Banks

[[#ex]]

Statement on dividends distribution, share buybacks and variable remuneration

The European Banking Authority (EBA), in its 12 March statement, urged banks to follow prudent dividend and other distribution policies, including variable remuneration, and use capital for ensuring continuous financing to the economy.

Many competent authorities have accordingly communicated to banks general expectations or engaged in bilateral dialogues in order to limit or refrain from dividend distribution and share buybacks.

The EBA supports all the measures taken so far to ensure banks maintain a sound capital base and provide the needed support to the economy. The EBA also emphasizes that the capital relief resulting from the measures adopted by competent authorities in response to COVID 19 crisis are to be used to finance the corporate and household sectors and not to increase the distribution of dividends or make share buybacks for the purpose of remunerating shareholders.

The EBA, acknowledging that some banks have already communicated a postponement of their decisions, urges all banks to refrain from dividends distribution or share buybacks which result in a capital distribution outside the banking system, in order to maintain its robust capitalisation. Banks should revert to their competent authorities in case they consider themselves legally required to pay-out dividends or make share buybacks. The EBA also considers that ensuring the efficient and prudent allocation of capital within banking groups is crucial and should be monitored by competent authorities. Capital distributions within a banking group should serve the need to support the local and the broader european economies as well as to ensure the proper functioning of the Single Market, particularly crucial in this time of crisis.

Furthermore, competent authorities should ask banks to review their remuneration policies, practices and awards to ensure that they are consistent with and promote sound and effective risk management also reflecting the current economic situation. Remuneration and, in particular, its variable portion should be set at a conservative level. To achieve an appropriate alignment with risks stemming from the COVID-19 pandemic a larger part of the variable remuneration could be deferred for a longer period and a larger proportion could be paid out in equity instruments.

EBA: statement on supervisory reporting and Pillar 3 disclosures in light of COVID-19

In response to the global outbreak of the Corona virus (COVID-19 outbreak) and its spread in Europe particularly since February 2020, the EBA issued a statement on actions to mitigate the impact of COVID-19 outbreak on the EU banking sector on 12 March 20201. The statement published today aims to detail further possible actions to be taken by institutions or competent and resolution authorities in this context.

As the institutions may face increasingly difficult conditions in the immediate future, the EBA considers that they need to concentrate their efforts on monitoring and assessing the impact of the COVID-19 outbreak as well as ensuring business continuity. At the same time, market participants and competent and resolution authorities need access to reliable information, in order to understand institutions’ financial and prudential situations.

Supervisory reporting

The statement issued by the EBA on 12 March 2020 explicitly refers to the possibility that competent and resolution authorities could give institutions some leeway with regard to the remittance dates for some areas of supervisory reporting, without putting at risk the access to the crucial information needed to monitor closely institutions’ financial and prudential situation.

Reliable supervisory data is crucial in times when the financial system faces turbulences caused by extraordinary situations. Considering the potential impact of the COVID-19 outbreak on the economy in the near future, it is important to have key prudential information on capital, risks, liquidity and the financial position of institutions.

Bearing all these factors in mind, competent and resolution authorities should assess the extent to which a delayed submission of all the data or subsets of the data included in the EBA reporting framework would be justified in these extraordinary circumstances. For the time being, such supervisory actions are only being considered for submissions due between March and end of May 2020.

In general, institutions should be allowed up to one additional month for submitting the required data2. Each competent and resolution authority should clarify the precise terms for institutions in their jurisdiction. Such exception should not apply to:

• Information on the liquidity coverage ratio (LCR) and on the Additional Monitoring Metrics (ALMM) and data sets identified as priority by the competent or resolution authority. This data should be reported in accordance with the deadlines specified in the applicable reporting standard;
• Reporting for resolution planning purposes: Information on the institution’s liability structure, including intra-group financial connections should be reported to resolution authorities by the set date in the applicable reporting standard (30 April 2020 or earlier if set by the resolution authority).

High quality data is of crucial importance and a pre-requisite for a reliable assessment during ordinary times, but even more during times when the financial system faces extraordinary situations. Where an adequate level of data quality is not achieved, resubmissions are necessary. In order to facilitate operational efficiency, however, a specific timeframe for updating, correcting and resubmitting the data can be discussed and agreed with the competent authority.

From March 2020 onwards, reporting framework version 2.9 will gradually replace its predecessor version 2.8. The EBA is of the view that prolonging the application of version 2.8 would not provide a significant relief to institutions or authorities, because their operational planning is already advanced and a postponement would be more disruptive. It would also misalign the reporting with the underlying regulatory framework. Reporting in accordance with version 2.9 should therefore start, as envisaged by the adopted Implementing Act amending Regulation, with the reference date 31 March 2020.

