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    EU and UK Regulators Announce COVID-19 Relief Measures for Banks

    March 12, 2020

    Regulators from US, UK, and EU published statements and guidance addressed to financial entities on dealing with the impact of the coronavirus COVID-19 on their operations. The regulators that have published such information so far are EBA, ECB, ESMA, FCA, BoE, and several US agencies. Some of these regulators have urged banks to review their business continuity plans to check operational risk. BoE reduced the countercyclical capital buffer rate with immediate effect. PRA announced that it is willing to accept applications for recalculation of transitional measure on technical provisions under Solvency II. ESMA has requested issuers to make appropriate disclosures and report the financial impact of COVID-19. EBA stated that addressing any operational challenges banks may face should be the priority and has, therefore, decided to postpone the EU-wide stress test exercise to 2021.

    For 2020, EBA will carry out an additional EU-wide transparency exercise to provide updated information on banks’ exposures and asset quality to market participants. Competent authorities could also give banks some leeway in the remittance dates for some areas of supervisory reporting, without putting at stake the crucial information needed to monitor closely banks’ financial and prudential situation. Additionally, ECB will allow banks to operate temporarily below the level of capital defined by the Pillar 2 Guidance, the capital conservation buffer, and the liquidity coverage ratio. ECB considers that these temporary measures will be enhanced by the appropriate relaxation of the countercyclical capital buffer (CCyB) by the national macro-prudential authorities. Banks in EU will also be allowed to partially use capital instruments that do not qualify as Common Equity Tier 1 capital, for example Additional Tier 1 or Tier 2 instruments, to meet the Pillar 2 Requirements. This brings forward a measure that was initially scheduled to come into effect in January 2021, as part of the latest revision of the Capital Requirements Directive (CRD V). The measures announced by ECB are intended to provide significant capital relief to banks in support of the economy. 

    In addition, ECB is discussing with banks individual measures, such as adjusting timetables, processes and deadlines. For example, ECB will consider rescheduling on-site inspections and extending deadlines for the implementation of remediation actions stemming from recent on-site inspections and internal model investigations, while ensuring the overall prudential soundness of the supervised banks. In the light of the operational pressure on banks, ECB supports the EBA decision to postpone the 2020 EBA EU-wide stress test and will extend the postponement to all banks subject to the 2020 stress test. ECB emphasized that banks should continue to apply sound underwriting standards, pursue adequate policies regarding the recognition and coverage of non-performing exposures, and conduct solid capital and liquidity planning and robust risk management.

    In the UK, the three policy committees of BoE have announced several measures to help bridge across the economic disruption that is likely to be associated with COVID-19. A key measure being the reduction in the UK CCyB rate by the Financial Policy Committee or FPC. CCyB rate has been reduced to 0% of banks’ exposures to UK borrowers, with immediate effect. The rate had been 1% and had been due to reach 2% by December 2020. FPC expects to maintain the 0% rate for at least 12 months, so that any subsequent increase would not take effect until March 2022 at the earliest. In addition, PRA has set out its supervisory expectation that banks should not increase dividends or other distributions, such as bonuses, in response to these policy actions. Major UK banks are well able to withstand severe market disruption. They hold GBP 1 trillion of high-quality liquid assets, enabling them to meet their maturing obligations for many months. 

    Furthermore, PRA is willing to accept applications from firms to recalculate transitional measure on technical provisions (TMTP) as at March 31, 2020. In any application, PRA expects firms to be able to demonstrate that a material change in risk profile has occurred. In line with SS6/16 on maintenance of the transitional measure on technical provisions under Solvency II, PRA monitors market conditions since the previous biennial TMTP recalculation (December 2019) and considers whether changes in market conditions since then can reasonably be considered to have been sustained. Movements in risk free rates since December 31, 2019 meet the threshold for a material change in risk profile as set out in SS6/16 and the PRA’s view is that the risks posed by the advent of COVID-19 are sufficient to meet a broad definition of a change in risk profile that for some firms may be material.

     

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    Keywords: Europe, Americas, EU, UK, US, Banking, Insurance, Securities, Solvency II, Basel III, COVID-19, CCyB, TMTP, Stress Testing, EBA, ESMA, ECB, BoE, FCA, PRA, US Agencies

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