Greg Kilminster
Head of Product - Content
EBA publishes key stress test information
The European Banking Authority (EBA) has unveiled its final methodology, draft templates, and key dates for the upcoming 2025 EU-wide stress test. Designed to assess the resilience of banks under challenging economic conditions, this exercise will formally launch in January 2025, with results expected by August.
Some context
Stress tests are conducted to evaluate how banks might withstand adverse economic scenarios and to reinforce stability within the financial system. The EBA’s 2025 stress test marks a pivotal exercise amid ongoing regulatory changes, notably the upcoming revisions under the Capital Requirements Regulation (CRR3) and the Capital Requirements Directive (CRD VI). These tests are a key tool for identifying vulnerabilities in the banking sector, ensuring supervisory bodies have a clear picture of potential risks, and enabling greater transparency within the market.
In line with recent practices, the 2025 stress test will employ a “constrained bottom-up” methodology. This approach allows banks to use their own data models to project risk outcomes but requires them to adhere to specific parameters and centralised instructions, particularly regarding the projected impact of adverse shocks on their balance sheets and capital positions. This mixed approach seeks to balance detailed, bank-specific insights with standardisation that enables cross-bank comparison.
Key takeaways
The EBA's methodology for the 2025 stress test introduces several distinctive elements:
- Constrained bottom-up approach: The test allows banks to model risk impacts on a bottom-up basis while observing centrally defined parameters. This method aligns bank-specific data with standardised assumptions, promoting consistency across submissions.
- Focus on adverse scenarios: The primary purpose of the test is to evaluate how banks would perform under stressed economic conditions. Scenarios will include baseline projections and adverse conditions, examining effects on credit, market, counterparty, and operational risks.
- Key income projections: Banks will forecast how adverse scenarios would affect main revenue streams. Net interest income, a critical indicator of financial health, will be standardised, with projections set centrally. For net fee, commission income, securitisation risk weights, and sovereign credit losses, banks will follow predefined parameters to ensure accuracy and comparability.
- Timeline adjustments: Responding to industry feedback, the EBA has extended certain deadlines to give banks additional preparation time. Key dates include the initial launch in January, with a first round of submissions due by April, a second by June, and final submissions by July 2025. Results will be published in August, allowing regulators and market participants to assess bank resilience during the late summer.
Next steps
Banks across the EU are advised to review the methodology and draft templates, which, while close to final, may undergo minor adjustments before January’s formal launch. The EBA’s decision to publish these materials in advance provides banks with ample time to align their reporting processes with the updated requirements. The EBA will coordinate closely with the European Central Bank, the European Systemic Risk Board, and national authorities to ensure that this stress test continues to meet the highest regulatory standards.
The 2025 EU-wide stress test will serve as a significant benchmark for EU banks in a period of regulatory and economic uncertainty. Its results will shape future supervisory actions and offer the market a clearer view of the resilience of Europe’s banking sector.
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FCA issues fines against Metro Bank and insurance company director
The Financial Conduct Authority (FCA) has issued two fines: a £16.7 million penalty against Metro Bank Plc for anti-money laundering (AML) compliance failings and a £1.1 million penalty against the former Executive Director of Inspire Insurance Services.
Looking at the Metro Bank penalty first, this was initially set at £23.8 million, but was reduced by 30% due to early resolution. The regulatory failings exposed Metro to financial crime risks over several years, primarily due to inadequate monitoring systems.
Some context
The FCA cited Metro’s use of an Automated Transaction Monitoring System (ATMS) that was marred by serious data handling issues. Implemented in 2016, this system experienced significant technical problems, notably the "Time Stamp Code Logic Error", which resulted in nearly 47 million transactions going unmonitored. Further complicating matters was Metro’s inability to identify and rectify these issues in a timely manner due to poor oversight and ineffective data reconciliation.
