Regulatory update: September 2023

Keep informed about the latest regulatory changes affecting the banking industry that have happened in the UK & EU as of September 2023. Here is our summary of what you need to know:

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UK

• The Bank of England announced two updates on their intended timetable to implement the Basel 3.1 standards in the UK.  This update revised the expected implementation date to 1^st July 2024 and to set expectations for publication of near-final policies relating to credit risk, CVA Risk, counterparty credit risk and operational risk to Q2 2024. 
  
  
• The PRA have proposed (CP17/23) clarifications and amendments when capitalising foreign exchange exposures under the market risk capital framework and sets out the process for seeking permission to exclude Structural Foreign Exchange (SFX) positions from this capital calculation.  This proposal would result in changes to the current proposal around the implementation of Basel 3.1 (CP16/22). The PRA proposes aligning the implementation of this proposal with the implementation of Basel 3.1. 
  
  
• Concurrent with HM Treasury’s consultation on legislative changes that would allow ring-fenced bodies (RFBs) to operate in non-UK and EEA third-countries, the PRA are proposing (CP20/23) a rule to ensure an overseas branch or subsidiary does not pose a material risk to the RRB.  This would be expected to be implemented as close as practical to the removal of the legislative prohibition of this currently and is expected to be around the first half of 2024. 
  
  
• Both the PRA & FCA have jointly published consultation papers (CP18/23 & CP23/20, respectively) on proposals to introduce a new regulatory framework on Diversity & Inclusion in the financial sector.  Proposals include a mandatory regulatory reporting requirement for firms > 250 employees. The deadline for feedback on CP23/20 is December 18, 2023, with implementation expected in 2024. 
  
  
• The Bank of England’s Quarterly Bulletin incorporated an update on “Enabling innovation through a digital pound”, which indicated that a central bank digital currency, in wholesale or retail form, is likely to be needed. The Bank highlighted that the vast majority of central banks globally are at least researching the potential for central bank digital currencies in their jurisdictions, with a handful having already launched. The UK authorities see a role for the digital pound in (a) maintaining public access to retail central bank money and (b) promoting innovation, choice and efficiency in domestic payments. 
  

EU

• The Basel Committee on Banking Supervision (BCBS) have just published findings from the latest Basel III monitoring exercise, as of December 2022, and revealing several key findings. In the context of the initial Basel III framework, the Common Equity Tier 1 (CET1) capital ratios for Group 1 banks increased from 12.7% to 13.1% in the second half of 2022, surpassing pre-pandemic levels. The average impact of Basel III on the Tier 1 minimum required capital (MRC) of Group 1 banks slightly increased (+3.0%), compared to the previous reporting period. Despite a decrease in capital shortfalls under the final Basel III framework in H2 2022, they still remained above end-2021 levels for Group 1 banks and Global Systemically Important Banks (G-SIBs). Liquidity Coverage Ratio (LCR) for Group 1 banks declined, while Net Stable Funding Ratio (NSFR) increased. The report emphasizes that banks generally met or exceeded regulatory requirements, with no significant shortfalls. The analysis includes Group 2 banks, showing changes in their results, but cautioning against direct comparisons due to significant changes in the sample. The findings provide stakeholders with a benchmark for analysing the impact of Basel III reforms on banks. 

• The European Banking Authority (EBA) conducted its second mandatory exercise on the full implementation of Basel III in the European Union. The results indicate a substantially reduced impact on EU banks compared to previous assessments. This suggests that the implementation of Basel III, a set of international banking regulations, is having a less severe effect on EU financial institutions than initially anticipated.  Overall, the show that European banks’ minimum Tier 1 capital requirement would increase by 9.0% at the full implementation date in 2028 with the main contributing factors as the output floor and credit risk.  

• The European Supervisory Authorities (EBA, EIOPA, and ESMA) have issued their Autumn 2023 Joint Committee Report on EU financial system risks, emphasizing ongoing economic uncertainty. They caution national supervisors and financial market participants about financial stability risks tied to this uncertainty. Recent events, including the Russian-Ukraine conflict, energy crisis, and turmoil in US mid-sized banks in March 2023, have been managed well by most institutions, but high uncertainty remains due to geopolitical risks, inflation, and an uncertain economic outlook. The European financial system is sensitive to shocks, with market implications causing risk aversion. Interest rate increases have varying impacts, affecting banks positively but reducing profitability for insurers and creating liquidity risks in asset management. The report advises close monitoring, preparedness for asset quality deterioration, and emphasis on effective risk management and governance. 

Upcoming ALMIS releases

These are just some of the key regulatory reporting updates in the UK and EU in September 2023. Firms should stay up-to-date with the latest regulatory developments to ensure that they are compliant with their reporting obligations. If you have any questions about these updates or are looking for support with meeting your regulatory commitments, please contact us.