In this article, we review the Bank of England’s Call to reduce data risk by enhancing regulatory reporting controls and increasing data lineage and data quality. 

The recent communication to banking executives, the Bank of England (BoE) highlighted persistent challenges in regulatory reporting, underscoring the importance of robust data governance, accuracy and data lineage. This Dear CEO letter, part of an ongoing initiative to enhance banking supervision, casts a spotlight on the need for improved data management within financial institutions. 

The letter outlines deficiencies identified through a comprehensive program of skilled persons reviews. These reviews, encompassing a significant sample of firms, have repeatedly uncovered lapses in data controls, governance, systems, and production controls associated with regulatory reporting. 

The BoE emphasises that the submission of complete, timely, and accurate regulatory returns is fundamental to effective supervision.   The message is clear, banks should take heed the feedback and undertake necessary remedial actions. 

A key aspect of ensuring data accuracy and governance is maintaining robust data lineage. Data lineage tracks the flow of data from its origin through various transformations to its final state, providing transparency and accountability. This capability allows practitioners to stand confidently behind the reports produced, ensuring that every data point is traceable and verifiable. 

At ALMIS® International, we’ve tackled the challenge head on with recent developments to our bank treasury data warehouse and reporting applications. All data enrichments and changes are logged per transaction with drilldown back to transaction-level accounts. 

As regulatory scrutiny intensifies, the BoE is set to continue deploying targeted supervisory tools, including the use of skilled persons, throughout 2024. This proactive stance reflects a broader industry concern about the adequacy of risk data aggregation practices, as highlighted in the Basel Committee on Banking Supervision’s (BCBS) recent progress report on the adoption of BCBS 239 standards. The report reveals that significant work remains to ensure that data accuracy and risk data aggregation are prioritised across all data types. 

The Bank of England’s letter also signals forthcoming long-term reforms through its Transforming Data Collection Programme and the PRA’s Banking Data Review. These initiatives aim to overhaul how data is collected, and which data points are prioritised, ensuring a more streamlined and effective regulatory reporting framework.  There are three key industry reforms banks will need to consider; 

• Defining and adopting common data standards that identify and describe data in a consistent way throughout the financial sector.  

• Modernising reporting instructions to improve how our reporting instructions are written, interpreted and implemented.  

• Integrating reporting to move to a more streamlined, efficient approach to data collection.  

As the BoE and other regulatory bodies intensify their focus on data management, the message is clear: data accuracy, governance, and lineage must be at the forefront of their operational priorities. As regulatory bodies tighten their oversight, financial institutions are urged to invest in their data management systems, ensuring that their regulatory submissions meet the high standards expected by supervisors. Engaging with the ongoing reforms and industry forums will be crucial for banks to navigate this evolving regulatory landscape effectively, whilst balancing the cost of compliance with operational efficiency. 

About the Author 

Matt Poole is an experienced CertBALM-qualified Product Owner at ALMIS® International specialising in data warehousing and banking risk calculations for treasury, ALM, and regulatory reporting.  

ALMIS® International has a team of experts in bank Asset Liability Management, Regulatory Reporting, Hedge Accounting and Treasury Management supporting over 65 Financial Institutions. Please get in touch to learn more about how we can help

Industry Leaders share their insights 

Following  the Prudential Regulatory Authority’s (PRA) recent publication of ‘scenarios for banks and building societies not part of concurrent stress testing‘ our latest webinar with Luke Di Rollo, Chief Product Officer  joined by special guests  Nick Lock, former Senior Advisor at the Bank of England, and Simon Garrett, Director at ALM Financial Solutions, explored the published scenarios in more detail, the incentives of the regulator, and how non-systemic firms could use these to add value to their internal risk analysis. 

• There is a growing critical role for stress testing as part of the supervisory process, specifically in measuring the resilience of individual banks and building societies with a particular focus on capital and liquidity. These scenarios build on the incumbent model by providing a wider audience with a tool to benchmark the types and severity of economic shocks that are expected to be considered. 

• With reference to the Supervisory Statement on the ICAAP and supervisory review and evaluation process (SREP), it is essential to understand that all firms are responsible for designing their own stress tests. By publishing two differing scenarios, the PRA’s aim is to encourage firms to consider the type, characteristics and severity of stress that their business model is vulnerable to. This means that Banks and Building Societies should consider the scenarios, which depict a series of macroeconomic dynamics, within the context of their business and specific risk drivers. 

• Historically, stress testing has been subverted into a compliance exercise with the regulator demanding an ICAAP document in which specific stresses are run – institutions take the parameters in the stress test, run them against their business to produce an output and the supervisor tells them what their capital requirement is. Ideally what would happen is that each firm thinks about its own risks and risk drivers and stress test for those, which may be based off reverse stress testing to know which areas they are most vulnerable or are most material. 

• The instructions outlined by the PRA signal a transition to a more effective framework, which incorporates effective risk management at an individual and encourages firms to optimise their management of capital or liquidity. More emphasis is placed on the ‘internal’ and ‘process’ aspects of the ICAAP, while also satisfying the PRA’s requirement of a minimum requirement on a consistent basis. While banks have a deep understanding of their own business models and customer behaviours, what is particularly valuable here is the credible external assessment of the macroeconomic parameters provided by the PRA. This external perspective ensures a comprehensive approach to stress testing, incorporating broader economic factors that banks might overlook. 

 Reviewing the scenarios for non-systemic banks 

The scenarios for non-systemic banks and building societies are the same as those used for the concurrent stress test. Both scenarios are designed to be severe and broad enough to assess the resilience of the UK banking system. Within each scenario there is a domestic and global recession, with UK GDP falling by 5%, unemployment rising to 8.5%, and house prices falling by 28%. World GDP falls by 3%. The macroeconomic scenario results in sharp moves in other asset prices. There are assumed to be further falls in UK and global commercial real estate (CRE) prices, equity prices fall, government bond term premia rise, and corporate bond spreads widen. 

The demand shock scenario sees a severe negative global aggregate demand shock and global recession, resulting in falling inflation. This prompts Bank Rate to fall rapidly from 5.25% to 0.1%, remaining below 0.5% for two years, to support the recovery and return inflation to target. 

The supply shock scenario sees a severe, negative global aggregate supply shock from an increase in geopolitical tensions and global commodity prices and supply-chain disruptions. This leads to higher-than-expected inflation across advanced economies. High inflation is assumed to lead to expectations of higher inflation in the future and global policymakers increase interest rates to bring inflation back to target. In this scenario, Bank Rate rises to 9% and stays there for a year. 

Can firms use this opportunity to develop one suite of stress scenarios that can be used as part of ICAAP, ILAAP, Recovery Planning and Operational Resilience? 

