The European Banking Authority (EBA) has launched the 2021 EU-wide stress test and has published the macroeconomic scenarios. The adverse scenario builds on a prolonged COVID-19 scenario in a lower for longer interest rate environment. A variety of possible negative outcomes includes ineffective vaccine distribution and mutation(s) of the virus. This triggers adverse confidence effects worldwide and economic contraction. Over the scenario horizon, GDP contracts by 3.6%, both in the EU and in the euro area. The EBA has stated that the theoretical shocks are among the toughest used in the regulatory stress test exercise so far. “The 2021 adverse scenario is very severe having in mind the weaker macroeconomic starting point in 2020 as a result of the severe pandemic-induced recession,” EBA said.
In a report published by Fitch Ratings they identify the sectors and issuers that are most at risk from impairments. For several key economic sectors, the coronavirus pandemic has accelerated and amplified structural shifts that may cause some permanent weakening to their operating environments, thereby accentuating longer-term pressures on credit metrics. Moreover these sectors will be faced with execution risks as they adapt to their respective “new normal” environments.
Please contact Martijn de Groot for more information.
CME Group has published a discussion document related to a proposal giving Central Counterparty Clearings (CCPs) a leading role in automatically converting LIBOR-referencing swaps into new OIS contracts that follow Risk Free Rate (RFR) standards (with in arrears rate fixing). It would involve a cash adjustment to compensate for any changes in valuation. This approach would be an alternative to relying on contractual fallbacks to prevent separate trading of ‘legacy’ IBOR contracts referencing RFRs and ‘new’ OIS contracts, and to reduce operational complexities for market participants related to the implementation of IBOR fallbacks. Also LCH is considering such a move.
The European Central Bank (ECB) has received a record of over 8000 responses to its consultation on the creation of a central bank digital euro (CBDE), an electronic form of central bank money (in supplement to cash) accessible to all citizens and firms. The public consultation was launched on 12 October 2020, following the publication of the Euro system report on a digital euro. The ECB says it will publish a comprehensive analysis of the public consultation in the spring, “which will serve as an important input for the ECB’s Governing Council when deciding whether to launch a digital euro project”.
In a reaction on the consultation, the European Banking Federation (EBF) states that it is fundamental to acknowledge and secure the role of banks as reliable, trusted and supervised intermediaries when considering any possible future provision of a CBDE. It then furthers comments on the specific scenarios set by the ECB which could induce the introduction of a CBDE. Moreover it specifies high level design principles for a possible CBDE.
Please contact Gijs Immerman for more information on this topic.