COVID-19, Banks and Regulation
By Emmanuel Dooseman & Gregory Marchat
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.
Loans to debtors distressed by the Covid-19 outbreak will also qualify for more favorable prudential treatment. Supervisory flexibility will be applied to:
- non-performing loans (NPLs),
- classification of debtors as “unlikely to pay”, and
- loans under Covid-19 related public moratoriums.
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 03.20.2020 several supervisory and prudential policy measures to address Covid-19 challenges. The following steps are included in their press release:
- Cancellation of the Bank’s 2020 annual stress test – the annual cyclical scenario (ACS) – to allow banks to focus on the needs of UK households and businesses;
- Amendment to the biennial exploratory scenario (BES) timetable – the liquidity exercise has been paused until further notice, and the responses to the BoE’s Climate Risk paper will be considered in summer 2020;
- Bank statement on IFRS 9 and Covid-19 – currently there is not enough forward-looking information used to incorporate the impact of coronavirus on borrowers into the expected credit loss (ECL), hence the PRA finds the preparation of reliable and detailed forecasts very challenging at present. Further guidance on this will be provided by the BoE this week (23.03.2020 – 27.03.2020);
- Postponement of the joint BoE / Financial Conduct Authority (FCA) survey into open-ended funds – it has been delayed until further notice with a delay on subsequent FCA consultation that should follow;
- Supervisory programs for individual firms and FMIs – postponement of non-critical data requests, on-site visits and deadlines;
- Senior Manager Function (SMF) application – the process is to be reviewed keeping in mind current events;
- Operational Resilience Policy Development – ongoing BoE / PRA consultations “Building Operational Resilience: impact tolerances for important business services” and “Outsourcing and third-party risk management” are extended to 1 October 2020;
- Internal Ratings Based (IRB) models – implementation of the proposals published in Consultation Paper (CP) 21/19, and related to the Definition of Default, Probability of Default, and Loss Given Default estimation will be delayed by one year to 1 January 2022;
- Financial Services Regulatory Initiative Forum (RIF) – first meeting (BoE, PRA, FCA) will take place in April 2020;
- Basel III – the government announced, that it will introduce legislation enabling Basel III.
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