Banking Act (Supervisory Review)

Suppliment tal-Gazzetta tal-Gvern ta’ Malta, Nru. 20,757, 24 ta’ Diċembru, 2021

L.N. 493 of 2021

BANKING ACT

(CAP. 371)

Banking Act (Supervisory Review)

(Amendment) Regulations, 2021

IN EXERCISE of the powers conferred by article 3 of the

Banking Act, the Minister for Finance and Employment, after

consultation with the Malta Financial Services Authority, has made

the following regulations:-

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

(Supervisory Review) (Amendment) Regulations, 2021, and these

regulations shall be read and construed as one with the Banking Act S.L. 371.16.

(Supervisory Review) Regulations, hereinafter referred to as "the

principal regulations".

(2) These regulations shall come into force on such date as the

Minister for Finance and Employment may, by notice in the Gazette

establish and a different date or dates may be so established for

different provisions of these regulations.

In sub-regulation (2) of regulation 1 of the principal Amends

regulations, for the words "104, 105, 107 and 110 of the CRD" there regulation

the principal

shall be substituted the words "104, 104a, 104b, 104c, 105, 107, 110, regulations.

143 and 144 of the CRD".

Regulation 2 of the principal regulations shall be amended Amends

regulation 2 of

as follows

the principal

regulations.

(a)

sub-regulation (1) thereof shall be amended as

follows

(i) in the definition "the CRD", for the words

"and the prudential supervision of credit institutions and

investment firms" there shall be substituted the words "and

the prudential supervision of credit institutions"; and for

the words "and includes any implementing measures that

may be made thereunder" there shall be substituted the

words "and includes any binding legal instruments,

guidelines and other measures that may be issued

thereunder";

(ii) in the definition "the CRR", for the words "on

prudential requirements for credit institutions and

investment firms" there shall be substituted the words "on

prudential requirements for credit institutions"; and for the

words "and includes any implementing measures" there

shall be substituted the words "and includes any binding

legal instruments, guidelines and other measures";

(iii) the definition "EU parent institution" shall be

deleted;

(iv) the definition "parent institution in Malta"

shall be deleted;

(v) immediately after the definition "internal

approach" there shall be added the following new

definitions

" "Regulation (EU) 2017/2402" means

Regulation (EU) 2017/2402 of the European

Parliament and of the Council of 12 December

2017 laying down a general framework for

securitisation and creating a specific framework for

simple, transparent and standardised securitisation,

and amending Directives 2009/65/EC, 2009/138/

EC and 2011/61/EU and Regulations (EC) No

1060/2009 and (EU) No 648/2012;

"Resolution

Committee"

means

the

committee responsible for resolution, as

established by the Malta Financial Services

Authority Act;"; and

(b) in sub-regulation (2) thereof, for the words "shall

have the same meaning as in the Act." there shall be substituted

the words "shall have the same meaning as in the Act:", and

immediately thereafter there shall be added the following two

provisos

"Provided that, in accordance with article 2(1A) of

the Act, for the purposes of applying the requirements and

supervisory powers laid down in these regulations on a

consolidated or sub-consolidated basis in accordance with

the Act and any regulations and Banking Rules made or

issued thereunder transposing the CRD, with any binding

legal instruments issued under the CRD and with the CRR,

the terms "institution", "parent institution" and "EU parent

institution" shall also include the entities listed in

paragraphs (a), (b) and (c) of article 2(1A) of the Act

Provided further that, for the purposes of applying

the requirements and supervisory powers laid down in

regulations 3(1), (3), (4) and (5), 4, 5, 6, 7(1), (2), (4) and

(5), 8, 9, 10, 13(2), 14, and 15(1), (2) and (3) on a

consolidated or sub-consolidated basis in accordance with

the Act and any regulations and Banking Rules made or

issued thereunder transposing the CRD, with any binding

legal instruments issued under the CRD and with the CRR,

the term "credit institution" shall also include the entities

listed in paragraphs (a), (b) and (c) of article 2(1B) of the

Act.".

