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):
- Treatment of partial or full credit risk takeover by KfW: Currently, institutions are exempted from the requirement to take loans into account for the calculation of large exposure limits and own funds requirements.
- Application of the EBA guidelines on treatment of public and private moratoria (EBA/GL/2020/02): BaFin fully adopts the EBA guidelines on the specific treatment of general payment moratoria concerning the definition of forbearance and default. An example for such a general moratorium would be the German „Regelungen zum Darlehensrecht „according to Art. 240 Part 3 of the „Einführungsgesetz zum Bürgerlichen Gesetzbuch“ (EGBGB). In that regard, BaFin states that even a financial concession that leads to a decrease of the net present value of the loan by more than 1% still does not harm the classification of a general moratorium. Moreover, this should not trigger the forbearance classification and the assessment of distressed restructuring (see our blog post on Default, NPL and Provisioning for further discussions).
- Forbearance measure within the meaning of Article 47b CRR: An eligible moratorium through postponing a loan is not considered a forbearance measure within the meaning of Article 47b of the CRR. This is due to the fact that a postponement of payments within the framework of a moratorium applies to a larger group without reference to their financial situation and not only to a specific obligor.
- Default under Article 178 (1) CRR: Counting the days past due within the meaning of Article 178 (1)(b) is paused for the period of governmental payment moratoria. The „unlikely to pay“ criteria as part of the definition of default under Article 178 (1)(a) of the CRR requires a case-by-case assessment.
- Default under Article 178 (3) CRR: In general, an interest rate reduction for an obligor facing financial difficulties has to be classified as default under Art. 178 (3) CRR. Whereas concessions to an obligor or a group of obligors not facing financial difficulties are not allocated as default under Art. 178 (3) CRR.
- Postponement of payment: If a payment is postponed, but interests are charged on the amounts postponed in line with the conditions originally agreed upon, („original effective interest rate“), then the debtor is not considered defaulted.
- Covered bonds (Pfandbriefe): For a transitional period, BaFin accepts institutions to consider immovable property collaterals within their mortgage-lending-value (Beleihungswert) (in the meaning of Art. 4 (1) no. 74 CRR) for RWA calculation. However, in the case of missing on-site inspection, additional haircuts up to 20% stipulated in the Q&A section have to be applied.
- Combined Capital Buffer: Within the current situation, it is allowed to operate below the level of combined capital buffers, especially for the provision of loan purposes. If an institution fails to meet the combined buffer requirement, this does not constitute a breach of supervisory minimum capital requirements but rather the appropriate use of available equity.
- Compliance with Pillar 2 Capital Guidance (P2G): The P2G requirements are no stipulated supervisory requirement but rather depict expectations by the supervision concerning the minimum capital requirements. As the current situation clearly is a period of stress, institutions will not be facing additional requirements as long as the amount covered by the capital conservation buffer remains unused. Otherwise, limitations concerning the distribution of dividends have to be applied. In general, BaFin requests a written statement in the event of failing to comply with P2G requirements. Currently, institutions just have to provide short information if dropping below the P2G requirements. BaFin will keep the institutions informed about next steps in due time.
Accounting and Valuation
- Publication of accounting documents: Possible breaches of deadlines will not be pursued by BaFin until June 30 2020. However, it is clearly stated that this is an exception that only applies during the pandemic crisis. This deadline will be extended by BaFin should these measures to fight the pandemic continue.
- IFRS 9 – Expected loss provisions: Institutions can make use of the transitional provision under Article 437a of the CRR in order to mitigate the impact on the CET1 ratio.
- IFRS 9 – Impairment: Based on IFRS 9, the estimation of the expected loss for the determination of credit value adjustments has to be performed point-in-time under consideration of reasonable and supportable forward-looking information. BaFin recommends focussing on long-term stable scenario estimations that are also based on historical experiences. Furthermore, institutions should consider operational reliefs like KfW promotional loans and payment moratoria within their estimation.
- Reporting of forbearance and defaulted loans: A debtor is not considered at default if a loan is postponed, but interest is charged to the amounts postponed in line with the conditions originally agreed upon (annualised percentage rate). Reporting under F 18 (Non-performing exposures) is therefore not necessary. Furthermore, it is not necessary to report this under F 19 (Forbearance).
