Emmanuel Dooseman Partner, Global Head of Banking - New York, United States
24/03/2020 The Covid-19 outbreak and the unprecedented emergency it presents has created a unique threat to the world’s economy. Like all sectors, banking has been impacted, and its stakeholders have felt excessive pressure over the last few weeks to get things right. Regulators in financial markets around the globe have all announced Covid-19 action plans, which may afford the banks room for relief over the coming weeks and months.
On 20.03.2020, the Basel Committee held a conference and shared a press release on the impact of the rapid spread of coronavirus on the global banking system. The Committee has stated its full support for the regulators in their efforts to encourage banks to use their capital and liquidity buffers from the Basel III framework, including their stock of high-quality liquid assets (HQLA) as resources to sustain the economy. Many supervisors, including the Federal Reserve in the US, have similarly released statements encouraging banks to use such tools as a response to the current crisis.
A press release issued by the European Central Bank on 20.03.2020 outlined further flexibility for EU banks in their response to the coronavirus. The capital and operational relief measures announced by the ECB on March 12, 2020 have been activated. According to these, banks can operate below the Pillar 2 Guidance (P2G), the capital conservation buffer (CCB) and the liquidity coverage ratio (LCR). Instruments that do not qualify as CET1 capital can be partially used to meet the Pillar 2 Requirements (P2R), and this will bring forward relief to the amount of €120 billion, which could be used to absorb losses, or potentially finance up to €1.8 trillion of lending.
Loans to debtors distressed by the Covid-19 outbreak will also qualify for more favourable prudential treatment. Supervisory flexibility will be applied to:
There will be preferential prudential treatment for loss provisioning of loans which become non-performing and are under public guarantee. Considering the unusual current market conditions, supervisors will offer full flexibility when NPL reduction strategies are being discussed with the banks. Additionally, the ECB, advises banks to avoid excessive procyclical effects when applying the IFRS 9 international accounting standards.
The Bank of England (BoE) and Prudential Regulation Authority (PRA) announced on 20.03.2020 several supervisory and prudential policy measures to address Covid-19 challenges. The following steps are included in their press release:
The action plans for the EU and the UK outlined above are not set in stone. Keeping in mind the exponential rise in the number of people infected by the virus, as well as the uncertainty ahead, changes to existing measures and the announcement of new measures are to be expected every day. What is clear though is the commitment of central banks and regulatory authorities to ensure that all segments of the economy can benefit from a strong and well-supported banking sector.
Contributor: Meglena Grueva, Mazars in Germany
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