Joint efforts: A comparison of the EBA key areas of focus 2016 with ECB’s priorities 2016

EBA key areas align with ECB priorities

The ECB 2016 priorities are intertwined with the EBA key areas of focus for 2016.

David Nicolaus

Senior Manager, KPMG ECB Office

KPMG in Germany

Businessmen talking together in lobby

On June 15th the European Banking Authority (EBA) published its annual report where it laid out its key areas of focus for 2016. Not surprisingly, the EBA’s work areas for 2016 overlap with some of the European Central Bank (ECB) priorities for 2016, however, it is interesting to see how these are intertwined in detail:

  • Leverage Ratio: the EBA seeks an answer on how to account for banks' business model and individual risk profile when including the leverage ratio in Pillar 1 (as mandated in article 511 CRR). Therefore, the EBA has defined business model categories in close cooperation with competent authorities on the basis of a benchmarking approach that partly overlaps with the ECB’s business model analysis, although with significantly less qualitative elements.
  • Non-performing loans (NPL): the EBA will do a stock-take of country-specific NPL resolution practices (e.g. solvency procedures, tax treatment, transparency of NPL markets) and issue policy statements if deemed necessary. For the ECB, NPL’s are one of the key priorities for 2016 where a task force has been established that has set up (non-binding) NPE reduction targets. Failing to meet NPE reduction targets could also have a considerable Pillar 2 impact for SSM banks.
  • IFRS 9: the EBA will assess the impact of IFRS 9 on own funds and prudential requirements via a quantitative impact study (QIS). Furthermore, the EBA plans to publish a guideline on the application of new expected credit loss model and has issued a draft technical standard on FINREP following changes from IFRS 9. On the ECB side, the impact of IFRS 9 on provision levels is addressed by a thematic review, and the ECB is involved in the EBA QIS.
  • Complementing SREP-guidelines: the EBA plans to complement the guideline on SREP with additional guidelines focusing on stress testing, ICAAP and ILAAP, credit valuation adjustment (CVA) and information and communication technology (ICT) risk. With regard to stress testing, the ECB has broadly aligned the SSM SREP stress test methodology with the EBA stress test methodology. Further on, harmonizing the supervisory approach to ICAAP including stress testing is also a key ECB priority for 2016. For the design of banks’ ICAAP and ILAAP, the ECB’s expectations have been formulated in the ECB’s guidance. Counterparty Credit Risk has been addressed by the ECB via a questionnaire that has been sent to banks within the Targeted Review of Internal Models (TRIM). In the area of ICT risk, the ECB is carrying out a highly prioritized thematic review on BCBS 239.
  • Consistency of Risk Weighted Assets (RWA): the EBA has proposed to the EU commission two technical standards for a RWA benchmarking exercise. In addition, the EBA is reviewing main definitions and technical aspects of IRB models (i.e. default definition, materiality threshold, probability of default and loss given default estimation), providing a common assessment methodology for competent authorities and is developing standardized comparable templates to enhance transparency on internal model outcomes. For the ECB, reducing RWA variability for Pillar 1 internal models on credit and market risk is one the major objectives of TRIM where model parameter inputs are analysed in depth and model outputs are benchmarked.

Taken together, it appears that SSM-banks have an informational advantage compared to non-SSM banks within some of the EBA’s key areas of focus for 2016 as these typically have been exposed to supervisory interaction on these topics with the ECB already and therefore have gained an understanding for potential changes of regulatory measures. Non-SSM banks are well advised to monitor the ECB’s priorities and initiatives under the SSM to avoid ‘surprises’ from forthcoming EBA regulations.

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