Banking Act (Supervisory Review) Regulations, 2015

Suppliment tal-Gazzetta tal-Gvern ta’ Malta, Nru. 19,406, 10 ta’ April, 2015

L.N. 127 of 2015

BANKING ACT

(CAP. 371)

Banking Act (Supervisory Review) Regulations, 2015

IN exercise of the powers conferred by article 3 of the Banking

Act, the Minister for Finance, acting on the advice of the Malta

Financial Services Authority, has made the following regulations:-

(1) The title of these regulations is the Banking Act Citation and

scope.

(Supervisory Review) Regulations, 2015.

(2) The purpose of these regulations is to implement Articles 3

(in part), 75, 77(2), 78(2), 78(3), 78(4), 78(5), 86(3), 91(11), 97, 98,

99, 100, 101, 103, 104, 105, 107 and 110 of the CRD.

(1)

In these regulations, unless the context otherwise Interpretation.

requires -

"the Act" means the Banking Act;

"the CRD" means Directive 2013/36/EU of the European

Parliament and of the Council of 26 June 2013 on the access to the

activity of credit institutions and the prudential supervision of credit

institutions and investment firms, amending Directive 2002/87/EC

and repealing Directives 2006/48/EC and 2006/49/EC, as amended

from time to time, and includes any implementing measures that have

been or may be made thereunder;

"the CRR" means Regulation (EU) No 575/2013 of the

European Parliament and of the Council of 26 June 2013 on

prudential requirements for credit institutions and investment firms

and amending Regulation (EU) No 648/2012, as amended from time

to time, and includes any implementing measures that have been or

may be issued thereunder;

"European regulatory authority" means an authority which is in

a country or territory outside Malta that is a Member State and is

empowered by law or regulation to supervise credit institutions;

"internal approach" means the internal ratings based approach

referred to in Article 143(1), the internal models approach referred to

in Article 221, the own estimates approach referred to in Article 225,

the advanced measurement approaches referred to in Article 312(2),

the internal models method referred to in Articles 283 and 363, and

the internal assessment approach referred to in Article 259(3) of the

CRR;

"systemic risk" means a risk of disruption in the financial

system with the potential to have serious negative consequences for

the financial system and the real economy.

(2) Words and expressions used in these regulations which are

also used in the Act but which are not defined herein, shall have the

same meaning as in the Act.

(1) The competent authority shall, taking into account

the technical criteria set out in regulation 4, review the arrangements,

strategies, processes and mechanisms implemented by credit

institutions to comply with the Act and any regulations or Banking

Rules issued thereunder, and the CRR and evaluate

(a)

risks to which credit institutions are or might be

exposed;

(b) risks that a credit institution poses to the financial

system taking into account the identification and measurement

of systemic risk in terms of Article 23 of Regulation (EU) No

1093/2010, or recommendations of the ESRB, where

appropriate; and

(c)

risks revealed by stress testing taking into account

the nature, scale and complexity of a credit institution’s

activities.

(2) The scope of the review and evaluation referred to in sub-

regulation (1) shall cover all requirements of the Act and any

regulations or Banking Rules issued thereunder, and the CRR.

(3) On the basis of the review and evaluation referred to in

sub-regulation (1), the competent authority shall determine whether

the arrangements, strategies, processes and mechanisms implemented

by credit institutions and the own funds and liquidity held by them

ensure a sound management and coverage of their risks.

(4) The competent authority shall establish the frequency and

intensity of the review and evaluation referred to in sub-regulation (1)

having regard to the size, systemic importance, nature, scale and

complexity of the activities of the credit institution concerned and

taking into account the principle of proportionality. The review and

evaluation shall be updated at least on an annual basis for credit

institutions covered by the supervisory examination programme

referred to in regulation 5(2).

(5) Where a review shows that a credit institution may pose

systemic risk in accordance with Article 23 of Regulation (EU) No

1093/2010, the competent authority shall inform EBA without delay

about the results of the review.

(1) In addition to credit, market and operational risks, Technical

the review and evaluation performed by the competent authority in criteria

supervisory

accordance with regulation 3 shall include at least

review and

evaluation.

