Closed factories and shops, cancelled events, travel bans, wide-ranging curfews – the Corona crisis turns out to have dangerous 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:
- An 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
Besides, 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 help to analyze 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!). Information in German on the impact on the German Banking & Capital Market are available here: Banken und Kapitalmärkte – Auswirkungen durch COVID-19
Please do not 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!
The following sections of this post serve as a general overview that will be updated continuously. For more details, we will refer to separate posts, slides, etc. that will be published regularly.
Update as of April 29, 2020
What’s new in this update?
- We updated the overview of global reactions and measures taken by governments and supervisory authorities including latest EU Commission draft regulation to implement several changes to the existing Capital Requirements Regulation (CRR)
- We updated the section on Defaults, Non-Performing Loans (NPL) and provisioning and on operational reliefs including information on EBA’s latest statements on how how additional flexibility will guide supervisory approaches in relation to market risk, the Supervisory Review and Evaluation Process (SREP), recovery planning, digital operational resilience and ICT risk and securitization
- We updated the section on Minimum capital ratios including EBA’s series of measures targeted at the area of market risk capital requirement
- We updated the section on Minimum liquidity requirements with details on LCR and AMM reporting
- We added a blog post on Q&A regarding supervisory and regulatory measures of the German financial supervisory authority BaFin
- We added a blog post on PwC’s Pandemic Analysis and Scenario Simulation tool (PwC) that supports banks with all the challenges involved in the simulation of the impact of the COVID-19 pandemic on regulatory capital ratios, in particular those relating to credit risk
Overview of supervisory reactions (as of April 29, 2020)
Reaction from the Basel Committee on Banking Supervision
The Basel Committee on Banking Supervision (BCBS) supports the objectives of the measures taken by member jurisdictions and highlights in its latest press release from March 20, 2020, that members have the flexibility to undertake further steps if needed under the current Basel III framework. The BCBS also acknowledges the extraordinary circumstances and announced that, in the immediate term, the consultation on all policy initiatives will be suspended and all outstanding jurisdictional assessments planned in 2020 under its Regulatory Consistency Assessment Programme will be postponed.
Basel IV postponed!
On March 27 2020, the Group of Central Bank Governors and Heads of Supervision (GHOS), has endorsed a set of measures to provide additional operational capacity for banks and supervisors to respond to the immediate financial stability priorities. The measures comprise the following changes to the implementation timeline of the outstanding finalisation of the Basel III standards Basel IV: (click to enlarge):
These measures will free up operational capacity for banks as they respond to the economic impact of COVID-19. However, the BCBS reaffirmed the expectation of full, timely and consistent implementation of all Basel III standards based on this revised timeline.
While the timeline for implementation of the new standards is extended and banks can start detailed planning for the implementation without too much time pressure, the complexity remains the same – and may even increase depending as the banks are weathering the storm of the corona impact.
In line with the BCBS, the EU Commission is considering postponing Basel IV in the EU. Already before the crisis, the banking industry expected that Basel IV would come into force more likely in 2023 than 2022. The publication of a first draft for the adoption of Basel IV within the EU, which are intended to tighten the capital requirements in some cases significantly, was initially planned for Summer 2020. According to current rumours, the first draft is now expected to be published not earlier than September 2020. Whether this also means that the implementation date will be further moved, e.g. to 2024, is speculation.
Reaction from the EU Commission
Besides postponing the finalisation of Basel III, the EU Commission published a draft regulation to implement several changes to the existing Capital Requirements Regulation (CRR) on April 28th. The proposed changes include:
- In line with the BCBS statement from April 3, 2020, the IFRS 9 transitional provisions to soften the impact of ECL on regulatory capital will be amended to cover any increase of provisions on performing exposures after January 1st, 2020. These provisions will be completely excluded from own funds in 2020 and 2021 and will be phased in over three years until 2025. Even if banks do not use the IFRS 9 transitional provisions so far, they are allowed to reverse that decision in light of the COVID-19 crisis, but requires consent of the competent authority;
- Loans guaranteed by the public sector to counter the COVID-19 impact will receive preferential treatment in the calculation of the NPL backstop;
- Several measures implemented as part of CRR II which are beneficial for banks will be implemented earlier than foreseen by CRR II. This includes the revised SME supporting factor, infrastructure financing factor and deduction of software assets and preferential treatment of loans backed by borrowers’ pension or salary.
- Finally, the binding minimum requirement for the leverage ratio introduced by CRR II is changed with regard to the treatment of central bank reserves while the introduction of the additional G-SII buffer is postponed by one year.
The EU Commission proposes to fast track the changes to ensure that they enter into force as soon as possible.
Reaction from the ECB banking supervision
On March 12, 2020, following intensive bilateral communication with the significant institutions, the ECB publicly announced several actions to be taken in reaction to the Corona crisis. These measures were activated, refined and extended by ECB’s latest press release from March 20, 2020, which comes with a detailed and continuously updated FAQ section on the specific measures. To boost banks’ capacity to absorb losses and support lending to households, small businesses and corporates during the crisis, ECB updated its recommendation to banks on dividend distributions. In essence, banks should not pay dividends for the financial years 2019 and 2020 until at least October 1 2020 and should also refrain from share buy-backs aimed at remunerating shareholders.
Reaction from the European Banking Authority (EBA)
The EBA published several statements on its website to support the measures taken and proposed by national governments and EU bodies to address and mitigate the adverse systemic economic impact of COVID-19 on the EU banking sector. This includes the postponement of the EU-wide stress test from 2020 to 2021 and a statement on the application of the prudential framework regarding Default, Forbearance and IFRS9 in light of the COVID-19 measures (see our detailed blog post). Furthermore, on March 31, 2020, the EBA shared its view on operational reliefs on supervisory reporting and Pillar 3 disclosures in light of COVID-19 (for more details see our updated blog post on operational reliefs).
The EBA published further guidance on the use of flexibility in relation to COVID-19 on April 22,2020. This new publication includes information on market risk and prudent valuation (see our detailed blog post on minimum capital requirements), on the Supervisory Review and Evaluation Process (SREP) and recovery planning (see also our detailed blog post on operational reliefs) as well as on securitisations of exposures that are subject to a general moratorium (see our detailed blog post on Defaults, Non-Performing Loans (NPL and provisioning)). The publication of EBA also contains a section concerning information and communication technology (ICT). This section underlines the necessity of an adequate internal governance and internal control framework, effective crisis management as well as of an appropriate ICT and security risk management under current circumstances. Besides, EBA expects competent authorities to work closely together with their supervised institutions to prioritise necessary efforts and to support the implementation of the EBA guidelines on ICT and security risk management (EBA/GL/2019/04 of November 28 2019) becoming applicable on June 30 2020.
Reactions from National Supervisors and other competent authorities
In Germany, BaFin also set up a particular website with the most recent updates on the Corona crisis from a supervisory perspective, including the measures introduced by the ECB supervision that need to be formally implemented on the national level for the less significant institutions. We collect, sort and summarise these Q&As in a separate blog post.
The PwC network firms are continuously collecting the global reactions of governments, central banks and supervisory authorities to the COVID-19 crisis. Please find below our current collection as of April 29, 2020 (please note that this is a non-exhaustive list that will be updated regularly).(please click to open pdf)
Overview of topic-related measures (as of April 24, 2020)
The following sections serve as an overview of specific measures taken by the various authorities and the respective discussions or challenges. To provide greater clarity we structured this overview topic-related (not chronologically). As soon as there are updates, we will add these accordingly and highlight the amendments.