Banking and finance regulatory news, April 2020 #2

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Recent regulatory developments of interest to financial institutions.

Contents

  • COVID-19: EBA and PRA approach to regulatory reporting and Pillar 3 disclosures
  • COVID-19: Coronavirus Business Interruption Loan Scheme and new Large Business Interruption Loan Scheme
  • COVID-19: HM Treasury and PRA welcome delay to implementation Basel III
  • COVID-19: PRA statement on deposit takers' approach to dividend payments, share buybacks and cash bonuses
  • COVID-19: EBA statement on dividend distributions, share buybacks and variable remuneration
  • COVID-19: ECB recommendation to delay dividends and share buy-backs until October 2020
  • COVID-19: PRA statements on approach to VAR back-testing exceptions and exposure value for internal models method CCR
  • COVID-19: EBA final guidelines on legislative and non-legislative moratoria on loan repayments
  • COVID-19: SRB operational relief measures for resolution planning and MREL
  • CRR: Commission Implementing Regulation amending ITS on supervisory reporting
  • CRR II: EBA final draft RTS on key areas for implementing Fundamental Review of the Trading Book
  • Bank resolution: SRB "Expectations for Banks" policy
  • Principles for Responsible Banking: impact analysis tool for bank

COVID-19: EBA and PRA approach to regulatory reporting and Pillar 3 disclosures

On 2 April 2020, the PRA published a statement on amendments made to regulatory reporting and Pillar 3 disclosure requirements as a result of COVID-19. The statement is relevant to UK banks, building societies, designated investment firms and credit unions.

The statement follows a statement published on 31 March 2020 by the European Banking Authority (EBA) in which the EBA recommends that national competent authorities (NCAs) and national resolution authorities (NRAs) should allow firms up to one additional month for submitting the required data for supervisory reporting. The EBA advises that this additional period should not apply to information on the liquidity coverage ratio (LCR) or the additional monitoring metrics (ALMM), or for reporting for resolution planning purposes. The EBA also suggests that NCAs and NRAs should not prioritise their supervisory actions towards ad hoc data collections that are not specifically needed to monitor firms in the context of COVID-19.

In response to the EBA statement, the PRA:

  • will accept delayed submissions (of up to one month) for certain specified aspects of harmonised regulatory reporting, where the original remittance deadlines fall on or before 31 May 2020. However, remittance dates for information on the LCR and the ALMM, as well as reporting for resolution planning purpose, will not be delayed;
  • will accept delayed submission (of up to one or two months) for certain specified aspects of PRA-own regulatory reporting where the remittance deadlines in the PRA Rulebook fall on or before 31 May 2020;
  • strongly encourages firms to submit branch return data for the first half of 2020 using the old version of the branch return template instead of the new template. Firms considering submitting the new branch return are advised to discuss this with their supervisors;
  • may ask for more frequent submissions of particular reports, and additional ad hoc reporting on key prudential metrics, to maintain the safety and soundness of firms;
  • will take a flexible approach to assessing the reasonableness of any delay to the publication of firms' Pillar 3 disclosures. Where firms reasonably anticipate that publication of their Pillar 3 reports will be delayed, the PRA expects them to inform their supervisors and market participants of the delay, the reasons for the delay and, to the extent possible, the estimated publication date; and
  • clarifies that where firms follow the EBA's recommendation to assess the need for additional disclosures on the impact of COVID-19 and, in that context, choose to make additional disclosures relating to the LCR, these should be calculated using the average of 12-monthly end points as specified in the EBA guidelines on the LCR disclosure.

In due course, the PRA will consider whether the actions in the statement will be extended to reporting beyond 31 May 2020.