(a) the results of the stress test carried out in accordance

with Article 177 of the CRR by credit institutions applying an

internal ratings based approach;

(b) the exposure to and management of concentration

risk by credit institutions, including their compliance with the

requirements set out in Part Four of the CRR and those on

concentration risk in Article 81 of the CRD;

(c)

the robustness, suitability and manner of application

of the policies and procedures implemented by credit

institutions for the management of the residual risk associated

with the use of recognised credit risk mitigation techniques;

(d) the extent to which the own funds held by a credit

institution in respect of assets which it has securitised are

adequate having regard to the economic substance of the

transaction, including the degree of risk transfer achieved;

(e)

the exposure to, measurement and management of

liquidity risk by credit institutions including the development of

alternative scenario analyses, the management of risk mitigants

(in particular the level, composition and quality of liquidity

buffers) and effective contingency plans;

(f)

the impact of diversification effects and how such

effects are factored into the risk measurement system;

(g) the results of stress tests carried out by credit

institutions using an internal model to calculate market risk own

funds requirements under Part Three, Title IV, Chapter 5 of the

CRR;

(h) the geographical location of credit institutions’

exposures;

(i)

the business model of the credit institution; and

(j)

the assessment of systemic risk, in accordance with

the criteria set out in regulation 3.

(2) For the purposes of sub-regulation (1)(e), the competent

authority shall regularly carry out a comprehensive assessment of the

overall liquidity risk management by credit institutions and promote

the development of sound internal methodologies. While conducting

these reviews, the competent authority shall have regard to the role

played by credit institutions in the financial markets. The competent

authority shall also duly consider the potential impact of its decisions

on the stability of the financial system in all other Member States

concerned.

(3) The competent authority shall monitor whether a credit

institution has provided implicit support to a securitisation. If a credit

institution is found to have provided implicit support on more than

one occasion the competent authority shall take appropriate measures

reflective of the increased expectation that it will provide future

support to its securitisation thus failing to achieve a significant

transfer of risk.

(4) For the purposes of the determination to be made under

regulation 3(3), the competent authority shall consider whether the

valuation adjustments taken for positions or portfolios in the trading

book, as set out in Article 105 of the CRR, enable the credit

institution to sell or hedge out its positions within a short period

without incurring material losses under normal market conditions.

(5) The review and evaluation performed by the competent

authority shall include the exposure of credit institutions to the

interest rate risk arising from non-trading activities. Measures shall

be required at least in the case of credit institutions whose economic

value declines by more than 20% of their own funds as a result of a

sudden and unexpected change in interest rates of 200 basis points or

such change as defined in the EBA guidelines.

(6) The review and evaluation performed by the competent

authority shall include the exposure of credit institutions to the risk of

excessive leverage as reflected by indicators of excessive leverage,

including the leverage ratio determined in accordance with Article

429 of the CRR. In determining the adequacy of the leverage ratio of

credit institutions and of the arrangements, strategies, processes and

mechanisms implemented by credit institutions to manage the risk of

excessive leverage, the competent authority shall take into account

the business model of those credit institutions.

(7) The review and evaluation conducted by the competent

authority shall include governance arrangements of credit institutions,

their corporate culture and values, and the ability of directors to

perform their duties. In conducting that review and evaluation, the

competent authority shall, at least, have access to agendas and

supporting documents for meetings of the board of directors and its

committees, and the results of the internal or external evaluation of

performance of the board of directors.

(1) The competent authority shall, at least annually, Supervisory

adopt a supervisory examination programme for the credit institutions examination

programme

it supervises. Such programme shall take into account the supervisory

review and evaluation process referred to in regulation 3, and shall

contain the following

(a) an indication of how the competent authority intends

to carry out its tasks and allocate its resources;

(b) an identification of which credit institutions are

intended to be subject to enhanced supervision and the measures

taken for such supervision as set out in sub-regulation 3; and

(c)

a plan for inspections at the premises used by a

credit institution, including its branches and subsidiaries

established in other Member States in accordance with

regulation 12 of the European Passport Rights for Credit S.L. 371.11

Institutions Regulations and regulation 10(2) and (3) and

regulation 19(1) and (2) of the Supervisory Consolidation L.N. 31 of 2014

Regulations.

