FRSGlobal : Risk Analysis and Regulatory Reporting

Regulators in Belgium

Belgium has two regulatory bodies for the financial industry :

• The National Bank of Belgium (NBB)
• Financial Services and Markets Authority (FSMA)

FRSGlobal in Belgium

The financial crisis has created strong impetus for reforming the financial system. The Belgian banks responded to the vulnerabilities due to the crisis by undertaking a major structural reform process, paving the way for return to adequate and sustainable profitability.

In parallel to the formation of new European system of Financial Supervision (ESFS), the architecture of Belgium financial supervision changed from integrated model to the Twin Peaks model. This new bipolar supervisory model entered into force from 1 April 2011.

According to this model the central bank is responsible for micro- and macro-prudential supervision. And the Financial Services and Markets Authority (FSMA), formerly the Banking, Finance and Insurance Commission (CBFA) is in charge of the smooth operation of the markets and the protection of consumers of financial services.

The National Bank of Belgium have adopted risk centric approach and using stress testing as a prudential tool :

• To diagnose vulnerabilities due to various types of risks such as credit risk, market risk, and liquidity risk,
• To mitigate the risk and
• Assess the soundness in the financial system.

The harmonisation and standardisation efforts of the ESFS, emergence of new global regulatory reforms such as Solvency II, Basel III, IFRS etc. and use of new XBRL taxonomy have created immense challenges for Belgian banks and insurance companies.

Regulatory Environment — Belgium

Statutory

IFRS Scheme A Consolidated (FINREP)
The consolidated financial reporting framework (FINREP) developed by EBA (formerly CEBS), is based on International Financial Reporting Standards (IAS/IFRS). FINREP reporting in Belgium is only applicable on consolidated financial reporting level that an individual banking group has to provide to the National Bank of Belgium. The scope of consolidation of FINREP is based on reference to IAS/IFRS or the Capital Requirements Directive 2006/48/EC, as the national supervisory authority considers appropriate. Using XBRL as mode of filing returns is compulsory in Belgium. These reports are required to be submitted on monthly, quarterly, bi-annual, and annual basis.

Scheme B reporting
Scheme B is a set of reports collecting financial information for the National Bank of Belgium. It is also referred to as financial market reporting. It consists of returns that include information regarding balance sheet, off-balance sheet, and profits and losses account statements (Financial data reports) and a series of annexes to be submitted on annual basis.

Prudential

Basel II reporting
Our solution provides a sophisticated Basel II module with the ability to calculate the capital charge for market and credit risk as specified in Pillar I and Pillar II.

• Basel II Pillar 1 Reporting
  Basel II pillar 1 covers reports on capital adequacy, credit risk, group solvency details, market risk and large exposures based on the Standardised and Internal Rating Based (IRB) approaches.
• Basel II Pillar 2 Reporting
  Pillar 2 reporting is related to the control and the statute of the finance companies by Banking, Finance and Insurance Commission (CBFA), providing a structure of risk management and a level of stockholders' equity. These reports are based on risk management of interest rates related to liquidity and individual country specific concentration.

Statistical

Schema A
Banks that do not report on consolidated basis need to file Scheme A reporting. Schema A statistical reporting includes balance sheet information as well as P&L. Additionally, there are a number of breakdown reports which focus on specific items from the balance sheet or P&L. These reports include information on balance sheet breakdown per country, economic sector, currencies, maturities, notice periods, etc. Also included is reporting on specific topics like information relating to shareholders' equity, credit and deposit transactions, inter-bank transactions and securities.

ECB Reporting- MIR
MIR is interest-rate reporting by Monetary Financial Institutions (MFIs). The reports cover statistics on interest rates applied by MFIs to deposits and loans related to households and non-financial corporation’s residents in the Euro zone.

