27 February 2023

EBA publishes a no-action letter on the boundary between the banking book and the trading book provisions

The European Banking Authority (EBA) today published a no-action letter stating that competent authorities should not prioritise any supervisory or enforcement action in relation to the new banking book – trading book boundary provisions.

The amendments to the Capital Requirements Regulation (CRR2) introduced certain elements of the Basel standards on the trading book / non-trading book boundary framework, which will enter into application as of 28 June 2023.

As part of the on-going legislative process amending the CRR2, both the Council and the Parliament, in their respective positions, proposed to postpone the application date of the boundary provisions to 1st of January 2025. However, the legislators’ effort to postpone the application date of the boundary provisions is void if the legislative process ends after 28 June 2023.

The front-loaded application of the boundary provisions compared to the rest of the Fundamental Review of the Trading Book (FRTB) framework creates several significant operational issues:

• First, institutions would be subject to an operationally complex and fragmented two-step implementation of the boundary framework.
• Second, they would be subject to an operationally burdensome and costly fragmented application of the rules for the reclassification of positions and internal-risk transfer between the trading and non-trading books.
• Third, there are no jurisdictions at global level that envisaged such a two-step implementation of the boundary and internal-risk transfer frameworks. This would de-facto lead global institutions to be subject to very different regulatory requirements depending on where the risk management is performed, leading to fragmentation in the regulatory framework and, hence, in the financial markets, as well as potential unlevel playing field issues.

Considering the positions recently adopted by the legislators, and to alleviate the operational burden that institutions would face with such a two-step implementation, the EBA published today an opinion stating that competent authorities should not prioritise any supervisory or enforcement action in relation to the new banking book – trading book boundary provisions.

EBA

© EBA