A snapshot of recent regulatory developments in the banking space is set out below.
Department of Finance: Consultations on the Review of the Canadian Payments Act
Last Friday, the Department of Finance (DoF) launched consultations to seek views on whether 2015 governance changes have been effective in achieving the intended public policy objectives of efficiency, safety and soundness, and user interests. The changes followed amendment of the Canadian Payments Act (CPA).
According to the DoF, the launch of the review follows through on a commitment to review the CPA three years after the changes were made. The federal government will table a report in both Houses of Parliament based on feedback from stakeholders on the consultations.
Comments are to be sent no later than July 20, 2018.
2. UNITED STATES:
i) The Office of the Comptroller of the Currency: Bulletin on Core Lending Principles for Short-Term, Small-Dollar Installment Lending
The Office of the Comptroller of the Currency (OCC) issued a bulletin to remind banks of the core lending principles for prudently managing risks associated with offering short-term, small-dollar installment lending programs. These programs are typically two to 12 months in duration with equal amortizing payments.
The OCC expects banks to develop and implement their offering short-term, small-dollar installment lending programs in a manner consistent with sound risk management practices.
The banks are to align the programs with their overall business plans and strategies. Such strategies could include working with consumers who have an ability to repay a loan despite a credit profile that is outside of a bank’s typical underwriting standards for credit scores and repayment ratios.
ii) The Office of the Comptroller of the Currency: Report on Key Risks for Federal Banking System
The Office of the Comptroller of the Currency (OCC) issued its ‘Semi-Annual Risk Perspective for Spring 2018.’ Focused on risks facing US national banks and federal savings associations, the report outlines credit, operational, compliance, and interest rate risks as key themes.
Highlights from the report include the following:
• competition for quality loans is strong, as examiners note evidence of eased underwriting. The accommodating credit environment warrants a continued focus on underwriting practices to monitor and assess credit risk and lender complacency;
• operational risk is elevated as banks adapt business models, transform technology and operating processes, and respond to evolving cyber threats; and
• compliance risk is elevated as banks manage money laundering risks and implement changes to policies and procedures to comply with amended Bank Secrecy Act and consumer protection requirements.
3. UNITED KINGDOM:
i) Prudential Regulation Authority: Securitization – New European Framework and Significant Risk Transfer
The Prudential Regulation Authority (PRA) launched a consultation paper outlining its proposed approach to the European Union’s Securitization Regulation and certain aspects of the revised Capital Requirements Regulation banking securitization capital framework.
The consultation paper also proposes to update financial institutions on the PRA’s expectations with regard to significant risk transfer securitization.
Stakeholders are requested to send their comments by August 22, 2018.
ii) European Banking Authority:
a) Standards on Estimation and Identification of an Economic Downturn in Internal Ratings Based Modelling
b) Guidelines for the Estimation of Loss Given Default Appropriate for an Economic Downturn
The European Banking Authority launched two consultations on draft regulatory technical standards i) specifying an economic downturn; and ii) on a set of guidelines related to the estimation of loss given default (LGD) appropriate for conditions of an economic downturn.
The draft standards specify the nature, severity and duration of an economic downturn, while the guidelines focus on the appropriate estimation of the LGD in a situation of economic downturn.
Stakeholders are to send comments no later than June 22, 2018.
4. NEW ZELAND:
The Reserve Bank: Submissions on Mortgage Bond Collateral Standards
The Reserve Bank (Bank) published a summary of submissions following consultation on its review of mortgage bond collateral standards. Earlier the Bank had sought feedback from stakeholders on: i) terms under which it should accept mortgage bonds as collateral; and ii) a proposed standard in residential mortgage obligations.
As next steps, the Bank indicates it will: i) follow up with stakeholders on the key issues raised; and ii) consult on a revised proposal with the aim of finalizing the mortgage bond collateral policy review by the end of 2018.
i) Financial Supervisory Authority: Countercyclical Capital Buffer
The Financial Supervisory Authority increased the countercyclical capital buffer applicable to banks in Iceland. A countercyclical capital buffer of 1.75% will apply on domestic exposures of all financial undertakings, both individually and on a consolidated basis, unless they are specifically excluded from the buffer.
The primary purpose of the countercyclical capital buffer is to increase the resilience of Iceland’s financial system against potential losses due to increased cyclical systemic risk.
ii) Financial Supervisory Authority: Capital Buffer for Systemic Risk and an On-going Capital Buffer for Other Systemically Important Financial Institutions
The Financial Supervisory Authority announced an unchanged capital buffer for systemic risk and an on-going capital buffer for other systemically important financial institutions.
Based on the announcement, systemically important financial institutions in Iceland are to maintain a 2% capital buffer. The buffer is to be maintained on a consolidated basis and will continue to cover all of their exposures.
Ministry of Finance and the Bank of Russia: Financial Ombudsman for Financial Institutions
A bill on establishing a financial ombudsman in Russia passed its second reading in the State Duma. The bill had its first reading in the State Duma in 2014.
If passed, the financial ombudsman is intended to assist build a system of out-of-court dispute settlement between households and financial institutions in cases involving a claim of up to 500 thousand rubles.
Households will be able to promptly receive professional legal advice of the financial ombudsman free of charge to solve their disputes with financial institutions.
Bermuda Monetary Authority: Scope of Anti-money Laundering/Anti-terrorist Financing Activities in Bermuda
The Bermuda Monetary Authority (Authority) released stakeholders’ comments on the Authority’s consultation paper on scope of anti-money laundering and anti-terrorist financing (AML/ATF) activities in Bermuda.
The consultation paper proposed for the definition of AML/ATF regulated financial institutions to include institutions carrying on money lending activities and initiated a period of industry consultation on the matter.
*An expert on banking law and regulation, Olakunle Komolafe holds an LL.M. from Harvard Law School, United States and another LL.M. in Energy, Natural Resources and Environmental Law from the University of Calgary, Canada.