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On 12 November 2018, approximately 6 months after the adoption of the 5th EU Anti-Money Laundering Directive (5AMLD), the European Parliament published further rules to strengthen the fight against money laundering through the 6th EU Money Laundering Directive (6AMLD).
Member States are required to transpose the 6AMLD into national law by 3 December 2020. After which, relevant regulations must be implemented by firms within Member States by 3 June 2021.
This article represents the first in a Deloitte UK Risk Advisory series on the new age of Basel Pillar 2 Economic Capital (‘EC’) modelling in banking with a particular focus on Credit Risk models. In article 1 we look at the changing use of this well-seasoned model type, starting with an overview of the resurgence of EC, challenges for both retail and corporate parameterisation, and the Concentration Risk question. We finish by considering the best way to prioritise development effort between model design & parameterisation, how EC can be used and some of our EC expert’s considerations for enhancing an EC framework.
As we enter 2019, firms will naturally ask themselves what they should be doing to prepare for the year ahead. When it comes to the all-important subject of regulation, firms will want to know what issues and concerns are at the top of the regulatory agenda and how they can best respond. To help firms with these vital questions, Deloitte publishes its annual Financial Markets Regulatory Outlook. The Outlook’s perspective is deliberately strategic, both in analysing regulatory strategies and priorities and in considering the implications for firms’ strategies and business models.
Banks have the same challenge as any new business: how to convince investors and lenders that your business has a viable model, can generate sufficient returns and can repay its liabilities. Candidate banks face this challenge and one more – they must convince the regulators of the viability and sustainability of their business plan.
In our July blog on equity release mortgages we explored the PRA’s proposals in its Consultation Paper CP13/18 to tighten significantly its approach on equity release mortgages (ERMs). Specifically, the PRA proposed, unusually, to specify particular assumptions that it expects to underlie the calculation of the “effective value” used to assess whether firms are claiming undue Matching Adjustment (MA) benefit for ERMs backing annuities.
Data from the European Banking Authority (EBA) published this Autumn, assessing the potential impact of Basel III reforms on EU banks, underlined the importance of the EU’s forthcoming implementation of global regulatory standards on the capital banks must hold for certain activities. One of the most immediate issues, from the EU’s perspective, is addressing capital requirements for market risk through the implementation of the Fundamental Review of the Trading Book (FRTB). The impact of the FRTB is widely expected to be substantial, with the EBA’s assessment finding that it would require a 52% increase in Tier 1 capital held against market risks for the group of 38 large EU banks that were assessed.
Transaction reporting was a key focus in MiFID I. Twelve firms were fined a total of £33m by the Financial Conduct Authority (FCA) and further fines were levied across the EU.1 With the greatly expanded rules under MiFID II, there are even more pitfalls. Our survey of ten EU regulators revealed that six of these are currently undertaking or planning supervisory activities on MiFID II transaction reporting, the FCA among them.2
Europe might reasonably claim to be the 'cradle of Open Banking' - after all, PSD2 and the UK's Open Banking Standard pioneered it. But, look around now, and open banking initiatives are popping up everywhere. It is not just a matter of replicating the European approach elsewhere. Jurisdictions are adopting their own approaches to Open Banking, reflecting their markets and policy objectives, and in some cases developing cross-industry approaches beyond financial services.
EBA RTS on the specification of the nature, severity and duration of an economic downturn, and the business case for credit cycle modelling
The EBA’s consultation postbag appears to have been heavier than usual, perhaps evidenced by the second public consultation on economic downturn EBA/CP/2018/07, the consultation on guidelines for downturn LGD CP/2018/08, the quantity and nature of feedback referenced in the feedback to the public consultation, and perhaps most importantly the significant change in methodology since the original consultation CP/2017/02. We summarise the changes in each draft below:
The FCA has become increasingly concerned that firms’ use of cross-subsidies or price discrimination (also known as differential or dual pricing) may lead to unfair outcomes for certain groups of consumers who, as a result of these pricing practices, end up paying higher prices. The FCA’s scrutiny of these practices was explored in our recent paper, “Cross-subsidies in the crosshairs.”