Global Risk Regulator - April 2021
- Tackling post-Brexit regulatory challenges as UK and EU plot separate paths
- Future of UK regulatory regime still unclear
- EU and UK agree ‘bare bones’ MoU on financial regulatory co-operation
- Stress testing for climate change could influence bank capital levels
- Fed ends SLR exemptions despite bank calls for it to be extended
- SEC consults on ESG disclosure standards for listed companies
Limited room to reform UK regulatory regime: Following statements by officials and various reports, clues are emerging over the future shape of the UK’s regulatory framework – a minor makeover at best as the scope for divergence is restricted.
'On March 26, the two jurisdictions said they had agreed the basics of a memorandum of understanding to create a Joint UK–EU Financial Regulatory Forum. It means the two sides can cooperate on regulation and it might pave the way for the EU to eventually grant the UK equivalence on more financial services areas. Meanwhile, the EU has granted the UK temporary equivalence in only two areas. By contrast, EU firms are allowed to continue selling a wide range of wholesale financial services into the UK, and UK-located firms are permitted to trade instruments such as derivatives on EU venues — moves which do not look set to be reciprocated anytime soon. This is hurting the revenue of some EU banks with London branches. But, on balance from an EU perspective, this stance appears effective. Most trading in euro-denominated shares has moved into the bloc.'
Proposed green asset ratio could inflict reputational damage on banks: A European Union proposal for a green asset ratio for banks is being touted as a wake-up call for the industry, but bankers question its feasibility and the risk of unfair reputational damage.
'The European Commission is ramping up its mission to make Europe the first climate-neutral continent by 2050 with its newest proposal, a green asset ratio (GAR) that would measure how banks finance sustainable activities. The green asset ratio – described by analysts as “disruptive” and “ambitious” – is billed as a tool to show how institutions embed sustainability considerations in their risk management, business models and strategy. The ratio would measure the amount of climate-friendly loans, advances and debt securities compared to total assets on a lender’s balance sheet. In March, the European Banking Authority (EBA) put out a consultation paper on a framework for environmental, social and governance (ESG) disclosures, which included the GAR proposal. Piers Haben, director of banking markets, innovation and consumers at the EBA, tells Global Risk Regulator: “I think this proposed framework is a wake-up call for all of us that we need proper disclosure both around the physical and transition risks associated with carbon-intensive lending, as well as setting strategies that meet objectives like the Paris targets.”
Singapore Libor transition plan “aggressive but achievable”: Singapore is poised to take the next step in transitioning its interest rate benchmark in April with a ban on issuing swap offer rates (SOR) cash products, as the city-state sticks to an end-2021 benchmark cessation date - a plan which the country’s leading bank says “is aggressive but achievable”.
'In February, the deputy managing director of the Monetary Authority of Singapore's markets and development division, Leong Sing Chiong, said in a speech to an industry conference that the regulator would continue its plan to discontinue swap offer rates (SOR) by the end of this year. This is despite the ICE Benchmark Administration’s decision to extend the lifespan of US dollar LIBOR - a key component of SOR - to 2023. According to Andrew Ng, head of treasury and markets at Singapore bank DBS, there hasn’t yet been large amounts of activity in instruments linked to SOR’s replacement benchmark, Singapore Overnight Rate Average (SORA), but this would likely change in the near future. “On the interbank side we have seen a fair bit of closing out of outstanding SOR trades from the market but so far we haven't really picked up a lot of customers' trades on SORA. However, I expect the volume of SORA swaps will pick up from April onwards. The current timeline of switching at least 80% or 85% of trades to a new benchmark between April and December is aggressive, but also achievable,” Mr Ng says.'
Pandemic highlights EU bank resolution framework weaknesses: The EU’s much-criticised bank failure rules are up for re-evaluation. Experts insist the rules are currently unworkable and change is overdue, especially as Europe is poorly prepared for a COVID-19-related banking crisis.
'The European Commission is gathering stakeholders’ experience with the current crisis management and deposit insurance framework, along with their thoughts on how to revise the rules and complete the European Banking Union. The Bank Recovery and Resolution Directive came into force in spring 2014, to resolve failing banks quickly and with as little spillover onto the real economy and public finances as possible. However, banks and legal practitioners say that the rules in their current format are unrealistic and countries are finding creative ways to skirt them. Meanwhile, the final pillar of the European Banking Union — the European Deposit Insurance Scheme — is still on the backburner amid deadlock between various member states. Despite the best of intentions at the outset, even the EC has conceded with its latest consultation that its post-financial-crisis rules need revising.'
US regulators scramble to catch up on climate change policies: The Federal Reserve and other US financial regulators are framing a slew of regulations on climate change as they hurry to deliver on ambitious policies to combat global warming set out by the Biden administration.
'Over the past few weeks the Fed has been speaking to the Bank of England, which is pushing ahead with comprehensive climate change stress tests. The UK’s first such tests will take place soon under a roadmap that makes climate disclosure mandatory for banks by the end of the year. Additionally, the UK will make Task Force on Climate-related Financial Disclosures (TCFD) -aligned disclosures fully mandatory for financial institutions and expects a “significant portion” of mandatory requirements to be in place by 2023, with complete adoption across the economy by 2025. The European Central Bank is also undertaking an EU-wide stress test exercise and has said it is prepared to raise the amount of capital required at any banks considered to have particularly high levels of climate risks in their balance sheets as early as this year. On top of this, US regulators have praised the work of the International Organization of Securities Commissions and the International Financial Reporting Standards on climate change. And they have said they might employ the Community Reinvestment Act, a federal statute that encourages financial institutions to meet the credit needs of all segments of their borrowers, to force banks to consider climate change’s impact on poorer communities.'