“I was keen to get Nick’s perspective on whether firms could use this opportunity to develop one suite of stress scenarios that can be used for as part of ICAAP, ILAAP, Recovery Planning and Operational Resilience. From my experience working with a majority of the target audience, stress testing has become a myriad of distinct and overlapping exercises, which Simon reiterated. There was unanimous agreement on a systematic approach to stress testing at an institution level, but I appreciate the management actions forming part of a stress test are nuanced, and where management actions to protect capital are likely to deviate from that in a liquidity stress. Or that there are some idiosyncratic type liquidity shocks that aren’t necessarily balance sheet driven and more akin to your funding model. 
 
Having taken time to digest the discussion I am reminded of a UK ALMA presentation many years ago where it was suggested that the global financial crisis was exacerbate by a failure of imagination – to think critically of the specific risks inherent within the financial system or one’s individual balance sheet. Nick’s experience as a supervisor over many years is that firms tend to be very good at projecting upsides but not so good at thinking about where they could go wrong, and so having modelling capability that you can plug new inputs or separate the extras are really important to manage the business. ‘Imagination’ and modelling capability really need to go hand in hand for this to be realised.” Luke Di Rollo 

We now have a proxy for the severity of the stress but how does it apply to my balance sheet and where do you start when designing internal scenarios? 

Having spent a decade working with banks and building societies on their risk model designs Simon’s recommendation is to start with the corporate plan. This should have an approximate 5-year time horizon, sufficient periodicity to ensure no inter-period risk, and appropriate granularity to allow the flex of business assumptions. Overlaying the macroeconomic parameters provided by the PRA, can lead to spurious assumptions and so it is helpful to consider the key business metrics in context of the stress: 

In conclusion, the Prudential Regulatory Authority’s recent scenarios offer a valuable framework for banks and building societies to enhance their internal risk assessments and ensure resilience in the face of economic uncertainties.    

By integrating these scenarios into their internal risk management processes, institutions can better prepare for potential shocks, aligning their capital and liquidity strategies with both regulatory expectations and their unique business models. 

Adopting a proactive and tailored risk management approach encourages a deeper understanding of individual risk drivers and the potential impact of various stress factors, fostering a culture of resilience and strategic foresight within the industry. 

Start with the corporate plan to incorporate the PRA’s macroeconomic parameters in a nuanced manner provides a clear pathway for institutions to develop comprehensive and effective stress testing frameworks. By leveraging these scenarios and maintaining a balance between regulatory compliance and internal risk management, banks and building societies can navigate the complexities of today’s financial landscape with greater confidence and stability. 

Successful stress testing is not merely about meeting regulatory requirements but about fostering a deeper, more imaginative approach to understanding and mitigating risks. By doing so, financial institutions can not only comply with regulatory standards but also enhance their strategic decision-making, ensuring long-term sustainability and resilience in an ever-evolving economic environment.  

About the Author 

Luke Di Rollo, Chief Product Officer, is a seasoned professional in the banking industry with nearly a decade of experience specialising in Asset and Liability Management (ALM) and Interest Rate Risk in the Banking Book (IRRBB). Throughout his career, he has developed and implemented several widely adopted models within the UK banking sector. Luke holds a CertBALM qualification and is a member of the Association of Corporate Treasurers (ACT), underscoring his expertise and commitment to the field. 

ALMIS® International has a team of experts in bank Asset Liability Management, Regulatory Reporting, Hedge Accounting and Treasury Management supporting over 65 Financial Institutions. Please get in touch to learn more about how we can help

Over the past decade the needs of Bank Treasury Management have evolved due to the financial system’s ever evolving landscape. Timely adaptations to prudential, regulatory and technological obligations are typically onerous due to an institutions’ existing systems, data quality and resource constrains.  This article provides an overview of the key considerations to ensure the Treasury Management System you invest in can deliver saleable growth, optimise prudential reporting and risk management as well as meet the expectations of the regulator or audit committees.

2024 year end surveys conducted by EY and Deloitte highlight a continued reliance on spreadsheets and a lack of integration across the treasury departments. Most often a myriad of vendor solution models, proprietary built models and spreadsheets are implemented within the same Bank for the purposes of capturing market data, deal capture, valuations, risk metric calculations, monitoring of limits, stress testing, reporting and planning/forecasting. The incumbent is inefficient in the long run due to high and unforeseen costs of maintenance, update, manual work arounds and time-intensive data analysis, with most banks also foregoing areas of significant value due to technical challenges.

Prior year financial results show strong profitability and growth for most institutions, however, headwinds of margin compression and increased competition for funding, alongside changing customer needs are likely to pose challenging for the years ahead, exacerbated by the aforementioned business challenges. Adopting a Treasury Management System which has been built to accommodate bespoke bank treasury operations is therefore an area for competitive advantage, allowing organisations to accommodate and automate the integrated processes within this malleable domain.

Implementation and upgrade timelines are one of the major determents when deciding what system(s) to adopt. Treasury personnel resource spent on implementing/upgrading systems or manual spreadsheets continues to trend upwards at the detriment of time spent analysing exposures and protecting the Bank’s economic position. 

By partnering with SaaS providers on a subscription model, FINTECHs are encouraged to ensure continued customer success. The resultant is a hands-on implementation process with project management lead by the supplier and a commitment to timely completion. The providers should have integrated solutions for importing data along with comprehensive reporting to streamline reconciliations. New version releases are also offered frequently, containing improved functionality to avoid migration resistance and are designed to minimise testing resource from the Bank’s side due to modern testing approaches such as integration, automation and regression tests. The potential ROI on these solutions is truly exponential, leaving treasury teams to focus on their day-to-day activities.

Integration with real-time market data and payment systems have seen marked improvements in recent times. The sourcing of yield curves, market prices and FX rates has historically been a double edged sword. Most treasury management systems can integrate with 3rd parties such as Bloomberg or Refinitive to provide real-time market data, however, this comes at an extortionate cost due to the additional licence requirements and multiple sources required. The alternative has been a provision of this data from smaller providers but this solution lacks the timeliness needed to gauge the competitiveness of trades at the point of the transaction. Swap counterparties, for example, will look to maximise returns on these trades. Actual trade prices reflect the true consensus value of forward rates at the point of trade, incorporating all available market information and the real balance of supply and demand. The fair value is therefore a truer representation of market conditions and how competitive swap prices actually are.

Nevertheless, the TMS market consists of providers that can balance this double act, providing integrated API’s that source data from live markets and construct prices or yield curves in a cost effective manner rather than passing on the burden to the Bank. This can save the Bank hundreds of thousands on licensing costs as well as provide the tools required to maximise net interest margin by ensuring counterparties remain competitive and minimise the hedged rate.

