On the 24th November 2020, Central Bank of Cyprus (‘CBC’), acting as the macroprudential authority of Cyprus has notified all Cypriot Investment Firms (‘CIFs’) about the latest decision to set the Countercyclical Capital Buffer (‘CCyB’) rate at 0% on risk exposure amount on exposures in Cyprus for the period 1 January 2021 to 31 March 2021. CBC sets CCyB on a quarterly basis since its introduction on 1 January 2016.
The Macroprudential Oversight of Institutions Law of 2015 (Law 6(1) of 2015) (the ‘Macroprudential Law’) grants the power to the CBC to implement a macro-prudential strategy for safeguarding the stability of the financial system in order to ensure that the CIFs accumulate sufficient capital, during economic growth and to absorb losses during stressed periods.
As part of the CBC’s macro-prudential strategy all Full Scope CIFs (i.e. initial capital of EUR730k) are obliged to maintain the institution-specific CCyB which is equivalent to total risk exposure amount (Banking Book & Trading Book), calculated in accordance with Article 92 of Regulation (EU) No 575/2013 (‘CRR’) multiplied by the weighted average of the countercyclical buffer rates as per the provision of paragraph 53 of Directive DI144-2014-14 (‘Directive’). According to section 5(2) of the Macroprudential Law, CBC has the power to exempt small and medium sized CIFs from the said obligation. However, CBC after its latest assessment has decided not to exempt small and medium sized CIFs with immediate effect.Therefore, all Full Scope CIFs are obliged to maintain an institution specific CCyB.
The following map shows current CCyB rates set in Europe:
*Source: European Systemic Risk Board
**the only non-European country with non-zero CCyB is Hong Kong (Current CCyB is 1%)
Beside the CCyB, Directive 2013/36/EU (‘CRD’) sets as combined buffer requirement, the total Common Equity Tier 1 capital required to meet the requirement for the capital conservation buffer extended by the following, as applicable:
Capital Conservation buffer (‘CCB’)
The aim of the CCB is to ensure that banks have an additional layer of usable capital that can be drawn down when losses are incurred. In accordance to Paragraph 52 of the Directive, Full Scope CIFs are also obligated to maintain CCB of 2.50% into the capital adequacy calculations (both solo and consolidated).
Other Systemically Important Institutions (‘O-SII’) buffer
Member States must identify O-SIIs, which have been authorised within their jurisdiction and require each O-SIIs, on a consolidated or sub-consolidated or individual basis, as applicable, to maintain an O-SII buffer of up to 2% of the total risk exposure amount calculated in accordance with Article 92(3) of CRR. This buffer consists of and is supplementary to Common Equity Tier 1 capital. CBC works together with CySEC to identify O-SIIs CIFs. CySEC, as the supervisory authority of CIFs, will monitor the application of O-SII buffer by CIFs classified as O-SIIs.
Investment Firms Regulation (‘IFR’) and Investment Firms Directive (‘IFD’)
The introduction of the new prudential framework will make significant alterations to the prudential framework governing investment firms. On December 5, 2019, the IFR and the IFD were published in the Official Journal of the European Union (OJ). The IFR becomes directly applicable in Member States 18 months following its entry into force (June 26, 2021).
The IFR will require only large investment firms meeting the conditions of systemically important firms, which will be reclassified as a credit institution under the CRD IV and CRR, to meet the combined buffer requirement. Also, large investment firms that are not systemic important but whose size and activities present some risks to financial stability will be also be obliged to maintain the aforementioned requirements. These large investment firms will be classified as Class 1 Investment Firms (see our IFR/IFD Article for further details about the new classification system) subject to the CRR and CRD IV requirements but will not be required to be reauthorized as a credit institution.
According to EBA Roadmap on Investment Firms, the EBA mandates cover a broad range of areas related to the prudential treatment of investment firms. These include 18 regulatory technical standards (‘RTS’), 3 implementing technical standards (‘ITS’), 6 sets of guidelines, 2 reports, the requirement for the EBA to maintain a list of capital instruments and a database of administrative sanctions, and a number of notifications in various areas. The EBA will have to submit to the Commission the draft ITS on reporting and on disclosure of own funds by 26 December 2020 and the draft RTS on disclosure of investment policy by 26 June 2021.