Practice notes on financial market | Avantage Reply Page 5

This paper summarizes BaFin's September 2024 guidelines on implementing DORA in Germany’s financial sector, highlighting key differences in ICT and third-party risk management. It outlines actions for firms to align with DORA’s broader resilience requirements in governance, IT operations, and security.

Guide to Effective RDARR

Briefing Note

Data governance framework, including the role of the 'validation function'

On 3rd May 2024, the ECB released its Guide on Effective Risk Data Aggregation and Risk Reporting (RDARR), relating to the Principles adopted by the Basel Committee on Banking Supervision (BCSB239). The ECB outlined its supervisory expectations across seven key areas; this one-pager focuses on the ECB's expectations regarding the data governance framework in Significant Institutions (SIs).

Briefing Note

Six Design Principles for Bank Risk and Control Operating Model Transformations in 2024

This briefing note functions as a starting point for banks’ senior management to identify key priorities and design decisions for risk and control target operating model (TOM) transformations in 2024. It has been developed by identifying the key supervisory priorities of the UK and EU regulators, analysing strategic risk management trends in the industry, and leveraging Avantage Reply’s insights from developing target operating models for a range of risk and control functions at some of the most significant financial institutions across Europe.

Briefing Note

NEW SUPERVISORY REGIME FOR NON-SYSTEMIC BANKS

Following Brexit, the UK Government has sought out ways to improve, clarify, and simplify the regulatory regime for UK financial institutions. On April 29, 2021, the PRA published a Discussion Paper, “A Strong and Simple Prudential Framework for Non-Systemic Banks and Building Societies”, outlining its proposed changes to the prudential framework regime for non-systemic banks and building societies to ensure the resilience, stability, and soundness of smaller firms.

Credit Risk Management

Briefing Note

New Trends In Credit Risk Management: Real-Time Analysis And Data Teams

In Credit Risk management, it is common practice for banks to use financials for assessing the creditworthiness of large and mid-corporates, with the drawback of being outdated by the time the credit review takes place. This paper proposes the use of real-time transactional data to circumvent this issue. This process can be further improved by setting in place teams dedicated to data management and preparation with the benefit of centralising the information used for other purposes, e.g. modelling, loss collection, monitoring, validation.

Climate Risk

Briefing Note

Environment & Climate Risk RMF Self-assessment

Leveraging on ECB Guide on climate-related and environmental risks and emerging market practices, Avantage Reply has developed a self-assessment tool for financial institutions. The key objective is to help financial institutions while engaging bilateral discussions with ECB early 2021 and evaluating internal capabilities in terms of Environment and Climate-related risk management framework. Interactive and practical, the self-assessment tool covers the key building blocks of ERM function and assesses an institution’s readiness and preparedness in identifying, measuring and managing climate-related risks. Integration of climate dimensions at the highest level of the organization is key due to the transversal impact of climate risk over credit, market, liquidity, operational and other transversal risks.

Stress Testing

Briefing Note

Impact of COVID-19 on Stress Test Models

Since the 2008 financial crisis, regulators have emphasised the importance for banks of using stress tests to better identify potential weaknesses in their banking books, trading books and liquidity positions in the event of market turmoil. This paper will show model outcomes likely to be observed by banks in the 2021 STEBA and propose solutions and considerations for banks to mitigate the risk of having to deal with unrealistic model outcomes.

ICAAP & ILAAP

Briefing Note

ICAAP & ILAAP Internal Self-Assessment

Leveraging on its experience and in line with market practices, Avantage Reply has developed ICAAP ILAAP self assessments tools. Interactive and easy to use, the self assessment tools cover the key building blocks of ICAAP and ILAAP frameworks and provide an overview that will help benchmarking frameworks in place against supervisory expectations and best practices. ICAAP and ILAAP integrated at the highest level of the organization is key for a proper use of both processes into the decision making process.

ICAAP

Briefing Note

ECB report on bank's ICAAP practices

Since the establishment of the Single Supervision Mechanism (SSM) under the European Central Bank’s (ECB) mandate, banks directly supervised by the ECB are required to submit an Internal Capital Adequacy Assessment Process (ICAAP) package on an annual basis. This submission is aimed at demonstrating the robustness of banks’ internal processes in relation to the identification, assessment and measurement of their risk profile and the availability of sufficient capital to support their risk profile.

