COVID-19: checking in on banks facilitating government aid
19 May 2021
As part of its coordinated coronavirus (COVID-19) credit risk strategy, ECB Banking Supervision launched a number of complementary projects to get a full picture of how banks are measuring and managing credit risk during the pandemic. This is the third article in our related series.
When the COVID-19 pandemic hit in 2020, governments moved quickly to support the European economy via multiple national relief measures. Banks played a major role in facilitating these aid packages by channelling loans and guarantees through their systems and offering repayment moratoria. While this swift action was vital to contain the economic impact of the pandemic, it required banks to rapidly adjust their business-as-usual processes to a large-scale emergency response. Consequently, banks had to adapt their governance and internal control frameworks to adequately manage and monitor the implementation of these aid measures, including determining how to incorporate moratoria in the systems that classify loans based on their inherent risk.
ECB Banking Supervision wanted to verify that banks had adequately implemented the relief measures. However, it had to adapt its supervisory processes and techniques owing to the pandemic. Inspectors would normally perform such investigations on the banks’ premises, but for this campaign ECB Banking Supervision had to carry out its credit risk inspections entirely remotely. The inspections covered banks in seven countries (Belgium, Germany, Spain, France, Italy, Netherlands and Portugal) and aimed to confirm that banks had:
- operationalised the various relief measures to provide the intended support to their customers and the economic sectors hit by the crisis, in line with the conditions of the support programmes;
- adequately adapted their governance and internal control frameworks to manage, monitor and control how they applied and incorporated the relief measures, i.e. in accordance with the regulatory framework and, in particular, the European Banking Authority’s Guidelines on legislative and non-legislative moratoria on loan repayments applied in the light of the COVID-19 crisis.
ECB Banking Supervision also wanted to gauge the impact of the government relief measures on banks’ credit risk profiles and levels of loan loss provisioning.
On the whole, banks facilitated the aid swiftly and passed on the support to their customers. However, the results of the inspections show that banks need to further improve how they incorporate the exceptional COVID-19 measures in their policies, processes and systems. First, the governance frameworks require further adjustments so that the relief measures can be appropriately managed and monitored. In particular, banks should ensure greater involvement of the management body (in both its management and supervisory functions), remediate deficiencies in internal and external reporting and strengthen their internal control framework. For the latter, banks should take particular care to ensure that the distribution of tasks complies with the three lines of defence model – risk taking, risk oversight and independent risk assurance must remain separated.
Second, banks should update their internal policies and procedures to properly incorporate the specific features of the COVID-19 relief measures. Their written frameworks should better document, among other things, the criteria for applying moratoria or the eligibility rules for relief measures.
The inspections also revealed that banks’ IT systems were not always sufficiently agile to manage the relief measures properly. Inspectors sometimes found that developments in the ratings of loans benefiting from the relief measures were counter-intuitive. For example, ratings for vulnerable debtors remained stable or even improved, while in other cases loans subject to moratoria and guarantees were not adequately categorised and, as a result, did not reflect the inherent risk.
The inspections were centrally coordinated by the ECB and had mainly the same scope. The inspection teams cooperated closely and provided regular feedback to the Joint Supervisory Teams (JSTs) responsible for ongoing supervision. This fostered harmonised inspection approaches that considered the country-specific features of the relief measures. The investigation teams have now handed over the follow-up to the JSTs, who will define action plans for the banks, scrutinise their remediation actions and make sure that they effectively address the issues identified in the investigations. The JSTs are also continuously monitoring developments in banks’ loan portfolios and provisioning levels and stand ready to act should the situation start to deteriorate.
This 2020 campaign on COVID-19 measures produced a wealth of valuable insights. ECB Banking Supervision is therefore continuing these investigations remotely in 2021, increasing the number of banks and countries covered and extending the scope of inspection. The upcoming inspections will include an in-depth review of credit quality. Inspectors will also assess whether banks have appropriately implemented the supervisory expectations on credit risk that the ECB specified in 2020. The ECB has repeatedly stressed that adequate risk assessment, classification and measurement are key to contain the negative effects of the pandemic. Banks should continue lending, but they must also limit their risks and preserve their own viability. They should ensure that they transparently reflect the inherent risks in their internal risk measurement and management processes, financial statements and regulatory reporting.