Regulation 3 of the principal regulations shall be amended Amends

regulation 3 of

as follows

the principal

regulations.

(a)

in sub-regulation (1) thereof, for the words

"Banking Rules issued thereunder, and the CRR" there shall be

substituted the words "Banking Rules issued thereunder, with

any binding legal instruments issued under the CRD and with

the CRR,";

(b) in paragraph (a) of sub-regulation (1) thereof, for the

words "or might be exposed;" there shall be substituted the

words "or might be exposed; and";

(c)

paragraph (b) of sub-regulation (1) thereof shall be

deleted;

(d) in sub-regulation (2) thereof, for the words

"Banking Rules issued thereunder, and the CRR." there shall be

substituted the words "Banking Rules issued thereunder, of any

binding legal instruments issued under the CRD and of the

CRR.";

(e)

in sub-regulation (4) thereof, for the words "referred

to in regulation 5(2)." there shall be substituted the words

"referred to in regulation 5(2):"; and immediately thereafter

there shall be added the following new proviso

"Provided that when conducting the review and

evaluation referred to in sub-regulation (1), the competent

authority shall apply the principle of proportionality in

accordance with the criteria disclosed pursuant to

regulation 17(1)(c).";

(f)

immediately after the proviso to sub-regulation (4)

thereof, as added, there shall be added the following new sub-

regulation

"(4A) The competent authority may tailor the

methodologies for the application of the review and

evaluation referred to in sub-regulation (1) to take into

account credit institutions with a similar risk profile, such

as similar business models or geographical location of

exposures. Such tailored methodologies may include risk-

oriented benchmarks and quantitative indicators, shall

allow for due consideration of the specific risks that each

credit institution may be exposed to, and shall not affect

the institution-specific nature of measures imposed in

accordance with regulation 9

Provided that where the competent authority

uses tailored methodologies pursuant to this sub-

regulation, it shall notify the EBA.";

(g) in sub-regulation (5) thereof, for the words "the

competent authority shall inform EBA" there shall be

substituted the words "the competent authority shall inform the

EBA"; and

(h)

immediately after sub-regulation (5) thereof, there

shall be added the following new sub-regulation

"(6) Where a review, in particular the

evaluation of governance arrangements, the

business model, or the activities of a credit

institution, gives the competent authority

reasonable grounds to suspect that, in

connection with that credit institution, money

laundering or terrorist financing is being or has

been committed or attempted, or there is

increased risk thereof, the competent authority

shall immediately notify the EBA and the

Financial Intelligence Analysis Unit established

in terms of the Prevention of Money Laundering

Act. In the event of potential increased risk of

money laundering or terrorist financing, the

competent authority together with the Financial

Intelligence Analysis Unit shall conduct a joint

assessment. Such assessment shall be

immediately notified to the EBA. The

competent authority shall take, as appropriate

and without prejudice to the power of other

authorities to take any action or regulatory

measures available to them under any other

applicable law, measures in accordance with the

Act and any regulations made and Banking

Rules issued thereunder transposing the CRD

and with any binding legal instruments issued

under the CRD

Provided that this sub-regulation

shall be without prejudice to the obligations of

the competent authority arising out of any other

applicable legislation relating to the prevention

of money laundering and the funding of

terrorism.".

Regulation 4 of the principal regulations shall be amended Amends

regulation 4 of

as follows

the principal

regulations.