Accommodation of all treasury products and transactions is another challenge due to the sophistication and variability of terms from counterparty to counterparty. To be truly scalable, and to ensure cash positions can be anticipated precisely, Treasury Management Systems need to cater for the bespoke market conventions used throughout the industry.

In truth, these conventions differ counterparty by counterparty and may require manual adjustments or regular reconciliations to identify gaps that are not fully understood. As an example, the SONIA linked collateral swap agreements offered by HSBC, Lloyds, Natwest and Barclays differ based on whether and how often they compound along with the rounding of the rate used to calculate interest settlements. Furthermore, over-the-counter swap agreements can vary on lags or shifts. These simple examples show the intricacies involved with even small discrepancies causing regular headaches in cash projections, settlement reconciliations or GL postings. A TMS built on industry feedback will accommodate for these idiosyncrasies, removing the operational challenges involved and providing treasury departments with true clarity.

Flexible reporting can now accommodate no-code solutions. Out of the box reports can be customised per user/institution without the need for downstream spreadsheet transformations or complex report writer functionality befitting of skillsets held out with the user’s domain. Desired changes to report structures/calculations frequent regularly and legacy systems or spreadsheets do not possess the adaptability to give Finance Directors or Treasurers the positions they want to see on a timely basis.

In conclusion, selecting the right Treasury Management System  is pivotal for modern bank treasury operations. The evolving financial landscape demands systems that not only ensure compliance with regulatory standards but also offer robust risk management and prudential reporting capabilities. Traditional reliance on spreadsheets and disparate vendor solutions is increasingly seen as inefficient and costly. Therefore, a TMS that integrates and automates complex processes can provide significant competitive advantages. Ultimately, the right TMS not only addresses current operational challenges but also positions banks for sustainable growth and adaptability in a dynamic financial environment. Investing in a modern, integrated TMS is not just a technical upgrade but a strategic imperative for any institution aiming to thrive in today’s competitive landscape.

About the Author

Luke Di Rollo , Chief Product Officer, is a seasoned professional in the banking industry with nearly a decade of experience specialising in Asset and Liability Management (ALM) and Interest Rate Risk in the Banking Book (IRRBB). Throughout his career, he has developed and implemented several widely adopted models within the UK banking sector. Luke holds a CertBALM qualification and is a member of the Association of Corporate Treasurers (ACT), underscoring his expertise and commitment to the field.

ALMIS® International has a team of experts in bank Asset Liability Management, Regulatory Reporting, Hedge Accounting and Treasury Management supporting over 65 Financial Institutions. Please get in touch to learn more about how we can help.

BCBS Consultation Paper – Recalibration of shocks for interest rate in the banking book

In February this year, the Basel Committee on Banking Supervision (BCBS) released consultative document for recalibration of shocks for interest rate risk in the banking book, issued for comment by 28 March 2024.

In April 2016 the Basel Committee published its standard on interest rate risk in the banking book (IRRBB), which was most recently updated with SPR98 on 15 December 2019. The standard requires banks to calculate measures of interest rate risk for their banking book exposures with the measures based on a specified set of interest rate shocks for each currency for which the bank has material positions. The Committee noted the severity of the specified shocks would be subject to periodic review. The purpose of December 2023’s Consultative Document is to detail a set of prescribed adjustments to the specified interest rate shocks in the IRRBB standard, alongside adjustments to the current methodology used to calculate the shocks. These changes are deemed necessary to address problems with how the current methodology captures interest rate changes during periods when rates are close to zero due to fundamental shortcomings in basic risk management of traditional interest rate risk.

Current Interest Rate Shocks

The IRRBB standard requires banks to apply specified interest rate shocks to risk-free yield curves for each currency for which the bank has material positions. Under the standardised approach, banks must determine the impact of these shocks on their economic value of equity (EVE) and net interest income (NII). The shocks that must be applied to the risk-free yield curve for each currency is set out in the following table, which is derived from historical data during the period from January 2000 to December 2015:

The methodology used to produce the specified shocks combined three elements: (i) average interest rates for each currency; (ii) global shock parameters that are applied to the average rates for each currency; and, (iii) application of a floor, a set of caps and rounding.

Average interest rates were calculated for each currency using interest rate data from the calculation period, covering tenors from 3 months to 20 years:

The next step used to calculate the specified shocks was to multiply the average interest rates by the following set of global shock parameters:

Applying the global shock factors to the average interest rates for each currency gives the following unfloored, uncapped, unrounded interest rate shocks:

The IRRBB standard notes in SPR98.60 that the methodology can lead to unrealistically low interest rate shocks for some currencies and to unrealistically high shocks for others. To ensure a minimum level of prudence and a level playing field, a floor and a set of caps are applied. The floor is set at 100bp and the caps are set at 400bp for the parallel shock, 500bp for the short-term shock and 300bp for the long-term shock. Finally, the amounts are rounded to the nearest 50bp.

Problems with methodology used to calculate global shock parameters

The main objective of the Committee’s review of the interest rate shocks in the IRRBB standard was to update the interest rate data that is used in the calibration of the shocks. The current standard uses data from the period January 2000 to December 2015 and the Committee would like to extend that period to cover the period January 2000 to December 2022. Expending the period used, however, reveals a problem with the above methodology for calculating global shock parameter.

The shock parameters are generated from the average of 99th and 1st percentiles of rolling six-month percentage changes in interest rates (i.e. [rate in six months – current rate] / current rate). When rates are close to zero, the rate of change can be very large. For example, when the rate went down from 0.02% to 0.001% (0.019% difference) in six-months for a certain currency, the shock parameter is 95%. In another example, however, when the rate went up from 5.5% to 5.519% (the same 0.019% difference), the shock parameter is just 0.35%. The same calculation generates huge differences depending on the original level of interest rates. Therefore, in addition to updating the data period used to calibrate the interest rate shock parameters, the Committee has agreed to propose revisions to the way the shock parameters are calculated.

Comparison of existing and new methodology

• Expansion of the time series used in the calibration from December 2015 to December 2022.
• Removal of the global shock factors calculated using rolling six-month percentage changes in interest rates. These are replaced with local shock factors calculated directly for each currency using the averages of absolute changes in interest rates calculated over a rolling six-month period.
• Move from a 99th percentile value in determining the shock factor to a 99.9th percentile value, to maintain sufficient conservatism in the proposed recalibration.

The table below shows the interest rate shock parameters calculated using the proposed new methodology, with the data through to end-2022. The colours in the table show whether the shock sizes under the proposed new methodology results in an increase, decrease or are unchanged relative to the existing shock factors:

The following table quantifies the impact of the proposed change to the interest rate shock of each currency:

For most currencies the standard shocks have increased, e.g. the current 250bps parallel shock for GBP and 200bps parallel shock for EUR are proposed to increase to 300bps and 250bps respectively. If introduced, this would likely lead to banks revisiting their IRRBB framework including risk appetite, modelling, and hedging capacity

About the Author

Luke Di Rollo , Chief Product Officer, is a seasoned professional in the banking industry with nearly a decade of experience specialising in Asset and Liability Management (ALM) and Interest Rate Risk in the Banking Book (IRRBB). Throughout his career, he has developed and implemented several widely adopted models within the UK banking sector. Luke holds a CertBALM qualification and is a member of the Association of Corporate Treasurers (ACT), underscoring his expertise and commitment to the field.

