pilot tests for the CPIDIS that will be used to help develop a joint IADI-IFSB handbook for the assessment of compliance with the CPIDIS.

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Authored by Yvonne Clapham