(a)

sub-regulation (1) thereof shall be amended as

follows

(i) paragraph (h) thereof shall be substituted by

the following

"(h) the geographical location of credit

institutions’ exposures; and"

(ii) paragraph (i) thereof shall be substituted by

the following

"(i) the business model of the credit

institution."; and

(iii) paragraph (j) thereof shall be deleted;

(b) sub-regulation (5) thereof shall be substituted by the

"(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

book activities

Provided that the supervisory powers shall be

exercised at least in the following cases

(a) where a credit institution’s economic

value of equity as referred to in Article 84(1) of the

CRD declines by more than 15% of its Tier 1

capital as a result of a sudden and unexpected

change in interest rates as set out in any of the six

supervisory shock scenarios applied to interest

rates;

(b) where a credit institution’s net interest

income as referred to in Article 84(1) of the CRD

experiences a large decline as a result of a sudden

and unexpected change in interest rates as set out in

any of the two supervisory shock scenarios applied

to interest rates

Provided further that, notwithstanding the

first proviso to this sub-regulation, the competent authority

shall not be obliged to exercise supervisory powers where

it considers, based on the review and evaluation referred to

in this sub-regulation, that the credit institution’s

management of interest rate risk arising from non-trading

book activities is adequate and that the credit institution is

not excessively exposed to interest rate risk arising from

non-trading book activities."; and

(c)

immediately after sub-regulation (5) thereof, as

substituted, there shall be added the following new sub-

regulation

"(5A) For the purposes of sub-regulation (5), the

term "supervisory powers" means the powers referred to in

regulation 9(1) or the power to specify modelling and

parametric assumptions, other than those identified by the

EBA pursuant to point (b) of paragraph 5a of Article 98 of

the CRD, to be reflected by credit institutions in their

calculation of the economic value of equity under Article

84(1) of the CRD.".

Sub-regulation (2) of regulation 5 of the principal Amends

regulation 5 of

regulations shall be amended as follows

the principal

regulations.

(a)

in paragraph (a) thereof, for the words "transposing

the requirements of the CRD, and of the CRR;" there shall be

substituted the words "transposing the requirements of the CRD,

of any binding legal instruments issued under the CRD and of

the CRR; and"; and

(b)

paragraph (b) thereof shall be deleted.

Regulation 8 of the principal regulations shall be deleted.

Deletion of

regulation 8 of

the principal

regulations.

Regulation 9 of the principal regulations shall be amended Amends

regulation 9 of

as follows

the principal

regulations.

(a)

sub-regulation (1) thereof shall be amended as

follows

(i) for the words "For the purposes of regulations

3, 4(4), 7(4), 8 and article 17E of the Act" there shall be

substituted the words "For the purposes of regulations 3,

4(4) and (5), and 7(4), and article 17E of the Act";

(ii) paragraph (a) thereof shall be substituted by

the following

"(a) to require credit institutions to have

additional own funds in excess of the requirements

set out in the CRR, under the conditions set out in

regulation 9A;";

(iii) in paragraph (c) thereof, for the words "to

present a plan" there shall be substituted the words "to

submit a plan"; and for the words "Banking Rules issued

thereunder, and to the CRR", there shall be substituted the

words "Banking Rules issued thereunder, with any binding

legal instruments issued under the CRD and with the

CRR";

(iv) in paragraph (e) thereof, for the words "of a

credit institution" there shall be substituted the words "of

the credit institution";

(v) in paragraph (f) thereof, immediately after the

words "of credit institutions" there shall be added the

words ", including outsourced activities";

(vi) paragraph (j) thereof shall be substituted by

the following

"(j) to impose additional or more frequent

reporting requirements, including reporting on own

funds, liquidity and leverage;";

(b) sub-regulation (2) thereof shall be substituted by the

following

"(2) For the purposes of sub-regulation (1)(j), the

competent authority shall only impose additional or more

frequent reporting requirements on credit institutions

where the relevant requirement is appropriate and

proportionate with regard to the purpose for which the

information is required and the information requested is

not duplicative

Provided that, for the purposes of article 17E

of the Act, and regulations 3 to 7, any additional

information that may be required from credit institutions

shall be deemed as duplicative where the same or

substantially the same information has already been

otherwise reported to the competent authority or may be

produced by the competent authority

Provided further that credit institutions shall

not be required to report additional information where the

competent authority has previously received it in a

different format or level of granularity and that different

format or granularity does not prevent the competent

authority from producing information of the same quality

and reliability as that produced on the basis of the

additional information that would be otherwise reported.";

and

(c)

sub-regulation (3) thereof shall be deleted.

