Explanatory Memorandum to COM(2020)310 - Amendment of Regulations 575/2013 and 2019/876 on capital requirements as regards adjustments in response to the COVID-19 pandemic - Main contents
Please note
This page contains a limited version of this dossier in the EU Monitor.
| dossier | COM(2020)310 - Amendment of Regulations 575/2013 and 2019/876 on capital requirements as regards adjustments in response to the COVID-19 ... |
|---|---|
| source | COM(2020)310  |
| date | 28-04-2020 |
1. CONTEXTOFTHE PROPOSAL
• Reasons for and objectives of the proposal
Regulation (EU) No 575/20131 of the European Parliament and of the Council (the Capital Requirements Regulation or CRR) establishes together with Directive 2013/36/EU2 (the Capital Requirements Directive or CRD) the prudential regulatory framework for credit institutions operating in the Union. The CRR and CRD were adopted in the aftermath of the 2008-2009 financial crisis to enhance the resilience of institutions operating in the EU financial sector, largely based on global standards agreed with the EU’s international partners, in particular the Basel Committee on Banking Supervision (BCBS).
The CRR has been subsequently amended to tackle remaining weaknesses in the prudential regulatory framework and to implement some outstanding elements of the global financial services reform that are essential to ensure institutions' resilience. Amongst various subsequent changes, Regulation (EU) 2017/23953 has inserted in the CRR transitional arrangements for mitigating the impact on own funds from the introduction of the new accounting standard, the International Financial Reporting Standard – Financial Instruments (IFRS) 9. Regulation (EU) 2019/6304 has introduced in the CRR a requirement for minimum loss coverage for non-performing exposures (the so-called prudential backstop). Furthermore, Regulation (EU) 2019/8765 (CRR II) has added to the CRR some of the final elements of the international reforms (the finalised Basel III framework), which entail amongst others, a new definition of the leverage ratio and a leverage ratio buffer, which will prevent institutions from excessively increasing leverage. The latter Regulation has also introduced in the CRR more favourable prudential treatments of certain software assets, of certain pension- and salary-backed loans, as well as of loans to small and medium sized enterprises (SMEs) and infrastructure projects.
Contents
- Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on
- Directive 2013/36/EU of the European Parliament and of the Council of 26 June 2013 on access to the
- Regulation (EU) 2017/2395 of the European Parliament and of the Council of 12 December 2017
- Regulation (EU) 2019/630 of the European Parliament and of the Council of 17 April 2019 amending
- Regulation (EU) 2019/876 of the European Parliament and of the Council of 20 May 2019 amending
- Communication from the Commission to the European Parliament and the Council - Commission
- The postponement covers both, the revised rules on risk-based capital requirements and the revised rules on the
prudential requirements for credit institutions and Directive 2013/36/EU of the European Parliament
and of the Council of 26 June 2013 on access to the activity of credit institutions and the prudential
supervision of credit institutions.
Directive 2013/36/EU of the European Parliament and of the Council of 26 June 2013 on access to the
activity of credit institutions and the prudential supervision of credit institutions and investment firms,
amending Directive 2002/87/EC and repealing Directives 2006/48/EC and 2006/49/EC (OJ L 176,
27.6.2013, p. 338).
amending Regulation (EU) No 575/2013 as regards transitional arrangements for mitigating the impact
of the introduction of IFRS 9 on own funds and for the large exposures treatment of certain public
sector exposures denominated in the domestic currency of any Member State (OJ L 345, 27.12.2017, p.
27).
Regulation (EU) No 575/2013 as regards minimum loss coverage for non-performing exposures (OJ L
111, 25.4.2019, p.
4).
Regulation (EU) No 575/2013 as regards the leverage ratio, the net stable funding ratio, requirements
for own funds and eligible liabilities, counterparty credit risk, market risk, exposures to central
counterparties, exposures to collective investment undertakings, large exposures, reporting and
disclosure requirements, and Regulation (EU) No 648/2012 (OJ L 150, 7.6.2019, p.
