EBA Highlights Progress & Challenges in EU Supervisory Practices for 2023, Introduces Updates Supervisory Framework

The European Banking Authority (EBA) released its annual Report on convergence of supervisory practices today, underscoring both achievements and areas needing improvement in the implementation of supervisory priorities across the EU for 2023.

The EBA report acknowledges that most competent authorities adequately incorporated key supervisory topics identified for 2023 into their work programmes. These topics included macroeconomic and geopolitical risks, operational and financial resilience, transition risks related to digitalization and environmental, social, and governance (ESG) factors, and money laundering/terrorism financing (ML/TF) risks.

Regarding macroeconomic and geopolitical risks, the EBA noted heightened attention due to ongoing challenges such as Russian aggression in Ukraine and economic pressures stemming from interest rate hikes and inflation across Member States.

While progress was noted, concerns were raised about the consistency in handling certain risk areas, particularly environmental, social, and governance risks, and the integration of data aggregation capabilities into supervisory processes. The report highlighted that some competent authorities are still in the process of fully incorporating these elements.

A significant aspect of the report focused on Pillar 2 requirements, where the EBA identified a need for greater consistency in the identification and treatment of risks across the EU. Despite improvements in the Pillar 2 Guidance framework, disparities remain in how authorities assess and manage these risks, impacting supervisory outcomes.

Supervisory colleges, designed to foster collaboration among national authorities overseeing cross-border institutions, were generally deemed effective. However, the EBA emphasized the potential for enhanced information sharing and joint supervisory activities to bolster resilience and responsiveness in uncertain economic environments.

The EBA's ongoing efforts to promote supervisory convergence through peer reviews and benchmarking exercises were highlighted as instrumental in addressing deficiencies and aligning practices across jurisdictions.

Looking ahead, the implementation of the EU Banking Package, including updates to the Capital Requirements Regulation and Directive, is expected to further harmonize supervisory approaches and strengthen the consistency of supervisory outcomes across the EU.

The EBA will continue to play a pivotal role in advancing supervisory convergence and ensuring the consistent application of regulatory standards across Member States, contributing to a more integrated and resilient European banking sector.

EBA Introduces Updated Supervisory Reporting Framework to Align with Basel III Reforms

In a separate but related move, the European Banking Authority (EBA) has also unveiled significant updates to its supervisory reporting framework, encompassing both the technical package for version 3.5 and final draft implementing technical standards (ITS) aimed at implementing changes under the Capital Requirements Regulation (CRR3) aligning with Basel III reforms in the EU.

The technical package for version 3.5 of the reporting framework includes standard specifications, validation rules, the Data Point Model (DPM), and XBRL taxonomies. These components support various reporting obligations such as amendments to the technical standards for the Fundamental Review of the Trading Book (FRTB), diversity benchmarking Guidelines, and standards for ICT service use under the Digital Operational Resilience Act (DORA). Notably, the package adopts the new XBRL architecture and updates the DPM Query Tool to reflect the current release.

Simultaneously, the final draft ITS introduce or amend supervisory reporting requirements crucial for monitoring institutions' compliance with CRR3. These include provisions on the output floor, credit risk, market risk, credit valuation adjustment (CVA) risk, operational risk, leverage ratio, and transitional reporting on exposures to crypto-assets. The updates aim to ensure the supervisory reporting framework remains relevant and aligned with the latest regulatory changes.

"The ITS are designed to provide supervisors with comparable information to monitor compliance with CRR3 requirements, fostering enhanced and consistent supervision across the EU," stated the EBA.

These ITS are part of the EBA's broader roadmap to strengthen the prudential framework, enhancing the reporting framework to reflect Basel III reforms effectively. They complement the revised disclosure templates and Pillar 3 disclosure requirements published earlier this year, facilitating institutions' compliance and transparency efforts.

To aid institutions in preparing and submitting supervisory data, the EBA is publishing an updated mapping tool and a summary of all Pillar 3 disclosure requirements, emphasizing clarity and usability in regulatory compliance.

Looking forward, the EBA plans to release a comprehensive technical package in Q4 2024, including the DPM, validation rules, and taxonomy, further supporting institutions in meeting their supervisory reporting obligations.

The development of these ITS aligns with Regulation (EU) No 575/2013 (the CRR), as amended by Regulation (EU) 2024/1623 (CRR3), mandating the EBA to specify uniform reporting formats and IT solutions for supervisory reporting. These efforts underscore the EU's commitment to enhancing the prudential framework and regulatory compliance in the banking sector.

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