The European Banking Authority has issued a new set of guidelines updating its approach to COVID-19, including issues of default, regulatory requirements and recovery planning.
The coronavirus pandemic has sent ripples of shock waves across the economic and business landscape affecting how businesses can maintain operations as well as sparking increases in defaults. Regulators have been issuing guidelines about how they will mitigate such effects, the latest of which comes from the European Banking Authority which has provided updates on risk, supervision, flexibility and moratoria on loan payments.
Moreover, the EBA has provided further clarity on its attitude to how flexibility will guide supervision in market risk, recovery planning, digital resilience and the Supervisory Review and Evaluation Process (SREP).
Here’s a quick look at what these guidelines are and what lessons firms should take…
To mitigate the impact of exceptional volatility triggered by COVID-19, the EBA proposes to adjust the capital impact and amend its standards on valuation. Among other things it will introduce is a 66% aggregation factor which will be applied on 31 December 2020.
The challenge of COVID-19 is having a considerable impact on firms and the EBA is making allowances. There will be a more pragmatic approach to SREP assessments in 2020 which will focus on the most serious material risks created by the crisis.
It will also delay reporting on the first FRTB-SA figures to September 2021 in recognition of the impact the pandemic is having on businesses and will offer greater flexibility on prudential requirements for competent authorities for banks using internal VAR models.
The next issue is how businesses will recover. This is a highly fluid situation and no organisation is entirely certain about what recovery plans will look like because they still don’t know the full scale of the challenge. The EBA says the focus should be firmly on understanding which recovery options are necessary and can be applied under the current high stress conditions.
The EBA has also provided clarity on the prudential application of default and forbearance whether in the form of postponement of payment or interest of a credit facility granted by a bank to a borrower in financial distress.
The EBA has clarified that a payment moratorium which abides by the guidelines will not lead to a reclassification under the definition of forbearance, banks should still categorise such exposures as “performing” or “non-performing” according to the applicable requirements. Banks should also assess each individual’s repayment capacity and set up tailored specifications where necessary.
Key to this is digital resilience. As we’ve covered elsewhere, technology is coming to the fore in this crisis. It will create complications and opportunities for businesses looking to ensure digital operational resilience. The regulator says that businesses, will have to ensure business continuity, adequate ICT capacity and security risk management to ensure they can maintain the integrity of systems and continue to offer value and protection for clients. Financial institutions will be able to use the new EBA ICT and security risk management guidelines to focus on priority areas.
The crisis is, and will, have an unimaginable impact on the financial sector. In setting out these guidelines the EBA seeks to ensure allowances are made and to guide businesses through the process of appropriate recovery plans.