United efforts to overcome the crisis are indispensable
The following text is a letter sent today by ESBG to EU policymakers. The letter includes an annex with proposals to consider as they further address financial sector issues brought on by the pandemic. See annex at bottom of page.
BRUSSELS, 25 March 2020
Dear Madam, Dear Sir:
In 2020, banks will have to face their biggest challenge for many years due to Covid-19. The past decade since the crisis has seen major financial reforms, making banks safer, more stable, and more resilient in the face of shocks. But a health pandemic was not on the cards and banks need to work together with authorities to avoid any collapse in the economic system.
Our savings and retail banks are fully committed to supporting their customers when they are struggling – individuals, families, small and medium-sized companies (SMEs), institutions, young people, the elderly and society in general, in urban and also rural areas. We aim to figure out the best, sustainable solutions. Locally-rooted savings and retail banks have a crucial stabilising function in times of crisis with their infrastructure, contact management and continuous lending. They help SMEs and other companies overcome liquidity bottlenecks and provide stability. For this to succeed, everything possible should be done in regulatory and macroprudential terms to maintain the liquidity and credit supply.
What is most important is that the so-called “real economy" suffers as little as possible. In particular, SMEs are facing extraordinarily challenging times. They must not be left alone in this time of crisis. We welcome the very strong support measures offered in many countries to help them, as well as to larger, heavily affected industries, such as transport and tourism. It is clear that all stakeholders from the public and private sectors will need to work together to overcome this difficult period. Economic, financial, fiscal and social measures need to be designed and implemented as soon as possible. What is more, this is a moment in which European cooperation is of utmost importance. Europe needs to face the coronavirus crisis in a united and well-coordinated manner.
In the current coronavirus crisis, banks are an essential part of the solution, not the problem. ESBG members' inclusive and socially-committed approach to banking is vital, and it will not change in challenging moments. Clients of savings and retail banks can continue to rely on their banks as partners that do their utmost to mitigate the effects of this crisis situation. Now more than ever, we will stand strong to provide confidence, comfort and trust when customers and communities need it most.
What has been done so far?
ESBG members welcome the initiatives being taken in Europe in order to support the economy at this difficult time. Actions such as reducing counter-cyclical buffers, enabling the use of capital and liquidity buffers, as well as fiscal and budgetary changes are part of the flexibility needed. We consider liquidity contributions and bridging loans from governments as indispensable right now. Help from the public side creates trust, supports companies in securing their existence and ensures employment and income for the people concerned. The more successful this is, the less need there will be for stabilisation of overall economic demand.
The ECB has already stated it will ease some regulatory requirements including the conditions for targeted longer-term refinancing operations (TLTRO), which is a great bank lending support to those affected most by the spread of the coronavirus. Furthermore, the ECB announced plans for extra asset purchases, which is another very useful measure to support the real economy (and the public sector). ESBG members also appreciate that the ECB Banking Supervision provides temporary capital and operational relief in reaction to coronavirus as well as additional flexibility regarding the treatment of non-performing loans to ensure banks can continue to fulfil their role to fund the real economy.
The European Supervisory Authorities have also taken commendable actions to help alleviate the immediate operational burden for banks, in particular the European Banking Authority's decision to postpone the stress tests until 2021 will allow banks to focus on and ensure continuity of their core operations, including support for their customers.
Finally, we think that it is unavoidable that the EU spends money in order to increase the financial firepower. At its meeting mid-March, we understand that the 19 Eurozone members have decided fiscal measures of about 1% of the GDP for 2020 and the provision of liquidity facilities of at least 10% of the GDP to support the economy, which is a welcome step in the right direction.
All of this is much needed, in our opinion, and will help support economic activity, employment, and price stability. In an annex to this letter, we are sharing with you some additional measures which would be important to be implemented to help savings and retail banks fulfil their role in this economically challenging period.
What happens next?
Regulatory authorities should question themselves if new regulatory requirements that are planned to be implemented in 2020-2022 are critical or if there is a possibility that they can be delayed by 1-2 years or more, depending on how the crisis further develops. This would allow supervised entities to focus on the coming challenges caused by the Covid-19 crisis and act accordingly (review strategies, adapting procedures, policies, maybe even IT systems, enforce controls) and creating enough flexibility within their workforce planning to act on foreseeable and non-foreseeable upcoming issues. Even if only a part of the upcoming regulation could be delayed this will certainly help banks, and other players, to focus their resources on critical immediate action.
