This recent update is in response to the European Systemic Risk Board’s (ESRB) recommendation, addressed to the EBA, to facilitate the reporting of funding plans.
The guidelines are intended to assist national supervisory authorities in:
- assessing the funding plans provided by credit institutions and their feasibility for each national banking system
- monitoring the development of funding structures in order to identify innovative instruments and the corresponding risks
- monitoring the level, evolution and behaviour of uninsured deposit-like financial instruments, which are sold to retail customers.
National supervisory authorities are expected to assess credit institutions plans for reducing reliance on the central bank facilities and to assess the effect that this may have on the flow of credit to the real economy.
This is important for European Financial Institutions because:
The guidelines are published on a ‘comply or explain’ basis and in scope banks are defined as those that account for 75 percent of the banking systems total consolidated assets. In the UK, this is likely to only involve the largest four or five banks with a similar scope expected in France and Germany.
In scope banks must submit funding plans to meet the following requirements:
- Plans are projected, annually, for three years (six monthly in year one).
- Plans should represent the projected balance sheet, without an unforeseen stress materialising.
- The first submission deadline is 30 September 2015, with a reference date of no later than 30 June 2015.
- Subsequent submissions will have a reference date of 31December and a submission deadline of 31 March in the following year.
Despite this representing a harmonisation of existing processes in some countries, such as the UK, this may require considerable implementation effort in some European countries. For all countries, it is likely to represent an incremental reporting requirement and will pose a burden on banks, including the initial data parameterisation and control enhancement that will be required.
Further implications may include:
- Increased pressure could be exerted by the regulator for firms to reduce reliance on public sector funding, and to strengthen funding structures.
- Increased regulatory focus on “deposit like” products as a source of funding that are not covered by deposit guarantee schemes. These can cause increased volatility and conduct risk during times of stress.
- A major challenge for institutions which are not IFRS based and therefore also do not have to report any FINREP data, upon which many of the definitions are based.
To discuss this issue further, please contact: