Financial Services Regulation and Compliance - Banking Apr 2020

Domestic

The Central Bank of Ireland introduces prudential regulatory flexibility measures

The Central Bank of Ireland (CBI) has issued communications to regulated financial services providers, introducing prudential regulatory flexibility measures in light of COVID-19.

The communication to credit institutions describes the steps taken by the CBI to ease regulatory requirements for credit institutions, in line with recent announcements made by the European Central Bank (ECB) and the European Banking Authority (EBA) (which were covered in our March 2020 Bulletin). Deadlines for remedial actions and measures related to prudential banking supervision will be postponed by six months. Remittance dates for certain regulatory returns have been extended to May and June 2020. The CBI expects to be notified of any delay in supervisory reports or Pillar 3 disclosures and to be provided with the reason for such delay and, to the extent possible, the anticipated publication date.

The communication also reports the CBI's adoption of the ECB and SSM's capital and liquidity measures. Finally, the CBI has called on credit institutions to review their remuneration policies to ensure they promote sound risk management. Deferrals should be considered and dividends for 2019 and 2020 should not be declared until at least 1 October 2020. Share buy-backs with the aim of remunerating shareholders should be avoided.

CBI publishes research on SME liquidity needs in light of COVID-19 pandemic

The CBI has published a financial stability note assessing the liquidity needs of SMEs, finding that firms will likely need some form of external liquidity if they are to re-open after the pandemic (estimated at €2.4bn or more depending on the scenario). As per the latest sectoral data in June 2019, Irish SMEs had €2.7bn in undrawn credit available from Irish retail banks. Should private sector liquidity be insufficient to meet demand, the authors assess the options available to policymakers, including credit guarantee schemes, lending schemes, and direct fiscal supports.

The authors used a combination of sector- and bank-level data to estimate the liquidity needs of SMEs for a three month period, under a range of scenarios. An important factor that will determine the demand for liquidity, the authors note, is the ability of firms to reduce non-personnel expenses (e.g. rent, rates, tax, insurance, trade credit, debt repayments, and utilities).

European

European Commission adopts banking package to facilitate lending to EU households and businesses

On 28 April 2020, the European Commission adopted a banking package, which aims to ensure that banks can continue lending to support the economy and combat the economic impact of COVID-19. The package includes an Interpretive Communication on the EU's accounting and prudential frameworks, as well as targeted amendments to EU banking rules.

The Communication confirms recent statements (such as those by the EBA, the ECB, and the Basel Committee on Banking Supervision) on flexibility within accounting and prudential rules, and encourages banks and supervisory authorities to make use of such flexibility. It also calls on banks to act responsibly, for example by refraining from making dividend distributions or adopting conservative variable remuneration policies.

The proposed "quick fix" temporary changes to the EU's banking prudential rules (the Capital Requirements Regulation) include, among other things:

  • extending by two years the transitional arrangements for expected credit loss accounting under IFRS 9
  • more favourable treatment of public guarantees under the prudential backstop for non-performing loans
  • offsetting the impact of excluding certain exposures from the calculation of the leverage ratio
  • postponing the date of application of the leverage ratio buffer until 10 January 2023

The Parliament and Council will now consider the legislative proposal, and the Commission has called for the amending Regulation to be adopted by the end of June 2020.

ECB issues communication to banking industry on supervisory reporting measures in the context of the COVID-19 pandemic

In the communication, the ECB, recognising the operational challenges faced by banks due to COVID-19, confirms its support for the EBA statement on supervisory reporting and Pillar 3 disclosures. Under this, euro area significant institutions directly supervised by the ECB will be allowed to delay submission of certain supervisory data by one month for remittance dates between March 2020 and May 2020. The ECB has also decided to postpone the remittance dates for most ECB-specific recurring requests between March 2020 and May 2020.