Immediately after regulation 9 of the principal regulations, Adds new

regulations to

as amended, there shall be added the following new regulations

the principal

regulations.

(1) The additional own funds

"Additional

own funds

requirement referred to in regulation 9(1)(a)

requirement.

shall be imposed by the competent authority

where, on the basis of the reviews carried out in

accordance with regulations 3 and 7, it

determines any of the following situations for

an individual credit institution

(a)

the credit institution is

exposed to risks or elements of risk that

are not covered or not sufficiently

covered, as specified in sub-regulation

(2), by the own funds requirements set

out in Parts Three, Four and Seven of the

CRR and in Chapter 2 of Regulation

(EU) 2017/2402;

(b) the credit institution does not

meet the requirements set out in articles

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

of the CRR and it is unlikely that other

supervisory measures would be sufficient

to ensure that those requirements can be

met within an appropriate time-frame;

(c)

the adjustments referred to in

regulation 4(4) are deemed to be

insufficient to enable the credit

institution to sell or hedge out its

positions within a short period without

incurring material losses under normal

market conditions;

(d) the evaluation carried out in

accordance with regulation 7(4) reveals

that the non-compliance with the

requirements for the application of the

permitted approach will likely lead to

inadequate own funds requirements;

(e)

the

credit

institution

repeatedly fails to establish or maintain

an adequate level of additional own funds

to cover the guidance communicated in

accordance with regulation 9B(3);

(f)

other

institution-specific

situations deemed by the competent

authority to raise material supervisory

concerns

Provided that the competent

authority shall only impose the additional own

funds requirement referred to in regulation

9(1)(a) to cover the risks incurred by individual

credit institutions due to their activities,

including those reflecting the impact of certain

economic and market developments on the risk

profile of an individual credit institution.

(2)

For the purposes of sub-regulation

(1)(a), risks or elements of risk shall only be

considered as not covered or not sufficiently

covered by the own funds requirements set out

in Parts Three, Four and Seven of the CRR and

in Chapter 2 of Regulation (EU) 2017/2402

where the amounts, types and distribution of

capital considered adequate by the competent

authority, taking into account the supervisory

review of the assessment carried out by credit

institutions in accordance with article 17C of

the Act, are higher than the own funds

requirements set out in Parts Three, Four and

Seven of the CRR and in Chapter 2 of

Regulation (EU) 2017/2402.

(3)

For the purposes of sub-regulation

(2), the competent authority shall assess, taking

into account the risk profile of each individual

credit institution, the risks to which the credit

institution is exposed, including

(a)

institution-specific risks or

elements of such risks that are explicitly

excluded from or not explicitly addressed

by the own funds requirements set out in

Parts Three, Four and Seven of the CRR

and in Chapter 2 of Regulation (EU)

2017/2402;

(b) institution-specific risks or

elements of such risks likely to be

underestimated despite compliance with

the applicable requirements set out in

Parts Three, Four and Seven of the CRR

and in Chapter 2 of Regulation (EU)

2017/2402

Provided that, to the extent that risks

or elements of risk are subject to transitional

arrangements or grandfathering provisions laid

down in the Act and any regulations made and

Banking Rules issued thereunder transposing

the CRD, in any binding legal instruments

issued under the CRD or in the CRR, they shall

not be considered risks or elements of such risks

likely to be underestimated despite compliance

with the applicable requirements set out in Parts

Three, Four and Seven of the CRR and in

Chapter 2 of Regulation (EU) 2017/2402.