(2) Supervisory examination programmes shall include the

following credit institutions

(a) credit institutions for which the results of the stress

tests referred to in regulation 4(1)(a) and (1)(g) and in

regulation 6, or the outcome of the supervisory review and

evaluation process under regulation 3, indicate significant risks

to their ongoing financial soundness or indicate breaches of the

Act and any regulations or Banking Rules issued thereunder

transposing the requirements of the CRD, and of the CRR;

(b) credit institutions that pose systemic risk to the

financial system; and

(c)

any other credit institution for which the competent

authority deems it to be necessary.

(3) Where appropriate under regulation 3, the following

measures shall, in particular, be taken if necessary

(a) an increase in the number or frequency of on-site

inspections of the credit institution;

(b) a permanent presence of the competent authority at

the credit institution;

(c)

additional or more frequent reporting by the credit

institution;

(d) additional or more frequent review of the

operational, strategic or business plans of the credit institution;

and

(e)

thematic examinations monitoring specific risks that

are likely to materialise.

(4) Adoption of a supervisory examination programme by the

European regulatory authority of a home Member State shall not

prevent the competent authority from carrying out, on a case-by-case

basis, on-the-spot checks and inspections of the activities carried out

by branches established in Malta of credit institutions authorised by

such European regulatory authorities in accordance with regulation

8(2) and (3) of the European Passport Rights for Credit Institutions

Regulations.

The competent authority shall carry out, as appropriate but

at least annually, supervisory stress tests on credit institutions it

supervises, to facilitate the review and evaluation process under

regulation 3.

(1) The competent authority shall review on a regular

basis, and at least every three years, credit institutions’ compliance

with the requirements regarding approaches that require permission

by the competent authority for the calculation of own funds

requirements in accordance with Part Three of the CRR. The

competent authority shall have particular regard to changes in a credit

institution’s business and to the implementation of those approaches

to new products. Where material deficiencies are identified in risk

capture by a credit institution’s internal approach, the competent

authority shall ensure they are rectified or take appropriate steps to

mitigate their consequences, including by imposing higher

multiplication factors, or imposing capital add-ons, or taking other

appropriate and effective measures.

(2) The competent authority shall in particular review and

assess whether the credit institution uses well developed and up-to-

date techniques and practices for those approaches.

(3)

If for an internal market risk model numerous over-

shootings as referred to in Article 366 of the CRR indicate that the

model is not or is no longer sufficiently accurate, the competent

authority shall revoke the permission for using the internal model or

impose appropriate measures to ensure that the model is improved

promptly.

(4) If a credit institution has received permission to apply an

approach that requires permission by the competent authority before

using such an approach for the calculation of own funds requirements

in accordance with Part Three of the CRR but no longer meets the

requirements for applying that approach, the competent authority

shall require the credit institution to either demonstrate to the

satisfaction of the competent authority that the effect of non-

compliance is immaterial, where applicable in accordance with the

requirements of the CRR, or present a plan for the timely restoration

of compliance with the requirements and set a deadline for its

implementation. The competent authority shall require improvements

to that plan if it is unlikely to result in full compliance or if the

deadline is inappropriate. If the credit institution is unlikely to be able

to restore compliance within an appropriate deadline and, where

applicable, has not satisfactorily demonstrated that the effect of non-

compliance is immaterial, the permission to use the approach shall be

revoked or limited to compliant areas or those where compliance can

be achieved within an appropriate deadline.

(5) The competent authority shall take into account the

analysis carried out by the EBA in terms of Article 101(5) of the CRD

and the guidelines containing benchmarks on the basis of that

analysis issued by the EBA, for the review of the permissions it grants

to credit institutions to use internal approaches for the calculations of

own funds requirements.

(1) Where the competent authority determines in terms Application of

of regulation 3 that credit institutions with similar risk profiles such supervisory

measures to

as similar business models or geographical location of exposures, are credit

institutions with

or might be exposed to similar risks or pose similar risks to the similar risk

financial system, it may apply the supervisory review and evaluation profiles.

process referred to in regulation 3, to those credit institutions in a

similar or identical manner and the competent authority shall notify

the EBA accordingly.

(2) For this purpose, the competent authority shall have the

necessary legal power to impose the requirements under the CRD and

under the CRR on the credit institutions referred to in sub-regulation

(1) in a similar or identical manner, including in particular the

exercise of supervisory powers contained in regulations 9, 10 and

article 30A of the Act.