Key takeaways
- Systemic failures: Metro’s ATMS was impaired by both technical and governance failures, allowing unmonitored transactions to accumulate. The issue was discovered three years after the ATMS launch, during which time Metro failed to reconcile data effectively.
- Impact of failings: Between 2016 and 2020, these monitoring lapses affected transactions worth more than £51 billion, undermining Metro’s anti-money laundering controls.
- Delayed rectifications: Metro identified the logic error in 2019 and began reviewing unmonitored transactions through a Lookback Review, ultimately finding numerous suspicious activity reports.
- Governance shortfalls: Metro’s senior leadership was made aware of the ATMS issues by staff as early as 2018, but efforts to resolve the problems were inadequate, exposing it to increased regulatory scrutiny.
The FCA acknowledged Metro’s significant investment in improving AML controls since discovering these issues. With the final notice, the FCA is keen to reinforce the importance of proactive compliance monitoring. Other financial institutions should view this penalty as a reminder of the cost of neglecting adequate systems for AML risk management and governance.
Insurance director fined
In a separate enforcement, (FCA) has issued a final notice against Leigh Mackey, the former Executive Director of Inspire Insurance Services, imposing a £1.1 million penalty. Mackey, who misused insurer-held funds for personal and business expenses, is now banned from any role in regulated financial activities. This action highlights significant FCA concerns over governance failures and fund misappropriation in financial services.
Some context
Inspire Insurance, under Mackey’s sole directorship, was an insurance broker for clients in the constructions. As the firm’s only authorised executive, Mackey had complete control. However, between 2016 and 2020, the FCA found that Mackey repeatedly diverted insurer premiums—funds meant to be held in trust—for personal and company use. Mackey admitted to drawing “advance commissions”, using insurer funds before their rightful payment date.
Despite regulatory requirements, Mackey did not conduct client asset audits and submitted false information in regulatory filings. These failures prompted the FCA’s intervention, ultimately leading Inspire Insurance into liquidation.
Key takeaways
- Misappropriated funds: The FCA found Mackey used over £660,000 in insurer funds to cover operating costs and personal expenses. These diversions artificially inflated Inspire’s revenue.
- Governance and integrity failures: Mackey, aware of mounting insurer obligations, continued withdrawing funds without reconciling or addressing shortages. He misrepresented Inspire’s financial standing in FCA submissions, stating that client money audits had occurred when they had not.
- FCA penalty and prohibition: The FCA imposed a £1.1 million penalty, including a 30% reduction for early settlement. The FCA also banned Mackey from holding any regulatory function due to his conduct’s impact on consumer trust and financial system integrity.
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BIS speech: building an ethical foundation for central banking
In a speech at the Netherlands Bank Ethics and Compliance Conference, Mr Klaas Knot, President of the Netherlands Bank, urged central banking organisations to move beyond rigid rules and cultivate a strong ethical culture. Reflecting on his own institution's journey, Knot acknowledged that “people working in our institutions are just a cross-section of society,” emphasising that ethics must extend beyond compliance frameworks.
Knot mentioned the establishment of a professional integrity framework at the Netherlands Bank in 2008 to manage ethical risks, and noted similar progress at the European Central Bank (ECB). Knot praised the ECB’s independent Ethics Committee, formed in 2014, as a model for governance, with two of its three members unaffiliated with the institution. This independence, he said, boosts credibility and ensures adherence to rigorous standards.
Highlighting challenges in the evolving digital landscape, Knot noted some complex ethical issues, such as employees’ social media activities. He argued that while democratic rights are essential, employees must consider their responsibilities as representatives of central banks. Additionally, Knot acknowledged the ambiguity often present in ethical dilemmas, such as managing relationships with financial industry leaders—a challenge he manages through transparency.
Knot stressed that ethical culture “requires effort from all of us,” and is not achievable through compliance officers alone. As a final point, he added that the board’s role is pivotal, advocating for leaders to model transparency, admit mistakes, and encourage open dialogue on ethics.
