FAQs on ECB supervisory measures in reaction to the coronavirus

To be updated depending on developments. Last updated 28 July 2020.

Section 1 – Relief measures regarding asset quality deterioration and non-performing loans

You announced flexibility when implementing the ECB Guidance on non-performing loans (NPLs). Are you considering forbearance for NPLs? Are you looking at other ways to mitigate the deterioration of asset quality, for example with regard to IFRS9?

The ECB Guidance on NPLs already embeds flexibility and case-by-case assessments by Joint Supervisory Teams (JSTs).

In exercising flexibility, the right balance should be achieved between helping banks absorb the impact of the current downturn, on the one hand, and maintaining the correct risk identification practices and risk management incentives, on the other, as well as ensuring that only sustainable solutions for viable distressed debtors are deployed.

It remains crucial, in times of distress, to continue identifying and reporting asset quality deterioration and the build-up of NPLs in accordance with the existing rules, so as to maintain a clear and accurate picture of risks in the banking sector. At the same time flexibility should be deployed to help banks absorb the impact of credit risk developments and mitigate the procyclicality of that impact.

Against the backdrop of these guiding principles, and to complement the case-by-case flexibility embedded in the ECB Guidance on NPLs and in the Addendum the ECB will take the additional actions described below.

In relation to all exposures that will benefit from government guarantees issued by Member States in the context of public interventions relating to the coronavirus (COVID-19) pandemic, the ECB will, within its own remit, and within the context of the ECB Guidance on NPLs and the Addendum, extend flexibility on the automatic classification of obligors as unlikely to pay, when institutions call on the coronavirus related public guarantees, as allowed under the Guidelines on the application of the definition of default issued by the European Banking Authority[1].

  • The preferential treatment foreseen for NPLs guaranteed or insured by Official Export Credit Agencies is extended to non-performing exposures that benefit from guarantees granted by national governments or other public entities. This ensures alignment with the treatment provided in Regulation (EU) 2020/873 (the “CRR Quick Fix”)[2]. Concretely, this means that banks would face a 0% minimum coverage expectation for the first seven years of the NPE vintage count.

The ECB also extends flexibility to the NPL classification of exposures covered by qualifying legislative and non-legislative moratoria, following the EBA guidelines on legislative and non-legislative moratoria on loan repayments applied in the light of the coronavirus crisis[3]. More precisely, the ECB complies with the abovementioned EBA guidelines.

Accounting standards, and their implementation, do not fall within the remit of ECB Banking Supervision, which can take very limited action in this regard. In a letter to banks under its supervision, the ECB has provided guidance to mitigate volatility in banks’ regulatory capital and financial statements stemming from IFRS 9 accounting practices, including on the use of forecasts to avoid excessively procyclical assumptions in expected credit loss (ECL) estimations. Given that the IFRS 9 provisions must be based on macroeconomic forecasts and that, particularly in these times of pronounced uncertainty, IFRS 9 model outcomes may be excessively variable and procyclical, the ECB:

  1. Encourages those banks under its supervision that have not already done so to fully implement the transitional IFRS 9 arrangements foreseen in Article 473(a) of the CRR. The ECB stands ready to process in a timely fashion all applications received in this context.
  2. Expects banks to consider whether a top-down collective approach can be applied to estimate a portion of the portfolio for which credit risk has increased significantly. This is especially important in times where information at loan level is not yet available to banks.
  3. Expects that, within the framework provided by international accounting standards, banks give a greater weight to long-term macroeconomic forecasts evidenced by historical information when estimating long-term expected credit losses for the purposes of IFRS 9 provisioning policies. This appears particularly important where banks face uncertainty in generating reasonable and supportable forecasts. In producing such forecasts banks should take into account the relief measures granted by public authorities – such as payment moratoriums.
  4. Expects that banks consider ECB publications on macroeconomic projections in applying IFRS 9 provisioning policies.

Adopting transitional IFRS 9 implementation measures should allow all banks to filter out from their prudential capital a large part of the additional IFRS 9 volatility from 2020 until the end of the planned transitional period. The measures proposed under (2), (3) and (4) should also help mitigate procyclicality in banks’ published financial statements.

The ECB welcomes the extension of IFRS 9 transitional arrangements introduced by Regulation (EU) 2020/873. This legislation extends the IFRS 9 transitional arrangements by two years, and institutions are allowed to fully add back to their Common Equity Tier 1 capital any increase in expected credit loss provisions that they recognise in 2020 and 2021 for their financial assets that are not credit-impaired, as compared to end-2019. In addition, a temporary prudential filter that neutralises the impact of the volatility in central government debt markets on institutions’ regulatory capital during the coronavirus pandemic has been introduced.

Will you also revise your expectations for the stock of NPLs?

In the context of the financial turmoil triggered by the coronavirus outbreak, banks should be supported as they provide solutions to viable distressed customers. The stock of NPLs accumulated prior to the outbreak is not the focus of our current mitigation measures. However, the ECB is fully aware that current market conditions may make the agreed reduction targets difficult to attain and somewhat unrealistic. In this vein, the JSTs will be fully flexible when discussing the implementation of NPL strategies on a case-by-case basis.

Regarding the submission of updated NPL strategies, the ECB has decided to postpone the deadline for submission by another six months, to end-March 2021, to provide banks with additional time to better estimate the impact of the coronavirus pandemic on asset quality, which should enable more accurate planning.

Banks are nonetheless still expected to continue with the active management of their NPLs and any foreclosed assets.

Will you provide guidance regarding the operational management of asset quality deterioration during this time?

In order to be able to provide support to viable distressed borrowers, banks need to ensure that they have effective risk management practices and sufficient operational capacity in place. Therefore, in a letter to all banks under its direct supervision the ECB provided a number of high level supervisory expectations along with more specific operational elements, which banks are expected to follow. The JSTs will engage with banks in the coming months in order to discuss their risk management practices in light of these expectations.

Section 2 – Relief measures regarding the operational aspects of supervision

You announced in March 2020 that JSTs would discuss with individual banks a more flexible approach to supervisory processes, timelines and deadlines. Do you foresee any further postponements?

To alleviate the supervisory burden for banks during stressed times, the ECB clarified on 20 March 2020 that it had decided to do the following.

  • Postpone, by six months, the existing deadline for remedial actions imposed in the context of on-site inspections, TRIM investigations and internal model investigations.
  • Postpone, by six months, the verification of compliance with qualitative SREP measures.
  • Postpone, by six months, the issuance of TRIM decisions, on-site follow up letters and internal model decisions not yet communicated to institutions, unless the bank explicitly asks for a decision because it is seen as beneficial to the bank.
  • Permit banks with stable recovery plans to submit only the core elements (indicators, options, overall recovery capacity) of their 2020 plans, focusing on the current coronavirus stress and ensuring that the plans can be implemented effectively and in a timely manner if needed. Banks are also permitted, where applicable, to address only the key deficiencies identified in the 2019 plans.

In addition to the above, in 2020 the ECB will also not undertake comprehensive information gathering relating to the LCR for the products and services referred to under Article 23 of the LCR Delegated Regulation[4] for which the likelihood and potential volume of liquidity outflows are material. However, banks are reminded that they are still required to properly estimate outflow rates for these products and services based on their own methodologies, unless otherwise determined by the ECB in the past, and that such estimates should reflect the assumption of combined idiosyncratic and market-wide stress as referred to in Article 5 of the LCR Delegated Regulation. In that regard, these estimates should also reflect experiences made during the current stress period.

Taking into account the economic and financial developments so far and the gradual return to normality at most banks, the ECB does not foresee any further postponements of the deadlines for remedial actions imposed in ECB decisions and operational acts including in relation to on-site inspections, TRIM investigations and internal model investigations. Similarly, it plans to resume the issuance of TRIM decisions, on-site follow up letters and internal model decisions by the end of September 2020, after the previously announced six-month suspension expires.

The measures taken regarding recovery plans do not apply to deadlines, meaning that banks will have to submit their 2020 recovery plans by the existing deadlines.

In March, you postponed the verification of compliance with qualitative SREP measures by six months. Could there be any further postponement or should banks expect a restart of this verification?

At the moment the ECB does not expect a further postponement of qualitative SREP measures.

Considering the pragmatic approach to the SREP mentioned in the Supervision Blog published in May and taking into account the requirements currently applicable to the banks, the ECB decided as a general rule to not issue SREP decisions for the 2020 SREP cycle. Nevertheless, based on the assessment conducted this year, observations and concerns will be conveyed to banks as recommendations upon conclusion of the SREP. An ECB SREP decision may still be warranted for exceptional cases.

