To address the exceptional challenges stemming from COVID-19 pandemic and its potential impact on the financial system of the European Union, ESRB announced a second set of actions, which have been agreed by the General Board of ESRB. These macro-prudential actions, which refer to the five priority areas identified by ESRB, together with reinforced coordination, both across authorities responsible for different segments of the financial sector and across borders, are aimed at ensuring that the European financial system is able to withstand the shock and thus prevent an even sharper loss of economic capacity and jobs. The five priority areas in which actions have been taken were earlier discussed at an extraordinary meeting of the ESRB General Board on May 06, 2020.
The progress on the five priority areas identified last month is being summarized below:
- Implications for the financial system of guarantee schemes and other fiscal measures. Debt moratoria, guarantee schemes, and other fiscal measures are being put in place by member states to protect firms and households from the effects of the COVID-19 pandemic. Given that EU economies are highly integrated, the different measures implemented by individual countries to support their economies during the COVID-19 pandemic might have an impact on other countries. Therefore, the General Board of ESRB decided to establish an EU-wide framework to monitor the financial stability implications of the support measures. With this framework, ESRB intends to complement and enhance what is being done at the national level via the exchange of experiences and the early identification of cross-sectoral and cross-border issues. The General Board also adopted a recommendation that introduces minimum requirements for national monitoring and establishes a framework for reporting to ESRB. This recommendation does not create new reporting requirements for financial institutions, as ESRB will rely on the reporting and data collected by national macro-prudential authorities and member institutions, in particular the ESAs, ECB, and SRB.
- Market illiquidity and implications for asset managers and insurers. In a communication to EIOPA, the General Board strongly encouraged EIOPA and its members to promptly finalize and operationalize the framework for monitoring of liquidity risks in the insurance sector. This would facilitate a more informed and timely assessment of any potential financial stability risks stemming from liquidity risks in the insurance sector. Beyond the need to address risks and vulnerabilities stemming from the current crisis, and as ESRB has emphasized in the past, the Solvency II review provides an opportunity to better enable supervisors to address liquidity risk in the insurance sector. The COVID-19 crisis highlights the need to better equip (re)insurers to deal with future periods of stress. Reflecting this, as already noted in the past, the Pillar 2 provisions in the Solvency II regulatory regime should be enhanced in the medium term to enable supervisors to require individual (re)insurers with a vulnerable liquidity profile to hold a liquidity buffer.
- Impact of large-scale downgrades of corporate bonds on markets and entities. Following the decision of the General Board on May 06, ESRB, along with its member institutions, continued to monitor developments in the corporate bond market, including possible implications of large-scale corporate bond downgrades across the financial system.
- System-wide restraints on dividend payments, share buybacks, and other payouts.The General Board decided to support and complement previous initiatives of ECB, EBA, EIOPA, and national authorities by issuing a recommendation on the restriction of distributions during the COVID-19 pandemic. The ESRB Recommendation, which covers banks, certain investment firms, insurers, reinsurers, and central counterparties, takes into account the critical role these sectors of the financial system play in the real economy, in particular during the times of crisis. With this recommendation the General Board aims to achieve a uniform approach to restraints on payouts across the EU and across different segments of the financial sector. The recommendation is published together with a background report.
- Liquidity risks arising from margin calls.The General Board acknowledged that market shocks, such as sharp drops in asset prices and high levels of market volatility, translate into increases in variation margins and may also lead to significant initial margin calls on positions in cash securities, commodities, or derivatives. Recognizing the risks resulting from such a situation, the General Board decided to issue a recommendation aimed at limiting cliff effects in relation to the demand for collateral, also including client clearing services and non-centrally cleared markets. The recommendation also aims to enhance CCP stress test scenarios for the assessment of future liquidity needs, limit liquidity constraints related to margin collection; promote international standards related to the mitigation of procyclicality in the provision of client clearing services and in securities financing transactions. The recommendation is published together with a background report.
- Press Release
- Recommendation on Impact Monitoring (PDF)
- Communication to EIOPA (PDF)
- Recommendation on Dividend Distribution (PDF)
- Report on Payouts (PDF)
- Recommendation on Liquidity Risks from Margin Calls (PDF)
- Report on Liquidity Risks from Margin Calls (PDF)
- Overview of Five Priority Areas
Keywords: Europe, EU, Banking, Insurance, Securities, PMI, FMI, COVID-19, Dividend Distribution, Liquidity Risk, Loan Moratorium, Guarantee Scheme, OTC Derivatives, Corporate Bonds, Credit Risk, Solvency II, Financial Stability, ESRB
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