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MAS announces new green finance and capital markets initiatives with China
The Monetary Authority of Singapore (MAS) has unveiled new green finance and capital markets initiatives to strengthen financial ties with China. The initiatives, designed to foster cooperation in sustainable finance, bond markets, and investment products, were introduced at the 20th Joint Council for Bilateral Cooperation (JCBC) meeting in Singapore.
Accelerating green finance flows
One key initiative is the expansion of green finance channels between the two nations. The China-Singapore Green Finance Taskforce, a joint effort by MAS and the People’s Bank of China (PBC), aims to finalise work on the Common Ground Taxonomy (CGT) by year-end. This taxonomy will facilitate comparisons between green finance standards in Singapore, China, and the EU, easing cross-border issuance of green loans, bonds, and fund investments. The CGT will also be an integral part of a broader “Green Corridor” connecting Singapore and China to encourage green financing flows.
Expanding bond market access
MAS and the PBC are also exploring new ways to enhance foreign access to China’s bond market. Under the proposed pilot programme, Singapore and Chinese banks would leverage China’s “over-the-counter” bond market framework, giving international investors easier access to the China Interbank Bond Market. This arrangement would allow Singapore-based banks to provide trading and custodial services, expanding access to fixed income products for investors.
Building new indices and ETFs
To deepen capital markets collaboration, MAS and the China Securities Regulatory Commission (CSRC) are discussing enhancements to exchange-traded fund (ETF) links between the Singapore Exchange (SGX) and the Shenzhen and Shanghai exchanges. The initiative builds on growing demand for ETF products, with both sides exploring the addition of new offerings under the ETF Product Links. In addition, the SGX and China Securities Index are working together to develop a second joint index, following the success of their Emerging Asia Technology Index, launched earlier this year.
Facilitating access to Chinese financial markets
The two countries are also working to improve access for financial institutions to each other’s markets. In a symbolic first, United Overseas Bank (UOB) listed a RMB 5 billion three-year Panda Bond on the SGX, marking the first Panda Bond listing in Singapore. This listing signals increasing investor interest in the Panda Bond market and aims to attract more international issuers. Additionally, UOB and the Shanghai Gold Exchange have signed a Memorandum of Understanding to support gold trading and services for Southeast Asian suppliers and investors, enhancing commodity trade ties.
Boosting capital for Southeast Asian expansion
MAS is encouraging Chinese companies interested in Southeast Asian expansion to consider listing on the SGX. This aligns with China’s recent policy to support eligible domestic firms in accessing international markets to fuel growth.
Mr Chee Hong Tat, Singapore’s Minister for Transport and Second Minister for Finance, said, “Financial cooperation has been a key pillar underpinning the strong bilateral relations between China and Singapore. The strong slate of initiatives announced today at the 20th anniversary of JCBC reflects our continued commitment to deepen financial connectivity between our markets.”
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AFCA refines complaint process for additional issues
The Australian Financial Complaints Authority (AFCA) has revised its procedures to clarify how it addresses new issues that arise during the complaint process. The update aims to ensure fairness and transparency, in line with AFCA's role as an impartial mediator.
Some context
The changes stem from Recommendation 1 of an Independent Review, which suggested clearer guidelines on when further issues should revert to the financial institution's internal dispute resolution (IDR) process.
Key takeaways
- Guidance on new issues: AFCA will determine if new issues should be combined with or separated from the original complaint.
- Procedural fairness: Decisions to introduce new issues will depend on their relevance to the main complaint and whether the addition supports procedural fairness.
- Efficiency improvements: AFCA aims to address all related concerns within one process when feasible to prevent complainants from repeatedly moving between AFCA and IDR processes.
Next steps
AFCA will notify all involved parties when further issues are added, ensuring they have opportunities to review, exchange information, and submit relevant comments, thus enhancing clarity and procedural fairness.
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