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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: BaFin Q&A on the regulatory impact

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.

The Corona crisis affected banks not only in their daily business but also in their need to fulfil the regulatory requirements. Banks are now obviously confronted with a lot of open and urgent questions regarding specific regulatory issues. Therefore BaFin has set up a website with a comprehensive Q&A section around the regulatory issues in relation to the COVID-19 crisis and the countermeasures taken by the governments. The BaFin statements are directed to less significant institutions (LSI) in Germany. However, they might to some extent also serve as a guidance for significant institutions (SI) or banks in other jurisdictions, provided the statements are applicable and no contradicting statements were published by the respective competent authorities.

Since it is difficult to keep track with the frequently updated Q&As, we clustered and summarised BaFin’s most current key messages in the following section (as of April 22, 2020, to be updated continuously): 

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

The most prominent decision taken by the BCBS in light of the COVID-19 crisis is obviously the revised timeline for implementing the final Basel III package (i.e. “Basel IV”). The general starting point is now postponed from 2022 to 2023, hoping that banks still have the chance to adapt to the new requirements in an appropriate manner despite the current circumstances. This will also apply in the European Union which has postponed the publication of a first CRR III draft to implement Basel IV in the Union that had been expected by mid-of-2020. In the same vein, the EBA In a statement on additional supervisory measures in the COVID-19 pandemic related to market risk declared that the reporting requirement for the new Fundamental Review of the Trading Book (FRTB) standardised approach will also be postponed. CRR II required banks exceeding certain thresholds to start reporting on the new market risk calculations in the first quarter of 2021. Now, the EBA proposes to postpone this reporting requirement to the third quarter of 2021.

One of the first measures taken by the 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 (see EBA statement as of March 12, 2020). To support banks’ focus on key operations and to limit any non-essential requests in the short term, the EBA has reviewed all ongoing activities requiring inputs from banks in the next months and decided to extend or postpone several deadlines. Please find below a detailed list of changes (click to enlarge):

In addition, according to the EBA statement as of March 31, 2020, further operational reliefs will be granted in terms of supervisory reporting and disclosures. According to the EBA, competent and resolution authorities should assess the extent to which a delayed submission of all the data or subsets of the data included in the EBA reporting framework would be justified in these extraordinary circumstances. For the time being, such supervisory actions are only being considered for submissions due between March and end of May 2020. In general, institutions should be allowed up to one additional month for submitting the required data. Each competent and resolution authority should clarify the precise terms for institutions in their jurisdiction. However, due to their importance for the supervisory authorities, the reportings of the LCR, the additional liquidity monitoring metrics (AMM) and the information on the institution’s liability structure, including intra-group financial connections (part of the resolution planning reporting) should still be reported in accordance with the deadlines specified in the applicable reporting standard. Further, the EBA clarifies that despite the current circumstances the reporting in accordance with the new data point model version 2.9 should still start with the reference date 31 March 2020.

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

Whereas regulatory and supervisors have enacted a number of measures to support banks’ solvency and provide relief by for example pushing implementation and reporting deadlines, the opposite is true when it comes to the topic of liquidity. One of the lessons learned from the 2007/08 financial  crisis is that in a crisis, banks fail when they run out of liquidity. Therefore, regulators and supervisors have stressed the importance of receiving timely and accurate liquidity reporting from banks and have taken measures to strengthen banks’ liquidity rather than granted relief on any liquidity-related obligations.

Banks’ liquidity during the COVID-19 crisis is under pressure due to a number of reasons. Looking at the liquidity coverage ratio (LCR) as the most important tool for the supervision of banks’ short term liquidity, both the numerator as well as the denominator are impacted. In the numerator, the market value of liquid assets is reduced by the declining asset prices. At the same time, the increased volatility of asset values makes controlling and managing the LCR more complex. Turning to the denominator, outflows may increase if depositors move to other means of storing their wealth that they consider safe in times of crisis such as gold. At the same time, liquidity inflows will be reduced as loans become non-performing due to the impact of COVID-19 on the real economy. 

Given the monthly reporting frequency of LCR and the Additional Monitoring Metrics (AMM), these will be the first reportings in which the effects of COVID-19 on banks will become apparent for supervisors. Therefore – and in contrast to the quarterly COREP and FINREP reporting – the EBA stressed in its statement from March 31st, that LCR and AMM reporting have been identified as priority and therefore no extension of reporting deadlines can be granted. At the same time, the changes to LCR reporting envisaged by DPM 2.9 has entered into force on March 31st without any postponement.

As pointed out above, there have been only few relief measures to soften the impact of the crisis on the LCR ratio. One point in case is the German supervisor’s statement on the eligibility of shares as Level 2 high quality liquid assets (HQLA). While they are generally only eligible if they withstand a liquidity shock without losing 40% of their market value, BaFin declared that even if shares exceed this threshold in the COVID-19 crisis, they remain eligible as high quality liquid assets if they are constituents of a main index and all other criteria for inclusion in the HQLA are fulfilled. Obviously, this is applicable only for German LSIs. More detailed information about the clarifications regarding liquidity risk from the German FSA (Bafin) can be found in the separate section (Supervisory measures in reaction to the Corona crisis: BaFin Q&A on the regulatory impact)

Finally, the ECB has taken measures to strengthen banks’ resilience by extending short term funding such as TLTRO measures and by stressing that banks may use their liquidity buffer during times of 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, various supervisory authorities refer to the flexibility of the current NPL framework. For example, 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).
  • 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.

The picture below provides an overview of the mechanism of the NPL backstop in times of the COVID-19 crisis:(please click to enlarge)

The following sub-chapters summarise the most recent publications and statements of the various authorities (especially BCBS, ECB, EBA) with regard to the prudential framework for defaulted and forborne exposures including related considerations on the provisioning according to IFRS 9.

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 groĂźen BĂĽhne. Bei Themen rund um die Bereiche Bankenregulierung und Risikomanagement kommt jeder Regulatory Fan auf seine Kosten.

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.

Frohe Weihnachten und Alles Gute fĂĽr 2020!

Liebe Leserinnen und Leser des Regulatory Blogs,

im letzten Weihnachtsgruß Ende 2018 haben wir noch Mutmaßungen über eine abschließende Einigung zur CRR II und Veröffentlichung in 2019 angestellt – hier hat uns die Realität dann doch schneller als ursprünglich erwartet eingeholt: Bereits im Februar 2019 lagen die finalen Entwürfe vor. Damit waren die regulatorischen Herausforderungen der kommenden Jahre bestimmt – für die Banken und auch für uns. In einer ausführlichen Beitragsserie und unserer handlichen „CRR II to go“ haben wir die Eckpunkte des finalen Banking Package intensiv untersucht und die wesentlichen Handlungsbedarfe unter anderem in den Bereichen Eigenmittel und Konsolidierung, MREL und TLAC, KSA, IRBA, Leverage Ratio, NSFR, Großkredite, Offenlegung aufgezeigt.

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