Insights

In this issue:

• EBA issues guidelines on credit risk mitigation for institutions applying the IRB approach with own estimates of LGDs
• New action plan by the EU Commission for a comprehensive Union policy on AML-CFT
• ECB’s asset-backed securities programme deemed unconstitutional by German Constitutional Court
• New legal notice on the European Passport Rights for Financial Institutions Regulations, 2020

EBA issues guidelines on credit risk mitigation for institutions applying the IRB approach with own estimates of LGDs

Following a three-month consultation period, the European Banking Authority has issued a set of guidelines to provide a clearer blueprint to institutions on the application of the credit risk mitigation advanced internal rating-based (A-IRB) approach. The main rationale behind these guidelines is to assuage the dissimilarities, which emanate from the diverse supervisory and institution-specific practices. In fact, both the supranational authority as well as the industry have highlighted that the complexity of the CRR (Regulation (EU) No 575/2013) provisions on the CRM framework are causing significant implementation issues.

New action plan by the EU Commission for a comprehensive Union policy on AML-CFT

Last week, the European Commission has adopted a 6-pillar action plan for a comprehensive Union policy on the prevention of money laundering and financing of terrorism, reflecting the findings of the 2019 AML package which inter alia highlight the fragmentation of rules, uneven supervision and limitations in the cooperation among the EU financial intelligence units.

The action plan rests on six main pillars namely: (a) A single EU rulebook (b) Effective implementation of existing rules (c) EU-level supervision (d) A stronger EU in the world (e) A support and cooperation mechanism for financial intelligence units and (f) Better use of information to enforce criminal law. The Commission intends to deliver on all these actions by early 2021.

The Commission kickstarted a public consultation exercise among all stakeholders in parallel to the adoption of this action plan and will be welcoming feedback until the 29th of July 2020.

ECB’s asset-backed securities programme deemed unconstitutional by German Constitutional Court

On the 5th of May 2020, the German Constitutional Court ruled that the European Central Bank’s (ECB) asset-backed securities programme (PSPP) was unconstitutional and advised the German government to request the ECB to justify the need for such programme within three months. Furthermore, the Court implied that Germany would not partake in any fresh bond buying if the ECB does not provide these clarifications. This controversial decision has not been received well by the EU institutions. The ECJ has reaffirmed the fact that it is the only institution empowered to interpret EU law and that its decisions are binding on all Member States. Additionally, the European Commission has held that it could open infringement procedures against Germany.

German constitutional court’s judgment

New legal notice on the European Passport Rights for Financial Institutions Regulations, 2020

Legal Notice 165 of 2020 under the Financial Institutions Act (Chapter 376 of the laws of Malta or “FIA”) was published in the Government Gazette at the end of April this year. The Legal Notice entails the European Passport Rights for Financial Institutions Regulations, 2020 (the “Regulations”) which primarily transpose several provisions of the second Payment Services Directive (Directive (EU) 2015/2336 or “PSDII”). Mainly, the Regulations stipulate that subject to a number of conditions, a European financial institution (i.e. a legal entity authorised by a European regulatory authority to provide payment services or solely account information services in terms of the PSDII, or authorised under the Electronic Money Directive (Directive 2009/110/EC)) that intends to offer its services or products in Malta in the exercise of a European right under the freedom to provide services may, subject to the conditions outlined in the Regulations, be exempt from the licensing requirement under the FIA. In parallel, the Regulations also state that subject to the conditions therein, a Maltese financial institution may exercise a European right to provide payment services and/or issue and/or distribute and/or redeem electronic money in another Member State under the freedom to provide services.