On June 24, 2020, the EU Council announced that it had adopted Regulation EU 2020/873 ("CRR Quick Fix") amending Regulations (EU) No 575/2013, as amended ("CRR") and (EU) 2019/876 ("CRR2").1 The new Regulation is based on the Commission's legislative proposal for a Regulation of April 28, 2020 ("Legislative Proposal") 2 which was amended in the co-legislation process. On June 26, 2020 the CRR Quick Fix was published in the Official Journal of the EU and entered into effect on June 27, 2020. 3 The CRR Quick Fix contains a number of adjustments to CRR and CRR II to facilitate lending by banks as a response to the COVID-19 crisis. The adjustments also reflect recent statements of the Basel Committee on Banking Supervision ("BCBS") addressing the challenges of the pandemic.
The Amendments to CRR based on the Commission's initial proposal
1. Resetting the IFRS 9 transitional arrangements to mitigate the impact on regulatory capital and on banks' lending capacity of the likely increases in expected credit loss ("ECL") provisioning under IFRS 9 due to the economic consequences of the COVID-19 crisis. The CRR Quick Fix amends Article 473a CRR which contains arrangements allowing institutions to add back to their Common Equity Tier 1 ("CET1") capital a portion of any increase in provisions due to the introduction of ECL accounting under IFRS 9 during a transitional period. The CRR Quick Fix introduces a new transition period that allows financial institutions to add-back increases in ECL provisions for non-credit-impaired assets to CET1 capital during 2020-2024.
The key aspects of the changes are as follows:
- The reference date for any increase in ECL provisions (the so-called "dynamic component") is moved to January 1, 2020 in order to limit the granted relief to COVID-19 related increases.
- The revised text of Article 473a(1) CRR contains an adjusted formula for the calculation of the ECL amounts that can be added back to CET1 capital, which applies different factors to the "static component" relating to the "day-one impact" of IFRS 9 on CET1, which is not impacted by the changes, and the dynamic (post-day-one) component, which is subject to the extended transitional period and to revised transitional adjustment factors. Compared to the Legislative Proposal, the CRR Quick Fix has further adjusted the formula in Article 473a(1) CRR for the calculation of the ECL amounts that can be added back to CET1 capital.
- A new Article 473a(6a) CRR resets and extends the transitional period for the dynamic component, allowing institutions to add back to their CET1 capital 100% of new ECL provisions recognised in 2020 (as opposed to 70% under the current rules) and 2021 (as opposed to 50% under the current rules) for their financial assets that are not credit-impaired. The percentage amount that could be added back from 2022 to 2024 would then decrease in a linear manner, and the transitional arrangement would be completely phased out starting from 2025. Accordingly, for relevant provisions raised from January 1, 2020, the CET1 add-back percentages are:
- A new Article 473a(7a) CRR replaces the rescaling of all exposure values that are reduced by ECL provisions with a standard risk weight of 100% to be assigned to the amounts added back to CET1 capital. The standard risk weight of 100% is not mandatory (as in the Legislative Proposal) and institutions may choose (only once) to apply, instead, the scaling factor pursuant to Article 473a(7)(b) CRR.
- Institutions that opted previously not to use the transitional arrangements are allowed to opt in at any time during the transitional period (and to opt out again) subject to prior approval from their competent authority under the revised Article 473a(9). Institutions also have the option to apply only the dynamic component of the transitional arrangements, in which case they will have to inform their competent authority. The CRR Quick Fix also introduces a requirement for institutions to publicly disclose their decisions to opt in or opt out to the transitional arrangements (as well as any decision not to apply the dynamic component or to apply the scaling factor instead of the standardised 100% risk weight under Article 473a(7a)) or reverse their previous opt-out decisions with the prior permission of their competent authority.
2. Preferential treatment for non-performing exposures ("NPEs") guaranteed or counter guaranteed by the public sector. The preferential treatment granted under the CRR's prudential backstop4 is extended to NPEs guaranteed or insured by an export credit agency to NPEs that benefit from guarantees or counter-guarantees granted by national governments or other public entities. While the Legislative Proposal proposed limiting the preferential treatment to a period of seven years, this limitation is not part of the CRR Quick Fix. In addition, the Legislative Proposal that expressly limited the preferential treatment to measures taken in response to the COVID 19 pandemic was also not incorporated in the final Regulation.
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1 The CRR Quick Fix is available at http://data.europa.eu/eli/reg/2020/873/oj
2 The Legislative Proposal is available at https://ec.europa.eu/finance/docs/law/200428-banking-packageproposal_ en.pdf. For further details see our alert memorandum "The EU Commission adopts banking package to facilitate lending in response to COVID-19" published May 1, 2020, available at https://www.clearygottlieb.com/- /media/files/alert-memos-2020/the-eu-commission-adopts-banking-package-to-facilitate-lending-in-response-to-covid19- pdf.pdf.
3 It also generally applies from June 27, 2020, except for the provisions relating to the leverage ratio offsetting mechanism.
4 Article 47c(4) CRR.
Originally published July 2, 2020.
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