(3) The type of credit institutions referred to in sub-regulation

(1) may be determined in accordance with the criteria referred to in

regulation 4(1)(j).

(1) For the purposes of regulations 3, 4(4), 7(4), 8 and

article 17E of the Act and the application of the CRR, the competent

authority shall have at least the following powers

(a) to require credit institutions to hold own funds in

excess of the requirements set out in Chapter 4 of Title VII of

the CRD, and in the CRR relating to elements of risks and risks

not covered by Article 1 of the CRR;

(b) to require the reinforcement of the arrangements,

processes, mechanisms and strategies implemented in

accordance with articles 17B and 17C of the Act;

(c)

to require credit institutions to present a plan to

restore compliance with supervisory requirements in accordance

with the Act and any regulations made or Banking Rules issued

thereunder, and to the CRR and set a deadline for its

implementation, including improvements to that plan regarding

scope and deadline;

(d) to require credit institutions to apply a specific

provisioning policy or treatment of assets in terms of own funds

requirements;

(e)

to restrict or limit the business, operations or

network of credit institutions or to request the divestment of

activities that pose excessive risks to the soundness of a credit

institution;

(f)

to require the reduction of the risk inherent in the

activities, products and systems of credit institutions;

(g) to require credit institutions to limit variable

remuneration as a percentage of net revenues where it is

inconsistent with the maintenance of a sound capital base;

(h) to require credit institutions to use net profits to

strengthen own funds;

(i)

to restrict or prohibit distributions or interest

payments by a credit institution to shareholders, members or

holders of Additional Tier 1 instruments within the meaning of

the CRR, where the prohibition does not constitute an event of

default of the credit institution;

(j)

to impose additional or more frequent reporting

requirements, including reporting on capital and liquidity

positions;

(k) to impose specific liquidity requirements, including

restrictions on maturity mismatches between assets and

liabilities; and

(l)

to require additional disclosures.

(2) The additional own funds requirements referred to in sub-

regulation (1)(a), shall be imposed by the competent authority at least

where

(a)

a credit institution does not meet the requirement set

out in articles 17B and 17C of the Act or in Article 393 of the

CRR;

(b) risks or elements of risks are not covered by the own

funds requirements set out in Chapter 4 of Title VII of the CRD,

or in the CRR;

(c)

the sole application of other administrative measures

is unlikely to improve the arrangements, processes, mechanisms

and strategies sufficiently within an appropriate timeframe;

(d) the review referred to in regulation 4(4) or in

regulation 7(4), reveals that the non-compliance with the

requirements for the application of the respective approach will

likely lead to inadequate own funds requirements;

(e)

the risks are likely to be underestimated despite

compliance with the applicable requirements of the Act and any

regulations made or Banking Rules issued thereunder, and of

the CRR; or

(f)

a credit institution reports to the competent authority

in accordance with Article 377(5) of the CRR that the stress test

results referred to in that Article materially exceed its own funds

requirement for the correlation trading portfolio.

(3) For the purposes of determining the appropriate level of

own funds on the basis of the review and evaluation carried out in

accordance with these regulations, the competent authority shall

assess whether any imposition of an additional own funds

requirement in excess of the own funds requirement is necessary to

capture risks to which a credit institution is or might be exposed,

taking into account the following

(a) the quantitative and qualitative aspects of a credit

institution's assessment process referred to in article 17C of the

Act;

(b) a credit institution’s arrangements, processes and

mechanisms referred to in article 17B of the Act;

(c)

the outcome of the review and evaluation carried out

in accordance with regulations 3 and 7; and

(d)

the assessment of systemic risk.

(1) For the purposes of determining the appropriate

level of liquidity requirements on the basis of the review and

evaluation carried out in accordance with these regulations, the

competent authority shall assess whether any imposition of a specific

liquidity requirement is necessary to capture liquidity risks to which a

credit institution is or might be exposed, taking into account the

following

(a)

the particular business model of the credit

institution;

(b) the credit institution’s arrangements, processes and

mechanisms referred to in Section II of Chapter 2 of Title VII of

the CRD and in particular in Article 86 of the CRD in relation to

liquidity risk;

(c)

the outcome of the review and evaluation carried out

in accordance with regulation 3;

(d) systemic liquidity risk that threatens the integrity of

the financial markets in Malta.

