ANNUAL REPORT 2021 – EUROPEAN BANKING AUTHORITY

Contributing to the sound development of financial innovation and operational resilience in the financial sector

Contributing to the European Commission’s digital finance package and monitoring innovations

In 2021 the EBA continued to monitor how financial innovations emerge and evolve in the financial market and, as discussed in detail below, contributed to a wide range of topics under the European Commission’s digital finance strategy and beyond, including legislative proposals for the Regulation on Markets in Crypto-assets (MiCA), the Digital Operational Resilience Act (DORA), the use of digital platforms in the EU’s banking and payments sector and requirements for crowdfunding service providers. In addition, the EBA drew up proposals for non-bank lending.

Crypto-assets, decentralised finance and the application of AI, as well as digital platforms and solutions to facilitate AML/CFT compliance, are just a few examples of innovations that are currently on the EBA’s innovation monitoring radar. By keeping a close eye on recent developments via targeted industry and competent authorities’ surveys, information exchanged by national innovation facilitators and market participants at the European Forum for Innovation Facilitators (EFIF), engagement with industry at the EBA’s FinTech Knowledge Hub and close collaboration with other EU and international organisations the EBA can obtain a comprehensive overview of the main innovation trends across the EU. This helps to identify emerging risks and provide guidance on areas where further work by the EBA may be needed.

Monitoring and assessing the impact of the digital finance legislation

The EBA is closely following the progress of the Commission’s proposals for a Regulation on Markets in Crypto-Assets (MiCA) and the Digital Operational Resilience Act (DORA) through the co-legislative phase. It is also evaluating, on a regular basis, the potential impact of these initiatives and providing technical advice to the Commission where necessary.

Through its project team on operational preparedness for tasks under DORA and MiCA, the EBA has already started preparatory work to ensure it stands ready to carry out the oversight, supervision and policy tasks that may ultimately be conferred on the EBA.

As regards DORA, the EBA’s staff have been working closely with ESMA and EIOPA staff as well as competent authorities to analyse the proposed provisions and constructively assess their implementation and impact. It is worth recalling that DORA aims to establish a comprehensive framework on digital operational resilience for EU financial entities by streamlining and strengthening the existing patchwork of relevant provisions across EU financial services legislation. DORA envisages enhanced collaboration and cooperation among authorities within the EU and internationally. DORA also envisages the establishment of an oversight framework, the first concrete initiative to address the complex issue of the dependencies on critical ICT third-party providers (CTPPs) in the financial sector, including monitoring third-party concentration risks.

The ESAs will be assigned this oversight role, which will be limited to the ICT risks that CTPPs may pose to financial entities and will not amount to full supervision of CTPPs across the full range of their activities. The proposed ESA-led oversight model for CTPPs may raise coordination and consistency challenges, and in light of this the ESAs’ chairs issued a joint letter to the co-legislators on 9 February 2021 to express views on a number of aspects (namely the oversight framework, resources and proportionality) and propose modifications with a view to improving the current legislative proposal and achieving its objectives in an effective manner.

In addition, the EBA has been assessing the potential impact of DORA on existing sectoral guidance in an effort to better understand how this can be leveraged for the upcoming DORA policy mandates and to identify any gaps that might need to be addressed.

Under the Commission’s legislative proposal for MiCA, there are proposals to establish an EU-level supervisory framework for issuers of significant asset-referenced and e-money tokens and for those issuers who choose to voluntarily submit to EU-level supervision. As proposed by the Commission, the EBA would be the EU-level supervisor. The ultimate attribution of supervisory powers will be determined in the context of the co-legislative process.

In the meantime, the EBA has commenced its assessment of the preparatory steps that will need to be taken in order to prepare for supervision, including human resource and IT needs.

The EBA is also continuing its analysis of the coherence of the MiCA regime in the context of existing sectoral measures in the banking and payments sector and preparing technical observations for the Commission as appropriate.

Identifying ICT risks, monitoring underlying internal governance arrangements and reviewing ICT supervisory practices ahead of the upcoming DORA

Not only are ICT risks becoming more complex, ICT and security-related incidents (including cyber incidents) are also becoming more frequent. In addition, their potential adverse impact on financial institutions’ operational functioning is increasingly significant. The EBA has continued to monitor the ICT risk landscape and to foster a common supervisory culture and consistent supervisory practices, as well as ensuring uniform procedures and consistent approaches in the area of ICT. As identified in the EBA’s RAR for 2021, ICT risk (including cyber risk and data security) is currently the most prominent driver of increased operational risks. In addition, COVID-19 has increased the focus on ICT risks given the additional shift to digital channels and ICT usage.

Source: Figure 97 from the EBA RAR 2021.

Monitoring internal governance arrangements for ICT risks

Considerable supervisory work has already been conducted on ICT risk over the past two years. In particular, supervisors reviewed credit institutions’ practices for the identification, monitoring, assessment and mitigation of ICT risks, and ensured that most of them had an ICT strategy in place. In the EBA 2021 Convergence Plan, the EBA highlighted the need for further supervisory focus on adequate ICT risk governance.

Overall, according to the EBA`s follow-up to the 2021 Convergence Plan, approximately three-quarters of CAs have reviewed the institutions’ internal governance on ICT and security risk management frameworks, as well as their ICT requirements for third-party providers and exit strategies. A high number of CAs confirmed that adequate internal governance in respect of ICT & security risk management and effective information security measures were an integral part of their on-site IT inspections, while a large proportion of CAs continued to rely on dedicated ICT self-assessment questionnaires.

In 2021 CAs were also expected to verify whether cybersecurity was part of financial institutions’ overall information security risk management, and whether they established effective information security measures to ensure appropriate preparedness for cybersecurity. The outcome is detailed in the 2021 Convergence Report.

The EBA stresses that there is a need to further strengthen CAs’ preparedness to supervise cyber risk and scrutinise institutions’ actions to ensure an appropriate level of cybersecurity. Cyber risk, including in the context of outsourced services, remains an area for supervisory attention in 2022.

Reviewing the ICT supervisory practices ahead of the upcoming DORA

In 2021, the EBA also performed an internal exercise to assess ICT supervisory practices and identify any potential gaps and challenges in the light of DORA. While a notable improvement has been observed in ICT supervisory practices since 2014, a sharper focus is required to support ICT supervision from a capacity and expertise perspective. Moreover, comprehensive rules are needed at the EU level given the cross-border nature of ICT risks. The ongoing EBA policy work in the area of ICT has established a good basis for a harmonised approach to and regulatory framework in ICT supervision across the EU.

In terms of ICT risk management, financial institutions are expected to intensify their efforts to better manage and address their ICT risks. Broad support has been noted for more cooperation at the EU level, along with heightened information-sharing in the areas that closely coincide with parts of the upcoming DORA (e.g. incident reporting, cyber intelligence and ICT third-party dependencies).

Assessing crypto market developments

The EBA monitors crypto-asset developments and takes measures to facilitate knowledge-sharing between competent authorities with the objective of promoting consistency in regulatory and supervisory approaches to, and the understanding of, crypto-assets.

In this context, to further strengthen its monitoring and assessment capacity in view of the broadening and deepening of markets in crypto-assets, in mid-2021 the EBA established a Network on Crypto-assets comprising representatives from the NCAs represented on the EBA’s Board of Supervisors and observers from the Commission, ECB, EIOPA and ESMA. The Network enables a structured exchange of views on market developments, supervisory experiences and regulatory perimeter issues, including taking into account emerging activities such as crypto lending and staking, and new business models, notably decentralised finance. It also supports the aggregation of the results of monitoring activities at the EU level.

In addition, the EBA, together with EIOPA and ESMA, reminded consumers of the risks relating to crypto-assets in March 2021 in view of market volatility.

Responding to the rapid rise of digital platforms

In 2021 the EBA completed its assessment of the use of digital platforms in the EU’s banking and payments sector, which also makes an important contribution to the joint ESAs’ work in response to the Commission’s call for advice on digital finance of February 2021.

The EBA has defined a ‘digital platform’ as a technical infrastructure that enables at least one financial institution directly (or indirectly using a regulated or unregulated intermediary) to market to customers – and/or conclude with customers – contracts for financial products and services.

The EBA has observed a wide variety of digital platforms operating in the EU. For example, the EBA has observed single-product aggregators (e.g. platforms operated by mortgage credit intermediaries), multiple-product, multi-brand/single-brand aggregators, user-matching platforms such as invoice trading platforms, trade finance platforms and general e-commerce platforms/marketplaces. Some are subscription-based, pay as you use/transaction-fee based or no-fee, etc. depending on the business model, functionalities and ecosystem of product providers and customers using the platform.

In view of this diversity, to assist competent authorities in understanding prevalent business models, the EBA developed an indicative taxonomy of the four main clusters of digital platforms, plus ‘enablers’ (typically the ‘pay’ platforms offered by BigTech companies), as explained in Figure 14.

For further information, see Chapter 3 of the EBA’s report.

The EBA found that the use of digital platforms presents a range of potential opportunities for both EU customers and financial institutions and offers significant transformative potential. However, new forms of financial, operational and reputational interdependencies are emerging over which supervisors have limited visibility.

DAVIDE STROPPA

Senior Bank Expert

SPECIFYING REQUIREMENTS FOR CROWDFUNDING SERVICE PROVIDERS

 

Crowdfunding for business has become established as one of the relevant financial innovations of the past few years and has changed the way some firms can finance their projects. Through crowdfunding, a service provider operates a digital platform to match or facilitate matching between prospective investors and lenders with owners of projects that need financing. In providing a wider set of project owners – in particular SMEs – with better access to finance, crowdfunding can contribute to the completion of the CMU.

To this extent, one of the main obstacles that had prevented the full development of an efficient EU-wide crowdfunding market was the existence of a fragmented regulatory framework across Member States. In order to promote uniform conditions across the European Union and the proper functioning of the Internal Market, a new regulation on crowdfunding service providers was issued in November 2020, making it easier for crowdfunding service providers to offer their services across the EU.

The European Crowdfunding Service Providers Regulation (ECSPR) recognises that, unlike in banking intermediation, the crowdfunding service provider does not take any credit risk of its own; rather, the risk remains entirely with investors. The ECSPR therefore includes provisions to ensure that investors are adequately informed about their investment and the relative risks, and that crowdfunding operators undertake an appropriate assessment of the risks connected to the projects offered on their platforms for financing.

During 2021, I led the EBA’s work on the mandates that we have been assigned under the new Regulation to develop two draft regulatory technical standards (RTS) covering a wide range of requirements for crowdfunding platforms:

• providing adequate information to investors about the risks connected with the loan or the portfolio of loans, and about any contingency fund that may be set up;
• undertaking an appropriate credit risk assessment of the crowdfunding project or project owner, based on reliable information;
• establishing sound risk management practices for credit risk assessments and loan valuations.

The work on crowdfunding, which was carried out with the support of experts in our competent authorities, was particularly challenging as we had to find the right equilibrium to ensure that investors are adequately protected – both through adequate information and a solid risk assessment of the projects they are investing in – without this hindering the pace of innovation on the market. It ultimately proved to be a finely balanced exercise, but I trust the work done by the EBA will help to enhance transparency, giving investors the appropriate tools to take well-informed decisions. In turn, this will contribute towards a better functioning market across the EU.

 

Identifying risks and setting out proposals for non-bank lending

As part of the broader call for advice on digital finance, the EBA was asked to carry out an analysis of the non-bank lending sector, i.e. lending provided by financial intermediaries outside the EU financial services regulatory perimeter, with the aim of identifying the relevant risks and the extent to which these activities are not covered by EU legislation. In particular, the EBA was asked to advise on the potential need to adjust the EU regulatory perimeter, developing and proposing appropriate policy options.

The analysis of the regulatory regimes currently in place shows that non-bank lending remains largely un-harmonised across the EU. The report also identifies some specific risks in the areas of prudential supervision and scope, consumer protection and conduct of business and AML/CFT, as well as in the macroprudential framework, identifying some proposals to address them. For further information, please see the EBA’s report on non-bank lending.

Analysing the RegTech market in the EU

The EBA has conducted an in-depth assessment of the RegTech market and in June 2021 published a report that assessed the benefits, challenges and risks of RegTech use in the EU.

Based on thorough research and inputs gathered from CAs, financial institutions and RegTech providers, the RegTech report featured a deep-dive analysis into the application of technology to facilitate compliance with regulatory requirements and make certain financial institutions’ processes more effective and efficient. The top five segments identified in which RegTech is used most widely are AML/CFT, fraud prevention, prudential reporting, ICT security and creditworthiness assessments.

Looking at the benefits that RegTech solutions offer, financial institutions emphasise enhanced risk management, better monitoring and sampling capabilities, and reduced human errors. RegTech providers flag up the ability to increase efficiency, manage the impact of ongoing regulatory change and boost effectiveness.

Both financial institutions and RegTech providers face certain challenges. It is essential that they maintain their efforts to overcome these issues if they are to benefit from technological innovation. The RegTech report suggested that the majority of challenges to the development of the RegTech market were internal factors within financial institutions and RegTech providers. Factors that were seen to be hindering the adoption of RegTech across the EU included the following: data quality, security and privacy, interoperability and the integration of new solutions with the existing legacy systems, a lack of application programming interface (API) capabilities at some financial institutions, costly and often lengthy and complex due diligence processes, and limited awareness of RegTech solutions.

Innovations must go hand in hand with carefully identifying, assessing and managing any associated risks on the part of both institutions that adopt RegTech and supervisors who supervise institutions’ use of RegTech solutions. In this regard, the RegTech report has provided an overview of some potential risks that may emerge for financial institutions, including compliance, concentration, business continuity, specific technology-related risks, personal data protection and operational risks. From the competent authorities’ perspective, the main risks that may stem from the supervision of institutions’ use of RegTech solutions relate to potential difficulties in the assessment of the effectiveness and reliability of the technological solutions used and the potential lack of the skillset and toolset needed to supervise the use of technology-enabled RegTech solutions.

Building on the existing initiatives undertaken by the EBA, ESAs and CAs, the EBA proposed the direction of travel for steps to support the sound adoption and scale-up of RegTech solutions. The aims would be to deepen knowledge about technological developments, address any existing skills gaps among regulators and supervisors and to support the convergence of supervisory practices across the EU in the treatment of RegTech. Leveraging the role and expertise of the EFIF and the national regulatory sandboxes and innovation hubs as a safe testing environment for RegTech solutions, the launch of the flagship EU Supervisory Digital Finance training Academy and the EU Digital Finance Platform will help these goals to be achieved.

Identifying the benefits and challenges of machine learning models used in the context of IRB models for credit risk

More than 15 years after the introduction of credit risk models to the regulatory framework, the availability of data and the capacity of computer power have skyrocketed. In this context, new algorithms have been developed which allow for both the use of new data (‘unstructured data’) and the better use of existing data. As such, these state-of-the art modelling techniques represent a new opportunity to enhance credit risk management practices, and have already been used successfully by institutions in other business areas such as fraud detection and AML.

However, this innovation also entails certain costs. As a matter of fact, the extra complexity of machine learning models brings with it additional challenges in terms of development (such as the risk of overfitting additional ‘hyperparameters’) and of application and maintenance (e.g. the interpretability of the results).

The EBA has therefore engaged with the industry via a discussion paper published on 11 November 2021 to identify how new, sophisticated machine learning models can coexist with and adhere to the regulatory requirements when used in the context of IRB models. The discussion paper seeks feedback on how these models are used in practical terms by the industry, how the new challenges are being dealt with, as well as on the potential interaction with recent new initiatives (General Data Protection Regulation and Artificial Intelligence Act). The discussion paper therefore investigates a set of principles-based recommendations that would ensure the prudent use of machine learning models in the context of the IRB framework.