Covid-19

Briefing Note

ECB COVID-19 Reporting

The ECB has mandated a new reporting exercise in the light of the COVID-19 crisis in an effort to ensure the timely and consistent monitoring of the risks sparked by the outbreak and to widen the scope beyond the SREP STEs, FINREP and COREP, through the inclusion of credit moratoria and state guarantees figures. The reporting shall be submitted to NCAs on a monthly basis until at least December 2020, and is expected to raise several implementation challenges for SIs on the organizational and operational levels (including capacity and data aggregation issues).

DPM 2.9

Briefing Note

Reporting Framework 2.9

Article 99 of the CRR (Regulation (EU) No 575/2013) requires the European Banking Authority (EBA) to develop and maintain so-called Implementing Technical Standards (ITS) on supervisory reporting. They shall notably cover own funds, large exposures, leverage ratio, liquidity coverage ratio, additional monitoring metrics (AMM), stable funding, asset encumbrance (regrouped under COREP), financial information (FINREP), supervisory benchmarking (SBP) and resolution planning (Resolution).

Inter-Bank Offered Rates

Briefing Note

Preparing for the end of IBOR

Inter-Bank Offered Rates (IBOR, of which LIBOR is one example) are being forced out due to regulatory pressure following a series of scandals. This transition will have significant ramifications as these rates are used as references in many wholesale transactions and some retail transactions. Following industry and regulatory consultations, new Risk-Free Rates (RFR) are replacing IBORs. In this publication, Avantage Reply will explore the impacts of this transition on banks.

Stress Testing

Briefing Note

Analysis of the 2016 Bank of England stress testing results

The Bank of England has published the results of their annual concurrent stress test confirming that, in aggregate, the UK banking system is sufficiently capitalised to withstand a severe stress. However the regulator has been clear: there is more work to do for banks to have a sufficiently robust stress testing process. In this briefing, Avantage Reply provides its analysis and its perspectives on how banks can up their stress testing game.

Risk & Compliance

Briefing Note

EDTF guidelines for IFRS 9 impairment-related disclosures

In 2012, the Financial Stability Board set up the Enhanced Disclosure Task Force (”EDTF”), which focused on the quality, comparability and transparency of these disclosures, particularly those flowing from IFRS 9 and US GAAP changes in Expected Credit Loss (“ECL”) approaches. In December 2015, the EDTF issued detailed guidance, including templates, for the requirements relating to changes in disclosures under the IFRS's new ECL regime.

Risk & Compliance

Briefing Note

Securitisation at a crossroad? Major recast of the regulatory framework

In September 2015, the European Commission released the Securitisation Initiative. On one hand, it establishes a common framework for all regulated financial institutions in Europe and defines the concept of a simple, transparent and standardised, or STS, securitisation. On the other hand, it implements in Europe the Basel III securitisation framework – finalized by the Basel Committee in December 2014 – but with a twist as STS securitisations qualify for a preferential treatment in the form of reduced capital charges.

Risk & Compliance

Briefing Note

Shadow Banking Entity Exposure Limits: EBA Guidelines

The EBA published a consultation paper on shadow banking entity exposure limits on 19 March 2015. The EBA intends to finalise its guidelines by the end of 2015. It defines “shadow banking entities” as those that carry out credit intermediation activities (bank-like activities involving maturity transformation, liquidity transformation, leverage, credit risk transfer or similar activities) and are not defined excluded undertakings.

Practice note

Briefing Note

Fundamental Review of the Trading Book: Internal Models

The Basel Committee on Banking Supervision’s (“BCBS’s”) second full consultative document on the fundamental review of the trading book (“FRTB”) , supplemented by a third paper in December 2014 covering outstanding issues , sets out significant revisions to the market risk capital requirements framework. Key areas include moving from Value at Risk (“VaR”) to Expected Shortfall (“ES”), varying liquidity horizons, the trading book/banking book boundary, the treatment of credit, hedging and diversification, and the relationship between the internal models-based and standardised approaches. The FRTB document succeeded the Committee’s initial consultation from the previous year. Its proposed revisions are part of a broader reform agenda in response to the material weaknesses exposed in the financial crisis, and they incorporate the lessons learned from recent investigations into the variability of market Risk-Weighted Assets (“RWA”). This note reviews the FRTB changes to internal models-based market risk approaches – Expected Shortfall, confidence level, liquidity horizons, stressed ES, migration risk and backtesting -- assessing their implications for firms and capital requirements.

