Financial Services Regulation and Compliance - Banking May 2020

DOMESTIC

Central Bank of Ireland updates prudential regulatory flexibility measures relating to credit institutions directly supervised by the Central Bank

The Central Bank of Ireland (CBI) has updated its communication to credit institutions on the prudential regulatory measures adopted in response to COVID-19 (first announced in April 2020 and covered in our April bulletin). It takes into account further measures outlined in recent European Supervisory Authority announcements and to confirm that they will be applied by the CBI. The CBI will continue to review its approach to regulatory flexibility for the duration of the current disruption caused by COVID-19.

Central Bank of Ireland publishes economic letter entitled 'Bank Credit Conditions & Monetary Policy'

The research examines the results of the Bank Lending Survey of a representative sample of Ireland's banks, which is carried out by the CBI on a quarterly basis. In the survey, conducted between 19 March and 3 April, banks were asked about changes in credit market conditions in the first quarter of the year and their expectations for the second quarter. As the effects of COVID-19 pandemic only intensified towards the end of the first quarter, the banks' expectations for the second quarter will more fully reflect the effects of the virus on the credit market.

The research finds that COVID-19 had a limited impact on credit conditions during the first quarter. Banks tightened their credit conditions somewhat due to a perceived increase in the riskiness of lending but so far banks have reported no changes in their credit standards due to a deterioration in their balance sheets or in their cost of funds. Banks expect credit demand from businesses to be mixed, with demand for short-term business loans expected to increase (reflecting higher working capital and inventory needs), while demand for longer-term business credit is expected to decrease (reflecting lower investment). Banks expect recent ECB monetary policy decision to have a positive effect on their balance sheets.

EUROPEAN

ECB announces modifications to terms and conditions of its targeted longer-term refinancing operations

On 30 April 2020, the European Central Bank (ECB) announced a number of notifications to the terms and conditions of its targeted longer-term refinancing operations (TLTRO III) in order to further support the provision of credit to households and firms during this period of economic disruption and economic uncertainty.

Key changes include:

  • the interest rate on all TLTRO III operations is reduced by 25 basis points to -0.5% from June 2020 to June 2021
  • for banks meeting the lending threshold of 0% introduced on 12 March 2020, the interest rate can be as low as -1%
  • the start of the lending assessment period to ascertain whether banks qualify for the lower rate is brought forward to 1 March 2020 (from 1 April 2020). The end of the assessment period will remain unchanged at 31 March 2021

ECB announced new non-targeted pandemic emergency longer-term refinancing operations

Also on 30 April 2020, the ECB announced a new series of non-targeted pandemic emergency longer-term refinancing operations (PELTROs) to support liquidity conditions in the euro area financial system, and to contribute to preserving the smooth functioning of money markets by providing an effective liquidity backstop.

The PELTROs consist of seven additional refinancing options commencing in May 2020 and maturing in a staggered sequence between July and September 2021 in line with the duration of the ECB's collateral easing measures. They will be conducted as fixed rate tender procedures with full allotment, and the interest rate will be 25 basis points below the average rate on the main refinancing operations prevailing over the life of each PELTRO.

ECB publishes results of May 2020 financial stability review

On 26 May 2020, the ECB published the results of its financial stability review in May 2020. The review assesses how the financial system has operated so far during the COVID-19 pandemic. It considers the financial stability implications of the potential economic after-effects. It takes into account the financial vulnerabilities identified before the pandemic, including those related to financial market functioning, debt sustainability, bank profitability, and the non-bank financial sector. It also sets out policy considerations for the both the short and medium term. The review finds that the COVID-19 pandemic has greatly amplified existing vulnerabilities of the financial sector, corporates and sovereigns, and that euro area banks, though now better capitalised, are likely to face significant losses and further pressure on profitability.

EBA publishes final draft technical standards on specific reporting requirements for market risk

The European Banking Authority (EBA) has published its final draft Implementing Technical Standards (ITS) on specific reporting requirements for market risk under the Capital Requirements Regulation ((EU) No. 575/2013, CRR). The ITS introduce the first elements of the Fundamental Review of the Trading Book into EU prudential framework by means of a reporting requirement, and are expected to apply from September 2021.

The specific reporting requirements for market risk include:

  • a thresholds template, providing information on the size of institutions' trading books and the volume of their business subject to market risk and
  • a summary template, reflecting the own funds requirements under the alternative standardised approach for market risk (MKR-ASA)

These reporting requirements will at a later stage be complemented with details on the own funds requirements under the MKR-ASA and the alternative internal model approach, in line with the mandate of Article 430b, CRR.