(4)

For the purposes of sub-regulation

(2), the capital considered adequate shall cover

all risks or elements of risks identified as

material pursuant to the assessment laid down in

sub-regulation (3) that are not covered or not

sufficiently covered by the own funds

requirements set out in Parts Three, Four and

Seven of the CRR and in Chapter 2 of

Regulation (EU) 2017/2402

Provided that interest rate risk

arising from non-trading book positions may be

considered material at least in the cases referred

to in regulation 4(5), unless the competent

authority, in performing the review and

evaluation, comes to the conclusion that the

credit institution’s management of interest rate

risk arising from non-trading book activities is

adequate and that the credit institution is not

excessively exposed to interest rate risk arising

from non-trading book activities.

(5)

Where additional own funds are

required to address risks other than the risk of

excessive leverage not sufficiently covered by

point (d) of Article 92(1) of the CRR, the

competent authority shall determine the level of

the additional own funds required under sub-

regulation (1)(a) as the difference between the

capital considered adequate pursuant to sub-

regulations (2) to (4) and the relevant own funds

requirements set out in Parts Three and Four of

the CRR and in Chapter 2 of Regulation (EU)

2017/2402

Provided that where additional own

funds are required to address the risk of

excessive leverage not sufficiently covered by

point (d) of Article 92(1) of the CRR, the

competent authority shall determine the level of

the additional own funds required under sub-

regulation (1)(a) as the difference between the

capital considered adequate pursuant to sub-

regulations (2) to (4) and the relevant own funds

requirements set out in Parts Three and Seven of

the CRR.

(6)

The credit institution shall meet the

additional own funds requirement imposed by

the competent authority under regulation 9(1)(a)

to address risks other than the risk of excessive

leverage with own funds that satisfy the

following conditions

(a)

at least three quarters of the

additional own funds requirement shall

be met with Tier 1 capital;

(b) at least three quarters of the

Tier 1 capital referred to in paragraph (a)

shall be composed of Common Equity

Tier 1 capital.

(7) The credit institution shall meet the

additional own funds requirement imposed by

the competent authority under regulation

9(1)(a) to address the risk of excessive

leverage with Tier 1 capital.

(8) By way of derogation from sub-

regulations (6) and (7), the competent authority

may require the credit institution to meet its

additional own funds requirement with a

higher portion of Tier 1 capital or Common

Equity Tier 1 capital, where necessary, and

having regard to the specific circumstances of

the credit institution.

(9)

Own funds that are used to meet the

additional own funds requirement referred to in

regulation 9(1)(a) imposed by the competent

authority to address risks other than the risk of

excessive leverage shall not be used to meet any

of the following

(a)

own funds requirements set

out in points (a), (b) and (c) of Article

92(1) of the CRR;

(b) the

combined

buffer

requirement;

(c)

the guidance on additional

own funds referred to in regulation 9B(3)

where that guidance addresses risks other

than the risk of excessive leverage.

(10) Own funds that are used to meet the

additional own funds requirement referred to in

regulation 9(1)(a) imposed by the competent

authority to address the risk of excessive

leverage not sufficiently covered by point (d) of

Article 92(1) of the CRR shall not be used to

meet any of the following

(a)

the own funds requirement set

out in point (d) of Article 92(1) of the

CRR;

(b) the leverage ratio buffer

requirement referred to in Article 92(1a)

of the CRR;

(c)

the guidance on additional

own funds referred to in regulation

9B(3), where that guidance addresses

risks of excessive leverage.

(11) The competent authority shall duly

justify in writing to the credit institution the

decision to impose an additional own funds

requirement under regulation 9(1)(a), at least by

giving a clear account of the full assessment of

the elements referred to in sub-regulations (1) to

(10). That justification shall include, in the case

set out in sub-regulation (1)(e), a specific

statement of the reasons for which the

imposition of guidance on additional own funds

is no longer considered sufficient.

(1) Pursuant to the strategies and

Guidance on

additional

processes referred to in article 17C of the Act,

own funds.

credit institutions shall set their internal capital

at an adequate level of own funds that is

sufficient to cover all the risks that a credit

institution is exposed to and to ensure that the

credit institution’s own funds can absorb

potential losses resulting from stress scenarios,

including those identified under the supervisory

stress test referred to in regulation 6.

