Featured Product

    ESRB Holds Meeting, Discusses Priority Areas to Address COVID Impact

    May 14, 2020

    The General Board of ESRB held an extraordinary meeting to discuss the first set of actions in five priority areas identified to address the impact of COVID-19 emergency on the financial system, from a macro-prudential perspective. The priority areas are focused on macro-prudential implications of guarantee schemes, liquidity risks arising from margin calls, impact of credit rating downgrades in corporate bonds sector, restrains on dividends and other payouts, and implications of market illiquidity for asset managers and insurers.

    These actions are guided by two overarching principles. One principle involves the use of flexibility provided in existing regulatory standards and the other involves achieving an effective policy response across sectors and countries while ensuring that necessary national macro-prudential actions do not cause negative spillovers and effects in the Single Market in EU. The following are the key highlights of the priority areas were discussed at the meeting:

    • Macro-prudential implications of guarantee schemes and other fiscal measures. ESRB is undertaking a stock take of the measures implemented so far and is setting up a framework for monitoring the macro-prudential implications of these measures, with focus on the cross-border and EU levels. ESRB strongly encourages cooperation and information exchange between the relevant national fiscal and macro-prudential authorities to help understand the effects the implemented measures have on financial stability. ESRB, in a letter to the Economic and Financial Affairs Council, highlights that work in this area has three main objectives: identifying implications of these measures for financial stability; establishing minimum requirements for monitoring framework that help understand the effects these measures; and outlining future work on cross-border and cross-sectoral effects of these measures and their effect on financial stability. By the end of May 2020, ESRB will review the existing reporting system and define minimum requirements for an EU framework for monitoring the implication of fiscal measures for financial stability. 
    • Liquidity risks arising from margin calls. The General Board of ESRB discussed two issues related to financial stability issues: high amounts of margin calls since mid-February and possible adverse liquidity impact on both bank and non-bank entities, also in view of high degrees of market concentration and inter-connectedness. The high amounts of margin calls could increase further due to likely forthcoming credit rating downgrades and possible further market volatility. The General Board stressed the importance of mitigating procyclicality that could be linked to the provision of clearing services and to the exchange of margins in bilaterally cleared markets. The Board also stressed on the importance of enhancing central counterparty stress test scenarios for the assessment of liquidity needs and limiting excessive liquidity constraints related to margin collection.
    • Impact of procyclical downgrades of bonds on markets and entities across the financial system. The economic disruptions caused by COVID-19 could trigger a wave of credit rating downgrades in the corporate bonds sector due to the systemic increase in credit risk. From the macro-prudential perspective it is important to ensure that the effects of these credit rating downgrades are well understood and do not impair the functioning of financial markets so that the negative effects on the real economy are minimized. ESRB discussed these issues in a note it published. Furthermore, the General Board decided to coordinate a top-down analysis, with ESAs and ECB, to assess the impact of a common scenario of large-scale downgrades across all parts of the financial sector (banks, investment funds, insurers, pension funds, and financial markets).
    • System-wide restraints on dividend payments, share buybacks, and other payouts. A number of ESRB member countries and European-level institutions (EBA, ECB, and EIOPA) have encouraged banks and insurers in EU to restrain voluntary payouts, such as dividends, bonuses, and share buybacks, aimed at remunerating shareholders. AT this meeting, the ESRB General Board supported the actions taken so far and stressed the value of applying pay-out restrictions in times of crisis.
    • Market illiquidity and implications for asset managers and insurers. Investment funds and insurers with regard to unit-linked insurance products may see further redemption pressures if the macro-economic outlook worsens by more than is currently anticipated. ESRB adopted a recommendation to ESMA to coordinate with the national competent authorities in undertaking a focused piece of supervisory engagement with investment funds that have significant exposures to corporate debt and real estate assets. The objective of the engagement is to assess the current state of preparedness of these two fund segments to potential future redemption pressures, further declines in market liquidity or increased valuation uncertainty, while also considering any steps that could enhance that preparedness.

     

    Related Links

    Keywords: Europe, EU, Banking, Insurance, Securities, COVID-19, Dividend Distribution, Systemic Risk, Credit Risk, Macro-prudential Policy, Liquidity Risk, ESMA

    Featured Experts
    Related Articles
    News

    ESAs Issue Multiple Regulatory Updates for Financial Sector Entities

    The three European Supervisory Authorities (ESAs) issued a letter to inform about delay in the Sustainable Finance Disclosure Regulation (SFDR) mandate, along with a Call for Evidence on greenwashing practices.

    November 15, 2022 WebPage Regulatory News
    News

    ISSB Makes Announcements at COP27; IASB to Propose IFRS 9 Amendments

    The International Sustainability Standards Board (ISSB) of the IFRS Foundations made several announcements at COP27 and with respect to its work on the sustainability standards.

    November 10, 2022 WebPage Regulatory News
    News

    IOSCO Prioritizes Green Disclosures, Greenwashing, and Carbon Markets

    The International Organization for Securities Commissions (IOSCO), at COP27, outlined the regulatory priorities for sustainability disclosures, mitigation of greenwashing, and promotion of integrity in carbon markets.

    November 09, 2022 WebPage Regulatory News
    News

    EBA Finalizes Methodology for Stress Tests, Issues Other Updates

    The European Banking Authority (EBA) issued a statement in the context of COP27, clarified the operationalization of intermediate EU parent undertakings (IPUs) of third-country groups

    November 09, 2022 WebPage Regulatory News
    News

    OSFI Sets Out Work Priorities and Reporting Updates for Banks

    The Office of the Superintendent of Financial Institutions (OSFI) published an annual report on its activities, a report on forward-looking work.

    November 07, 2022 WebPage Regulatory News
    News

    APRA Finalizes Changes to Capital Framework, Issues Other Updates

    The Australian Prudential Regulation Authority (APRA) finalized amendments to the capital framework, announced a review of the prudential framework for groups.

    November 03, 2022 WebPage Regulatory News
    News

    BIS Hub and Central Banks Conduct CBDC and DeFI Pilots

    The Bank for International Settlements (BIS) Innovation Hubs and several central banks are working together on various central bank digital currency (CBDC) pilots.

    November 03, 2022 WebPage Regulatory News
    News

    ECB Sets Deadline for Banks to Meet Its Climate Risk Expectations

    The European Central Bank (ECB) published the results of its thematic review, which shows that banks are still far from adequately managing climate and environmental risks.

    November 02, 2022 WebPage Regulatory News
    News

    ESAs, ECB, & EC Issue Multiple Regulatory Updates for Financial Sector

    Among its recent publications, the European Banking Authority (EBA) published the final standards and guidelines on interest rate risk arising from non-trading book activities (IRRBB)

    October 31, 2022 WebPage Regulatory News
    News

    EC Adopts Final Rules Under CRR, BRRD, and Crowdfunding Regulation

    The European Commission (EC) recently adopted regulations with respect to the calculation of own funds requirements for market risk, the prudential treatment of global systemically important institutions (G-SIIs)

    October 26, 2022 WebPage Regulatory News
    RESULTS 1 - 10 OF 8582