Supervisory and Regulatory Reform TC Programme to Accelerate Equivalence under Art. 114 CRR

Overview
Project Summary Document

TCRS 13673

Status Approved

Location

Regional

Business Sector

Financial Institutions

Notice Type

Public

PSD Disclosed

20 Nov 2020

Project Description

After the financial crisis, the EU introduced regulatory changes aimed at reducing risks in the EU banking sector. These reforms affect EU banks’ activities in EBRD countries that are not EU Member States, as EU bank prudential regulation is applicable at the highest level of consolidation. In 2017, under the Vienna Initiative (VI), EBRD was approached by Western Balkan authorities, which expressed concern about the adverse impact of the EU Capital Requirement Regulation (CRR) on their financial systems as a result of diverging treatment of sovereign exposures on the balance sheets of EU banking groups and their subsidiary banks. Ukraine also expressed its interest to participate in regional cooperation and policy dialogue in this area. Article 114 of the CRR stipulates that in EU countries, local currency exposures to sovereign bonds and mandatory reserve requirements held at central banks receive risk weights of 0%, whereas local currency exposures to non-EU sovereigns held by subsidiaries of EU banks are assigned positive risk weights when consolidated at group level. As a result, there are several adverse effects on the financial system and capital markets in non-EU EBRD countries with presence of EU banks. However, Art. 114 CRR allows sovereign and central bank exposures in domestic currency held by EU banks’ subsidiaries in non-EU countries to retain zero risk weights if the European Commission (EC) attests that local arrangements are at least equivalent to those applied in the EU (equivalence status). This EC equivalence assessment (EA) focuses on eight key areas where regulatory provisions in the relevant applicant country are compared to the ones applicable in the EU Following a request from Western Balkan authorities, EBRD organised a workshop under the VI, during which local regulators decided to prepare initial self-assessments to support the formal equivalence assessment undertaken at a future date. However, there is still significant variation in the degree of alignment of regulatory and supervisory frameworks of countries in the Western Balkans (and Eastern Europe and the Caucasus) with those of the EU. It was agreed that the VI would remain a platform to expedite the process of equivalence assessment and that EBRD would continue supporting policy dialogue and targeted regulatory reforms to maximise the countries’ prospects to obtain a positive equivalence assessment by the EC. This will have systemic benefits for the entire banking sectors of these countries establishing strong incentives for local regulatory authorities to implement the recommended reforms. Moreover, it will further support beneficiary countries in the Western Balkans in their EU accession process .The Programme’s objective is to support up to 3 authorities in EBRD non-EU countries in bringing their regulatory and supervisory frameworks applicable to credit institutions equivalent to EU standards. All EBRD non-EU countries with presence of EU banks’ subsidiaries are eligible to receive support under this TC Programme. Promoting this convergence with the EU legal framework is expected to increase authorities’ readiness for qualifying for positive assessments to achieve the equivalence status under Art. 114 CRR. Such decision by the EC would ultimately help EU banks’ subsidiaries in the countries to benefit from the favourable treatment in terms of capital requirements for sovereign and central bank exposures in local currency. The TC Programme provides continuity to the work already undertaken by the Bank and a centralised and holistic framework for possible cooperation activities provided by the EBRD.

The TC activities under the Programme will conform closely to local needs and will be demand-driven. The support provided to the authorities will consist of providing expertise in the eight EA focus areas in order to advance the countries’ implementation of Basel III. Where deemed necessary to support the EA process, work might also include targeted assistance in the process of aligning beneficiary countries’ national resolution frameworks with the EU Banking Recovery and Resolution Directive (BRRD) II. The assignment Consultant(s) would also be expected to contribute to EBRD horizontal policy dialogue activities, including by participating during VI workshops to further raise the strategic importance of prioritisation of selected EBRD CoOs for the EA, facilitating knowledge sharing and stock-taking of progress and discussing required actions to further accelerate the equivalence process. The exact type of support provided to each individual beneficiary country will be detailed in a dedicated assignment ToR under the current TC Programme, with the activities and specific deliverables agreed with the authorities and drawing from the non-exhaustive list of activities and tasks below. The present mapping of IFI support in the region indicates minimal parallel projects implemented by other IFIs (e.g. WB support for bank prudential regulations adopted by the National Bank of Ukraine in compliance with BCBS standards) which are highly complementary, focusing on areas in the remit of every IFI’s respective competencies, based on the request from beneficiary country authorities. Consultants with strong expertise in bank prudential regulation from both EU and non-EU markets will be engaged. The detailed assignment under the current TC Programme in support of the beneficiary local authority will be provided in a set of dedicated ToR drawing from the non-exhaustive list of activities and tasks below. (1) Gap analysis: a. Review the regulatory and supervisory framework for credit institutions of the beneficiary country in connection with all or a subset of the EA focus areas; b. Draft a report drawing from the above analysis, identifying potential gaps in the beneficiary country’s regulatory and supervisory framework for credit institutions and providing recommendations which will provide the basis for supervisory and regulatory arrangements to be deemed equivalent to those applied in the EU; (2) Self-assessment and due diligence support: a. Provide assistance for conducting self-assessments in line with the EBA methodology. This can include for example the verification of already conducted self-assessments and additional due diligence ;b. Provide assistance with completing EBA questionnaires and during EBA onsite due diligence visits forming part of the formal EA process;(3) Address identified gaps relative to EU regulation, which will have to be implemented before an opinion is passed on to the EC. This can include assistance in developing and drafting changes and/or supplements to their supervisory/regulatory framework, if necessary, to implement the recommendations contained in the above report, and in line with EU best practices. Concerning the indicative project pipeline under the TC Programme, the EBRD intends to launch the first and second assignments, respectively with the Bank of Albania and the National Bank of Ukraine, in Q1 2021. A third assignment will be identified over the course of the Programme’s lifetime.

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Business opportunities

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TCRS 13673

Status Approved

Location

Regional

Business Sector

Financial Institutions

Notice Type

Public

PSD Disclosed

20 Nov 2020

Project Description

Any competitive selections for business opportunities relating to this project will be published on the EBRD's website: Consultancy Procurement Opportunities.

General enquiries

EBRD project enquiries not related to procurement:
Tel: +44 20 7338 7168
Email: projectenquiries@ebrd.com

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Independent Project Accountability Mechanism (IPAM)

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Supervisory and Regulatory Reform TC Programme to Accelerate Equivalence under Art. 114 CRR

Project Description

Enquiries

Business opportunities

General enquiries

Project Description

General enquiries

Access to Information Policy (AIP)

Independent Project Accountability Mechanism (IPAM)