- Treatment of loans as part of the emergency KfW program: If institutions grant loans as part of the emergency credit program of KfW „Schnellkreditprogramm“ and these loans fulfil the definition of fiduciary loans according to section 6 (2) RechKredV, these loans will be exempted from the calculation of the Leverage Ratio Art. 429 (13) CRR.
Liquidity Coverage Ratio:
- Impairment of HQLA shares: Shares are allowed to be taken into account if their liquidity is also given within a stress phase. This condition is fulfilled in cases the decline of prices is not more than 40 per cent within 30 days of stressed market conditions. Besides the high volatility of more than 40 percent shares can still be taken into account by LSI as HQLA if they are included in a main index (classified as main index by the Commission acc. to Regulation EU 2016/1646) and meet all other criteria acc. to Article 12 (1c) of the LCR Regulation (EU) 2015/61.
- Single investor special fund: In the case of so-called single investor special funds held by LSIs, the sole criterion in accordance with Regulation (EU) 2015/61 is temporarily suspended. The HQLA held in the investment fund can be considered for the calculation of the LCR with immediate effect in accordance with the provisions of Article 416 (6) CRR or Article 15 of the LCR Regulation, irrespective of whether or not the fund is exclusively invested in HQLA.
- Netting of associated inflows and outflows: The requirement pursuant to Article 26 of the LCR Regulation (EU) 2015/61 is met in the case of inflows and outflows from pre-financed outflows of grants and loans under federal or state COVID-19-programmes if the inflow associated with the outflow is received within ten days. The outflow has been approved by the federal government or state.
- Shortfalls and usage of liquidity buffer: Institutions are allowed to use the liquidity buffer in the current situation; even if this means the LCR minimum requirements are not met, it will not be necessary to obtain the prior approval of the competent supervisory authorities. In accordance with Article 414 of the CRR, where an institution does not meet or does not expect to meet, the LCR minimum requirements, it must notify the competent authorities without delay, prepare a liquidity restoration plan and report the LCR on a daily basis.
- No additional exemptions for intragroup exposures under the large exposure regime: According to section 2 (3) of the GroMiKV, institutions can apply for a waiver to exempt specific exposures within a group of institutions from the large exposures limit by up to 93,75% (i.e. the large exposures limit can be increased up to 400% of eligible capital (of Tier 1 capital from June 28 2021)). Therefore, BaFin does not consider it to be necessary to grant further Corona-related reliefs with regard to intragroup exposures.
- Promotional loans from KfW: BaFin and Deutsche Bundesbank support the government program to mitigate the economic consequences of the Corona crisis, as initiated via development banks. The conditions presented by the KfW were coordinated with BaFin and Deutsche Bundesbank and accepted. These include for example the streamlined application process and the simplification of the documents to be submitted by the client.
- Lending under the promotional program „KfW-Schnellkredit“: Within the promotional program of „KfW-Schnellkredit“ it is assumed that the obligors being eligible for a promotional loan will be able to pursue their economic activities after the crisis in a similar manner and to a similar extent as at the reference date December 31 2019. Under this assumption institutions act in accordance with MaRisk when using the simplified procedure for checking the obligors‘ solvency by following KFW’s bulletin on „KfW Schnellkredit 2020“.
- § 18 KWG creditworthiness assessment: Concerning the submission of annual accounts, BaFin considers section 18 of the KWG as fulfilled if the latest available annual accounts are considered. However, in general, a waiver of the creditworthiness assessment, as required under section 18 of the KWG, is not acceptable.
- Bridge loans: The MaRisk does not specify the criteria and conditions under which postponement for the benefit of the borrower or the granting of a new loan as a bridge loan would be allowed. This decision falls to the individual institutions and must be made in line with their respective business policy and their due diligence requirements customary in the industry. Nonetheless, institutions must also appropriately consider the associated risks when granting bridge loans (or postponements).
- Credit decisions: In order to facilitate the prompt credit decision, BaFin considers it as appropriate for loans to only be subject to voting by the front office. Several conditions must be met to renounce the evaluation of the back office e.g. only existing customers are eligible borrowers within the scope of this facilitation.
- Problem loans: The application of the BTO 1.2.5 point 3 is currently suspended by the BaFin. Lending to obligors can also be granted if the ability to cover interest and principal payments is currently not given due to the crisis or depends essentially on the further course of the crisis. Within the scope of an internal bank assessment, the institution has to conclude that the company is viable after the crisis.