Strengthening depositor protection

Enhancing the resilience of the national deposit guarantee schemes

The EBA revised the existing guidelines on the stress tests conducted by the national DGS. These revisions were based on the areas for improvement that had been identified by the first EBA peer review of DGS resilience, published in June 2020.

The revised framework extends the scope of the DGS stress tests by requiring more tests compared to the original guidelines. Deposit insurers now have to test their ability to perform all the interventions included in their legal mandate, such as compensating customers and restoring banks’ solvency, as well as their ability to access all of their ex ante and ex post funding sources. The DGS should also assess their ability to cooperate with their counterparts in other Member States and other public authorities.

The revised guidelines provide comparability of the results by establishing a set of mandatory indicators and a harmonised template. The DGS are asked to transparently report possible weaknesses and elaborate on the lessons learned from their tests and real-life cases. Deposit guarantee schemes’ internal systems over time can also be enhanced by encouraging DGS to stress test scenarios with additional business continuity challenges such as pandemics or IT failures.

Thanks to these revised guidelines, depositors can have greater confidence in the ability of their national DGS to promptly repay their funds in the event of a bank failing.

Strengthening the protection of client funds by deposit insurers

The EBA published an opinion on the treatment of client funds under the Deposit Guarantee Schemes Directive (DGSD). This document assessed the current approaches to the protection of funds deposited with credit institutions on behalf of clients by entities that are themselves excluded from DGS protection, such as payment institutions, e-money institutions, investment firms, other banks and other types of financial companies. Based on the EBA’s assessment, the opinion articulated a number of specific recommendations addressed to the EU Commission with the aim of informing its ongoing review of the DGSD.

For example, the EBA observed that there are discrepancies relating to the protection of client funds by DGS across the EU, and also within Member States, depending on what sort of entity deposits them on behalf of its clients. Thus, the opinion recommends clarifying the DGSD to ensure that funds deposited on behalf of clients are uniformly protected across the EU. This would provide clarity, the harmonised treatment of client funds and, in instances where they are not covered, enhanced consumer protection. The opinion also makes recommendations on how to prevent risk spreading from a failed bank to entities which placed client funds with that bank, and on how to ensure that credit institutions contribute to the DGS funds based on the amount of protected client funds they hold.

Contributing to the harmonised and transparent funding of deposit insurers

The EBA published guidelines on the delineation and reporting of available financial means (AFMs) of deposit guarantee schemes. The aim of the guidelines is to improve confidence in financial stability across the EU by establishing a more harmonised application of the DGSD with regard to reaching the target level in the and by enhancing transparency and the comparability of DGS’ financial positions.

In accordance with the Deposit Guarantee Schemes Directive, DGS are required to build up ex ante funds amounting to 0.8% of covered deposits by 3 July 2024. The guidelines stipulate that only funds that were originally contributed by credit institutions will count towards the target level of said funds. This means that borrowed funds cannot count towards the target level. However, this does not prevent DGS from also using borrowed resources, where necessary, for example to reimburse depositors. The guidelines also expand the current reporting requirements by DGS to the EBA to enable the EBA to publish more extensive information on DGS funding going forward.

Monitoring the application of the EU regulatory framework for retail payments (PSD2) and strengthening its supervision

In 2021, the EBA contributed to the PSD2 objectives of facilitating innovation, enhancing competition in the EU single market and protecting consumers by boosting supervisory convergence, progressing its work on the removal of obstacles to the provision of third-party providers’ services and providing clarity on the application of the limited network exclusion under PSD2.

Enhancing supervisory convergence to ensure compliance and foster a level playing field on the market

In February 2021 the EBA published an opinion on the supervisory actions NCAs should take for the timely removal of any remaining obstacles by account servicing payment service providers (ASPSPs). The opinion aims to contribute to a level playing field across the EU and the consistent application and supervision of relevant requirements under PSD2 and the regulatory technical standards (RTS) on strong customer authentication and secure open standards of communication (SCA and CSC).

Furthermore, in the second half of 2021 the EBA published two sets of clarifications in response to the outstanding issues that had been raised by the EBA industry working group on application programming interfaces (APIs) under PSD2.

In the second half of 2021, the EBA launched the process for amending the RTS on SCA and CSC with regard to the 90-day exemption from SCA for account access. In October, the EBA published a consultation paper with its proposals. The proposed amendment to the RTS aims to address a number of issues that the EBA has identified in the application of this exemption by some ASPSPs across the EU and which have resulted in a negative impact on the services offered by account information service providers (AISPs). To mitigate these issues, in the consultation paper the EBA proposes introducing a new mandatory exemption from SCA for the specific use case when access is obtained through an AISP, provided that certain conditions are met.

The consultation ran until 25 November 2021 and attracted a very high number of 1 250 responses, which provided the EBA with a good overview of the various types of stakeholders involved. The EBA continued this work in 2022 and published its final report on the amendment of the RTS in April 2022.

The EBA also closely monitored the process of finalising the migration to SCA for e-commerce card-based payment transactions to ensure a level playing field and prevent regulatory arbitrage. As a result, in June 2021 the EBA published a report providing insights based on industry data into the migration status of EU merchants, SCA-enabled payment cards and payment service users, compliant transactions and fraud levels.

Enhancing convergence in the assessment of exclusions from PSD2

In July 2021, the EBA published a consultation paper on own-initiative guidelines pertaining to the application of the limited network exclusion under PSD2. The exclusion covers services based on specific payment instruments that can be used only in a limited way, such as store cards, fuel cards, public transport cards and meal vouchers. The aim of the draft guidelines was to address significant inconsistencies in how this exclusion had been applied across the EU in the past with a view to contributing to the Single Market for payment services in the EU and enhancing transparency for supervisors and customers. The proposed guidelines provided clarity on specific aspects of the exclusion’s application, such as how a network of service providers or a range of goods and services should be assessed in order to qualify as ‘limited’, the use of payment instruments within limited networks, the provision of excluded services by regulated financial institutions and the submission of notifications to NCAs.

Building the infrastructure in the EU to lead, coordinate and monitor AML/CFT supervision

In 2021, the EBA continued to lead, coordinate and monitor the EU financial sector’s efforts in the field of AML/CFT, based on its revised mandate from 2020. The main areas of focus remained AML/CFT-related policy development, fostering cooperation across Member States’ competent authorities in the fight against money laundering and terrorist financing and supporting the effective implementation of the overall EU AML/CFT framework through training and capacity-building.

Completing the EU’s regulatory AML/CFT framework

The EBA worked to put in place a holistic approach to tackling ML/TF risk across all areas of supervision and all stages of an institution’s life cycle. This included, among other deliverables, work to ensure that prudential supervisors are aware of – and have the necessary tools to tackle – ML/TF risk at authorisation and during the SREP, and that they cooperate with AML/CFT supervisors as part of these processes.

The EBA further consolidated and strengthened the EU’s AML/CFT regulatory framework through updates to its core AML/CFT guidelines as well as the risk-based AML/CFT supervision and ML/TF risk factor guidelines. These revisions take into account changes to the EU AML/CFT legal framework and address new ML/TF risks, including those identified by the EBA’s implementation reviews. In addition to strengthening financial institutions’ risk-based approaches to AML/CFT, the revision supports the development of more effective and consistent supervisory approaches where evidence suggested that divergent approaches continue to exist. The EBA also issued draft regulatory technical standards (RTS) on EuReCA, a new, central, AML/CFT database, its third opinion on ML/TF risk in the EU’s financial sector, as well as draft guidelines on remote customer onboarding and the role and responsibilities of AML/CFT compliance officers. A project to assess the scale and impact of de-risking in the EU culminated in the publication of an opinion and report in January 2022.

Putting in place a data-driven approach to monitoring ML/TF risks

EBA opinion on ML/TF risks

In March 2021, the EBA issued its third opinion on the risks of ML and TF affecting the EU’s financial sector, one of the EBA’s flagship publications on financial crime, which is issued every two years based on the EBA’s mandate. This opinion informs the European Commission’s Supranational Risk Assessment (SNRA) as well as the national risk assessments of EU Member States. In 2021, the most significant risks related to virtual currencies and innovative financial services, which affected the entire financial system. Although these risks had already been identified in the previous two opinions on ML/TF risks, information provided by NCAs suggested that they were more relevant than ever. Other risks included de-risking, tax-related risks (including the difference in supervisory approaches to handling tax-related crimes) and risks associated with the COVID-19 pandemic. The opinion also covered risks that are specific to particular sectors such as ML/TF risks associated with crowdfunding platforms. The opinion included targeted recommendations to competent authorities to close the gaps identified.

Identifying new ML/TF risks

In addition to the opinion on ML/TF risks, the EBA monitored the emergence of new risks throughout 2021 and alerted competent authorities and the public at large where necessary. Risks associated with the COVID-19 pandemic, which may affect financial institutions’ ability to ensure adequate AML/CFT compliance, and competent authorities’ ability to ensure the ongoing supervision of financial institutions in the context of restrictions on movement, were underlined further in the EBA annual risk assessment report (RAR) on the European banking system. In 2021, we also carried out our first inquiry under Article 9a(5) of the EBA Regulation, which empowers the EBA to perform risk assessments of competent authorities’ strategies, capacities and resources to address the most important emerging risks relating to ML/TF at the EU level. This inquiry covered the competent authorities’ responses to the risks identified as part of the information contained in the ‘Luanda Leaks’, as released in January 2020. The findings of this inquiry will be made public in 2022.

Developing EuReCA – the European AML/CFT central database

2021 marked a milestone in establishing the EBA’s central AML/CFT database named EuReCA, which stands for European reporting system for material CFT/AML weaknesses. EuReCA is based on the EBA’s revised AML/CFT mandate in Article 9a of the EBA Founding Regulation, which was entrusted to it in 2020. The EBA aims to use EuReCA to gather, structure and share information on financial institutions’ AML/CFT material weaknesses, as identified by competent authorities, and the measures that such authorities have taken to rectify these material weaknesses.

ESTABLISHING EURECA – AN EXCELLENT EXAMPLE OF COLLABORATIVE WORK WITHIN THE EBA AND ACROSS MEMBER STATES

 

RAPHAELLE STREMSDOERFER

AML Policy Expert

JOANA NETO

AML Data Specialist

FERNANDO PIRES

AML Data Specialist

How did the work on EuReCA progress during 2021?

The work initially involved drawing up two draft regulatory technical standards (RTS), constituting the basis of EuReCA, and then building EuReCA itself. The final draft RTS, which benefited from extensive support from the Board of Supervisors, were published on the EBA’s website in December 2021. The draft RTS emerged from intense discussions throughout the year on key notions such as what constitutes a material weakness, which is the trigger for reporting to EuReCA. There was a lot of deliberation regarding the specifications of the information to be reported, ensuring in particular that the information obtained can allow a comprehensive assessment of the weakness and its impact or potential impact, as well as the factors leading up to it. The draft RTS were accompanied by technical specifications comprising the detailed data points as well as the type of authorities reporting directly and indirectly to EuReCA.

You said EuReCA is the result of a collaborative effort – who was involved in the project?

Indeed, this project has required collaboration with numerous actors, both internally at the EBA –with the involvement of experts from various teams (policy experts, AML/CFT data specialists, legal and data protection experts, IT specialists including business analysts, IT architects and security specialists) – and across the EU, spanning competent authorities from all financial services sectors as well as ESMA and EIOPA. This was important to ensure buy-in, a consistent approach, and a result that makes sense for those who will use EuReCA.

What about the data protection aspects of EuReCA?

One important step also entailed drawing up, together with data protection experts and for the first time at the EBA, a draft data protection impact assessment (DPIA) that first identified and evaluated the risks of processing personal data and then established the necessary controls to mitigate these risks. This also required informal consultation with the European Data Protection Supervisor (EDPS) on both the draft RTS and the draft DPIA, as well as on drafting a memorandum of understanding on joint controllership of personal data by both the EBA and the various relevant authorities concerned.

How did you find the process of building EuReCA?

We worked very closely with the EBA’s IT unit from the very beginning. The formal IT work started in early 2021 with an analysis of the requirements specified in the draft RTS and the technical specifications mentioned above. The initial work consisted of an exhaustive analysis with business analysts and legal experts of the different business requirements and brainstorming how to transform them into IT specifications. This was crucial in identifying the most suitable delivery strategy based on the nature of the data and experience of similar systems. The project has matured since then, passing through different stages in its evolution from the design of the platform to that of its architecture and subsequently on to its final delivery. The work also resulted in a set of user flows and screen mock-ups. Due to the complexity of the data collected by this platform, we requested competent authorities’ first-hand insights on the usability and user-friendliness aspects of the platform design before launching it. This feedback was obtained via user research workshops that took place in September 2021. In addition, during this journey the project team kept in close contact with security experts. Once the requirements were finalised, the IT architects got involved to start building the platform. From then on until the platform’s delivery, the IT, legal and business teams worked together closely to create and test the EuReCA platform.

What difference will EuReCA make to the fight against money laundering/terrorist financing in the EU?

EuReCA is a unique information source on AML/CFT weaknesses, and the first time in the European context that we collect such information centrally. The EBA envisages using information from EuReCA to inform its wider work on ML/TF risks affecting the EU financial sector and its policy work. EuReCA is also expected to promote the EBA’s coordination efforts by enabling the EBA to share information from EuReCA with competent authorities on a confidential and need-to-know basis. Information from EuReCA can therefore support authorities at all stages of the supervisory process and, in particular, where specific ML/TF risks or trends emerge. In this regard, EuReCA is expected to act as an early warning tool that will enable competent authorities to act before ML/TF risks crystallise.

 

Enhancing the convergence of AML/CFT supervisory practices across the EU

Functioning of AML/CFT colleges

In 2021, the EBA continued to foster cooperation and the exchange of information between competent authorities, including by establishing and monitoring AML/CFT colleges. The AML/CFT colleges are permanent structures that bring together different supervisory authorities responsible for the supervision of the same financial institution if it operates in at least three Member States and outside the EU.

Throughout 2021, the EBA contributed, through technical advice, to setting up 120 new AML/CFT colleges of financial institutions and Member States. EBA staff attended 37 colleges and provided hands-on bilateral feedback, as required, as well as facilitating the negotiation of framework terms of participation for AML/CFT college observers and third-country authorities.

In December 2021 the EBA put in place a strategy for its AML/CFT colleges’ monitoring activities. This strategy will come into effect in 2022. Accordingly, between 2022 and 2024 the EBA will actively monitor 15 AML/CFT colleges and select 10 other AML/CFT colleges annually for thematic monitoring. The outcomes from this monitoring will be published in an annual report and will also inform the EBA’s other work.

Reviewing NCAs’ approaches to AML/CFT supervision and providing targeted, bilateral recommendations for improvement

Throughout 2021, the EBA continued its programme of in-depth staff-led reviews of competent authorities’ approaches to the AML/CFT supervision of banks. During this round of reviews, EBA staff, with the support of a small network of AML/CFT experts, assessed seven competent authorities, out of which six reviews were carried out concurrently with the Council of Europe. An eighth review was planned but rescheduled to 2022 at the request of the Member State.

Every review lasted several months and included a comprehensive desk-based review of each competent authority’s policies and procedures, a one-week virtual on-site review during which teams interviewed key members of staff and external stakeholders, and a detailed feedback letter. This letter set out the review team’s findings as well as the actions EBA staff recommended that NCAs take to strengthen their approach to AML/CFT supervision and tackle ML/TF risk from a prudential perspective going forward.