What's more, the current crisis is adding to many workloads and shifting priorities. ESBG member banks are currently focusing most of their resources on assuring a normal and smooth continuation of their activities, in order not to interrupt serving companies, in particular SMEs, and households. In order to respond adequately to public consultations currently under way by different authorities, such as the European Commission and the EBA, ESBG members call for prolonged deadlines in order to give us the time to carefully gather our feedback. This would help make sure authorities' expectations in terms of quality and quantity will be met. In this context, we noted that the Basel Committee already announced that it would be suspending consultation on all policy initiatives and postponing all outstanding jurisdictional assessments for the time being. European institutions could take inspiration from this announcement.
Once the emergency is stable, it may be useful to carry out an impact assessment in order to see what measures should be taken to ensure that the global economy is still growing.
Together, it is possible to reduce the effects of Covid-19 on the economy. But measures need to be taken now, at the same time, instead of gradually. By acting immediately, we may manage to endure this crisis better than the one before. The economy must recover as quickly as possible after the pandemic. Capital levels and labour force potential must be maintained during the crisis. They form the basis for the economy's recovery.
We remain at your disposal in case you would like to discuss these points in greater detail. It is of utmost importance that a good dialogue between public authorities as well as the industry is maintained in these challenging times. We look forward to seeing how different regions will continue to respond, and the impact it will have on financial stability, and we stand ready to help navigate through the crisis, supporting particularly the most vulnerable actors of the economy, such as SMEs and households.
Annex to the ESBG statement on Covid-19: United efforts to overcome the crisis are indispensable
Savings and retail banks believe that some additional measures would be appropriate at this time, in order to give banks enough flexibility to continue supporting their customers. Some measures already taken need additional guidance and an extended scope to achieve its objective. Please find below a list of proposals:
Regarding conditions established to have access to TLTRO III facilities, the benchmark period for the eligible net lending should be backdated to 1 March 2020 (instead of 1 April 2020 as it was announced). Many companies are already requesting credit lines during this month due to the Covid-19 crisis.
Increase multiplier for the 2-tiered interest rate of the over fulfilment of the Minimum Reserve requirement.
Introduce a Repo facility with QE investments with a tenor of at least 35 days (ideally on an evergreen basis).
Allow (in cooperation with the EBA) for an immediate non-deduction (capitalisation) of software assets (both purchased and developed internally) as foreseen in CRR 2 Article 36 (1) (b) in order to eliminate current disadvantages for the EU institutions in comparison with the USA institutions and to create and foster a level playing field;
Regarding the flexibility on asset quality assessment of loans under Covid-19 related public moratoria, we ask ECB to extend this flexibility to all moratoria given by banks to temporarily support solvent clients facing liquidity difficulties due to Covid-19 crisis.
Postponement of first impact of the ECB NPL Addendum (which should start in April) for one year and review of supervisory expectations affecting the stock of NPLs communicated to entities in the SREP letter.
Allow for a non-deduction of irrevocable payment commitments (IPCs) from own funds.
National competent authorities and national governments could significantly increase public default guarantees in order to back temporary emergency loans for companies hit by the coronavirus outbreak (like being short of cash due to sharp falls in sales) and to mitigate the effects of possible moratoria that may be established by the entities in the payment schedules of their clients (with special focus on SMEs and the self-employed); they could relax fiscal rules and coordinate fiscal action in Europe (also supported by the IMF) to avoid supply/demand shocks.
In cooperation with the ECB, measures of price stability must be foreseen because during this period prices of various products began to increase, having the potential to provoke an unjustified speculating panic to the detriment of consumers.