ALMIS® International has a team of experts in bank Asset Liability Management, Regulatory Reporting, Hedge Accounting and Treasury Management supporting over 65 Financial Institutions. Please get in touch to learn more about how we can help.

This article explores

• What is Earnings at Risk (EaR) and the importance of managing this risk. 
• The different approaches to measuring EaR. 
• How ALMIS® International can help you manage this risk. 

What is Earnings at Risk (EaR)? 

EaR is a measure of the estimated impact to a bank’s earnings under an economic scenario.  Whereas Economic Value of Equity (EVE) – another key measure of IRRBB that measures the sensitivity of the net present value of repricing cash flows to an interest rate movement – is primarily a concern to the Treasury function and the regulator, EaR is a metric with business-wide implications. Institutions, whose earnings have an overly elastic sensitivity to interest rate movements, could see effects such as their profitability and dividend capacity reduce; erosion of key investor metrics and share price reduction; or operational impacts, such as lower capital expenditure capacity or reduced bonus pots in the event of an adverse movement in interest rates. 

EaR arises where the structure of a firm’s balance sheet does not allow them to adequately reprice their balance sheet to maintain their net interest margin (NIM) and typically meaning the interest they are paying on their funding increases more than (or decreases less than) the movement in interest they are earning on their assets. 

Understanding and satisfying Regulatory Requirements 

There is no formal return that firms must file to calculate or disclose an earnings metric, unlike the FSA017 for EVE. 

However, 9.1(2) from the Internal Capital Adequacy Assessment section of the PRA rulebook confirms (UK regulated) firms must have a system of identifying, evaluating and managing the risk to earnings from potential interest rate changes.  The PRA’s Standardised methodology – positioned as an alternative to a bank’s own internal systems – does not include a methodology for assessing earnings sensitivity and this is consistent with the Basel’s standardised methodology as well.  As of 2022, the EBA, however, have introduced both an earnings Supervisory Outlier Test (SOT) and Standardised (& simplified Standardised) methodology. 

The PRA do not provide guidance in this section around the appropriate time horizon to consider your earning risk, although the general convention is one year in the UK.  The Basel principles suggest firms should consider a horizon of between one and three years and no more than five and the 2018 EBA Guidelines essentially paraphrase this.  Under the newer (replacing the repealed 2018 Guidelines) EBA Supervisory Outlier Test (SOT), there is a prescribed one year horizon whereas the Standardised (& simplified-Standardised) methodology a more ‘opaque’ minimum of one year. 

It is generally accepted that the longer the horizon you consider the less accurate and meaningful the analysis will be due to the level of assumptions necessary to project the impact. 

Approach to measurement 

For the purposes of measuring EaR, there are three balance sheet profiles that Basel make reference to in their standards for earnings and IRRBB: 

• Run-off; 
• Constant, and; 
• Dynamic. 

A run-off balance sheet, as typically used to manage EVE, is where the assets and liabilities of a firm roll off as items reprice or mature. 

A constant balance sheet assumes that as each item on your balance sheet reprices it is replaced by an equivalently sized item and therefore, in essence, the size and composition of your balance sheet remains constant across the scenario’s horizon. 

A dynamic balance sheet overlays assumptions of how you expect the composition of your balance sheet to change over the scenario’s horizon. 

The most common approach ALMIS® International see firms taking is looking at their EaR on the constant balance sheet basis – also the basis the EBA prescribe for the SOT and Standardised methodologies – but we do also see firms evaluating their earnings on a dynamic modelling basis as well, so we will focus on the benefits and limitations of these two main approaches.  

Let’s consider the benefits and limitations of each scenario 

The benefits under a constant balance methodology are: 

• It gives a much truer representation of the interest rate risk in your balance sheet today. 
• It can be very quick to produce.  No inputs or assumptions are required to be computed and collated from the business. 
• It makes comparison easier.  By using a consistent methodology any period on period movements have a better and direct correlation to increases / reduction in risk on your balance sheet. 

The limitations of a static balance sheet are: 

• It doesn’t represent the true risk your balance sheet will face as it is improbable your balance sheet will remain constant over the horizon. 
• It doesn’t capture risk from growth, product mix changes, strategic shifts. 
• It can lead to a false sense of security if the risk appears low, but may not be under evolving conditions. 
• It is less useful for long term decision making and planning. 

The benefits to using dynamic balance sheet modelling: 

• It can be a truer representation of the interest rate risk that will be faced by the institution as it takes account of the expected activity the business will undertake. 
• It can allow an institution to take into account the micro-economic behaviours of new/existing customers under different scenarios e.g. a propensity for higher-yield, term deposits than lower-yield, open maturity deposits in a rising rate environment. 
• It allows for better proactive risk management through early identification of risk. 
• It aligns the risk management with the strategic direction of the business. 

The limitations to using a dynamic balance sheet are: 

• It is complex and time-consuming to perform as it requires the modelling and validation of assumptions from across the business. 
• It is more resource intensive and requires more data, insight and expertise to produce and analyse. 
• The output is highly sensitive to assumption risk as the meaningfulness of the output can only ever be as accurate as the assumptions feeding the scenario. 
• It can be difficult to segregate the risk between what exists on your balance sheet today and what is being introduced through expected activity. 

Many of ALMIS  International’s clients have adopted a static approach due to it’s ease and speed to implement and assess.  However the Basel principles do infer that institutions may opt (or need) to monitor their EaR under different approaches.  Ultimately, the board and managers of the institution need to consider the appropriate approach for measuring and evaluating this risk, alongside any conversations with regulatory supervisors.  And, upon implementation of these, it is critical to the management of the risk that the methodology is understood, along with any limitations.  Internal education is key to this and ensuring that the ALCO and other relevant committees have the appropriate expertise along with the necessary training in order that the key messages are understood and that effective challenge can be provided. 

Margin & Balance Sheet Report 

A foundation report of ALMIS® Front Office, this allows you to produce your balance sheet for today and drive meaningful insight into your current NIM position.  When combined with ALMIS® Front Office’s forward and backward looking capabilities, this can give you insight into not only where you are today, but where you were and where you are going. 