Overall, EBA staff found that most of the competent authorities in this year’s sample were committed to strengthening their approach to AML/CFT supervision and that the changes introduced after the recent transposition of relevant EU legislation, such as greater enforcement powers, had started to make a difference. In spite of this, challenges relating to the identification of ML/TF risks in the banking sector, the adoption of meaningful risk-based supervisory strategies and ensuring an appropriate balance between intrusive on-site and off-site supervision remained a challenge for most. The EBA also found that cooperation with financial intelligence units was not always systematic and was often ineffective. These challenges have hampered the implementation of an effective risk-based approach to AML/CFT supervision.

Sharing expertise and building capacity through AML/CFT training

EBA staff provided expert input and technical expertise on AML/CFT issues to the European Commission, the BCBS’s AML Expert Group and the Financial Action Task Force and remained involved, as an observer, in the Europol Financial Intelligence Public-Private Partnership, which brings together law enforcement agencies, financial intelligence units and financial institutions. The EBA also organised four AML/CFT training events that were attended by more than 1 500 AML/CFT and prudential supervisors as well as financial intelligence units from all EU/EEA Member States. In addition, the EBA hosted four AML/CFT expert round table discussions with up to 90 participants from national competent authorities. A quarterly AML/CFT newsletter, which the EBA launched last year, now has close to 2 000 subscribers.

Providing the policies to factor in and manage ESG risks

Climate change, environmental degradation and other sustainability (or ESG) factors are expected to pose considerable challenges for the global as well as EU economy, driving key risks for the banking sector. Supporting the transition to a more resilient and sustainable European banking sector is a key objective for the EBA. To that end, the Authority has been highly active in outlining how ESG factors should be considered by institutions and competent authorities.

Setting out proposals on the management and supervision of ESG risks

EBA report on the management and supervision of ESG risks

There is a broad acknowledgement that ESG factors may translate into financial risks and that the financial sector should play a key role both in terms of managing risks and facilitating the transition towards a more sustainable economy. Clear definitions and effective risk assessment methodologies are necessary to achieve progress in this regard.

Against this background, on the basis of its CRD and IFD mandates the EBA published its report on the management and supervision of ESG risks for credit institutions and investment firms in June 2021. This report harmonises definitions and describes available methodologies, as well as set out the EBA’s proposals and recommendations on how institutions should address ESG risks and how supervisors should assess institutions’ ESG risk management practices.

The report points out the need for institutions to incorporate ESG risk considerations across their processes and operations. A comprehensive, strategic and forward-looking approach must be taken given the characteristics of these risks. While institutions should remain responsible for setting their strategies, they should identify and manage ESG risks to ensure the resilience of their business models, not only in the short term but also in the medium and long term.

The report clarified how the EBA expects banks to manage ESG risks as drivers of financial risks and to implement enhanced business planning, governance and risk management frameworks. Efforts to develop internal risk management tools and practices, including the use of scenario analysis, should be accelerated. Moreover, business planning should, at least on a qualitative basis, consider an extended time horizon of 10 years as a minimum.

Several recommendations included in the report have been followed up in the Commission’s legislative proposal on the revised banking package (CRR III/CRD VI), which should contribute to a more systematic incorporation of these risks by the banking sector going forward. At the EBA level, the report will be the basis for developing new and updating existing guidelines. Updated guidance on internal governance and remuneration has already been provided. Further guidance on ESG risk management and supervision will follow.

Defining disclosure standards on sustainability

The EBA contributed towards defining sustainability disclosure standards, as mandated by the CRR via the final technical standards for Pillar 3 disclosures of ESG risks. Further explanations of these standards are provided in other sections of this report.

In addition, the EBA contributed to the Joint Committee’s work on defining ESG-related disclosures of financial products and financial market participants’ entity-level disclosure of the principal adverse sustainability impacts.

In the case of the banking sector, these disclosures will apply to credit institutions with portfolio management activities.

 

PILAR GUTIERREZ

Head of the Reporting and Transparency Unit

ALI ERBILGIC

Senior Policy Expert

LIDJA SCHIAVO

Policy Expert

Why did the EBA develop Pillar 3 disclosure standards on ESG risks?

Enhanced disclosure can help to promote market discipline in the financial sector. Reducing information asymmetry regarding banks’ risk profiles allows stakeholders to make informed decisions. With the implementation of the Pillar 3 framework on ESG risks following the mandate included in the CRR, the EBA aims to support institutions in their disclosure obligations, facilitating stakeholders’ access to comparable information on lending and investment activities that are subject to ESG-related risks, while enabling them to compare institutions’ sustainability performance. In addition, the Pillar 3 framework should promote institutions’ transparency on how they are mitigating these risks and how they are supporting their counterparties in the climate change adaptation process, as well as the transition towards a more sustainable economy.

What do Pillar 3 standards on ESG risks entail?

In developing the Pillar 3 framework, the EBA is following a sequential approach. At the moment its focus is on climate change-related risks. This priority reflects the urgency of the matter and is in line with current developments in Europe and internationally. In this phase, banks are required to disclose both quantitative and qualitative information on climate change-related risks. Meanwhile for other environmental objectives and social and governance aspects, banks are required to disclose qualitative information on their own governance arrangements, business model and strategy, as well as risk management. The EBA is closely monitoring policy developments in the EU and internationally and will eventually extend the disclosure standards to cover quantitative information on the broader scope of ESG risks.

In terms of quantitative information, the standards aim to capture key activities on banking books relating to ESG risks. This includes information on (i) banks’ exposures – loans, for example – to fund non-financial corporations operating in key sectors that contribute significantly to climate change such as fossil fuels, together with the greenhouse gas (GHG) emissions financed via those loans; (ii) banks’ exposures to financing economic activities in geographical areas that may be affected by climate change, such as areas prone to flooding; (iii) the energy efficiency of the immovable properties that banks accept as collateral when they finance RRE for households and CRE for businesses; (iv) information on exposures to carbon-intensive, highly polluting corporates; and (v) forward-looking information on banks’ alignment with net-zero GHG metrics and their targets.

In addition, banks are required to disclose information on actions mitigating climate risks by supporting non-financial corporations and other counterparties in the transition to a carbon-neutral economy and adapting to climate change. For example, the disclosures would show banks’ lending to non-financial corporates that are contributing to these climate change transition and adaptation objectives. One example would be a technology company that borrows funds to improve the energy efficiency of its manufacturing site. Another would be a car manufacturer that produces electric vehicles. This information is captured in two KPIs: the GAR, which focuses on exposures to large corporates and households, and the BTAR, which incorporates relevant information on SMEs.

The disclosure templates also ask banks to explain their activities and plans for tackling and mitigating ESG risks.

How did the EBA develop these standards?

When developing the standards, we understood the need for coordination at the EU and international levels to avoid regulatory fragmentation, and we cooperated closely with various public stakeholders and private market participants. The standards are built on other relevant initiatives such as the recommendations of the Financial Stability Board’s Task Force on Climate-Related Financial Disclosures (TCFD) and the classifications provided by the EU Taxonomy Regulation. However, we have gone one step further by setting mandatory and consistent disclosure requirements – including granular templates, tables and associated instructions – to improve the consistency and comparability of disclosures.

 

Laying the foundations for embedding climate risk into the stress testing framework

Given the unprecedented challenges posed by climate-related risks, the EBA has put these at the top of its agenda. Means of addressing these relatively new risks include climate stress testing and scenario analysis. In 2021, the EBA published the results of the EU-wide pilot exercise on climate risk, which was launched in 2020 as part of the EBA action plan on sustainable finance. The EBA pilot exercise was the first EU-wide initiative on climate risk and was run with 29 volunteer banks from 10 EU countries representing around 50% of the banking sector assets in the EU (47% of its risk-weighted assets).

Since frameworks for stress testing climate risk are still developing, the pilot was designed as a learning exercise for both the EBA and participating banks. It focused on transition risk, and its main objective was to explore data and methodological challenges in order to categorise exposures that could potentially be vulnerable to climate risks and to assess banks’ readiness to apply the EU green taxonomy. A scenario analysis, which was run using the scenarios developed by the Network for Greening the Financial System (NGFS), was also performed using a top-down model.

The exercise focused on non-SME corporate exposures, as banks face challenges in retrieving climate-related information for SMEs’ exposures and retail mortgages at this stage.

The experience gained by both the EBA and participating banks was positive. It helped give an understanding of where banks stand in terms of data capabilities to assess climate risk. Banks are making significant efforts to expand their data and modelling infrastructures, but a substantial amount of work still remains to be done, especially concerning client-specific information at the activity level and incorporating forward-looking components (such as transition strategies) into climate risk assessment tools.

The results indicated that 58% of the total non-SME corporate exposures of participating banks are to sectors vulnerable to transition risk, with a high concentration in certain sectors. Furthermore, 35% of the total non-SME corporate exposures are to EU obligors with GHG emissions above the median of the distribution, while high- and low-carbon obligors each make up roughly 22% of banks’ corporate non-SME holdings in the analysis.

As far as green classification is concerned, the participating banks were in different development phases in terms of assessing the greenness of their exposures. The exercise involved estimations using two techniques, and the report shows the differences in outcomes. Subject to the constraints outlined, a first gauge of the GAR is provided, showing an aggregate EU GAR of 7.9%.

Finally, the scenario analysis shows that there is a large dispersion across banks in terms of the impact on expected credit risk losses due to adverse climate risk scenarios. Tools for scenario analysis are developing quickly, and further progress is likely to be made on modelling the transmission channels of climate risk shocks to banks’ balance sheets and on developing more granular climate risk scenarios.

After the publication of the results, the EBA followed up bilaterally with participating banks to discuss individual banks’ performance in the exercise and obtain general feedback on climate risk assessments from the industry.

The pilot exercise has been a catalyst for the transition process that banks have started towards incorporating climate-related factors into their internal risk assessment tools. Most banks have gained momentum on tackling climate risk, but they are still at an early stage and a lot of work remains to be done.

Starting from the experience gained and the results of the exercise, in the coming years the priority will be to build the fundamentals for a robust climate risk stress test framework in line with the new mandates awarded by the European Commission. This will also require the involvement of the EBA’s stakeholders, cooperation with other EU authorities and close interaction with the industry.

Providing guidance on own funds and eligible liabilities that include ESG features

In light of the recent market trend of issuing own funds or eligible liabilities instruments with ESG features linked to ESG labels, the EBA included a dedicated guidance in the Additional Tier 1 (AT1) report published in June 2021. The purpose of this guidance is to (i) provide an overview of the risks identified, (ii) comment on the differences identified in clauses and (iii) provide policy observations and guidance on how the clauses used for ESG issuance and the eligibility criteria for own funds and eligible liabilities instruments interact. The ultimate aim is to indicate best practices or practices/clauses that should be avoided from an own funds and eligible liabilities perspective. To investigate compliance with the guidance, the EBA assessed some prospectuses and terms and conditions relating to new issues of ESG own funds, paying particular attention to the following aspects:

1. no segregation of assets and liabilities (i.e. a need for fungibility of use and management of the proceeds);
2. a clear description of the status of notes (i.e. hierarchy, subordinated nature, no impediment to resolution, etc.);
3. no link between the performance or use of assets and notes (i.e. no acceleration, no event of default, lack of assets not being an incentive to redemption, no performance fees or ESG targets linked to the premiums).

Based on the EBA’s initial assessment, it appears that the recommendations on ESG capital instruments have been integrated into the documentation for recent issues, with varying degrees of completeness depending on the individual issuers.

In terms of the next steps, the EBA will continue to look at the ESG features (including ESG targets and KPIs) of some new own funds and eligible liability issues.

Making progress towards obtaining Eco-Management and Audit Scheme (EMAS) registration

In 2021, the EBA successfully completed all the preparatory phases to be EMAS verified and was expecting to be certified in the first quarter of 2022.

The Environmental Policy was updated. These are the overall intentions and direction of an organisation relating to its environmental performance as formally expressed by top management including compliance with all applicable legal requirements relating to the environment and also a commitment to the continuous improvement of environmental performance. It provides a framework for action and for the setting of environmental objectives and targets.

The roles and responsibilities within the Environmental Management System were established (see graph below), and Katerina Karypidou, Head of Unit Corporate Support, was appointed as the Environmental Coordinator and top management representative.

The first internal audits were hosted, with auditors underlining that “environmental matters and concerns are part of the EBA’s premises management, activities and missions; the European Banking Authority complies with most of the essential requirements for validation pursuant to EMAS Regulation 2017/1505; and that the environmental management system seems to be well embedded within top management and implemented in a target-oriented manner”.

The first management review was performed, with the Executive Director concluding that the Environmental Management System at the EBA was suitable, adequate and effective.

The ESAs’ cross-sectoral work under the Joint Committee

In 2021, the Joint Committee, under the chairmanship of ESMA, continued to have a central role for the coordination and exchange of information between the ESAs, the European Commission and the European Systemic Risk Board (ESRB). The main areas of cross-sectoral focus continued to be joint risk assessment, enhancement of consumer protection, development of the regulatory and supervisory frameworks for sustainable finance and securitisation, as well as monitoring and contributing to the development in digital finance, supporting scale-up of FinTech through innovation hubs and sandboxes and cybersecurity.

Joint risk assessments: understanding the impact of COVID-19 and financial sector vulnerabilities

The Joint Committee issued two joint risk assessment reports on risks and vulnerabilities in the EU financial system. The 2021 Spring Joint Risk Report highlighted how the COVID-19 pandemic continued to weigh heavily on short-term recovery prospects, focused on a number of vulnerabilities in the financial markets and warned of possible further market corrections. The ESAs also warned of a possible deterioration in asset quality and recommended policy actions for supervisors and regulated institutions, including for banks to ensure sound lending practices and appropriate pricing of risks, and to adjust provisioning models to adequately address the impact of the economic shock of the pandemic. The ESAs also called on competent authorities, financial institutions and market participants to continue to develop further actions to accommodate a ‘low-for-long’ interest rate environment and its risks.

The 2021 Autumn Joint Risk Report highlighted increasing vulnerabilities in the financial sector, not least because of side effects of the COVID-19 crisis measures, such as increasing debt levels and upward pressure on asset prices. The report noted that expectations of inflation and yield growth, as well as increased investor risk-taking, might put additional pressure on the financial system. In such a context, the ESAs warned of the continued risk of possible asset quality deterioration, potential disorderly increases in yields and sudden risk premium reversals. In addition to these economic vulnerabilities, the Joint Risk Report highlighted the increased exposure of the financial sector to cyber risk and ICT-related vulnerabilities. The ESAs highlighted the need for appropriate technologies and suitable control frameworks to be in place to address threats to information security and business continuity in the financial sector.

Consumer protection: spotlight on financial education

In 2021, consumer protection continued to be a key element in the work of the Joint Committee.

Following the submission of the draft RTS with the proposed amendments to the packaged retail and insurance-based investment products (PRIIPs) Delegated Regulation to the European Commission in January 2021 and as part of a wider initiative of the European Commission to develop a new retail investment strategy for the EU, in July 2021, the Joint Committee received from the Commission a call for advice on the review of the PRIIPs Regulation. The scope of the mandate from the European Commission follows the areas referred to in Article 33 of the PRIIPs Regulation and includes issues related to the use of digital media. In order to gather evidence, the Joint Committee published a call for evidence for a public consultation until 16 December 2021 and delivered its joint advice at the end of April 2022.

