ECB: second consultation on the new euro benchmark rate

News

Mar 18 2018

On March 15, 2018, the ECB launched a second consultation to market participants and interested parties on the new ECB overnight reference rate. Comments on this second and detailed report of the new features of this rate will be welcomed up to April 20, 2018.

The ECB expects to collect stakeholders’ views both on the methodology adopted and on the key technical and operational features. The new rate was announced on September 21, 2017  and a first consultation has already been launched on November 28, 2017.

The objective of an ECB overnight rate is twofold: it will complement the benchmark rates manufactured by the private sector and will also serve as a backstop reference rate. Benchmark rates underlie many important features of financial markets contracts, and play a central role in the transmission of ECB monetary policy.

The rate will be based only on transactions in euro that are reported within the ECB money market statistical reporting standards. It is expected to be launched in 2020, after a public consultation to the industrial parties is answered too.

ECB second consultation (15 Mar. 2018)

ECB first consultation (28 Nov. 2017)

ECB launches new overnight reference rate (21 Sep. 2017)

 

ECB: The effects of non-conventional monetary policy on real growth

News

Mar 14 2018

The President of the European Central Bank Mario Draghi gave a speech at the Institute for Monetary and Financial Stability in Frankfurt. The main topic covered are the real effects of extrarodinary monetary policy in the Euro Area, with a focus on the asset purchase programme.

The analysis of last year’s real growth in the Euro Area confirm that the economy expanded wider than expected, together with a growing confidence in the Euro Area itself. Business investment stands 7% over the pre-crisis level, and house investing reaches +17% with respect to the crisis period. Labour market continues on a recovery path, as unemployment reaches the lowest level since 2008.

The contribution of non-conventional monetary policy is retained to be crucial to such developments. The ECB estimates that without the ECB asset purchase programme, the growth rate of bank lending would have been roughly a half of current level, with rates almost 50% higher.

Despite the achievement of these goals, the clear condition to bring net asset purchases to an end is the pattern of inflation: the aim is to inflate the inflation rate up to 2% level, and monetary policy must be conducted such as to continue along this path.

“For this reason,” stated the President “even once the outlook becomes less dependent on net asset purchases, monetary policy still needs to be patient, persistent and prudent to guarantee the return of inflation to our aim.”

Full speech (ECB website)

BIS: implications of digital currencies in central banking

News

Mar 14 2018

The Committee on Payments and Market Infrastructures and the Markets Committee at the Bank of International Settlement (BIS) issued a report resuming the major entanglements of digital currencies on central banking. The possibility of issuing digital currencies must be supplemented by a careful weigh of the implications both for monetary policy and stability of the financial system.

The report considers a wholesale CBDC (for use in financial markets), and a general purpose CBDC (for use by the general public). On the one hand, it finds that wholesale CBDCs might be useful for payments, although supplementary checks are needed to capture the full potential of such new mechanisms. On the other hand, wholesale CBDCs could affect the transmission of monetary policy, although it would not reshape the basic mechanism of its implementation.

Concerning general purpose CBDCs, the impact on the financial and system could be broader and larger in size. Particualrly, the intermediation activity pursued by commercial banks must be carefully accounted for. Furthermore, the reliance of such institutions on customer’s deposits might become less stable in times of stress, as it could be proner to take flight to the central bank itself.

The conclusion is that each jurisdiction considering the launch of a central banking digital currency should consider these implications thoroughly before taking any decision.

Central Bank Digital Currencies (PDF)

EIOPA consults on the IDD reviews of PII limits
di Silvia dell’Acqua

Articolo

Mar 13 2018
EIOPA consults on the IDD reviews of PII limitsdi Silvia dell’Acqua

Last 30 January 2018, EIOPA published a consultation paper on the adjustments elaborated on the Insurance Distribution Directive (IDD), regarding the base amounts for Professional Indemnity Insurance (PII) and for financial capacity of the insurance intermediaries.

A PII is a form of liability insurance that covers the costs of compensating policyholders for claims, legal fees and remedies that can arise from acts, errors or omissions committed by insurance intermediaries during the conducting of their business activities. A PII not only strengthens the consumer protections by providing a source other than the firm’s capital to pay the claims, but also protects the assets of the insurance intermediaries in case of large and unexpected amounts. It is particularly valuable for small insurances and ancillary intermediaries, that might find difficult and inappropriate for their business to hold large amounts of capital. The IDD states that, regardless its size and irrespective of whether it operates in more than one Member State, to be registered and to carry on insurance intermediation, an intermediary must:

  • hold a PII covering the hole territory of the Union
    • with a level of indemnity of at least 1,250,000 euros for a single claim
    • with a level of indemnity of at least 1,850,000 euros per year for all claims
    • capital resources are not allowed as an alternative to PII
  • have a minimum financial capacity of max (18,750 euros ; 4% sum annual premiums received)

With the aim of ensuring trust in the insurance distribution, the IDD also provides for specific national options to protect customers against the inability of insurance intermediaries to pay the claim, that goes on top of the minimum requirements listed above.