Static Earnings At Risk 

ALMIS® Front Office’s turn-key and comprehensive EaR sensitivity function allow you to calculate your EaR  on a constant balance sheet basis across user definable time horizons, where one year, two years or beyond.  You can easily apply parallel shifts – for example to model the EBA’s SOT 250bps parallel shift for GBP exposures – but also flexible to allow you define more complex and intricate interest rate scenarios you can define at categories, product or interest rate markets. 

Key benefits of  ALMIS® Financial Planner 

Financial Planner is a powerful tool within the ALMIS® Front Office solution providing clients  with the ability to use their existing balance sheet to automate the calculation of forward balance sheets using comprehensive user-definable scenarios. 

Adapting to change is key with Financial Planner you can create forward plans over a long period using monthly, quarterly or annual intervals or you can create weekly, or even daily plans depending on your needs.  

Embed your business assumptions to build out the resultant balance sheets.  With a user friendly interface you can interface data from Excel as well as comprehensive range of modelling assumptions, including: 

• Assumptions around business retention and roll-over. 
• The different characteristics and types of new lending and new deposit at business line or product level. 
• Model asset acquisition or asset disposals. 
• Embed expected assumptions around arrears, prepayment and early redemptions. 
• Model you funding requirements. 
• Depreciation and accounting adjustments. 
• Any capital raising activity and adjustments. 
• Incorporate overheads including fee income, management & capital expenditure and provisioning. 

Through the application of these assumptions to your existing balance sheet ALMIS® Front Office will project forward the resultant balance sheet position and allow you to see impact of this through a suite of detailed reports outlining the resultant interest income and interest expenditure (and other income statement entries) as a consequence of your plan, but also enabling all of the standard ALMIS® Front Office functionality on these positions as well. 

Report Writer 

Whilst ALMIS® Front Office holds a wealth of rich information, what is essential in order to drive out value from this is being able to flexibly and efficiently present this in a manner that can be put in from of Senior Management, ALCO and other committees.  In being able to do so efficiently, this allows time to be invested in the analysis and understanding of the drivers rather than spent in the manual production of charts and graphs. The ALMIS® Front Office Report Writer enables this precisely by offering a ‘one-click’ solution to publish an array of ALMIS® Front Office data and reports directly to Microsoft Excel and allowing you to: 

• Build custom reports by automating the publication of turn-key reporting directly to Microsoft Excel. 
• Pull data together from multiple reports calculated in ALMIS® Front Office. 
• Incorporate current balance sheet data with prior month comparatives and forward looking forecast data. 
• Incorporate ALMIS® Front Office data with other external data sources. 
• Leverage off Excel functionality to build automated graphics for inclusion in ALCO packs, board papers and other MI reporting. 

Summary 

Earnings at Risk is a subset of Interest Rate Risk in the Banking Book that will affect all institutions holding assets and liabilities that have asymmetric repricing characteristics.  Failure to manage EaR can result in tangible consequences that can be felt across all functions of the institution.  There are different methodologies that you can employ to assess your EaR measure and these differing methodologies have different benefits and limitations, both in terms of what they are telling you and the effort required to produce meaningful analysis.  Institutions need to balance the practicalities and data requirements in producing the analysis with the speed, resources and assumptions required and critical to the value this analysis can provide is ensuring the approach and measurement of this metric is understood. 

About the Author 

Stuart Fairley is Head of Client Experience at ALMIS® International and works closely with clients in his role.  Prior to joining ALMIS® in 2019, Stuart had spent most of his career working in the bank and building society sector and holding a number of finance and project roles.  Stuart is a also member of the Chartered Institute of Management Accountants (CIMA). 

Market leading experts in controlling risk, ALMIS® has been developing solutions to deliver accurate information on current and forward-looking positions for Treasury to proactively manage and plan. If you want to find out more book a demo.
 

Key takeaways

• Why is capital important to institutions?
• The evolution and standardisation of capital requirements.
• The purpose of performing capital stress testing.
• Key considerations when performing capital stress testing.

Capital stress testing, as a regulatory, co-ordinated activity emerged from the 2007-2008 financial crisis following several high-profile financial institutions experiencing near-terminal capital shortfalls and requiring government intervention and the resultant public backlash. Within the UK alone, ubiquitous high street institutions such as Lloyds Banking Group, Royal Bank of Scotland Group (now Natwest Group), Bradford and Bingley and Northern Rock all required some form of rescue in order to safeguard the UK financial services sector as well as the wider economy as a whole.

Ensuring the financial stability of banks and building societies is a global concern and a major focus for regulatory bodies, governments and central bank as well as customers, employees and shareholders of these institutions. 

Why is capital important to institutions?

The move towards global standards based on lessons learned from past occurrences has led to an increasing amount of mandatory capital required to combat the actual and perceived risks facing the banking sector.

The capital of a financial institution refers to money and or assets owned by the institution that can act as a buffer to absorb any losses arising from their activities and, where no further capital exists to absorb such losses, that institution is then insolvent.  Therefore, the availability of these buffers are of utmost importance during an economic downturn, when such losses may crystallise.

However, simple market equilibrium will result in Financial Institutions attempting to find the optimum balance of holding sufficient capital for regulatory compliance, whilst seeking not to hold too much, given capital is generally more expensive than debt, due to the inherent higher risk premium attached to capital.

The most common forms of capital held by UK financial institutions will include:

• The most common forms of capital held by UK financial institutions will include:
• Share capital & share premium
• Retained earnings
• Perpetual & convertible bonds
• Subordinated debt
• Revaluation reserves
• General provisions

As capital rules have been refined over time, driven by the Basel accords, there has been recognition that not all capital can be assumed to be as loss-absorbing as others (if at all) and therefore capital has been divided into different tiers of loss absorbing quality along with prescribed deductions – items with little or no loss-absorbing qualities, such as goodwill or other intangible assets, deferred tax assets relying on future profitability or investments in own shares – to ensure the reported capital position best reflects the loss-absorbing capabilities of an institution.

The evolution of capital requirements

The Basel Committee on Banking Supervision (BCBS) are the primary global standard setter for prudential regulation and have published three main accords with regards to capital requirements.  This has led to financial institutions and regional regulators to consider the minimum amounts of capital a financial institution must hold and in what forms it must be held. 

These have evolved as summarised below:

Basel I – 1988

• Advocated the use of a risk-weighted approach by banks, where different exposure types are weighted to reflect their perceived credit risk.
• Basel I introduced five asset classes, but subsequent accords have refined the classification and methodologies for calculating risk weighting.
• Introduced an international minimum standard of a minimum 8% of risk-weighted assets to be held as capital.

Basel II – 2004

• Introduced the 3 pillars concept:
  • Minimum capital requirements
  • Supervisory review
  • Market discipline
• Refinement to the definitions and classifications of capital to better reflect the different grades of quality.
• Incorporation of operational and market risk into the framework.

