The European Central Bank ("ECB"), European Banking Authority ("EBA") and the Malta Financial Services Authority ("MFSA") have addressed certain matters of interest to banks, financial institutions and consumers concerning the economic impact of COVID-19 on the EU banking sector. Key regulatory updates have been highlighted below.
This is piece forms part of a series of COVID-19 updates published by our firm in response to developments around the pandemic with a special emphasis on the banking sector. For more on this series, please see here .
1. European Central Bank
Dividend distribution policies – ECB publishes Recommendation in response to the COVID-19 pandemic
The ECB has published a Recommendation, dated 27 March 2020, on credit institutions' dividend distribution policies in the light of COVID-19 pandemic and economic shock. As such, the ECB has recommended that the conservation of capital resources by credit institutions be prioritised over discretionary dividend distributions and share buy-backs.
The ECB recommends that until at least 1 October 2020, firms should:
- Not pay dividends or make any irrevocable commitment to pay out dividends for the 2019 and 2020 financial years;
- Refrain from share buy-backs aimed at remunerating shareholders.
In effect, Recommendation (ECB/2020/1) of the ECB of 17 January 2020 on dividend distribution policies for the 2019 financial year, published in January 2020, is repealed.
Credit institutions which are, for some reason, unable to comply with the Recommendation and which consider themselves legally required to pay out dividends, are expected to explain the underlying reasons to their joint supervisory team.
The Recommendation applies to:
- Significant supervised groups, as defined in point 22 of Article 2 of the SSM Framework Regulation;
- Significant supervised entities which are not part of a significant supervised group, as defined in point 16 of Article 2 of the SSM Framework Regulation;
- National competent and designated authorities which should, in turn, apply the Recommendation to less significant supervisory entities and less significant supervisory groups, as defined in points 7 and 23 of Article 2 of the SSM Framework.
The ECB has committed to further evaluate the economic situation and consider whether further suspension of dividends and share buy-backs is advisable after 1 October 2020.
The Recommendation may be accessed here.
In response to the above, on 2 April 2020, the MFSA announced that it will be adopting the ECB's Recommendation in its entirety and that the requirements contained therein shall apply to all credit institutions licenced in terms of the Banking Act (Chapter 371 of the Laws of Malta).
These recommendations will apply from 3 April 2020 until 1 October 2020, with the possibility for further extension.
The MFSA Circular may be accessed here.
2. European Banking Authority
EBA Statement on supervisory reporting and Pillar 3 disclosures in light of COVID-19 of 31 March 2020
The EBA's statement addresses supervisory reporting and Pillar 3 disclosures with the primary aim of providing for further possible actions to alleviate the adverse effects of the current pandemic.
The EBA's statement on supervisory reporting and Pillar 3 disclosures encourages firms to concentrate their efforts on:
- Monitoring and assessing the impact of the COVID-19 outbreak;
- Ensuring business continuity;
- Providing market participants and competent and resolution authorities access to reliable information, to understand institutions' financial and prudential situations.
Supervisory reporting
Competent and resolution authorities should assess the extent to which a delayed submission of all the data or subsets of the data included in the EBA reporting framework would be justified in these circumstances.
The EBA explained that institutions should be allowed up to one additional month for submitting the required data, with the precise terms to be specified by the competent and resolution authority.
This allowance does not apply to:
- Information of the liquidity coverage ratio and the additional monitoring metrics and data sets identified as priority by the competent or resolution authority;
- Reporting for resolution planning purposes.
With regards to the resubmission of data, a specific timeframe can be discussed and agreed with the competent authority.
The above applies to supervisory measures which are being considered for submissions due between March and May 2020.
Furthermore, the EBA suggests that competent and resolution authorities should not prioritise supervisory actions over ad hoc data collections which are not necessary to monitor institutions during the outbreak.
