Featured Product

    ECB Publishes Results of Financial Stability Review in May 2020

    May 26, 2020

    ECB published results of the financial stability review in May 2020. Among other issues, the financial stability review assesses operations of the financial system so far during the COVID-19 pandemic. Overall, the review concludes that the pandemic greatly amplified existing vulnerabilities of the financial sector, corporates, and sovereigns. Euro area banks, although now better capitalized, are likely to face significant losses and further pressure on profitability. The review also highlights that the policy responses to the pandemic are essential to preserve financial stability.

    The review considers the financial stability implications of the potential economic after-effects of the pandemic while also taking account of the financial vulnerabilities identified before the pandemic, including those related to financial market functioning, debt sustainability, bank profitability, and the non-bank financial sector. The review also sets out policy considerations for the near and the medium term. This issue of the review contains two special features: one feature analyzes trends in real estate lending standards and derives implications for financial stability while the other feature discusses derivatives-related liquidity risk facing investment funds.

    The results of the review highlight that, despite the immense social and economic disruption in the wake of the COVID-19 pandemic, decisive policy responses have helped to prevent a seizing-up of the financial system. Banks should benefit from the action of prudential authorities across the euro area to ease capital requirements and grant more operational flexibility to maintain the flow of credit to the economy. In addition, ECB Banking Supervision recommended that banks temporarily refrain from paying dividends or buying back shares, strengthening their capacity to absorb losses and avoid deleveraging. These capital measures are expected to remain in place until the economic recovery is well established. Short-term funding remained ample in euro area banks, which entered the stress episode with larger buffers than during the 2008 crisis. The Single Supervisory Mechanism has allowed banks to operate temporarily below the liquidity coverage ratio requirement, with the aim of banks using liquidity buffers to support the real economy.

    However, the impact of COVID-19 on the economy and markets has increased existing vulnerabilities for euro area financial stability. Bank valuations fell to record lows and bank funding costs increased, despite the enhanced resilience since the global financial crisis. An expected increase in credit risk in the wake of the pandemic weakened the outlook for bank profitability, although in the near-term government schemes may offset some losses. Banks continue to face the challenges of operating in business continuity mode, including the associated increase in cyber risk. Banks also need to continue managing the implications of the transition to a greener economy. The main euro area central clearing counterparties were able to avoid operational disruption during the turmoil. Despite the high volatility in financial markets prompting large variation margin calls in both cleared and non-cleared derivatives markets, calls were in general met by market participants. The risk of corrections in euro area residential and commercial real estate markets has increased in the wake of the pandemic. 

    The assessment shows that credit rating downgrades of banks might increase their market funding costs, limit their ability to achieve minimum requirement for own funds and eligible liabilities, or MREL, targets, and weigh on future profitability. There remains a risk that credit rating agencies could downgrade sovereigns and/or banks on the back of rising credit risks. Such a development could reactivate the negative feedback loops of the sovereign-bank nexus, especially for Italy and Portugal, as well as for Spain, where bank ratings are closest to non-investment grade. The reforms to bank resolution and bail-in should reduce the strength of the nexus compared with past crises. However, the benefits of these reforms could be weaker if banks are unable to reach their targets in terms of issuing bail-in-able debt. 


    Related Links

    Keywords: Europe, EU, Banking, Insurance, Securities, Financial Stability Review, COVID-19, Macro-prudential Policy, Systemic Risk, Operational Risk, Credit Risk, Liquidity Risk, MREL, Basel, Credit Rating Agencies, ECB

    Featured Experts
    Related Articles
    News

    EC Consults on PSD2 and Open Finance; EU Reaches Agreement on DORA

    The European Commission (EC) published a public consultation on the review of revised payment services directive (PSD2) and open finance.

    May 11, 2022 WebPage Regulatory News
    News

    EC Mandates ESAs to Propose Amendments to SFDR Technical Standards

    The European Commission (EC) has issued two letters mandating the European Supervisory Authorities (ESAs) to jointly propose amendments to the regulatory technical standards under Sustainable Finance Disclosure Regulation or SFDR.

    May 11, 2022 WebPage Regulatory News
    News

    EBA Examines Supervisory Practices, Issues Deposits Reporting Template

    The European Banking Authority (EBA) published its annual report on convergence of supervisory practices for 2021. Additionally, following a request from the European Commission (EC),

    May 11, 2022 WebPage Regulatory News
    News

    US Agency Publications Address Basel, Reporting, and CECL Developments

    The Farm Credit Administration published, in the Federal Register, the final rule on implementation of the Current Expected Credit Losses (CECL) methodology for allowances

    May 09, 2022 WebPage Regulatory News
    News

    SEC Extends Comment Period on Climate Risk Disclosures

    The U.S. Securities and Exchange Commission (SEC) looks set to intensify focus on crypto-assets and cyber risk and extended the comment period on the proposed rules to enhance and standardize climate-related disclosures for investors.

    May 09, 2022 WebPage Regulatory News
    News

    APRA Reduces Committed Liquidity Facility, Issues Other Updates

    The Australian Prudential Regulation Authority (APRA) announced reduction in the aggregate Committed Liquidity Facility and issued an update on the operational preparedness for zero and negative market interest rates.

    May 09, 2022 WebPage Regulatory News
    News

    CMF Consults on Basel Rules, Presents Roadmap to Address Climate Risks

    The Commission for the Financial Market (CMF) in Chile published capital adequacy ratios (as of February 2022, January 2022, and December 2021) for 17 banks and for the banking system.

    May 06, 2022 WebPage Regulatory News
    News

    PRA Issues Statement on NPEs and Policy on Trading Activity Wind-Down

    The Prudential Regulation Authority (PRA) issued a statement on the European Banking Authority (EBA) guidelines on management of non-performing exposures (NPEs) and forborne exposures.

    May 06, 2022 WebPage Regulatory News
    News

    EBA Updates Standards for 2023 Benchmarking of Internal Approaches

    The European Banking Authority (EBA) updated the implementing technical standards that specify the data collection for the 2023 supervisory benchmarking exercise in relation to the internal approaches used in market risk, credit risk, and IFRS 9 accounting.

    May 06, 2022 WebPage Regulatory News
    News

    EIOPA Responds to Stakeholder Views on Blockchain in Insurance

    The European Insurance and Occupational Pensions Authority (EIOPA) published a feedback statement on the responses received to the consultation on blockchain and smart contracts in insurance.

    May 06, 2022 WebPage Regulatory News
    RESULTS 1 - 10 OF 8179