During 2021, in total 11 administrative sanctions or measures under the PRIIPs Regulation were reported to the ESAs by the competent authorities in three Member states (Croatia, Czech Republic and Hungary). These measures were administrative fines and orders to the PRIIPs manufacturer to remedy specified breaches of the PRIIPs Regulation and the PRIIPs Delegated Regulation. The Czech National Bank and the Central Bank of Hungary reported administrative fines totalling CZK 1 000 000 (approximately EUR 40 225), and HUF 3 000 000 (approximately EUR 8 118), respectively.

Furthermore, the Joint Committee finalised its review of the application of the joint ESAs’ guidelines on complaints-handling that the three ESAs had issued in 2014. The review concluded that the joint guidelines have contributed to a consistent approach to complaints-handling across the banking, insurance and securities sectors and have resulted in better outcomes for consumers. This review examined how the ESAs guidelines on complaints-handling have been applied since they came into force. In particular, the final report of the review describes the extent to which the objectives of the guidelines have been achieved, the supervisory actions that the NCAs have undertaken as a result of their national implementation, including the steps taken to identify good/poor practices by firms, as well as the remaining challenges faced.

Finally, the Joint Committee started a new work stream on financial education to fulfil the ESAs’ mandate to review and coordinate national financial education initiatives. The main focus of the Joint Committee’s work in this area in 2021 was the preparation of a joint high-level conference on financial education and the development of a joint ESAs repository of national education initiatives focused on fraud, scams and cybersecurity, both of which took place in February 2022.

New disclosure rules on sustainability in response to demand for sustainable products

A very significant part of the work of the Joint Committee in 2021 focused on the development of the regulatory and supervisory framework for sustainability-related disclosures.

The SFDR, which was amended by Article 25 of the Taxonomy Regulation, mandated the ESAs to develop a number of RTS through the Joint Committee. In 2021, the Joint Committee developed two sets of draft RTS, containing a total of 13 individual RTS.

First, on 4 February 2021, the ESAs published draft RTS on the content, methodologies and presentation of disclosures under the SFDR that aim to strengthen protection for end-investors by providing sustainability disclosures on the principal adverse impacts of investment decisions and on the sustainability features of a wide range of financial products. This will help to respond to investor demands for sustainable products and reduce the risk of greenwashing. In addition, the draft RTS contain proposals under the Taxonomy Regulation on the ‘do no significant harm’ (DNSH) principle.

Second, on 22 October 2021 the ESAs published draft RTS on disclosures under the SFDR that relate to financial products investing in economic activities that contribute to environmental objectives. The draft RTS provide disclosures to end-investors on the investments of financial products in environmentally sustainable activities, providing them with comparable information to make informed investment choices and enable a single rulebook for sustainability disclosures under the SFDR and the Taxonomy Regulation. The draft RTS include pre-contractual and periodic disclosures for products referred to in Articles 5 and 6 of the Taxonomy Regulation that identify the environmental objectives to which the product contributes and show how and to what extent the product’s investments are aligned with the EU Taxonomy.

The ESAs also addressed emerging implementation and supervisory issues. In a letter to the European Commission on 7 January 2021, the ESAs highlighted the priority issues on the draft RTS under the SFDR. The European Commission responded in July 2021 and provided interpretative guidance on a number of the questions highlighted in the ESA letter.

In addition, on 25 February 2021, the Joint Committee published a Joint ESA Supervisory Statement to mitigate the risk of divergent application of the SFDR from 10 March 2021 (SFDR application date) to the application date of the SFDR RTS. The overall objective of the joint supervisory statement is to achieve an effective and consistent application and national supervision of the SFDR, promoting a level playing field and the protection of investors.

The Commission informed the European Parliament and Council in November 2021 that due to the technical complexity of the RTS and the timing of the submission, the bundled February and October RTS would become applicable by 1 January 2023.

Apart from the SFDR-related work, through the Joint Committee, the ESAs coordinated their approach with regard to the membership and governance of the new Sustainability Reporting Pillar of European Financial Reporting Advisory Group (EFRAG). In the letter in July 2021, the ESAs reiterated their strong commitment to contributing to the development of high-quality sustainability reporting standards. They also expressed their preference to remain active observers in the EFRAG governance framework. The ESAs considered that such an observer status is in line with the proposal for a Corporate Sustainability Reporting Directive (CSRD) to require ESMA, and invite the other ESAs, to provide an opinion on the EFRAG draft sustainability reporting standards.

Next steps on the implementation of the Securitisation Framework

With a view to supporting the development of the EU securitisation market, the Joint Committee continued its work to address obstacles in the implementation of the Securitisation Framework and to suggest improvements in the regulatory and supervisory regime to the NCAs and the European Commission.

In particular, the Joint Committee considered the difficulties in ascertaining the jurisdictional scope of application of certain provisions in the Securitisation Regulation if one or more of the securitisation parties are located in a third country. In the joint opinion issued in March 2021, the ESAs examined the EU securitisation requirements which may be applicable to third-country parties, as well as related compliance aspects of a transaction under the Securitisation Regulation. The ESAs also set out their common view on the practical difficulties faced by market participants and recommended that these difficulties should be addressed through interpretative guidance from the European Commission.

In addition, in the report prepared according to Article 44 of the Securitisation Regulation, the ESAs assessed the implementation and the functioning of the Securitisation Regulation. They also provided recommendations on how to address initial inconsistencies and challenges which may affect the overall efficiency of the current securitisation regime. In particular, the report highlighted specific issues related to transparency and due diligence requirements, criteria for STS securitisation and requirements related to supervision of securitisation. The report was meant to provide guidance to the European Commission in the context of its review of the functioning of the Securitisation Regulation. It also includes an analysis of the efficiency of the STS securitisation framework, considering in particular the role that securitisation could play in the economic recovery in the post-COVID-19 period.

In addition, the Joint Committee provided further guidance on the application of the Securitisation Regulation through Q&As. These Q&As clarify in particular: (i) the content and the format of the information of a securitisation transaction that should be disclosed by the originator, sponsor and securitisation special-purpose entity (SSPE); (ii) the transaction documentation of a STS securitisation that should be made publicly available to facilitate investors’ compliance with its due diligence requirements; and (iii) the type of STS certification services that can be provided by third-party verifiers to the securitisation parties. These Q&As were subsequently updated to clarify whether a ‘vendor-financing’ structure can be considered a synthetic securitisation.

Finally, the Joint Committee has initiated work to address the call for advice from the European Commission in October 2021. This call for advice seeks the Joint Committee’s assistance to assess the recent performance of the rules on capital requirements (for banks, and insurance and reinsurance undertakings) and liquidity requirements (for banks) relative to the framework’s original objective of contributing to the sound revival of the EU securitisation market on a prudent basis. The Joint Committee report is scheduled for submission to the European Commission by 1 September 2022.

Contributing to the ESAs’ response to the European Commission’s call for advice on Digital Finance

In 2021 the Joint Committee stepped up its digital-finance-related work, including in the context of the European Commission’s Digital Finance Strategy, with extensive technical discussions on topics such as crypto-assets and digital operational resilience. In addition, the ESAs prepared a comprehensive response to the European Commission’s February 2021 call for advice on digital finance regarding value chains, platformisation and new mixed activity groups. Most notably, the report envisaged possible ways to foster the regulation and supervision of mixed activity groups, among others by enhancing cooperation between financial and other relevant authorities, and potentially by expanding and strengthening the perimeter of consolidation.

The ESAs have been actively involved in the discussions on the legislative proposals for a regulation on markets in crypto-assets (MiCA) and the regulation on digital operational resilience for the financial sector (DORA). In particular, apart from considering technical and resource elements on operational preparations for the proposed supervision and oversight tasks, the chairpersons of the ESAs sent a letter to co-legislators, where the ESAs set out their views on how to most efficiently take forward important aspects of the governance and operational processes of the oversight framework for critical third-party service providers and the application of the proportionality principle in the proposed DORA. Among other things, the ESAs stated that the proposal raised challenges on the practical functioning of the oversight framework, especially the complexity of the governance and decision-making process between the Joint Committee of the ESAs, the Boards of Supervisors of the ESAs and the Oversight Forum.

Adoption of the new list of financial conglomerates

The EFIF continued to bring value in bridging national innovation facilitators (regulatory sandboxes and innovation hubs) on innovation-related issues. EIOPA handed its chairpersonship of this forum over to ESMA in September 2021 and the first ESMA-chaired meeting took place in October 2021.

Under EIOPA’s chairmanship, the EFIF finalised the procedural framework to facilitate cross-border testing in accordance with the mandate set out in the Digital Finance Strategy.

The EFIF members continued to exchange views on the design and development of already established and new innovation facilitators, innovation trends in the financial sector, including the issues of multi-purpose digital platforms facilitating the provision of financial services, RegTech, AI, big data and machine learning; to promote greater coordination and cooperation between innovation facilitators and thus support the scaling up of FinTech across the single market.

Other relevant cross-sectoral Joint Committee work

The Joint Committee finalised the joint final report on the third amendment to the draft ITS on the allocation of credit assessments of ECAIs to an objective scale of credit quality steps in accordance with CRR and Solvency II. This amendment addressed (i) the registration of two new credit rating agencies (CRAs), (ii) the outcome of a monitoring exercise on the adequacy of existing mappings and (iii) the deregistration of a number of CRAs.

The ESAs developed joint Q&A on the Commission Delegated Regulation on bilateral margin requirements under EMIR clarifying different aspects of the bilateral margin regime. The Q&A clarify in particular (i) the relief covered by a partial intragroup exemption from bilateral margin requirements, (ii) the procedure to grant intragroup exemptions from bilateral margin requirements between a financial counterparty and a non-financial counterparty that are based in different Member States and (iii) the exemption regime from bilateral margin requirements for derivatives entered into in relation to covered bonds.

Finally, the Joint Committee discussed the mandate in Article 31a of the ESA Regulations to set up a cross-sectoral system for the exchange of information on the fit and proper assessments. The work continued on the draft guidelines for the exchange of information and on an IT solution consisting of a cross-sectoral CA contact list and a searchable shared database of holders of qualifying holdings, directors and key function holders assessed for fitness and propriety.

The renewal of the Board of Appeal

The Board of Appeal is a joint independent body of the ESAs introduced to effectively protect the rights of parties affected by decisions adopted by the authorities. The ESAs provide administrative support to the Board of Appeal and serves as its Secretariat. As of 1 December 2021, the ESAs renewed 10 members and alternates of the ESAs Board of Appeal. Following the renewal, Mr Michele Siri was elected the new President and Mr Christos Gortsos the new Vice-President of the ESAs’ Board of Appeal.

In 2021, three appeal cases were finalised, one brought against each of the ESAs:

In its decision ‘A’ against ESMA, the Board of Appeal unanimously decided to dismiss the appeal brought by an institution that wishes to stay anonymous as inadmissible. The appeal was in relation to the launch of an investigation into an alleged breach of EU law by an NCA.

In its decision in Howerton against the EBA, the Board of Appeal unanimously decided to dismiss the appeal brought by Mr Howerton against the EBA in relation to an alleged non-application of Union law by eight NCAs as manifestly inadmissible, as the facts described do not seem to involve a subject matter within the remit of the EBA nor of the Board of Appeal.

Finally, the Board of Appeal decided in its decision Societatea de Asigurare-Reasigurare City Insurance SA (City Insurance) against EIOPA that the appeal was inadmissible. The appeal was in relation to a balance sheet review (BSR) exercise of the Romanian insurance sector that is carried out by the Autoritatea de Supraveghere Financiară (ASF) with the support of EIOPA.

Establishing sound and effective governance and good conduct in financial institutions

Fostering supervisory convergence on the remuneration of sales staff

In December 2021 the EBA published a report on the application of its guidelines on the remuneration of sales staff, which has been in force since 2016. The guidelines aim to provide a framework for financial institutions to implement remuneration policies and practices that will improve links between incentives and the fair treatment of consumers. Consumer detriment can happen for example, where sales staff receive a remuneration linked to one or several specific banking products offered or provided to consumers and as a result, they offer or provide those products irrespective of the consumers’ rights and interests. The report assessed how financial institutions apply the guidelines and adapt their remuneration policies and practices to better serve customers.

The EBA’s assessment revealed that financial institutions focus more on prudential requirements and commercial interests than on meeting the interests of consumers. However, the EBA also identified 17 good practices that financial institutions are advised to follow if they want to be certain that they are compliant with the guidelines. For example, it is good practice to apply a ‘gatekeeper provision’, i.e. reduce or forfeit the variable remuneration of sales staff when they acted in a way that was detrimental to the consumer. Another example of a good practice is not to consider sales performance as a determining criterion for the promotion of staff.

Enhancing competent authorities’ understanding of mystery shopping

The EBA also published a report on the mystery shopping activities of NCAs. It collated mystery shopping activities by NCAs to share experiences, learn valuable lessons and identify good practices for the benefit of the EBA and NCAs that use or intend to use mystery shopping in the future.

The report covers mystery shopping initiatives of NCAs in respect of retail banking products within the scope of action of the EBA’s consumer protection mandate, which are consumer credit, mortgage credit, deposits, payment services, electronic money and payment accounts. It summarises the most common approaches used by NCAs, based on information covering the period from 2015 to 2020. It does so by reviewing three key characteristics of mystery shopping activities: their objective, subject matter and product scope; the methodologies used by NCAs; and the follow-up actions after the mystery shopping was concluded. The report also identifies some lessons learned and sets out good practices, for example common procedural aspects such as organising training for NCAs’ inspection and supervisory staff, identifying target customer profiles and defining agreed ‘rules’ of customers’ behaviour.

Based on this report, in 2021, the EBA also published a methodological guide to mystery shopping addressed to the NCAs. This guide sets out how mystery shopping activities can be carried out in real life and how they can be voluntarily used as a complement to other existing supervisory tools.

Collecting and publishing consumer trends data

In March, the EBA published its biennial Consumer Trends Report (CTR) covering the years of 2020/2021. In line with the previous edition, the CTR describes the trends that the EBA observed for retail banking products and services within its regulatory remit. It also outlines the topical issues that the EBA identified as being relevant to consumers across these products and services and which should therefore be included in the EBA’s consumer protection work in the subsequent years. The issues included irresponsible lending, creditworthiness assessments, digitalisation of services, selling practices and access to bank accounts. In addition, the report covers measures the EBA has taken to mitigate the impact of the COVID-19 pandemic on consumers, as well as actions the EBA has taken to address the topical issues identified in the CTR 2018/2019.

Executing the EBA action plan on dividend arbitrage trading schemes (‘cum-ex’)

In May 2020, the EBA published a 10-point action plan to enhance the prudential and AML framework applicable to dividend arbitrage trading schemes (‘cum-ex/cum-cum’). The EBA completed the actions set out in the plan with a deadline of the end of 2021. More specifically, the EBA completed the following.