- Intensified loan management: The institutions themselves are responsible for specifying (and where applicable adjusting) the criteria for when a credit relationship is to be subjected to intensified loan management under BTO 1.2.4 of MaRisk. The principles-based requirements of the MaRisk are flexible enough to adapt to the current situation.
- Audit planning of the internal audit function: Institutions should review and document which audits by the internal audit function can still be carried out properly. In case the contact persons for the internal audit function are unavailable or are required to focus on other issues relating to the Corona crisis, BaFin accepts to postpone audits. Acc. to BT 2.3, item 1 of the MaRisk, the internal audit function has a certain degree of flexibility in its risk-oriented audit planning.
- Use of internal audit resources: Internal audit staff should not be entrusted with tasks which are unrelated to auditing (BT 2.2, item 2 of the MaRisk) – due to the independence of the internal audit function. However, under BT 2.2, item 2 of the MaRisk, given the auditors independence, the internal audit staff may, as part of its tasks, provide advisory services to the other organisational units of the institution.
- Trades outside the business premises: BaFin considers the strict rules regarding trading acc. to BTO 2.2.1, item 3 of the MaRisk to be relaxed temporarily as part of contingency planning within the meaning of AT 7.3. All necessary precautionary measures and controls can and should be implemented electronically.
- Bonuses and P2G: Disbursing bonuses whilst falling below P2G requirements may not be considered, unless fulfilling the requirements under §7 InstitutsVergV is not at risk due to the shortfall of P2G. The risk bearing capacity, the capital planning and the profit situation has to be considered and documented for every individual case. BaFin refers to the EBA statement as of March 31, 2020, for further information.
- Organisational segregation of front and back-office: To mitigate the impact of staff shortages resulting from the crisis, BaFin will accept a more flexible use of staff members, i.e. by assigning experienced front office staff to back-office and vice versa. This approach is only acceptable in exceptional circumstances in order to maintain the institution’s operational capacity.
- AML identification processes: Subject to the specific requirements of the respective state promotional loan conditions, BaFin will not object if the identification processes for granting state promotional loans are carried out acc. to Section 14 of the Money Laundering Act in a simplified way.
- Communication with BaFin and Deutsche Bundesbank: Institutions can get in touch with their BaFin contacts via e-mail and at their known telephone extension. If electronic communication is impossible or institutions do not have a secure connection, institutions have to contact BaFin or Deutsche Bundesbank to work out a solution as quickly as possible.
- Publication and application of the new MaRisk: Work on the upcoming amendment of MaRisk is proceeding yet will be delayed. Thus, the new requirements will not apply as of December 31 2020 and will not be relevant for audits in 2020. Additionally, it should be noted that for some groups of institutions, certain requirements (e.g. outsourcing) will be eased compared to the past.
- LSI stress test 2021 postponed: Deutsche Bundesbank and BaFin have decided to postpone the stress test for LSIs from 2021 to 2022.
- Implementation of CRD V: There are currently no plans to deviate from the application dates stipulated in the CRR II/CRD V.
- On-site inspections and WpHG-Audit: Due to the specificity of the current situation it is allowed that auditors do not perform on-site-inspections. If a fully comprehensive „remote“ audit is not possible due to a lack of sufficient electronic access to all documents required for the audit, this must be carried out at a later date. Possible violations of deadlines in these cases will not be pursued by BaFin and a formal notice of interruption is not required in these cases. On-site inspections, such as inspections of banking business carried out by the Deutsche Bundesbank and coverage audits for SIs and LSIs, etc. are being discontinued for the time being. Any inspections already begun will be completed without any on-site activities, wherever possible.
- Regulatory reporting: For certain reports, particularly those based on the German Financial and Internal Capital Adequacy Information Regulation (FinaRisikoV) and the reporting of large exposures and million loans, BaFin and Deutsche Bundesbank will not take supervisory measures in the event of a late submission. Institutions will be permitted to use an additional modified submission procedure for master data for reporting large exposures and million loans.
- Recovery Plans of LSIs: Due to the COVID-19 pandemic, various reliefs will be granted to all LSIs. The measures depend on the classification of the LSI and will in most cases be communicated individually.