The Global Regulatory Brief provides monthly insights from regulatory bodies on developments within risk and regulation. This brief was written by Bloomberg’s Regulatory Affairs Specialists.
Risk, capital and financial stability regulatory developments
The financial stability outlook became more challenging for regulatory bodies in recent weeks as a consequence of the recent turmoil in the banking sector. The FSB highlighted vulnerabilities associated with elevated debt levels, stretched asset valuations, and liquidity mismatches – all of which are sensitive to tightening financial conditions and slowing economic activity. Regulatory bodies are discussing new rules and bank crisis management, from FRTB internal models, deposit insurance rules and updates on LIBOR transition. Navigate the regulatory challenges that are reshaping financial markets with confidence.
- FSB Chair highlights recent banking sector turmoil to G20
- FSOC proposes framework for financial stability risks
- EBA consults on draft rules to assess FRTB internal models
- EU propose new banking crisis management and deposit insurance rules
- UK PRA publishes feedback on prudential liquidity framework
- Hong Kong published new risk-based capital regime for insurance industry
- Global regulatory bodies provide update on LIBOR transition
FSB Chair writes to G20 finance ministers and central bank governors on recent banking sector turmoil
The Chair of the Financial Stability Board (FSB), Klaas Knot, has written to the G20 finance ministers and central bank governors regarding the consequences of recent turmoil in the banking sector and its implications for financial stability. The letter also introduces the FSB’s cyber incident reporting recommendations following a public consultation. Among other things, the FSB Chair notes that ongoing surveillance has highlighted vulnerabilities relating to elevated debt levels, business models based on presumptions of low and stable interest rates, stretched asset valuations, and the combination of leverage and liquidity mismatches in non-bank financial intermediation.
FSOC proposes framework for financial stability risks and guidance for the nonbank financial company determinations
The Financial Stability Oversight Council voted unanimously to issue for public comment a proposed analytic framework for financial stability risks. This new framework is intended to provide greater transparency to the public about how the Council identifies, assesses, and addresses potential risks to financial stability, regardless of whether the risk stems from activities or firms.
The Council also voted unanimously to issue for public comment new proposed interpretative guidance on the Council’s procedures for designating nonbank financial companies for the Federal Reserve supervision and enhanced prudential standards. This proposed guidance would replace the Council’s existing guidance and describes the procedural steps the Council would take in considering whether to designate a nonbank financial company.
The two proposals will be available for a 60-day public comment period after publication in the Federal Register.
EBA consults on draft rules to assess FRTB internal models
The European Banking Authority (EBA) has launched a consultation on draft rules spelling out the assessment methodology under which national competent authorities verify institutions’ internal models under the Fundamental Review of the Trading Book (FRTB) rules. One of the prerequisites for an institution to use the new internal model approach for calculating its own funds requirements for market risk is the approval from its competent authority. The EBA is seeking to ensure clarity on the assessment performed by competent authorities, so as to guide the implementation of FRTB internal models in EU. The draft standards set out a framework for competent authorities to assess the requirements and focuses on governance, the internal risk-measurement model covering the expected shortfall and the stress scenario risk measure, and the internal default risk model. Comments are due by June 26, 2023.
The consultation comes as European legislators work to finalize the revised Capital Requirements Regulation (CRR) to implement the remaining Basel III banking standards.
EU propose new banking crisis management and deposit insurance rules
The European Commission has published a package of proposals to reform the EU framework for bank crisis management and deposit insurance, with a focus on small and medium-sized banks. Specifically, reforms relate to the Bank Recovery and Resolution Directive (BRRD), Single Resolution Mechanism Regulation (SRMR) and the Deposit Guarantee Schemes Directive (DGSD). The proposals are intended to enable authorities to organize the orderly market exit for failing banks through the use of industry-funded safety nets to shield depositors in banking crises. This is intended to complement banks’ internal loss absorption capacity, which remains the first line of defence.The EU is also evaluating the State aid framework for banks, which is expected to complete in Q1 2024. The proposals will now be debated and revised by the EU Parliament and Council.
UK PRA publishes feedback on prudential liquidity framework
The Prudential Regulation Authority (PRA) has published a feedback statement regarding liquid asset usability examining bank reluctance to draw down their high-quality liquid assets (HQLA) in times of severe stress and how the Bank of England (BoE) and PRA could improve HQLA usability. Responses show that banks are generally concerned about regulatory reactions to initial falls in their liquidity coverage ratio (LCR) such as more intensive supervision and increased reporting requirements. Banks are also concerned about the amount of time it takes to rebuild HQLA buffers after a drawdown and negative market perceptions. The statement includes various suggestions for improvements, such as simplifying liquidity-related disclosures in a liquidity stress and improving international coordination to avoid conflicting regulatory guidance across jurisdictions. Other suggestions include clarification of the extent to which LCRs can fall and the time banks have to rebuild stocks of HQLA during liquidity stresses, as well as adjustments to LCR calculations.
Hong Kong published new risk-based capital regime for insurance industry
The Hong Kong Government has published the amended Insurance Bill 2023 to provide a legal framework to implement a risk-based capital regime for the Hong Kong insurance industry. The new regime is expected to render the capital requirements imposed on insurance companies more sensitive to their asset and liability matching, risk profile and mix of products. The Government and Insurance Authority have conducted a series of studies and consultations to help lay the ground for implementation. The Bill was introduced into the Legislative Council for first reading in mid-April.
Global regulatory bodies provide update on LIBOR transition
The Bank of England (BoE) and Financial Conduct Authority (FCA) have reminded firms that there are less than 90 days until the USD LIBOR ceases on 30 June 2023, marking a milestone in the transition to Risk-Free Rates (RFRs).
The FCA published a notice of first decision to compel ICE Benchmark Administration Limited (IBA) to continue the publication of the 1-, 3- and 6-month US dollar LIBOR settings after June 30, 2023 until September 30, 2024, using an unrepresentative synthetic methodology. The FCA reminds firms that they must continue to actively transition contracts that reference US dollar LIBOR. The FCA has also reminded firms that the 3-month synthetic sterling LIBOR setting is expected to cease on March 28, 2024 and firms should continue their active transition efforts ahead of this date. The 1- and 6-month synthetic sterling LIBOR settings were published for the final time on March 31, 2023 and have ceased permanently. The FCA plans to publish a detailed feedback statement in Q2 2023 and to publish the final versions of the draft notices in July 2023.
The Hong Kong Monetary Authority (HKMA) has issued a leaflet and updated question and answer document to remind corporate customers of authorized institutions to prepare for the transition away from remaining LIBOR settings. The leaflet reminds corporate treasurers that the remaining USD LIBOR settings will be discontinued from July 1, 2023, and that the Secured Overnight Financing Rate (SOFR) has replaced LIBOR. To ensure a smooth transition away from LIBOR, corporate treasurers are reminded to take action to complete the remediation of existing contracts referencing the remaining USD LIBOR settings in good time, and in any event before the end of June 2023.
The Alternative Reference Rates Committee (ARRC) released a summary and update of its Term SOFR Scope of Use recommendations to provide a detailed summary and examples of the ARRC’s existing recommendations and add a limited refinement with respect to Term SOFR-SOFR basis swaps. The ARRC’s existing recommendations recognize the ability of end users to use Term SOFR derivatives to hedge Term SOFR business loans or legacy LIBOR products that have converted to Term SOFR. The ARRC’s update of its recommendations additionally recognizes the ability of end users to enter into Term SOFR-SOFR basis swaps (but not other Term SOFR derivatives) in a wider set of circumstances, even when they do not hold Term SOFR cash assets that they are seeking to hedge.
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