“Banks will need to navigate an uncertain and challenging operating environment at the same time as continuing the build-up of MREL resources; further developing financial crime capabilities; strengthening and ensuring digital operational resilience; and developing a risk-based approach to climate change and environmental risks,” said Pauline Lambert, executive director in the financial institutions team of Scope Ratings in a report out today.

MREL

On MREL, investors have been reliant on varying public disclosures from banks as it can be difficult to arrive at the requirements based on published policies. This stems in part from the EU’s approach of assigning MREL to banks beyond those considered systemically important, as well as differences between MREL and global standards for Total Loss-Absorbing Capacity (TLAC).

Updates to the Single Resolution Board’s (SRB) MREL policy mean there will be closer harmonisation between standards and clarity on the required level of subordination. In early 2021, the SRB intends to communicate MREL decisions to banks, replacing those issued previously. Each decision will comprise two binding MREL targets, including requirements for subordination: an intermediate target to be met by 1 January 2022 and a final target to be met by 1 January 2024.

AML/CFT

When it comes to Anti-Money Laundering (AML) and Countering the Financing of Terrorism (CFT), Lambert says that as standards become more rigorous, criminals more creative, and regulators improve supervision in this area, banks will need to continue developing their financial crime capabilities. A legislative proposal from the EC to harmonise rules and establish an EU-level supervisor is expected early in 2021.

ESG

Work continues on incorporating ESG factors into the risk management of banks and supervision. In June 2021, the EBA is expected to publish a report on integrating ESG risks into the review and evaluation of financial institutions performed by competent authorities. The EBA will also prepare technical standards for Pillar 3 disclosures outlining qualitative and quantitative information on environmental, social and governance factors.

The ECB’s supervisory approach greatly encourages banks to assess these risks. Its final guidance on climate-related and environmental risks, published in November 2020, details expectations for banks’ business strategy and governance and risk management frameworks. In early 2021, banks will have to conduct self-assessments based on the ECB guide and create action plans. The ECB will benchmark these, and they will be challenged in supervisory dialogues. In 2022, the ECB will perform a full supervisory review of banks’ practices, with follow-up actions to be dispensed as needed. The 2022 stress test also will cover climate-related risks.
 
Download the full report here.