In order to provide liquidity to the economy in the context of the COVID-19 pandemic, governments in several jurisdictions and European and international bodies have taken various measures in the recent weeks to encourage banks to continue providing credit to support households and businesses worldwide.
Among these measures, the European Commission (EC) released on 28 April 2020 a new banking package (read the proposal and interpretative communication here) notably amending Regulations (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms, as amended (CRR). Such amendments are intended to introduce targeted “quick fix” amendments to the CRR, according to the EC, increasing the ability of banks to lend and absorb losses related to the COVID-19 pandemic, while still ensuring their continued resilience. As highlighted by the EC, it is part of EU efforts to ensure a coordinated response to the pandemic in order to avoid national fragmentation: in this respect, the interpretative communication referred to above aims at providing a guidance and a consistent and uniform interpretation on how rules arising from CRR should be applied by banks and supervisors in a flexible but responsible manner.
Such proposal slightly modifies the existing rules and makes temporary adjustments to the CRR prudential framework to give more flexibility to the sector as regards capital requirements.
The banking package text proposed by the EC includes inter alia amendments to extend by two years the transitional arrangements to alleviate the impact, resulting from the COVID-19 pandemic, from expected credit-loss (ECL) provisioning under international financial reporting Standards (IFRS) 9 on credit institutions’ own funds. The provisions eligible to these measures are those incurred as of 1 January 2020. This key measure, in line with a recent proposal from the Basel Committee on Banking Supervision (BCBS) (read the press release here), will allow lenders to fully add back to their regulatory capital increase in new ECL provisions that they recognise in 2020 and 2021 for their financial assets which are not credit-impaired. The new arrangements will only apply to provisions taken after 1 January 2020.
Alongside the update to the capital treatment of IFRS 9 provisions, the EC also proposes changes to adjust the rules on the minimum loss coverage for non-performing exposures (NPEs), referred to as the “NPL backstop”, by extending temporarily the preferential treatment, currently only applicable to NPEs guaranteed or insured by export credit agencies, to "NPEs that would arise as a consequence of the covid-19 pandemic" and that are covered by European member States guarantee schemes that were put in place in such context.
Further, the new amendments to the banking package also include (i) a proposal to postpone the date of application for leverage ratio buffer targets by one year from 1 January 2022 to 1 January 2023 in line with the revised implementation timeline agreed by the BCBS, and (ii) adjustments of the new leverage ratio rules including the exclusion, under certain circumstances, of exposures in the form of central bank reserves from the leverage ratio offsetting mechanism, applicable from 28 June 2021.
The legislative proposals will now be discussed by the European Parliament and the Council with a targeted date of adoption of this package envisaged in June.