Regulatory Blog

Supervisory measures in reaction to the Corona crisis – Overview

Closed factories and shops, cancelled events, travel bans, wide-ranging curfews – the Corona crisis turns out to have alarming and sudden effects on the global economy. The dramatic meltdown of leading stock markets in recent weeks seems to reflect the fears of a long-lasting recession. For some people, this brings back bad memories of the financial crisis back in 2008. Although “this time is different” [credits to Reinhart/Rogoff], the financial sector is facing severe second-order effects, including:

  • A unprecedented wave of distressed and defaulted clients leading to a sharp increase in loan loss provisions and thus serious P&L hits
  • Deterioration and high volatility of prices for bonds and equities that serve, e.g. as liquid assets or collateral

In addition, banks themselves need to cope with multiple operational challenges resulting from the extensive shutdown, e.g. working from home as a trader within a highly regulated environment or managing ongoing on-site inspections and important implementation projects “remotely”.

Therefore, besides several short-term measures to support companies, employees and self-employed people, the governments and respective competent authorities also agreed on various temporary reliefs for banks to ensure that they “can continue to fulfil their role to fund households and corporations amid the coronavirus-related economic shock to the global economy” [ECB].

PwC is committed to to be side by side with our clients in these difficult times, in any way possible to support institutions deal with the many challenges they are facing. Part of this commitment includes informing our clients proactively and support analyzing the potential impact of this crisis and related measures. Through this Regulatory Blog we will continuously provide you with updates on regulatory and supervisory measures and share our views on how these could affect banks. (this time only in English since we have a steadily growing number of international readers – thank you for your understanding!). Please don’t wait to contact us whenever you need our support – be it in understanding and analyzing the impact of the crisis and the potential measures or in coping with the operational challenges in these extraordinary times. And most important: Please stay healthy and take good care of you and your loved ones!

Supervisory measures in reaction to the Corona crisis – Minimum liquidity requirements

The following blog post is part of the overview of supervisory measures in reaction to the Corona crisis: Supervisory measures in reaction to the Corona crisis – Overview.

Minimum liquidity requirements

Beyond the additional capital needs, banks might face significant liquidity constraints. This might be due to higher outflows, e.g. stemming from retail and operational accounts or additional collateral calls in times of stress, and lower inflows, e.g. as a result of counterparty defaults or deferred payments. Further, the deterioration of the credit quality of bond or equity issuers might lead to decreasing volume of eligible liquid assets. 

Therefore, the ECB allows banks to make use of their liquidity buffer under stress. This means to operate temporarily below the minimum LCR level of 100% in order to ensure liquidity in the system and avoid contagion effects that might trigger liquidity problems in other institutions. However, the precautions to be taken according to Art. 414 CRR when there is an (expected) LCR shortfall will be still applicable, i.e. immediate notification to the competent authorities, preparation of a liquidity restoration plan and daily LCR reporting. (please click to enlarge)

Supervisory measures in reaction to the Corona crisis – Defaults, Non-Performing Loans (NPL) and provisioning

Defaults, Non-Performing Loans (NPL) and provisioning

The following blog post is part of the overview of supervisory measures in reaction to the Corona crisis:Supervisory measures in reaction to the Corona crisis – Overview.

Since banks fear a massive wave of counterparty defaults in the course of the Corona crisis, the ECB refers to the flexibility of the current NPL framework. In particular, the ECB allows banks to benefit from guarantees and moratoriums put in place by public authorities to tackle the upcoming distress in the following manner:

  •  Supervisors will grant flexibility regarding the classification of debtors as defaulted due to “unlikeliness to pay” when banks call on public guarantees issued in the context of the Corona crisis. Further flexibility will be exercised regarding loans under Covid-19 related public moratoriums.
  • Loans which become non-performing and are under public guarantees will benefit from preferential prudential treatment in terms of supervisory expectations about loss provisioning (i.e. 0% coverage rate for the first seven years of the vintage count when determining the NPL backstop. However, the NPL backstop itself is not going to be suspended according to current discussions). Please see below for an overview of the mechanism of the NPL backstop in times of the COVID-19 crisis.S
  • Supervisors will deploy full flexibility when discussing with banks the implementation of NPL reduction strategies, taking into account the extraordinary nature of current market conditions.(please click to enlarge)


Statement of EBA on the application of the prudential framework regarding Default, Forbearance and IFRS 9 in light of COVID-19 measures (March 25, 2020)

In the light of the COVID-19 crisis, EBA published on March 25 a statement on how to apply the rules on the definition of default (DoD), forbearance (FB) and the accounting treatment under IFRS 9 (ECL). The main principle behind DoD, FB and ECL is to ensure a sound identification of credit-impaired assets. It is crucial that these rules must be applied consistently and comparably, even if the capabilities of banks in the current crisis might be limited. EBA emphasizes that all the flexibility of the prudential framework should be used and gives some guidelines on how the rules should be applied.

Supervisory measures in reaction to the Corona crisis – Minimum capital ratios

Minimum capital ratios

The following blog post is part of the overview of supervisory measures in reaction to the Corona crisis:Supervisory measures in reaction to the Corona crisis – Overview.

According to the ad hoc measures taken by the ECB, banks can fully use their capital buffers during this time of financial distress, including the Capital Conservation Buffer (CCB) and the Pillar 2 Guidance (P2G). This means that banks are allowed to operate temporarily – until further notice – below the level of capital defined by the P2G and the CCB. 

Besides, banks can partially use capital instruments that do not qualify as CET1 capital, e.g. Additional Tier 1 or Tier 2 instruments, to meet their Pillar 2 Requirement (P2R). This measure is effectively an early implementation of the standards laid down in CRD V that originally should entry into force in January 2021). Banks will therefore benefit from relief in the composition of capital for the P2R.

Supervisory measures in reaction to the Corona crisis – Operational reliefs

The following blog post is part of the overview of supervisory measures in reaction to the Corona crisis:Supervisory measures in reaction to the Corona crisis – Overview.

Operational reliefs

One of the first measures taken by EBA to reduce the operational burden of banks in the light of the Corona crisis was to postpone the EU-wide stress test from 2020 to 2021.

Furthermore, the ECB considers operational flexibility in the implementation of bank-specific supervisory measures, e.g. adjusting timetables for on-site inspections (OSI) and internal model investigations (TRIM) and extending deadlines for the implementation of remediation actions stemming from recent OSIs. In particular, the ECB clarifies that all decisions and measures taken remain valid while the ECB decides to:

  • postpone, by six months, the existing deadline for remedial actions imposed in the context of OSIs, TRIM investigations and internal model investigations,
  • postpone, by six months, the verification of compliance with qualitative SREP measures,
  • postpone, by six months, the issuance of TRIM decisions, OSI follow up letters and internal model decisions not yet communicated to institutions unless the bank explicitly asks for a decision because it is seen as beneficial to the bank.

The respective JSTs will be in contact with the banks to provide clarity on the revised implementation timeline of those requirements and their specific application. 

Implications for ECB regulated banks currently engaged with their IRB Repair Programme

For many banks, the TRIM reports of the inspection ECB teams revealed many findings in the last two years. And the banks have received in return time to prepare their remediation plans. These plans usually have accommodated several remediation actions so that banks might be able to keep their IRB status going forward. The plans were in length discussed with the JST and in most cases were tied up to some deadlines; i.e. for several banks there were need for the redevelopment of the LGD models, where new components had to be incorporated. In most cases, banks were held to keep higher capital for their IRB portfolios under the remediation programme as their IRB risk parameters were not necessarily fully in compliance due to the TRIM findings, and expectedly this capital add-ons were only to be lifted once the full remediation took place. Such model redevelopments naturally require extensive new data collection, where the data should be tempered and aligned with the New Default Definition requirements. Such actions take significant time and require several internal sources in the bank work closely in coordination. Under the current circumstances as many bank risk resources will be working remotely from home and will not have the chance to meet frequently with their team members as during the normal times. Due to this it would be not possible for the bank to achieve a certain level of efficiency to be prepared to fulfill the tasks for the committed deadlines along the remediation plans that had been already agreed with the JSTs of the respective banks regulated directly with the ECB.

