FRSGlobal : Risk Analysis and Regulatory Reporting

Regulators in Ireland

The Irish financial sector is supervised by :

• Central Bank of Ireland (CBoI)

FRSGlobal in Ireland

The economy in Ireland has been hit hard by the global ‘credit crunch’, which has led to a demand for tighter regulation of banks around the world.

Following the financial crisis there have been huge shifts in the way the entire industry is regulated and whilst the economy continues to struggle, regulation is not going to go away, if anything it will become more stringent.

One of the big changes being faced by Ireland is the increasing number of regulatory changes and risk management initiatives that are being introduced by the Regulator. Such changes have been high on the regulatory agenda where the opportunity has been taken to streamline the reporting forms and bring them in line with best international standards and the changes to the ECB regulations.

These changes included the introduction of 30+ new templates/formats which will significantly augment Irish financial firms’ current reporting methodologies.

New reporting schemas are in the process of regular modification, with the regulator: new templates have been added to the reports together with revisions to the Large Exposures Return and the possibility of XML delivery for certain statistical returns.

Such modifications place continual pressure on regulatory reporting divisions of financial institutions to provide adequate returns in a timely fashion.

Moving forward, Ireland has to cope with significant pains from the recent bail out. Economic recovery is likely to be slow but will be assisted by a sound banking system and a Central Bank regime characterised by attentive, assertive supervision.

Regulatory Environment — Ireland

Statutory

Financial reporting (FINREP)
Credit institutions preparing their accounts under international accounting standards (IAS/IFRS) are required to submit core FINREP templates comprising of income statement and balance sheet, and Tables 3 and 8 on derivatives, and Table 36 on loan and other commitments, on a quarterly basis. Credit institutions preparing their accounts based on Irish GAAP are also required to submit core FINREP templates on quarterly basis.

Impairment provisions for credit exposures and information on non-performing assets
Credit institutions preparing their accounts under IFRS are required to submit reports as set out in the regulation on Impairment Provisions for Credit on a quarterly basis. In addition, quarterly reports on non-performing assets are also collected from all credit institutions.

Deposit protection returns
These returns include detail information on central government deposits, non-government deposits, and deposits held by subsidiaries etc. to be submitted on quarterly basis.

Prudential

Capital adequacy reporting (COREP)
Ireland has adopted the Common Reporting (COREP) based on the Capital Requirements Directive (CRD) for its prudential supervision of credit institutions. Credit institutions are required submit core COREP templates on quarterly basis while noncore templates are required to be submitted on demand basis. These reports cover information on capital requirements and calculation of credit risk, market risk and operational risk based on standardised and IRB approaches.

Large exposures reporting
Credit institutions are required to submit quarterly information on large exposures (exposures greater than 10% of own funds) on solo and consolidated basis. These reports are based on the guidelines set by the EBA in relation to large exposures reporting pursuant to the EU directive 2009/111/EC (CRD II).

Liquidity reporting
These reports are collected by the regulator as a measure to monitor and control the maturity mismatches between assets and liabilities. Credit institutions are required to submit information on liquid assets, cash inflows, cash outflows, and maturity mismatch and liquidity ratios with varying frequencies as specified by the financial regulator. Related party lending These reports are concerned with information on related party lending exceeding 1 Million Euro to be submitted on periodic basis.

Statistical

Banking statistics
These reports include information on Interest Rate return (IRM), Income and expenses (AIE), Commercial Papers (CPP) as required by the Central Bank of Ireland to be submitted on monthly basis. Additional reports on holdings of Irish government stocks & exchequer notes (INV), statistics of currencies (CRT) are also collected by the Central Bank of Ireland on quarterly basis.

Residential Office Return (RS1)
RS1 reporting covers information on balance sheet overview, reserve requirements calculation, market value and transactions of selected assets , amortizations of loans, securitization activities etc. These reports are required to be submitted to the Central Bank of Ireland on monthly basis.

Reclassification Adjustment (RC1)
These reports are collected by the Central Bank of Ireland on monthly as well as quarterly basis. The RC1 monthly reporting covers balance sheet reclassification for Irish residents as well as for other monetary union member state that have resident and securitisations activities. The RC1 quarterly reports cover the reclassification of Interest rate reset (IRC) and the selected liabilities and assets (IPC).

Revaluation Adjustment (RV1)
These reports include information on revaluation adjustments (REV) to be submitted to the central bank on monthly basis. In addition it also includes quarterly returns on revaluation adjustment for Government Credit (REG) and securitisation - write downs at time of loan transfer (SER).

