The impact of COVID-19 on banking regulations | Financial Services | Deloitte Netherlands


The impact of COVID-19 on banking regulations

The banking industry has been struggling with implementing new regulations and policies. Due to COVID-19, some of the implementation deadlines have been postponed, so banks could focus on maintaining financial stability. This article will provide a brief overview of the extended deadlines and the importance of efficient use of time deferrals.

Jurie Wessels | Maitrie Ramautar | Anne Claire van den Wall Bake-Dijkstra - May 6, 2020

The outbreak of the COVID-19 pandemic and the subsequent (intelligent) lockdown around the world, has a noticeable impact on financial services. The EU banking sector had to adjust its focus to support lending into the real economy while maintaining a sound capital base. At the same time, banks have been facing strict deadlines in implementing new regulations and policies, such as the Basel III reforms (known in the industry as Basel IV). After increased presence of COVID-19, the Basel Committee on Banking Supervision (BCBS) has announced its intention to defer some of these deadlines in order to maintain focus on financial stability and to alleviate operational burdens that banks are currently facing. This leaves banks with uncertainties regarding previously defined timelines in assuring timely implementation. In this blog, Deloitte’s Center of Excellence for Regulatory Reporting presents an overview of these extended deadlines and highlights the importance of efficient usage of these time deferrals.

Extended deadlines and revised timelines

Basel III
The BCBS has officially announced that the required implementation of the Basel III framework is to be delayed by one year to 1 January 2023. This marks a serious, yet expected, response by regulators to the ongoing COVID-19 pandemic gripping the world. The industry had already been working against the clock to ensure the successful implementation of the Basel III regulatory framework, and although this decision to defer the final due date provides some breathing room in uncertain times, the BCBS does not expect banks to relax their ongoing processes in working towards satisfying the requirements of the Basel III framework.

Driving this decision by the BCBS is the importance for banks to ensure the availability of resources for essential operations in responding to the impact of COVID-19 pandemic crisis. The underlying regulatory aim of stimulating financial and operational sustainability remains a focal point.
The revised implementation guidelines below indicate a deferral of the relevant regulatory standards by one year:

Stress Testing

In addition to the effects on regulatory timelines relating to the BCBS, the European Banking Authority (EBA) has taken similar measures in ensuring that banks’ operational continuity is prioritised by postponing the EU-wide stress test to 2021.
In an official statement, the EBA has indicated that it is coordinating a joint effort along with national competent authorities (CAs) to alleviate the current operational burden which banks face by postponing the EU-wide stress test. To supplement this, the EBA will reportedly carry out an additional EU-wide transparency exercise to provide insight into banks’ exposures and asset quality to market participants.
The EBA has emphasised the importance of CAs to make full use of the flexibility embedded in the regulatory framework to support the operational continuity of banks and has suggested the possible postponement of non-essential supervisory activities. These measures have been taken to ensure that the burden of the COVID-19 pandemic is alleviated as much as possible.

Recommendation on the efficient use of time deferrals

The postponement of previously mentioned deadlines has led to increased uncertainty among banks regarding upcoming actions. Additional postponement can be given to banks individually, such as postponements on the implementation of the definition of default, or follow-up on findings from onsite inspections, SREP or TRIM. To ensure timely implementation, it is recommended that banks adhere to the timelines that were initially pursued. Considering the effort to maintain essential operations, it is tempting to use the newly freed-up time to pause or postpone the assessment and implementation of new regulations and policies, and pick them up in a more convenient period. However, in line with past experiences, the delayed deadlines will probably prove to be necessary, as was experienced with other major programs such as the implementation of IFRS 9. The effective date of this guidance was postponed a few times by institutions, causing an overall delay of several years whereby banks decided to also delay, or at least significantly slow down the underlying implementation activities. Such delays can result in two consequences:

  • First, it will affect your data. Changes in regulations also trigger new data requirements. The longer banks wait, the harder it is to ensure high data quality. Taking advantage of the deferrals and continue working on new data requirements will increase the quality thereof and also enables banks to better incorporate this in existing broader data remediation programs.
  • Second, if a deadline approaches and banks experience a time crunch, it is only possible to focus on the minimum requirements. This means banks will solely focus on compliance towards the regulators and stakeholders, and not on embedding the required changes into other change programs and developments (e.g. loan origination and sustainability and climate risk developments). Should there be a change in the process of data collection, new policies might need to be written. 

These two aspects are caused by a lack of time to thoroughly implement new regulations and policies. Additionally, new regulations have been focusing on the responsible business aspect of a bank. Banks are stimulated to act pro-actively on (expected) changes and make sure the data is sufficient. This will also be more difficult in a shorter timeframe.

Maintain the focus on execution of the roadmap

The unexpected outbreak of the COVID-19 pandemic has forced regulators and banks to make rapid changes. In order to support banks in focusing on the financial stability of the economy, the BCBS has decided to postpone some deadlines regarding the implementation of regulatory requirements. In our experience, extending the deliverables of the roadmap because the regulator allows more time for implementation, the same pressure and difficulties to become compliance will arise, but only a year later. By not repeating past behaviour as with the situation with IFRS 9, banks can decide to use this extra time efficiently. This will offer them more space to assess and adjust their data requirements and possibly revise their policies, strengthening their position as a responsible business. It is therefore recommended for banks to continue with this process immediately in the aftermath of the COVID-19 pandemic.

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The Center of Excellence for Regulatory Reporting (CoE) is a virtual team centralising Deloitte’s Regulatory Reporting knowledge and helping clients to do responsible business by helping them with their regulatory reporting. In order to effectively support our banking clients in this complex regulatory environment, the CoE is founded to (i) stay on top of new developments in the field of regulatory reporting to support timely and appropriate data-driven-reporting solutions at financial institutions, (ii) support financial institutions by leveraging expert view of our international network on ad hoc queries regarding their regulatory reporting data and processes; and (iii) have teaming of professionals to combine expert knowledge in the field of regulatory reporting with strong data and implementation skills to ensure fit-for-purpose teams.

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