COVID-19: Financial Services Round-Up for 18-31 May 2020

Assessment of Impact of COVID-19 on Banking Sector

On 25 May 2020, the EBA published a preliminary assessment of the impact of COVID-19 on the EU banking sector (here).  Key points from the assessment include:

• Banks have entered the COVID-19 crisis more capitalised and with better liquidity compared to previous crises;
• COVID-19 will have a negative impact on asset quality;
• Banks have been using their liquidity buffers and are expected to continue using them in the coming months; and
• Banks’ operational resilience is under pressure due to the handling of large volumes of applications for debt moratoria and guaranteed loans, and the insufficient preparation of some offshore units to work remotely, among other things.

Banking Union – COVID-19 Effects

On 15 May 2020, the Banking Union Working Group released a briefing on the effects of COVID-19 for the banking industry (here). It sets out a number of recent events relating to recapitalisations including the following:

• The Recapitalisation Group set up by CityUK estimated that the level of unsustainable debt held by UK private businesses will reach £90 – £105 billion, without taking account of future growth capital needs post-pandemic.
• The European Commission adopted a second amendment to its temporary State aid framework relating to COVID-19. It sets out the criteria upon which Member States may provide recapitalisations and subordinated debts to companies.
• A proposal for a European Pandemic Equity Fund was outlined by Ursula Van der Leyen in a 13 May speech. The Fund seeks to protect SMEs which have no access to capital markets and so must rely on bank loans. A group of academics have put forward a proposal for a European Pandemic Equity Fund.

Capital Requirements Regulation – Prudent Valuation

On 28 May 2020, the European Commission adopted a Delegated Regulation amending Delegated Regulation 2016/101 supplementing the Capital Requirements Regulation with regard to regulatory technical standards for prudent valuation under Article 105(14) of the Capital Requirements Regulation (here).

The Delegated Regulation has been adopted in response to the COVID-19 pandemic which triggered an unprecedented systemic shock and extreme levels of volatility, which have had an impact on aggregated additional valuation adjustments (AVAs).  The EBA published a report on the proposed changes to the RTS on prudent valuation on 23 April 2020.

The Delegated Regulation will enter into force on the day after its publication in the EU’s Official Journal.  The Commission states that as it is expected that the extreme market volatility due to COVID-19 will recede with the subsiding of the pandemic within the next months, such provision should be of a transitional nature and should apply until 31 December 2020.

Central Bank of Ireland

On 20 May 2020, the CBI published a statement confirming that it will apply the measures outlined in various statements made by the European Supervisory Authorities (ESAs) in recent weeks (here). 

In particular, it has confirmed its application of two recent EBA statements to MiFID investment firms subject to CRR/CRD IV, one on the application of the prudential framework on targeted aspects in the area of market risk in the COVID-19 outbreak, and another on additional supervisory measures in the COVID-19 pandemic.  It has also confirmed its approach to certain deadlines for bilateral margining under EMIR, in accordance with a recent ESA publication.

European Commission Public Consultation on Protection and Facilitation of Investment within the EU

On 26 May 2020, the European Commission launched a public consultation on protection and facilitation of investment within the EU (here).  The purpose of the consultation is to assess the current system of investment protection and facilitation in the EU.

European Commission Work Programme

On 27 May 2020, the European Commission published a communication setting out its adjusted work programme for 2020 (here).  The adjustments to the work programme are part of a package aiming to deliver a recovery plan for Europe in the light of the COVID-19 pandemic.  Changes to the financial services aspects of the plan are as follows:

• Sustainable finance. As part of the European Green Deal, a non-legislative proposal relating to a renewed sustainable finance strategy is expected in Q4 2020 (previously Q3 2020).
• Capital Markets Union. An action plan on deepening the CMU is expected in Q4 2020 (previously Q3 2020). The other proposals relating to the CMU are still expected in Q3 2020.
• Consumer credit. The Commission is expected to publish more on its ongoing evaluation of the Consumer Credit Directive in Q2 2021.
• Distance marketing. The Commission is expected to publish more on its ongoing evaluation of the Financial Services Distance Marketing Directive in Q4 2021.
• eIDAS framework. A report on the application of the Electronic Identification and Signature Regulation ((EU) 910/2014) (eIDAS Regulation) is due by 1 July 2020 (previously no date was given).

The timing of the initiatives relating to a FinTech action plan remain unchanged (Q3 2020).

Insurance – Extraordinary RFR/EDA Productions

On 19 May 2020, EIOPA published a press release announcing that it has changed the frequency of current extraordinary processes for risk-free interest rate term structures (RFR) and symmetric adjustment to equity risk (EDA) from a weekly basis to every two weeks (here). The new frequency will apply from the week starting on 25 May. A calendar for the next extraordinary RFR/EDA processes will be also published on the dedicated area of EIOPA's website.

Insurance – Risk Assessment of EU Insurance Industry

On 18 May 2020, EIOPA published an updated Risk Dashboard based on Solvency II data from the fourth quarter of 2019 (here). The data was collected from the prudential reporting of insurance groups and undertakings to gain a picture of the main vulnerabilities of the EU insurance sector. The results showed disruption to all financial sectors and economic activities as a result of the COVID-19 pandemic. The risk exposures of the EU insurance sector increased and credit risk increased across all asset classes, in particular CDS of government bonds. The global lockdown affected macro and market risk indicators, which reached the level ‘very high’ in March 2020. GDP estimates predicted a worldwide recession in 2020.

The analysis noted that while liquidity indicators and insurers’ solvency positions remained relatively stable for Q4-2019, these are expected to deteriorate due to an expected drop in new business and expected increase in claims. It is noted that some indicators did not capture the latest market developments and the effects of COVID-19, however, in assigning risk levels the expected deterioration of relevant indicators was considered.

IAIS

On 29 May 2020, the International Association of Insurance Supervisors (“IAIS”) published its newsletter for April/May 2020 (here). The newsletter contains further information about the adjustments the IAIS has made to its work programme for 2020/2021 to address the impact of COVID-19 on the insurance sector. 

Issuers – Fair Disclosures about COVID-19

On 29 May 2020, the International Organization of Securities Commissions (“IOSCO”) published a public statement, encouraging issuers to provide fair disclosure about the impact of COVID-19 (here).

The statement highlights the importance of having timely and high quality information about the impact of COVID-19 on issuers´ operating performance, financial position and prospects for investors and other stakeholders.  IOSCO recognises that the current situation may make disclosures outside the financial statements more challenging but is of the view that this makes high quality disclosures that much more important.  The statement covers the following:

• Importance of transparent and complete disclosures
• Non-GAAP financial measures
• Interim reports
• Implications for the annual audit
• Extension of filing deadlines in many jurisdictions
• IOSCO interaction with other stakeholders

Issuers – Half Yearly Financial Reports

On 20 May 2020, ESMA published guidance on the implications of the COVID-19 pandemic on the half-yearly financial reports of listed issuers (here). ESMA urged the provision of information to stakeholders which is relevant, reliable and up-to-date and which relates specifically to the entities involved and not the pandemic generally. Financial reports should detail performance targets and reference strategies used to mitigate the effects of the pandemic.

Newsletter - ESMA

On 27 May 2020, ESMA published the May 2020 edition of its newsletter (here).  The newsletter contains the following:

• ESMA’s recent activities related to COVID-19
• Deadlines for consultations
• Press office updates

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The McCann FitzGerald website has a dedicated COVID-19 section containing FAQs, briefings and guidance on a range of legal and business issues that may need to be addressed (here).