The ECB will continue to monitor the evolution of the situation and take a flexible approach when considering any need to revise its stance.

Section 3 – Relief measures regarding capital and liquidity requirements

Banks have been allowed to operate below the P2G level and to frontload the rules on the composition of P2R originally scheduled to come into force in 2021 with CRD V. Concretely, how much capital relief has this provided?

The ECB announced in the press release of 20 March 2020 that a release of the full Pillar 2 Guidance (P2G) buffer would make around €90 billion of Common Equity Tier 1 (CET1) capital available to significant institutions supervised by the SSM. With the immediate implementation of the latest Capital Requirements Directive (CRD V) rules on the composition of Pillar 2 Requirements (P2R), which are less stringent than the composition currently requested by the ECB, around €30 billion of additional CET1 capital have been added to the relief. The two measures combined have provided banks with aggregate relief of roughly €120 billion of CET1 capital. Overall, this has provided significant room for banks to absorb losses on outstanding exposures without triggering any supervisory action.

As announced in the press release, the ECB estimates that the capital released by the two measures considered could enable banks to potentially finance up to €1.8 trillion of loans to households, small businesses and corporate customers in need of extra liquidity, taking into account that the average risk of lending to households, small businesses and corporates would most likely increase from current levels as a result of the shock. Thus, even in the most adverse scenarios, the lending capacity released by the measures remains very substantial.

These estimates do not take into account the beneficial effects of the public guarantees provided by various Member States in favour of household and/or corporate borrowers. As public guarantees substantially reduce the regulatory capital cost of lending and the amount of provisions that banks need to take against expected losses, such public measures increase the lending potential of banks.

How does allowing banks to operate below the P2G help the economy in the current situation?

P2G is a supervisory expectation about the bank’s ability to maintain an adequate level of capital to be able to withstand stressed conditions. It should be built up in normal times in order to make banks’ capital positions stronger in the event of a crisis. Allowing banks to operate below the level of capital defined by the P2G makes additional resources available to banks that should be used to provide more financial support to household and corporate borrowers and/or to withstand additional losses on existing exposures to those borrowers.

You said banks can fully use their capital buffers, including the capital conservation buffer (CCB). Does this mean you expect banks’ capital losses to reach levels that will deplete the CCB buffer? What are the implications if that happens?

The ECB’s indication that banks can also use the CCB buffer is not linked to a specific expectation regarding capital losses. The ECB reminds banks under its supervision that, in these difficult times, all capital buffers including the CCB may be used to withstand potential stress, in line with the initial intentions of the international standard setter on the usability of the buffers [Newsletter on buffer usability, 31 October 2019]. Having said that, as indicated in the notes to the press release of 12 March 2020, in the case of banks’ capital falling below the combined buffer requirement (CCB, CCyB and systemic buffers), banks can make distributions only within the limits of the maximum distributable amount (MDA) as defined by EU law.

The ECB does not have any discretion to waive the application of automatic restrictions to distributions that are set out in the EU law. However, the ECB decision to frontload the CRD V rules on the composition of P2R reduces the MDA trigger level for banks with enough AT1/T2 capital.

This said, the ECB will continue to take a flexible approach to approving capital conservation plans that banks are legally required to submit if they breach the combined buffer requirement.

You allowed banks to go below the liquidity coverage ratio (LCR) requirement. What does this imply?

Banks have made important efforts in recent years to achieve good levels of liquidity buffers (evidenced by the LCRs being well above the 100% minimum). The ECB clarified in the press release of 12 March 2020 that these buffers can be used to a substantial extent. This is indeed one of the foundations of the LCR, fully recognised by the international standards setter[5] and reflected in EU regulation[6]. It is key that banks make use of their liquidity buffers under stress, even if that means that their LCR falls substantially below the general 100% minimum level. This is important to ensure liquidity in the system and to avoid contagion effects that might trigger liquidity problems in other institutions, and, ultimately, the real economy.

By emphasising that banks can make use of their liquidity buffers to cover net liquidity outflows, the ECB effectively confirmed – ex-ante – that the current environment corresponds to a situation in which the applicable regulation explicitly allows banks to use their liquidity buffers.

