In brief….
The coronavirus outbreak has already had a significant
impact on the UK and the global economy, leading to
market uncertainty, falls in asset prices, disruption in
businesses’ cashflows and increased demand for
short-term credit.
In response to this, UK and EU authorities are taking
action to support the economy and facilitate the flow
of capital. This article explains how the coronavirus
outbreak and the associated measures affect the
financial services sector in the EU and UK.
EU
Banking Sector
On 12 March, the European Central Bank announced
a series of capital and operational relief measures
concerning directly supervised banks. In particular:
-
Banks will be able to operate temporarily below the
level of capital required under the Pillar 2 Guidance,
the capital conservation buffer and the liquidity
coverage ratio.
- In addition, banks may partially use capital instruments
not qualifying as Common Equity Tier 1 capital, such as
Additional Tier 1 or Tier 2 instruments.
These measures aim to provide banks with temporary
capital and operational relief so they can continue
financing the economy during this downturn. The
European Central Bank notes, however, that banks
should not take advantage of these measures to increase
dividend distributions or renumerations.
In addition to the above, on 20 March the ECB announced
further measures for directly supervised banks. In
particular, the ECB introduced supervisory flexibility
with regards to the treatment of non-performing loans
(NPLs), to allow banks to benefit from guarantees and
moratoriums that are being put in place by a number
of public authorities. The ECB also encourages banks to
avoid excessive procyclicality of regulatory capital in the
application of the IFRS 9 international accounting standard.
The ECB estimates that the combined effect of the above
measures will release EUR120 billion in CET1 capital,
which will be available to banks to absorb losses or to
potentially finance up to EUR1.8 trillion of loans.
Moreover, on 18 March 2020, the ECB announced a
package of non-standard monetary policy measures to
support the economy in the eurozone during the time of
the pandemic. These include the launch a new EUR750
billion temporary asset purchase programme of private and public sector securities (the Pandemic Emergency
Purchase Programme or PEPP). Purchases under the
PEPP will take place until the end of 2020 and will include
all the asset categories which are eligible under the
existing asset purchase programme (APP). The European
Central Bank also decided to expand the range of eligible
assets under the corporate sector purchase programme
(CSPP) to include non-financial commercial paper.
The European Banking Authority has also published its
own statements. The key messages are the following:
-
Banks should focus on their core operations and
ensure continuity. To this end, the European Banking
Authority will postpone the EU-wide stress test
exercise to 2021 and will extend the closing date of
ongoing public consultations by two months. National
Competent Authorities are also expected to be flexible
in the way they carry out their supervisory duties,
where it is prudent to do so.
- National Competent Authorities should make full use
of flexibility afforded under the current regulatory
framework, for example regarding the countercyclical
buffer and the liquidity coverage ratio.
- According to the EBA, generalised payment delays
resulting from legislative initiatives and addressed to all
borrowers should not automatically lead to the borrower
being classified as in default, or unlikely to pay.
- In cases where institutions apply the IFRS 9
international accounting standard, they are expected
to use a certain degree of judgement and differentiate
between borrowers whose credit position would not
be significantly affected by the current situation in
the long run, and those who are unlikely to be able to
restore their creditworthiness.
- The EBA expects lenders to act in the interest of
consumers, ensuring, among other things, that any new
terms do not automatically have an adverse impact on
the customer’s credit rating.
- Considering the importance of orderly payments
services during this period, the EBA recommended
that the limit of contactless payments should increase
up to EUR50.
Capital Markets
On 11 March, the European Securities and Markets
Authority made the following recommendations:
-
All market participants should be ready to
implement their contingency plans to ensure
operational continuity.
- In accordance with their transparency obligations
under the Market Abuse Regulation, issuers
must disclose as soon as possible any significant
information concerning COVID-19 that may affect their
fundamentals, prospects or financial situation.
- Issuers must disclose in their 2019 year-end financial
reports or – if those have already been finalised –
in their interim financial reporting disclosures actual
and potential impacts of COVID-19 on their business,
financial situation and economic performance.
However, in a subsequent statement ESMA
acknowledged that issuers might experience difficulties
with submitting accurate financial statements in
time and therefore recommended that National
Competent Authorities should allow for certain delays
in this regard.
- Asset managers must continue to apply the risk
management requirements applicable to them and
react accordingly.
ESMA also decided to extend the response date for all
ongoing consultations with a closing date on, or after,
16 March by four weeks.
UK
UK regulators have responded quickly to the coronavirus
outbreak. On 11 March, it was announced that the
Financial Policy Committee (FPC) of the Bank of England
had decided to reduce the UK countercyclical capital
buffer rate to 0% (from 1%) of banks’ exposures to UK
borrowers. This measure became effective immediately
and the Committee estimates that the reduced 0% rate will
remain in place for at least 12 months. It is expected that
the release of the countercyclical capital buffer will support
the lending capacity of banks up to GBP190 billion.
In light of the FPC’s announcement, the Prudential
Regulation Authority published on the same day its own
supervisory guidance, highlighting that firms should not
increase dividends or other distributions following these capital easing measures. In addition, firms are expected
to identify a senior manager who will be responsible for
overseeing any proposals relating to dividend distributions
or share buybacks, which are associated with the reduction
of the UK countercyclical buffer rate.
The Prudential Regulation Authority also expects that
the individual performing the chair of the remuneration
committee senior management function (SMF12) or,
if different, the senior manager holding the prescribed
responsibility for “overseeing the development of, and
implementation of the firm’s remuneration policies and
practices” should pay due regard to decisions relating to
bonus pools.
The FPC’s decision forms part of a series of measures
taken by the Bank of England to support the UK
economy. These include the decision of the Bank’s
Monetary Policy Committee to reduce the Bank Rate
to introduce a new term-funding scheme with additional
incentives for small and medium-sized enterprises
(TFSME); and to maintain the stock of sterling nonfinancial
investment-grade corporate bond purchases
at GBP10 billion and the stock of UK government bond
purchases at GBP435 billion.
Last, the Financial Conduct Authority announced on
17 March its plans to postpone certain regulatory
activity, to extend the date for responses to its open
consultation papers and calls for input until 1 October
2020, and to reschedule most other planned work. In
particular, the FCA will relax its programme of routine
business interactions, and it will be focusing on business-critical
requests by firms. The FCA has published more
information on its website on its expectations of firms
during the coronavirus crisis, including how they should
treat their customers.