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    ECB Ends Liquidity Relief, Assesses NPL Situation at Banks

    December 17, 2021

    The European Central Bank (ECB) decided to not extend, beyond December 2021, the liquidity relief measure that allowed banks to operate with a liquidity coverage ratio below 100% and expects all banks to maintain a the ratio of above 100% as of January 01, 2022. ECB also published an action plan to address the recommendations of an independent review mandated by its Governing Council in November 2020, following the five major incidents that affected TARGET2 and TARGET2 Securities in 2020. Eurosystem will implement majority of measures by the end of 2022. In addition, the ECB Banking Supervision published a letter from Andrea Enria, the Chair of the Supervisory Board of ECB, answering questions on the impact of banking rules on bankruptcies caused by the COVID-19 pandemic.

    Andrea Enria's letter on the impact of banking rules on bankruptcies amid pandemic highlights that it is still difficult to estimate the impact of the pandemic on the amount of non-performing loans, or NPLs, for euro area banks, as the loan moratoria are being gradually removed. Nevertheless, with reference to the second quarter of this year, increasing inflows of loans classified as underperforming could be observed in some vulnerable sectors of the economy and an overall higher risk profile could be observed among loans subject to expired coronavirus measures when compared to total loans. Therefore, it is important for significant institutions to ensure that risks are adequately assessed, classified, measured, and reflected on their balance sheets. The letter notes that it is not appropriate to ease credit assessments, as this would delay not only the correct representation of risk in the financial statements, but also the adequate and timely management of these exposures and the provision of adequate solutions to viable distressed debtors. This would in turn result in higher losses for the banks. The letter also specified that banks successfully continued to decrease legacy non-performing loans and the non-performing loans ratios even during the pandemic and the recession. It is important that non-performing loans coverage expectations remain in place, as they not only ensure that banks build up the required provisioning buffers to reduce non-performing loans bur also provide a strong incentive for banks to address such loans timely.

    Additionally, the ECB action plan on addressing the recommendations issued by the Eurosystem oversight function and the Internal Audit Committee in relation to the TARGET2 information technology incidents consists of six workstreams: change and release management, business continuity management, fail-over and recovery tests, communication protocols, governance, and data center and information technology operations. Following the five major non-cyber, information technology incidents affecting TARGET systems, ECB had appointed Deloitte, in December 2020, to conduct an independent review of these incidents. In July 2021, ECB had published the results of Deloitte’s review and the Eurosystem’s response, in which the Eurosystem accepted the general conclusions and recommendations of the review and committed to addressing them as soon as possible. Measures addressing several recommendations have already been agreed or implemented in the course of 2021, while most of the remaining ones will be implemented by the end of 2022. The measures will benefit all TARGET services, including TARGET Instant Payment Settlement (TIPS). Market participants will be kept informed about their deployment. ECB also published a letter related to the action plan.

     

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    Keywords: Europe, EU, Banking, LCR, Liquidity Risk, COVID-19, Credit Risk, NPLs, TARGET2, Action Plan, Basel, ECB

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