The European Supervisory Authorities (ESAs) are closely monitoring the COVID-19 situation and have taken measures to seek to protect markets and consumers and to ensure firms have adequate contingency plans in place.
The European Systemic Risk Board (ESRB) has published an overview of the various measures taken by Member States, EU institutions and national authorities. Similarly, the European Central Bank (ECB) has published a webpage showing the measures taken by macroprudential authorities in various Member States complementing and reinforcing the ECB’s measures. This webpage sets out the measures taken by the regulators to date and key points firms should be aware of. Please see our separate alert on the measures taken by the UK financial services regulator in response to COVID-19 here.
European Systemic Risk Board
On 14 May 2020, the ESRB published a press release highlighting the first set of actions to address the impact of COVID-19 as discussed at the extraordinary meeting of the General Board of the ESRB. The General Board aims to use the flexibility in the existing EU regulatory standards to ensure adequate capital and liquidity resources are available, as well as sustaining a stable Single Market through equivalent policy responses across sectors and Member States. The actions are in five key priority areas: (i) implications for the financial system of guarantee schemes and other fiscal measures to protect the real economy, (ii) market illiquidity and implications for asset managers and insurers, (iii) impact of large-scale downgrades of corporate bonds on markets and entities across the financial system, (iv) system-wide restraints on dividend payments, share buybacks and other pay-outs, and (v) liquidity risks arising from margin calls.
European Securities and Markets Authority
The European Securities and Markets Authority (ESMA) published an initial public statement on 11 March 2020 highlighting the ongoing priority of ensuring business continuity, and making various recommendations to financial market participants. The recommendations include specific reminders to issuers of the need to disclose any relevant significant information concerning the impacts of COVID-19 on their fundamentals, prospects or financial situation as soon as possible in accordance with the Market Abuse Regulation (MAR), and providing transparency in any financial reporting disclosures. Further, on 20 March 2020, ESMA extended the response date for all ongoing consultations due to close on, or after, 16 March 2020 by four weeks to allow institutions to focus on their core operations.
ESMA has also issued a public statement on the recording requirements of telephone conversations pursuant to MiFID II. ESMA acknowledges that recording may not be practicable in certain circumstances, but it expects firms to mitigate any potential risks and to use all possible efforts to restore recording of telephone conversations as soon as possible.
In its updated webpage, on 11 May 2020 ESMA stated that it is continuously engaging with Credit Rating Agencies (CRAs), as the single EU direct supervisor of CRAs. Its focus is on business continuity and compliance with key regulatory requirements (e.g. conflicts of interest, internal controls, transparency and governance).
On 20 May 2020, ESMA published a public statement addressing the implications of COVID-19 on the half-yearly financial reports of listed issuers. In the statement, ESMA reminds issuers to not unduly delay their reports and to ensure compliance with their obligations under MAR. The statement also sets out specific guidance on the preparation of half-yearly financial statements and makes recommendations on the detailed and entity specific disclosures it expects issuers to include in their interim management reports.
ESMA’s 14 Edition Newsletter was published on 27 May 2020. The newsletter noted that ESMA continues to closely monitor the impact of COVID-19 and provided an update on ESMA’s recent activities related to COVID-19. It also highlighted deadlines for closing consultations next month and catch up on the full list of publications from April and May.
European Central Bank
In line with other central banks, the ECB has announced a €750bn Pandemic Emergency Purchase Programme (PEPP) to buy public (including Italy and Greece) and private sector debt across the eurozone. Purchases under the PEPP will be conducted in a flexible manner for maximum impact and alignment with other measures by the ESAs. Further, the ECB announced measures providing added flexibility to banking supervision to ensure that its directly supervised banks can continue to fulfil their role to fund households and corporations. To this extent it introduced supervisory flexibility to its treatment of non-performing loans and encouraged banks to avoid excessive procyclical effects when applying the IFRS 9 international accounting standard (an approach consistent with ESMA). The ECB also activated capital and operational relief measures already announced amounting to €120 billion, which could be used to absorb losses or potentially finance up to €1.8 trillion of lending. On 27 March 2020, the ECB released a statement advising banks to be prudent when deciding dividend payments and share buyback schemes. It stated that banks should be forward-looking and preserve liquidity to support households and businesses.
On 16 April 2020, the ECB announced a temporary reduction in capital requirements for market risk by allowing banks to reduce a supervisory measure, the qualitative market risk multiplier, to adjust for the market volatility and retain market liquidity.
The ECB published an opinion on 20 May 2020, on the proposed Regulation containing amendments to the Capital Requirements Regulation (575/2013) (CRR) as regards adjustments in response to the COVID-19 pandemic. The ECB provided its general comments on the proposals and specific observations on each of the key reforms introduced.
European Banking Authority
On 12 March 2020 from the European Banking Authority (EBA) released a public statement announcing its decision to postpone the EU-wide stress test exercise to 2021 to allow banks to prioritise supporting their customers and address the key operational challenges they may be facing. The EBA also reminded national competent authorities (NCAs) and banks of the flexibility in capital and liquidity regulations. The EBA subsequently released two statements on 25 March 2020, providing clarity on the functioning of the prudential framework and addressing consumer and payment issues in light of COVID-19. The ECB called for flexibility and pragmatism in the application of the prudential framework and clarified that, in case of debt moratoria, there is no automatic classification in default, forborne, or IFRS9 status. Nonetheless, it asked institutions to ensure adequate risk management measures are in place, to use the measures in compliance with EU law and ensuring consumer protection remains a priority. The EBA also emphasised the importance of contactless payments and encouraged payment services providers to use the maximum thresholds available.
Following on from the EBA’s statement on the prudential framework, on 3 April 2020, the EBA published a final report containing guidelines on the legislative and non-legislative moratoria on loan repayments. It clarified that the payment moratoria do not trigger classification as forbearance or distressed restructuring if the measures are taken based on market led initiatives. The EBA also recognised the importance of accurate and transparent monitoring and recording of the scope and effects of COVID-19 on the market, and urged institutions to consider the longer term financial difficulties that may be faced.
On 22 April 2020, the EBA released a statement on the application of the prudential framework to mitigate the impact of COVID-19 on the EU banking sector. The statement addressed the following: a postponement of the revised market risk reporting requirements (Fundamental Review of the Trading Book (FRTB)), a deferral to the implementation of the final two phases of the framework for margin requirements for non-centrally cleared derivatives and flexibility under the CRR to mitigate the increase in aggregated amounts of additional valuation adjustments (AVAs). In conjunction, the EBA also published a final report on the proposed amendments to the regulatory technical standards (RTS) on prudent valuation under the CRR.
European Insurance and Occupational Pensions Authority
On 17 March 2020, the European Insurance and Occupational Pensions Authority (EIOPA) published a statement on actions to mitigate the impact on the EU insurance sector. They emphasised the need for insurers to take steps for business continuity and urged national authorities to give flexibility and offer operational relief. Similarly, the EIOPA stated insurance companies should preserve their solvency capital positions (under Solvency II) to protect the industry and the insured. To ensure the EIOPA’s priorities are consistent, they have extended or delayed projects where input from NCAs and/or the industry is foreseen. In a statement on 2 April 2020, the EIOPA also urged all (re)insurers to temporarily suspend all discretionary dividend distributions and any planned share buy backs. They stated, in the current turbulent market it is prudent for insurers to protect their capital position.
On 18 May 2020, the EIOPA published its updated Risk Dashboard based on the fourth quarter 2019 Solvency II data. While the report does not capture the latest market developments resulting from COVID-19, it showed that insurers face very high market risk but the general market perceptions and imbalances remained at a medium level.