Practice note

Briefing Note

MiFID II: implications for Commodity Derivatives

Commodity dealers are subject to important changes under MiFID II regulation. This has far-reaching implications for both commodity trading market participants and for the market as a whole. Exemptions for commodity derivative dealers are being removed and more firms will be regulated under MiFID II, many for the first time. ESMA, the European supervisor and regulator, is empowered to enforce new position limits on market participants (read: forcibly close out positions) in exceptional circumstances. Trading firms will report their positions daily to the market operator, who will report positions daily to ESMA. ESMA will publicly disclose an overview of the positions held on contracts. The 3rd January 2017 implementation date of MiFID II may seem a long way off, but for the many firms who fall under the expanding scope of MiFID II, there is a great deal of work to do. Necessary plans need to be put in place now and there will be little regulatory sympathy for those who have not prepared.

IFRS9

Briefing Note

BCBS's view on the new impairment model under IFRS9

On 2 February 2015, the Basel Committee on Banking Supervision (“BCBS”) issued a Consultative Paper setting forth guidelines for a robust and consistent implementation of the new Expected Credit Loss (ECL) accounting framework across all jurisdictions. The guidance outlines supervisory expectations for ECL accounting in the form of 11 principles that are consistent with the applicable accounting standards established by the IASB and other standard setters. Comments from the industry are expected by 30 April 2015.

Practice note

Briefing Note

Interest Rate Risk in the Banking Book 2015 QIS

In June 2013, the European Banking Authority launched a consultation paper on amendments and additions to the earlier CEBS Guidelines on interest rate risk arising from non-trading activities (IRRBB) published in 2006. The main objectives of the proposed changes were to improve the management of IRRBB risks and to push for the convergence of supervisory practices under the Pillar 2 assessment process. Furthermore, this update will provide more detailed technical guidance for both institutions and supervisors on various aspects of the management and the assessment of interest rate risk in the banking book. The adjusted EBA guidelines first released in 2013 should have been published by the end of 2014. However, since then the Basel Task Force on Interest Rate (TFIR) has not yet reached consensus on draft Pillar1 versus Pillar2 guidelines. The momentum for IRRBB has slowed down somewhat, the Basel/EBA/FSB QIS exercise for it is now expected for the summer of 2015.

Practice note

Briefing Note

Fundamental Review of the Trading Book: Current Developments

The recent financial crisis revealed material weaknesses in the regulatory capital framework for trading activities. Capital allocated to absorb trading losses displayed high volatility. As an initial rapid response to the apparent undercapitalisation of market risk, the Basel Committee on Banking Supervision introduced a range of framework revisions in July 2009, including stressed calibrations and capital for credit risks. This package, often referred to as “Basel 2.5”, was believed to be a necessary but not fully sufficient update to the capital requirements.

This Briefing Note provides a summary of the key proposals. The Committee is expected to issue a third (and final) Consultative Document by early 2015.

Banking System Solidity

Briefing Note

Capital adequacy, cost of the risk and profitability: during a crisis, a real puzzle for Banks

Source: Avantage Reply Observatory
Following the burst of the real estate bubble on the US sub-prime lending market and following the bankruptcy of Lehman Brothers, the worst economic crisis since 80 years has now passed through, and in some cases overcome, different stages, both from a real and from a financial point of view. In such a context, the banking industry is still facing several and complex challenges.

Practice note

Briefing Note

Leverage Ratio: An Update on Regulatory Developments

On 5 March 2014, the European Banking Authority (“EBA”) issued a report, which provides a policy analysis of aligning the current CRR1 definition of the leverage ratio exposure measure to the aforementioned Basel III standard. Later that month, the European Commission hosted a Public Hearing discussing the Commission’s forthcoming Delegated Act amending the capital measure and the total exposure measure of the leverage ratio. This Briefing Note presents an overview of regulatory developments to date, highlighting areas that banks should carefully monitor to ensure they can address impending regulatory requirements in a timely fashion.

Practice note

Briefing Note

Proposed European Regulation on the Reporting and Transparency of Securities Financing Transactions

On 29 January 2014, the European Commission (“EC”) published the Proposal for a Regulation of the European Parliament and of the Council on reporting and transparency of Securities Financing Transactions (“SFTs”). The proposal has the objective of improving the transparency of SFT transactions, including securities lending and repos, and restricting rehypothecation practices.

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Briefing Notes