1).
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The severe economic shock caused by the COVID-19 pandemic and the exceptional containment measures are having a far-reaching impact on the economy. Businesses are facing disruption in supply chains, temporary closures and reduced demand, while households are confronted with unemployment and a fall in income. Public authorities at Union and Member State levels have taken decisive actions to support households and solvent undertakings to withstand this severe but temporary slowdown in economic activity and the liquidity shortages that it will cause. Due to the reforms undertaken in the aftermath of the 2008 financial crisis, credit institutions are today well capitalised and much more resilient than they were in 2008. This enables them to play a key role in managing the economic shock that stems from the COVID-19 pandemic. Nevertheless, uncertainty related to the pace of recovery of economic activity will inevitably have an impact on the banking sector.
In reaction to the new circumstances, competent authorities across the Union have provided temporary capital and operational relief to ensure favourable conditions for credit institutions to continue lending amid COVID-19. It is therefore important that capital is deployed where it is most needed and that the prudential framework interacts smoothly with the various measures that address the COVID-19 pandemic. The CRR offers ample leeway for banks to support public and private initiatives to promote continued lending in the context of the COVID-19 pandemic, while ensuring a prudent approach. The flexibility embedded in the CRR is described in the Commission Interpretative Communication of 28 April 20206 on the application of the accounting and prudential frameworks to facilitate bank lending in the Union amid COVID-19.
Besides making full use of the flexibility allowed for in the existing framework, some limited changes to specific aspects of the CRR are necessary in order to maximise the capacity of credit institutions to lend and to absorb losses related to the COVID-19 pandemic, while still ensuring their continued resilience. Moreover, at international level, the BCBS has agreed a one-year delay in the deadline for implementing the final elements of the Basel III framework, of which some elements had been already incorporated in the CRR7, as well as a greater flexibility to the phase-in of the impact of the IFRS 9 on capital. These changes need to be reflected in the existing rules.
First, it is necessary to adjust the transitional arrangements that allow credit institutions to alleviate the impact from expected credit-loss (ECL) provisioning under IFRS 9 on their own funds. This adjustment would allow credit institutions to better mitigate the impact of any potential increase in ECL provisioning caused by the deterioration in the credit quality of credit institutions’ exposures due to the economic consequences of the COVID-19 pandemic.
Second, to account for the impact of COVID-19 related guarantees, the rules on the minimum loss coverage for non-performing exposures (NPEs) need to be adjusted to extend temporarily the treatment that is currently applicable to NPEs guaranteed or insured by export credit agencies to NPEs that would arise as a consequence of the COVID-19 pandemic and that are covered by the various guarantee schemes that were put in place by Member States. This would recognise the similar characteristics shared by export credit agencies guarantees and COVID-19 related guarantees.
Interpretative Communication on the application of the accounting and prudential frameworks to
facilitate EU bank lending - Supporting businesses and households amid COVID-19, COM(2020)169 of
28.04.2020.
The postponement covers both, the revised rules on risk-based capital requirements and the revised rules on the
leverage ratio.
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Third, the offsetting mechanism associated with the competent authority discretion to allow credit institutions to temporarily exclude exposures in the form of central bank reserves from the calculation of the leverage ratio needs to be modified. This would ensure that liquidity measures provided by central banks in a crisis context would be effectively channelled by credit institutions to the economy.
Fourth, it is necessary to defer, in line with the decision of the BCBS, the application date of the new leverage ratio buffer requirement. This would free up credit institutions’ operational capacity and allow them to focus on the more immediate challenges associated with the COVID-19 pandemic.