Basel III – 2010

• Following the 2007 – 2008 financial crisis, significantly increased the amount of capital required to be held.
• In particular, increased the amount of capital required to be held as Core Equity Tier 1 (CET1) capital.
• Introduced capital buffers to operate as additional layers of capital required, beyond the minimum.
• Introduced a liquidity framework (not impacting on capital requirements).

The buffers referred to above, include, but not limited to:

Capital Conservation Buffer

The capital conservation buffer is intended to set aside capital during normal times that can be drawn down upon, if necessary, during periods of stress.  Institutions are required to hold this from CET1 capital.

Countercyclical Buffer

The countercyclical buffer is a variable buffer intended to set aside capital during high credit growth to mitigate the risk of unbeknown systemic risk accruing.  Similar to the Capital Conservation Buffer, it is required to be held in the form of CET1 capital.

With the final Basel III reform due to be implemented in mid-2025 in the UK, the expectation is that overall Risk Weighted Assets (RWAs) will increase and, by extension, capital requirements.  At the time of publication of the PRA’s consultation around the UK’s implementation of the rules, the PRA were forecasting an expected increase of 3.1% of capital in the UK, with this figure being net of any corresponding reductions to Pillar 2 capital as a consequence.

The purpose of performing capital stress testing

Recognising the importance of holding sufficient capital, the purpose of capital stress testing is to assess whether the capital position of an institution (or the entire sector, from the perspective of the regulator) would be sufficient to withstand adverse and severe, yet plausible scenarios. 

In the UK, for the largest institutions, the regulator has traditionally run a co-ordinated annual stress test exercise, the Annual Cyclical Scenario (ACS).  This exercise has been based upon a hypothetical adverse economic scenario developed by the Prudential Risk Authority (PRA) and this scenario may consider how factors such as the country’s GDP, unemployment, property prices, interest rates and other factors would all be impacted under the scenario.  For participating institutions, they are required to integrate the scenario with their own business models to analyse the impact to their profitability and capital position under the scenario, reporting these results to the PRA.

In late-2023 the Bank of England (BoE) had announced it’s intention to cancel the 2024 ACS exercise – alternatively running a ‘desk-based’ exercise –but intending to return to a concurrent exercise in 2025 following a review of their stress testing programme.

For institutions that do not fall within the scope of the ACS, capital stress testing still remains a regulatory requirement as documented under the ICAAP section of the PRA Rulebook.  Institutions are expected to perform scenario analyses in proportion to their complexity and levels of risk they face.

These institutions are required to develop their own scenarios that should consider an adverse  event over a prolonged period as well as sudden and severe events as well as considering a potential combination of both.  To support such institutions, the PRA will periodically publish scenarios to serve as a guide and a starting point that can be tailored by each institution to prepare a scenario that will present a strong challenge to the institution.

During the assessment of performance under a capital stress test, institutions should be concerned with how the scenario would impact their profitability and the impact of any losses or other impairment to their capital position: are they able to maintain their required capital ratios and / or would they be forced to drawn down on their regulatory buffers to remain within their compliance limits.  Institutions should also be conscious that the ‘human behavioural’ element can also add further complexity to a situation.

Key considerations when performing capital stress testing

The value to be gained from running capital stress testing simulations is very much dependent on realistic design and execution of the scenarios as well as the integration into the wider risk management framework:  

Key considerations to running these effectively should include:

• Buy-in: capital stress testing should not be seen as a regulatory, tick-box exercise.  Whilst the regulator holds a vested interest, capital stress testing is equally an internal opportunity to identify and mitigate vulnerabilities.  Without genuine buy-in from the board down and across all counterparts of the exercise will minimise the potential effectiveness of the exercise.
• Risk modelling: using risk modelling techniques to accurately model the impact of a scenario across the institution.
• Data synergy: typically data will be required from across the business and commonly there is no single golden source for this information.  As inputs and assumptions are assessed at pace, this can result in poorly calibrated inputs impacting on accuracy or requiring substantial manual involvement to validate and reconcile the inputs, assumptions and outputs.
• Scenario Scope: there is undoubted value in measuring resiliency to severe yet plausible or likely scenarios, however in reality crises do arise from the unexpected and due consideration should be given to reverse stress testing to understand what would be required to happen for an institution to become below capital requirements or become insolvent.
• Assumption risk: both building and impact assessing the scenario will require high levels of assumption.  Assumptions should be suitably challenged and, where possible, validated.
• Resource requirements: capital stress testing can become highly resource intensive, demanding coordinated expertise from across the business.  Ensuring that the appropriate resources are identified and engaged throughout the exercise, in addition to the exercise having the suitable focus and priority at a senior level should ensure that lack of resource or expertise doesn’t act as a bottleneck.

Capital stress testing has existed in the financial sector for over a decade, following the learnings from the 2007 – 2008 financial crises.  Results from the most recent ACS show a strong resiliency in the UK financial sector to perceived potential scenarios, yet complacency cannot be afforded given the myriad of interwoven political, geopolitical, economic and social factors that can all combine in a way that could put sudden or unexpected strain on the financial sector and wider economy, both domestically and internationally.

About the Author

Stuart Fairley is Head of Client Experience at ALMIS® International and works closely with clients in his role.  Prior to joining ALMIS® in 2019, Stuart had spent most of his career working in the bank and building society sector and holding a number of finance and project roles.  Stuart is also a member of the Chartered Institute of Management Accountants (CIMA).

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A financial institution’s stress testing in conjunction with supervisory review – is essential to strengthen financial resiliency to adverse scenarios but how can you prepare for the impact of unpredictable consumer behaviour?

The financial crisis in 2007-2008 brought with it global upheaval, but it also brought reform. In the aftermath, the Basel Committee on Banking Standards (BCBS) published the Basel III framework attempting to strengthen some of the weakness in the current banking sector exposed by the crisis. These included the introduction of the now-ubiquitous regulatory liquidity ratios, the Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR) to ensure financial institutions;

(i) held assets that could be easily converted to cash with minimal loss of value during a time of stress and;

(ii) fund their activities from stable, less-volatile sources of funding seeking to avoid some of the events that unfolded during the crisis, including the first bank run in Britain in 150 years, where customers queued on masse to withdraw their funds from Northern Rock.

Banking, by nature, has inherent liquidity risk. The fundamental principle of ‘maturity transformation’, the process of borrowing short to lend long, means institutions have to maintain a buffer of liquidity to enable meeting all short term obligations as they fall due. These obligations can range from facilitating customer withdrawal requests to honouring lending commitments, but will also include any other cash outflows such as funding management expenses and capital expenditure. Under normal circumstances these can be accurately predicted but adverse conditions makes it increasingly difficult to anticipate due to the behavioural element of an institutions customer base.