Paragraph 7 of Article 10 of the IDD states that EIOPA should draft Regulatory Technical Standards (RTS) to adapt the amounts foreseen as a minimum coverage according to the changes of the European Index of Consumer Prices (EICP) published by Eurostat for the EEA in the period 01.01.2013 – 31.12.2017, reviewing the figures every five years thereafter. Although the IDD prescribes how to perform the calculations, EIOPA sees the public consultation as an important step towards a better regulation and carries it out in accordance with Article 10 of Regulation EU 1094/2010, in case of drafting a RTS. Comments can be provided by the 27th of April 2018, EIOPA is submitting the finalized RTS to the Commission by the 30th of June 2018.

EIOPA has conducted a review of different aspects of the market for PII for insurance intermediaries, concluding that:

  • there are no evidences of market failures arising from PII
  • PII is not acting as a barrier to enter the insurance intermediaries market in the EEA
  • claims for PII vary from Member State to Member State, making difficult to judge the adequacy of minimum limits
  • as the EICP increased by 4.03% (from 99.01 to 103.00), the base euro amounts for PII and financial capacity should be review as follows
    • PII level of indemnity of at least 1,300,370 euros for a single claim
    • PII level of indemnity of at least 1,924,550 euros per year for all claims
    • minimum financial capacity of max (19,510 euros ; 4% sum annual premiums received)
  • the increase of the amounts is likely increasing the cost for distributors on an ongoing basis
    • the new minimum levels of indemnity may result in a slight rise of the premiums to be paid by insurance intermediaries for their PII
    • the new minimum financial capacity may result in a potential loss of returns on investments
  • on the other hand, the increase is ensuring an adequate level of consumer protection, in line with the inflation, that ultimately increases the trust of consumers in insurance distribution.

EBA publishes a draft set of guidelines to manage NPLs

News

Mar 11 2018

The European Banking Authority (EBA) launched a consultation on a draft set of guidelines to properly manage non-performing exposures (NPEs), with a particular focus on non-performing loans (NPLs). The crisis left as its legacy a considerable amount of non-performing loans in banks’ balance sheets. Furthermore, a frail financial sector is more prone to suffer from new NPLs in the nearby future.

In July 2017, the European Council concluded an Action Plan to tackle non-performing loans (NPLs) in Europe. The EBA, along with other bodies and institutions, was invited by the Council to contribute to address the existing stock of non-performing loans (NPLs) as well as to prevent the emergence and accumulation of new NPEs on banks’ balance sheets.

The guidelines are designed primarily to reduce NPEs on banks’ balance sheets by providing supervisory guidance to ensure that credit institutions effectively manage NPEs and forborne exposures (FBE) in their balance sheets.

The development of an NPE strategy is the core building block of the guidelines for banks’ NPE management. The NPE strategy should be built on an assessment of the operating environment, should set out time-bound realistic, yet ambitious reduction targets and consider all available strategic options to reduce NPEs.

The guidelines outline the key elements of the governance and operations of a NPE workout framework with key aspects related to steering and decision making, the NPE operating model, internal control framework and NPE monitoring as well as early warning processes.

Credit institutions with elevated levels of NPEs should establish a NPE strategy, as part of their overall strategy, and related governance and operational arrangements. Effective governance covers all responsibilities that banks have, including to treat customers fairly.

 

Guidelines on NPLs (PDF)

European Supervisory Authorities jointly warn customers on virtual currencies

News

Mar 11 2018

The European Supervisory Authorities (ESAs) for securities (ESMA), banking (EBA), and insurance and pensions (EIOPA) issued a pan-EU report to warn consumers on the risks of buying virtual currencies. The ESAs’main concern is the increasing demand of virtual currencies by etherogeneous customers, often unaware of the underlying risks.

First of all, the price of virtual currencies is extremely volatile, and already showed signs of pricing bubbles. Customers must be warned that the consequences of large drops in prices will result in severe losses in their virtual portfolios.

Secondly, common trading platforms are not regulated under EU law, hence no protection associated to financial services is provided for EU consumers. As an example, a cyber-attack stealing virtual money from target exchange will not provide any cover to the consumers losses under the EU jurisdiction.

 

Furthermore, many virtual currencies exchanges have been subject to severe operational problems in the past. Consumers were not able to execute their buy/sell orders when they wanted, and suffered losses from the (high) fluctuations in such periods.