The ECB will continue to take a flexible approach when approving LCR restoration plans which banks are legally required to submit when breaching the LCR requirement.

You allowed banks to temporarily operate below P2G and the LCR requirement. When are banks expected to replenish them?

The ECB announced in the press release of 12 March 2020 that banks are allowed to operate below P2G and LCR requirements until further notice.

By drawing down their capital buffers, banks can retain their ability to continue lending to households and businesses through the current period of stress. Other things remaining equal, maintaining support for the real economy will also reduce the level of credit losses affecting the banking system, thereby helping to mitigate the downward pressure on banks’ solvency ratios.

The ECB will cautiously take into account the evolution of economic conditions and the credit cycle before requesting that banks replenish their Pillar 2 Guidance. This will not happen too early in the capital cycle. The timeline for P2G replenishment will depend on the economic outlook, taking into consideration factors such as banks’ capital trajectories, asset quality, equity markets, etc.

In any case, in order to facilitate banks lending to the economy, the ECB will not expect banks to operate above the level of their P2G any sooner than the end of 2022.

In relation to the LCR, the point in time at which the ECB would expect banks which have previously used their liquidity buffers to once again comply with the general 100% minimum level will depend on both bank-specific (e.g. access to funding markets) as well as market-specific factors (e.g. demand for liquidity from households, corporates and other market participants). In any case, the ECB will not expect this any sooner than the end of 2021.

The 2021 EBA Stress Test is expected to inform the setting of P2G levels. Do you foresee any impact on the P2G levels?

Indeed, the 2021 EBA Stress Test will inform the setting of P2G levels going forward, and therefore P2G levels are expected to be revised. However, the ECB does not intend the updated P2G levels to be fully met by banks before the date when banks are expected to again meet their P2G (see previous question). The ECB in particular intends to give banks sufficient time to replenish their capital in cases of increased P2G levels.

You said banks can continue to operate below P2G levels until at least the end of 2022. What does this imply for banks who may pay out distributions?

The ECB considers that the level of economic uncertainty due to the coronavirus pandemic remains elevated and that, consequently, credit institutions need to maintain a sufficiently large amount of capital to absorb potential losses that would also contribute to supporting the real economy by providing credit to households, small businesses and corporates.

As a guiding principle, banks whose capital levels are sustainable from a forward-looking perspective may be allowed to pay out an appropriate level of distributions using conservative and prudent assumptions, taking into account the mandatory restrictions on distributions provided for in the Capital Requirements Directive.

In any case, the ECB intends to liaise with banks individually regarding the extent to which banks operating below P2G levels may consider resuming dividend payments after the current dividend recommendation has been lifted.

What are the implications of the ECB stance on the buffer/P2G use for less significant institutions?

The ECB expects the national competent authorities to apply the same treatment to the less significant institutions as the ECB is applying to the significant institutions.

Section 4 – Restrictions on dividends and variable remuneration

You have asked banks to refrain from paying out dividends until 1 January 2021. How exactly should banks apply this to the dividends for the 2019 and 2020 financial years?

Dividends for the 2019 financial year

Following up on ECB Recommendation (ECB/2020/19), as replaced by ECB Recommendation ECB/2020/35, the Board of Directors/Supervisory Board of credit institutions may decide to:

  • keep the initial proposal for the distribution of dividends but make the actual payment conditional on the reassessment of the situation once the uncertainties caused by the coronavirus disappear (and, in any case, not before 1 January 2021); or
  • propose a change to the dividend policy whereby no dividend will be distributed for the 2019 financial year while committing to a possible distribution of reserves subject to the reassessment of the situation once the uncertainties caused by the coronavirus disappear (and, in any case, not before 1 January 2021).

If the first option is chosen, the amount of dividends proposed shall continue to be deducted from retained earnings for the 2019 financial year, and therefore from CET1 calculations. Corporate law in the relevant jurisdiction may not allow for the postponement of the dividend payment for the 2019 financial year beyond 1 January 2021, in which case only the second option can be chosen.

If the second option is chosen, the amount of dividends initially foreseen can be reintegrated into the profit for 2019 and fully included in the retained earnings for this financial year. Thereafter, if the situation evolves positively any payment to remunerate shareholders would need to be made out of the credit institution’s reserves.