EBA publishes preliminary assessment of the impact of COVID-19 on the EU banking sector

The EBA has published a preliminary assessment of the impact of COVID-19 on the banking sector. It notes that banks entered the crisis with strong capital and liquidity buffers and managed the pressure on operational capacities activating their contingency plans. While the crisis is expected to affect asset quality and thus the profitability of banks going forward, the capital accumulated by banks in recent years together with the capital relief provided by regulators amounts on average to 5p.p. above their overall capital requirements. The EBA notes that this capital buffer should allow banks to withstand the potential credit risk losses derived from a sensitivity analysis based on the 2018 stress test.

Key findings include the following:

  • banks have entered the COVID-19 crisis more capitalised and with better liquidity compared to previous crises
  • the COVID-19 crisis will have a negative impact on asset quality
  • banks have been using their liquidity buffers and are expected to continue using them in the coming months
  • banks’ operational resilience is under pressure

ECB launches consultation on its guide on climate-related and environmental risks

On 20 May 2020, the ECB published a guide for consultation that explains how it expects banks to safely and prudently manage climate-related and environmental risks and disclose such risks transparently under the current prudential framework (the Capital Requirements Regulation, Capital Requirements Directive IV and relevant EBA guidelines). While the ECB's immediate focus is on the COVID-19 pandemic, it remains committed to advancing the management and disclosure of climate-related and environmental risks in the banking sector.

The draft guide aims to raise industry awareness of climate-related and environmental risks and to improve the management of such risks, and it is intended to serve as a basis for supervisory dialogue. The consultation on the draft guide is open until 25 September 2015. As part of the consultation process, an industry dialogue webinar will be hosted by the ECB on 17 June 2020. The ECB has also published a list of FAQs.

EBA proposes framework for STS synthetic securitisation

On 6 May 2020, the EBA published its proposals for developing a simple, transparent and standardised (STS) framework for synthetic securitisation. The proposal, which is limited to balance-sheet securitisation, includes a list of criteria to be considered when labelling the synthetic securitisation as 'STS' and provides the pros and cons of a potential differentiated capital treatment for this type of securitisation.

EBA publishes final guidelines on the methodology to determine the weighted average maturity of contractual payments due under the tranche of a securitisation transaction

The EBA has published its final guidelines on the determination of the weighted average maturity of the contractual payments due under the tranche of a securitisation transaction, as laid down in the CRR.

The purpose of the guidelines is to provide guiding principles for institutions that opt for the use of the weighted average maturity approach instead of the final legal maturity approach when calculating their capital requirements. The main areas covered by the guidelines are:

  • meaning of contractual payments due under the tranche
  • data and information requirements
  • methodologies for determining the contractual payments of the securitised exposures due under the tranche both for traditional and synthetic securitisations
  • implementation and use of the weighted average maturity model

The guidelines apply from 1 September 2020.

EBA launches additional EU-wide transparency exercise

On 4 May 2020, the EBA launched an additional EU-wide transparency exercise to provide market participants with updated information on the financial conditions of EU banks as of 31 December 2019, before the start of the COVID-19 pandemic. The data will cover banks' capital positions, financial assets, financial liabilities, risk exposure amounts, sovereign exposures and asset quality. The EBA has stated that it considers that the provision to market participants of continuous information on banks' exposures and asset quality is crucial, particularly in times of increased uncertainty. The results of this exercise are expected to be published at the beginning of June.

ECB takes note of German Federal Constitutional Court ruling regarding the PSPP and remains fully committed to its mandate

In a press release dated 5 May 2020, the ECB took note of the judgment of the German Federal Constitutional Court regarding the Public Sector Purchase Programme (PSPP).

It notes that the ECB's Governing Council remains fully committed to its mandate to ensure that inflation rises to levels consistent with its medium-term aim and that the monetary policy action taken in pursuit of the objective of maintaining price stability is transmitted to all parts of the economy and to all jurisdictions of the euro area. It also notes that the Court of Justice of the European Union had ruled in 2018 that the ECB is acting within its price stability mandate.