COVID-19: Coronavirus Business Interruption Loan Scheme and new Large Business Interruption Loan Scheme

On 3 April 2020 the UK government announced changes to the Coronavirus Business Interruption Loan Scheme (CBILS), under which SMEs may obtain loans of up to £5 million, to help them deal with the impact of COVID-19. Details of the scheme, as expanded, are available on the British Business Bank website. In response to pressure from businesses, the government has made the following changes to CBILS, which will apply from 6 April 2020:

  • lenders will no longer be permitted to refuse applications for a CBILS loan on the basis that the applicant business is eligible for regular commercial financing; insufficient security is no longer a condition to access the scheme. Businesses that have previously been refused CBILS loans may re-apply;
  • lenders will no longer be able to request personal guarantees for loans under £250,000. For facilities of more than £250,000, personal guarantees may still be required, at a lender’s discretion, but recoveries under these will be capped at a maximum of 20% of the outstanding balance after the proceeds of business assets have been applied and a Principal Private Residence may not be taken as security. The new rules will also apply to existing borrowers under the scheme; and
  • operational changes will be made to speed up lending approvals.

As before, the government will cover the first twelve months of interest and fees and will guarantee 80% of any CBILS loan. The maximum loan value is £5 million and an applicant must have an annual turnover of not more than £45 million.

The government has also announced a new Coronavirus Large Business Interruption Loan Scheme (CLBILS) under which the government will guarantee 80% of loans of up to £25 million to firms with an annual turnover of between £45 million and £500 million. Loans backed by a guarantee under CLBILS will be offered at commercial rates of interest. Further details of the scheme will be announced later this month.

COVID-19: HM Treasury and PRA welcome delay to implementation Basel III

On 2 April 2020, HM Treasury and the PRA issued a joint statement welcoming the announcement made on 27 March 2020 by the Group of Central Bank Governors and Heads of Supervision, delaying the implementation of the Basel 3.1 standards by one year. They state that this will provide operational capacity for banks and supervisors to respond to the immediate financial stability priorities from the impact of COVID-19.

The Treasury and the PRA remain committed to the full, timely and consistent implementation of the Basel 3.1 standards and will work together towards a UK implementation timetable that is consistent with the one year delay.

COVID-19: PRA statement on deposit takers' approach to dividend payments, share buybacks and cash bonuses

On 31 March 2020, the PRA published a statement on deposit takers' approach to dividend payments, share buybacks and cash bonuses. The PRA welcomes the decisions by the boards of the large UK banks to suspend dividends and buybacks on ordinary shares until the end of 2020, and to cancel payments of any outstanding 2019 dividends, in response to a request from the PRA.

The PRA states that it also expects banks not to pay any cash bonuses to senior staff, including all material risk takers. It comments that it is confident that bank boards are already considering this, and will take any appropriate further actions with regard to the accrual, payment and vesting of variable remuneration over coming months.

The PRA also published letters it sent on 31 March 2020 to HSBC, Nationwide, Santander, Standard Chartered Bank, Barclays, RBS and Lloyds Banking Group setting out its expectations relating to bonuses and asking the banks to confirm whether or not they are prepared to agree to its requests. The PRA states that it stands ready to consider use of its supervisory powers should any bank not agree to take the requested action.

COVID-19: EBA statement on dividend distributions, share buybacks and variable remuneration

On 31 March 2020, the EBA published a statement on dividend distributions, share buybacks and variable remuneration in the light of the COVID-19 pandemic.

The EBA acknowledges that some banks have already communicated a postponement of their decisions on dividends and share buybacks. It urges all banks to refrain from dividends distribution or share buybacks which result in a capital distribution outside the banking system, in order to maintain its robust capitalisation. The EBA states that banks should discuss with their competent authorities if they consider themselves legally required to pay out dividends or make share buybacks. The EBA also considers that ensuring the efficient and prudent allocation of capital within banking groups is crucial and should be monitored by competent authorities.

The EBA also asks that competent authorities request banks to review their remuneration policies, practices and awards to ensure that they are consistent with and promote sound and effective risk management and reflect the current economic situation. Remuneration and, in particular, its variable portion should be set at a conservative level. The EBA states that, to achieve an appropriate alignment with risks stemming from COVID-19, a larger part of the variable remuneration could be deferred for a longer period and a larger proportion could be paid out in equity instruments.

COVID-19: ECB recommendation to delay dividends and share buy-backs until October 2020

On 27 March 2020, the European Central Bank (ECB) updated its recommendation to banks on dividend distributions to state that, in the light of the COVID-19 pandemic, they should not pay dividends for the financial years 2019 and 2020 until at least 1 October 2020. The ECB states that banks should also refrain from share buy-backs aimed at remunerating shareholders.

