Banking Supervision and COVID-19

doi:10.17104/9783406779282

Banking Supervision and COVID-19

A Handbook

Series: Beck International

1. Edition 2021

No access

doi.org/10.17104/9783406779282
ISBN print: 978-3-406-76241-3
ISBN online: 978-3-406-77928-2
C.H.BECK, München C.H.BECK, München

Abstract

Lackhoff

Banking Supervision and COVID-19 The COVID-19 pandemic is the first crisis with which the Single Supervisory Mechanism has to cope. This mechanism was only established in response to the financial crisis. While it is not yet clear which ramifications the pandemic will have for the financial sector, regulators and in particular super visors have taken swift measures to enable credit institutions from the prudential perspective to deal with the situation. The measures already adopted lay also the ground for future legislative and supervisory responses to the dynamic development of the pandemic and touch upon general legal issues of the SSM. The book brings together the perspective of the European and national supervisors and the perspective of the supervised entities. In the first two parts the adopted measures at the Union level (e.g. in respect of dividends and IFRS 9) and the national level in France, Germany, Italy and Spain are described. The third and fourth part provide the supervised entities’ perspective to these measures and look at upcoming challenges (e.g. recapitalisation and remuneration issues).

Zusammenfassung

Lackhoff

Banking Supervision and COVID-19 The COVID-19 pandemic is the first crisis with which the Single Supervisory Mechanism has to cope. This mechanism was only established in response to the financial crisis. While it is not yet clear which ramifications the pandemic will have for the financial sector, regulators and in particular super visors have taken swift measures to enable credit institutions from the prudential perspective to deal with the situation. The measures already adopted lay also the ground for future legislative and supervisory responses to the dynamic development of the pandemic and touch upon general legal issues of the SSM. The book brings together the perspective of the European and national supervisors and the perspective of the supervised entities. In the first two parts the adopted measures at the Union level (e.g. in respect of dividends and IFRS 9) and the national level in France, Germany, Italy and Spain are described. The third and fourth part provide the supervised entities’ perspective to these measures and look at upcoming challenges (e.g. recapitalisation and remuneration issues).

Chapter Expand | CollapsePage
I–XVI Titelei/Inhaltsverzeichnis I–XVI
1–7 Part 1: Introduction 1–7
- Banking Supervison and COVID-19: A Foreword
  - 1–2 I. The Corona Crisis 1–2
  - 2–3 II. The broader context at a glimpse 2–3
  - 3–4 III. What does this mean for banking supervision in Europe? 3–4
  - 4–7 IV. This book 4–7
7–97 Part 2: The European Perspective – Measures on the European Level 7–97
- 7–23 A. The reaction of the EU legislator – quick fix amendments to the Capital Requirements Regulation in view of the Corona pandemic (Lefterov) 7–23
  - 7–7 I. Context of the measures 7–7
  - 7–15 II. Description of the pre-existing (Capital Requirements Regulation) CRR regime and the Commission proposal for quick fixes 7–15
    - 1. Accounting for Corona-related losses – IFRS 9 and its impact on regulatory capital
    - 2. Treatment of public guarantees
    - 3. Treatment of central bank exposures under the leverage ratio
    - 4. Date of application of other provisions
  - 15–20 III. Final CRR amendments adopted by the co-legislators on 24 June 2020 15–20
    - 1. Discussion by the co-legislators
    - 2. IFRS 9 implementation
    - 3. The prudential backstop and minimum loss coverage for NPEs guaranteed by public sector entities
    - 4. The exclusion of central bank exposures from the calculation of the leverage ratio
    - 5. Changes to the treatment of exposures to governments and central banks
    - 6. Market risk under the internal model method
    - 7. Distributions of dividends and remunerations
    - 8. Other elements of the amending regulation
  - 20–23 IV. Lessons learned 20–23
    - 1. The substance of the adopted measures
    - 2. The role of the Commission and the supervisory authorities in the legislative process
- 23–40 B. Supervisory measures taken in reaction to the corona crisis – an overview (Gruber) 23–40
  - 23–25 I. Introduction 23–25
  - 25–34 II. Analysis of the supervisory measures taken by the ECB 25–34
    - 1. Use of capital buffers
    - 2. Change to the composition of the Pillar 2 requirements
    - 3. Release of liquidity buffers
    - 4. Restrictions of dividends and buy-backs
    - 5. Measures related to credit risk
    - 6. Temporary reduction of capital requirements for market risk
    - 7. Operational relief
  - 34–38 III. Preliminary assessment of the supervisory measures taken by the ECB 34–38
    - 1. Effectiveness of the supervisory measures taken by the ECB
    - 2. Reactions of external stakeholders
    - 3. Key characteristics of the ECB’s measures
  - 38–40 IV. Conclusion 38–40
- 40–57 C. Dividend Recommendation (Riso/Lackhoff) 40–57
  - 40–43 I. The content of the Dividend Recommendation 40–43
    - 1. Material scope of application
    - 2. Personal scope of application
    - 3. Recommendation to National Competent authorities (NCAs) in respect of less significant institutions (LSIs)
    - 4. Interaction with other legal instruments
  - 43–48 II. Purposes pursued by the dividend recommendation 43–48
    - 1. Specific purposes pursued by the dividend recommendation
    - 2. Broader conceptualization of the function of dividends
    - 3. Outlook for future developments
  - 48–49 III. Why (only) a dividend recommendation? 48–49
  - 49–51 IV. Level of application 49–51
    - 1. Subsidiaries of an SSM group
    - 2. Parent undertaking outside the SSM
  - 51–53 V. Material scope of application 51–53
    - 1. Distribution of dividends
    - 2. Share buy-backs
  - 53–57 VI. Practical application 53–57
    - 1. Issues relating to the material scope of application
    - 2. Issues relating to the personal scope of application
- 57–74 D. IFRS 9 and the COVID-19 Pandemic (Grünberger/Vandervoort) 57–74
  - 57–59 I. Introduction 57–59
    - 1. A summary of critical issues related to IAS 39
    - 2. ECB letter to banks
  - 59–61 II. Impairment under IFRS 9 59–61
  - 61–67 III. Collective assessment 61–67
    - 1. The Standard
    - 2. Practice
    - 3. ECB Guidance
  - 67–74 IV. Macroeconomic forecasts 67–74
    - 1. The Standard
    - 2. Practice
    - 3. ECB Guidance
- 74–82 E. Measures regarding internal models (Lauter) 74–82
  - 74–75 I. Internal models – a short recap 74–75
  - 75–77 II. Operational relief measures regarding internal models 75–77
    - 1. Extension of deadlines for internal model related obligations
    - 2. Postponement of issuance of new internal model related decisions
    - 3. Extended timeline for supervisory benchmarking
  - 77–80 III. Measures addressing internal models for specific risk types 77–80
    - 1. Compensation of Market Risk multiplier increases due to overshootings
    - 2. CRR2 quick fix
  - 80–81 IV. Impact of other support measures on internal models 80–81
  - 81–81 V. Assessment of requests for initial approval, material changes or extensions 81–81
  - 81–82 VI. Conclusion 81–82
- 82–97 F. The legal effects of national emergency laws suspending time-limits on ECB supervisory procedures (Almhofer) 82–97
  - 82–83 I. Introduction 82–83
  - 83–89 II. Sources of administrative law establishing time-limits for ECB supervisory procedures 83–89
    - 1. The notion of “time-limits”
    - 2. Time-limits in EU (soft) law applicable to the ECB
    - 3. Time-limits in national law applicable to the ECB
  - 89–94 III. National laws on suspending time-limits in supervisory procedures 89–94
    - 1. Purpose and modalities of suspending time-limits
    - 2. Example: Laws and regulations suspending time-limits in Austria
    - 3. Application of national suspension measures by the ECB
  - 94–97 IV. Conclusion 94–97
97–167 Part 3: The national perspective – Measures on the national level 97–167
- 97–114 G. Supervisory measures in response to the COVID-19 pandemic in France (Bonnard) 97–114
  - 97–100 I. Background 97–100
    - 1. The economic and legal environment
    - 2. Prudential impact on credit institutions
  - 100–104 II. Relations with the ACPR 100–104
    - 1. Business continuity
    - 2. Temporary flexibility for submission of national prudential reporting, and public disclosure
    - 3. General observations
  - 104–111 III. Measures intending to promote the granting of loans to corporates 104–111
    - 1. Release of capital buffer
    - 2. French State Guarantee
    - 3. ACPR request not to pay dividends
  - 111–114 IV. Commitments undertaken by the banking sector 111–114
- 114–130 H. Supervisory measures in response to the COVID-19 pandemic in Germany (Witte) 114–130
  - 114–115 I. Introduction 114–115
  - 115–118 II. Legal nature of the announcements made by BaFin and Bundesbank 115–118
    - 1. Scope of BaFin’s competence for the issuance of supervisory interpretations
    - 2. Legal effects arising from the publications made by BaFin
    - 3. The role of MaRisk
  - 118–128 III. Overview of the individual changes pronounced for supervision 118–128
    - 1. Quantitative supervision
    - 2. Qualitative supervision
    - 3. Non-prudential matters
  - 128–128 IV. Pending regulatory projects 128–128
  - 128–130 V. Conclusion 128–130
- 130–148 J. Supervisory measures in response to the COVID-19 pandemic in Italy (Pala/Droghini) 130–148
  - 130–131 I. Introduction 130–131
  - 131–135 II. Italy’s legislative provisions on banking supervision in response to the Corona crisis 131–135
    - 1. The general suspension of terms and deadlines
    - 2. The expansion of the “Golden powers” regime
    - 3. Support measures for banks in Law Decree No 34/2020
  - 135–145 III. Supervisory measures adopted by the Bank of Italy to confront the pandemic 135–145
    - 1. The specific extensions of terms and deadlines in the supervisory framework
    - 2. Capital and liquidity reliefs
    - 3. Recommendation on dividend distribution and remuneration policies
    - 4. Banks’ contingency strategies
    - 5. Customer protection and fight against financial crime
  - 145–146 IV. Emergency national measures on banking resolution 145–146
  - 146–148 V. Conclusions 146–148
- 148–167 K. Supervisory measures in response to the COVID-19 pandemic in Spain (Fernández Rupérez) 148–167
  - 148–149 I. Overview 148–149
  - 149–162 II. COVID-19 driven legislative measures implemented relevant for banks 149–162
    - 1. Suspension of administrative deadlines and time limits
    - 2. The Mortgage Payment Moratorium
    - 3. Unsecured Loans Payment Moratorium
    - 4. Regulation of Banking Sector Moratoria
    - 5. Other legislative measures
  - 162–165 III. COVID-19 driven supervisory measures taken by Banco de España 162–165
    - 1. Banco de España applies the ECB recommendation on dividend distribution to the credit institutions under its supervision
    - 2. Supervisory and accounting measures relating to the flexibility envisaged in the regulatory framework in view of the COVID-19 outbreak of 30 March 2020
    - 3. Impact of ECB’s prudential recommendations on less significant credit institutions in Spain
    - 4. Banco de España applies the flexibility available in the regulations on minimum requirements for own funds and eligible liabilities (MREL), in view of the impact of COVID-19
  - 165–167 IV. Conclusion 165–167
167–219 Part 4: The banks perspective – prudential and legal issues 167–219
- 167–179 L. The view from a Significant Institution (Bauer-Weiler/Scarra) 167–179
  - 167–168 I. Executive summary 167–168
  - 168–170 II. Effectiveness of COVID-19-related measures 168–170
  - 170–171 III. Crisis specific ad-hoc reporting expectations 170–171
  - 171–172 IV. Relevance of globally consistent measures from supervisors and policymakers 171–172
  - 172–175 V. Fungibility of resources and fragmentation of the playing field 172–175
    - 1. Using buffers in the current environment
    - 2. Distribution restrictions
  - 175–177 VI. Pro-cyclicality 175–177
    - 1. IFRS 9 transitional arrangements
    - 2. VaR back-testing
  - 177–179 VII. A possible way forward 177–179
- 179–193 M. Impacts of regulatory and supervisory measures on Less Significant Institutions (LSIs) during the COVID-19-crisis (Hofmann/Achtelik) 179–193
  - 179–180 I. Introduction 179–180
  - 180–181 II. Oversight of LSIs in general 180–181
    - 1. What are LSIs?
    - 2. Supervision of LSIs in the SSM
    - 3. Specific characteristics of LSIs
  - 181–189 III. Supervisory and regulatory reliefs in reaction to corona crisis for LSIs 181–189