Assessing risk through liquidity adequacy
In an attempt to regulate, and in addition to prescribed regulatory metrics, banks are required to assess their liquidity adequacy against a range of potential adverse scenarios beyond the prescribed regulatory metrics. In the PRA rulebook, institutions are formally required to consider scenarios that could plausibly arise, including Institution-specific scenarios, market-wide scenarios over varying time horizons. Yet, despite lessons learned and the strengthening the regulatory framework, 15 years on from the financial crisis, two internationally active institutions have failed recently with both institutions experiencing a run where depositors sought to extract their funds as quickly as possible! This underlines the importance of how institutions satisfy themselves and regulators of their liquidity adequacy. The key challenge in assessing liquidity adequacy is in quantifying the risk . For example, the stock of high quality liquid assets divided by the net outflows of an institution over a prescribed 30 day stress horizon – Institutions have control over the numerator, but cannot directly control the denominator.

The impact of human behaviour and public opinion during a liquidity crisis
Another key area, and possibly the most critical aspect, for an institution modelling a stress scenario is anticipating how their depositors will behave during the scenario. Northern Rock experienced the first UK bank run in 150 years in 2007, with customers queuing outside of branches to withdraw their money from the bank in fear of the security of their funds. One of factors that fuelled the bank-run was the media reporting of the bank’s situation, in particular their request to the Bank of England for emergency funding. This should clearly highlight the risk of the role human behaviour and public opinion can have during a liquidity crisis and it should also be noted that this risk could potentially crystallise based on misconception or misinformation.

The evolving role of technological and societal changes to bank runs
In Michael J. Hsu’s recent 2024 speech at Columbia Law School “Building Better Brakes for a Faster Financial World” he noted several factors that, following observations on the bank runs on Credit Suisse and SVB, have highlighted how bank runs have changed. One of these factors he noted was the speed that outflows can happen. SVB, for example, experienced 25% of their uninsured deposits in one day, an uplift on previous observed outflow rates around the financial crisis. Expanding on Hsu’s observation, there are likely a number of factors for this, both technological and societal:

1. Consumer adoption of mobile banking means that customers no longer have to queue outside branches, people are able to quickly, easily and confidently move money between banks from their own devices.
2. Evolution of social media has changed how news is shared, consumed and responded to. It is, therefore, easier for information / misinformation to spread and in an unregulated way, unlike traditional news outlets and this can potentially result in an increased ‘herd mentality’ accelerating customer outflows.
3. Simplification of the onboarding process for customers makes it easier for customers to open accounts and move deposits around.

Considering how these aspects have evolved since the financial crisis, this should serve as a reminder that much of the accepted prescriptive regulatory metrics have not been recalibrated to take account of how banking, technology and society has developed since its implementation. For example, in the LCR an uninsured deposit would expect to receive an outflow of 10% over the 30 day horizon. Even taking SVB’s unique deposit base into account, their observed 25% uninsured outflow in a day highlights a risk that retail deposits – generally seen as a quality and sticky source of funding at a macro level – could be vastly under-calibrated for the risk at a micro level and that proactive boards, ALCO and ALM practitioners should seek to challenge their assumptions around the speed and the severity of a stress scenario they are assessing their balance sheet against. Hsu’s conclusion is that more targeted regulation is required to address the lessons learned from the recent bank failures seems inevitable, especially as technologically the banking industry continues to evolve at increasing pace and, by extension, the risk to institutions ability to manage their liquidity position effectively in an increasing real-time world.

Liquidity risk is a complex area of Treasury Risk Management and can be difficult to quantify the level of risk an Institution is exposed to. Technological advancements and social developments continue to change how the next liquidity crisis may play out. While prescriptive regulatory metrics continue to improve standardisation, it doesn’t address all risks to an institution’s liquidity. An Institutions own stress testing – in conjunction with supervisory review – it is essential to explore an Institution’s resiliency to adverse scenarios.

Market leading experts in controlling risk, ALMIS® has been developing solutions to deliver accurate information on current and forward-looking positions for Treasury to proactively manage and plan. If you want to find out more book a demo.
 
About the Author
Stuart Fairley is the Head of Client Experience at ALMIS® International and works closely with clients in his role. Prior to joining ALMIS® in 2019, Stuart had spent most of his career working in the bank and building society sector and holding a number of finance and project roles. Stuart is a also member of the Chartered Institute of Management Accountants (CIMA).

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Keep informed about the latest regulatory changes affecting the banking industry that have happened in the UK & EU as of September 2023. Here is our summary of what you need to know:

ALMIS® RR+ offers the best automated regulatory reporting software of its kind on the market. Find out more about RR+.

UK

• The Bank of England announced two updates on their intended timetable to implement the Basel 3.1 standards in the UK.  This update revised the expected implementation date to 1^st July 2024 and to set expectations for publication of near-final policies relating to credit risk, CVA Risk, counterparty credit risk and operational risk to Q2 2024. 
  
  
• The PRA have proposed (CP17/23) clarifications and amendments when capitalising foreign exchange exposures under the market risk capital framework and sets out the process for seeking permission to exclude Structural Foreign Exchange (SFX) positions from this capital calculation.  This proposal would result in changes to the current proposal around the implementation of Basel 3.1 (CP16/22). The PRA proposes aligning the implementation of this proposal with the implementation of Basel 3.1. 
  
  
• Concurrent with HM Treasury’s consultation on legislative changes that would allow ring-fenced bodies (RFBs) to operate in non-UK and EEA third-countries, the PRA are proposing (CP20/23) a rule to ensure an overseas branch or subsidiary does not pose a material risk to the RRB.  This would be expected to be implemented as close as practical to the removal of the legislative prohibition of this currently and is expected to be around the first half of 2024. 
  
  
• Both the PRA & FCA have jointly published consultation papers (CP18/23 & CP23/20, respectively) on proposals to introduce a new regulatory framework on Diversity & Inclusion in the financial sector.  Proposals include a mandatory regulatory reporting requirement for firms > 250 employees. The deadline for feedback on CP23/20 is December 18, 2023, with implementation expected in 2024. 
  
  
• The Bank of England’s Quarterly Bulletin incorporated an update on “Enabling innovation through a digital pound”, which indicated that a central bank digital currency, in wholesale or retail form, is likely to be needed. The Bank highlighted that the vast majority of central banks globally are at least researching the potential for central bank digital currencies in their jurisdictions, with a handful having already launched. The UK authorities see a role for the digital pound in (a) maintaining public access to retail central bank money and (b) promoting innovation, choice and efficiency in domestic payments. 
  

