Today Commission Executive Vice-President Valdis Dombrovskis presented proposals for a temporary reduction of capital requirements in the Corona crisis. The Commission wants to ensure that banks continue to provide credit to the real economy despite the crisis. The package of measures includes a proposal to compensate for the effect of the new accounting rules (IFRS9) on equity, which should prevent banks from having to set aside provisions for expected losses in the Corona crisis. In addition, publicly guaranteed loans are to be put on a temporary equal footing with export credit guarantees under the rules for non-performing loans (NPL prudential backstop). The application of the leverage ratio rules is to be postponed by one year as already decided by the Basel Committee on Banking Supervision. Central bank reserves are to be allowed to be excluded from the leverage ratio in times of crisis, as is already the case in the USA and Switzerland. In addition, some equity-relief measures of the CRR2 will be brought forward.
MEP Sven Giegold, financial and economic policy spokesperson of the Greens/EFA group commented:
“If the banks now get capital relief, they must also do everything possible to keep their capital together. State action in the crisis cannot be a one-way street. Not only bonuses, dividend distributions and share buybacks should be stopped, but also coupon payments on equity-replacing instruments (“AT1”). The legislator must convey a clear message instead of letting the banks decide on distributions themselves. The recommendation of the ECB and EBA to waive dividend payments, bonuses and share buybacks should now be made binding by the legislator and extended to AT1 instruments. Any distribution today can hurt taxpayers very badly tomorrow.
The more favourable treatment of public guarantees in the rules for bad loans strengthens the problematic state-bank nexus. A financially weak Member State, which now provides many guarantees, could itself get into financial trouble in the event of a default.
The proposed measures preserve important accounting transparency about bad loans. However, the delayed introduction of the subtraction of possible losses from equity will reduce the transparency of the banks’ actual equity capital.
The new European banking regulation, originally intended as an all-weather regulation, is already proving to be a fair-weather event. Because no real consolidation of the banking market has been dared, sufficient countercyclical buffers have not been built up. In the next upswing, there needs to be a clear European responsibility for strong capital buffers that can actually cushion new crises”.
Link to the press release of the EU Commission: https://ec.europa.eu/commission/presscorner/detail/en/ip_20_740
Q&A of the EU Commission: https://ec.europa.eu/commission/presscorner/detail/en/qanda_20_757