Dividends for the 2020 financial year

For the recognition of interim profits or year-end profits during 2020 (Q1, Q2, Q3, Q4), if no change in the dividend policy of the credit institutions has been proposed by its Board of Directors/Supervisory Board, the highest of the three pay-out ratios will need to be deducted from the interim profit: (i) pay-out ratio defined in the dividend policy, (ii) pay-out ratio of the previous year, (iii) average of the pay-out ratios of the last three years. If there is a formal proposal of the Board of Directors/Supervisory Board not to pay dividends until the uncertainties caused by the coronavirus disappear that also covers the 2020 financial year, credit institutions may apply for recognition of the full amount of interim profits without deducting any amount as foreseeable dividends.

The ECB will provide further guidance in Q4 2020 on the approach to be followed for dividends for the 2020 financial year to be paid out after 1 January 2021.

Is the distribution of dividends in the form of shares in line with the recommendation?

Dividend distributions solely in the form of shares are in line with the current recommendation provided they do not reduce the quantity or quality of own funds. Such dividend distributions should nevertheless be designed in such a way that they do not mechanically increase dividends to be paid out in subsequent years, in particular for banks expressing their dividend policy in a fixed amount per share.

At what level of consolidation does Recommendation ECB/2020/35 apply?

Recommendation ECB/2020/35 applies at the consolidated level for significant supervised groups and at the individual level for credit institutions that are not part of a significant supervised group. For most significant supervised groups, this means that the parent undertaking in that significant supervised group is recommended not to pay dividends. For other significant supervised groups, such as those with supervised entities being affiliated to a central body, the legal entities that are recommended not to pay dividends depends on the specific structure of the significant supervised group.

With a view to supporting the smooth functioning of the internal market and, in particular, the free flow of capital within significant supervised groups, the recommendation not to pay dividends or buy back shares does not generally apply to payments of dividends or share buy backs among entities within a significant supervised group. However, the ECB may recommend any credit institution to refrain from paying dividends or buying back shares on a case-by-case basis taking into account the individual circumstances of the credit institution in question.

Credit institutions that have a parent institution, parent financial holding company or parent mixed financial holding company that is established in a Member State that is not a participating Member State of the Single Supervisory Mechanism (SSM) are recommended to contact their joint supervisory team to determine whether it would be appropriate to pay-out dividends or make irrevocable commitments to pay-out dividends to their non-SSM parent undertaking.

Why is the ECB expecting banks to reduce variable remuneration payments?

On 28 July 2020, the ECB sent a letter to all supervised entities to convey and reiterate its supervisory expectations on variable remuneration, in the light of the current crisis triggered by the coronavirus pandemic. This measure follows the same objectives as the other related ECB supervisory measures (i.e. the measures providing temporary capital and operational relief, the recommendation on dividend distributions, etc.) implemented in response to the coronavirus pandemic: enabling institutions to support the economy to the fullest extent possible while maintaining their capital levels and capacity to withstand the impact of expected financial distress. The ECB also invited banks to reflect on the reputational impact of the payment of variable remuneration in the current crisis context, in particular in relation to cases involving large individual amounts.

You have asked banks to adopt extreme moderation with regard to variable remuneration payments until 1 January 2021. What are the precise supervisory expectations and how should banks apply them?

In this context, extreme moderation means reducing to the fullest possible extent the payment of variable remuneration. In principle, this applies to non-awarded variable remuneration, while it is also considered prudent to avoid entering in new commitments, e.g. new awards.

In any case, to the extent that banks are not able to reduce variable remuneration, they should consider whether a larger part of the variable remuneration could be deferred for a longer period of time, as well as consider the payment of bonuses in instruments at a higher ratio, especially for identified staff (so-called “material risk takers”).

Banks should also not adopt measures that compensate staff for the reduction or loss of variable remuneration, as this would amount to a circumvention of the relevant regulatory provisions and the ECB’s supervisory expectations, and would hamper the overall objectives pursued via the aforementioned measures.