EU

• The Basel Committee on Banking Supervision (BCBS) have just published findings from the latest Basel III monitoring exercise, as of December 2022, and revealing several key findings. In the context of the initial Basel III framework, the Common Equity Tier 1 (CET1) capital ratios for Group 1 banks increased from 12.7% to 13.1% in the second half of 2022, surpassing pre-pandemic levels. The average impact of Basel III on the Tier 1 minimum required capital (MRC) of Group 1 banks slightly increased (+3.0%), compared to the previous reporting period. Despite a decrease in capital shortfalls under the final Basel III framework in H2 2022, they still remained above end-2021 levels for Group 1 banks and Global Systemically Important Banks (G-SIBs). Liquidity Coverage Ratio (LCR) for Group 1 banks declined, while Net Stable Funding Ratio (NSFR) increased. The report emphasizes that banks generally met or exceeded regulatory requirements, with no significant shortfalls. The analysis includes Group 2 banks, showing changes in their results, but cautioning against direct comparisons due to significant changes in the sample. The findings provide stakeholders with a benchmark for analysing the impact of Basel III reforms on banks. 

• The European Banking Authority (EBA) conducted its second mandatory exercise on the full implementation of Basel III in the European Union. The results indicate a substantially reduced impact on EU banks compared to previous assessments. This suggests that the implementation of Basel III, a set of international banking regulations, is having a less severe effect on EU financial institutions than initially anticipated.  Overall, the show that European banks’ minimum Tier 1 capital requirement would increase by 9.0% at the full implementation date in 2028 with the main contributing factors as the output floor and credit risk.  

• The European Supervisory Authorities (EBA, EIOPA, and ESMA) have issued their Autumn 2023 Joint Committee Report on EU financial system risks, emphasizing ongoing economic uncertainty. They caution national supervisors and financial market participants about financial stability risks tied to this uncertainty. Recent events, including the Russian-Ukraine conflict, energy crisis, and turmoil in US mid-sized banks in March 2023, have been managed well by most institutions, but high uncertainty remains due to geopolitical risks, inflation, and an uncertain economic outlook. The European financial system is sensitive to shocks, with market implications causing risk aversion. Interest rate increases have varying impacts, affecting banks positively but reducing profitability for insurers and creating liquidity risks in asset management. The report advises close monitoring, preparedness for asset quality deterioration, and emphasis on effective risk management and governance. 

Upcoming ALMIS® releases

Version	Expected Release	Detail
1.8.0	Nov-23	Bank of England 3.6.0 Taxonomy
1.9.0	Q1 2024	Bank of England 3.7.0 Taxonomy (Currently PWD – timelines may change depending on publication of final draft)

These are just some of the key regulatory reporting updates in the UK and EU in September 2023. Firms should stay up-to-date with the latest regulatory developments to ensure that they are compliant with their reporting obligations. If you have any questions about these updates or are looking for support with meeting your regulatory commitments, please contact us.

Keep informed about the latest regulatory changes affecting the banking industry that have happened in the UK & EU as of August 2023. Here is our summary of what you need to know:

ALMIS® RR+ offers the best automated regulatory reporting software of its kind on the market. Find out more about RR+.

UK

• The Prudential Regulatory Authority (PRA) published version 3.6.0 of the Bank of England Banking Taxonomy to support the collection of data relating to the risks from contingent leverage and trading exposures. The reporting requirement will take effect on 1 January 2024, with a first reference date of 30 June 2024.
• The Financial Conduct Authority (FCA) revoked its transitional direction on the share trading obligation (STO) with effect from 29 August 2023. This means that UK investment firms are no longer required to ensure that shares admitted to trading in the UK are traded on a UK-regulated (or EU-regulated) market, multilateral trading facility, systematic internaliser or equivalent third-country venue.
• The FCA also published guidance on the repeal and replacement of retained EU law. This guidance provides information on the changes that firms will need to make to their regulatory reporting as a result of Brexit.
• The FCA and PRA issued consultation papers (23/17 and 15/23 respectively) on the UK Securitisation Regulation’s proposal to retain EU law on regulated securitisation markets. The CPs introduce new PRA rules to replace these requirements and covers adjustments to supervisory statements. The proposals aim to maintain current requirements, enhance safety and soundness, and promote competitiveness. They include adjustments to person scope, due diligence obligations, risk retention requirements, and timelines for information provision. Key highlights include:
  • Risk retention in non-performing exposure securitization now based on market valuation, typically lower than face value.
  • Regulation prevents firms from selectively choosing the weakest assets for securitization.
  • Assets with higher expected losses over a maximum four-year period compared to similar ones cannot be selected.
  • Clarification on “comparable” stipulates using similar methods, variables, and models to assess expected performance for both securitized and non-securitized exposures.
  • Reporting and disclosure requirement changes for securitization to be addressed in future consultations.

EU

• The European Central Bank (ECB) published a consultation paper on a draft guide on financial conglomerate reporting of significant risk concentrations and intragroup transactions. This guide aims to provide consistency, coherence, effectiveness, and transparency regarding the approach the ECB will take where it has been appointed coordinator for a financial conglomerate.
• The European Securities and Markets Authority (ESMA) published a report on the implementation of the Markets in Financial Instruments Directive (MiFID II) and the Markets in Financial Instruments Regulation (MiFIR). The report found that there has been significant progress in the implementation of MiFID II and MiFIR, but there are still some areas where further work is needed.

In addition to these specific updates, there were also a number of other regulatory developments in the UK and EU in August 2023. These included:

• The FCA published a market watch report on transaction reporting shortcomings. The report found that there are still a number of firms that are not complying with the transaction reporting requirements under MiFIR.
• The UK Treasury published the outcome of its Investment Research Review. The review found that there is a need for greater transparency and accountability in the investment research industry.
• The FCA issued a warning to asset managers to review their liquidity management. The warning follows concerns about the liquidity of some asset classes, such as European equities.
• The FCA has been granted new powers to ensure the reasonable provision of cash deposit and withdrawal services, as mandated by the Financial Services & Markets Act 2023. Despite the evolving landscape of digital payments, access to cash remains essential for some individuals and small businesses in the UK. While 85% of payments are now digital, 6% of adults rely on cash for most transactions. The FCA’s approach will balance the needs of consumers and businesses with the costs for firms. They plan to consult on rules for designated firms to maintain reasonable cash access, considering various factors and encouraging shared solutions. The government will designate which firms the regulation applies to, with new rules expected to take effect by summer 2024. 

Upcoming ALMIS® releases

Version	Expected Release	Detail
1.7.0	Sep-23	Bank of England Statistical 1.3.0 (Including IPA submission)
		FCA IFPR reporting
1.8.0	Nov-23	Bank of England 3.6.0 Taxonomy
1.9.0	Q1 2024	Bank of England 3.7.0 Taxonomy  (Currently PWD – timelines may change depending on publication of final draft)

These are just some of the key regulatory reporting updates in the UK and EU in August 2023. Firms should stay up-to-date with the latest regulatory developments to ensure that they are compliant with their reporting obligations.