Maßnahmen zum Umgang mit COVID-19 und Auswirkungen auf das Bankgeschäft

Staaten weltweit ergreifen Maßnahmen in bislang nicht gekanntem Umfang, um die Ausbreitung der Pandemie zu verlangsamen und Menschen vor einer Ansteckung zu schützen. Gleichzeitig passen die OECD und der IWF ihre Erwartungen an die Auswirkungen auf einzelnen Volkswirtschaften und die Weltwirtschaft regelmäßig an. Für die Banken reagieren EBA und EZB/SSM auf die gegenwärtigen Umstände.

Einladung zum Regulatory Spring Festival 2020

Das Warten hat ein Ende…

Es ist so weit: unsere alljährliche und beliebte Regulatory Roadshow geht in die nächste Runde und wir freuen uns, Sie unter dem Motto Regulatory Spring Festival begrüßen zu dürfen.

Auch in diesem Jahr stehen die aktuellsten und angesagtesten Regulatory Themen auf der großen Bühne. Bei Themen rund um die Bereiche Bankenregulierung und Risikomanagement kommt jeder Regulatory Fan auf seine Kosten.

EBA consultation on Future of Stress Test: old wine in new bottles?

On 22 January 2020, the European Banking Authority (EBA) published a discussion paper on possible future changes to the EU-wide stress test. The proposed new stress test framework changes the current approach significantly and will challenge both banks and supervisors. In the new framework, two calculation legs are introduced. First, the supervisory leg mirrors the current framework enhanced by additional top-down components. Second, within the so-called bank leg the EBA proposed a revised methodology that finally breaks with the inflexibility of the constrained bottom-up approach. This change in paradigm will lead to changes regarding governance, processes, implementation and execution of the stress test exercise as well as model development resulting in an additional effort for banks.

BCBS zur aufsichtsrechtlichen Behandlung von Krypto-Assets

Der Basler Ausschuss für Bankenaufsicht (BCBS) hat am 12. Dezember 2019 ein Diskussionspapier zur aufsichtsrechtlichen Behandlung von Krypto-Assets veröffentlicht (Designing a prudential treatment for crypto-assets (BCBS 490)). Das Diskussionspapier behandelt insbesondere die Merkmale und Risiken von Krypto-Assets, wie Liquiditätsrisiko, Kreditrisiko, Marktrisiko, operationelles Risiko (einschließlich Betrug und Cyberrisiken), Risiko der Geldwäsche und Terrorismusfinanzierung sowie Rechts- und Reputationsrisiken. Ebenso stellt es Überlegungen an, um einen möglichen aufsichtsrechtlichen Rahmen zu schaffen. Auffällig ist hierbei vor allem ein recht vorsichtiger und konservativer Ansatz des Ausschusses im Umgang mit risikoreichen Krypto-Assets. Kommentare zum Diskussionspapier können bis zum 13. März 2020 beim Ausschuss eingereicht werden. Diese Chance sollte genutzt werden, da sie Einfluss auf die Meinungsbildung des Ausschusses und die weitere Ausarbeitung der aufsichtsrechtlichen Behandlung von Krypto-Assets haben werden. Trotz der teilweise noch zurückhaltenden Aussagen des Basler Ausschuss ist absehbar, dass weitere Veröffentlichungen mit konkreten Vorgaben zur Behandlung von Crypto-Assets folgen werden.

/* */