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 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.
In the same vein, the Single Resolution Board (SRB) states that it will apply a pragmatic and flexible approach in order to consider, where necessary, postponing less urgent information or data requests related to the upcoming 2020 resolution planning cycle. However, the following reports are nonetheless considered to be essential, i.e. not of less urgency: the Liability Data Report, the Additional Liability Report and the MREL quarterly template, and therefore to be reported in accordance with the applicable deadlines.
When it comes to additional ad-hoc data collections, the EBA suggests that competent and resolution authorities should not prioritise their data collections that are not specifically needed to monitor institutions in the context of the COVID-19 outbreak. In that context, the EBA has already decided in coordination with the BCBS to cancel the Basel QIS exercise based on June 2020 data.
With regard to the Pillar 3 disclosures, the EBA encourages competent authorities to be flexible when assessing the institutions’ compliance with the deadlines for the publication of their Pillar 3 reports as set out in accordance with Article 106 (1) CRD. However, in that context, the EBA again emphasises the importance of transparency and Pillar 3 disclosures to address uncertainties on the risks faced by institutions. Competent authorities and institutions should therefore assess the need for additional Pillar 3 disclosures on prudential information that may be necessary in order to properly convey the risk profile of the institution in the context of the COVID 19 outbreak. When doing this assessment, they should take into account the extraordinary measures that competent authorities, central banks, national governments, and other EU bodies have announced to address the adverse systemic economic impact of the outbreak.
The following overview summarizes the key measures (please click to enlarge):
In the EBA statement on additional supervisory measures in the COVID-19 pandemic published on April 22, 2020, the EBA is underlining the need for institutions to maintain a strong focus on effective crisis management and preparedness. Therefore, EBA expects the institution to regularly review and update their recovery plans and all relevant recovery options being necessary and available under current stressed conditions. This also includes an analysis on how the COVID-19 stress might evolve the institution and an estimation of their overall recovery capacities for liquidity and capital. Competent authorities should be kept informed with a sufficient frequency on the regular review and the assessment of the COVID-19 stress and if necessary, on an ad-hoc basis.
The EBA foresees different operational reliefs which will be granted and communicated to institutions by competent authorities. Possible operational reliefs could be to submit only key elements of recovery plans, to postpone the submission of different parts or the performing of planned dry-runs or fire-drills.
The EBA also announces a pragmatic approach in undertaking the Supervisory Review and Evaluation Process (SREP). The process will entail a risk-driven supervisory assessment focusing on the the most material risks and vulnerabilities driven by the crisis. As a result, SREP elements considered not directly affected by the crisis could be maintained, also if then SREP may not embrace a comprehensive assessment of all risks. Besides the EBA emphasises that is necessary to draw a supervisory conclusion on the viability of institutions and their ability to meet the capital and liquidity requirements.
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„.