Fifth, the application dates of some of the capital benefits envisaged in the CRR but not yet applicable need to be anticipated, namely the provisions on the treatment of certain software assets, the provisions on certain loans backed by pensions or salaries, the revised supporting factor for small and medium-sized enterprises (SME) and the new supporting factor for infrastructure finance. Advancing the date of application of the two supporting factors, the preferential treatment of certain software assets, and the preferential treatment of certain loans backed by pensions or salaries would free up own funds of institutions, allowing them to boost much needed lending during the COVID-19 pandemic and its aftermath.
These proposed changes will not fundamentally alter the prudential regulatory framework. They form part of the response of the Commission to address the emergency situation triggered by the COVID-19 pandemic. These adjustments to the prudential framework would facilitate collective efforts aimed at mitigating the impact of the pandemic and thus moving towards a fast recovery.
• Consistency with existing policy provisions in the policy area
The proposal introduces amendments to existing legislation. These amendments are fully consistent with the existing policy provisions in the field of prudential requirements for institutions and their supervision, including with the Commission’s Interpretative Communication adopted at the same time as this proposal. They are also fully consistent with the Union’s accounting rules, in particular with Commission Regulation (EU) 2016/2067 of 22 November 2016 amending Regulation (EC) No 1126/2008 adopting certain international accounting standards in accordance with Regulation (EC) No 1606/2002 of the European Parliament and of the Council as regards IFRS 9. This proposal complements measures taken by the European Central Bank, the European Banking Authority and national competent authorities in this area.
Consistency with other Union
policies
This proposal is part of the broader response by the European Commission to the COVID-19 pandemic. It is instrumental to ensuring the effectiveness of measures adopted by the Member States, the Commission and the European Central Bank. It is fully consistent with the Commission Communication on the economic aspects of the coronavirus crisis issued on 13 March 20208, as well as with ‘COVID 19 – Economic package – Using every available Euro’ launched on 2 April 20209.
Communication from the Commission to the European Parliament, the European Council, the Council, the European Central Bank, the European Investment Bank and the Eurogroup on Coordinated economic response to the COVID-19 Outbreak, COM(2020) 112 final of 13.03.2020.
Communication from the Commission to the European Parliament, the European Council, the Council, the European Economic and Social Committee and the Committee of the Regions on Coronavirus Response - Using every available euro in every way possible to protect lives and livelihoods, COM(2020) 143 final of 02.04.2020.
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2. LEGALBASIS, SUBSIDIARITYAND PROPORTIONALITY
• Legal basis
The proposal is based on Article 114 of the Treaty on the Functioning of the European Union (TFEU), the same legal basis as for the legislative acts that are being amended.
• Subsidiarity (for non-exclusive competence)
The objectives pursued by the envisaged amendments, namely to maximise the capacity of credit institutions to lend and to absorb losses related to the COVID-19 pandemic, while still ensuring their continued resilience, can be better achieved at Union level rather than by different national initiatives as the amendments concern the application dates of Union rules or represent adjustments to existing Union rules in response to the COVID-19 pandemic. The problems and the underlying causes are the same across all Member States. In the absence of action by the Union the existing regulatory framework would be less effective in supporting the various measures taken by public authorities at both Union and national level and less reactive to exceptional market challenges.
The ability of Member States to adopt national measures is limited, given that the CRR already regulates those matters, and changes at national level would conflict with Union law currently in force. If the Union were to cease regulating those aspects, the internal market for banking services would become subject to different sets of rules, leading to fragmentation and undermining the recently build single rulebook in this area.
• Proportionality
This Union action is necessary to achieve the objective of maximising credit institutions’ capacity to lend and to absorb losses amid the COVID-19 pandemic, whilst maintaining the consistency of the prudential framework. The proposed amendments do not go beyond addressing selected provisions in the Union’s prudential framework for credit institutions that target exclusively measures aimed at ensuring recovery from the current COVID-19 pandemic. Moreover, the proposed amendments are limited to those issues which cannot be addressed within the existing margin of discretion the current rules provide for.
