On 28 April 2020, the European Commission published its legislative proposal for a Regulation amending Regulation (EU) 575/013 on prudential requirements for credit institutions and investment firms (“Capital Requirements Regulation” or CRR) as regards adjustments in response to the COVID-19 pandemic. The legislative proposal was accompanied by a Commission Interpretative Communication. This set of targeted amendments is intended to compliment the already existing flexibility in the current framework and is designed to “maximise the capacity of credit institutions to lend and to absorb losses related to the COVID-19 pandemic”, while ensuring their continued resilience. Specific measures proposed include:
- Transitional arrangements for mitigating the impact of IFRS 9 provisions on regulatory capital
The Commission acknowledges that the application of IFRS 9 during the economic downturn caused by the COVID-19 pandemic may lead to a sudden significant increase in expected credit-loss (ECL) provisions and in order to mitigate this potential impact, an extension of the transitional period is required. To this end, the Commission proposes to reset the 5-year transition period for the IFRS 9 application that started in 2018, so that it runs between 2020 and 2024.
- Treatment of publicly guaranteed loans under the NPL prudential backstop
The Commission proposes to extend Article 47c CRR preferential treatment for non-performing loans guaranteed by official export credit agencies 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.
- Date of application of leverage ratio requirements
The CRR leverage ratio requirement was due to become applicable to global systemically important institutions on 1 January 2022. The Commission proposes to defer it by one year, i.e. until 1 January 2023.
- Exclusion of certain exposures from the leverage ratio calculation
The Commission proposes to amend the offsetting mechanism for discretion to temporarily exclude central bank exposures from an institutions’ total exposure measure in exceptional circumstances. With the current requirements due to become applicable on 28 June 2021, the Commission is of the view that it is necessary to modify them before they become applicable in order to improve its flexibility. To this end, it proposes that a credit institution that exercises the discretion will be required to calculate the adjusted leverage ratio only once (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.
- Date of application of the exemption of certain software assets from capital deductions
The Commission proposes to amend the date of application of the exemption for “prudently valued software assets” from deductions for the purpose of the Common Equity Tier 1 capital calculations. 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 and the revised treatment of those assets was to become applicable 12 months after entry into force of the said RTS. The Commission proposes to advance this application date to the date of entry into force of the RTS.
- Date of application of the specific treatment envisaged for certain loans backed by pensions or salaries
The Commission proposes to advance the date of application of favourable treatment of certain loans granted by credit institutions to pensioners or employees with a permanent contract. The new proposed application date would be the date of entry into force of this amending Regulation.
- Date of application of the revised SME supporting factor and the infrastructure supporting factor
Finally, the Commission proposes to advance the date of application of CRR provisions concerning the adjustment of own funds requirements for non-defaulted SME exposures (the SME supporting factor) and 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). The new proposed application date would be the date of entry into force of this amending Regulation.
The legislative proposal will now be forwarded to the Commission and to the Council (Member States) for review and formal adoption. While legislative review is expected to take place on an expedited manner, both legislators can introduce further amendments to the text. Initial feedback from members of the European Parliament’s Economic and Monetary Affairs Committee (ECON) indicates that while there is a general support for targeted amendments amongst the major political groups, there will be some divergences as to the scope and breadth of such “quick fix” provisions.
Separately, in its Interpretative Communication accompanying the legislative proposal, the Commission confirmed that it will delay implementation in the EU of the final Basel III standard until January 2023. This is in line with an announcement made by the Basel Committee on Banking Supervision. In practice, this means that the Commission will postpone the publication of its banking legislative package (originally planned to be published in June 2020) by a few months. With the new date of the publication yet to be announced, it may still take place later in 2020, given the expected duration and complexity of legislative review that will follow.