On 20 March, the Bank of England announced a package of measures in response to COVID-19 that aims to help firms and financial market infrastructures maintain their safety and soundness and deliver the critical functions they provide to the economy. These are mainly aimed at the banking sector and there are no specific announcements related to the insurance sector.
This update summarises the key points in the Bank's announcements that could have a material impact on work already in progress in many firms. As the situation develops, KPMG will provide further updates on specific topics.
- Statement on IFRS 9 - the COVID-19 outbreak and resulting economic uncertainty will have wide-ranging impacts on bank financial reporting, specifically the recognition of expected credit losses (ECL) under IFRS 9. The PRA has now published initial guidance, acknowledging this uncertainty. It expects firms' forecasts to reflect the temporary nature of the shock, and fully take into account the significant economic support measures already announced by global fiscal and monetary authorities.
The PRA has further indicated that mortgage repayment holidays announced by the UK government are not expected to be a sufficient condition to move participating borrowers into Stage 2 ECL. However, any significant increase in the probability of default could still result in these exposures moving to Stage 2. Banks would also need to carefully consider how to apply days past due criteria considering these concessions and how their specific terms (e.g. whether interest still accrues during the payment holiday) should be accounted for. Further guidance is expected next week.
The announcement on IFRS 9 shows that the Bank recognises the significant amount of judgement required to apply the expected loss requirements at a time of great economic uncertainty and the guidance aims to drive consistency in the application of these requirements.
- Cancellation of the Bank's 2020 annual stress test - the annual cyclical scenario (ACS) - the ACS for the eight major banks and building societies has been cancelled to help lenders focus on meeting the needs of UK households and businesses via the continuing provision of credit.
- Amendments to the biennial exploratory scenario (BES) timetable - the Bank has paused publication of the results of the 2019 BES on liquidity until further notice. In addition, while the Bank will review responses to the discussion paper on the 2021 BES climate change scenarios, the process is now under review and not further action will be announced until the summer.
- Section 166 reviews on reliability of banks' regulatory returns - these will be paused as part of a wider review of supervisory programmes that will postpone non-critical data requests, on-site visits and deadlines to allow supervisory focus on the most important matters relating to financial stability, the safety and soundness of firms, and protection of policyholders, including the impact of COVID-19.
- Internal Ratings Based (IRB) models - measures to improve credit risk modelling across the sector will be delayed, specifically the implementation of the proposals related to the Definition of Default, Probability of Default, and Loss Given Default estimation, by one year to 1 January 2022 and the move to `hybrid' IRB models will also be delayed until the same date.
- Basel 3.1 (Basel 4) - the PRA acknowledges that the existing Basel timetable may prove to be challenging and is coordinating internationally to ensure that UK implementation will happen alongside other major jurisdictions. The PRA will advise the government on the legislative approach to implementation of Basel 3.1 accordingly.
- Operational Resilience - the deadline for responses to the Bank, PRA and FCA consultations on impact tolerances and outsourcing and third-party risk management have been extended until 1 October 2020. As a result, publication of final policy and supervisory statements are expected to be delayed.
- Joint Bank / Financial Conduct Authority (FCA) survey into open-ended funds - postponed until further notice.
- Senior Management Function applications - process under review.