The COVID-19 pandemic has triggered an economic upheaval with workers losing their jobs, restaurants and hotels closing their doors, airline companies grounded as well as consumers and businesses facing steep losses in income. As a result of this, pressures on the banking system started to increase exponentially with a prediction of higher defaults on debt.
In this scenario, there is one legitimate question to ask. Can banks sustain liquidity levels, especially to SME’s? The International Monetary Fund (IMF) in its World Economic Outlook warned of a serious threat to the stability of the global financial system if this current situation persists. According to the EC’s recent economic forecast, somewhat dim prospects are ahead with a contraction of the EU economy of 7.7%.
Since early March this year, significant regulatory developments have emerged from the EU Institutions – EC, European Parliament and Council - in the face of the evolving COVID-19 crisis, with detailed EU-wide measures to address both the current safety and future recovery stages.
An EU economic safety rescue plan worth €540bn has been devised, aimed at being in place by 1st June, to implement a three pillar-plan to support workers, businesses, and sovereigns. At a core is a Pandemic Crisis Support Fund to be financed by the European Stability Mechanism (ESM), subject to threshold capped at 2% of individual state GDP, to support domestic financing of direct and indirect healthcare, cure and prevention related costs. The two remaining pillars - still awaiting national parliamentary approval, thus some short delays – will consist of a €100bn to aid member states to finance temporary unemployment benefits and European Investment Bank €200bn plan to support EU businesses.
The EU has also launched a temporary sate-aid framework to allow EU states to inject capital and provide subordinated debt to companies in difficulty, especially SMEs. Already totalling nearly €2tn of state aid disbursed by member states, the measures are subject to conditionality, i.e., ban on dividends, bonus payments, share buybacks, cross-subsidies within a group and acquisitions, with member states called upon to develop an “exit strategy” for the recipient companies.
Amid all this, the EC last week launched an EU AML strategy communication, complete with an action plan for a series of policies to tackle money laundering and terrorism financing. The plan outlines concrete measures that the Commission, notably the notion of creating an independent central EU AML agency, a coordination and support mechanism for FIU’s and a single AML rule book, with a strengthened role for the EBA. The EC intends to deliver on these actions by early 2021.
A focus has also been directed at the non-banking sector in this crisis, with the recent IMF financial stability report underlining that a prolonged period of dislocation in financial markets may result in distress among these other financial institutions, including asset managers, to an extent that could lead to a credit crunch for non-financial borrowers. This has lent weight to ESMA concerns about the adequacy of liquidity and maturity mismatches in some funds - even before C-19.
Many EC and ESMA public consultations in the financial services regulatory space have been deferred. But the EC announced, however, on 28 April last its proposals to amend the EU banking prudential package to facilitate lending to the real economy, touching on the expected credit loss approach under IFRS9, the leverage ratio and the assessment of a significant increase in credit risk.
The European Supervisory Authorities (ESMA, EBA, and EIOPA) have also amended the Delegated Regulation on the risk mitigation techniques for non-centrally cleared over the counter (OTC) derivatives. This amendment incorporates a one-year deferral of the two implementation phases of the bilateral margining requirements, in response to the COVID-19 outbreak.
These and many other important EU measures will be discussed in detail during an online webinar to be held on Wednesday 20 May at 14:00. This session is targeted mainly at interested representatives of banks and financial institutions, insurance companies and funds.
The session will be conducted by Dr David Doyle, EY’s Senior Policy Advisor in EU Financial Services Regulation and Grace Camilleri, EY Malta TAS Leader and Partner.
More information can be found online. To register, send an email to events@mt.ey.com with your details. Session is eligible to 1hr CPE.