The new recommendation does not retroactively cancel the dividends already paid out by some credit institutions for the financial year 2019. However, credit institutions that have asked their shareholders to vote on a dividend distribution proposal in their upcoming general shareholders meeting will be expected to amend such proposals in line with the updated recommendation.

The ECB will further evaluate the economic situation and consider whether further suspension of dividends is advisable after 1 October 2020.

COVID-19: PRA statements on approach to VAR back-testing exceptions and exposure value for internal models method CCR

On 30 March 2020, the PRA published the following statements on its approach to value-at-risk (VAR) back-testing exceptions and calculating exposure under the internal models method counterparty credit risk (CCR) in the light of the COVID-19 pandemic:

  • a statement on its approach to value-at-risk (VAR) back-testing exceptions to mitigate the possibility of excessively pro-cyclical market risk capital requirements. Firms are allowed, on a temporary basis, to offset increases due to an elevated level of VAR back-testing exceptions through a commensurate reduction in risks-not-in-VAR (RNIV) capital requirements. The baseline number of back-testing exceptions to be used, which will determine the point at which the RNIV reduction starts, should be agreed with the PRA before firms apply the temporary approach. This approach will be reviewed by the PRA after six months; and
  • a statement on calculating exposure under the internal models method (IMM) counterparty credit risk (CCR). The PRA is aware that some firms have recently experienced significant moves in CCR risk-weighted assets, and it understands that these moves are partially attributable to large margin calls following significant intraday market price movements. The PRA clarifies that, among other things, the Capital Requirements Regulation (CRR) does not preclude firms using the IMM to measure the exposure value including collateral which has not yet settled at the time of calculation.

If firms have any questions, they are advised to contact their normal PRA supervisory contact.

COVID-19: EBA final guidelines on legislative and non-legislative moratoria on loan repayments

On 3 April 2020, the EBA published a final report containing guidelines on legislative and non-legislative moratoria on loan repayments applied in the light of COVID-19.

The EBA refers to its March 2020 statement on the application of the prudential framework regarding default, forbearance and IFRS9 in the light of COVID-19 measures, in which it clarified a number of aspects relating to the use of public and private moratoria. However, it also noted that further detailed guidance was needed to ensure consistent application. These guidelines therefore aim to provide clarity on the treatment of legislative and non-legislative moratoria applied before 30 June 2020. The EBA may extend this time limit if necessary.

The guidelines clarify that payment moratoria do not trigger classification as forbearance or distressed restructuring if the measures taken are based on the applicable national law or on an industry or sector-wide private initiative agreed and applied broadly by the relevant credit institutions.

The EBA also states that it is aware of the need to ensure that the risk presented by the economic consequences of the COVID-19 pandemic is identified and measured in a true and accurate manner. Therefore, institutions must continue to adequately identify those situations where obligors may face longer term financial difficulties and classify them in accordance with the existing regulation. The requirements for identification of forborne exposures and defaulted obligors remain in place.

It adds that, in order to allow effective monitoring of the effects of the COVID-19 pandemic, institutions must collect information about the scope and effects of the use of the moratoria. The EBA expects institutions to use the general payment moratoria in a transparent manner, providing relevant information to their competent authorities, while specific disclosure requirements to the public will be published at a later point in time.

Due to the urgency of the matter and the specific focus of these guidelines on measures related to COVID-19, the EBA has not carried out public consultations or a cost-benefit analysis.

The guidelines will apply from the date of translation into all EU languages.

COVID-19: SRB operational relief measures for resolution planning and MREL

On 1 April 2020, the SRB published a letter it has sent to banks under its remit, outlining potential operational relief measures in light of COVID-19, relating to resolution planning and minimum requirements for own funds and eligible liabilities (MREL).

The SRB states that it is committed to working on 2020 resolution plans and issuing 2020 decisions on minimum requirements for own funds and eligible liabilities (MREL) according to the planned deadlines in early 2021. However, it will apply a pragmatic and flexible approach to consider, where necessary, postponing less urgent information or data requests related to the 2020 resolution planning cycle.

