In this article we will dive into how the European Central Bank intervenes to stem COVID19 crisis effects
The European Central Bank (ECB) has recently announced different measures to ensure that its credit institutions can continue to fulfil their role in helping fund the economy, as the financial impact and effects of the coronavirus (COVID-19) become apparent.
Andrea Enria, Chair of the ECB Supervisory Board has been quoted as saying “The coronavirus is proving to be a significant shock to our economies. Banks need to be in a position to continue financing households and corporates experiencing temporary difficulties. The supervisory measures agreed today, aim to support banks in serving the economy and addressing operational challenges, including the pressure on their staff.”
Having been designed with a view of assisting and allowing banks to cope during a ‘stressed’ situation, such as COVID-19, banks have access to Capital and liquidity buffers. Luckily, the European banking sector has accumulated a significant buffer.
As a standard rule, the ECB does not allow banks to operate below the level of capital defined by the Pillar 2 Guidance (P2G), the capital conversion buffer(CCB) and the liquidity coverage ratio(LCR), however during this period this has been waived and banks are permitted to do so. The ECB believes this is a temporary measure that will provide a substantial benefit to banks and citizens alike.
The ECB is also having one-on-one discussions with banks which might need to take certain specific measures during these times, such as adjusting timetables, deadlines and processes. As part of these discussions, the ECB has proposed the extension of deadlines of remediation actions as well as rescheduling of future on-site inspections and internal model investigations.All extensions that are allowed are done whilst ensuring the overall prudential soundness of the supervised banks.
The ECB is supporting all initiatives aimed at providing effective and sustainable solutions to temporarily struggling debtors due to the current outbreak.
The ECB’s guidance to banks on non-performing loans also provides supervisors with a creditable amount of flexibility to adjust to each and every bank’s specific requirements. The option of extending deadlines for certain non-critical supervisory measures and data requests is also being considered. Supervisory flexibility towards non-performing loans (NPLs) has been introduced by the ECB. This in turn allows banks to benefit from moratoriums and guarantees which were put in place by public authorities to help tackle the current situation.
Upon witnessing the operational pressures which have been added to banks, the ECB supports the decision taken by the European Banking Authority to postpone the 2020 European-wide stress test.
Further flexibility to banks provided
Banks have been given further flexibility by the ECB in the treatment of loans backed by public support measures. This will then encourage banks to avoid excessive fluctuations when applying the IFRS 9 international accounting standard which, with Capital relief amounts to €120 billion, means this could be used to absorb losses caused by this crisis or potentially finance up to €1.8 trillion of lending in the future.
Banking supervisors have been instructed by the ECB, as long as they are within their remit and on a temporary basis, to exercise flexibility regarding the classification of debtors as “unlikely to pay”. Supervisors will also exercise certain flexibilities regarding loans under Covid-19 related public moratoriums. Loans which are deemed to become non-performing and are under public guarantees will benefit from preferential prudential treatment. Supervisors will also be able to deploy full flexibility when discussing the implementation of NPL reduction strategies with banks.
ECB recommends non payment of dividends till October 2020
To help boost banks’ capacity to absorb losses and support lending to may different households due to the COVID 19 pandemic, both small businesses and corporate companies have been advised to not contribute or pay dividends for the financial year of 2019- 2020 until October 1st.
This new recommendation does not cancel the dividends already paid out by certain banks for the financial year 2019. Banks that have requested their shareholders to vote on a dividend distribution proposal in their upcoming General Shareholders Meeting are however expected to amend any such proposal to stay in line with the updated recommendation.
Read more about the ECB’s efforts to support banks and nations during and post the Covid19 outbreak — link to article 2