Transactional

MIFID
Credit institutions have an obligation to report certain transactions in financial instruments to the Central Bank of Ireland under Section 112 of the European Communities (Markets in Financial Instruments) Regulations, 2007 (S.I. No. 60 of 2007) (as amended).

Survey of Credit Institutions (CRS1)
The Survey of Credit Institutions is designed to give a summary of all transactions of the Credit institutions. All credit institutions resident in Ireland are required to submit their balance sheet positions as a part of this survey.

What’s Coming Up — Ireland

Large Exposure reporting

The Central bank of Ireland incorporated the new large exposures regime into their national regulation. These revised guidelines developed by the EBA relating to large exposures pursuant to EU directive 2009/111/EC (CRD II amendments) were applicable from 31 December 2010. The existing large exposures reports (LEX) were replaced by the new EBA reports wherein major changes included amendments to large exposure limits, exemptions, reporting and collateral rules.

From 31 December 2012, large exposure reporting will be included in the COREP framework. Current submission of these templates is done manually via the Online Reporting System. Currently, no automatic file upload exits for the large exposures return. Rather than provide a file upload solution in the interim, the Central Bank plans to adopt the EBA designed file upload solution in 2013.

Liquidity

Against the backdrop of substantial funding losses in the domestic banking system as debt instruments failed to roll and deposits were withdrawn, the Central Bank introduced the Prudential Liquidity Assessment Review (PLAR) in 2010 to set Irish financial institutions on a path to a more sustainable funding and liquidity position.

The Prudential Liquidity Assessment Review (“PLAR”) regime establishes a package of liquidity metrics including a Net Stability Funding Ratio (“NFSR”) and Liquidity Cover Ratio (“LCR”) in line with proposals by Basel III. This necessitates balance sheet deleveraging via asset disposal and run-off of non-core portfolios. Additionally, PLAR will establish a new liquidity governance regime providing enhanced monitoring and liquidity standards, taking all CRD changes into account. The Central Bank has set each bank a target NSFR for end-2013, and interim half-yearly targets during 2011 to 2013. These will ensure that convergence to Basel III standards occurs by January 2018.

Solvency II

From latest updates it seems that many of the provisions of the Solvency II regime would come into force from 1 January 2014. But the Central Bank of Ireland is still advising banks and insurance companies to work to a submission date of 1 January 2013 for S II balance sheet and SCR. The Central Bank of Ireland is adopting all common templates as developed by EIOPA for all forms.

Narrative Reporting Templates:

• Regular Supervisory Report (RSR)
• Solvency & Financial Conditional Report (SFCR)

Quantitative Reporting Templates:

• Balance Sheet (3 forms)
• Assets (7 forms)
• Technical Provisions (15 forms)
• Reinsurance (4 forms)
• Capital Requirements (12 forms)
• Own Funds (2 forms)
• Variation Analysis and Miscellaneous (3 forms)
• Group Specific Templates (15 forms)

On 22 July 2011, the EIOPA launched a technical consultation on Solvency II XBRL Taxonomy. The responses and feedback from interested parties are open till 7 September 2011. The objective of this technical consultation is to receive information for quality assurance of XBRL taxonomy, identify and mitigate implementation risks (resources, cost, time, etc.) and to investigate mechanisms for XBRL taxonomy maintenance.

To develop supervisory approach towards credit risk standards, the Central Bank of Ireland intends to review the credit risk standards including valuations and credit limits. A discrete paper on the proposals suggested by the Central Bank is expected to be published sometime in 2011.

The central bank intends to review the valuation standards for collateral as this is particularly relevant to mortgages and commercial real estate loans.

In addition, the Central Bank aims to review the potential for credit limits to be applied as a macro-prudential measure. The position on credit limits is expected to be finalised and published in Q3 2011, with an implementation timeline of 2011 end.

BASEL III

The financial crisis has brought risk and regulatory issues into sharper focus and as such regulators around the world are attempting to introduce banking reform to prevent a reoccurrence. In a bid to strengthen regulation, the Basel Committee on Banking Supervision has produced a third Basel Accord. Basel III represents a significant tightening of the regulatory rules and will impact almost every business model throughout the financial sector.

The main issues:

• Capital - Capital structure undergoes significant reform: the constituents of Tier 1 and Tier 2 capital have been redefined to enhance its loss absorbing properties as well as the abolition of Tier 3; the amount of capital that needs to be held has increased; and there are notable new deductions from capital.