The EBA is committed to facilitating the efficiency of institutions’ reporting in the light of the situation caused by the COVID-19 outbreak. Competent and resolution authorities are asked to give particular considerations to the ad-hoc data requests they issue to institutions at this point in time. The COVID-19 outbreak triggers particular information needs which possibly cannot be fully satisfied on the basis of regularly reported data and which, within reason, need to be addressed to institutions. Therefore, the EBA suggests that competent and resolution authorities do not prioritise their supervisory actions towards ad-hoc data collections that are not specifically needed to monitor institutions in the context of the COVID-19 outbreak.

In line with this commitment and the statement of 25 March 20203, and in coordination with the Basel Committee on Banking Supervision, the EBA has decided to cancel the QIS exercise based on June 2020 data.

The remittance for funding plans data has been extended by two months, see EBA statement ‘EBA provides clarity to banks and consumers on the application of the prudential framework in light of COVID-19 measures’ of 25 March 2020.
3The EBA statement on Further actions to support banks’ focus on key operations: postponed EBA activities.

Pillar 3 disclosures

While the EBA recognises the relevance of the timely disclosure of meaningful prudential information by institutions to address uncertainties on the risks and vulnerabilities faced and to restore the stakeholder’s confidence, particularly in the context of the COVID-19 outbreak, the EBA is also aware of the operational challenges derived from this situation. Addressing, in a coordinated way, the operational challenges that institutions may face is a priority. When addressing institutions’ operational challenges, the EBA aims to ensure an effective coordination with the competent authorities and with actions taken by ESMA and EIOPA.

In the current circumstances, competent authorities should consider the difficulties that institutions may face to prepare their Pillar 3 reports within the usually applicable deadlines for publication and should make use of the flexibility that they may have when exercising the powers set in point (a) of Article 106 CRD.

In particular, the EBA encourages competent authorities to be flexible when assessing the institutions’ compliance with the deadlines for the publication of their Pillar 3 reports as set out in accordance with Article 106 (1) CRD.
When exercising this flexibility, competent authorities should consider the requirement for those institutions with securities issuances traded in a regulated market to publish their Pillar 3 reports “in conjunction with” the date of publication of their financial statements, that is, on the same date or as soon as possible thereinafter. In this regard, competent authorities should take into account the expectations set by ESMA in the public statement published on 27 March 20204 in respect of need for flexibility when supervising compliance with the deadlines set out in the Transparency Directive for the publication by issuers of whose securities are admitted to trading on regulated markets of their annual and half-yearly financial report.

Similarly, competent authorities should consider similar flexibility when assessing the compliance of the deadlines set in accordance with Article 106 CRD for those institutions preparing their financial statements according to their national accounting law and that are not under the scope of the Transparency Directive.

Where institutions reasonably anticipate that publication of their Pillar 3 reports will be delayed, they are expected to inform their competent authorities and market participants of the delay, the reasons for such delay and to the extent possible the estimated publication date.

Finally, the EBA emphasises the importance of transparency and Pillar 3 disclosures to address uncertainties on the risks faced by institutions. Competent authorities and institutions should assess the need for additional Pillar 3 disclosures on prudential information that may be necessary in order to properly convey the risk profile of the institution6 in the context of the COVID 19 outbreak. When doing this assessment, they should take into account the extraordinary measures that competent authorities, central banks, national governments, and other EU bodies have announced to address the adverse systemic economic impact of the outbreak.

This statement will be reviewed at a later point in time in the light of further developments with regard to the COVID-19 outbreak.

EBA statement on actions to mitigate financial crime risks in the COVID-19 pandemic

The European Banking Authority supports the measures taken and proposed by national governments and EU bodies to address the adverse systemic economic impact of the COVID-19 pandemic in the form of a general moratorium, payment holidays stemming from public measures or industry-wide payment relief initiatives taken by credit institutions.

The EBA has also clarified efforts to alleviate the immediate operational burden on banks by making use of the flexibility embedded in the relevant regulatory frameworks.

At the same time, safeguarding the integrity of financial markets is a shared objective of the EU’s anti-money laundering and countering the financing of terrorism (AML/CFT) and prudential frameworks. It is essential to preserving the effectiveness and stability of the EU’s financial system. The EBA reminds credit and financial institutions that it remains important to continue to put in place and maintain effective systems and controls to ensure that the EU’s financial system is not abused for money laundering or terrorist financing (ML/TF) purposes whilst asking competent authorities to support them in this regard.

The EBA calls on competent authorities that are responsible for the AML/CFT supervision of credit and financial institutions under Directive (EU) 2015/8492 to support credit and financial institutions’ ongoing AML/CFT efforts by

• Making clear that financial crime remains unacceptable, even in times of crisis such as the COVID-19 outbreak;
• Continuing to share information on emerging ML/TF risks and setting clear expectations of the steps credit and financial institutions should take to mitigate those risks; and
• Considering how to adapt the use of their supervisory tools temporarily to ensure ongoing compliance by credit and financial institutions with their AML/CFT obligations.

