Credit Institutions – Digitalisation
The ECB has published a blog by Pentti Hakkarainen, Member of the Supervisory Board of the ECB entitled “The first lesson from the pandemic: state-of-the-art technology is vital” (here).
The blog discusses the role of technology during the COVID-19 pandemic, its importance for banking and the challenges it poses. It also examines the opportunities the crisis creates to accelerate digital transformation. Finally, the blog focuses on how technology will shape the future of the banking sector.
Credit Institutions – Prudential Regulation
The ECB’ Supervision Newsletter contains an interview (here) with the chair of its supervisory board, Andrea Enria, entitled “The Current Crisis is a Wake-up Call”. Among other things, Mr Enria states that ECB relief measures put in place to tackle the coronavirus (COVID-19) crisis will remain as long as is necessary and will only be lifted very gradually as pre-crisis capital and liquidity measures return.
Credit Rating Agencies (“CRAs”)- Collateralised Loan Obligations
ESMA published a thematic report, “EU CLO credit ratings – an overview of Credit Rating Agencies practices and challenges”, (here) which among other things highlights the impact that the COVID-19 pandemic may have on CLO methodologies.
Credit Rating Agencies (CRAs) – Supervision
ESMA published an updated version of its webpage on COVID-19 to include information on the supervision of CRAs (here). According to the updated page, ESMA is continuing to engage with CRAs to assess the impact of COVID-19 on their businesses and operations. It is also closely monitoring CRAs’ rating actions through enhanced data analytics to assess the possible impact of ratings actions on financial stability. This information is shared with National Competent Authorities and other stakeholders.
DAC – 6
Council Directive 2011/16/EU of 15 February 2011 on administrative cooperation in the field of taxation, sets out rules regarding administrative cooperation between EU Member States in the field of taxation. It has been amended five times, including by:
- Directive 2014/107/EU (“DAC 2”), which introduced automatic exchange of financial account information; and
- Directive (EU) 2018/822 (“DAC 6”) which provides certain mandatory disclosure and reporting rules in relation to reportable cross-border arrangements. DAC 6 comes into operation on 1 July 2020.
In a letter dated 20 April 2020, a number of financial services industry bodies wrote to the European Commission seeking a delay of the DAC 6 reporting obligations as well as on the deadline for automatic exchanges of financial account information under DAC 2 for a number of reasons, including due to the disruptive impact of COVID-19.
On 8 May 2020, the European Commission published a draft directive (here), which proposes:
Significantly, the proposed measures only affect the deadlines for reporting and exchanging information and the reportable arrangements made during the postponement period will have to be reported by the time the deferral has terminated. Equally, the exchange of information between Member States on financial accounts will resume at the end of the deferral period.
Depending on the evolution of the pandemic, the draft directive also empowers the Commission to adopt a delegated act extending the deferral period once, for a maximum of three further months.
On 5 May 2020, the Financial Action Task Force published a paper, “COVID-19 Money Laundering and Terrorist Financing, risks and policy responses” (here), which identifies challenges, good practices and policy responses to new money laundering and terrorist financing threats and vulnerabilities arising from the COVID-19 crisis.
The Bank for International Settlements has published a brief entitled “Financial crime in times of Covid-19 – AML and cyber resilience measures” (here). The brief outlines official responses to the increasing levels of financial crime during the global lockdown and highlights the financial crime seen so far during the current crisis. It also summarises official approaches to strengthening financial institutions’ cyber resilience and describes the main Anti-Money Laundering measures taken by selected authorities worldwide.
Insurance – International Association of Supervisors (“IAIS”)
On 7 May 2020, the IAIS published a press release setting out how it is facilitating global coordination on financial stability and policyholder protection during the COVID-19 pandemic (here).
The press release states that in circumstances where pandemic risks are covered by a policy, it is important that insurers pay out such claims in a prompt and efficient manner. The IAIS is of the view that efficient claims handling and clear communication with policyholders on coverage for losses arising from COVID-19 should help deepen confidence and trust in the insurance sector and contribute to longer-term economic recovery efforts. The IAIS also cautions against initiatives seeking to require insurers to retroactively cover Covid-19 related losses, such as business interruption, that are specifically excluded in existing insurance contracts. The IAIS states that requiring insurers to cover such claims could create material solvency risks and significantly undermine the ability of insurers to pay other types of claims. These initiatives could ultimately threaten policyholder protection and financial stability, further aggravating the financial and economic impacts of COVID-19.
