According to Reuters, European Central Bank (ECB) officials are generating plans to cope with potentially hundreds of billions of euros of loans that might not be repaid in the wake of the coronavirus outbreak. The project is aimed at shielding commercial banks from any second fallout of the crisis following increased credit risk. One of the ideas is to set-up a ‘bad bank’ which is created to warehouse unpaid euro debt.
Any pan-European scheme to tackle the problem of bad loans would likely face political objections from Germany, which has long resisted attempts to support banks in weaker countries for fear it could get lumbered with unpaid bills. Another measure that has been taken by the ECB is that it has decided to increase the pandemic purchasing programme (PPP) with an additional EUR 600 billion to EUR 1.350 billion. Of the first portion of the PPP, only a third has been spent so far. In addition to the increase, the end date has also been extended from December 2020 to June 2021 and repayments will be re-invested until December 2020.
On 20 May 2020, the Single Resolution Board (SRB) published the ‘Minimum Requirements for Own Funds and Eligible Liabilities (MREL) Policy under the Banking Package’. The SRB is the central resolution authority within the Banking Union and MREL is one of the key tools in resolvability, ensuring that banks maintain a minimum amount of equity and debt to support an effective resolution. Hence, the MREL requirements should prevent the use of public money for a failing bank.
This policy implements the requirements stemming from the 2019 Banking Package, which introduced a number of risk-reducing measures for the financial sector. The updated policy introduces changes to MREL requirements for large global systemically important banks (GSIBs), integrating the global standard for Total Loss-Absorbing Capacity (TLAC). There are changes to the way it is calculated (e.g. introducing a second MREL that is based on the leverage ratio) and in its quality (subordination). Another key change is to the deadlines for binding MREL targets. The SRB will decide on the level of MREL that institutions should hold in its 2020 resolution planning cycle. These decisions, which will be communicated to banks in early 2021, will include two binding MREL targets: the binding intermediate target to be met by 1 January 2022 and the MREL final target to be met by 1 January 2024.
Please contact Tim Neijs for more information on MREL policy.
On 29 May 2020, the European Banking Authority (EBA) published its ‘Guidelines on loan origination and monitoring’. These guidelines were developed as part of the action plan to tackle non-performing loans. Institutions are expected to develop robust and prudent standards to ensure newly originated loans are assessed properly. The guidelines differentiate between lending to consumers, micro and small enterprises, and medium-sized and large enterprises.
Further, supervisory expectations for the risk-based pricing of loans are set out and guidance on the valuation of (im)movable property collateral is included. The guidelines clarify the credit decision-making process including the use of automated models, building on the requirements of the EBA Guidelines on internal governance. Finally, the guidelines aim to ensure that the institutions’ practices are aligned with consumer protection rules and respect fair treatment of consumers. The guidelines will apply from 30 June 2021, but institutions can benefit from a series of transitional arrangements. For example, institutions will be allowed to address possible data gaps and adjust their monitoring frameworks and infrastructure until 30 June 2024.
The Swiss Financial Market Supervisory Authority FINMA takes climate-related financial risks into account as part of its supervisory remit. The following topics are in scope:
According to FINMA CEO Mark Branson, disclosure obligations can encourage institutions to address these risks.
On 27 May 2020, the Network for Greening the Financial System (NGFS) published two documents to provide guidance on the management of climate- and environmental-related risks to central banks and supervisors:
On 24 June 2020, the NGFS published several additional documents which aim to ease the integration of climate-related risks:
On 1 July 2020, the European Banking Authority (EBA) published its final Guidelines on the treatment of structural FX positions. The aim of these Guidelines is to establish a harmonised framework for the application of the structural FX waiver, which will allow its consistent application going forward. The guidelines will be applicable from 1 January 2022 which is one year later than originally envisaged to ensure that institutions have time to prepare for the introduction of the requirements.
Before publishing these final guidelines, a consultation paper was launched by the EBA. The main takeaways of this consultation paper were published on this website.
The EBA launched a consultation on draft Regulatory Technical Standards (RTS) on the capitalisation of non-modellable risk factors (NMRFs) for institutions using the new Internal Model Approach (IMA) under the Fundamental Review of the Trading Book (FRTB).
One of the key features of the FRTB is the classification of risk factors that are included in the risk measurement model of the bank as modellable or non-modellable. The standards require that institutions calculate a separate stress scenario risk measure for each non-modellable risk factor. The draft RTS set out the methodologies that institutions are required to use for determining the extreme scenario of future shock that, when applied to the non-modellable risk factor, provides the stress scenario risk measure.
The consultation considers two options: