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EBA statement on new supervisory measures in the COVID-19 pandemic

EBA statement on new supervisory measures in the...

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Ágnes Rakó

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KPMG Tanácsadó Kft.

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On 22 April 2020, the EBA issued a statement on new supervisory measures in response to the economic and financial difficulties caused by Covid-19. Areas covered by the statement include SREP, recovery plans, digital operational resilience, easing market risk regulation and interpreting the payment moratorium in relation to securitization regulation.

SREP

The principles that guide the EBA's supervisory approach to SREP are effectiveness, flexibility and pragmatism. The most important risk areas considered by EBA are those which are particularly sensitive to the crisis. Accordingly, in the next period, the EBA may not embrace a comprehensive risk assessment, in areas considered not directly affected by the crisis or where no new relevant information is available, the previously assigned supervisory assessment could be maintained.

The EBA emphasizes that drawing supervisory conclusions on the financial institutions’ ability to meet the capital and liquidity requirements is paramount in this period.

Recovery plans

The EBA draws attention to the need for financial institutions to focus on ensuring their core operations during this stressed period. At the same time, their recovery plans which aim at restoring the institutions’ financial and economic viability under stress, should be kept reviewed and updated in order to be implemented timely and effectively if needed. Although they need to monitor all recovery indicators, they should enhance their focus on understanding which recovery options are necessary and available under the current stressed conditions and adjust this analysis if the situation changes

Financial institutions are required to analyze how the COVID-19 stress might evolve for their institution and estimate their overall recovery capacities for liquidity and capital. They are required to notify regulators on an ongoing basis the recovery indicators used and their updated assessment of the recovery options taking into account the latest impact of the COVID-19 stress.

Financial institutions may be granted operational relief for some elements of recovery plans, without compromising the ability of institutions to react to the current COVID-19 stress, and if a plan has already been developed in previous exercises.

Digital operational resilience

In the stressful situation caused by Covid-19, it is particularly important to ensure the operational resilience of financial institutions. A significant increase in the number of their staff working remotely from home, the risks affecting business continuity and communication systems are increasing as well. To this end, the EBA highlights the following as priority tasks:

  • Adequate internal governance and internal control framework place for operational resilience, including involvement of senior management in effective decision-making and priority setting
  • Ensuring the capacity of IT systems and the adequate monitoring and management of increasing cyber risks.
  • Ensuring that the business continuity plans are up to date and adapted, including considerations related to potentially longer-term nature of the measures applied for COVID-19.

Market risks

The EBA also proposes temporary easing of market risk regulations due to Covid-19:

  • A proposal to mitigate the deduction of own funds due to prudent valuation by setting the aggregation factor to 66% from the previous 50%, with a temporary effect until the end of the year.
  • The opinion of the EBA that the first reporting of FRTB-SA should be postponed from the first quarter of 2021 planned so far to 30 September 2021, however the European Commission has the final say.
  • The EBA supports the deferral of margin requirements for non-centrally cleared derivatives for institutions above the € 50 billion (September 2020 currently) and € 8 billion (September 2021 currently) limits. The deferral would take effect by amending the relevant RTS.
  • The EBA recommends that national authorities keep the VaR multipliers used by institutions applying internal models low and postpone the recalibration of the stress VaR observation period.

Securitization

The EBA would like to clarify how the EBA directives on credit repayment moratoriums resulting from the Covid-19 situation (EBA / GL / 2020/02) apply to the securitization processes.

The EBA guidelines issued for moratoria due to Covid-19 are interpreted as the they to apply to all exposures that fall within the scope of the moratoria. When rating securitized assets and calculating its capital requirement, financial institutions should not automatically reclassify securitised exposures as in default or in forbearance where those securitised exposures were not classified as prior to the date of entry into force of the moratorium. Financial institutions should continue to assess the potential unlikeliness to pay of obligors subject to the moratorium.

Implicit support

The EU regulation of securitization places great emphasis on defining the framework for the relationship between the originator and the investor, provided that the originator applies the more favorable capital requirements arising from the securitization. In that case, the originator may not, directly or indirectly, provide the investor with any support other than that specified in the contract that may reduce the potential or actual losses to investors incurred on the exposure. However, in the special situation caused by Covid-19, the EBA has published some exceptions that are not covered by this ban:

  • If the originator suspends, postpones or reduces payments on securitized assets as per a general payment moratorium in force (so it helps maintain the debtor’s solvency), these activities are not considered to be an implicit support of the investor.
  • The originator (or sponsor, servicer) replacing securitized assets in the pool which are subject to a general payment moratorium with assets of a similar risk profile not subject to any such moratorium, subject in each case to the contractual documentation.
  • The originator (or sponsor, servicer) restructuring or amending the contractual documentation governing the securitized assets as appropriate or necessary to implement or comply with the general payment moratorium.

Financial institutions applying these exceptions set out above shall notify these circumstances to the competent authorities.

© 2020 KPMG Tanácsadó Kft., a Hungary limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.

KPMG International Cooperative (“KPMG International”) is a Swiss entity.  Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm.

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