Financial Services Regulation and Compliance - Banking Mar 2020
Financial Services Regulation and Compliance - Banking Mar 2020
Central Bank of Ireland meets with the Banking & Payments Federation Ireland (BPFI) and five retail banks
On 19 March 2020, the Central Bank of Ireland met with the BPFI and the five main retail banks to discuss customers affected by the COVID-19 pandemic. The Central Bank and the BPFI agreed that there is no impediment to the banks introducing a three-month COVID-19 payment break for customers affected by the pandemic. Recent decisions by the Central Bank, also as part of the Eurosystem and Single Supervisory Mechanisms, are designed to ensure monetary and financial stability and that the financial system operates in the best interests of consumers and the wider economy. Wide ranging measures such as the launch of a €750bn Pandemic Emergency Purchase Programme (PEPP) were introduced, temporary capital and operational relief to banks across the Eurozone, and the release the Counter Cyclical Capital Buffer (CCyB) from 1% to 0%.
Central Bank of Ireland release the Counter Cyclical Capital Buffer
On 18 March 2020 the Central Bank of Ireland announced that it would release the Counter Cyclical Capital Buffer (CCyB) from 1% to 0% by 2 April 2020. This aims to boost credit and provide support to businesses, households and the wider economy affected by the COVID-19 pandemic. By releasing the CCyB at this time, it is expected that the finance industry will be in a position to provide an additional €13bn of lending to the Irish economy.
Statement by the Governor of the Central Bank of Ireland, Gabriel Makhlouf
The Governor of the Central Bank of Ireland, Gabriel Makhlouf, has said in a statement issued on 13 March, that the Central Bank expects banks in Ireland to use the positive effects of the measures recently announced by the European Central Bank (ECB) to support the economy. Governor Makhlouf noted that the Governing Council of the ECB believes that an ambitious and coordinated fiscal policy response is required to mitigate the economic impact of the COVID-19 virus and support workers and businesses, and that fiscal measures such as those announced by the Irish government are the primary policy tool to deal with this type of shock. Governor Makhlouf also said that the Central Bank does not want to see banks increase dividend distributions or variable remunerations as a result of the ECB measures.
Range of measures announced due to COVID-19 pandemic
Following engagement with Ireland's five retail banks, the Minister for Finance Paschal Donohoe TD has announced a range of measures designed to provide support for bank customers affected by the fallout from COVID-19.
The measures are seen as building on the Government response, along with the ECB’s monetary and regulatory policy measures, to deliver support to individuals and businesses facing COVID-19 related difficulties.
The following measures have been announced:
flexible loan and mortgage repayment arrangements including the possibility of a payment break of up to three months for mortgages and other loans
buy to Let bank customer support flexible repayment arrangements to be made available to buy-to-let bank customers with tenants affected by COVID-19, with the possibility of using the opportunity to seek a payment break of up to three months
SME customer supports: banks are working to ensure an extensive range of credit and cash flow supports alongside supply chain supports for business who are trying to manage pressures. The deferral for three months will also be available to SMEs
Euronext Brussels designated as a market by Revenue
On 20 March 2020, the Revenue Commissioners made a Regulation cited as the Stamp Duty (Designation of Exchanges and Markets) (No.1) Regulations 2020 designating Euronext Brussels as a market.
The Regulation follows the Migration of Participating Securities Act 2020 (the Act), which provides a legislative mechanism to facilitate the migration of Irish securities from CREST to another EU based central securities depository (CSD). While it had always been proposed to move to Euroclear Bank Belgium, this Regulation formally designates Brussels as the new CSD for Ireland.
ECB sends letter to significant institutions on contingency preparedness in the context of COVID-19
On 3 March 2020, the ECB sent a letter to all significant institutions it supervises reminding them of the critical need to consider and address potential pandemic risk in their contingency strategies. The ECB asked banks to review their business continuity plans and consider what actions could be taken to improve preparedness to minimise the potential adverse effects of the spread of COVID-19. ECB Banking Supervision will engage with banks to ensure the continuity of their critical functions.
To keep liquidity flowing, the ECB will launch a €750bn temporary asset purchase programme of private and public sector securities to counter the serious risks to the monetary policy transmission mechanism and the outlook for the euro area posed by the COVID-19 outbreak.
Purchases will be conducted until the end of 2020 and will include all the asset categories eligible under the existing asset purchase programme. It will also consider the debt of Greece. The Governing Council will terminate net asset purchases under PEPP once it judges that the coronavirus COVID-19 crisis phase is over, but in any case not before the end of the year.
ECB Banking Supervision provides temporary capital and operation relief in response to coronavirus
On 12 March 2020, the ECB announced measures to ensure that its directly supervised banks can continue to fund the real economy during the COVID-19 pandemic.
The ECB will allow banks to operate temporarily below the level of capital defined by the Pillar 2 Guidance, the capital conservation buffer, and the liquidity coverage ratio. The ECB expects that these measures will be enhanced by the relaxation of the countercyclical capital buffer by national authorities.
The ECB is also allowing banks to partially used capital instruments that do not qualify as common equity tier 1 capital to meet the Pillar 2 requirements. This brings forward a measure that was initially due to come into effect in January 2021, as part of the last revision of the Capital Requirements Directive.
In addition, the ECB is discussing individual measures with banks, such as adjusting timetables, processes, and deadlines. The ECB also supports the EBA's decision to postpone the 2020 EBA EU-wide stress test (see below), and will extend the postponement to all banks subject to the 2020 stress test.
The ECB notes that banks should continue to apply sound underwriting standards, pursue adequate policies regarding the recognition and coverage of non-performing exposures, and conduct solid capital and liquidity planning and robust risk management.
ECB Banking Supervision provides further flexibility to banks in reaction to COVID-19
The ECB has introduced supervisory flexibility regarding the treatment of non-performing loans, in particular to allow banks to fully benefit from guarantees and moratoriums put in place by public authorities to deal with the impact of COVID-19.
In addition, the ECB notes that excessive volatility of loan loss provisioning should be tackled to avoid excessive procyclicality of regulatory capital and published financial statements. Within its prudential remit, the ECB recommends that banks avoid procyclical assumptions in their models to determine provisions and that banks that have not done this so far opt for the IFRS 9 transitional rules.
ECB asks banks not to pay dividends until at least October 2020
To boost banks' capacity to absorb losses and support lending during the COVID-19 pandemic, the ECB has said that banks should not pay dividends for the financial years 2019 and 2020 until at least 1 October 2020. Banks should also refrain from share buy-backs aimed at remunerating shareholders.
This does not retroactively cancel any dividends already paid out for the financial year 2019. However, banks that have asked their shareholders to vote on a dividend distribution at their upcoming General Shareholders Meetings will be expected to amend such proposals in line with the new recommendation.
ESMA requires net short position holders to report positions of 0.1% and above
ESMA has issued a decision temporarily requiring the holders of net short positions in shares traded on an EU regulated market to notify the relevant national competent authority (NCA) if the position reaches or exceeds 0.1% of the issued share capital after the entry into force of the decision.
Lowering the reporting threshold is a precautionary measure that ESMA considers essential for authorities to monitor developments in markets during these exceptional circumstances linked to the COVID-19 pandemic. The temporary measures apply immediately (as of 16 March 2020) to any natural or legal person, irrespective of their country of residence, and do not apply to shares traded on a regulated market where the principal venue for trading is located in a third country, market making or stabilisation activities.
EBA statement on actions to mitigate the impact of COVID-19
The European Banking Authority (EBA) has issued a statement on the actions it is taking to mitigate the impact of the COVID-19 outbreak on the banking sector.
The EU-wise stress test exercise has been postponed until 2021, to allow banks to prioritise continuity of their core operations, including support for their customers. For 2020, the EBA will carry out an additional EU-wide transparency exercise in order to provide updated information on banks’ exposures and asset quality to market participants. The EBA has also advised NCAs to be flexible and pragmatic with supervisory activities, including by postponing non-essential activities or allowing banks some leeway in the remittance dates for some supervisory reporting.
The EBA also states that NCAs should make use of the flexibility already embedded in the existing regulatory framework – for example, the ECB Banking Supervision's decision to allow banks to cover Pillar 2 requirements with capital instruments other than common equity tier 1.
On 2 March 2020, the EBA published its Report assessing institutions' Pillar 3 disclosures. The report identifies best practices and potential areas for improvement. While the Report found overall progress in institutions’ prudential disclosures, it found that some practices may still impair the proper communication of their risk profile in a comparable way, compromising the ultimate objective of market discipline.
The EBA also observes that institutions are starting to embed sustainability considerations into their strategic agenda and to recognise environmental and climate changes risks as emerging risks.
BCBS announces deferral of Basel III implementation to increase operational capacity of banks and supervisors
The Basel Committee on Banking Supervision (BCBS) has announced the deferral of the implementation of the final Basel III reforms, in response to the financial stability issues resulting from the COVID-19 outbreak. The deferral is to increase the operational capacity of banks and supervisors to respond to immediate financial stability priorities.
The BCBS's oversight body, the Group of Central Bank Governors and Heads of Supervision (GHOS), has endorsed the following set of measures to provide additional operational capacity for banks and supervisors:
the implementation date of the Basel III standards finalised in December 2017 has been deferred by one year to 1 January 2023. The accompanying transitional arrangements for the output floor has also been extended by one year to 1 January 2028
The BCBS does not expect the revised timeline to dilute the capital strength of the global banking system.
EBA launches call for papers for its 2020 Policy Research Workshop
The European Banking Authority (EBA) has launched a call for research papers for its 2020 Policy Research Workshop. The workshop is due to take place from 12-13 November in Paris on the topic "New technologies in the banking sector – impacts, risks and opportunities". The submission deadline is 10 July 2020.
ECB Annual Report on supervisory activities 2019
The ECB has published its annual report on supervisory activities for 2019.
Some key figures include:
banks' Common Equity Tier 1 capital ratio remained unchanged in 2019 from 2018, at 14.1%. The level of this highest quality capital held by banks was almost three percentage points higher than in 2014
banks' return on equity fell in 5.8% in 2019, from 6.8% in 2018. Weak profitability remains one of the main challenges for banks in the euro area
the Supervisory Board of the ECB took 2,356 decision in 2019, most on fit and proper assessments (1,114), internal models (176) and own funds (169)
The Chair of the Supervisory Board usually presents the report to the European Parliament at a public hearing, but this did not take place this year due to the COVID-19 pandemic.
ESMA publishes statement on actions to mitigate the impact of COVID-19 on Reporting Securities Financing Transactions
ESMA has issued a public statement delaying the implementation of the reporting obligations under the Securities Financing Transactions Regulation (SFTR) and the Markets in Financial Instruments Regulation (MiFIR). Reporting obligations for banks and certain investment firms had been due to become applicable on 13 April 2020, but this start date has now been delayed by three months until 13 July 2020, due to the impact of COVID-19 on the financial industry.
The statement, originally published on 19 March, was revised on 26 March to clarify that SFTs concluded between 13 April 2020 and 13 July 2020 and SFTs subject to backloading under SFTR are also covered.
European Commission Implementing Regulation amending ITS on supervisory reporting under CCR published
Commission Implementing Regulation (EU) 2020/429 of 14 February 2020 amending Implementing Regulation (EU) No 680/2014 laying down implementing technical standards with regard to supervisory reporting of institutions according to Regulation (EU) No 575/2013 was published in the Official Journal of the EU on 30 March 2020.
The European Commission had adopted the Implementing Regulation on 14 February 2020, and it entered into force on 31 March 2020.
EBA publishes final draft RTS on key areas for the EU implementation of the FRTB
The EBA has published its final draft Regulatory Technical Standards (RTS) on the new Internal Model Approach (IMA) under the Fundamental Review of the Trading Book (FRTB). These RTS conclude the first phase of the EBA roadmap towards implementation of the market and counterparty credit risk frameworks in the EU.
These draft RTS cover 11 mandates and are grouped in three different documents:
the final draft RTS on liquidity horizons for the IMA
the final draft RTS on back-testing and profit and loss attribution requirements
the final draft RTS on criteria for assessing the modellability of risk factors under the IMA
ESMA issues guidance on accounting implications of COVID-19
ESMA has issued a public statement providing guidance on some accounting implications of the economic support and relief measures adopted by Member States in response to the COVID-19 outbreak. The measures include moratoria on loan repayments and have an impact on the calculation of expected credit losses in accordance with IFRS 9.
The statement provides guidance to issuers and auditors on the application of IFRS financial instruments, specifically as regards the calculation of expected credit losses and related disclosure requirements.
The EBA has also issued a related statement regarding the prudential framework and accounting implications of COVID-19.
ECB publishes FAQs on ECB supervisory measures in response to COVID-19
The ECB has published on its website FAQs on the supervisory measures it has adopted in response to the ongoing COVID-19 outbreak. The FAQs will be updated depending on developments.
ECB Speech - Climate change-related risks for financial sector
In a speech at the launch of the COP 26 Private Finance Agenda at the end of February, Christine Lagarde, ECB President, discussed climate change-related risks for the financial sector. Ms Lagarde discussed the main climate change related risks as falling into three categories, namely risks stemming from disregard, delay and deficiency.
Ms Lagarde noted that disregarding the implications of climate change can generate significant risks for the financial sector, and so banks must consider the risk that climate-related events create for their credit exposures.
The second category of risk was risks from delaying the response to climate change. If intervention is delayed, the reduction in emissions may have to be steeper, making the transition towards carbon neutrality more disruptive for the economy. Certain economic activities may be rendered obsolete, leading to a re-pricing of assets and the risk that some will become stranded. It is therefore vital for financial institutions to understand the risks on their balance sheets. Greater disclosure by companies on their climate exposure is essential, to bolster the ability of market participants and financial institutions to carry out appropriate risk assessment. Ms Lagarde also stated that the ECB is preparing for a macroprudential stress test to assess climate-related risks, which aims to assess how climate-related risks propagate through the real economy and the financial system.
Finally, Ms Lagarde discussed the risks from deficiency in the provision of finance. She noted it is vital for the financial sector to provide finance of sufficient quantity and quality to help our economies transition towards carbon neutrality, and that while a common approach is needed to mobilise global funding for the energy transition, we must guard against attempts to "green wash."