Central Corporate Credit Register (CCCR) Reporting
Central Corporate Credit Register Reporting includes monthly reports on credits granted crossing the threshold value of 25,000 Euros or more, or the equivalent in foreign currency. CKO2 is a new central IT system to be introduced in 2011, and represents a change in data that needs to be reported in frequency of reports by credit institutions, insurance companies, leasing companies and factoring companies.

Transactional

MIFID Reporting
MiFID (Market in Financial Instruments Directive) reporting is based on the EU Directive 2004/39/CE. It is delivered to the regulator on a daily basis. MIFID relates to the delivery of information about the details of trading to regulatory authorities, to help them fight financial crime including market abuse.

Our solution provides reports on transactions on financial instruments, counterparty information and market data required for MiFID reporting. For all non-ISIN futures and options, our solution supports the use of aII these alternative instrument identifier codes in MiFID reporting since September 2008. These reports include the assessment of the financial instruments which the institution keeps at the expense of its customers.

Balance of Payment Reporting (BoPR)
The National Bank of Belgium is responsible for balance of payments statistics. These reports constitute an important economic indicator which is included in the balance of payments for the euro area. They are an essential part of the national accounts, recording external elements that contribute to the formation of gross national income (GNI) and gross domestic product (GDP). These reports comprise statistics on all transactions or foreign payments between Belgian residents and non-residents.

What’s Coming Up — Belgium

Belgium has recently adopted a new supervisory architecture — the twin peaks model enforced on 1 April 2011. The responsibility of Prudential supervision of financial institutions lies with the NBB and that of surveillance of financial markets and the protection of users of financial services rest with the newly formed Financial Services and Market Authority (FSMA).

COREP

The EBA published a revision of its framework for Common Reporting (COREP rev3) based on CRD III amendments (Directive 2010/76/EU). This will be applicable as of the 31 December 2011.

FINREP

To further harmonise and reduce options in FINREP guidelines, the EBA decided to use the dirty price approach (including accrued interest) based on IFRS/ IAS for reporting financial instruments on the balance sheet affecting core and non-core templates. Following the EBA’s recommendations, the NBB decided to implement these revisions for reporting financial instruments from 30 June 2012.

Basel III

The National Bank of Belgium will implement Basel III rules as foreseen in the EU directive (LCR 2015). Current liquidity reporting in Belgium implemented as of January 2011 follows a similar methodology like Basel III LCR (Liquidity Coverage Ratio).

From CKO1 to CKO2
– new reporting requirement in Belgium from 1 June 2011

CKO2 is a new central IT system to be used by the Central Corporate Credit Register (CCCR) in order to:

• Allow the financial institutions to better assess risks when providing their financial services
• Help the Banking, Finance and Insurance Commission (CBFA) to control credit institutions by providing information on the risks they run
• Provide the National Bank of Belgium (NBB) with the data necessary to develop risk assessment tools aiming at giving additional information:
  • To the financial institutions on the risks they run
  • To the NBB for financial stability purposes and for credit risk assessment of the bank loans used by credit institutions as collateral of monetary policy operations
• Exchange data with European central credit registers, in accordance with the Memorandum of Understanding ratified by the governors of the European central banks.

The main driver behind the change from CKO1 to CKO2 is the ability to report and send consultation requests to the Central Corporate Credit Register (CCCR) directly over the network.

CKO2 represents a change in data that needs to be reported and in frequency of the reports (no simplified reporting regimes will exist under CKO2).Another important change is that CKO2 will not only apply to credit institutions and insurance companies, as is the case under CKO1, but also leasing companies and factoring companies will have to report to the CCCR under CKO2.

For more information on this new reporting requirement read the “From CKO1 to CKO2” data sheet »

CEBS change over to EBA

The European Banking Authority (EBA) came into effect from 1 January 2011 and took over the responsibilities of Committee of European Banking Supervisors (CEBS). EBA is responsible for safeguarding public values such as stability of the financial system, transparency of markets and financial products, protection of depositors and investors wealth.

