In order to tackle the socio-economic crisis caused by the Covid-19 pandemic, the European Commission believes that the banking sector, which it considers to be better equipped to face the coming recession than it was during the financial crisis of 2008, must be part of the European response by continuing to finance the economy.
To this end, on Tuesday 28 April, the European institution presented a draft regulation lifting, in a targeted and temporary manner, certain requirements laid down in the supervisory banking regulations, as well as an interpretative communication calling on supervisors and industry to make use of all the flexibility already allowed by European legislation.
These measures, if all are adopted by the European Parliament and the Council of the European Union, will reduce bank capital requirements by up to €30 billion and provide up to €450 billion in additional credit, one European official estimated.
“We are using the full flexibility of the EU’s banking rules and proposing targeted legislative changes to enable banks to keep the liquidity taps turned on, so that households and companies can get the financing they need”, said Commission Vice-President Valdis Dombrovskis. According to him, bank provisioning for ‘non-performing loans’ (NPLs) could reach €100 billion this year in the EU, if the trend observed in the first quarter continues.
Calling for the measures to be dealt with urgently so that they can be adopted in “June”, the Commissioner reaffirmed the Commission’s commitment to continue to implement in the EU the ‘risk reduction’ legislative package arising from the Basel III accord (see EUROPE 12237/18).
However, the European official acknowledged that a series of measures to finalise the transposition of the Basel III accord in the EU will not be presented in June. “In the current context, this makes little sense”, because all the data we rely on must be revised, he said.
Measures. In line with a recent agreement reached in the Basel Committee, the Commission proposes to extend by 2 years, until the end of 2024, the provisional application of the accounting standard IFRS 9, which introduces a loan impairment model based on expected rather than actual losses (see EUROPE 11892/8). In times of pandemic, the application would suddenly increase the bank provisions due. This measure will give banks more time to increase their capital levels related to bank loans that become non-performing in 2020 and 2021.
In addition, global systemically important insurers (G-SIIs) will be required to apply the leverage ratio buffer in January 2023 and not early 2022. It has also been proposed that the way be changed in which certain exposures are excluded from the calculation of the leverage ratio in order to facilitate banks’ access to European Central Bank (ECB) liquidity.
The Commission also proposes to extend preferential treatment with regard to the minimum capital requirement (‘NPL backstop’) to NPLs benefiting from a public guarantee granted in response to the pandemic.
Other measures concern the early application – as soon as this proposal for a Regulation is adopted – of reduced capital requirements in the case of loans to SMEs and individuals (pensioners, employees on permanent contracts) or for the realisation of infrastructure related to essential public services. Legislation currently provides for a reduction in these requirements as of 28 June 2021.
See the proposal for a Regulation: https://bit.ly/2KG66Ub
Interpretative communication. The Commission’s interpretative communication confirms the guidance already issued by the European Banking Authority (EBA) and the ECB acting as single supervisor in the euro area banking union (see EUROPE 12461/14).
Three areas where flexibility is possible have been identified: – rules allowing banks to assess the risk that a borrower may not be able to repay a loan in the event of a sudden economic crisis, such as the current pandemic, and the impact of this on bank capital requirements; – rules relating to the classification of non-performing loans where public guarantees have been granted and moratoria on repayments have been granted; – the accounting treatment of delays in the repayment of loans benefiting from the abovementioned public aid.
On the issue of dividends, the institution supports the EBA ECB’s position that publicly supported credit institutions should refrain from paying dividends to their shareholders and act with restraint in granting bonuses to their managers.
“Banks should suspend dividends”, Mr Dombrovskis said. Noting that the industry had overwhelmingly responded to this call, this European official considered that legislation to ban dividends did not seem to be required, although monitoring compliance with the commitments made was necessary.
See the interpretative communication: https://bit.ly/2xkxrrU
Dialogue. Finally, Mr Dombrovskis announced that the Commission would conduct a dialogue with stakeholders – the banking sector, businesses and civil society – to identify the most urgent measures to tackle the crisis and promote a uniform and consistent application of the regulatory framework. (Original version in French by Mathieu Bion)