• Action (i), by publishing in 2 July 2021 revised EBA guidelines on internal governance under the CRD and separately under the IFD, which now take into account the amendments introduced by Directive 2019/878/EU (CRD V) and Directive 2019/2034/EU (IFD) to Directive 2013/36/EU and their effect on institutions’ governance arrangements. In particular, the link between money laundering and terrorism financing risks and prudential risks has been clarified, and a reference to dividend arbitrage schemes has also been included.
• Action (ii), by publishing on 2 July 2021 revised Joint EBA and ESMA guidelines on the assessment of the suitability of members of the management body and key function holders, which now take into account the amendments introduced by CRD V and the IFD to Directive 2013/36/EU and their effect on the assessment of the suitability of members of the management body. In addition, tax offences, whether committed directly or indirectly, including through unlawful or banned dividend arbitrage schemes, should be considered for the assessment of the reputation, honesty and integrity of the management body’s members.
• Action (iii), by publishing on 28 June 2021 a Consultation paper on draft revised EBA SREP guidelines, which include the requirement for prudential supervisors to assess in the SREP whether institutions, as part of their code of conduct, have set out principles on, and provided examples of, acceptable and unacceptable behaviours linked to financial misreporting and misconduct, economic and financial crime, whether committed directly or indirectly, including through dividend arbitrage schemes (see Title 5 and paragraph 104(j) of the SREP guidelines for details).
• Action (iv), by including in the 2020 report on convergence in supervisory practices the topic for supervisory colleges’ attention in 2020 and still engaging with colleges in 2021 to ensure that the topic is explored during supervisory college meetings, as part of their SREP assessment of the internal governance framework (see the section on ‘topical tasks’ requiring the attention of supervisory colleges in 2021 and page 81 of the report).
• Action (v), by publishing, on 1 March 2021 the revised Final EBA guidelines on AML/CFT risk factors, in which we stress the need for supervisory authorities and financial institutions to enhance their understanding of tax crimes (see guidelines 2.14 and 2.15 for more details).
• Action (vi), by publishing on 17 March 2021 a consultation paper on draft EBA guidelines on risk-based AML/CFT supervision, which also emphasises the importance for supervisors to develop a good understanding of ML/TF risks associated with tax crimes, which may involve cooperation with tax authorities in their Member State (see guidelines 4.1.4, 4.2.1, 4.2.2 and 4.2.3 for details).
• Action (vii), by publishing on 3 March 2021 a revised EBA opinion on the ML/TF risks affecting the EU financial system, which, inter alia, identifies, as one of the risks, the differences in the treatment by competent authorities of financial institutions’ involvement in facilitating or handling tax-related crimes (see paragraphs 39-44 of the opinion and paragraphs 32-50 in the associated report).
• Action (viii), by allocating a specific amount of time to ML/TF risks associated with tax crimes in its staff-led AML/CFT implementation reviews of competent authorities, where this ML/TF risk has been assessed to be significant.
• Action (ix), by monitoring and intervening in discussions in a sample of the 300+ AML/CFT colleges that competent authorities created in compliance with the 2019 EBA guidelines on Cooperation and Information Exchange.

Following the amendment of the regulatory and supervisory framework as per the above, the EBA will execute action (x) of the plan, which is for the EBA to assess compliance with the amended requirements. In order to give time to financial institutions to make the system and process changes required to comply with the revised framework, several of the aforementioned legal instruments have applications dates will enter into force in 2022. As a result, this final action is likely to commence towards the end of the year.

Addressing the aftermath of COVID-19

Addressing credit risk stemming from the COVID-19 pandemic

In 2020 the EBA focused on mitigating the short-term effects of the pandemic, in order to maintain banks’ ability to provide lending and address short-term liquidity shortages faced by many businesses. The use of the flexibility embedded in the prudential framework was maintained during the subsequent resurgence of the pandemic in 2021, via the reactivation of the guidelines on legislative and non-legislative moratoria. However, after more than a year of crisis conditions, the focus was shifted to managing the transition to its full extent in order to ensure a smooth return to normality. As such, the EBA introduced two additional safeguards when reactivating the guidelines and confirmed their phasing-out at the end of March.

In addition to this management of the immediate consequences of the pandemic, the EBA started its reflections on how to ensure proper recognition of the consequences of the pandemic on banks’ lending books, in particular in the context of credit risk internal models (the internal ratings-based approach). In fact, institutions now have at their disposal some observed risk metrics during the pandemic (i.e. the year 2020 and the entire year of 2021), which should be cautiously analysed in terms of representativeness in order to avoid distorting the risk picture in the medium to long term. The discussions on this matter are still ongoing and will feed into the reflections at an international level in the BCBS forum.

Enhancing depositor protection during the pandemic

In April 2021, the EBA followed up on a survey it had conducted in April 2020 on the potential impact of the pandemic on depositor protection provided by national deposit guarantee schemes (DGSs). The updated survey confirmed that the pandemic itself did not have any adverse effects on depositor protection and confirmed the continued resilience of DGSs.

More specifically, the survey revealed that the pandemic did not significantly increase the workload of the deposit insurers. Most of the competent authorities did not report a higher number of phone calls received by the DGSs from the public, higher supervision of credit institutions or operational challenges stemming from the rise in covered deposits over this period. Most DGSs did not need to take specific measures or refine their compensation method. Some of the DGSs even took into account the pandemic when stress testing their respective capability to repay depositors in due time. Half of the respondents also specified that the administrative burden on credit institutions was relieved in order to let them focus on clients’ queries.

Monitoring and assessing the evolution of exposures under support measures

The pandemic caused a series of challenges to the banking industry. Some of these included operational hurdles and increased demand for liquidity. They were added to the increased uncertainty due to blurred macroeconomic projections. As a result, banks needed to take on decisions, like their customers’ viability, with very limited visibility on macroeconomic expectations.

While fiscal and monetary support measures were vital in absorbing the bulk of the macroeconomic shock, supervisory and regulatory flexibility helped banks to have the necessary time and space to address the challenges with which they were faced and maintain lending flow to the real economy.

Authorities put forward two major support programmes to support businesses and households struggling with low liquidity due to the pandemic. Moratoria on loan repayments and public guaranteed schemes (PGS) were mainly used by SMEs and residential mortgage borrowers. The total volume of loans that benefited from some sort of EBA-eligible moratoria on loan repayment reached nearly EUR 900 bn, while at the same time, banks reported more than EUR 370 bn of loans backed by PGS.

The EBA has been monitoring the evolution and assessing the asset quality of these loans on a regular basis. In addition, in order to keep market participants informed, as of the third quarter of 2020 the EBA introduced regular reporting of these metrics through its quarterly Risk Dashboard. This complemented the published list of PGS and moratoria.

The volume of loans with active EBA-eligible moratoria was residual at the end of 2021, (around EUR 10 bn), while banks still report around EUR 700 bn of loans with expired EBA-eligible moratoria. The asset quality of these is markedly lower compared to total loans. For example, around 25% of these loans are classified as stage 2 loans and more than 5% as NPLs.

A similar deteriorated asset quality is observed in the loans backed by PGS. EU banks reported EUR 373bn loans subject to PGS at the end of 2021. As of the end of the year, around 20% of them were classified as Stage 2, and their NPL ratio, was above total average (3.1%), with an increasing trend.

Although a lower asset quality is expected to some extent, as these support measures were used by borrowers affected the most by the pandemic, the vulnerabilities in these portfolios remain a concern.

Prof. RYM AYADI

Chair of the EBA’s Banking Stakeholders Group

 

The Banking Stakeholder Group (BSG) plays a key role in facilitating consultation with our stakeholders in all the areas relevant to the tasks of the EBA. As Chair of the BSG, can you please talk us through how the BSG contributes to the EBA’s work?

The BSG is officially designated as the EBA’s advisory group in Article 37 and Recital 48 of the Authority’s Founding Regulation. Its role is to help facilitate consultation with stakeholders in areas relevant to the EBA tasks, according to the Rules of Procedure of the BSG.

It is composed of thirty members from six constituencies: credit institutions, consumers, academics, users of banking services, employees of credit institutions, and small and medium-sized enterprises. The diversity of the group’s composition is a key asset to achieve multidisciplinary and rich outputs from different perspectives. Such diversity provides a unique and balanced perspective, to ensure regulation is adapted to the needs of all stakeholders involved, in order to achieve financial stability, consumer protection and to respond to emerging matters that could impact the EU financial system.

The BSG has been very proactive in providing strategic and technical advice to support the EBA in achieving its mission and goal. From the beginning of 2020 till April 2022, eight technical working groups (TWGs) have been active in producing 32 opinion papers and responding to consultations. I would also like to mention the exceptional work stream imposed by the COVID-19 crisis and currently by the war in Ukraine. The BSG has also been active in organising three workshops: one on financial inclusion and two on Basel 3 implementation.

Which are the key areas or topics that you focused on in 2021? Looking forward, which are the priority topics that rank high in your agenda?

In 2021, the BSG aligned its work plan to the following six EBA strategic priorities:

Risk reduction package and effective resolution tools

EU-wide EBA stress testing framework

Integrated EU data hub for performing flexible and comprehensive analysis

Financial innovation and operational resilience

AML/CFT infrastructure

Policies for factoring and managing ESG risks

It also worked on the following two horizontal priorities:

• A culture of sound and effective governance and good conduct in financial institutions
• The aftermath of COVID-19.

And on the emerging challenge: the war in Ukraine.

The BSG work plan is summarized in this table

Working Groups	Mission
1 A- CAPITAL, LIQUIDITY 1 B- RECOVERY, RESOLUTION AND RISK	Monitoring and – when decided – drafting a BSG response on all consultations or discussion papers launched by the EBA related to capital, liquidity, other types of risk management in banks and topics related to the BRRD (Bank Recovery and Resolution Directive) as well as associated systemic issues.
2- SUPERVISION, GOVERNANCE, ACCOUNTING, REPORTING AND DISCLOSURE	To review the EBA consultation papers regarding banking supervision (Supervisory Examination Programs – SEP -, colleges of supervisors, inspections, authorisations, sanctions, Options and Discretions, transparency, etc.), internal governance of banks and disclosure requirements.
3- CONSUMER PROTECTION	Advising EBA on the preparation,implementation and enforcement of legislation or policy initiatives affecting the users of financial services and to proactively identify key issues affecting users of financial services,within the remit of the EBA.
4- PAYMENTS, DIGITAL, FINTECH AND REGTECH	Analysing andreviewing the EBA consultation papers dealing with financial technology and innovations,especialy in the payments area, and drafting responses and/or opinions. The WG may also elaborate own initiative position notes on related topics, subject to the approval of the BSG.
5- SUSTAINABLE FINANCE	Advice the EBA in planned and potential new activities.
6- AML/CFT	Advice the EBA in planned and potential new activities according to new mandate.
7- POST COVID-19 RECOVERY	Advice EBA in activities related to COVID-19 recovery.
8- BBM/PoP	Assist EBA’s Advisory Committee on PoP.

 

In 2021, we provided advice and opinions on sustainable finance, covid 19 recovery, resolution and recovery, AML-CFT, de-risking, consumer protection, non-bank lending, digitalisation, SREP. All BSG publications are available on the EBA website.

The priorities for 2022 remain the same. I would like to emphasise the emerging risks such as cyber security, geopolitical and the transition risks brought about by the geopolitical uncertainties, war and conflicts and the energy crisis. These risks must be carefully monitored, and appropriate responses will have to be provided in due time. Also due to these unprecedented challenges, the frequency of the BSG responses and opinions is expected to increase because of the ongoing geopolitical challenges.

In your capacity as Chair of the BSG, and considering the different composition of the Group, how do you make sure that your advice and opinions reflect the many voices and stances within the BSG?

I would like to recall the Amended art. 37 EBA Regulation:

“The Banking Stakeholder Group shall be composed of 30 members, 13 members representing in balanced proportions credit and investment institutions operating in the Union, three of whom shall represent cooperative and savings banks, 13 members representing their employees’ representatives, consumers, users of banking services and representatives of SMEs and four of its members shall be independent top-ranking academics.”

The BSG is diverse with a relatively balanced composition between the different constituencies as stipulated by the amended EBA Regulation. However, the number of academics has been reduced to four, compared to the previous BSG composition, which operated with nine academics. Despite this weakness, which we flagged in a BSG letter published in 2020, we tried to structure the eight balanced TWGs with leadership from 2 members of different constituencies to ensure all positions are reflected and the composition of the TWGs includes members from different groups. In addition, there is a consultation process with all members of the BSG to allow each and every member to reflect his/her position.

On the organisation of the BSG work, in 2021 we had nine online meetings with the coordinators of the TWG and nine online meetings with the EBA coordinating team. The aim of these meetings was to assess the progress of the TWG, agree on the key topics for the 2021 BSG and joint BSG-BoS meetings, to inform about the key updates, and to better target and align the BSG advice and opinion to the work plan of the EBA.

 

Enhancing the efficiency and effectiveness of the EBA

Communicating and promoting the EBA’s work

In 2021, the EBA continued to carry out communication activities aimed at informing different categories of stakeholders about its work on key topics such as sustainable finance and ESG risks, digital finance, integrated reporting, financial education and consumer protection. The EBA also continued to monitor the application of the relief measures related to the COVID-19 pandemic.

Throughout the year, the EBA published 207 press releases and news items, promoted the EBA’s work in the press and media, conducted 93 interviews and briefings with the press and responded to 856 queries via email.

The team also coordinated and supported the production of high-level publications, including the 2020 Annual Report, the study of the cost of compliance with supervisory reporting requirements, the report on the use of digital platforms, the Basel III monitoring report, the IFRS 9 monitoring report, the RAR and the report on integrated reporting.

To reach a wider public, the EBA produced fact sheets and infographics on ESG disclosures, ESG risk management and supervision, integrated reporting, RegTech, digital platforms and EUCLID.

Other important activities in 2021 were the EU-wide transparency exercise and the EU-wide stress test. The latter, which was launched in January and its results disclosed in July, was actively promoted with many print and broadcast EU media outlets, and with an interview given by the EBA Chairperson to Bloomberg and Bloomberg TV. The results of the transparency exercise were published in December and also received considerable press coverage.

Since remote working continued to be the norm for most of 2021, the Communication Team carried out internal communication campaigns and activities to keep the staff informed on the developments of the COVID-19-related measures by the French Government as well as at EU level.

In 2021, the EBA celebrated its 10th anniversary, and the Communication Team organised several initiatives to commemorate this important milestone.

To comply with the legal obligation and the EBA Management Board decision to translate all final guidelines into all EU official languages, 15 sets of guidelines were translated. In addition, 111 final EBA publications were proofread or edited.

The EBA’s social media strategy has led to increased visibility, with the accounts reaching and surpassing 15 600 followers on Twitter and 81 000 on LinkedIn. The Communication Team adopted a more interactive approach, exploiting all the available tools that could help elevate the day-to-day content, by making it more engaging and eye-catching for the audience. Informative videos, scrolling infographics and factsheets were among the key materials used to promote EBA events and publications. This approach was successful with the engagement levels rising remarkably and reaching some of the highest numbers recorded in the EBA social media history. The best performing tweet in 2021 on the results of the EU-wide stress test had more than 55 000 impressions and 750 interactions.

Implementing the EBA collaboration platform

The EBA Collaboration Platform Program, launched back in 2020, reached its final implementation phase, and is intended to be completed in early 2022. The objective of the program is to enable the EBA to operate and collaborate internally and with external stakeholders through digital solutions that are future-proofed, secure, easy to use, highly efficient and effective.

The solution facilitates internal and external cooperation and collaboration and enables secure and quick information exchanges. It provides voice, video, chat and conferencing, and enables joint collaboration on documents, document co-drafting and co-authoring, secure content sharing/search and collaborative workspaces. The EBA users can work seamlessly within the EBA office and outside of it, enabled by devices, tools and services, to communicate, share and collaborate with colleagues and counterparts.

During 2021, key features were released, such as Exchange hybrid (preparing the path to Exchange Online), the M365 Apps for Enterprise and OneDrive, in line with security and data protection requirements. Internal workflows were delivered along with feasibility studies to enable the convergence of EBA legacy applications (Colleges and the EBA extranet) to a unified platform that will allow secure internal and external collaboration.

The EBA on the journey to the cloud

In 2021, the EBA reached some significant milestones in the roadmap to a secure and cost-efficient IT cloud infrastructure. The journey started with the EBA IT strategy, which established a clear direction towards the cloud. This was followed by the EBA cloud risk assessment, which presented a list of key risks and summarised the recommendations and high-level mitigation strategies that should be used to address these risks. The strategy of the journey to the cloud was further elaborated in the EBA cloud strategy, adopted also in 2021. The cloud strategy provided the implementation roadmap and a technically informed framework for cloud adoption, risk management, operations and governance.

In parallel, the EBA implemented a cloud-based unified identity solution currently in use for all EBA platform-related systems and EBA external applications. The authentication mechanism was upgraded from the previous hard token to a new soft token solution and all users were migrated as of November 2021. The EBA will continue its journey in 2022, with the cloudification programme, aiming to transition from the current CANCOM community cloud provider to CLOUD II public cloud. The programme, along with EUCLID, is a key investment for 2022.

Strengthening ethics and compliance within the EBA

The Risk and Compliance team established in January 2021 within the Legal and Compliance Unit brought together the functions of ethics, data protection, risk management and anti-fraud, and access to documents. This has sharpened the focus on these crucial topics and significantly increased the level of staff dedicated to these topics, with further support from external resources.

In 2021, in addition to managing day-to-day tasks, reviews and enhancements to the ethics, data protection and risk management frameworks were prioritised. Key achievements in 2021 include:

1. a significant increase in communications and awareness-raising activities to improve the EBA-wide understanding of ethics and data protection requirements in particular;
2. review and development of an ethics training programme, with first ‘live’ courses taking place presently, and online courses in development for roll-out by mid-2022;
3. launch of first EBA-wide ethics survey to gauge the views of EBA staff on all ethics-related activities with a view to identifying opportunities for improvement;
4. completion of the first stage in digitising the conflict of assessment process pending an IT project which should be completed in the second quarter of 2022, which will fully digitise ethics processes;
5. award of a framework contract for external data protection advice which should enable a step change in the data protection work to be carried out from 2022 onwards, by making additional resources available to both the Risk and Compliance team and to data controllers across business areas;
6. a data protection risk assessment to ensure EBA-wide understanding of data protection risks and inform priority areas for data protection work;
7. development of the EBA’s first three data protection impact assessments;
8. initial steps in developing and implementing an enterprise risk management (ERM) framework to establish a more mature risk management function in 2022.

Disseminating research with a dedicated workshop, staff papers and seminars

In the context of its research activities, the EBA organised events, seminars and workshops and published staff papers throughout the year. The EBA Policy Research Workshop is an annual event bringing together economists and researchers from supervisory authorities and central banks, as well as leading academics, to discuss developments in the banking sector to identify future challenges for banks and their regulators. In 2021, the key topic of the discussion was the future of the banking sector in the “new normal” that is emerging from the COVID-19 pandemic, with more than 350 registered participants attending the virtual event.

The Staff Paper Series (SPS) provides a platform for EBA staff to disseminate research and thematic analyses to the wider public. In 2021, four papers were published on a wide variety of topics: The application of the IRB supervisory formulas; Window dressing in the G-SIB framework with evidences from EU banks; Testing the capacity of the EU banking sector to finance the transition to a sustainable economy; Stress scenarios for capitalising non-modellable risk factors under the FRTB. Finally, regular internal seminars featuring external speakers are organised on a monthly basis for EBA staff. The aim is to promote discussion on regulatory and supervisory topics, to enhance the EBA staff knowledge and skills and to contribute to improving the process or regulatory policymaking.

Monitoring and fostering supervisory independence

Since January 2020 the EBA is obliged to foster and monitor supervisory independence.

Independence is key to ensuring that fair, effective and transparent decisions are taken by appropriately resourced competent authorities.

In 2021 the EBA carried out work to determine how, and the extent to which, key aspects of supervisory independence have been incorporated into the governance and activities of CAs within the EBA’s scope of action.

In October 2021, the EBA published the sectoral report on supervisory independence, taking into account 82 submissions from CAs on the basis of a survey closely aligned with a similar questionnaire from the International Organization of Securities Commissions (IOSCO). The EBA survey also included specific resolution and deposit guarantee scheme issues. Taking into account existing requirements in Union sectoral legislation and international standards on supervisory independence, the EBA report was organised around four principles of supervisory independence:

1. operational independence;
2. financial independence;
3. personal independence and accountability;
4. transparency.

The report found that competent authorities consider themselves:

1. independent authorities;
2. operating independently on a day-to-day basis;
3. with sufficient financial and personal independence;
4. a suitable framework for ensuring accountability and transparency.

However, the precise approach and framework reported by competent authorities varied, for example in relation to the links to ministries, ability to hire necessary staff, funding models, management of conflicts of interest and cooling-off periods.

The report provides the EBA with valuable information which it will consider in future work in this field and was submitted to the Commission as the EBA’s contribution to the Commission’s own report on supervisory convergence that it is preparing as part of the current ESAs Review.

Celebrating 10 years of EBA achievements

The year 2021 marked an important milestone for the EBA, which celebrated its 10 years of activity. For this special anniversary, the EBA organised several internal and external initiatives.

To kick-off the celebrations, the EBA produced a short video that condensed in three minutes its main achievements over the past decade. [https://youtu.be/t28nAXzM53o]

Throughout the year, the press office organised 15 interviews in 13 EU countries: Belgium, Cyprus, the Czech Republic, Denmark, France, Finland, Germany, Greece, Italy, the Netherlands, Portugal, Slovenia, Spain and. Reaching out locally helped to build synergies with domestic media, which in turn lead to increased visibility of the EBA and its work.

In early 2021, the EBA also organized its high-level conference EBA@10, which took place in a hybrid format on 26 October. The event brought together stakeholders from all over the European Union and beyond to reflect together on the progress made over the last 10 years on EU banking and financial integration, as well as to look at the EBA challenges and opportunities that lie ahead. The event took place at Les Jardins de Saint-Dominique in Paris as well as remotely and via live streaming. The hybrid mode enabled the participation of more than 100 people physically, more than 600 connected via conference call and over 1 200 watched the live-streamed event. The event was also widely promoted on social media and the best performing tweet reached more than 28 000 impressions and 550 engagements. Recordings of the conference are available on the EBA website.

 

 

The EBA’s 10th anniversary was also celebrated internally through a series of testimonials from colleagues who joined the EBA when the Authority was established, or during the first years of its existence. It was a nice way to connect with the staff and to share memories of the early stages of the Authority.

In addition, the EBA also organised a series of inspirational talks with prominent European and international speakers, including:

Jaime Caruana, who served as the General Manager of the Bank for International Settlements and as Governor of the Bank of Spain, spoke about ‘a long term perspective on banking supervision’;

Elizabeth McCaul, currently a member of the Supervisory Board of the European Central Bank, who previously served as Superintendent of Banks for the State of New York, the head of the New York State Banking Department, and who held several senior executive positions at Promontory Financial Group, an IBM company, who talked about the current challenges in banking supervision and her experience as a senior executive in the private and public sector on both sides of the Atlantic;

Emer Cooke, Executive Director of the European Medicines Agency, who discussed the impact of Brexit on the EU Agencies – particularly on the European Medicines Agency (EMA) and the EBA – and the role of the EMA in the COVID-19 pandemic.

 

 

Monitoring and updating the prudential framework for supervision and resolution

Preparing the implementation of CRD VI – CRR III

On 27 October 2021, the European Commission adopted the review of the EU banking package, which incorporates the final provision of the Basel III agreement in the EU regulation. The review builds on the EBA call for advice published on 5 August 2019. As such, it tackles a number of areas of the framework, including credit, market and operational risk in addition to other elements, such as a general promotion of the ESG disclosure framework. It is therefore a key milestone in strengthening the banking sector’s resilience to economic shocks.

The review of the banking package will be substantiated by a number of binding technical standards and guidelines, which will have to be developed in a short period of time following final adoption. In this context, the EBA stands ready to support the upcoming political negotiations by providing targeted technical advice. It will evaluate the proposal items on which the technical reflections can begin, to build a road map for the timely adoption of the technical standards.

Finalising the framework for the interest rate risk in the banking book

Following the public consultation period ending on 4 April 2022, the EBA intends to publish the guidelines on IRRBB and CSRBB, the draft RTS on the IRRBB standardised approach and the draft RTS on IRRBB supervisory outlier tests in 2022. These draft RTS and guidelines are being developed based on Articles 84(5), 84(6) and 98(5a) of the CRD.

The guidelines on IRRBB and CSRBB will replace the current guidelines on technical aspects of the management of interest rate risk arising from non-trading activities under the supervisory review process published in 2018. The updated guidelines provide continuity to the current ones and include new aspects of the mandate. In particular, they specify the criteria to identify non-satisfactory internal models for IRRBB management and identify specific criteria to assess and monitor CSRBB.

The RTS on the IRRBB standardised approach specify the methodology for the evaluation of IRRBB from the perspective of the economic value of equity and the net interest income if a competent authority decides to apply it in view of a non-satisfactory IRRBB internal system. They will also provide a simplified approach for smaller and non-complex institutions.

The RTS on IRRBB supervisory outlier tests specify the supervisory shock scenarios as well as the criteria to evaluate if there is a large decline in the net interest income or in the economic value of equity that could trigger supervisory measures.

Providing transparency on the implementation of the EBA opinion on legacy instruments

In 2020 the EBA issued an opinion to clarify the prudential treatment of these ‘legacy instruments’ after the ending of the CRR grandfathering rules in December 2021. In this opinion, the EBA explained the ‘infection risk’ stemming from these instruments and further envisaged two main options: (i) to call, redeem, repurchase or buy back the relevant instrument; (ii) to amend the terms and conditions. Under strict conditions and to a limited extant, the EBA also considered a third, ‘last resort’ option. In the course of 2021, to ensure consistent implementation, the competent authorities, in close cooperation with the EBA, worked with the institutions under their direct supervisory remit to identify the possible infection risk and discussed the way forward based on the EBA opinion. The implementation was finalised in the vast majority of the EU jurisdictions and a significant number of instruments were resolved in 2021 through either option (i) or (ii). In a few cases the last resort option was implemented or the infection risk was addressed through the transposition of Article 48(7) of the BRRD. Finally, for a limited number of instruments, actions are still under consideration.

The monitoring exercise of the legacy instruments will be finalised in course of 2022 and the main observations will be conveyed in the second half of this year. Going forward the EBA expects that institutions and competent authorities would consistently apply the guidance and principles of the EBA’s opinion for identifying potential issues and develop the appropriate actions for addressing risks stemming from a new generation of legacy instruments with reference to the grandfathering introduced with the CRR II.

Providing input to the Commission’s call for advice on the review of the macroprudential framework

The European Commission has launched a review of the macroprudential framework, which is defined in the CRR and the CRD. The Commission intends to gather views on the functioning of the current framework via a public consultation and specifically addressed the EBA to provide its views and to propose any changes that are deemed required.

The COVID-19 pandemic presented the first use case of the macroprudential framework. However, it did not result in a comprehensive test of the framework, due to significant public support measures, which allowed banks to continue their lending function and to further strengthen their capital positions during the crisis period. Despite that, some evidence could be gathered, and some lessons have been learned since the inception of the macroprudential framework that can inform targeted changes to the framework. The aim of these targeted changes is to simplify the procedures around some of the existing macroprudential tools and to increase harmonisation for others, which should lead to a better functioning of the Single Market.

The EBA’s assessment and proposals focus on four aspects of the macroprudential framework:

• the overall design and use of the buffer framework and its ability to prevent and mitigate financial stability risks and to reduce the pro-cyclicality of the financial system;
• the toolset in the current macroprudential framework and an assessment on whether or not there are any tools that are missing or that have or may soon become obsolete;
• the trade-off between national decision-making (the macroprudential framework relies on national authorities to make use of macroprudential tools) and a well-functioning internal market; and
• the suitability of macroprudential tools to prevent and mitigate financial stability risks arising from new global risks, such as those associated with climate change, new global providers of financial services, cybersecurity and crypto-assets.

Assessing the current legal framework for payment services and electronic money

In October 2021, the EU Commission sent a request to the EBA to collect evidence on the application and impact of PSD2, including evidence on benefits and challenges that have arisen for the different stakeholders, and for the EBA to identify areas where amendments to the PSD2 are needed. The scope of the request to the EBA is very comprehensive and covers 28 questions spread across 9 different sections. These cover, inter alia, topics related to the following:

• the potential need for amendment of the prudential requirements under PSD2;
• whether there is a need for merging PSD2 and the Electronic Money Directive;
• whether there is merit in introducing consolidated group supervision under PSD2;
• potential shortcomings the EBA may have identified in the enforcement of PSD2; and
• whether introducing a sanction regime for PSPs will contribute to the better application of the Directive.

The EBA is aiming to publish a response within the set deadline of 30 June 2022.

Strengthening the framework for raising contributions to deposit guarantee schemes

The EBA is conducting the second review of the guidelines on methods for calculating contributions to Deposit Guarantee Schemes. The EBA published the guidelines in 2015 and conducted the first review in 2017. The Deposit Guarantee Scheme Directive requires a review of the guidelines every five years. The aim of the review is to assess whether the risk-based method outlined in the guidelines provides adequate risk-differentiation between institutions. Furthermore, it aims to assess the balance between consistent application of the guidelines across the Member States and flexibility to cater to national specificities. It also aims to identify practical issues or obstacles in the application of the current framework. The EBA envisages issuing a consultation paper with proposed amendments in the second quarter of 2022.

Monitoring MREL build-up and enhancing convergence in recovery and resolution planning practices

The build-up of the MREL and TLAC by institutions was also an area that CAs worked on in 2021 and engaged with resolution authorities (RAs) to understand whether all resolution entities of G-SIIs were compliant with the intermediary target of TLAC and have plans in place to meet end-state MREL/TLAC requirements. While more CAs reported that they either do not have resolution entities of G-SIIs in their jurisdiction, or that the resolution strategy of local SNCIs was liquidation, the CAs for which the item was relevant have dealt with it mostly on a risk-based approach and liaised with their respective RA counterparts as well as with the institution. The capacity of banks with an MREL deficit to meet the intermediary targets was evaluated in cooperation with the RA. Overall, MREL plans were considered to be realistic.

In addition, the new EBA guidelines on recovery plan indicators will include requirements for additional indicator types such as MREL and liquidity position, along with more detailed guidance on the calibration of regulatory capital and liquidity indicators.

Finalising the SREP for investment firms

In November 2021 the EBA and ESMA launched a public consultation on their draft Joint guidelines on common procedures and methodologies for the supervisory review and evaluation process (SREP). The public consultation ended on 18 February 2022. The EBA and ESMA are now in the process of reviewing the responses received by the industry and expect to publish the final joint guidelines by July 2022.

The development of a specific framework for the SREP of the investment firms follows the introduction of a more tailored prudential regime defined in Regulation (EU) 2019/2033 (IFR) and Directive 2019/2034 (IFD).