(2)

The competent authority shall

regularly review the level of the internal capital

set by the credit institution in accordance with

sub-regulation (1) as part of the reviews and

evaluations performed in accordance with

regulations 3 and 7, including the results of the

stress tests referred to in regulation 6. Pursuant

to that review, the competent authority shall

determine for the credit institution the overall

level of own funds it considers appropriate.

(3)

The competent authority shall

communicate its guidance on additional own

funds to the credit institution. The guidance on

additional own funds shall be the own funds

exceeding the relevant amount of own funds

required pursuant to Parts Three, Four and

Seven of the CRR, Chapter 2 of Regulation

(EU) 2017/2402, regulation 9(1)(a) and Article

128(6) of the CRD or pursuant to Article 92(1a)

of the CRR, as relevant, which are needed to

reach the overall level of own funds considered

appropriate by the competent authority pursuant

to sub-regulation (2).

(4)

The competent authority’s guidance

on additional own funds pursuant to sub-

regulation (3) shall be institution-specific. The

guidance may cover risks addressed by the

additional own funds requirement imposed

pursuant to regulation 9(1)(a) only to the extent

that it covers aspects of those risks that are not

already covered under that requirement.

(5)

Own funds that are used to meet the

guidance

on

additional

own

funds

communicated in accordance with sub-

regulation (3) to address risks other than the risk

of excessive leverage shall not be used to meet

any of the following

(a)

the own funds requirements

set out in points (a), (b) and (c) of Article

92(1) of the CRR;

(b) the requirement laid down in

regulation 9A imposed by the competent

authority to address risks other than the

risk of excessive leverage and the

combined buffer requirement

Provided that own funds that are

used to meet the guidance on additional own

funds communicated in accordance with sub-

regulation (3) to address the risk of excessive

leverage shall not be used to meet the own funds

requirement set out in point (d) of Article 92(1)

of the CRR, the requirement laid down in

regulation 9A imposed by the competent

authority to address the risk of excessive

leverage and the leverage ratio buffer

requirement referred to in Article 92(1a) of the

CRR.

(6)

The failure to meet the guidance

referred to in sub-regulation (3) where a credit

institution meets the relevant own funds

requirements set out in Parts Three, Four and

Seven of the CRR and in Chapter 2 of

Regulation (EU) 2017/2402, the relevant

additional own funds requirement referred to in

regulation 9(1)(a) and, as relevant, the

combined buffer requirement or the leverage

ratio buffer requirement referred to in Article

92(1a) of the CRR shall not trigger the

restrictions referred to in Article 141 or 141b of

the CRD.

The competent authority shall notify

Cooperation

with

the Resolution Committee of the additional own

Resolution

Committee.

funds requirement imposed on credit

institutions pursuant to regulation 9(1)(a) and of

any guidance on additional own funds

communicated to credit institutions in

accordance with regulation 9B(3).".

Sub-regulation (1) of regulation 10 of the principal

regulations shall be amended as follows

(a)

in paragraph (c) thereof, for the words "in

accordance with regulation 3;" there shall be substituted the

words "in accordance with regulation 3."; and

(b)

paragraph (d) thereof shall be deleted.

Sub-regulation (1) of regulation 13 of the principal

regulations shall be substituted by the following

"(1) The competent authority shall collect the

information disclosed in accordance with the criteria for

disclosure established in points (g), (h), (i) and (k) of Article

450(1) of the CRR as well as the information provided by credit

institutions on the gender pay gap and shall use that information

to benchmark remuneration trends and practices. The competent

authority shall provide the EBA with such information.".

In paragraph (c) of sub-regulation (1) of regulation 17 of

the principal regulations, immediately after the words "referred to in

regulation 3" there shall be added the words "including the criteria for

applying the principle of proportionality as referred to in regulation

3(4)".

€0.72