COVID-19 - Measures of the European Banking Supervisors
The full extent of the impact of the corona pandemic on the financial markets cannot yet be foreseen. The European Banking Supervisors are therefore monitoring the COVID-19 situation very closely. In the second week of March, both the European Central Bank (“ECB”) and the European Banking Authority (“EBA”) finally took action:
On 12 March 2020, ECB announced a series of measures to ensure that its directly supervised banks can continue to fulfil their role in funding the real economy as the economic effects of the coronavirus become apparent. The following measures are planned:
- Capital and liquidity buffers, including Pillar 2 Guidance (“P2G”), can be fully used
- Relief in the composition of capital for Pillar 2 Requirements (“P2R”)
- Operational flexibility of ECB in the implementation of bank-specific supervisory measures
The above-mentioned measures should lead to a capital relief to enable banks to support the economy in coping with the corona pandemic. An increase in dividend payments or variable remuneration should not be the consequence.
In addition, EBA announced on the same day that it would postpone the EU-wide stress test for banks until 2021.
Use of capital and liquidity buffers
The capital and liquidity buffer requirements for banks have been designed to enable banks to withstand crisis situations. The ECB will allow banks to operate temporarily below the capital levels defined by the P2G, the capital conservation buffer (“CCB”) and the liquidity coverage ratio (“LCR”).
In the ECB’s view, these temporary measures will be enhanced by an appropriate relaxation of the countercyclical capital buffer (“CcyB”) by national supervisory authorities.
Facilitation of capital requirements under Pillar 2
Banks must hold additional own funds (P2R) for those material banking and operational risks that are not or not sufficiently covered by the minimum capital requirements (Pillar 1). The P2Rs must in principle always be met with Common Equity Tier 1 (“CET1”). According to the ECB’s plans, banks will be allowed to use capital instruments other than CET1 (e.g., AT1 or Tier 2 instruments) to meet the Pillar 2 requirements. This brings forward a measure that was initially scheduled to come into effect in January 2021, as part of the latest revision of the CRD IV in spring 2019.
Flexibility in the implementation of institution-specific supervisory measures
The ECB envisages adjusting timetables, processes and deadlines for institution-specific supervisory measures. These include
- the postponement of on-site inspections,
- the extension of deadlines for the implementation of measures resulting from on-site inspections carried out in the past, and
- the extension of deadlines for certain non-critical supervisory measures and data requirements.
Postponement of the EU-wide stress test for banks
EBA has a statutory mandate to monitor and assess developments in the banking market and identify trends, potential risks and vulnerabilities. One of the main supervisory tools for carrying out such analysis is the EU-wide stress test to ensure that banks have sufficient capital in the event of a crisis.
The next EU-wide stress test was scheduled for 2020. However, due to the current crisis, EBA has decided to postpone the stress test until 2021. This measure should allow banks to focus on their core business and ensure the continuity of their operations, including support for their customers. Addressing the operational challenges facing banks as a result of the corona pandemic should now be a priority.
ECB and EBA will monitor further developments in relation to COVID-19 and, if necessary, revise and adapt the above-mentioned measures.
Please note: This newsletter merely provides general information and does not constitute legal advice of any kind from Binder Grösswang Rechtsanwälte GmbH. The newsletter cannot replace individual legal consultation. Binder Grösswang Rechtsanwälte GmbH assumes no liability whatsoever for the content and correctness of the newsletter.