New supervisory measures in response to the economic and financial difficulties.
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.
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.
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:
The EBA also proposes temporary easing of market risk regulations due to Covid-19:
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.
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:
Financial institutions applying these exceptions set out above shall notify these circumstances to the competent authorities.
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