Financial measures taken by the ECB and EBA against COVID-19

The health and economic crisis generated by Covid-19 has forced governments and central banks to act in almost the whole world.

In the case of Europe, the region with the biggest numbers of infected and casualties by Covid-19 to date, the action filed by each of the governments at national level is joined by the action of the European Banking Authority (EBA) and the European Central Bank (ECB), which has announced several measures, including a temporary asset purchase program due to the emergency caused by the Covid-19 pandemic.

Measures taken to takle the impact of Covid-19 in Europe

Since the beginning of March, the European Central Bank has launched various initiatives in order to guarantee that liquidity reaches households and businesses, providing some room to financial institutions. These initiatives are included in the following measures:

March 3^rd: The ECB urges banks to update their business continuity plans considering the possible impacts of the pandemic.
March 12^th: the ECB announces the following measures:
- The ECB allows banks to reduce capital and liquidity buffers by operating below the limits established in pillar 2 -P2G-, the capital conservation buffer or CCB and the LCR or liquidity coverage ratio [1].
- It also allows banks to use capital instruments that do not qualify as CET1 to meet the requirements of Pillar 2 -P2R-. The ECB itself estimates at 120 billion euros of top-quality capital the amount that European banks will be able to mobilize thanks to these measures, while Goldman Sachs raises it to 180 billion euros.
- Additionally, it supports the EBA’s decision to postpone the stress exercise scheduled for 2020 to 2021 and offers its willingness to negotiate with each of the banks the different agendas and deadlines that would have been established as a result of a recent inspection.
- Finally, the ECB modifies the TLTRO III [2] . Thus, the amount that banks can request increases from 30% to 50% of the stock of eligible assets that they had as of February 28, 2020. In addition, the financing limit for each operation is eliminated and the interest rate is reduced. applicable both to operations already in force and to the operations of certain eligible counterparties.
March 20^th: the ECB announces measures in relation to credit risk and liquidity in USD:
- The NPL [3] which are guaranteed by the governments of each country or those who have been imposed one legal moratorium can be treated with greater flexibility to be classified from the point of view of credit risk. In addition, publicly guaranteed loans may benefit from a minimum coverage of 0% during their first seven years as doubtful exposures.
- From the accounting or IFRS 9 point of view , the ECB proposes to banks to implement the transitional IFRS 9 agreements established in the CRR regulation. [4] .
- That same day, the ECB announced the development of a coordinated measure with other central banks [5] to increase liquidity in USD with daily swaps operations maturing in seven days.
March 27^th: The ECB recommends that the eurozone banks do not distribute dividends related to the results of the fiscal year 2019 nor commit to the distribution of dividends on the possible results of 2020. It also requests to stop the purchase of their own shares. This same day, the BCBS [6] agreed to postpone the entry into force of the Basel III standards until January 1^st, 2023 , while transitional agreements for the output floor are also postponed until January 1, 2028. In addition, the disclosure requirements of Pillar 3 information and market risk models are also postponed to January 1^st, 2023.

March 31^st : EBA cancels QIS [7] . In addition, it extends the deadline for delivery of reports whose delivery dates were established between March and the end of May, with the exception of the LCR and ALMM.[8] .
April 7^th: the ECB publishes new temporary measures on the operation of guarantees:
- ACCs framework extension [9] : The ECB makes its guarantee structure more flexible, so that it will accept loans from companies and households that are guaranteed by the government or public sector entities. In addition, banks will be able to carry out their own credit quality assessment and the level of information the ECB requests about them is reduced.
- The conditions of the eligible credits are relaxed: the minimum amount to accept a credit as collateral is eliminated. It also raises the maximum of uncollateralized debt accepted by a single issuer from 2.5% to 10% and removes the ban on using Greek debt as collateral in liquidity auctions.
- Extension of tolerance levels: discounts on appraisal or haircuts are reduced by around 20%.
April 10^th: the ministers of economy and finance of the European Union reached an agreement according to which a total of 540 billion euros will be launched. From these, 240 billion euros will be mobilized through the European Stability Mechanism (ESM) with more lax conditions than those required in previous crises; € 200 billion will be offered by the European Investment Bank (EIB) in the form of business loans; Lastly, 100 billion euros that will be used to finance the numerous temporary employment regulation files (ERTEs) through a fund from the European Commission.

Purchase programs to guarantee market liquidity

In addition to the measures mentioned above, on March 18^th, 2020 [10] the ECB reported the launch of a temporary emergency purchasing program in the event of a pandemic or PEPP [11] for a total amount of 750 billion euros.

However, since mid-2014 this program has a precedent, which is the asset acquisition program or PAA [12] . The PAA is currently subdivided into four categories:

Program for the purchase of corporate debt of non-financial companies or CSPP [13] .
Program for the purchase of public securities in secondary markets or PSPP [14] .
Program for the purchase of debt backed by assets or ABSPP [15] .
Third program for the purchase of guaranteed bonds or CBPP3 [16] .

Differences between PEPP and PAA

PEPP, unlike PAA, provides a broader range of assets eligible for purchase, and assets can be purchased with no country amount limitation. Here are some important differences worth noting:

Conclusions on the measures taken

In Europe, although the measures adopted in the last liquidity crisis had not yet been completed, the possibility of relaxing them was still being debated. However, the evolution of the crisis as March progressed has reflected the change in the ECB’s discourse that has led to greater intervention. Thus on March 18^th the ECB conveyed a unprecedented move, the PEPP , where the ECB may make purchases Indiscriminate amounting to 750 billion euros and its extension is not ruled out in terms of maturity and amount.

The body led by Christine Lagarde constantly emphasizes that the ultimate goal of these measures is to get financing to both households and businesses that may need it during the crisis. However, it is not a current financial crisis and it is not clear what the final scope may be for the real economy, hence a large part of these measures emphasize the need to be flexible in terms of terms, eligibility of assets and even amounts.

Given the uncertainty, central banks continue to publish new measures quite frequently, so we recommend that you follow us on LinkedIn and on our blog where we will keep you constantly informed. If you wish to receive the full report that we have prepared with the detail of all the measures, do not hesitate to contact us through our website https://www.mirai-advisory.com/en

[1] Banks may default on the 100% ratio but, if this occurs, they must submit a ratio restitution plan to the regulator

[2] Targeted Longer-Term Refinancing Operations.

[3] Non-Performing Loans.

[4] Capital Regulatory Requirements.

[5] The Bank of Canada, the Bank of England, the Bank of Japan, the Federal Reserve and the Swiss National Bank, together with the ECB .

[6] Basel Committee on Banking Supervision.

[7] Quantitative Impact Study.

[8] Additional Liquidity Monitoring Metrics.

[9] Additional Credit Claims.

[10] The entry into force occurred on March 24 with its publication in the Official Journal of the European Union .

[11] Pandemic Emergency Purchase Program.

[12] Also known as APP or Asset Purchase Program.