On 28 April 2020, the European Commission (EC) published a proposal for a Regulation amending the Capital Requirements Regulation (EU) 575/013 (CRR) in response to the COVID-19 pandemic. The EC proposals are meant to complement the existing flexibility in the current framework and are designed to “maximise the capacity of credit institutions to lend and to absorb losses related to the COVID-19 pandemic”.
The areas of existing flexibility in the EU's regulatory framework include:
- rules on how banks assess the risk that a borrower will not repay a loan in a sudden economic crisis, such as the coronavirus pandemic, and the effect that has on the amount of money the bank needs to set aside for any possible losses;
- prudential rules on the classification of non-performing loans in the context of relief measures such as guarantee schemes and moratoria have been provided either by Member States or by banks;
- accounting treatment of delays in the repayment of loans. The Interpretative Communication of the EC clarifies that the application of relief measures that banks or Member States grant households and businesses to bridge short-term liquidity needs must not automatically lead to a harsher accounting treatment.
The EC has proposed exceptional temporary measures in order for EU banks to lend during the coronavirus pandemic whilst remaining resilient as financial institutions.
The following set of targeted changes to the CRR have been proposed by the EC:
Transitional arrangements for mitigating the impact of IFRS 9 provisions on regulatory capital
The 5-year transition period for the IFRS 9 application that started in 2018 will be reset, so that it runs between 2020 and 2024.
Treatment of publicly guaranteed loans under the NPL prudential backstop
Here, the EC proposes to extend Article 47c CRR preferential treatment for non-performing loans guaranteed by official export credit agencies.
Date of application of leverage ratio requirements
The date of application will be deferred to by one year (until 1 January 2023).
Exclusion of certain exposures from the leverage ratio calculation
The offsetting mechanism for discretion will be amended to temporarily exclude central bank exposures from an institutions’ total exposure measure in exceptional circumstances.
Date of application of the exemption of certain software assets from capital deductions
The date of application of the exemption for “prudently valued software assets” from deductions for the purpose of the Common Equity Tier 1 capital calculations will be amended.
Date of application of the specific treatment envisaged for certain loans backed by pensions or salaries
The EC will advance the date of application of favourable treatment of certain loans granted by credit institutions to pensioners or employees with a permanent contract.
Date of application of the revised SME supporting factor and the infrastructure supporting factor
Lastly, the EC proposes to advance the date of application of CRR provisions concerning the adjustment of own funds requirements for non-defaulted SME exposures and the adjustment to own funds requirements for exposures to entities that operate or finance physical structures or facilities, systems and networks that provide or support essential public services.
The EC will monitor implementation of the amendments in close cooperation with the European Central Bank and national competent authorities. Additionally, the legislative proposals will be reviewed by the European Parliament and the Council.