On 28 April 2020, the European Commission adopted a banking package aimed at facilitating bank lending to support the economy and help mitigate the economic impact of the COVID-19-pandemic. The package intends to encourage banks to make full use of the flexibility embedded in the EU’s prudential and accounting frameworks, to allow banks to fully support citizens and companies during this pandemic by providing funding. The package includes an Interpretative Communication on the EU's accounting and prudential rules, as well as specific “quick fix” amendments to EU banking rules.
The Interpretative Communication of the Commission confirms the recent statements on making use of the flexibility provided by the existing regulatory framework, such as those made by the Basel Committee of Banking Supervision (BCBS), the European Banking Authority (EBA) and the European Central Bank (ECB). The Interpretative Communication further clarifies how the accounting and prudential rules can be applied by banks and regulators in a flexible but responsible manner.
The areas of flexibility in the EU's regulatory framework include:
- The rules regulating how banks assess the risk that a borrower will not repay a loan in a sudden economic crisis (such as the COVID-19 pandemic) and the effect this may have on the amount of money the bank must set aside for any possible losses;
- The prudential rules on the classification of non-performing loans where relief measures (such as guarantee schemes and moratoria) have been provided by either EU Member States or by banks;
- The accounting treatment of delays in the repayment of loans.
Dividend and variable remuneration
The Interpretative Communication also highlights areas where banks are encouraged to act responsibly, for example by refraining from making distribution of dividends to shareholders, or adopting a conservative approach to the payment of variable remuneration.
The Commission also recalls how banks can help businesses and citizens through digital services, including contactless and digital payments. The Interpretative Communication points to the opportunity for banks to accelerate the development of digital finance. The Commission encourages banks to promote digital banking, while at the same time, remaining alert and continuing to fight financial crime, which is likely to increase in the context of the pandemic.
Best practices to support businesses and citizens
The Commission will engage with the European financial sector to explore how it can develop best practices that could further support citizens and businesses.
Targeted amendments to EU prudential banking rules
Besides making full use of the flexibility of the EU’s prudential banking rules, the Commission proposes some ‘quick fix’ amendments to specific aspects of the Capital Requirements Regulation (Regulation (EU) 575/2013 (CRR)). These legislative amendments are necessary in order to maximise the capacity of banks to lend and to absorb losses related to the COVID-19 pandemic, while still ensuring their continued resilience. Moreover, at international level, the BCBS has agreed a one-year delay to the deadline for implementing the final elements of the Basel III framework, of which some elements had been already incorporated in the CRR, as well as greater flexibility to the phase-in of the impact of the IFRS 9 on capital. These changes need to be reflected in the existing rules.
The following specific changes to the CRR have been proposed:
- A two-year extension of the current transitional arrangements for mitigating the impact of IFRS 9 expected credit-loss provisions on banks’ regulatory capital;
- Deferring the date of application of the leverage ratio buffer requirement on global systemically important institutions (G-SIIs) to 1 January 2023;
- A temporary extension of the preferential treatment of publicly guaranteed loans under the prudential backstop for Non-Performing Loans (NPLs);
- A temporary change to rules on how central bank reserves impact banks’ leverage ratio calculations;
- Advancing the proposed date of application of some capital benefits. This includes provisions on the treatment of certain software assets, provisions on certain loans backed by pensions or salaries, the revised supporting factor for small and medium-sized enterprises, and the new supporting factor for infrastructure finance.
Conclusion and next steps:
- encourages banks to make full use of the EU banking rules and proposing specific (temporary) legislative changes to enable banks to keep the liquidity taps turned on, to allow households and companies to get the financing they need;
- will engage with the European financial sector to explore how it can develop best practices that could further support citizens and businesses;
- encourages banks to promote digital banking.
The legislative proposal will now be discussed by the European Parliament and the Council of the EU. The Commission is counting on the full cooperation of these bodies to deal with the proposal as a matter of urgency and adopt this package as early as June.
More about the coronavirus
You can read more publications on the impact of the coronavirus on our website. Here you will also find a list of contacts within our office who can advise you with questions about the implications of the coronavirus for your company.