The individual JSTs will communicate an updated remittance calendar to the banks they cover. The same grace period of one month should be granted to less significant institutions that are subject to EBA and ECB reporting obligations under the ITS, the ECB FINREP regulation and other rules. The ECB hopes that the flexibility offered will reduce the operational burden on banks and enable them to report with an adequate level of data quality. The ECB may extend or review these measures in response to further COVID-19-related developments.

ECB adopts package of temporary collateral easing measures

The ECB has adopted a package of temporary collateral easing measures to facilitate the availability of eligible collateral for banks. The package is temporary for the duration of the COVID-19 pandemic and is linked to the duration of the Pandemic Emergency Purchase Programme. It contains three main features:

  • easing the conditions for the use of credit claims as collateral
  • reducing other collateral requirements
  • increasing risk tolerance in credit operations through a general reduction of collateral valuation haircuts by a fixed factor of 20%

ECB takes steps to mitigate impact of possible rating downgrades on collateral availability

On 22 April 2020, the ECB adopted temporary measures to mitigate the impact of possible rating downgrades on collateral availability, resulting from the economic consequences of COVID-19. This measure complements the broader package of collateral easing measures (described above). These measures aim to ensure that banks have sufficient assets that they can mobilise as collateral within the Eurosystem to participate in liquidity-providing operations and to continue providing funding to the economy in the Eurozone. 

The Governing Council decided to grandfather the eligibility of marketable assets and the issuers of such assets that fulfilled minimum credit quality requirements on 7 April 2020 in the event of a deterioration in credit ratings decided by the credit rating agencies accepted in the Eurosystem as long as the ratings remain above a certain credit quality level. It is hoped that by doing so potential procyclical dynamics will be avoided. This would ensure continued collateral availability, which is crucial for banks to provide funding in the current challenging circumstances. Non-marketable assets are outside of the scope of the temporary grandfathering.

EBA publishes quarterly risk dashboard

The EBA published its quarterly risk dashboard on 14 April 2020, covering Q4 2019 data and summarising the main risks to the EU banking sector. The Q4 data shows that capital ratios and asset quality of EU banks had improved, while the return on equity had worsened. The short-term outlook in the dashboard provides the following:

  • asset quality: asset quality is expected to deteriorate
  • market risk: more volatile financial market can be expected to be susceptible to underlying geopolitical risks and commodity price corrections (particularly oil)
  • liquidity and funding: some challenges for banks to attain longer-term at reasonable costs can be expected, while vulnerabilities for liquidity positions and potentially the deposit base of banks may also arise
  • profitability: substantial challenges are expected, but the fiscal response of governments as well as supervisory measures taken to combat the impact of COVID-19 may provide some relief
  • operational resilience: already existing operational challenges (including cybersecurity) are being compounded by COVID-19

EBA updates impact of the Basel III reforms on EU banks’ capital and compliance with liquidity measures

The EBA has published two reports, which measure the impact of implementing the final Basel III reforms and monitor the current implementation of liquidity measures in the EU. The results are based on the June 2019 reporting date, and so do not reflect the economic impact that COVID-19 has had on participating banks. Overall, the EBA estimates that the Basel III reforms, once fully implemented in 2028 after the additional one-year delay agreed by the Basel Committee on Banking Supervision (BCBS), would determine an average increase by 16.1% of EU banks' tier 1 minimum required capital. The liquidity coverage ratio of EU banks, which was fully implemented in January 2018, stood at around 147% on average in June 2019.

BCBS issues progress report on banks' implementation of the "Principles for effective risk data aggregation and reporting"

The BCBS published its latest progress report on banks' implementation of the "Principles for effective risk data aggregation and reporting". The principles aim to strengthen banks' risk data aggregation and risk reporting, with a view to improving their risk management, decision-making processes and resolvability. The report is based on a self-assessment survey of authorities with supervisory responsibilities for global systemically important banks (G-SIBs).

The report found that none of the banks are fully compliant with the principles in terms of building up the necessary data architecture and that IT infrastructure remains a challenge for many. However, the report does note that banks' efforts to implement the principles have resulted in progress in the areas of governance, risk data aggregation capabilities and reporting practices.