The SRB regards the liability data report, the additional liability report and the MREL quarterly template as essential and it expects banks to make every effort to deliver these documents on time. It will assess possible leeway in submission dates for other reports, such as those related to critical functions and access to financial market infrastructures (FMIs).

Its internal resolution teams will assess difficulties in achieving work programme updates and in submitting other deliverables on an individual basis. However, all banks are expected to substantiate their requests and identify mitigating actions to continue progress towards resolvability.

The SRB will monitor the market conditions in the next few months and analyse the potential impact on transition periods needed for the build-up of MREL. The SRB states that it is ready to use its discretion and the flexibility given by the regulatory framework to adapt transition periods and interim targets applied to banking groups, as well as to adjust MREL targets in line with capital requirements, with particular reference to capital buffers.

CRR: Commission Implementing Regulation amending ITS on supervisory reporting

Commission Implementing Regulation (EU) 2020/429 amending Implementing Regulation (EU) 680/2014 laying down implementing technical standards (ITS) on supervisory reporting of institutions under Article 99(5) of the Capital Requirements Regulation (CRR) has been published in the Official Journal of the EU (OJ).

The new Implementing Regulation amends the supervisory reporting requirements relating to:

  • common reporting (COREP) to reflect the new securitisation framework and changes relating to the reporting of the liquidity coverage requirement (LCR) in response to Delegated Regulation (EU) 2018/1620, which amends Delegated Regulation (EU) 2015/61; and
  • financial information reporting (FINREP) on non-performing exposures (NPE) and forbearance to allow the monitoring of reporting institutions' NPE strategies, the reporting requirements on profit and loss (P&L) items and the implementation of the new International Financial Reporting Standard on leases (IFRS 16).

The new Implementing Regulation entered into force on 31 March 2020. The amendments to the reporting framework will apply with different reference dates due to different application dates of the underlying regulatory requirements. The revised reporting requirements on own fund and own funds requirements (in points (1), (4) and (5) of Article 1) apply from 30 March 2020. The provisions related to liquidity reporting (points (9) to (12) of Article 1) apply from 1 April 2020 and the revised reporting requirements on NPEs, debt obligations subject to forbearance measures, the operating and administrative expenses and financial information (points (2), (3) and (6) to (8) of Article 1) apply from 1 June 2020.

CRR II: EBA final draft RTS on key areas for implementing Fundamental Review of the Trading Book

The EBA has published the following three reports containing final draft regulatory technical standards (RTS) under the CRR II Regulation on the new internal model approach under the Fundamental Review of the Trading Book (FRTB):

The EBA will submit the final draft RTS to the European Commission for adoption. Their adoption is expected to trigger the three-year period after which institutions with permission to use the FRTB internal models are required, for reporting purposes only, to calculate their own funds requirements for market risk with those internal models.

Bank resolution: SRB "Expectations for Banks" policy

Following consultation, the Single Resolution Board (SRB) has published its Expectations for Banks policy (Expectations) and an overview of the consultation responses.

The Expectations have been updated to reflect industry feedback. Among other things, they:

  • set out the capabilities the SRB expects banks to demonstrate in order to show that they are resolvable;
  • describe best practice and set benchmarks for assessing resolvability; and
  • provide clarity to the market on the actions that the SRB expects banks to take in order to demonstrate resolvability.

The Expectations will be subject to a gradual phase-in. The SRB expects banks to have built up their capabilities on all aspects by the end of 2023, except where indicated otherwise. Where needed and on a bilateral basis, the SRB and banks may agree alternative phase-in dates. The Expectations are tailored to each individual bank and its resolution strategy, allowing for flexibility and proportionality.

The SRB acknowledges the COVID-19 related challenges that banks face. The SRB, in close cooperation with other authorities and the banks under its remit, is carefully monitoring the situation. It is prepared to give banks the flexibility they may need to implement the Expectations on an individual basis.

Principles for Responsible Banking: impact analysis tool for banks

The United Nations (UN) Environment Programme Finance Initiative (UNEP FI) has announced that signatories to the Principles for Responsible Banking and UNEP FI member banks have developed a portfolio impact analysis tool for banks and a guidance document on impact analysis. These will support banks as they conduct their impact analysis for implementing the Principles for Responsible Banking.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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