Featured Product

    EU Regulators Warn of Fall in Asset Quality and Rise in Credit Risk

    March 31, 2021

    The Joint Committee of ESAs (EBA, EIOPA and ESMA) published the report on risks and vulnerabilities in the financial system in EU. The report highlights how the COVID-19 pandemic continues to weigh heavily on short-term recovery prospects, highlights a number of vulnerabilities in the financial markets, and warns of possible further market corrections. The financial regulators also warn of an expected deterioration of asset quality and recommend policy actions for supervisors and regulated institutions. EBA also published its assessment of risks in the financial system in the form of a dashboard, which points to a rising share of loans that show a significant increase in credit risk (stage 2 loans).

    Macroeconomic conditions improved in the second half of 2020, supported by ongoing fiscal and monetary policy efforts, but the resurgence of the COVID-19 pandemic since the last quarter of 2020 has led to increasing economic uncertainty. The start of the rollout of vaccinations provides a crucial anchor for medium-term expectations, but insufficient production capacities, delays in deliveries, and risks related to mutations of the virus are weighing heavily on short-term recovery prospects. Macroeconomic uncertainty was generally not reflected in asset valuations and market volatility, which have recovered to pre-crisis levels, highlighting a continued risk of decoupling of valuations from economic fundamentals. In light of these risks and uncertainties, ESAs advise national competent authorities, financial institutions and market participants to take the following policy actions:

    • Prepare for an expected deterioration of asset quality. Banks should adjust provisioning models to adequately address the impact of the economic shock of the pandemic and to ensure a timely recognition of adequate levels of provisions, while having an appropriate allocation of financial instruments within the IFRS 9 impairment stages. They should engage at an early stage with struggling borrowers to efficiently restructure overindebted, but viable
      exposure. Provisioning policies of banks should continue to be a point of particular attention for supervisors.
    • Continue to develop further actions to accommodate a “low-for-long” interest rate environment and its risks. While low interest rates are important to support economic activity, they negatively impact banks’ interest income and remain the main risk for the life insurance and pension fund sector. For insurers, it is important that the regulatory framework also reflects the steep fall in interest rates experienced in recent years and the existence of negative interest rates. Proposals to this aim, as well as other proposals aiming to keep the regulatory framework fit for purpose have been sent by EIOPA to EC in its Opinion on the Solvency II 2020 review. Financial institutions should also continue to monitor, and be prepared for, changes in interest rates, especially in light of the recent upward shifts of long-term interest rates and the consequent concerns about re-emerging inflationary pressures.
    • Ensure sound lending practices and adequate pricing of risks. Banks should continue to make thorough risk assessments to ensure that lending remains viable in the future; this should be closely monitored by supervisors. Banks should continue to make thorough risk assessments to ensure that lending remains viable, including after public support measures such as loan moratoria and public guarantee schemes will expire.
    • Follow conservative policies on dividends and share buybacks. Prudence is required to maintain sufficient capitalization as a necessary condition for the continuous financing of the economy. Any distributions should not exceed thresholds of prudency and institutions should ensure that the resulting reduction in the quantity or quality of their own funds remains at levels appropriate to the current and prospective levels of risk.
    • Investment funds should further enhance their preparedness in the face of potential increases in redemptions and valuation shocks. To this end, the alignment of fund investment strategy, liquidity profile, and redemption policy should be supervised, in addition to the funds’ liquidity risk assessment and valuation processes in a context of valuation uncertainty.

     

    Related Links

    Keywords: Europe, EU, Banking, Insurance, Securities, COVID-19, Asset Quality, NPLs, Credit Risk, IFRS 9, Solvency II, Policy Recommendations, EBA, ESAs

    Featured Experts
    Related Articles
    News

    EBA Issues Erratum for Phase 2 Package of Reporting Framework 3.0

    EBA published an erratum for the technical package on phase 2 of the reporting framework 3.0.

    April 08, 2021 WebPage Regulatory News
    News

    EBA Updates Lists of Entities for Use in Capital Calculations under SA

    EBA published an erratum for the technical package on phase 2 of the reporting framework 3.0.

    April 08, 2021 WebPage Regulatory News
    News

    MAS Amends Notice on Related Party Transactions of Banks

    MAS amended Notice 643A that addresses requirements for banks to prepare statements of exposures and credit facilities to related concerns or parties.

    April 08, 2021 WebPage Regulatory News
    News

    ECB Amends Guideline on Euro Short-Term Rate

    ECB has published, in the Official Journal of the European Union, the Guideline 2021/565 on the euro short-term rate (€STR) and this guideline amends the previous ECB Guideline 2019/1265.

    April 07, 2021 WebPage Regulatory News
    News

    EBA Consults on Standards Related to FRTB-SA

    EBA launched a consultation on the draft regulatory technical standards on the list of countries with an advanced economy for calculating the equity risk under the alternative standardized approach (FRTB-SA).

    April 07, 2021 WebPage Regulatory News
    News

    PRA Proposes Rules Related to IRB Approach for Credit Risk

    PRA is proposing, via CP7/21, the approach to implementing new requirements related to the specification of the nature, severity, and duration of an economic downturn in the internal ratings-based (IRB) approach to credit risk.

    April 07, 2021 WebPage Regulatory News
    News

    BoE Outlines Regulatory Treatment of Recovery Loan Scheme of UK

    The UK government launched the Recovery Loan Scheme (RLS) as part of its continued COVID-19 support for UK businesses, as announced by HM Treasury on March 03, 2021.

    April 06, 2021 WebPage Regulatory News
    News

    FSB Addresses G20 on COVID Measures, TBTF Reforms, and Climate Risks

    FSB published a letter, from its Chair Randal K. Quarles, to the G20 Finance Ministers and Central Bank Governors, ahead of their virtual meeting on April 07, 2021.

    April 06, 2021 WebPage Regulatory News
    News

    OSFI Unwinds Temporary Increase to Covered Bond Limit for Banks

    OSFI issued a letter to the deposit-taking institutions issuing covered bonds and announced the unwinding of the temporary increase to the covered bond limit for deposit-taking institutions, effective immediately.

    April 06, 2021 WebPage Regulatory News
    News

    EU Amends CRR and Securitization Regulation in Response to Pandemic

    To support recovery from the COVID-19 crisis, EU has published two regulations to amend the securitization framework, as set out in the Securitization Regulation (2017/2402) and the Capital Requirements Regulation or CRR (575/2013).

    April 06, 2021 WebPage Regulatory News
    RESULTS 1 - 10 OF 6826