Do you have the mechanisms in place to keep up to date with daily regulatory updates and the agility to implement these changes quickly and effectively to protect your most vulnerable customers? Paul Young explains how to prepare for the coming days.
The supervisory response to coronavirus has been quick and decisive, with significant actions taken by central banks, governments and regulators across the globe including China, Japan and the USA. So far, changes across Europe include the following:
The UK government has announced a series of financial measures worth £350 billion to support businesses and individuals in the UK; £330 billion in loans and £20 billion that is non-repayable. The Covid Corporate Financing Facility (CCFF) has been set up to support cash flow for non-financial firms. It will do this by purchasing commercial paper of up to one-year maturity, issued by firms making a material contribution to the UK economy. Banks have also been asked to grant struggling customers a three-month mortgage holiday and the controversial IR35 tax measures have been pushed back to 2021.
The Bank of England has dropped the interest rate to 0.1% and reduced the counter-cyclical buffer to 0% to ease pressure on borrowers and release more capital for banks to support customers over the next 12 months. Working with other central banks, it is also supporting greater liquidity by the standing US dollar liquidity swap line arrangements.
Other measures have also been announced by the Bank of England to reduce non-essential work, including publishing the results from the biennial exploratory scenario on liquidity, the joint survey with the FCA into open-ended funds, the UK 2020 stress test for banks and s166 reviews in relation to reporting. The deadline for the operational resilience and outsourcing consultations have also been postponed, and the Basel 3.1 implementation timeline may be adjusted, as will the timescale for changes to the internal ratings based (IRB) model.
The European Central Bank (ECB) has relaxed capital and liquidity buffers, including the capital conservation buffer (CCB), the liquidity coverage ratio (LCR) and Pillar II guidance. Capital instruments that do not constitute Common Equity Tier 1 capital can also partially be used. The bank has also launched the Pandemic Emergency Purchase Programme to buy USD 750 billion bonds over the next year, covering both corporate and sovereign debt.
The ECB is also reviewing how they conduct on-going work with individual banks, which may include extending deadlines for remediation work, among other timeframes. It has also recommended competent authorities to be flexible in their supervisory activities, including postponing non-essential work and reporting processes – focusing on crucial information for financial and prudential monitoring.
The European Securities and Markets Authority has recommended that market participants be ready to action their business continuity plans. It has also stressed the importance of transparency over the disclosure of additional risks, and making sure these impacts are accurately reflected in their financial reporting.
The European Banking Association has postponed the 2020 EU-wide stress test to 2021, giving banks greater scope to focus on operational continuity.
The FCA have asked lenders to be flexible with customers and recognise the immediate financial challenges they face. This includes a flexible approach to mortgage repayments, fees, withdrawal penalties on savings accounts and people in persistent credit card debt. Non-essential regulatory work is being postponed.
Collectively these measures aim to minimise the financial pressure on businesses and individuals, while focusing resources on business continuity. But it’s up to individual banks to work out how these financial measures can best be applied. Retail banks should consider how they can use these tools to support vulnerable individuals, while commercial banks should seek to support small and medium enterprises. Transparency is important and vulnerable customers should be made aware of the options available to them.
Putting these measures into practice is a difficult balancing act and firms should consider their risk profile and the impact of coronavirus on key regulatory ratios, such as own funds, liquidity coverage and leverage, and non-financial risks such as governance and conduct.
These buffers have been put in place to protect financial stability in the event of similar ‘black swan’ events, and elements of business continuity and resilience planning are an integral element of many regulations. It is included in recovery and resolution planning, wind-down planning and capital and liquidity frameworks. So, banks have extensive plans in place and should be on standby to action them, as required.
Taking a broader look at the regulatory landscape, financial institutions are setting up their operational resilience frameworks to reduce the economic impact if an important service is temporarily unavailable. It’s early days for implementation of this regulation, but lessons learned from the coronavirus response will help inform best practice in the future.
With the potential for financial instability, reporting is increasingly important and allows the FCA, PRA and Bank of England to effectively supervise financial institutions. Reporting requirements can vary from daily, weekly or monthly windows, depending on the type of reporting and the firm’s ongoing financial status.
Business disruption from coronavirus is, however, inevitable and firms may not be in a position to submit regulatory returns within the expected time frame. The FCA has acknowledged that firms may face reporting challenges, but has stressed the importance of keeping appropriate records and submitting data as soon as possible. It is important to keep close contact with regulators throughout this period and, if a reporting deadline may be missed, to let them know as soon as possible.
In the coming months, it is important to closely monitor capital and liquidity. Now is a good time to review those plans and update them accordingly, taking into account the nature of the current stressed conditions and the government support in place.
Firms should also consider how they are working with their outsourced providers, particularly in relation to regulated activities and important services under the operational resilience framework. Gaining assurance over third-parties’ business resilience plans is critical for all financial institutions.
Specific regulatory frameworks and accounting standards will also have an impact over the next few months, specifically IFRS 9, which aims to help identify and account for losses before they happen. Forward-looking scenarios need to reflect stressed conditions, which may impact profitability and capital. These scenarios may be difficult to model when they also take into account government support and its effectiveness. However, increased provisions would seem likely and represent just one aspect of stress test scenarios.
As regulators seek to minimise the impact of coronavirus, there will be further regulatory announcements and it’s important to keep up to date on the latest advice and changes. With the regulatory situation changing so rapidly, firms should review their current mechanisms for horizon scanning and sharing that information with all relevant parties across the firm. A robust process should be in place to monitor regulatory updates and rapidly assess what these changes mean for the business and how they can be best applied to support customers. Maintaining an on-going dialogue with the regulators is also vital to support effective supervision and help support financial stability.