3. RESULTS OF EX-POST EVALUATIONS, STAKEHOLDER CONSULTATIONSANDIMPACTASSESSMENTS
This proposal is not accompanied by a separate impact assessment, as this proposal does not alter the fundamental aspects of the CRR and does not impose new obligations on the concerned parties. Moreover, the impact of the measures which are being amended by this proposal have been subject to analysis in the impact assessments undertaken for Regulation (EU) 2017/2395, Regulation (EU) 2019/876 and Regulation (EU) 2019/630 amending the CRR in relation to aspects covered by this proposal.. The proposal primarily aims at providing, for exceptional reasons in the context of the current COVID-19 pandemic, deferrals as regards the date of application of certain provisions of the CRR, or anticipating the application of measures that would relieve banks from some capital requirements, or specifying the prudential treatment of certain exposures in light of the exceptional circumstances created by the COVID-19 pandemic.
The proposed amendments would have a limited impact on the administrative burden for banks and the costs for them to adapt their internal operations, with costs expected to be offset by benefits derived in terms of capital availability. The proposed amendments concern
provisions that enable banks to use more favourable treatments, but do not impose on them such treatments.
• Fundamental rights
The Union is committed to high standards of protection of fundamental rights and is signatory to a broad set of conventions on human rights. In this context, the proposal is not likely to have a direct impact on these rights, as listed in the main UN conventions on human rights, the Charter of Fundamental Rights of the European Union, which is an integral part of the EU Treaties and the European Convention on Human Rights (ECHR).
4. BUDGETARYIMPLICATIONS
The proposal does not have a budgetary impact for the Union institutions.
5. OTHERELEMENTS
• Detailed explanation of the specific provisions of the proposal
Transitional arrangements for mitigating the impact of IFRS 9 provisions on regulatory capital
Article 473a of the CRR contains transitional arrangements allowing institutions to add back to their Common Equity Tier 1 (CET1) capital a portion of any increase in provisions due to the introduction of ECL accounting under IFRS 9. The transitional arrangements consist of two components: a static and a dynamic component. The static component allows credit institutions to partially neutralise the “day-one impact” on CET1 capital of the increase in accounting provisions due to the introduction of IFRS 9. The dynamic component allows banks to partially neutralise the impact of the additional (i.e. post-day-one) increase in provisions for financial assets that are not credit-impaired. The existing transitional arrangements cover the period 2018-2022.
The application of IFRS 9 during the economic downturn caused by the COVID-19 pandemic may lead to a sudden significant increase in ECL provisions, as for many exposures expected losses over their lifetime may need to be calculated. To mitigate the potential impact that a sudden increase in ECL provision may have on institutions’ capacity to lend to clients at times when it is most needed, the transitional arrangements should be extended. This would bring additional relief to the impact of the COVID-19 pandemic on institutions’ possible rise in provisioning needs under IFRS 9, while maintaining the transitional arrangements for the ECL amounts established before the COVID-19 pandemic. Therefore, these amendments would allow resetting the 5-year transition period which started in 2018. The new transition period will thus allow financial institutions to adjust the calibration of the arrangements for adding back provisions to CET1 capital during the period 2020-2024.
In the context of the COVID-19 pandemic the transitional arrangements are extended only for the dynamic component in accordance with the targeted revisions10 of the internationally agreed prudential standards (Article 1 point (2) of the proposal) to address the potential increase in ECL provisions following the COVID-19 pandemic. To ensure that the additional relief is targeted at ECL arising from the exceptional circumstances of the COVID-19 pandemic without introducing undue complexity, the reference date for any increase in
10 See press release “Basel Committee sets out additional measures to alleviate the impact of Covid-19”, 3 April 2020,
available at: www.bis.org/press/p200403">https://www.bis.org/press/p200403.
provisions that would be subject to the extended transitional arrangements is moved from 1 January 2018 to 1 January 2020, as from this date on additional losses incurred by institutions would likely be related to the COVID-19 pandemic.