EBA publishes final guidelines on credit risk mitigation for institutions applying the IRB approach with own estimates

The EBA has published its final guidelines on credit risk mitigation (CRM) in the context of the advanced internal ratings-based (A-IRB) approach. The guidelines clarify the application of the CRM provisions currently laid down in the CRR applicable to institutions using the A-IRB approach. In particular, they clarify the eligibility requirements for different CRM techniques, namely funded and unfunded credit protection (e.g. collateral and guarantees), available to institutions.

The guidelines complement the EBA Guidelines on the PD estimation, LGD estimation and the treatment of defaulted exposures, which clarify how to adjust LGD estimates to recognise the effects of collateral (i.e. funded credit protection other than netting).

The guidelines will apply as of 1 January 2022 at the latest, but earlier implementation is encouraged. The EBA states that institutions should engage with their competent authorities at an early stage to determine an adequate implementation plan.

ECB publishes opinion on proposed amendments to EU prudential framework in response to COVID-19

On 20 May 2020, the ECB published an opinion on proposed amendments to the CRR and CRR II in response to COVID-19. The ECB expresses its support for the European Commission's initiative to increase banks' capacity to lend and absorb losses related to COVID-19, while ensuring their continued resilience. The ECB notes that any further changes to the proposed regulation should not fundamentally alter the prudential framework, which should continue to respect the agreed Basel standards and avoid further fragmentation of the European single rulebook. The ECB also makes a number of specific observations on the proposed amendments. The opinion was published in the Official Journal on 29 May 2020.

EBA publishes report on interlinkages between recovery and resolution planning

The EBA has published a report assessing the interlinkages between recovery and resolution planning under the Bank Recovery and Resolution Directive (BRRD), with the aim of enhancing synergies between the two phases and ensuring consistency in their potential implementation.

The report also analyses the potential impact of recovery options on the resolvability of an institution and introduces an assessment framework to support the assessment and consultation process between resolution and competent authorities.

EBA consults on technical standards for contractual recognition of stay powers under the BRRD

The EBA has launched a public consultation on its draft Regulatory Technical Standards (RTS) for contractual recognition of stay powers laid down in the BRRD. These RTS support the effective application of temporary restrictions on early termination rights (resolution stays) in relation to financial contracts governed by the law of a third country. These standards are the first EBA mandate stemming from the revised BRRD and aim at promoting the effective application of recovery and resolution powers to banks and banking groups and to foster convergence of practices between relevant authorities and institutions across the EU. The consultation runs until 15 August 2020.

ECB blog post on the importance of technology for the banking sector, as illustrated by the COVID-19 pandemic

The ECB has published a blog post by Pentti Hakkarainen, member of the ECB's Supervisory Board entitled "The first lesson from the pandemic: state-of-the-art technology is vital." In the blog post, Mr. Hakkarainen discusses how the COVID-19 pandemic has highlighted how important technology is for banks' business continuity, as well as how the crisis has presented opportunities to further accelerate the digital transformation of the banking industry. The blog post also looks at how technology will shape the future of the banking sector.

ECB delivers speech on digital currency

Yves Mersch, a Member of the Executive Board of the ECB and Vice-Chair of the ECB's Supervisory Board, delivered a speech on 11 May at the Consensus 2020 virtual conference entitled "An ECB digital currency – a flight of fancy?" Mr Mersch discussed how the ECB is working on a central bank digital currency (CBDC), but notes that demand for cash in the Eurozone is not receding, meaning that the "ECB's debate on CBDCs is therefore mainly analytical." He notes however that the lack of a "business case" for a CBDC at present should not and does not stop the ECB from seriously exploring the optimal design of a CBDC so that it will be well prepared should it ever decide to issue a digital currency. Mr Mersch said that the ECB has set up a task force on a CBDC within the Eurosystem.

ECB announces new measures to increase share of female staff members

The ECB has announced a new programme to further improve the gender balance of its staff at all levels. The strategy defines target percentages focusing on the annual share of women being appointed to new and open positions as well as targets for the overall share of female staff at various salary levels. The strategy covers the period until 2026, so as to fall within the mandate of President Christine Lagarde.

The objective is to fill at least half of new and open positions with women on all levels. The targets aim to increase the share of women at the different levels to between 40% and 51% by 2026. The ECB will publish interim assessments in 2022 and 2024. Staff members who do not wish to declare themselves as either female or male will not be included in the statistics. The targets are accompanied by a set of other measures to support gender diversity.

For more information on this topic please contact any member of A&L Goodbody's Financial Regulation team.

Date published: 8 June 2020