• Liquidity standards – in addition to the 2008 paper, Principles for Sound Liquidity Risk Management and Supervision, Basel III aims to establish a single global framework to measure and monitor liquidity including the new Liquidity Coverage Ratio (LCR) and Net Stable Funding Ration (NSFR)



• Capital buffers – Conservation buffers are to be held by institutions to protect against future severe shocks. Firms also need to hold a countercyclical buffer to make them more resilient to a possible collapse of the banking sector



• Leverage ratio - the new Leverage Ratio is to supplement risk based capital requirements in order to achieve a globally comparable measure and safeguard against model risk and measurement error. A 3% ratio was considered during the calibration period



• Risk coverage – there is a major overhaul for risk coverage in the following areas: capital requirements for trading book and complex securitisation; counterparty credit risk; and raised pillar 2 and 3 standards

The countdown to compliance has begun as Basel III is first incorporated into national law on 1 January 2013. With extra capital requirements and further reporting demands amongst other entailments, it is no surprise that Finance, Risk and Treasury departments are starting to feel the pressure. Basel III calls for a more holistic approach across the whole of the banking industry and means a complete change in risk and regulatory culture but the main question is: when will you be ready?

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.

To set Irish financial institutions on a path to a more sustainable funding and liquidity position, the Central Bank of Ireland initiated the Prudential Liquidity Assessment Review (PLAR) in 2010. The Review programme aims to encourage the convergence to Basel III liquidity standards by the relevant dates.

To enhance monitoring and liquidity standards, the Central Bank of Ireland has set three key target funding ratios with the first phase of PLAR being completed in March 2011

• The Loan to Deposit ratio (LDR)
• The Net Stable Funding Ratio (NSFR)
• The Liquidity Coverage Ratio (LCR)

With this review the central bank aims to impose loan to deposit ratio targets by 2013, establish a reporting and monitoring framework and ensure financial stability.

Solvency II

Download the Data Sheet which describes the full details of the FRSGlobal Solvency II solution » (362.63 kB)

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).

Recent media coverage states that the provisions of the Solvency II regime would come into force on January 1, 2014. As this proposal has not yet been finalised by the European Council or the European Parliament, the Central Bank of Ireland (CBoI) has encouraged insurance undertakings to continue their preparation toward the implementation of Solvency II on January 1, 2013.

The most important part of Solvency II implementation is the usage of the internal models approach for calculation of Solvency Capital Requirement (SCR). Currently, a large number of firms are at the walkthrough phase of the internal model pre-application stage.

The Central Bank of Ireland has started its quarterly issue on Solvency II matters which informs the industry about the latest happenings and updates from the EIOPA. Our Solvency reporting solution is equipped with actual report formats that meet the data and compliance requirements of the EIOPA and the European Commission.

New statistical reporting requirements for Ireland

As a member of the European System of Central Banks this organisation works closely with the ECB.

The Central Bank and Financial Services Authority of Ireland has recently introduced new regulatory changes that require firms to restructure their regulatory reporting processes to meet a June deadline - Regulation (EC) No 25/2009.

Firms face a change in reporting - all available as part of the FRSGlobal statistical reporting solution: download solution sheet here »

New reporting schemes, replacing existing ones:

• The Resident Offices return (RS1.)
• The Revaluations Adjustments from (RV1) will replace the FLO format of the FLW return.
• The Reclassifications Adjustments from (RC1) will replace and formalise the REC format of the FLW return.
• The Statistics on Interest Rates return (IRM2) will replace the existing IRM return.
• Introduction of online reporting through a web-based interface.

Customers who adopt the FRSGlobal solution which has been designed to address the new changes will be indemnified from future modifications made to the new returns by means of the FRSGlobal Regulatory Update Service. This keeps the reports our customers subscribe to up to date and in line with the regulator’s requirements. It is a unique feature from FRSGlobal which provides significant value and benefit to the user.

Read the Press Release:
15 Irish financial institutions select FRSGlobal RegPro to meet CBFSAI's statistical regulatory reporting overhaul - regulatory data dictionary published ahead of 2010 deadlines »
Many Irish banks already use RegPro for regulatory reporting and are busy preparing to produce the new reports from the FRSGlobal system. The FRSGlobal data dictionary will benefit 'new' users by giving them a 'head-start' in preparing the interfaces from the source data ahead of a new FRSGlobal implementation.

Read the Regulatory Update:
Central Bank and Financial Services Authority of Ireland »

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