ECB grants banks regulatory leeway to maintain credit supply to companies and households in response to COVID-19

The coronavirus continues to have a firm grip on the world. Particularly in Europe, numerous countries have therefore taken measures, which have had a negative impact, among others, on the financial sector. For this reason, the European Central Bank (“ECB”) has announced further measures. They are intended to ensure that banks directly supervised by the ECB under the Single Supervisory Mechanism (“SSM”) can continue to fulfil their role in financing households and companies despite the economic shock associated with the coronavirus. The measures are:

• ECB gives banks further flexibility in prudential treatment of loans backed by public support measures.
• ECB encourages banks to avoid excessive procyclical effects when applying the IFRS 9 international accounting standard.
• ECB activates capital and operational relief measures announced on 12 March 2020.

Additional scope for action with regard to the supervisory treatment of loans backed by public support measures

ECB supports all initiatives aimed at finding sustainable solutions for temporarily distressed debtors in the context of the current outbreak. For this reason, ECB has introduced supervisory flexibility in the treatment of non-performing loans (“NPLs”), in particular to allow banks to benefit fully from guarantees and moratoria established by public authorities to deal with the current emergency.

The supervisory authorities – in Austria the Financial Market Authority (“FMA”) – are expected to

• be more flexible, within their remit and on a temporary basis, in classifying debtors as “unlikely to pay” when banks make use of public guarantees granted in connection with the coronavirus. In addition, the competent supervisory authority should exercise some room for manoeuvre with regard to loans under the public moratoria associated with COVID-19.
• apply full flexibility when discussing with banks the implementation of NPL reduction strategies, taking into account the exceptional nature of current market conditions.
• Moreover, loans that become non-performing and are subject to public guarantees should benefit from preferential supervisory treatment with regard to regulatory expectations of loss provisioning.
   

Avoidance of procyclical effects within the IFRS 9 accounting regime for value adjustments

To avoid excessive procyclicality of regulatory capital and published financial statements, excessive volatility of loan loss provisioning should be tackled at this juncture. Within its prudential remit, ECB recommends that all banks avoid procyclical assumptions in their models to determine provisions and that those banks that have not done this so far opt for the IFRS 9 transitional rules.

Activation of the capital and operational relief measures announced on 12 March 2020

The ECB’s credit risk mitigation measures complement the capital and operational support measures announced on 12 March 2020 . ECB estimates that the capital relief provided by the possibility to operate below the Pillar 2 Guidance (“P2G”) and the frontloading of the new rules on the Pillar 2 Requirement (“P2R”) composition amounts to € 120 billion of CET1 capital. This relief is available for banks to absorb losses without triggering any supervisory actions or to potentially finance up to € 1.8 trillion of loans to households and corporate customers in need of extra liquidity.

FMA and OeNB support ECB measures

In a joint communication, FMA and the Austrian National Bank (“OeNB”) support the above-mentioned measures of the ECB and at the same time emphasise that Austrian banks are well positioned to cope with the economic effects of the current COVID 19 crisis and to support the domestic real economy to the best of their ability. Austrian banks have not only largely reduced their NPLs, but have also doubled their core capital ratios over the past decade, thereby building up capital buffers for crisis situations such as the current one.

Further monitoring of the current situation

In close cooperation with other authorities, the Supervisory Board of the ECB will continue to monitor developments as a result of the current crisis. This means that the measures taken will be reviewed as necessary and, if required, adapted accordingly.

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.