The BCBS has recommended that:

  • banks should continue to monitor their implementation of the principles
  • banks that have struggled to implement the principles should address weaknesses promptly
  • supervisors should continue to monitor banks' progress in implementing the principles
  • supervisors should take appropriate measures to address delays an ineffective implementation

ECB Banking Supervision provides temporary relief for capital requirements for market risk

The ECB has announced a temporary reduction in capital requirements for market risk, by allowing banks to adjust the supervisory component of these requirements. As well as smoothing procyclicality, the measure aims to maintain banks’ ability to provide market liquidity and to continue market-making activities. The ECB is temporarily reducing a supervisory measure for banks – the qualitative market risk multiplier – which is set by supervisors and is used to compensate for the possible underestimation by banks of their capital requirements for market risk. This temporary reduction of the qualitative multiplier compensates for currently observed increases of another factor, the quantitative multiplier, which can rise when market volatility has been higher than predicted by the bank’s internal model. This decision will be reviewed after six months.

ECB supports macroprudential policy actions taken in response to coronavirus outbreak

The ECB has issued a press release stating that it supports the actions taken by macroprudential authorities in the Eurozone in response to COVID-19. The ECB published an overview of the macroprudential measures taken by euro area authorities (including central banks and banking supervisors) in response to the coronavirus outbreak and their impact on banks’ regulatory capital. The ECB has assessed the notifications submitted by national macroprudential authorities for each proposed measure provided for in the Capital Requirements Regulation and Directive and has issued a non-objection decision, thereby endorsing the measures taken to reduce capital requirements, including the countercyclical capital buffer.

The measures announced by national macroprudential authorities since 11 March 2020 will free up more than €20bn of Common Equity Tier 1 capital held by euro area banks. They include releases or reductions of the countercyclical capital buffer, systemic risk buffer and buffers for other systemically important institutions. In addition, some authorities have postponed or revoked earlier announced measures to avoid placing pressure on banks to accumulate capital buffers in a downturn.

EBA publishes guidelines on treatment of public and private moratoria in light of COVID-19 measures

Following its statement in March on the application of the prudential framework regarding default, forbearance and IFRS 9 in light of COVID-19 measures (covered in our March Bulletin), the EBA has published more detailed guidance on the criteria to be fulfilled by legislative and non-legislative moratoria applied before 30 June 2020. The aim of the guidelines is to clarify aspects of the use of public and private payment moratoria.

The guidelines provide that payment moratoria do not trigger classification as forbearance or distressed restructuring if the measures taken are based on the application of national law or on an industry or sector-wide public initiative agreed and applied broadly by the relevant credit institutions.

The guidelines recall that institutions must continue to adequately identify those situations where borrowers may face longer term financial difficulties and classify exposures in accordance with the existing regulation. The requirements for the identification of forborne exposures and defaulted obligors remain in place.  

EBA issues further guidance on the use of flexibility in relation to COVID-19 and calls for heightened attention to risks

The EBA has published a statement on additional supervisory measures in relation to COVID-19, setting out guidance regarding flexibility in supervisory approaches relating to the following:

  • Supervisory Review and Evaluation Process (SREP).  The EBA recognises a need for a pragmatic approach to SREP assessments in 2020, focused on the most material risks and vulnerabilities driven by the COVID-19 crisis.
  • Recovery planning: the focus should be on understanding which recovery options are necessary and available under the current stressed conditions.
  • Digital operational resilience: the EBA calls on institutions to ensure business continuity, adequate ICT (information communication technology) capacity and security risk management. The EBA notes that its guidelines on ICT and security risk management should be used for this purpose.
  • Securitisation: the guidelines provide further clarity on the prudential application of the definition of default and forbearance, as well as how the EBA guidelines on legislative and non-legislative moratoria on loan repayments apply to securitisations.

For more information on this topic please contact any member of A&L Goodbody's Financial Regulation team.

Date published: 11 May 2020