Covid-19: Supervisory law for banks and other financial service providers

Date: 
Monday, 6 April 2020
Autoren: 

The Austrian Government issued a comprehensive package of measures to combat Covid-19 ("Corona virus"), which came into force gradually as of 16 March 2020. Most recently, the 3rd, 4th and 5th Covid laws were passed by one of the chambers of the Austrian Parliament. The following overview therefore addresses some of the key issues that this will raise for banks – but also for other financial service providers:

Overview

Questions and answers:

Do the emergency measures concerning Covid-19, which will apply from 16 March 2020, provide for special rules for banks and other financial service providers?

Banks, as part of the critical infrastructure, are exempted from the ordered closure of shops. Bank branches are therefore allowed to keep open, which probably also had the purpose to prevent a "bank-run". Other financial service providers, such as insurance companies, pension funds, investment firms and insurance brokers are not subject to these exemptions. So far, there are no other specific regulations for financial service providers regarding the new emergency measures, so that only advice via telephone or internet is currently permissible.

Has the Financial Market Authority already announced measures?

In a letter dated 13 March 2020, the FMA announced that it will switch to teleworking itself, except for critical functions, and that visits to the FMA should therefore be avoided. However, the availability of the FMA via telephone and email will remain guaranteed as well as via Skype for business.

In addition, the "local presence during inspections" will be suspended. Pending inspections are continued and completed off-site as far as this is possible based on information and documents available. The FMA has announced that it will closely monitor further developments.

In addition, the FMA has published current information on Covid-19 measures regarding the impacts on the assessment of credit risk (see below – question 1.4).

Apart from the above, the FMA has not yet published any specific guidelines on the current situation but refers to publications of the EU supervisory institutions (see below).

However, the FMA has announced that the requirement for the members to be present in person in meetings of the supervisory board and its committees may be disregarded for the purposes of supervisory law if a telephone or video conference is set up. However, this cannot supersede or replace the requirements under corporate law, so that a supplementary written resolution may also be necessary.

What measures are available at the EU level?

In a statement of 12 March 2020 on the Covid-19 crisis, the European Banking Authority (EBA) announced two key points:

  • EU-wide stress testing of banks will be postponed until 2021 to allow banks to focus on the current situation.
  • Where appropriate, the competent supervisory authorities should make the greatest possible use of the flexibility provided by supervisory laws.

This appears to be intended to prevent markets from being impaired by funding constraints due to the excessively strict application of, inter alia, capital adequacy and liquidity requirements. On the other hand, the EBA is keen to ensure that deteriorations in asset quality are correctly reflected. 

The current economic situation will of course also have an impact on banks' balance sheets. For example, loan defaults by borrowers who have run into difficulties as a result of the crisis or losses on trading positions due to stock market developments may have an impact on banks' capital ratios, which could fall below the minimum requirements in an emergency.

In this context, the European Central Bank (ECB), which also supervises the systemically important Austrian banks, announced corresponding relief for banks in press releases dated 12 March 2020 and 20 March 2020:

  • Banks should be able to make full use of the capital and liquidity buffers intended for times of crisis. The ECB allows banks to temporarily operate below the capital level defined by the Pillar 2 recommendation, the capital maintenance buffer and the liquidity coverage ratio.
  • In addition, the ECB allows banks to use additional Tier 1 or Tier 2 capital in addition to common equity Tier 1 capital to meet its Pillar 2 requirements.
  • ECB encourages banks to avoid excessive procyclical effects when applying the IFRS9 international accounting standard
  • Certain timelines and deadlines will be amended and postponed (ECB FAQ and EBA dated 31 March 2020 [not, however, LCR, ALMM and information regarding resolution]). The ECB also plans operational flexibility in the implementation of supervisory measures on a case-by-case basis. Moreover, the ECB will coordinate individual measures with the banks it supervises (such as postponing on-site inspections or extending deadlines for non-urgent supervisory measures).

Further, ESMA published a clarification dated 20 March 2020 regarding issues related to the application of MiFID II requirements on the recording of telephone conversations.

All these measures are positive in our view, although it remains to be seen how far the flexibility of the supervisory authorities will actually extend in practice.

Are there any reliefs with regard to loan defaults or (statutory) deferrals?

The Austrian legislator recently decided to defer repayment, interest or redemption payments of consumers and micro-entrepreneurs under certain conditions by three months via the 4th COVID Act (in detail see our Newsletter on Financing). EBA issued Guidelines dated 2 April 2020 refining its statement dated 25 March 2020 regarding public and private moratoria or proposed measures as a response to Covid-19 which do not have to be automatically classified as default or forbearance measures. However, a uniform application of the prudential framework is to ensure a sound identification of credit risks in order to monitor the economic effects of the current Covid-19 crisis in detail. Further guidance shall be published before 30 June 2020 to ensure uniform application.

Further, EBA in the statement addressed further details on the framework regarding default, forbearance and IFRS 9 in light of Covid-19 measures.