Pillar 3 disclosures
The EBA encourages competent authorities to be flexible when assessing institutions' compliance with deadlines for the publication of Pillar 3 reports, in terms of Article 106(1) Capital Requirements Directive. In particular, authorities should consider:
- The requirement for institutions with securities issuances traded in a regulated market to public their Pillar 3 reports in conjunction with the date of publication of their financial statements (on the same date or as soon as possible thereafter); and
- Similar flexibility when assessing deadlines set for institutions which are preparing their financial statements according to their national accounting law and which do not fall within the scope of the Transparency Directive.
Where institutions reasonably anticipate a delay in the publication of their Pillar 3 reports, they are expected to inform competent authorities and market participants of the reason for this and, to the extent possible, the estimated publication date.
Competent authorities and institutions should also assess the need for additional Pillar 3 disclosures on prudential information which may be necessary to convey the risk profile of the institutions in the context of the COVID-19 outbreak, while taking into account the measures being taken by EU and national authorities and bodies.
The Statement may be accessed here.
EBA Guideline on legislative and non-legislative moratoria on loan repayments applied in the light of the COVID-19 crisis (EBA/GL/2020/02) of 2 April 2020
The EBA considers payment moratoria as effective tools to address short-term liquidity difficulties caused by the limited or suspended operation of business resulting from the COVID-19 outbreak.
Forbearance classification
The Guidelines clarify that general payment moratoria will not be classified as forbearance and will not trigger the assessment distressed restructuring, provided that the measures taken are based on the applicable national law or an industry of sector wide private initiative agreed and applied broadly by credit institutions.
- Forbearance: when credit institutions identify that a borrower is experiencing financial difficulty and is likely to default on its payment obligation and grants a concession to such borrower.
- Distressed restructuring: where the likelihood of default on a payment obligation under a loan leads to a diminished financial obligation.
Institutions should continue to categorise the exposures as performing or non-performing, in accordance with applicable requirements.
Where institutions apply other forms of individual measures and renegotiate loans taking into account the specific situation of individual obligors, they should assess such measures against the definition of forbearance under EU law. Furthermore, measures which classify as forbearance should be considered to constitute distressed restructuring.
Conditions for general payment moratoria
The Guidelines specify the following conditions which moratoria must fulfil in order not to constitute forbearance:
- The moratorium was launched in response to the COVID-19 pandemic;
- The moratorium must be announced and applied before 30 June 2020.
- The moratorium must be broadly applied.
- The moratorium must apply to a broad range of obligors: a large, predefined group of obligors, regardless of the assessment of their creditworthiness.
- The same moratorium must offer the same conditions.
- The moratorium must change only the schedule of payments (principal, interest or both) within a limited period of time. No other conditions of the loan should be affected, unless such change only serves for compensation to avoid losses which an institution otherwise would have due to a delayed payment schedule under the moratorium, which would allow the impact of the net present value to be neutralised.
- The moratorium cannot apply to new loans granted after the launch of the moratorium.
Assessment of likelihood of default
Notwithstanding the compliance of general payment moratoria with the Guidelines, credit institutions must continue to carefully assess the credit quality of exposures benefitting from such measures. In addition, institutions must continue to identify any situations in which borrowers are likely to default on their payment obligations. As such, institutions should continue to apply their normal policies for making such assessments.
The Guidelines clarify that, where the schedule of payment has been revised as a result of an applicable moratorium, the assessment of the likelihood of default should be based on the revised schedule. Furthermore, institutions should take into account measures adopted in response to the COVID-19 pandemic which are available to the obligor such as public guarantees.
Documentation and notification
It is necessary for institutions to collect information about the scope and effects of use of the moratoria, which should be shared with their competent authorities.
The Guidelines propose that national competent authorities should notify the EBA about the use of any such moratoria in their jurisdiction.
The EBA will provide details of specific requirements on public disclosures and reporting of general payment moratoria at a later point in time.
The Guidelines may be accessed here.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
