Perspectives | 7 April 2020
With banks no longer the weak link in the financial
system, they now have a key role to play in supporting the real economy to
survive the crisis caused by the Covid-19 pandemic. The significant
strengthening of prudential regulation over the past decade since the 2008
financial crisis has enabled banking institutions to post solid levels of
capital and liquidity, putting them in a strong position to cope with this
unprecedented shock.
The regulatory framework contains
special measures for times of crisis
In a European economy mainly financed by banks, it is
essential that the effects of monetary policies adopted by central banks in
response to the current crisis are rapidly transmitted to businesses,
households and other key players in the economic system.
The Financial Stability Board (FSB) has
confirmed that the financial system is in a better position to withstand shocks
as a result of the post-crisis reforms. As a result, the FSB is encouraging
authorities and financial institutions to make use of the flexibility within
the regulations to keep the markets open and support the financing of the real
economy.[1]
Against this background, the Basel Committee observes
that the Basel III framework includes capital and liquidity buffers that are
designed to be used in periods of stress[2] and
supports measures taken locally by its members to alleviate the impact of Covid-19 on financial stability.
Encouragement to lend by releasing
capital for the banks and avoiding interbank tensions
One of the main lessons of the 2008 crisis was that
the banks lacked adequate safety buffers to enable them to absorb major shocks
at times of stress. For this reason, several buffers were introduced in
addition to the minimum Pillar 1 regulatory requirements: the capital conservation
buffer (CCoB), the countercyclical capital buffer (CCyB), and the systemic
buffer (SIIB). Apart from the requirement for combined buffers, regulators have
also imposed additional requirements on the banks under Pillar 2 (P2R) to cover
the risks which are not covered by Pillar 1, along with Pillar 2 guidance (P2G)
for coping with shocks caused by hypothetical stress.
In March 2020, the European Central Bank (ECB) took
several measures intended to reduce capital requirements, thus unlocking new lending capacity estimated
at €1800 bn [3] as recommended by the European Banking
Authority (EBA) [4] :
- Authorisation to operate below the P2G;
- Use of combined buffers: in this
instance, restrictions on distribution apply only within the limits of the maximum
distributable amount (MDA);
- Use of the liquid assets buffer, even if
this means operating below the minimum Liquidity Coverage Ratio (LCR) of 100%,
to ensure liquidity in the system and avoid spillover effects;
- Possibility of satisfying the P2R with
capital instruments that do not qualify as Common Equity Tier 1 (CET1) capital,
bringing forward a measure due to come into effect in January 2021, as part of
the Capital Requirements Directive (CRD) V.
It should also be noted that in France, the financial
stability board, HCSF, has decided to reduce the countercyclical buffer by
0.25% to 0%.
These measures take immediate effect and will remain
in place until further notice.
…accompanied by additional sureties
The EBA has also moved to clarify the prudential
treatment of public or private moratoriums granted by banks to their customers
to address the current crisis[5].
For the identification of default, the EBA confirms that the 90 days past due
criterion must be based on the new payment schedule agreed with the customer.
The EBA also clarifies that moratoriums that are not customer-specific, but
rather address a broad range of borrowers, will not be automatically classified
as forbearance measures. However, an institution must continue to monitor any
probable indication of non-payment using the EBA’s definition of prudential
identification of default.
These measures should make it possible to avoid a wave
of defaults directly due to the Covid-19 crisis. French banks have now
announced that they are ready to grant their business customers a deferral of
loan repayments of up to six months.
In terms of its guidance on non-performing loans
(NPLs), the ECB shows flexibility: where an exposure is covered by a public
guarantee or moratorium, that exposure will not automatically be characterised
as probable non-payment. Additionally, the NPLs covered by a public guarantee
may benefit from the exceptional treatment applicable to export loans, i.e. 0%
of prudential provisioning during the first seven years. In France, the
majority of loans granted by the banks between 16 March and 31 December 2020 to
non-financial firms (excluding real-estate investment companies, SCIs), will be
guaranteed by French State up to €300 bn, provided that they are granted at
cost. This guarantee should also make it possible to reduce the capital
requirements that would result from these new loans.
Finally, from an accounting angle, the EBA and ECB
hope that the procyclical impacts of IFRS 9 in conjunction with the crisis are
mitigated to the extent allowed by the standard. Both the EBA and ECB stress
that firms can make use of article 473a of the CRR to spread the capital impact
of IFRS 9 over a five-year period.
Postponement of significant 2020
deadlines
The EBA has announced the postponement of the 2020
stress testing exercise until 2021, in light of the vast and very real stress
test that banks now face. The EBA is also encouraging the competent authorities
to suspend any non-essential supervisory activities and to allow banks some
leeway for the submission of some areas of supervisory reporting. For example,
the ECB has announced a six-month postponement of the deadline for remedial
actions imposed following its review of internal models (TRIM), on-site
inspections, and compliance with 2020 SREP decisions.
Sources
[1] https://www.fsb.org/2020/03/fsb-coordinates-financial-sector-work-to-buttress-the-economy-in-response-to-covid-19/
[2] https://www.bis.org/press/p200320.htm
[3] https://www.bankingsupervision.europa.eu/press/pr/date/2020/html/ssm.pr200312~43351ac3ac.en.html
[4] https://eba.europa.eu/eba-statement-actions-mitigate-impact-covid-19-eu-banking-sector
[5] https://eba.europa.eu/sites/default/documents/files/document_library/News%20and%20Press/Press%20Room/Press%20Releases/2020/EBA%20provides%20clarity%20to%20banks%20and%20consumers%20on%20the%20application%20of%20the%20prudential%20framework%20in%20light%20of%20COVID-19%20measures/Statement%20on%20the%20application%20of%20the%20prudential%20framework%20regarding%20Default%2C%20Forbearance%20and%20IFRS9%20in%20light%20of%20COVID-19%20measures.pdf