Monitoring remuneration and diversity while enhancing data gathering

To improve the monitoring of market developments in the area of governance and remuneration, and following the amendments to the remuneration framework by CRD V and the IFD, the EBA will issue updated guidelines on the benchmarking of remuneration practices that will include additional data collection to benchmark the gender pay gap and application of the newly provided derogations on the requirements to pay out a part of the variable remuneration in instruments and under deferral arrangements. The EBA will conduct two separate benchmarking exercises, one for investment firms and one for institutions. The latter will include the monitoring of institutions’ practices on approving higher ratios between the variable and fixed remuneration of up to 200%. Moreover, the EBA will collect data on staff members that receive remuneration of EUR 1 million or above – high earners – separately for institutions and investment firms.

In this context, the EBA updated the guidelines to provide more clarity on the data to be reported and to ensure the high quality of data, which is critical for the validity of the derived benchmarks.

In 2022 a new diversity benchmarking exercise will be conducted that will include the benchmarking of the unadjusted gender pay between the different genders in the management body. The diverse composition of the management body will be analysed with regard to their gender, age, geographical provenance and educational and professional background. The EBA will again look at the implementation of diversity policies and the supervisory actions taken to ensure that all institutions adopt the required policies. The last report found that in 2018, over 40% of institutions had not adopted the required policies. The EBA aims to issue guidelines on a regular diversity data-benchmarking exercise in 2023.

Consolidating the intermediate parent undertaking framework

In order to implement the reporting requirement from competent authorities to the EBA set out in Article 21b(6) CRD, and to operationalise the methodology laid down in the EBA guidelines on the threshold monitoring for the establishment of the IPU, the EBA developed ad hoc templates in 2021. Based on such templates, in 2022, the EBA will collect from competent authorities the total value of assets of TCGs operating in the EU. According to Article 21b(6) and 47(2) CRD, EU entities of TCGs have to monitor such values against the EUR 40 bn threshold that, if exceeded, determines the establishment of an IPU. The total asset amount of the EU entities of the TCG also have to be reported annually to the EBA along with information on the establishment and the activities authorised to be carried out in the TCB of third-country credit institutions and investment firms. The EBA is required to publish a list of all TCGs operating in the EU, the IPU (where established) and the TCBs. This will enhance the supervision and transparency on TCGs operating in the EU.

As part of the focus on TCGs, the EBA will undertake a comprehensive analysis of the regulatory and supervisory approaches laid down in various parts of the EU legal framework, e.g. CRD, MiFID, IFR and IFD, to assess its overall comprehensiveness, internal consistency and adequacy to respond to balancing openness of the EU financial market with prudential concerns.

Contributing to the development of the securitisation framework

Delivering mandates of the capital markets recovery package and contributing to the European Commission’s review of the securitisation framework

The EBA will deliver the final drafts of the technical standards that were under consultation in the second half of 2021 to the European Commission in the first half of 2022. Namely, the RTS on risk retention, the ITS on the mapping of ECAIs credit assessment for securitisation positions, and the RTS on triggers for switching the amortisation system in STS synthetic securitisation (see Section 1.5).

In accordance with Article 31 of the Securitisation Regulation, the ESRB in collaboration with the EBA will publish a report on the financial stability implications of securitisation markets in the first part of 2022. The report will be produced in view of the ESRB’s responsibility for macroprudential oversight of the EU securitisation market, and it will be the ESRB’s first report of this kind.

In addition, the EBA has been mandated to develop a number of other technical standards and guidelines under the capital markets recovery package.

The EBA will continue working on the development of a consultation paper on a draft RTS to specify how an originator in a synthetic securitisation shall determine the exposure value of synthetic excess spread. The EBA aims to carry out a public consultation before the summer of 2022 and expects to submit the RTS to the European Commission in the third quarter of 2022.

The EBA will work on the development of technical standards on the homogeneity of the assets in on-balance-sheet synthetic securitisation as mandated by the Capital Markets Recovery Package. The RTS will specify which underlying exposures are deemed to be homogeneous as per the simplicity requirements for STS on-balance-sheet securitisations. It aims to carry out a public consultation throughout 2022 and expects to submit the RTS to the European Commission by March 2023.

In parallel, the EBA plans to develop guidelines and recommendations on the harmonised interpretation and application of the STS requirements for on-balance-sheet securitisations. The main objective of the guidelines is to ensure a common understanding and consistent application of the STS criteria for on-balance-sheet securitisations. Following a public consultation at the end of 2022, these guidelines are expected to be finalised and published by mid-2023.

Developing the Joint Committee’s response to the European Commission’s call for advice on the review of the securitisation prudential framework

In October 2021, the Joint Committee of the ESAs received a call for advice (CfA) from the European Commission about the review of the securitisation prudential framework. This advice is crucial in the context of the Commission CMU action plan, where a proportionate and risk-sensitive prudential framework is a central component to allow securitisation to revive in a prudent manner.

This CfA has two main parts. The first part, which is addressed to the EBA, tackles the capital requirements for securitisations and the treatment of securitisation in the liquidity framework by banks. The second part, which is addressed to EIOPA, focuses on the capital treatment of securitisation in Solvency II for insurance.

The EBA is therefore currently assessing how the securitisation capital framework and the liquidity legislative framework have performed in the past years relatively to their stated prudential purpose, and how they have managed to revive the securitisation market on a prudent basis.

Taking into account findings from the EU securitisation market assessment, the EBA will advise the Commission on the appropriateness of the securitisation capital framework, focusing on the provisions setting the key parameters for the risk-weighted exposures calculation for positions in securitisation and, in particular, those that have been introduced to address the shortcomings of Basel II.

Revisiting and strengthening the EU-wide stress testing framework

Preparing for the 2023 EBA EU-wide stress test

Following last year’s exercise, the next EU-wide stress test in 2023 is already casting its shadows ahead. As in previous cycles, the EBA launched a process to collect lessons learned from the supervisory community shortly after the conclusion of the 2021 exercise and also held a workshop with participating banks to gather feedback from the industry. The feedback received helps to continuously improve the EU-wide stress test from cycle to cycle.

A similar process is envisaged following the consultation of the draft 2023 EU-wide stress test methodology and templates, at the beginning of summer 2022. The aim is to finalise the methodology in the fourth quarter of 2022. As in previous years, the templates would be tested with banks participating in the exercise before the launch of the exercise.

Revision of the EBA EU-wide stress test methodology

As part of this regular review, areas for simplifying the methodology and streamlining of the templates have been identified, and will be addressed going forward. This also includes the incorporation of relevant FAQs from the 2021 exercise, the adaptation of the framework for regulatory changes, such as the phasing-out of COVID-19 support measures, as well as the targeted review of methodological constraints. Overall, this process aims to improve the relevance and increase the efficiency of the EU-wide stress test, while keeping the methodology as stable as possible.

Exploring how to embed climate risk into the stress test framework

In the last couple of years, the European Commission has been amending banking regulation to guarantee a smooth transition towards a low-carbon economy through a more sustainable banking sector (see Sections 6 and 17 of this report). Supervisory stress testing, which is a key tool to assess banks’ vulnerabilities, must also be adapted accordingly.

As a first step, in 2020, the EBA launched an EU-wide pilot exercise on climate risk (refer to this section for more information), representing the first EU-wide assessment on climate-related risks. Considering that tools and data for climate risk assessment were at the early stage, the pilot exercise represented a great step forward towards the design of a fully-fledged climate risk stress test. Other initiatives on climate risk stress tests, run by supervisors and central banks as learning exercises, have also been finalised, while some are ongoing.

One of the priorities for the EBA in 2022 will be to discuss how to best include climate risk in a stress test framework in light of the proposed mandates outlined by the European Commission in its renewed strategy on sustainable finance published in 2021 and then translated into the draft CRD VI text.

One of the proposed mandates refers to the EBA’s role to perform a regular climate risk stress test. In addition, a coordinated exercise together with EIOPA, ESMA and the ECB should be carried out to assess the resilience of the financial sector in line with the ‘Fit for 55’ package. Finally, the strategy includes mandates for the EBA to issue guidelines for banks and supervisors on ESG stress testing.

Going forward, the results of the EBA pilot exercise and the outcome of other initiatives run by other supervisors will further inform this process and will help to calibrate the level of ambition of an EBA climate risk stress test in the future.

Banking and financial data: leveraging EUCLID

Enhancing the EBA’s analytical capacities

Continuing the journey towards a data-driven organisation

Data plays a key role in the EBA’s activities, which include producing an evidence-based rulebook, performing impact assessments and risk analyses and developing a harmonised and proportionate supervisory reporting system for banks and other financial entities, among others. Consequently, as a data-based and insight-driven institution, the EBA has incorporated data and analytics as a key element in its 2021 strategic areas, strengthening EBA’s goal to become an integrated European data hub, leveraging the enhanced technical capability for performing flexible and comprehensive analyses.

Over the past 10 years, the EBA has been using and receiving a wealth of data. Namely, with the completion of EUCLID in early 2021, it now gathers the full spectrum of the EBA’s defined regulatory reporting covering all financial entities. EUCLID collects periodic data for:

• supervisory and resolution reporting from 5 000 banks;
• prudential reporting from 2 800 investment firms (go-live in 2022); and
• payment data from 2 700 payment institutions.

The EBA is also closely involved in several EU-wide initiatives to further improve the quality and availability of financial reporting and data (the EU’s supervisory data strategy, integrated reporting, cost of reporting, use of Legal Entity Identifier (LEI), European Single Access Point, etc.).

For efficiency across the organisation while focusing on data, the EBA needs to step up its role as a data-driven agency. Its ambition is to become a data hub providing data and analytics services to internal and external stakeholders. With these objectives in mind, at the end of 2021, the EBA started to implement a comprehensive data strategy that is supported by its large ecosystem of external stakeholders and is fully aligned with its mandates and strategic objectives (see the EBA 2021 Annual Work Programme). This is a multi-year project that is to be delivered in five years (3+2) after which it will be reassessed, reviewed and improved.

Several benefits to the EBA are expected: it will allow the EBA to achieve its mandated objectives effectively and to enhance its capability to monitor the status of the financial system; furthermore, defining a data strategy will help the EBA to communicate its activities more clearly to external stakeholders.

Exploring new data collection

The purpose of supervisory disclosure is to enable a meaningful comparison of the approaches adopted by the competent authorities and the Member States. The EBA intends to enhance transparency of the prudential requirements for investment firms across all Member States. In June 2021, the EBA published the final draft ITS on supervisory information to be disclosed by competent authorities for investment firms in accordance with Article 57(4) of Directive (EU) 2019/2034 (IFD). These final draft ITS cover different areas, including templates for competent authorities to disclose texts of laws, regulations, administrative rules, information on exercise of the options and discretions, general criteria and methodologies used for the SREP and aggregate statistical data on key aspects of the implementation of the prudential framework in Member States.

In 2022, the EBA will disclose these templates on its website for the first time.

In addition, the EBA will keep disclosing all the information published by the EU competent authorities to provide an overview of the implementation and transposition of CRD IV and the CRR across the EU. Through this disclosure, the EBA remains committed to providing meaningful comparisons across the EU and to promoting convergence.

EBA will continue to update and revise its supervisory reporting framework in 2022 and will prepare and finalise the reporting framework 3.3. These requirements will integrate monitoring of the threshold and other procedural aspects on the establishment of the Intermediate Parent Undertaking (IPU) and in addition, will include the regular update to the benchmarking ITS and a comprehensive review of the resolution planning ITS. The EBA will also start its work on the new IRRBB reporting framework building on the new policy package that is being developed and Pillar 3 disclosures on IRRBB.

Enhancing market discipline through a Pillar III data hub and integration with the EU Single Access Point (ESAP)

The EBA is looking to further enhance market discipline and promote the use of Pillar 3 information facilitating centralised access by becoming a hub of Pillar 3 disclosures for EEA credit institutions. The Pillar 3 data hub aims to offer easy access to Pillar 3 information for all EEA institutions, facilitating cross-sector comparability of information and digitally user-friendly visualisation tools. Furthermore, beyond the EBA Pillar 3 hub, Pillar 3 information and all public information from EU companies and EU investment products will be accessible in an ESAP following the package on the CMU published by the Commission in November 2021. The EBA will be the collection body bridging data between the Pillar 3 hub and the ESAP.

According to the CRR III proposal, the EBA is mandated to receive and centralise institutions’ prudential disclosures and make them available through a single electronic access point (its website) effectively playing the role of a Pillar 3 data hub.

The CRR III mandates are proposing a differential approach for SNCIs and for other institutions. While the main objective of this proposal is to promote market discipline and facilitate stakeholders’ access to Pillar 3 information, this project should also ease compliance with prudential disclosure requirements by SNCIs. Instead, the EBA will derive Pillar 3 data for SNCIs’ data from the supervisory reporting data it already receives and make it available on its website. Institutions other than large ones and SNCIs shall instead submit to the EBA the disclosures that they are already producing for publication by the EBA on its website without any delay. The Pillar 3 data hub will not bring any new data requirements for institutions which will continue to be responsible for their own data.

The EBA will build on the policy work already done in the area of disclosures, such as the comprehensive technical standards in place that specify uniform disclosure formats and associated instructions, and on the EUCLID platform. In addition, the EBA shall enhance, maintain, and publish a mapping tool of the data points in the disclosure templates with those in supervisory reporting.

The Pillar 3 data hub is intended to become operational by the fourth quarter of 2024, with institutions starting to report the data in January 2025. The Pillar 3 data hub is part of the wider EU initiative seeking to establish an ESAP for public, financial, and sustainability-related information about EU companies and EU investment products by 2024.

Digital resilience, fintech and innovation: deepening analysis and information-sharing

Preparing for the regulatory and oversight mandates under DORA

As the legislative procedure on DORA is ongoing, the EBA, in close coordination with the other ESAs, is preparing for the implementation of the new legislation. The ESAs are expected to jointly develop a significant number of policy mandates to further specify the technical implementing details of the legal requirements. To this end, preparations are being made to organise and deliver this work under the Joint Committee of the ESAs.

In addition, the EBA is preparing for its role as Lead Overseer for CTPPs while noting that this will neither imply direct supervision of CTPPs in providing those services to financial entities nor oversight across their full range of activities. The scope of the oversight will be limited to the ICT services the CTPPs provide to financial entities. The oversight responsibilities will be shared across the ESAs, with one of them acting as the lead overseer for each CTPP. Thus, the EBA is already working towards this for enhanced coordination with existing counterparts (ESMA, EIOPA, ECB, ESRB, ENISA and supervisory authorities of financial entities) and upcoming interaction with new counterparts (such as the Network and Information Systems (NIS) Cooperation Group and national NIS authorities).

Preparing for the regulatory and potential supervisory mandates under MiCA

In a similar way as with DORA, the EBA will, in 2022, continue to prepare for potential supervision and policy tasks under MiCA and will continue to provide technical inputs to the EC where appropriate. In particular, the EBA is monitoring the evolution of Titles III and IV of MiCA (asset-referenced and e-money tokens) and identifying necessary steps (e.g. regarding IT and staffing needs) in order to prepare for potential supervision functions of issuers of tokens that are ‘significant’ or of those who voluntarily submit to EU-level supervision.

Supporting the establishment of the EU Supervisory Digital Finance Academy

In 2022, the EBA together with ESMA and EIOPA will be partnering with the European Commission to establish the flagship EU Supervisory Digital Finance Academy. Over the course of next the years the Academy will help supervisors across the EU to obtain knowledge on innovative applications of technology to financial services and activities. It will also facilitate the sharing of practical experience.

The Academy will aim to strengthen supervisory capacity in the area of innovative digital finance, thus supporting the objectives of the EU Digital Finance Strategy. The Academy will feature a comprehensive training curriculum on digital finance, including seminars, lessons and self-guided study initiatives, and a series of workshops on practical issues stemming from the regulation and supervision of innovations used by financial entities and related service providers.