(2) In particular, without prejudice to regulation 7 of the

Administrative Penalties, Measures and Investigatory Powers

Regulations, the competent authority shall consider the need to apply

administrative penalties or other administrative measures, including

prudential charges, the level of which broadly relates to the disparity

between the actual liquidity position of a credit institution and any

liquidity and stable funding requirements established at national or at

European Union level.

(3) The competent authority shall monitor developments in

relation to liquidity risk profiles, for example product design and

volumes, risk management, funding policies and funding

concentrations.

(4) The competent authority shall take effective action where

developments referred to in sub-regulation (3) may lead to the

instability of an individual credit institution or systemic instability.

(5) The competent authority shall inform EBA about any

actions carried out pursuant to sub-regulation (4).

The competent authority shall inform EBA of

Notification to

EBA by the

competent

(a) the functioning of its review and evaluation process

authority.

referred to in regulation 3;

(b) the methodology used to base decisions on the

technical criteria for supervisory review referred to in regulation

4, the supervisory stress testing in regulation 6, the review of

internal approaches in regulation 7, the supervisory measures in

article 17E of the Act, the supervisory powers in regulation 9

and the specific liquidity requirements in regulation 10, on the

process referred to in paragraph (a).

The competent authority shall apply the review and Review and

evaluation process referred to in these regulations in accordance with evaluation

application of

the level of application of the requirements of Part One, Title II of the supervisory

measures.

CRR.

(1) The competent authority shall collect the Oversight of

information disclosed by credit institutions in accordance with the remuneration

policies.

criteria for disclosure established in Article 450(1)(g), (h) and (i) of

the CRR and shall use it to benchmark remuneration trends and

practices. The competent authority shall provide EBA with such

information.

(2) The competent authority shall collect information on the

number of natural persons per credit institution that are remunerated

EUR 1 million or more per financial year, in pay brackets of €1

million, including their job responsibilities, the business area

involved and the main elements of salary, bonus, long-term award and

pension contributions. The competent authority shall forward such

information to EBA.

The competent authority shall, taking into account the Sole or

nature, scale and complexity of the credit institutions’ activities, mechanistic

reliance on

monitor that credit institutions do not solely or mechanistically rely external

ratings.

on external credit ratings for assessing the creditworthiness of an

entity or financial instrument.

(1) Where the competent authority chooses to develop

specific portfolios of internal approaches permitted to be used by

credit institutions, it shall do so in consultation with the EBA and

shall ensure that credit institutions report the results of the

calculations for these specific portfolios separately from the results of

the calculations for the benchmark portfolios required under Article

78 of the CRD.

(2) The competent authority shall, on the basis of the

information submitted by credit institutions, monitor the range of risk

weighted exposure amounts or own funds requirements, as

applicable, except for operational risk, for the exposures or

transactions in the benchmark portfolio resulting from the internal

approaches of those credit institutions. The competent authority shall

make an assessment, at least annually, of the quality of those

approaches paying particular attention to

(a) those approaches that exhibit significant differences

in own fund requirements for the same exposure;

(b) approaches where there is particularly high or low

diversity, and also where there is a significant and systematic

under-estimation of own funds requirements.

(3) Where particular credit institutions diverge significantly

from the majority of their peers or where there is little commonality

in approach leading to a wide variance of results, the competent

authority shall investigate the reasons therefor and, if it can be clearly

identified that a credit institution’s approach leads to an

underestimation of own funds requirements which is not attributable

to differences in the underlying risks of the exposures or positions,

the competent authority, shall take corrective action.

(4) The competent authority shall ensure that its decision on

the appropriateness of corrective actions as referred to in sub-

regulation (3) comply with the principle that such actions must

maintain the objectives of an internal approach and therefore do not

(a)

lead to standardisation or preferred methods;

(b)

create wrong incentives; or

(c)

cause herd behaviour.

The competent authority shall collect the information Benchmarking

disclosed in accordance with Article 435(2)(c) of the CRR and shall of

practices by the

use it to benchmark diversity practices. The competent authority shall competent

authority.

provide that information to the EBA.

