financial services

News Update Financial Regulatory

AML/CFT, climate risk, blockchain, securitisation and more
1 June 2021
1 June 2021

In this News Update, we discuss the EBA's consultation on a central AML/CFT database and its report on the results of the first EU-wide pilot exercise on climate risk. We also look at the EIOPA's discussion paper on blockchain and smart contracts in insurance, and developments on the Securitisation Regulation. Finally, we highlight some other financial regulatory publications.

EBA – Consultation on proposals for a central AML/CFT database

The European Banking Authority ("EBA") launched a public consultation on the draft Regulatory Technical Standards ("RTS") for a central database on anti-money laundering and countering terrorist financing ("AML/CFT") in the EU. Under the revised EBA Regulations, which came into force in January 2020, the EBA has established a central database containing information on AML/CFT weaknesses for individual financial institutions identified by supervisors across the EU. The Consultation Paper comprises the draft RTS as well as an Annex. The draft RTS specifies the definition and the materiality of weaknesses identified by supervisors, the type of information collected, and how the information will be communicated to the EBA. It also sets out how the EBA will analyse and disseminate the information contained in the AML/CFT central database. The Annex sets out the technical specifications with the data points that will be contained in the database, and the list of authorities that will be indirectly submitting information to the AML/CFT database. The database also contains information on the supervisors' measures to rectify material AML/CFT weaknesses. The information will be used by supervisors and the EBA to make the fight against money laundering and terrorist financing in the EU more targeted and effective. The consultation runs until 17 June 2021.

EBA – Results of EU-wide pilot exercise on climate risk

On 21 May 2021, the EBA published a report with the findings of its first EU-wide pilot exercise on climate risk. The exercise's main objective was to map banks’ exposures to climate risk and to provide insight into the green estimation efforts banks have carried out so far.

The EBA ran the EU-wide pilot exercise on a sample of 29 volunteer banks from 10 countries, representing 50% of the EU banking sector’s total assets, which provided raw data on non-SME corporate exposures to EU domiciled obligors. Overall, the findings show that more disclosure on transition strategies and greenhouse gas ("GHG") emissions are needed to allow banks and supervisors to assess climate risk more accurately. In addition, the results highlight the importance for banks to expand their data infrastructure to include clients’ information at activity level. This is particularly crucial as for the 29 banks in the sample as more than half of their exposures to non-SME corporates (58% of total) are allocated to sectors that might be sensitive to transition risk. A parallel analysis, based on GHG emissions, reveals that 35% of banks’ total submitted exposures are towards EU obligors with GHG emissions above the median of the distribution.

Banks’ disclosures will be reinforced following the EBA draft technical standards on Pillar 3 disclosures on climate change and ESG related risks, including the definition of the green asset ratio ("GAR"), currently under consultation, which will allow stakeholders to assess banks' ESG related risks and sustainability strategy and to promote market discipline. Regarding the EU taxonomy classification, banks are currently in different development phases to assess the greenness of their exposures.

The scenario analysis shows that the impact of climate-related risks across banks has different magnitudes and is concentrated in some particular sectors. Tools for scenario analysis are quickly developing and further progress should be made on modelling the transmission channels of climate risk shocks to banks’ balance sheets.

EIOPA – Discussion paper on blockchain and smart contracts in insurance

On 29 April 2021, the European Insurance and Occupational Pensions Authority ("EIOPA") published a discussion paper, aiming to provide a high-level overview of risks and benefits of blockchain and smart contracts in insurance from a supervisory perspective as well as to gather feedback from stakeholders. EIOPA invites stakeholders to provide their views to this discussion paper by filling in the EU survey by 29 July 2021.

The EIOPA perceives that on one hand, blockchain has the potential to deliver key digital opportunities, reduce duplication of processes, increase process automation and efficiency, enhance customer experiences and improve data quality, but that on the other hand, the adoption of blockchain may also trigger new risks to insurers, supervisors and consumers. Considering that blockchain technology is still evolving, several challenges are emerging, such as the complexity of the technology, energy consumption, data protection and privacy, cyber risk, integration with legacy infrastructures, or interoperability and standardisation between different blockchains.