The implementation is to be guided by the use of exemptions and the principle of proportionality. For the former, the supervisory expectations should not expose banks to litigation or legal risk. They are therefore not intended to apply to cases where a bank is subject to a legal obligation to pay the variable remuneration. Regarding the latter, the ECB will pay due regard to the principle of proportionality as situations vary considerably, depending on factors such as the remuneration practice, business model and size of institutions. In particular, it will take into account their ability to contribute to the mitigation of systemic risks to financial stability that arise from the coronavirus crisis and to the economic recovery.

The ECB will continuously monitor the situation and determine in due course whether to update and/or amend these supervisory expectations, taking into account the economic environment, the stability of the financial system and the level of certainty around capital planning.

Section 5 – Other measures

Following the adoption of Regulation (EU) 2020/873, when would banks be able to exclude central bank exposures from the leverage ratio under the provisions of Article 500b of the CRR?

Regulation (EU) 2020/873 granted competent authorities the discretion to allow the exclusion of certain central bank exposures from institutions’ total exposure measure until 27 June 2021.
This exclusion would be possible once the ECB determines and publicly declares the existence of exceptional circumstances, in line with paragraph (2) of Article 500b of the CRR.

What other measures can we expect?

Taking into account the economic and financial developments so far, and the gradual return to normality at most banks, the ECB currently does not foresee the need for measures beyond those described above. The ECB will continue to closely monitor the evolving coronavirus pandemic and its implications for the banking sector, in close contact with other authorities and the banks we supervise. The ECB remains ready to use the flexibility within its supervisory toolkit to take further action should it prove necessary. This means that we may reassess our course of action, taking into account potential second-round effects.

Annex:

BCBS Statement: https://www.bis.org/publ/bcbs_nl22.htm

[BCBS statement extract]

While each of these buffers seeks to mitigate specific risks, they share similar design features and are all underpinned by the following objectives:

  • absorbing losses in times of stress by having an additional overlay of capital that is above minimum requirements and that can be drawn down; and
  • helping to maintain the provision of key financial services to the real economy in a downturn by reducing incentives for banks to deleverage abruptly and excessively.

The Committee continues to be of the view that banks and market participants should view the capital buffers set out in the Basel III framework as usable in order to absorb losses and maintain lending to the real economy. In practice, the Basel capital buffers are usable in the following manner:

  • banks operating in the buffer range would not be deemed to be in breach of their minimum regulatory capital requirements as a result of using their buffers;
  • banks that draw down on their buffers will be subject to the automatic distribution restriction mechanism set out in the Basel III framework; and
  • supervisors have the discretion to impose time limits on banks operating within the buffer range, but should ensure that the capital plans of banks seek to rebuild buffers over an appropriate timeframe.
[1]Such guarantees do not exempt institutions from assessing the potential unlikeliness to pay of the obligor and must not affect the results of such an assessment (EBA guidelines on legislative and non-legislative moratoria on loan repayments applied in the light of the COVID-19 crisis, para. 31)]
[2]Regulation (EU) 2020/873 of the European Parliament and of the Council of 24 June 2020 amending Regulations (EU) No 575/2013 and (EU) 2019/876 as regards certain adjustments in response to the COVID-19 pandemic (OJ L 204, 26.6.2020, p. 4–17).
[3]https://eba.europa.eu/regulation-and-policy/credit-risk/guidelines-legislative-and-non-legislative-moratoria-loan-repayments-applied-light-covid-19-crisis
[4]Article 23(2) of Commission Delegated Regulation (EU) 2015/61: “[…] Credit institutions shall report at least once a year to the competent authorities those products and services for which the likelihood and potential volume of the liquidity outflows referred to in paragraph 1 are material […].”
[5]BCBS Basel III: The Liquidity Coverage Ratio and liquidity risk monitoring tools (January 2013): "During a period of financial stress, however, banks may use their stock of high quality liquid assets (HQLA), thereby falling below 100%, as maintaining the LCR at 100% under such circumstances could produce undue negative effects on the bank and other market participants. Supervisors will subsequently assess this situation and will adjust their response flexibly according to the circumstances."
[6]Article 412(1) of Regulation (EU) No 575/2013: […] During times of stress, institutions may use their liquid assets to cover their net liquidity outflows.” Article 4(3) of Delegated Regulation (EU) 2015/61: “By derogation from paragraph 2, credit institutions may monetise their liquid assets to cover their net liquidity outflows during stress periods, even if such a use of liquid assets may result in their liquidity coverage ratio falling below 100 % during such periods.

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