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 Board of Governors of the Federal Reserve System (FED) published the final rule that amends Regulation I to reduce the quarterly reporting burden for member banks by automating the application process for adjusting their subscriptions to the Federal Reserve Bank capital stock, except in the context of mergers.
The European Banking Authority (EBA) published its assessment of risks through the quarterly Risk Dashboard and the results of the Autumn edition of the Risk Assessment Questionnaire (RAQ).
The Hong Kong Monetary Authority (HKMA) published a circular, along with the reporting form and instructions, for self-assessment, by authorized institutions, of compliance with the Code of Banking Practice 2021.
The Financial Conduct Authority (FCA) decided to register European DataWarehouse Ltd and SecRep Limited as securitization repositories under the UK Securitization Regulation, with effect from January 17, 2022.
The European Commission (EC) published the Delegated Regulation 2022/25, which supplements the Investment Firms Regulation (IFR or Regulation 2019/2033) with respect to the regulatory technical standards specifying the methods for measuring the K-factors referred to in Article 15 of the IFR.
The Bank of International Settlements (BIS) published a paper that assesses the ways in which platform-based business models can affect financial inclusion, competition, financial stability and consumer protection.
The European Supervisory Authorities (ESAs) published the list of identified financial conglomerates for 2021.
The Australian Prudential Regulation Authority (APRA) updated the list of authorized deposit-taking institutions, granting license to Barclays Bank PLC and Crédit Agricole Corporate and Investment Bank to operate as foreign authorized deposit-taking institutions under the Banking Act 1959.
EU published, in the Official Journal of the European Union, a corrigendum to the Delegated Regulation 2015/35, which supplements Solvency II Directive (2009/138/EC).
The European Banking Authority (EBA) published an Opinion on the scale and impact of de-risking in European Union and the steps that competent authorities should take to tackle unwarranted de-risking.