Important set measures related to COVID-19 announced by the ECB and EBA
The European Central Bank (ECB) and the European Banking Authority (EBA) have both announced an important set measures related to COVID-19 to ensure that banks under its supervision can continue to serve the economy, as the economic impact of the virus becomes more apparent:
- The ECB published a press release stating that it will allow banks to operate temporarily below the level of capital defined by the Pillar 2 Guidance (P2G), the capital conservation buffer (CCB) and the liquidity coverage ratio (LCR).
- The ECB expects that this will be complemented by national competent authorities relaxing the countercyclical capital buffer (CCyB).
- Banks will also be allowed to meet Pillar 2 Requirements partially with lower quality capital partially (such as Additional Tier 1 or Tier 2 instruments). This brings forward a measure in CRD5 that was due to come into effect in January 2021 (Article 104a) – EU banks will be allowed to meet P2R with 56.25% CET1, and the rest with AT1 and Tier 2 capital.
- The ECB expects that banks should use the capital freed up by these measures to support the economy, rather than to increase dividend distributions or variable remuneration.
- The ECB is discussing bank-specific measures, such as rescheduling on-site inspections and extending deadlines for the implementation of remediation actions stemming from recent on-site inspections;
- It underlines that banks should continue to apply sound underwriting standards, pursue adequate policies regarding the recognition and coverage of non-performing exposures, and conduct solid capital and liquidity planning and robust risk management.
This follows a letter sent by the ECB to all significant banks to remind them of the need to prepare for potential negative effects caused by the spread of coronavirus. The ECB’s measures go further than those proposed by the Bank of England, which has not yet suggested that it will allow banks to go into their capital conservation buffer or liquidity coverage ratio.
The EBA published its statement on actions to mitigate the impact of coronavirus on the EU banking sector and decided t o postpone the EU-wide stress test to 2021 so that to allow banks to focus on ensuring continuity of their core operations. It also encourages national competent authorities to make use of the flexibility already embedded in the existing regulatory framework, and suggests allowing banks to meet P2R partially with lower quality capital as an example of this.
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