Identifying new and emerging ML/TF risks

As most economies are facing a downturn, financial flows are likely to diminish. However, experience from past crises suggests that in many cases, illicit finance will continue to flow. For example, there is already some evidence of increased levels of cyber crime, COVID-19-related frauds and scams targeting vulnerable people and companies, of fake fundraising campaigns and of criminal networks selling rationed goods at a higher price. Furthermore, as criminals are highly adaptive, new techniques and channels of laundering money are likely to emerge.

The EBA therefore urges competent authorities to

• work closely with credit and other financial institutions, Financial Intelligence Units (FIU) and law enforcement authorities to identify, and raise awareness of, new ML/TF typologies;
• ensure that credit and other financial institutions remain alert to ML/TF techniques that might change due to the economic downturn and where necessary, update their ML/TF risk assessments accordingly. Examples include financial products that become less attractive for ML purposes due to diminishing returns, or ML techniques that give rise to an increased risk of detection, such as early repayment of loans;
• remind credit and other financial institutions to continue monitoring transactions and pay particular attention to any unusual or suspicious patterns in customers’ behaviour and financial flows. Credit and other financial institutions should in particular take risk-sensitive measures to establish the legitimate origin of unexpected financial flows, where these financial flows stem from customers in sectors that are known to have been impacted by the economic downturn and COVID-19 mitigation measures. Examples of such customers include cash-intensive businesses in the retail sector, companies involved in international trade, and any type of shell companies in sectors facing the economic downturn which will keep a similar volume of financial flows in the absence of real economic activity. The ESAs’ Guidelines on ML/TF risk factors and simplified and enhanced customer due diligence3 have further information on these points; and
• remind credit and other financial institutions to continue to report suspicions of ML/TF to the relevant FIU.

Adjusting AML/CFT supervision

Mitigating the adverse effects of the current pandemic may require temporary adjustments in supervisory activity and potentially, an adjustment of supervisory priorities and plans to ensure that AML/CFT supervision remains effective.

The EBA therefore calls on competent authorities that are responsible for the AML/CFT supervision of credit and other financial institutions to consider making full use of the flexibility embedded in the EU’s AML/CFT framework and to plan supervisory activities in an effective as well as pragmatic and risk-sensitive way. This may entail, for example, a temporary postponement of non-essential onsite inspections on a case-by case basis even after current restrictions on movement have been lifted, a move towards virtual meetings and inspections where appropriate, or an extension of submission dates for AML/CFT questionnaires where these are being used.

Competent authorities should refer to the ESAs’ Guidelines on Risk Based AML/CFT Supervision4 for information on different tools competent authorities can use to ensure AML/CFT supervision of credit and financial institutions remains effective.

The EBA remains in close contact with competent authorities to lead, coordinate and monitor their approach to the AML/CFT supervision of credit and financial institutions in the EU.

Banking Supervision provides further flexibility to banks in reaction to coronavirus

• ECB will give banks flexibility in prudential treatment of loans backed by public guarantees
• ECB encourages banks to avoid excessive pro-cyclical effects when applying the IFRS 9 accounting standard
• ECB activates capital and operational relief measures announced on March 12, 2020
• Capital relief amounts to EUR 120 billion and could be used to absorb losses or potentially finance up to EUR 1.8 trillion of lending

The European Central Bank (ECB) today announced further measures to ensure that its directly supervised banks can continue to fulfil their role in funding households and corporations in light of the coronavirus-related economic shock to the global economy.

The ECB supports all initiatives aimed at providing sustainable solutions to temporarily distressed debtors in the context of the current outbreak. To this end, the ECB introduced supervisory flexibility regarding the treatment of non-performing loans (NPLs), in particular to allow banks to fully benefit from guarantees put in place by public authorities to tackle the current distress.

First, supervisors, within their remit, will exercise flexibility regarding the classification of debtors as “unlikely to pay” when banks call on public guarantees. Second, loans which become non-performing and are under public guarantees will benefit from a preferential prudential treatment in terms of supervisory expectations on loss provisioning. Lastly, supervisors will deploy full flexibility when discussing with banks the implementation of NPL reduction strategies, taking into account the extraordinary nature of current market conditions.

In addition, excessive volatility of loan loss provisioning should be tackled at this juncture to avoid excessive pro-cyclicality of regulatory capital and published financial statements. Within its prudential responsibility, the ECB recommends that all banks avoid pro-cyclical assumptions in their models whenever forecasts lose relevance and that those banks that have not done this so far opt for the IFRS 9 transitional rules.

These measures on credit risk come on top of the capital and operational relief measures announced on March 12. The ECB estimates that the capital relief provided by the possibility to operate below the Pillar 2 Guidance (P2G) and the frontloading of the new rules on the Pillar 2 Requirement (P2R) composition amounts to EUR 120 billion of CET1 capital. This relief enables banks to absorb losses or to potentially finance up to EUR 1.8 trillion of loans to households and corporate customers in need of extra liquidity.

Further details on supervisory measures taken this week and last week are explained in the FAQs.

In close cooperation with other authorities, the ECB Supervisory Board will continue to monitor developments. Measures will be revised as necessary.