Financial Reporting (FINREP)

The aim of FINREP has always been to harmonise the financial reporting within the member states to improve comparability. However after implementation it has become apparent that the large number of national discretions has prevented to reach this goal. With the announced adjusted guidelines, the member states are obliged to apply at least the balance sheet and P&L statement and can choose out of 23 additional templates to apply. However CEBS insists that on all templates that the national regulator adopts, no changes should be made to its meaning or appearance.

Further it asks the member states for a firm commitment that the FINREP reporting will be the only consolidated financial reporting that an individual banking group has to provide to the regulator. Also the scope of consolidation will need to be aligned with the CRD.

Common Reporting (COREP)

In general the adoption of the COREP templates has been more straightforward between the member states than FINREP. However there have been still numerous differences. Here CEBS intends to align this further medium term with clearer definitions and tuning of the COREP templates.

Large Exposures is included in the COREP framework with the revised guidelines. It will be applicable as of 1st of January 2011, but only move into a binding core reporting framework as of 31st December 2012.

Read our data sheet for more information on the Large Exposure Reporting requirements

Concentration risk

Draft guidelines have been published on a revision of the concentration risk reporting. The most notable change is that reporting on concentration risk within an individual risk type (intra-risk) is considered to be insufficient. It pleas for reporting based on risk interaction (inter-risk) and would be related to credit, market, operational and liquidity risks.

Read the comment piece “CEBS pushes forward with reporting harmonisation agenda” for more information on the new requirements and their impact on financial institutions »

CEBS stress testing

Read the comment piece "CEBS stress testing" which looks at the results of the CEBS EU-wide stress testing exercise of July 2010, compares them with the previous US and UK FSA stress testing results, and looks at what the market can glean from them »

Liquidity Risk Management

With lessons learnt from the recent liquidity crunch, banks are going beyond simple static financial ratios and gap reports as measures of liquidity risk management. Recent efforts by the European Banking Authority – EBA (formerly Committee of European Banking Supervisors- CEBS), the Basel Committee on Banking Supervision (BCBS) and the UK FSA, in terms of principles and recommendations have set greater emphasis on liquidity risk management.

Since the BCBS issued its final paper, ‘Principles for Sound Liquidity Risk Management and Supervision’, banks have been adopting liquidity stress testing scenarios to simulate bank-specific and system risks to their balance sheets.

By modelling their liquidity contingency plans against such scenarios, the measure of a bank’s cash-flow survival horizon can be derived, giving a statement of the effectiveness of its plan against such crisis.

The Basel Committee in its recommendation outlined new prudential supervisory framework of liquidity with introduction of two regulatory ratios

The Basel Committee on Banking Supervision (BCBS) has proposed two regulatory ratios (Liquidity Coverage Ratio and Net Stable Funding Ratio) for liquidity risk for achieving two separate but complementary objectives.

Once the CRD IV proposals concerning liquidity reforms are finalised, the National Bank of Belgium aims to implement the Basel III capital adequacy and liquidity norms into its national regulation.

As preparations toward implementing Basel III as a regulatory reform from January 2011, a new regulatory ratio - liquidity stress test ratio has become a binding regulation for Belgian credit institutions. This new ratio is designed to promote short-term resilience of a bank’s liquidity profile by ensuring that it has sufficient high-quality liquid assets in a severe liquidity stress scenario.

The Basel III framework also comprises a Net Stable Funding Ratio (NSFR), which is designed to limit the long-term differences between non liquid assets and the potential absorption of liquidity relating to off-balance-sheet activities.

It is expected that until 2015, no internationally harmonised liquidity requirements will formally be applied. However prior to that time, from 2012 onward internationally agreed liquidity ratios; the Liquidity Coverage Ratio and possibly later the Net Stable Funding Ratio – will be reported on a standard basis for observation purposes.

With our solution and experts keeping eye on global regulatory change, banks need not worry about the changes in reporting requirements.