    - 1. Specific roles of EBA, ECB and NCAs in the crisis
    - 2. Targeted relief measures for LSIs
    - 3. Digression: SRB and ex-ante contributions in 2020
  - 189–190 IV. Legislative measures 189–190
  - 190–193 V. Conclusions 190–193
    - 1. Importance of NCAs
    - 2. Outstanding measures
    - 3. Maintenance of relief measures
    - 4. Procyvlical effects of the crisis
    - 5. Banks are part of the solution for this crisis
- 193–219 N. Key regulatory and market challenges for financial institutions (Boersch/Erb/Lellmann/Woyand) 193–219
  - 193–196 I. Economic Background 193–196
    - 1. The anatomy of the crisis
    - 2. Impact of COVID-19 on the economy
  - 196–203 II. Regulatory challenges for banks during the crisis 196–203
    - 1. Impact on banks
    - 2. Overview of regulatory actions and their objectives
    - 3. Implications for banks
  - 203–216 III. Upcoming challenges for the European banking industry in the long-run 203–216
    - 1. Increasing need for consolidation
    - 2. Growing pressure to reshape business models
    - 3. Accelerated digital transformation
  - 216–219 IV. Conclusion 216–219
219–281 Part 5: A look ahead and around 219–281
- 219–236 O. The implications of State aid rules and the resolution regime on the recapitalisation of banks by means of public funds (von Bonin/Heinz) 219–236
  - 219–220 I. Introduction 219–220
  - 220–221 II. Addressing the impact of the COVID-19 pandemic on the solvency of banks 220–221
    - 1. Heightened risk of increase in defaults in credit portfolios
    - 2. Sources and instruments of funding to strengthen the capital base
  - 221–226 III. Compatibility of public investment with State aid rules and conditionality 221–226
    - 1. Introduction and overview on State aid measures in the banking sector
    - 2. COVID-19 and public support to banks
  - 226–230 III. Compatibility of public investment with resolution regime 226–230
    - 1. Conditions for resolution: Failing or likely to fail?
    - 2. Implications of a “failing or likely to fail” assessment
  - 230–231 V. Conclusions 230–231
  - 231–236 VI. Excursus: Asset relief measures 231–236
    - 1. Introduction
    - 2. Public intervention in asset relief measures
- 236–254 P. Remuneration (Glasow/Schaer) 236–254
  - 236–238 I. Introduction 236–238
  - 238–242 II. General principles 238–242
    - 1. Variable remuneration: Pay for risk-adjusted performance
    - 2. Bonus pool: Maintaining a sound capital basis
    - 3. Interplay between regulatory requirements and contract and labour law
  - 242–243 III. Implications for the 2020 bonus decision in respect of the bonus for 2019 242–243
    - 1. Generally, no impact of COVID-19 on target achievement for 2019 bonus
    - 2. Potential implications for determination of bonus pool for 2019 bonuses
  - 243–250 IV. Implications for variable remuneration for performance in 2020 243–250
    - 1. Adjustment of performance parameters
    - 2. Award: Use of so-called modifiers at institutional (or group) level
    - 3. Award: Granting and vesting of variable remuneration (ex-ante risk adjustment and ex-post risk adjustment)
    - 4. Determination and distribution of the bonus pool
  - 250–252 V. Possible amendments to remuneration systems in reaction to COVID-19 250–252
    - 1. Increase of deferred variable remuneration and pay-out in equity instruments
    - 2. Increased use of qualitative and relative performance parameters
    - 3. Refrain from creating obligations to pay variable remuneration
  - 252–254 VI. Conclusion 252–254
- 254–269 Q. The dispute between Bundesverfassungegricht and European Court of Justice concerning the legality of asset purchases by the ECB – what does this mean for the Pandemic Emergency Purchase Programme? ... 254–269
  - 254–255 I. Introduction 254–255
  - 255–256 II. The PEPP as temporary crisis intervention 255–256
  - 256–259 III. OMT and PSPP as background 256–259
    - 1. The OMT programme
    - 2. The PSPP
    - 3. In comparison: the PEPP
  - 259–265 IV. The ECB’s public sector purchase programmes in the courts 259–265
    - 1. Bundesverfassungsgericht vs. ECJ: quis iudicabit?
    - 2. Criteria for assessing an ECB programme’s legality
  - 265–268 V. The legality of the PEPP 265–268
    - 1. Proportionality of the PEPP
    - 2. The PEPP’s compatibility with the monetary financing prohibition
  - 268–269 VI. Outlook 268–269
- 269–281 R. Ultra Vires Review of SSM- and SRM-Measures? Reflections on the Recent Jurisprudence by the Bundesverfassungsgericht (Berger) 269–281
  - 269–272 I. Introduction 269–272
    - 1. The PSPP-judgement of the Bundesverfassungsgericht
    - 2. Consequences of the PSPP-judgement
    - 3. The Bundesverfassungsgericht and the Banking Union
  - 272–278 II. The Banking Union-judgement 272–278
    - 1. The constitutional complaints
    - 2. Decision regarding the SSM
    - 3. Decision regarding the SRM
  - 278–279 III. Ultra vires review of SSM- and SRM-measures? 278–279
    - 1. Starting points for ultra vires arguments
    - 2. Procedural issues
  - 279–281 IV. Conclusion 279–281
281–284 Index 281–284

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