October 2, 2022

Volume XII, Number 275


September 30, 2022

Subscribe to Latest Legal News and Analysis

September 29, 2022

Subscribe to Latest Legal News and Analysis

COVID-19 Update: The European Commission Proposes Urgent Amendments to the EU Capital Requirements Regulation

On 28 April 2020, the European Commission (the “Commission”) proposed a new Regulation to make targeted amendments to the EU Capital Requirements Regulation (575/2013) (“CRR”) and the CRR II Regulation ((EU) 2019/876) (“CRR II”) in response to the COVID-19 pandemic. Subject to the EU legislative process operating as anticipated, it is expected that these changes will apply in the UK until the end of the Brexit transition period (currently scheduled to end on 31 December 2020), although these changes will also be reflected in the UK “onshored” version of CRR which will apply after the end of the transition period.

The legislative proposal is accompanied by a Interpretative Communication (the “Communication”), which sets out the Commission’s rationale for the changes and also provides guidance on the flexibility in the current EU accounting and prudential regimes during the COVID-19 pandemic. The Communication also sets out the Commission’s view that the EU’s existing prudential framework for banks contains sufficient flexibility for regulators to assist banks during the pandemic.

The Commission has, however, recognised that some further amendments to the CRR are required during the crisis. The proposed amendments are designed to improve banks' capacity to lend and to absorb losses. They include the following proposals:

IFRS 9 Transitional Measures

The Commission is concerned that the application of IFRS 9 during the COVID-19 pandemic may lead to a sudden significant increase in the Expected Credit Loss provisions of EU banks, which would result in an erosion of their capital. To counter this, the Commission has proposed an extension of the current transitional arrangements in the CRR by two years, in line with the international agreement of the Basel Committee on Banking Standards (announced on 3 April 2020). This would allow banks to add back to their regulatory capital any increase in new expected credit losses provisions that they recognise in 2020 and 2021 for their financial assets, which have not defaulted.

Calculation of the Leverage Ratio

In line with the Basel III standards, CRR II amends CRR to introduce a capital requirement based on the leverage ratio that will become applicable on 28 June 2021. The CRR provides a discretion to temporarily exclude central bank reserves from a bank's leverage ratio calculation in exceptional circumstances, for a period of up to 1 year. Under the current rules, any exclusion is to be offset via a mechanism that increases a bank’s individual leverage ratio requirement in a proportionate manner, through the calculation of an “adjusted leverage ratio”. The Commission is concerned that the current rules, relating to the offsetting mechanism, would be too restrictive and that their application would actually not facilitate an effective transmission of central bank monetary policy and, ultimately, could force a bank to deleverage by selling assets or reducing the level of its lending. The Commission is therefore proposing a modification so that a bank would only be required to calculate the adjusted leverage ratio once, at the time the discretion is exercised.   The adjusted leverage ratio would not change throughout the full period during which the discretion is exercised.

Leverage Ratio Buffer

The Commission proposes to delay the implementation of the leverage ratio buffer for global systemically-important institutions from 1 January 2022 to 1 January 2023. This revised timetable for implementation of the Basel III standards has been agreed with the Basel Committee on Banking Standards.

Treatment of Publicly Guaranteed Loans Under the NPL Prudential Backstop

CRR requires a minimum loss coverage requirement for non-performing loans (“NPLs”) (the so-called “NPL backstop”) to ensure that banks set aside sufficient funds to cover the risks associated with loans that have become non-performing. NPLs guaranteed by official export credit agencies currently receive a preferential treatment under the NPL backstop under CRR; the Commission proposes to temporarily extend this preferential treatment to exposures guaranteed by a wider range of public sector agencies which have provided guarantees in order to alleviate the economic impact of the COVID-19 pandemic.

Acceleration of CRR II Measures

The proposal also calls for measures in CRR II, due to apply from June 2021, to be brought forward in response to the pandemic. These measures include the favourable prudential treatment of loans backed by an employee’s salary or pension and the “SME supporting factor” and the “infrastructure supporting factor” (CRR II will amend CRR to provide for a reduction in the amount of capital that banks need to hold in respect of loans they grant to SMEs and separately for exposures to entities that operate or finance physical structures or facilities, systems and networks that provide or support essential public services). 

Legislative Timetable

These proposals now have to make their way through the EU legislative process, involving consideration and approval by the Council of the EU (representing the individual member states) and the European Parliament. It should be noted that the previous iteration of the CRR/CRD package took a number of years to be finalised. In this crisis situation, however, the Commission has called upon the legislators to finalise and approve these changes by the end of June 2020, citing the targeted nature of these amendments and informal engagement with member states prior to the announcement of the proposals. It is plausible, therefore, that these measures could become applicable from the beginning of July 2020.

© Copyright 2022 Cadwalader, Wickersham & Taft LLPNational Law Review, Volume X, Number 125

About this Author

Suzanne Bell, Cadwalader Law Firm, Finance Law Attorney
Special Counsel

Suzanne Bell is a special counsel in the Capital Markets Group in Cadwalader's London office.

Suzanne has advised leading financial institutions and corporations in connection with a wide range of domestic, European and International structured finance and capital markets transactions. Her experience includes structuring and documenting commercial paper conduits, structured investment vehicles, and public and private securitisations of a range of asset classes, with particular focus on credit card receivables, auto loans and...

Robert Cannon, Capital Markets attorney, Cadwalader law firm
Special Counsel

Robert Cannon is a special counsel in the Capital Markets Group in Cadwalader's London office.

He focuses on structured finance and securitisation, and has acted for arrangers, originators and asset managers on transactions involving a variety of structures and asset classes, including CDOs, CLOs, mortgage securitisations and commercial paper conduits.

Prior to joining Cadwalader in 2007, Robert worked in the structured finance practice at Clifford Chance's London office for two and a half years and, prior to that, in the banking and financial services group at Matheson...

+44 (0) 20 7170 8735
Stephen Day, Capital Markets attorney, Cadwalader law firm

Stephen Day is a partner in the Capital Markets Group, resident in the London office. He advises leading financial institutions and corporations in Europe and the United States in connection with a wide range of structured finance and securitisation transactions, with a focus on complex cross border deals. His work in this area includes structuring commercial paper conduits, structured investment vehicles, multi-country receivables (trade, auto loan/lease, credit card) securitisations, securitisation bridge and private equity take-out deals, whole business transactions and...

T.+44 (0) 20 7170 8535 M.+44 (0) 7944 370 395
Claire Suzanne Puddicombe, Securities attorney, Cadwalader law firm
Special Counsel

Claire Suzanne Puddicombe is special counsel at the London office of Cadwalader, Wickersham & Taft LLP in the Securitization & Asset Based Finance.

+44 (0) 20 7170 8533
David Quirolo, Capital Markets Attorney, Cadwalader, London Law firm

David Quirolo is a partner in Cadwalader’s Capital Markets Group, resident in the London office. Focusing his practice primarily on CLOs, securitisation and repackaging transactions involving various asset types in the United States and Europe, David represents banks, arrangers and asset managers in a variety of structured finance transactions. 

+44 (0) 20 7170 8635