Investment Firms – Conduct of Business
ESMA published a statement reminding investment firms of their conduct of business obligations under the MiFID II Directive in the context of increasing retail investor activity during COVID-19, on 6 May 2020 (here). In the statement, ESMA reminds investment firms of their obligations to act honestly, fairly and professionally in accordance with the best interests of their clients when providing investment or ancillary services and to comply with all relevant conduct of business and related organisational requirements, including those on product governance, information disclosure, suitability and appropriateness.
Investment Funds – Liquidity Risks
The European Systemic Risk Board (“ESRB”) published a recommendation on liquidity risks in investment funds (here), on 6 May 2020 (the “Recommendation”), as well as a statement, “ Use of liquidity management tools by investment funds with exposures to less liquid assets”, on 13 May 2020 (here) (the “Statement”).
The Recommendation recommends that ESMA co-ordinate with NCAs in undertaking a focused piece of supervisory work with investment funds that have significant exposures to corporate debt and real estate assets. The objective of the engagement is to assess the preparedness of these two segments of the investment funds sector to potential future redemption pressures, further declines in market liquidity or increased valuation uncertainty, while also considering any steps that could enhance that preparedness.
ESMA is required to communicate the actions taken in response to the Recommendation to the European Parliament, the Council of the EU, the European Commission and the ESRB by 31 October 2020.
According to the Statement, recent market developments highlight the need to make progress in implementing the 2017 ESRB Recommendation on leverage and liquidity in investment funds, which proposes making a diverse set of liquidity management tools available to fund managers to help them deal with redemption pressures when market liquidity is low.
ESMA has published a statement (here) expressing its support for the Recommendation and Statement. ESMA’s statement notes that ESMA has intensified the exchange of information among NCAs on the use of liquidity management tools by EU/EEA UCITS and Alternative Investment Funds (AIFs). It also refers to its recent launch of a common supervisory action with NCAs on UCITS liquidity risk management.
Macroprudential Actions – ESRB
According to a ESRB press release published on 14 May 2020 (here), its General Board discussed a first set of actions to address the impact of COVID-19 on the financial system from a macroprudential perspective at its extraordinary general meeting on 6 May 2020. The actions are set out in the following five priority areas:
- Implications for the financial system of guarantee schemes and other fiscal measures to protect the real economy;
- Market illiquidity and implications for asset managers and insurers (see above);
- Impact of large-scale downgrades of corporate bonds on markets and entities across the financial system;
- System-wide restraints on dividend payments, share buybacks and other pay-outs; and
- Liquidity risks arising from margin calls.
Monetary Policy Response
The European Parliament published an updated briefing (here) outlining the ECB’s Monetary Policy Response to the COVID-19 Crisis, which includes a reference to the judgement of the German Constitutional Court (the “Judgment“) on the ECB’s Public Sector Purchase Programme (the “PSPP”). In its Judgement, the German Constitutional Court found that ECB Governing Council decisions related to the PSPP “lack sufficient proportionality considerations” and that “they amount to an exceeding of the ECB’s competences” According to the briefing:
“While this decision of a national constitutional court does not directly concern monetary policy measures taken in response to the COVID-19 crisis, there is a direct effect on the PEPP and other recent asset purchase programme measures both from the point of view of a market reaction and possible future legal challenges.”
The European Parliament’s ECON committee also published documents prepared in advance of its upcoming monetary dialogue with the ECB, including a paper, “ The ECB’s Mandate and Legal Constraints” prepared by Karl Whelan (UCD), which also deals with the Judgment (here).
You can find a press release published by the Court of Justice of the European Union on 8 May 2020 in response to the Judgment here.
Risk Dashboard – ESMA
On 14 May 2020 ESMA published its first risk dashboard for 2020 (here). The risk dashboard states that during Q1 2020 the equity markets saw very large corrections due to a combination of the COVID-19 pandemic and existing valuation risks. Despite the high uncertainty and worsening economic outlook, markets have seen a remarkable rebound since then. This should also be viewed in light of public policy interventions in the EU and elsewhere.
T2-T2S Consolidation Project
The European Banking Federation together with the EACB, ESBG and EAPB has written to the ECB to request it to consider a one-year delay for the ongoing consolidation project TARGET2 and TARGET2 Securities (here).
The letter states that the COVID-19 crisis and the decision by SWIFT to delay migration of cross-border payments to ISO20022 to November 2022 have impacted on banks’ ability to achieve completion of their consolidation projects by the current deadline of November 2021. They request that the deadline be extended to November 2022.