On 28th April, the European Commission announced a banking package proposed to facilitate bank-lending in an effort to support the economy and mitigate the harsh economic impact of the coronavirus pandemic. The response aimed to encourage banks to utilise the flexibility within the EU’s prudential and accounting frameworks. The package includes “quick fix” amendments to EU banking rules as well as an Interpretative Communication on the EU’s accounting and prudential regulations. Katie Fisher Reports
The Interpretative Communication defines how banks and regulators can flexibly apply the accounting and prudential rules. The flexibility in the EU’s regulatory framework covers the rules regulating how banks’ risk-assess of a borrower. It takes into account the inevitable event that some borrowers will not repay a loan due to the sudden economic crisis ensued by the COVID-19 pandemic will affect the amount of money set aside by the bank for any possible losses. It also considers flexibility within the prudential rules on the classification of non-performing loans in the case that relief measures, such as guarantee schemes and moratoria, have been provided by EU Member States or banks.
The Interpretative Communication also underlines areas where banks are encouraged to act responsibly. It highlights circumstances regarding dividends and variable remuneration. For example, banks should avoid the distribution of dividends to shareholders and assuming a conservative approach to variable remuneration payments.
Moreover, the Commission illustrates the role banks can play in helping businesses and citizens during the pandemic. This includes digital services, such as contactless and digital payments. The Interpretative Communication highlights this as an opportunity for banks to accelerate their digital finance development. However, the Commission also advises banks to approach digital banking with caution. The risk of financial crime is likely to increase under the current COVID circumstances.
The ‘Quick Fix’
The European Commission proposes some ‘quick fix’ amendments to EU prudential banking rules due to the coronavirus. The targeted changes affect specific aspects of the Capital Requirements Regulation (CRR). It aims to maximise the capability of banks to lend and to absorb COVID-related losses, while still offering security. Valdis Dombrovskis, Executive Vice President of the European Commission for An Economy that Works for People said: “We are supporting households and businesses as much as we can to deal with the economic fallout of the Coronavirus. The banking sector can do a lot to help here. 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. I will soon also be launching roundtable discussions bringing together consumer and business groups with the financial sector so that we can address the most urgent needs of our citizens and companies.”
The specific aspects of the CRR affected include the current transitional arrangements for mitigating the impact of IFRS 9 expected credit-loss provisions on banks’ regulatory capital. The amendment proposes a two-year extension to these arrangements. It also suggests deferring the application date of the leverage ratio buffer requirement on global systemically important institutions to 1st January 2023. The temporary baking changes include extending preferential treatment of publicly guaranteed loans under the prudential backstop for Non-Performing Loans and a difference in how central bank reserves impact banks’ leverage ratio calculations. The proposed date of application for some capital benefits has also been advanced. This includes the treatment of certain software assets, specifications on particular loans backed by salary or pension, the revised supporting factor for small and medium-sized enterprises, and the new supporting factor for infrastructure finance.
It is clear that the Commission is encouraging banks to make full use of the flexibility within the EU banking rules. The temporary legislative changes have been imposed to enable banks to keep liquidity flowing, ensuring that households and companies have the financing they need. With this relaxation of banking accounting rules lenders are able to continue extending loans to companies struggling during the crisis. The announcements presents a coordinated EU response to the financial implication of the pandemic and is a great effort in avoiding national fragmentation. The Commission is taking an active role in engaging with the European financial sector to consider how best to develop further support systems for citizens and enterprises. There is also strong encouragement for banks to promote digital banking services which have seen a massive spike in engagement.
The European Parliament and Council of the EU are in the process of considering this legislative proposal as a matter of urgency. It is hoped that it will be adopted as early as June.