Banking Rules Reform – What’s in the Pipeline?
APRIL 06, 2021

The Banking Supervision function is currently working on reviewing and updating a number of Banking Rules. As highlighted above, several changes are being carried out to Banking Rules in particular to reflect and transpose some of the provisions of the CRDV.

Moreover, some Banking Rules are being completely revamped mainly in order to reflect any regulatory developments which would have taken place at EU level. An overview of the main Banking Rules which will be revised and possibly published during 2021 is provided below.

BR/09 – Non-Performing Loans (NPLs)

The MFSA has been very proactive in the context of addressing risks arising from Non-Performing Loans (NPLs). In fact, the Banking Rule BR/09 has served as a good tool for banks and the Authority to manage and supervise the level of NPLs in the Maltese banking system. This has also contributed to maintaining NPL levels under control. However, the BR/09 will be amended in order to, inter alia, implement the EBA Guidelines on the management of non-performing and forborne exposures (EBA/GL/2018/06).

Banks are expected to ensure they are in line with such EBA Guidelines. Banks are expected to reduce their levels of NPEs and effectively manage the NPEs and forborne exposures (FBEs). In this respect, the NPL threshold currently provided for in the BR/09 will also be aligned with the ratio set in EBA Guidelines. Thus, banks with a gross NPE ratio of 5% or above, will be required to develop and operationalise an NPE strategy as part of the overall bank’s strategy to target NPE reduction over a set period of time.

The Rule will also lay down the requirements in relation to the governance structure and operational set-up for addressing NPEs and FBEs. This will also be supplemented with further requirements in relation to NPE recognition, NPE impairment and write-offs. Other important elements that will be incorporated in the BR/09 include requirements with respect to collateral valuation of immovable and movable property such as the respective governance, procedures and controls, valuation methodology, IT database requirements, etc.

BR/12 - SREP

The Banking Rule on the Supervisory Review and Evaluation Process will also be revamped primarily in order to cater for the implementation, where relevant, of the EBA Guidelines on common procedures and methodologies for the supervisory review and evaluation process (SREP) and supervisory stress testing (EBA/GL/2018/03). In this respect banks are required to ensure that they are in line with the provisions of the EBA Guidelines with respect to the four different elements of SREP.

In general, banks must ensure that a) the business model of the bank is viable and sustainable, b) the governance structure and internal control framework of the bank is adequate to the risk profile of the bank, c) the bank adequately identifies the risks that it is exposed to and maintains the necessary amount of capital, and d) the bank adequately identifies its risks in relation to liquidity and funding and ensures that it has the appropriate levels of liquidity and funding resources. Thus, banks need to ensure that they have in place an adequate overall risk management and governance framework relative to their risk profile.

New BR on Internal Governance

During 2021, it is envisaged that a new Banking Rule will be published on Internal Governance. The main purpose of this Rule is to transpose relevant provisions of the CRD and to fully implement the EBA Guidelines on Internal Governance (EBA/GL/2017/11).

In this respect, the Rule will lay down the requirements related to the role and composition of the Boards and committees as well as highlighting the directors’ responsibility for the implementation of governance arrangements in order to ensure effective and prudent management.

The Rule will set out the requirements to be fulfilled by banks and their Boards on the organisational framework and structure of the bank as well as the risk culture and the business conduct principles and corporate values. From an operational perspective, the Rule will also provide detail on the policies and procedures that need to be in place. Banks shall develop and maintain a robust and comprehensive internal control framework, within which all business lines shall be responsible for managing their risks. On this basis, the Rule will prescribe requirements in relation to the internal control framework and control functions. The Rule will also provide for the establishment, role and requirements of the risk management function, the compliance function, and the internal audit function which form part of the internal control framework.