The EU Supervisory Digital Finance Academy should:

• enhance the capacity of supervisors to understand the functioning of advanced technologies used in financial activities and services and help to properly assess associated risks and take actions to mitigate them;
• facilitate an understanding of how advanced technologies are deployed within supervisory activities and processes;
• develop and foster synergies by collecting and spreading best practices from authorities with more advanced levels of expertise, thus enabling peer learning.

Based on supervisors’ practical experience and expertise exchanged, the Academy may help to identify potential improvements in the regulatory framework for digital finance.

The EBA, together with ESMA and EIOPA, will guide and steer development of the Academy’s training curriculum to ensure it is tailored to the competent authorities’ needs.

Assessing the current legal framework for the digitalisation of payment services and electronic money

The European Commission’s call for technical advice on the review of the PDS2 as received by the EBA on 20 October 2021 (see also Section X) requested the EBA to provide, inter alia, analyses of the impact of the continued digitalisation of payment services. The various sections included in this call for advice include topics related to:

• potential adjustment of the scope and definitions of the Directive in light of developments in the payments market;
• the impact and potential need for clarification of the security requirements in PSD2, namely Strong Customer Authentication;
• whether new security risks should be addressed with additional requirements;
• whether there are impediments and technical barriers to the access to payment accounts and whether further standardisation is needed on that matter;
• the opportunities and challenges for the potential expansion from access to payment account data towards access to other types of financial data, i.e. the move to open finance.

Providing advice to the European Commission on the EU framework for mortgage credit

In December 2021, the European Commission sent the EBA a call for technical advice on the review of the Mortgage Credit Directive (MCD). This call for advice covers a very wide range of topics related to the MCD, including:

• areas specifically excluded from the scope of this Directive, identifying any potential unjustified gaps in the protection of consumers due to the existing exceptions / regulatory options under the MCD;
• risks arising from crowdfunding / peer-to-peer platforms and providing mortgage credit, information disclosure rules (at pre-contractual and advertising stages), creditworthiness assessment, use of robo-advisers for granting of mortgage credit and cross-border provision of mortgages;
• ways to contribute to financial stability and lessons learned from COVID-19; and
• possible ways to encourage the uptake of green mortgages in the EU and risks related to climate change.

The EBA aims to deliver its response to the European Commission by 30 June 2022.

Enhancing convergence of supervisory actions to remove obstacles to competition in the payments market

In 2022, the EBA will continue its supervisory convergence work under the PSD2. It will monitor the removal of obstacles to providing account information services and payment initiation services offered by third-party providers to support the PSD2 objectives of facilitating innovation and enhancing competition in the EU single market.

In 2022, the EBA also continued its work on amending the RTS on SCA and CSC, with regard to the 90-day exemption from SCA for account access and published the final report in April 2022. The proposed amendment to the RTS aims to address a number of issues that the EBA has identified in the application of this exemption by some ASPSPs across the EU Member States and which has resulted in a negative impact on the services offered by AISPs under the PSD2. To mitigate these issues, in the fourth quarter of 2021, the EBA held public consultations on its proposal to amend the RTS in order to introduce a new mandatory exemption from SCA for the specific use case when access is done through an AISP, provided that certain conditions are met.

Developing retail risk indicators to measure the likelihood and probability of consumer harm

The amended EBA Regulation on European Supervisory Authorities as of January 2020 requires the EBA to develop retail risk indicators for the timely identification of potential causes of consumer harm. In 2022, the EBA will identify the different types of harm to which consumers may be exposed when buying retail banking products and services. The EBA will then aim to identify indicators that will measure the likelihood and/or severity of these types of harm from materialising and which can be published on a regular basis. From a supervisory perspective, the indicators designed by the EBA could be used for risk-monitoring purposes and enable the EBA and competent authorities to take early steps to mitigate, and possibly prevent, consumer harm.

Carrying out a thematic review into the level and transparency of fees and charges for retail banking products

Among the issues identified in the Consumer Trends Report 2021, the EBA will focus in 2021/2022 on the transparency and the level of the fees and charges imposed by financial institutions for providing retail banking products and services within the EBA’s remit (mortgage credit agreements, consumer credit agreements, deposits, payment accounts, payment services and electronic money services).

To address this issue, the EBA approached in 2021 national authorities, consumer associations and financial institutions to gather their views and experiences in relation to any detrimental impact on consumers arising from the lack of transparency and the level of fees and charges. This input will constitute key components of a thematic report that the EBA is aiming to publish in the third or fourth quarter of 2022. The report will allow the EBA to partially fulfil its statutory mandate to undertake thematic reviews of market conduct and take a leading role in promoting transparency, simplicity and fairness in the retail banking products and services market across the EU.

Fighting money laundering and terrorism financing and contributing to a new EU infrastructure

From developing policy to supporting effective implementation of AML/CFT measures

The EBA will continue to lead, coordinate and monitor the fight against financial crime in the EU’s financial sector. It will support the implementation of robust approaches to AML/CFT supervision across the EU; contribute to the implementation of a holistic approach to tackling ML/TF by embedding AML/CFT across all areas of the EBA’s work; and provide sound, technical advice where necessary to promote the effective design and implementation of the EU’s new institutional AML/CFT framework. Accordingly, the EBA’s AML/CFT-related priorities for 2022 are:

1. to complete the AML/CFT policy framework with guidance on topical issues including on the role of AML/CFT compliance officers, the use of remote customer onboarding solutions, de-risking and financial inclusion;
2. to build capacity of EU competent authorities through training, bilateral feedback and advice; and
3. to identify, assess and disseminate information about ML/TF risks based on, inter alia, information from the EBA’s new, central, AML/CFT database, its colleges monitoring activity and its assessments of national authorities approaches to AML/CFT supervision.

Contributing to shaping the future EU AML/CFT landscape

The EBA will launch the EU’s first, central AML/CFT database, EuReCA, in January 2022 (please see Chapter 5 of this report). Through EuReCA, the EBA is collecting, structuring, analysing and sharing information from national authorities on AML/CFT weaknesses they have identified in the processes and procedures, governance arrangements, fitness and propriety, business models and activities of individual financial institutions under their supervision. The EBA will use that information proactively to ensure that ML/TF risks are addressed by competent authorities and financial institutions in a timely and effective manner.

In addition, the EBA will continue to provide technical input to inform the EU’s future legal and institutional AML/CFT framework to help ensure that it meets the European Commission’s objectives. There will be a particular focus on cooperation because ML/TF cannot be fought effectively in isolation. Consequently, the EBA will follow issues on the forthcoming establishment of the EU’s new AML/CFT authority (‘AMLA’) as well as AMLA’s consistent insertion into the existing institutional landscape of EU institutions – including its future cooperation with the EBA as well as with national prudential and AML/CFT supervisors of the financial and non-financial sectors. Last but not least, the EBA stands ready to contribute to any technical discussions on the package and provide its expert views, as needed.

Providing tools to measure and manage ESG risks

Monitoring ESG risks and sustainable finance

The EBA has received mandates in the area of monitoring ESG-related risks, most recently through the European Commission’s renewed sustainable finance strategy. Jointly with the Commission, the ESRB, other ESAs, the ECB and the NCAs, the EBA will systematically monitor climate-related financial stability risks. Further, the EBA shall put in place a monitoring framework to assess material ESG-related risks, as per the EBA founding regulation. In 2022 the EBA intends to start building an ESG risk monitoring framework. A first integration of ESG-related aspects into the EBA’s existing risk-monitoring framework has been initiated through the RAQ. The EBA will further explore integration and new assessment tools throughout 2022.

Consulting on the role of environmental risks in the Pillar 1 framework

The EBA is mandated to assess whether a dedicated prudential treatment of exposures associated substantially with environmental objectives, or subject to environmental impacts, would be justified. To address these mandates, covering both the framework for credit institutions and for investment firms, the EBA will be following a two-step approach. In 2022 the EBA published a discussion paper, in which the analysis will be initiated and on which stakeholders will be invited to provide their feedback. The feedback received on this discussion paper, together with available data and insights gained from the EU and international initiatives, will inform the final report and related EBA policy recommendations, which should be finalised in 2023.

Advising on a framework for green retail loans

The EBA expects to receive a specific request from the European Commission to explore the extent to which the EU Taxonomy could be applied to identify green retail products and to advise on potential adjustments or alternative approaches to the EU Taxonomy regulation, if deemed appropriate. As part of this work, the EBA will assess current market practices and will identify potential impediments to the scaling up of green lending to retail customers in the EU. It will also investigate how to ensure appropriate monitoring of the use of proceeds of green loans and avoid the risk of ‘greenwashing’.

Ensuring robust and sensible transparency ESG rules

In 2022, the ESAs will continue to work on SFDR-related topics and mandates. To answer to questions received from stakeholders since the publication of both sets of RTS in 2021, the ESAs are planning to issue a guidance document and address Q&As in 2022. Furthermore, the ESAs are mandated to review the RTS under the SFDR, to clarify indicators for both climate and environment-related principal adverse impacts and principal adverse impacts in the field of social and employee matters, respect for human rights, anti-corruption and anti-bribery matters. Finally, the RTS will be updated in relation to the information that should be disclosed about the exposure of financial products to investments in fossil gas and nuclear energy activities.

In addition, the Joint Committee of the ESAs will finalise the draft RTS that will standardise the content, methodology and presentation of information an originator of an STS securitisation may choose to disclose about the negative impacts of the securitised assets on ESG factors. Disclosures based on these RTS will therefore assist investors in measuring and comparing the potential negative consequences of certain securitisation products.

Developing further guidelines on ESG risk assessment

In 2022, the EBA will undertake preparatory work to provide further guidance to institutions on the assessment and management of ESG risks. The EBA is expected to receive a new mandate to issue guidelines on this as per the Commission’s proposal on CRD VI. Building on the EBA report on the management and supervision of ESG risks, the EBA will explore how to best ensure robust and harmonised practices for the assessment and management of ESG risks, including by considering potential requirements for institutions’ internal scenario analyses and transition plans.

Monitoring and mitigating the impact of COVID-19

Monitoring the evolution of asset quality and assessing the regulatory COVID-19-related support programmes

The asset quality of loans that benefited from support measures has been constantly deteriorating since their introduction. The EBA has remained vigilant and warned on several occasions of the need to swiftly and effectively address those pockets of risks identified in these portfolios. Although support programmes are gradually being phased out, European banks continue to report a substantial volume of loans that have benefited from support measures. The EBA will continue monitoring the evolution and asset quality of these loans.

Maintaining COVID-19 reporting and disclosures requirements

The EBA took decisive action in response to the COVID-19 pandemic in 2020. This included the publication of guidelines on legislative and non-legislative moratoria on loan repayments setting out supervisory approaches to the treatment of such moratoria, as well as guidelines on reporting and disclosure of exposures subject to measures applied in response to the COVID-19 crisis. The latter set out framework for the regular reporting allowing supervisors to monitor the impacts of moratoria and other public support measures on the credit quality of the affected exposures.

Over the course of 2021, despite the noticeable reduction in the number of loans under various forms of payment moratoria and other public support measures, uncertainty on the evolution of the COVID-19 pandemic and its implications on the quality of banks’ lending remained. It was therefore necessary to continue monitoring the implementation of measures introduced in response to the COVID-19 crisis, potential increases in NPEs and overall impacts on the credit quality of banks’ assets, especially in the Member States, where such public support measures are still relevant. To this end, in its public statement on 17 January 2022, the EBA confirmed the continued application of COVID-19-related reporting and disclosure requirements until further notice. The EBA also noted that competent authorities may exercise the flexibility provided in the guidelines to reduce or stop some specific reporting and disclosure requirements, in order to consider the different needs across jurisdictions. The EBA will continue to monitor developments and will consider repealing the guidelines in the future when the COVID-19 situation permits, and the credit outlook of the affected loans improves.

Annexes

EBA organisational structure

Composition as of 31 December 2021

Board of Supervisors composition at the end of 2021

VOTING MEMBERS

EEA/EFTA MEMBERS

OBSERVERS

OTHER NON-VOTING MEMBERS

Management board

In accordance with the EBA Founding Regulation, the Management Board ensures that the EBA carries out its mission and performs the tasks assigned to it. It is composed of the EBA Chairperson and six other members of the Board of Supervisors elected by and from its voting members. The Executive Director, the EBA Vice-Chairperson and a representative of the Commission also participate in its meetings.

Four new members joined the Management Board in 2021. At the end of December 2021, the Management Board was composed of four members from participating SSM Member States (Austria, France, Germany, and the Netherlands) and two members from non-participating SSM Member States (Poland and Sweden).

The Management Board met five times in 2021 and given the COVID-19 pandemic and implemented measures, all meetings were held as teleconferences. To guarantee the transparency of its decision-making, minutes of Management Board’s meetings are published on the EBA website.

Management Board composition as of 31 December 2021

Some BSG members attending the EBA’s 10th anniversary event in Paris, 26 October 2021.

Banking Stakeholders Group composition as of 31 December 2021

Budget summaries

The amended budget for 2021 is published in the Official Journal of the European Union (available at https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX%3A32022B0308%2806%29&qid=1615295517740).

EBA establishment plan 2021

(*) Nine AD positions have not been offered by 31 December 2021.

(**) The filled posts include four temporary agent offers that was made by 31 December 2021.

Statistics on disclosure

The Legal Unit is the central point for dealing with requests relating to transparency and public access to documents. In 2021, within the remit of Regulation (EC) No 1049/2001, the Legal Unit provided its advice on 13 formal requests for access to information.

Facts and figures

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Less detail Photo and illustration credits

Photo credits: European Banking Authority on pages: 8, 11, 43, 44, 45, 50, 52, 58, 64, 72, 77, 92, 95, 99, 100, 119, 120, 122, 126.

Illustration credits: Getty Images on pages: 22, 27, 32, 34, 39, 42, 51, 55, 68, 70, 76, 79, 91, 98, 104, 106, 107, 108, 111, 117.

The page numbers refer to the PDF version of the book, please see below.

Additional website illustrations – Getty Images:

https://www.gettyimages.co.uk/detail/illustration/system-building-illustration-royalty-free-illustration/977724776

https://www.gettyimages.co.uk/detail/illustration/business-talk-new-business-concept-royalty-free-illustration/510184977

https://www.gettyimages.co.uk/detail/illustration/business-team-managers-meeting-at-round-royalty-free-illustration/1369386032

https://www.gettyimages.co.uk/detail/illustration/criminal-washing-banknotes-in-machine-money-royalty-free-illustration/905147482

https://www.gettyimages.co.uk/detail/illustration/businesswoman-with-umbrella-protecting-money-royalty-free-illustration/1218810022

https://www.gettyimages.co.uk/detail/illustration/data-analysis-and-statistics-concepts-royalty-free-illustration/1282816570

https://www.gettyimages.co.uk/detail/illustration/business-technology-and-finance-trends-royalty-free-illustration/1202231699

https://www.gettyimages.co.uk/detail/illustration/isometric-businessman-turning-risk-button-to-royalty-free-illustration/1096322874

 

Print	ISBN 978-92-9245-765-5	ISSN 1977-9038	doi:10.2853/509107	DZ-AB-22-001-EN-C
PDF	ISBN 978-92-9245-764-8	ISSN 1977-9046	doi:10.2853/23117	DZ-AB-22-001-EN-N
HTML	ISBN 978-92-9245-763-1	ISSN 1977-9046	doi:10.2853/783260	DZ-AB-223-001-EN-Q

 

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