Article 473a(1) of the CRR contains a revised formula for the calculation of the ECL amounts that can be included in (i.e. “added back to”) CET1 capital, which applies different factors to the static and the dynamic component, respectively. While the calculation of the static component remains unchanged following this proposal, the dynamic component will be subject to an extended transitional period and to a revised transitional adjustment factor.
The reference dates in paragraphs (3) and (5) of Article 473a of the CRR for computing a possible increase in ECL provisions for non-credit-impaired assets at the reporting date, which may be added back to CET1 capital are amended in consideration of the revised formula in paragraph 1 and the new cut-off date.
The transition period for the static component in Article 473a(6) of the CRR is adapted in light of the new formula in paragraph 1 of that Article.
A new paragraph 6a extends the transition for the dynamic component, allowing institutions to fully add-back to their CET1 capital any increase in new provisions recognised in 2020 and 2021 for their financial assets that are not credit-impaired. The amount that could be added back from 2022 to 2024 would decrease in a linear manner.
Changes to Article 473a(7) of the CRR simplify the recalculation of capital requirements. They replace the rescaling of all exposure values that are reduced by provisions with a standard risk weight of 100% to be assigned to the amounts added back to CET1 capital.
Changes to Article 473a(9) of the CRR allow institutions that opted previously not to use the transitional arrangements to reverse that decision anytime during the transitional period subject to prior approval from their competent authority. Furthermore, Article 473a(9) of the CRR provides institutions with the option to apply only the dynamic component. Finally, to monitor the number of institutions across the EU using the transitional arrangements, competent authorities are required to periodically submit information on the number of institutions they supervise that use those arrangements to the EBA.
Treatment of publicly guaranteed loans under the NPL prudential backstop
Official export credit agencies typically issue guarantees on behalf of national governments to provide credit protection for loans that are extended for export financing purposes. Non-performing loans guaranteed by such agencies receive a preferential treatment regarding provisioning requirements under Article 47c of the CRR. The proposed derogation from Article 47c(3) extends this preferential treatment to exposures guaranteed or counter-guaranteed by the public sector in the context of measures aimed at mitigating the economic impact of the COVID-19 pandemic, subject to Union State aid rules, where applicable. This would take account of the similar risk profile of these guaranteed exposures (Article 1 point (3) of the proposal).
Date
of application of the leverage ratio buffer
The CRR II introduced in the CRR a new Article 92(1a) imposing a leverage ratio buffer requirement on global systemically important institutions. The date of application of the buffer was originally set to 1 January 2022. In the context of the COVID-19 pandemic and in line with the revised implementation timeline agreed by the BCBS, the date of application set
in Article 3(5) of the CRR II is deferred by one year, to 1 January 2023 (Article 2 point (2) of the proposal).
Offsetting the impact of excluding certain exposures from the calculation of the leverage ratio
The CRR II has modified the calculation of the leverage ratio on the basis of the revised Basel standard. The changes included the implementation of a discretion to temporarily exclude certain central bank exposures from an institutions’ total exposure measure in exceptional circumstances (Article 429a(1)(n) and (5) to (7) of the CRR). The exemption may be granted for a limited period of time not exceeding one year, where the institution's competent authority has determined, after consulting the relevant central bank, and has declared publicly that such exceptional circumstances exist. Any impact of the exclusion is fully offset via a mechanism set out in Article 429a(7) of the CRR that increases a credit institutions’ individual leverage ratio requirement in a strictly proportionate manner.