(1) The competent authority shall, in accordance with General

Commission Implementing Regulation (EU) No 650/2014 of 4 June disclosures

the competent

2014 laying down implementing technical standards with regard to authority.

the format, structure, contents list and annual publication date of the

information to be disclosed by competent authorities in accordance

with Directive 2013/36/EU of the European Parliament and of the

Council, as amended from time to time, publish the following

information

(a) the texts of laws, regulations, administrative rules

and general guidance adopted in Malta in the field of prudential

regulation;

(b) the manner of exercise of the options and discretions

available in European Union law;

(c)

the general criteria and methodologies used in the

review and evaluation referred to in regulation 3;

(d) without prejudice to the provisions set out in Title

VII, Chapter 1, Section II of the CRD, aggregate statistical data

on key aspects of the implementation of the prudential

framework in Malta, including the number and nature of

supervisory measures taken in accordance with article 17E(1)(a)

of the Act, and of administrative penalties imposed in

accordance with regulation 4(1), (2) and (3) and regulation 5 of

the Administrative Penalties, Measures and Investigatory

Powers Regulations.

(2) In terms of Article 143 of the CRD, the information

published in accordance with sub-regulation (1) shall be sufficient to

enable a meaningful comparison of the approaches adopted by the

European regulatory authorities. The disclosures shall be published

following a common format and updated regularly. The disclosures

shall be accessible at a single electronic location.

(1) For the purpose of Part Five of the CRR, relating to Specific

exposures to transfer credit risk, the competent authority shall publish disclosures

the competent

the following information

authority.

(a)

the general criteria and methodologies adopted to

review compliance with Articles 405 to 409 of the CRR;

(b) without prejudice to the provisions laid down in

Title VII, Chapter 1, Section II of the CRD, a summary

description of the outcome of the supervisory review and

description of the measures imposed in cases of non-compliance

with Articles 405 to 409 of the CRR, identified on an annual

basis.

(2) If the competent authority exercises the discretion laid

down in Article 7(3) of the CRR, it shall publish the following

information

(a)

the criteria it applies to determine that there is no

current or foreseen material practical or legal impediment to the

prompt transfer of own funds or repayment of liabilities;

(b) the number of parent institutions which benefit from

the exercise of the discretion laid down in Article 7(3) of the

CRR and the number of those which incorporate subsidiaries in

a third country;

(c)

on an aggregate basis for Malta

(i) the total amount of own funds on the

consolidated basis of the parent institution in Malta, which

benefits from the exercise of the discretion laid down in

Article 7(3) of the CRR, which are held in subsidiaries in a

third country;

(ii) the percentage of total own funds on the

consolidated basis of parent institutions in Malta which

benefits from the exercise of the discretion laid down in

Article 7(3) of the CRR, represented by own funds which

are held in subsidiaries in a third country;

(iii) the percentage of total own funds required

under Article 92 of the CRR on the consolidated basis of

parent institutions in Malta, which benefits from the

exercise of the discretion laid down in Article 7(3) of the

CRR, represented by own funds which are held in

subsidiaries in a third country.

(3) If the competent authority exercises the discretion laid

down in Article 9(1) of the CRR, it shall publish the following

information

(a)

the criteria it applies to determine that there is no

current or foreseen material practical or legal impediment to the

prompt transfer of own funds or repayment of liabilities;

(b) the number of parent institutions which benefit from

the exercise of the discretion laid down in Article 9(1) of the

CRR and the number of such parent institutions which

incorporate subsidiaries in a third country;

(c)

on an aggregate basis for Malta

(i) the total amount of own funds of parent

institutions which benefit from the exercise of the

discretion laid down in Article 9(1) of the CRR which are

held in subsidiaries in a third country;

(ii) the percentage of total own funds of parent

institutions which benefit from the exercise of the

discretion laid down in Article 9(1) of the CRR

represented by own funds which are held in subsidiaries in

a third country;

(iii) the percentage of total own funds required

under Article 92 of the CRR of parent institutions which

benefit from the exercise of the discretion laid down in

Article 9(1) of the CRR represented by own funds which

are held in subsidiaries in a third country.

€0.72