ECB published an opinion (CON/2020/16) on amendments to the prudential framework in EU in response to the COVID-19 pandemic. The opinion was issued in response to a request from the European Council and the European Parliament to provide an opinion on the proposed regulation amending the Capital Requirements Regulations (CRR and CRR2) with regard to adjustments in response to the COVID-19 pandemic. In its opinion, ECB welcomes the targeted adjustments to CRR, as they further increase the capacity of the banking system to mitigate the economic impact of the pandemic and support recovery, while preserving the key elements of the prudential framework.
Some elements of the proposed regulation are complementary to the mitigating supervisory measures taken by ECB while certain other measures recently agreed to by BCBS require amendments to the EU legal framework to become operational. In its opinion, ECB sets out certain specific observations on the following topics:
- Transitional arrangements for mitigating the impact of IFRS 9 provisions on regulatory capital. Article 473a of CRR contains transitional arrangements allowing institutions to add back to their common equity tier 1 (CET1) capital a portion of any increase in provisions due to the introduction of expected credit losses (ECL) accounting under IFRS 9. ECB supports the amendment of Article 473a of CRR to allow credit institutions to add back to their CET1 capital an amount limited to the increase attributable to the dynamic component of the ECL provisions after December 31, 2019. This solution would allow to tailor the scope of additional measures to address the effects related to COVID-19 crisis, distinguishing them from the day-one impact that the increase in provisions had on CET1 capital due to the introduction of IFRS 9.
- Treatment of publicly guaranteed loans under the non-performing exposure (NPE) prudential backstop. ECB welcomes proposal to temporarily extend the more beneficial treatment of Article 47c(4) of CRR to NPEs guaranteed by the national governments or other public entities. The proposal removes an arbitrary distinction between guarantees given by different public entities with a similar credit standing.
- Date of application of the leverage ratio buffer. On March 27, 2020, BCBS issued a statement on postponement of the timeline for implementing the final elements of the Basel III reform by one year, including the leverage ratio buffer for global systemically important banks, which will become applicable in EU on January 01, 2022. The proposed regulation envisages an alignment of the applicable timeline in CRR with the new timeline that is January 01, 2023 (rather than January 01, 2022). ECB supports the decision to make use of the extended timeline agreed at the international level, for the finalization of Basel III reforms for the purpose of their transposition into EU law.
- Offsetting the impact of excluding certain exposures from the leverage ratio calculation. ECB welcomes that the proposed regulation implements a targeted exclusion of an increase in central bank reserves, which can support a smooth implementation and transmission of monetary policy measures. For the exclusion to be fully effective, ECB suggests certain modifications. Competent authorities should, therefore, be able to set the reference date for recalibration so that the recalibration remains stable for the period of the exceptional circumstances. In addition, the competent authorities should be able to recalibrate on the basis of a reference period, rather than a reference date. The average amount of eligible central bank reserves over the period would then be taken into account in the recalibration.
- Possible further changes to certain aspects of market risk requirements. BCBS standard on market risk internal models contains sufficient flexibility for competent authorities with regard to the treatment of back-testing overshootings in extraordinary circumstances. While CRR does not contain an explicit reference to the extraordinary circumstances described in the BCBS text, some flexibility for the competent authority in assessing the results of the backtesting is allowed. However, the opinion highlights that CRR should be amended to ensure that, in extraordinary circumstances, competent authorities can take appropriate action, in line with the BCBS standard. For this purpose, the competent authorities should be given further flexibility to allow them to temporarily adjust the number of overshootings (resulting from both actual and hypothetical losses) or take other appropriate action. It would also be important that the competent authority should exercise this power across all supervised entities with regard to their respective internal models, rather than on an individual basis.
Related Link: Opinion (PDF)
Keywords: Europe, EU, Banking, COVID-19, Opinion, CRR, Regulatory Capital, Basel, Credit Risk, Market Risk, NPE, Leverage Ratio, Implementation Timeline, ECL, IFRS 9, BCBS, ECB
Previous ArticleECB Consults on Guide for Managing Climate and Environmental Risks
The European Banking Authority (EBA) published four draft principles to support supervisory efforts in assessing the representativeness of COVID-19-impacted data for banks using the internal ratings based (IRB) credit risk models.
The Bank for International Settlements (BIS) Innovation Hub updated its work program, announcing a set of projects across various centers.
Certain members of the U.S. Senate Committee on Banking, Housing, and Urban Affairs issued a letter to the Securities and Exchange Commission (SEC)
The European Insurance and Occupational Pensions Authority (EIOPA) published a consultation paper on the advice on the review of the securitization prudential framework in Solvency II.
The Prudential Regulation Authority (PRA) issued a statement on PRA buffer adjustment while the Bank of England (BoE) published a notice on the statistical reporting requirements for banks.
The Federal Financial Supervisory Authority of Germany (BaFin) proposed to amend the “Capital Investment Conduct And Organization Ordinance” and issued a draft circular on the minimum resolvability requirements for resolution planning.
The European Banking Authority (EBA) proposed guidelines, for the resolution authorities, on the publication of the write-down and conversion and bail-in exchange mechanic, with the comment period ending on September 07, 2022.
The Financial Services Authority of Indonesia (OJK) is strengthening cooperation with the Australian Prudential Regulation Authority (APRA) and the Japanese Financial Services Agency (JFSA)
The European Parliament and the Council published Regulation 2022/868 on European data governance (Data Governance Act).
The European Banking Authority (EBA) published phase 2 of its reporting framework 3.2. The technical package supports the implementation of the updated reporting framework by providing standard specifications