Also, FMA published information on Covid-19 measures including:

  • For the purpose of the assessment of creditworthiness, the most recent annual financial statement for 2018 is adequate in the event that the annual financial statement for 2019 is not yet available.
  • For the assessment of the ability to service the loan institutions may apply a past full-year liquidity observation.
  • FMA recommends banks to apply the transitional rules for the IFRS9 accounting standards.

FMA and OeNB support the measures taken by the Single Supervisory Mechanism – using regulatory leeway should contribute towards maintaining the provision of loans for enterprises and households (statement dated 20 March 2020).

What are the implications of the current situation on the upcoming annual general meetings?

The ECB and the FMA issued an urgent recommendation dated 27 March 2020 to the banks that they supervise to refrain from the distribution of dividends for the recently ended financial year as well as from buying back their own shares. Both institutions, however, assume that the banks will in any case suspend such decisions for at least six months, or at least until there is clarity about the further economic developments. A similar recommendation was released by FMA and EIOPA on 3 April 2020.

In practice, some banks in Austria have already announced to postpone their annual general meetings and to review the proposed dividend. In case the economic development deteriorates significantly, the recommendation could be extended or, in extreme cases, enforced by the supervisory authority in order to ensure the stability of the financial sector.

What are the implications of teleworking (home office)?

The government has called on companies to enable teleworking for employees where possible from 16 March 2020. This is not a mandatory measure (probably also for budgetary reasons due to the potential claims for compensation that could arise from a mandatory order). However, many banks and other financial service providers have already sent most of their employees to their home office or enabled teleworking on request or in order to maintain business operations.

From a compliance point of view, the question naturally arises as to whether this is compatible with supervisory due diligence requirements, particularly with regard to

  • risk management,
  • the monitoring of the employees,
  • IT security,
  • the protection of banking secrecy and data protection, and
  • the market abuse rules (prevention of insider trading and market manipulation).

The FMA has not yet issued a general public statement on such issues (apart from the participation in supervisory board and committee meetings via telephone or video conference – see above), the German Federal Financial Supervisory Authority (BaFin) stated in an information dated 12 March 2020 on the admissibility of trading activities in the home office that the corresponding strict rules can be temporarily relaxed for a home office solution due to the crisis. This is justifiable from a banking supervisory point of view, if not even necessary – as part of an emergency concept – in crisis situations. In the absence of access to office and trading premises, it is necessary to create an alternative in order to maintain business operations. However, if institutions had previously excluded this possibility, they would have to explicitly lift the ban and lay down clear work instructions. From the point of view of BaFin, all required security measures and controls can be implemented electronically.

This approach, which is also in line with EBA's demand for flexibility, is also applicable for Austria. Even though teleworking is not mandatory, it is useful for ensuring the functionality of financial service providers (avoiding staff shortages due to illness) and is also recommended by the federal government. The various supervisory regulations are usually also flexible to the extent that the principles of proportionality and appropriateness must generally be taken into account. For example, the organisational requirements for banks pursuant to Article 39 para. 6 BWG provide, among other things, that "taking into account the nature, scope and complexity of their business activities, appropriate principles and procedures shall be laid down in writing, regularly updated and continuously complied with, which are designed to "minimise the risks of possible non-compliance" with supervisory laws. To a certain extent, this therefore permits a balancing of interests, which is the case here for the home office. Of course, corresponding service instructions and control measures will be necessary, but these could also be implemented electronically - as is the case with BaFin.

Are emergency plans to be readjusted?

On 3 March 2020, the ECB already requested significant banks to review their plans in order to maintain business operations and to consider measures to reduce the potential negative impact of a further spreading of Covid-19. Against that background, the EBA wants to review the emergency plans of European banks.

The Covid-19 crisis should therefore be taken as an opportunity to review the suitability of existing contingency plans and, if necessary, to review them on the basis of the current situation (e.g., adaptation with regard to teleworking – see above).

What should be considered regarding short selling?

The EU Regulation (No 236/2012) on short sales allows national supervisory authorities to temporarily prohibit short sales of financial instruments in the event of a significant price decline. In Italy, Spain, Belgium, France and the UK, the supervisory authorities have imposed temporary bans on short selling in response to the sharp fall in the prices of several company shares – which is associated with the Covid-19 crisis.

The Austrian regulator FMA has, by means of a Regulation, temporarily prohibited the short selling of shares that are admitted to trading on the Regulated Market of the Vienna Stock Exchange (Wiener Börse) and that are subject to supervision by the FMA as supervisory authority as of 18 March 2020 until, for the time being, 18 April 2020. Transactions in the course of the function as a market maker (or specialist pursuant to the rules of the Vienna Stock Exchange) function are excluded from the ban as well as certain transactions in financial instruments that are based on an index or a basket of securities, which track an index.

On a European level the ESMA temporarily requires holders of net short positions in shares traded on a EU regulated market to notify the relevant national competent authority if the position reaches or exceeds 0.1% (instead of 0.2%) of the issued share capital in order to be able to respond more quickly, if required. The threshold of 0.5% requiring a publication continue to apply.

Your contact person:

Andreas Zahradnik
Head of the Financial Market Supervision Law Practice Group
T +43-1-533 4795-42
andreas.zahradnik@dorda.at