Solvency II

Solvency II, a fundamental and wide-ranging review of the capital adequacy regime for the European insurance industry, aims to strengthen prudential regulation and improve policyholder protection.

January 1, 2013, is the expected global implementation date when all member states of the European Union (EU) will be obliged to implement Solvency II.

The project initiated by the European Commission as an advancement to Solvency I aims to enhance a revised set of EU-wide capital requirements and risk management standards.

The objective of the new system is to introduce more sophisticated solvency requirements for insurers, to guarantee that they have sufficient capital to withstand adverse events, such as floods, storms or big car accidents and offer some protection against systemic economic failures.

Currently, EU solvency requirements cover insurance risks, whereas in future insurers would be required to hold capital also against market risk (e.g. a fall in the value of an insurer's investments), credit risk (e.g. when debt obligations are not met) and operational risk (e.g. malpractice or system failure). This will help to increase their financial soundness with implementation of sound economic risk management practices in insurance industry.

With the demand for a more streamlined approach towards supervision, the Directive would enable insurance groups to be supervised more efficiently, through a College of Supervisors appointed among the supervisory authorities in the home country that would have specific responsibilities to be exercised in close cooperation with the relevant national supervisors.

The group supervisor would ensure that group-wide risks are not overlooked and would enable groups to operate more efficiently, while providing policyholders with a high level of protection. Groups that are sufficiently diversified may also be allowed to lower their capital requirements under certain conditions.

The Directive often referred as Basel II for insurers is based on a three pillar approach which is similar to the banking sector (Basel II) but adapted for insurance. The three Pillars of this new regime are structured as below:

The new provisions of Solvency II will be adopted under the Lamfalussy process:

In January 2011 the Omnibus II Directive proposed changes aligning the level 1 text with the Lisbon Treaty and amending the text to reflect the EU’s new supervisory structure

Level 1 – The European Commission adopts formal proposal for the directive (regime’s main outline and high level standards) approved by the European Parliament and the European Council.

Level 2 – Includes introduction of delegated acts developed by the European Commission. The European Commission is advised by the European Insurance and Occupational Pensions Authority, EIOPA (formerly Committee of European Insurance and Occupational Pension Supervision)- representing all insurance supervisors throughout the EEA.

Level 3 – The EIOPA adopts guidelines and recommendations, carries out peer review, mediates and settles agreements, takes action in emergency situations, facilitates delegation of tasks and responsibilities, monitors and assesses market developments, undertakes economic analyses and fosters investor protection.

Level 4 – Enforcement of European Union law (EIOPA and European Commission). The Commission ensures all member states have implemented the legislation correctly.

Maximum harmonisation is assumed with the new Solvency II framework Directive. This means European rules will be implemented in all countries of the European Economic Area (i.e. the EU including Iceland, Liechtenstein and Norway). The EIOPA has recommended Bermuda, Switzerland and Japan to be the first countries assessed for equivalence with EU insurance regulations under Solvency II. This will facilitate the preservation of a level playing field in Europe, with equal protection of all policyholders within Europe and equivalent jurisdictions.

The new Solvency II requirements with challenges and opportunities ahead will be more risk-sensitive and more sophisticated than in the past, thus enabling a better coverage of the real risks run by any particular insurer.

Insurance companies in Europe have already started their implementation processes and self assessments before the final directive comes into force. Through this exercise and by using the results of QIS 5 companies aim to analyse the factors driving the capital requirements, judge current arrangements and assess Solvency Capital Requirements (SCR).

The Belgian insurance industry is currently working toward implementing Solvency II which is expected to come in force by 2013. The QIS 5 study highlighted interesting results and scope for improvements before migrating from Solvency I to Solvency II — the new risk centric regime. As a proactive measure the NBB is continuously assessing the implications of Solvency II on insurance companies.

Our Solvency reporting solution is equipped with actual report formats that meet the data and compliance requirements of the EIOPA and the European Commission.