Although the EIOPA considers that the current regulatory and supervisory framework is mostly effective in addressing emerging risks, it also believes specific issues should be examined, based on the evolution of the technology and its uses in business processes. It emphasises the importance to ensure appropriate understanding by insurance undertakings and supervisors, as well as proportionate governance policies and processes, to guarantee that all relevant risks are identified and properly managed.

ECB and ESAs – Developments regarding the Securitisation Regulation

On 14 May 2021, the European Central Bank ("ECB") announced its decision to start ensuring that the banks under its direct supervision comply with the requirements for risk retention, transparency and resecuritisation set out in the Securitisation Regulation's ("SECR") Articles 6 to 8. This decision follows recent amendments to the SECR, which are part of the EU’s Capital Market Recovery Package. The amendments explicitly state that risk retention, transparency and ban on resecuritisation requirements are of a prudential nature and, therefore, should be supervised by the competent prudential supervisors. The decision further clarifies the implementation of the regulatory framework, which is an important precondition for a well-functioning securitisation market.

On 17 May 2021, the Joint Committee of the European Supervisory Authorities ("ESAs") published its analysis of the SECR's implementation and function, and recommended on how to address initial inconsistencies and challenges, which may affect the overall efficiency of the current securitisation regime. The report is meant to guide the European Commission in its review of the SECR's function.

According to the report, the SECR has been useful in increasing the EU securitisation market's overall soundness and reducing the stigma associated with securitisation products. To further improve the existing framework's overall consistency, the report suggests considering some adjustments, particularly on the following aspects:
  • Transparency requirements
    A more precise legal definition for private securitisations should be specified in the SECR to clearly identify private securitisations that should comply with the transparency requirements. Data reported for private securitisations should also be made available by a securitisation repository to ensure high quality data and supervise compliance with the transparency requirements.
  • Due diligence requirements
    Regulatory guidance would be useful to specify how proportionality could be implemented in due diligence to help new investors enter in the EU securitisation market.
  • Criteria for simple, transparent and standardised ("STS") securitisation
    Targeted amendments in the STS criteria would be needed to use the STS label for ABCP programmes. In addition, in the medium term, as more STS issuances are executed and the STS market reaches a stable pace, the European Commission with the ESAs’ support should further analyse how the STS criteria could be simplified without reducing the quality of the standard.
  • Supervision of securitisation requirements
    It is necessary to explore i) how to develop common EU supervisory tools, ii) potential alternatives to the current STS supervisory framework, particularly those jurisdictions with limited STS securitisation issuances and, iii) the relevance of a common EU approach to continually supervise the authorisation conditions for third-party verifiers.

Other financial regulatory publications

We have highlighted a selection of other publications by legislatures and regulators for the financial markets and financial supervision since our last News Update was published.
  • The EBA launched a consultation on draft Regulatory Technical Standards specifying the types of factors for the assessment of appropriateness of risk weights and the conditions for the assessment of appropriateness of minimum loss given default values for exposures secured by immovable property. The EBA also published a report on mystery shopping activities of national supervisors, a discussion paper to encourage review of the standardised data templates on non-performing loans, a report analysing the extent to which Member States' national law relies on external credit ratings, its final draft RTS on own funds and eligible liabilities and a report on applying early intervention measures under the Bank Recovery and Resolution Directive.
  • The EIOPA launched a consultation on Interbank Offered Rates transitions and its 2021 insurance stress test for the European insurance market.
  • The European Securities and Markets Authority ("ESMA") updated its Q&As on the Prospectus Regulation. The ESMA also launched consultations on its MiFIDII /MiFIR Annual Review Report under Delegated Regulation (EU) 2017/583 and on its draft Technical Standards for commodity derivatives. The ESMA also published a call for evidence on digital finance and its final report on Guidelines on how trade repositories under the Securities Financing Transactions Regulation calculate positions in securities financing transactions.
  • The Single Resolution Board ("SRB") published its updated ‘Minimum Requirements for Own Funds and Eligible Liabilities (MREL) Policy under the Banking Package’.

If you have any financial regulatory questions, please do not hesitate to contact Berry van Wijk and Roel Theissen. For questions related to Investment Management, you can also contact our colleagues Oscar van Angeren, Daan Horsthuis and Harm-Paul Plas.
Written by:
Berry van Wijk

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