The Group of Central Bank Governors and Heads of Supervision (GHOS), the Basel Committee’s oversight body, have agreed on March 27, 2020 to delay the implementation timelines for the outstanding Basel III standards. This should provide relief for banks and supervisors to respond to the immediate financial stability priorities resulting from the coronavirus (Covid-19) outbreak. The implementation of the following standards and frameworks have all been deferred by one year to January 1, 2023:
The transitional arrangements for the aggregate output floor have also been deferred by one year to January 1, 2028.
The Bank for International Settlements (BIS) has further presented an overview of the measures taken world-wide to counter the effects of Covid-19 in a report by the Financial Stability Institute (FSI). Next to the deferral of the Basel III implementation, capital and other regulatory requirements are relaxed, and accounting rules can be interpreted more flexibly.
The measures are supported, but the FSI also warns that the measures should be temporary in nature as a weaker banking sector would weaken the economy in the long-term. All measures should be aimed at supporting economic activity, while preserving the health of the banking system.
In yet another publication, the BIS provided technical guidance on the capital treatment of loans subject to government guarantees or payment moratoriums, and on expected credit loss (ECL) accounting. For the latter, we refer to the IFRS 9 item that was published on the Zanders website.
On April 7, 2020 the European Central Bank (ECB) adopted an unprecedented set of collateral measures to mitigate the tightening of financial conditions across the euro area. The temporary easing of collateral requirements should encourage lending during the coronavirus crisis. “The measures collectively support the provision of bank lending especially by easing the conditions at which credit claims are accepted as collateral,” according to ECB.
The ECB also adopted a general reduction of collateral valuation haircuts. Furthermore, and perhaps the most eye-catching measure, a waiver is installed to accept Greek sovereign debt instruments as collateral. The last time Greek bonds were accepted as collateral at the ECB was in mid-2018 when the country exited its last bailout program.
The European Banking Authority (EBA) further clarified its measures to mitigate the impact of COVID-19 on the EU banking sector. Stressing the importance of a sound capital base and the need to support the economy, the EBA reiterates its call to refrain from dividend payments and share buybacks and to asses remuneration policies.
Furthermore, the EBA asks competent authorities to offer leeway on reporting dates, flexibility in assessing deadlines of Pillar 3 disclosures (see also the delayed Basel III implementation by GHOS earlier in this article) and the cancellation of the Quantitative Impact Study based on June 2020 data. Lastly, the EBA calls on competent authorities to support financial institutions’ ongoing efforts to mitigate financial crime risk.
On March 20, 2020 the Bank of England (BoE) and the Prudential Regulation Authority (PRA) communicated measures which aim to mitigate operational burdens on PRA-regulated firms and Bank-regulated financial market infrastructures. The measures support financial institutions in remaining safe and sound and delivering critical functions to the economy. The main measures are as follows:
The Swiss Financial Market Supervisory Authority (FINMA) has provided guidance in the form of temporary exemptions for banks due to the Covid-19 crisis. On March 25, 2020 the Federal Council adopted the Swiss Federal Government’s package of liquidity measures to cushion the economic impact of Covid-19. FINMA supports these liquidity measures and provides banks with clarifications on dealing with the Covid-19 credits with federal guarantees within capital and liquidity requirement frameworks in the FINMA Guidance 02/2020.
In addition, clarification on temporary exemptions regarding the leverage ratio (central bank reserves may be excluded) and risk diversification requirements (the strict upper limit of 25% or 100% Tier 1 capital in the context of the risk diversification requirements may be exceeded) are given. Finally, the ECL approach under IFRS 9 and its application in light of the Covid-19 crisis is discussed in the document.
Since no specific regulations on these risks have been finalized yet, the Dutch Central Bank (DNB) published on April 1, 2020 a document on good practices regarding climate-related risk management observed in the Dutch banking sector.
The aim of the document is to provide non-binding guidance on how banks can cope with climate-related risks and to make banks more resilient to the financial risks resulting from climate change.
The good practices are divided into three categories:
The latter category differentiates between good practices for identification, assessment, mitigation and monitoring of the climate-related risks. A Q&A that elaborates on how existing regulation applies to climate-related risk management according to the DNB is also included in the document.
The ‘Expectations for Banks’ document sets out the capabilities the SRB expects banks to demonstrate in order to show that they are resolvable. It describes best practice and sets benchmarks for assessing resolvability. It also provides clarity to the market on the actions that the SRB expects banks to take in order to demonstrate resolvability.
The ‘Expectations for Banks’ will be subject to a gradual phase-in. Banks are expected to have built up their capabilities on all aspects by the end of 2023, except where indicated otherwise.