ESMA joint working on virtual currencies (PDF)

IOSCO: how to help trading venues manage extreme volatility

News

Mar 07 2018

The Board of the International Organization of Securities Commissions (IOSCO) is seeking feedback on its proposed recommendations to assist trading venues and regulatory authorities in the implementation of mechanisms to manage extreme volatility.

Extreme volatility in securities markets can undermine IOSCO’s objective of ensuring that markets are fair, efficient and transparent, weaken market integrity and reduce investor confidence. Following recent extreme volatility events, regulatory authorities and trading venues have been reviewing their approaches to managing extreme volatility; volatility control mechanisms seek to minimize market disruption triggered by events such as erroneous orders, by halting or temporarily constraining trading.

In the consultation report  Mechanisms Used by Trading Venues to Manage Extreme Volatility and Preserve Orderly Trading, IOSCO explores the measures that trading venues use to address the risks posed by extreme volatility. Specifical recommendations provide that:

• trading venues should have volatility control mechanisms to manage extreme volatility and that these mechanisms should be appropriately calibrated and monitored;

• regulatory authorities should consider what information they require to effectively monitor the overall volatility control mechanism framework in their jurisdiction, and make sure that trading venues maintain relevant records;

• information about volatility control mechanisms and when they are triggered should be made available to regulatory authorities, market participants and if appropriate, the public; and

• communication amongst trading venues should be considered where the same or related securities are traded on multiple trading venues in a particular jurisdiction.

(Source: IOSCO, http://www.iosco.org)

 

Basel III Monitoring report al 30 giugno 2017

News

Mar 07 2018

La Bank of International Settlement (BIS) ha pubblicato il nuovo report sull’esercizio di monitoring del comitato di Basilea III. L’esercizio si basa sui dati forniti da un totale di 193 banche, incluse 106 gruppi bancari internazionali, questi ultimi definiti come “Gruppo 1” e caratterizzati da un Tier 1 di più di 3 miliardi, a contrapporsi alle 87 istituzioni finanziarie del “Gruppo 2”, che riportano un Tier 1 di meno di 3 miliardi (o che non sono internazionalmente attive). I 30 gruppi bancari definiti di importanza sistemica globale (G-SIBs) sono stati tutti inclusi nel Gruppo 1 dell’esercizio.

I dati al 30 giugno del 2017 evidenziano che tutte le banche nel sample raggiungono il minimo di risk-based Common Equity Tier 1 (CET1) del 4.5%, e il target di CET1 del 7.0%. Tra il 31 Dicembre 2016 e il 30 Giugno 2017, le banche del Gruppo 1 hanno ridotto il proprio Tier 2 capital shortfall da 0.3 miliardi a 24 milioni di Euro.

In tema di indicatori di liquidità, la media pesata del Liquidity Coverage Ratio (LCR) nelle banche del Gruppo 1 è del 134% al 30 Giugno del 2017, in aumento del 3% rispetto al semestre precedente. Per le banche del Gruppo 2 invece, si registra un aumento medio del LCR del 16%, che si assesta al 175%. Il 99% delle banche del Gruppo 1 e tutte le banche del Gruppo 2 hanno riportato un LCR maggiore o uguale al 100%, in linea con la normativa in vigore che prevede un minimo del 90% nel 2018.

Per quanto riguarda la liquidità strutturale a lungo termine, l’indicatore di riferimento è il Net Stable Funding Ratio (NSFR). La media pesata per il Gruppo 1 e il Gruppo 2 si assesta attorno al 117% e al 118%, rispettivamente. Tutte le banche del Gruppo 1 e il 94% delle banche del Gruppo 2 hanno riportato comunque un NSFR maggiore uguale del 90%, in linea con lo standard previsto dal Comitato.

L’esercizio è stato svolto assumendo la piena attuazione del quadro di Basilea III, e non riflette alcuna misura attualmente in fase di valutazione da parte del Comitato di Basilea.

Basel Monitoring Report (full text)

