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.
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
Leading economist; commercial real estate; performance forecasting, econometric infrastructure; data modeling; credit risk modeling; portfolio assessment; custom commercial real estate analysis; thought leader.
Across 35 years in banking, Blake has gained deep insights into the inner working of this sector. Over the last two decades, Blake has been an Operating Committee member, leading teams and executing strategies in Credit and Enterprise Risk as well as Line of Business. His focus over this time has been primarily Commercial/Corporate with particular emphasis on CRE. Blake has spent most of his career with large and mid-size banks. Blake joined Moody’s Analytics in 2021 after leading the transformation of the credit approval and reporting process at a $25 billion bank.
The European Central Bank (ECB) is undertaking the integrated reporting framework (IReF) project to integrate statistical requirements for banks into a standardized reporting framework that would be applicable across the euro area and adopted by authorities in other EU member states.
The Basel Committee on Banking Supervision met, shortly after a gathering of the Group of Central Bank Governors and Heads of Supervision (GHOS), the oversight body of BCBS.
The International Organization of Securities Commissions (IOSCO) welcomed the work of the international audit and assurance standard setters—the International Auditing and Assurance Standards Board (IAASB)
The European Banking Authority (EBA) has been awarded the top European Standard for its environmental performance under the European Eco-Management and Audit Scheme (EMAS).
The Bank of England (BoE) published a Statistical Notice (2022/18), which informs that due to the Bank Holiday granted for Her Majesty Queen Elizabeth II’s State Funeral on Monday September 19, 2022.
The French Prudential Control and Resolution Authority (ACPR) announced that the European Banking Authority (EBA) has updated its filing rules and the implementation dates for certain modules of the EBA reporting framework 3.2.
The Australian Prudential Regulation Authority (APRA) announced reduction in the aggregate Committed Liquidity Facility (CLF) for authorized deposit-taking entities to ~USD 33 billion on September 01, 2022.
The China Banking and Insurance Regulatory Commission (CBIRC) published the administrative measures for internal control of wealth management companies, which come into force on the day of promulgation.
The Prudential Regulation Authority (PRA) proposed its approach to policy-making as it takes on wider rulemaking responsibilities under the Financial Services and Markets Bill.
The European Central Bank (ECB) published its opinion on the proposal for a regulation on harmonized rules on fair access to and use of data (Data Act).