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.
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.
The ECB already announced that this six-month delay may be extended based on the its assessment of economic and financial developments. However, whether or not this postponement will be sufficient is also significantly related to the question to what extent each individual bank is able to adapt at short notice to this new working environment. When looking e.g. at the current TRIM remediation projects (“IRB repair”), we see especially the following operational challenges:
- Model redevelopments in particular require extensive new data collection. Such actions take significant time and require several internal sources in the bank work closely in coordination. As many resources will now be working remotely from home and will not have the chance to meet frequently with their team members, it might be difficult 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.
- When it comes to working from home, bank internal resources might not have extensive experience and probably no access to efficient remote working conditions (e.g. laptops, mobile devices). Especially for model developers that need to handle with massive data sets sufficient server and network capacities are crucial as many banks imposed restrictions to load data to local hard-drives due to data security concerns.
- In most cases, banks need to meet higher capital requirements for their IRB portfolios under the remediation programme as their IRB risk parameters were not fully in compliance due to the TRIM findings, i.e. there might be a need to clarify if or to what extent this capital add-ons are applicable in case the delay will be extended.
Please find more detailed discussions on the operational challenges in these extraordinary times and our thoughts on the measures that banks need to take into consideration in the following blog post: „Implications for ECB regulated banks currently engaged with their IRB Repair Programme„.