Monitoring Exercises Archive

EBA pubblica il primo report sull’educazione finanziaria

News

Mar 07 2018
La European Banking Authority (EBA) ha pubblicato il suo primo Report sull’educazione finanziaria, che copre il biennio 2016/17. Il Report rappresenta  un’occasione di condividere esperienze per le autorità nazionali degli Stati membri, ed un’occasione di procedere appoggiandosi ad una solida base di partenza per i promotori di educazione finanziaria.
Le iniziative coperte dal Report comprendono una vasta gamma di differenti strumenti educativi, che spaziano dalle risorse online a seminari e corsi per studenti. Lo scopo è quello di aiutare i consumatori di prodotti finanziari ad approfondire la conoscenza degli strumenti che utilizzano, in linea con le direttive di Basilea.
Gli strumenti vengono valutati sulla base di quattro caratteristiche fondamentali: argomento, formato, pubblico e tipo di output prodotto. In questo modo, è possibile monitorare  i miglioramenti nell’area dell’educazione finanziaria a livello nazionale.
In questo caso, e diversamente dal suo normale mandato, l’EBA non mira all’armonizzazione all’interno dell’Unione di tali iniziative, perché diverse sono le necessità educative di ciascuno Stato.
Il Report è il risultato della raccolta di 84 iniziative di educazione finanziaria svoltesi nell’ultimo biennio. Le autorità nazionali possono per la prima volta avvalersi di un’insieme di linee guide comuni che permettano lo sviluppo di un “common sense” dei consumatori nei confronti dei prodotti finanziari.
L’educazione dei consumatori finanziari sarà dunque capillare, ma procederà a diverse velocità e su diversi livelli di approfondimento, proporzionati alle necessità di ciascuno degli Stati membri.

Link to publication (PDF)

FSB publishes Global Shadow Banking Monitoring Report 2017

News

Mar 07 2018

The Financial Stability Board (FSB) has published the monitoring report on shadow banking for 2017. The FSB provides a broad definition of “shadow banking” as “credit intermediation involving entities outside the regular banking system”. This intermediation, when appropriately managed, provides a reliable funding option for real economic activity. Latest financial crisis proved however that entities outside banks regulators jurisdiction are allowed to operate on a large scale, extending long term credit by means of short-term leveraged funding. This “maturity-transform” of credit might as well involve multiple transaction, yielding a chain which may unsettle financial stability.

In response to a G20 request at the Seoul Summit in 2010, the FSB adopted a two-way strategy to address potential concerns out of the shadow banking activity, and .  First, the FSB has created a system-wide monitoring framework to track developments in the shadow banking system, identifying the build-up of systemic risks and initiating corrective actions where necessary. Second, the FSB has been coordinating and contributing to the development of policies where oversight and regulation must be reinforced to mitigate the potential systemic risks associated with shadow banking.

The global monitoring of developments in the shadow banking system is part of the FSB’s strategy to transform shadow banking into resilient market-based finance. The 2017 monitoring exercise covers data up to end-2016 from 29 jurisdictions, which together represent over 80% of global GDP, including (for the first time) Luxembourg.

The exercise is activity-based rather than entity-based: the FSB focuses on those activities which are part of the non-bank financial sector and perform economic functions which might hamper financial stability.  As in previous monitoring exercises, the report compares the size and trends of financial sectors across jurisdictions based primarily on sector balance sheet data.

It then narrows the focus to those parts of non-bank credit intermediation that may pose financial stability risks (hereafter the “narrow measure of shadow banking” or “narrow measure”), based on the FSB’s methodology.

The FSB collects the main findings from the 2017 monitoring exercise as follows:

  • The activity-based, narrow measure of shadow banking grew by 7.6% in 2016 to $45.2 trillion for the 29 jurisdictions. This represents 13% of total financial system assets of these jurisdictions. China contributed $7.0 trillion to the narrow measure (15.5%), and Luxembourg $3.2 trillion (7.2%).
  • Collective investment vehicles with features that make them susceptible to runs (eg open-ended fixed income funds, credit hedge funds and money market funds), which represent 72% of the narrow measure, grew by 11% in 2016. The considerable trend growth of these collective investment vehicles – 13% on average over the past five years – has been accompanied by a relatively high degree of investment in credit products and some liquidity and maturity transformation. This highlights the importance of implementing the FSB policy recommendations on structural vulnerabilities from asset management activities published in January 2017.
  • The assets of market intermediaries that depend on short-term funding or secured funding of client assets (eg broker-dealers) declined by 3%. These intermediaries accounted for 8% of the narrow measure by end-2016. Reflecting their business models, broker-dealers in some jurisdictions employ significant leverage, although it is lower than the levels prior to the 2007-09 global financial crisis.
  • The assets of non-bank financial entities engaged in loan provision that is dependent on short-term funding, such as finance companies, shrank by almost 4% in 2016, to 6% of the narrow measure. In some jurisdictions, finance companies tend to have relatively high leverage and maturity transformation, which increases their susceptibility to roll-over risk during period of market stress.
  • In 2016, the wider “Other Financial Intermediaries” (OFIs) aggregate, which includes all financial institutions that are not central banks, banks, insurance corporations, pension funds, public financial institutions or financial auxiliaries, grew by 8% to $99 trillion in 21 jurisdictions and the euro area, faster than banks, insurance corporations and pension funds. OFI assets now represent 30% of total financial assets, the highest level since at least 2002.

 

(source: Financial Stability Board, www.fsb.org)

Link to publication (PDF)