The discretion, which is intended to facilitate the effective transmission of monetary policy measures, will become applicable together with the leverage ratio requirement on 28 June 2021. However, the current COVID-19 crisis has shown that the offsetting mechanism, when applicable, would be too restrictive and that its application would actually not facilitate an effective transmission of monetary policy. Indeed, because of the current offsetting mechanism, credit institutions may be constrained with regard to the level of the increase of their central bank reserves. The current offsetting mechanism might therefore discourage credit institutions from drawing on central bank liquidity facilities in a situation of stress to the extent that is needed or wished. This would result in hampering the effective transmission of monetary policy measures and, ultimately, forcing an institution to deleverage by selling assets or reducing the level of lending to the real economy, or both, given its limited leeway to control the extent of these reserves during a crisis.
On the basis of these findings, and in light of the Commission’s mandate set out in Article 511 of the CRR to review, amongst others, the treatment of central bank reserves, the Commission considers it is appropriate to modify the offsetting mechanism before it becomes applicable (Article 1 point (1)(b) of the proposal). This will enhance the flexibility to act appropriately and purposefully during possible future shocks and crises and enhance the effectiveness of the measure. In particular, a credit institution that exercises the discretion will be required to calculate the adjusted leverage ratio only once, namely at the moment it exercises the discretion, and based on the value of the institution’s eligible central bank reserves and total exposure measure on the day when the institution’s competent authority declares that exceptional circumstances that warrant the exercise of the discretion exist. The adjusted leverage ratio will apply throughout the full period during which the discretion is exercised and will not change like under the current offsetting mechanism. The modifications to the offsetting mechanism require also changes to Article 429a(1)(n) to allow the exclusion of all eligible central bank reserves rather than just those entered into after the exemption took effect (Article 1 point (1)(a) of the proposal).
Date of application of the exemption of certain software assets from capital deductions
The CRR II introduced provisions to change the regulatory treatment of 'prudently valued software assets', which are not materially affected in a gone concern situation (i.e. the
resolution, insolvency or liquidation of an institution). Institutions will not be required anymore to deduct these particular software assets from their Common Equity Tier 1 capital (point (b) of Article 36(1) of the CRR). The EBA was mandated to develop a draft Regulatory Technical Standard (RTS) to specify how this exemption from deductions is to be applied, by defining the scope of software assets to be exempted and how they will be risk-weighted (Article 36 i of the CRR). The application date of the revised treatment of software assets has been set to 12 months after the entry into force of this RTS (Article 3(7) of the CRR II).
In the context of the accelerated up-take of digital services as a consequences of public measures adopted to address the COVID-19 pandemic, the date of application is amended in order to permit the exemption to apply earlier, namely as of the date of entry into force of the RTS (Article 2 point (3) of the proposal).
Date of application of the specific treatment envisaged for certain loans backed by pensions or salaries
The CRR II introduced in Article 123 of the CRR a more favourable treatment of certain loans granted by credit institutions to pensioners or employees with a permanent contract. This favourable treatment was introduced because of the additional guarantees attached to such loans stemming from the unconditional transfer of part of the borrower’s pension or salary to that credit institution. The application of this treatment in the context of the COVID-19 pandemic would incentivise institutions to increase lending to employees and pensioners. To allow institutions to benefit from the more favourable treatment already during the COVID-19 pandemic, the date of application of that provision is advanced (Article 2 point (1) of the proposal).
Date of application of the revised SME supporting factor and the infrastructure supporting factor
The CRR II made changes to Article 501 of Regulation (EU) No 575/2013 concerning the adjustment of own funds requirements for non-defaulted SME exposures (the SME supporting factor), and introduced in Article 501a of Regulation (EU) No 575/2013 a new adjustment to own funds requirements for exposures to entities that operate or finance physical structures or facilities, systems and networks that provide or support essential public services (the infrastructure supporting factor). These supporting factors allow a more favourable treatment of certain exposures to SMEs and infrastructure with a view to incentivise institutions to prudently increase lending to those entities. In the context of the COVID-19 pandemic it is essential that banks continue lending to SMEs and supporting infrastructure investments. Therefore, the date of application of the two supporting factors as set out in Article 3 of CRR II is advanced (Article 2 point (1) of the proposal).