Banks get reprieve as Europe’s regulators clear the decks for virus fight
20 Mar 2020 7:25 pm by Fiona Maxwell
European banks are seeing impending regulations and information demands cast aside, as their supervisors clear the decks for lenders to focus on leading the economic fight against coronavirus.
Measures designed to avert another financial crisis are now being deferred. A decade ago, banks trading in exotic instruments were cast as the villain of the piece. This time, the slowdown has been spawned in real-economy sectors such as restaurants, entertainment and airlines — where banks willing to lend could prove economic saviors rather than saboteurs.
Stress tests and capital hikes have been put on the back burner, as regulators want financial institutions to focus on the core task of keeping an ailing economy on life support. Supervisors have also been keen to stress that banks’ balance sheets will not need to recognize borrowers who took advantage of mortgage holidays.
The first and most high-profile likely regulatory victim may be the so-called Basel III global capital norms, agreed in December 2017. The Bank of England’s supervisory arm today acknowledged that the existing timetable may prove too challenging, as staff focus all their efforts on fighting economic fires brought about by the pandemic.
The Prudential Regulation Authority confirmed it was speaking to its supervisory peers internationally about the Basel III timetable, and said it would advise the UK government on a legislative approach. But it looks almost impossible that the existing schedule can be kept, as new standards could see banks having to raise more capital in an economic downturn.
In Brussels, too, Basel III appears to have been put on ice. A proposal to legislate for it, previously promised by the end of June, does not appear on a list of forthcoming measures due for agreement by the EU executive, published earlier.
The new rules, agreed by the Basel Committee on Banking Supervision, would limit the use of banks’ internal risk models. That would impose a particular burden on European banks, which would have to raise an extra 125 billion euros ($135 billion) in capital, which the sector argues will constrain lending.
Business leaders recently called for a hiatus to the rules until stability returns; the EU banking sector, at least, would probably not complain if they were abandoned all together.
All eyes are now on the Basel Committee of global central bankers, as to whether they will agree to at least delay an implementation date originally intended to be phased in between 2022 and 2027.
A regular teleconference among member jurisdictions was held yesterday, MLex understands. Monitoring the impact of the pandemic is one of the issues on the Committee’s agenda.
Beyond bank capital, new legislation has been all but put on hold as central banks and policymakers acknowledge that alleviating the operational burden of new rules on financial firms is essential, to allow them to perform their critical functions in the wake of an economic crisis.
Even where laws are already agreed and in effect, regulators have called for enforcement to be put on hold, effectively offering an extra statutory concession for the beleaguered industry.
The European Securities and Markets Authority yesterday urged national authorities “not to prioritize their supervisory actions” against banks for new securities-financing rules. That in effect gives lenders a three-month reprieve from new requirements for reporting repurchase agreements and the like.
Those rules were initially introduced after regulators realized they did not have enough data to anticipate emerging risks in the shadow banking sector — risking a repeat of the 2008 crisis, in which a sudden loss of confidence froze entire asset classes.
New global accounting standards are another area that risks getting in the way of crisis-fighting measures.
In normal circumstances, a borrower who doesn’t pay the bank on time would be regarded by accountants as a heightened risk for the lender's future.
But governments and banks have been keen to offer homeowners a temporary holiday from mortgage repayments if they are expecting income to drop for a few months. Announcements made today by central banks effectively clarify that this regulatory largesse won’t impair banks' balance sheets.
“Our expectation is that eligibility for [the government’s] policy on the extension of mortgage repayment holidays should not automatically, other things being equal, be a sufficient condition to move participating borrowers into Stage 2 of [expected credit loss],” the Bank of England said today.
Counterparts at the European Central Bank today followed suit, saying that lender's accounts should look beyond short-term difficulties when assessing the likelihood a loan would be repaid.
The EU supervisor recommended that "institutions give a greater weight to long-term stable outlook evidenced by past experience when estimating long-term expected credit losses," in guidance issued today.
International accounting norms for banks that took effect in 2018, known as IFRS 9, require lenders to mark down their accounts if assets such as a loan have an increased credit risk, before losses are even apparent — an intermediate warning signal that a loan might turn sour. If a loan moves to that second stage, banks’ company accounts would then have to log the expected losses not just for the year, but the lifetime of the loan.
Now, though, regulators argue that borrowers temporarily caught short due to disruption from the coronavirus outbreak shouldn't have a permanent black mark against their creditworthiness.
Stress tests, staffing
Regulators are also recognizing that banks dealing simultaneously with distressed customers and absent staff will feel an outsized operational impact of supervisors poking their noses around.
That includes stress tests, which have heavy data requirements that always cause howls of protest from banks — and that are arguably redundant in a situation of real-life stress.
The Bank of England today said it was cancelling its 2020 exercise. Even the publication of last year’s results on liquidity within lenders has been postponed, while non-critical data requests, on-site visits and deadlines will be pushed back.
The UK supervisor joins the European Banking Authority, which last week announced that its own exercise for EU banks will be delayed until 2021, with supervisors putting off on-site visits.
In addition, the BOE joined the UK’s financial-services regulator in allowing its regulated entities more time to respond to key regulatory consultations. The Financial Conduct Authority said on Wednesday that it is reviewing its work plans to postpone activity that is not critical to protecting consumers and market integrity in the short-term.
Likewise, the ECB is pushing back by six months lower priority probes, such as checking that banks complied with earlier recommendations.
In England, where most schools have been told to close from today, education authorities have even included bank staff on the list of "key workers" eligible for continued education for their children, to ensure they’re not kept from vital activities due to parenting commitments.
The message from regulators could not be clearer: the absolute priority is to keep financial infrastructure open, banks lending and staff focused on their core job.
01 Apr 2020 7:16 pm by Fiona MaxwellMajor UK banks may have acquiesced yesterday to a Bank of England request to ditch dividend payments amid the Covid-19 crisis. But on a further request to withhold lucrative staff bonuses they have been conspicuously quiet. How far they will try to resist remains to be seen.
US derivatives market liquidity could be boosted by speeding bank capital rule, CFTC chief Tarbert says25 Mar 2020 4:54 pm by Neil RolandUS derivatives markets that are parched by the Covid-19 pandemic could benefit from a liquidity injection that a speedier introduction of a new bank capital rule could provide, Commodity Futures Trading Commission Chairman Heath Tarbert said.
23 Mar 2020 7:20 pm by Fiona MaxwellThe financial services industry is scrambling to persuade policymakers around the world that there is no need to close markets, despite daily tumbles in stocks. But their fate may have already been sealed.