EBA should promptly issue a waiver to EBA guidelines on definition of default to competent authorities on how to temporarily, in a clearly defined timeframe, wave prudential and, only if necessary, consumer protection regulation in order to:
avoid or limit adverse liquidity effects on European businesses and households;
secure the continuation of credit transmission by banks without major disruption to their prudential status;
secure the continuation of payment services;
allow banks to change the payment schedule of borrowers which are affected by the consequences of the COVID-19 (e.g. moratorium tool for instalment payments of sound borrowers) along with other exceptional measures deemed necessary to minimize the impact of COVID-19 on consumers (for instance, exceptional delay in payments in case consumers experience a disruption in their revenue stream);
ensure that these measures are available and put in place without an increase of costs and burden of distressed consumers. Taking inspiration on the EBA Guidelines on arrears and foreclosure (under the MCD), it would make sense that all measures have a neutral impact on credit institutions and borrowers;
facilitate the debt restructuring of firms which are in temporary distress but still economically viable;
set up clear expiration dates for the temporary measures aimed at stabilizing the financial system, and a plan for a return to compliance with current regulatory requirements, such as easing forbearance and NPL regulations.
advise national competent authorities that they should apply a pragmatic approach if due to the corona crisis banks can temporarily not cope with the given deadlines for supervisory reporting; the same should apply with regard to statistical reporting deadlines.
advise national competent authorities to take a pragmatic approach if due to the corona crisis large exposure limits are exceeded, especially in cases in which commitments are drawn to ensure liquidity.
Later implementation of planned/currently consulted Guidelines (suspension by 6 months including delayed implementation timelines accordingly):
EBA draft guidelines on the treatment of structural FX under 352(2) of the CRR;
EBA draft guidelines on loan origination and monitoring.
Delayed implementation of the three reporting packages EBA 3.0, EBA 2.10 and EBA 2.9 (Changes to FINREP concerning non-performing and forborne exposures reporting, P&L and IFRS 16, Changes to LCR to align with the LCR amending Act and Changes to reporting requirements as specified in the ITS on supervisory benchmarking of internal models).
The calendar for MREL compliance should be reviewed, taking into account the extreme volatility and rising risk aversion in the markets. This is particularly important for those cases in which MREL compliance was anticipated at the end of 2020, through the transitional agreements communicated individually to entities. The calendar established in BRRD 2 should also be extended beyond January 2024, especially the first binding milestone of January 2022 should be moved to 1 January 2024. These days the AT1 instruments are suffering a lot in the market due to their risk nature, and we fear that appetite on the markets for these instruments will significantly decrease.
Flexibility regarding the resolvability self-assessments, due in mid-2020, should be granted: As banks have to do the comprehensive resolvability assessment for the first time, endorsed by the management body, and due to limited technical work capabilities, priority setting and limited capabilities for external support, flexibility in deadlines and scope should be introduced.
Application of parts of CRR II that were supposed to entre into force in December 2020 and that require significant implementation efforts should be postponed until the corona crisis is overcome, e.g. extended consolidation rules.
A temporary increase in exposures being subject to the derogation provided for in the NPL backstop regulation (CRR article 469a) must not cause the exposures to be included in the NPL backstop deductions, when the increase in exposures can be directly attributed to the consequences of Covid-19.
The implementation of the IFRS 9 accounting standard for the recognition of loan loss provisions should take into account the disruptive Covid-19 crisis as many banks are re-focusing their short-term priorities to ensure customer protection. In addition to this, a postponement of the implementation of definition of default seems appropriate in the current exceptional situation, as well. Given the current circumstances, the already very challenging deadline of 1 January 2021 appears overly optimistic. We have the opinion that a postponement of one year would be useful to both banks and supervisors to get ready to apply the new definition consistently across Europe. It is crucial that banks have enough room of manoeuvre to modify the payment schedule of the affected borrowers without affecting their accounting provisions nor its solvency (that is, avoiding the increase in non-performing assets that would derive from the current regulations). Such clarification is essential to the extent that IFRS 9 is a principle-based standard and the EBA Guidelines have become a key reference to determine the accounting judgments and policies that entities apply in the classification and assessment of credit risk.
The SRB should consider measures to reduce or defer this year's contribution in light of the corona crisis to come to solvency discharges for banks.
We also propose to increase the percentage up to which institutions are entitled to provide their contribution in form of IPCs from the current 15% to 30% (50% would be legally possible).
ends / all