Shearman & Sterling LLP | FinReg | European Banking Authority Publishes Guidance on Prudential Flexibility for COVID-19
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  • European Banking Authority Publishes Guidance on Prudential Flexibility for COVID-19

    The European Banking Authority has published guidance on its supervisory flexibility for certain aspects of the European bank prudential regulatory framework, in light of the COVID-19 pandemic. In particular, the EBA’s guidance covers:
    • market risk: the EBA has published final draft Regulatory Technical Standards on prudent valuation of fair-valued financial instruments under the Capital Requirements Regulation, proposing a higher aggregation factor of 66% for additional valuation adjustments for market price uncertainty, close-out costs and model risk until December 31, 2020; reporting requirements for the Fundamental Review of the Trading Book standardized approach (the EU’s revised framework for market risk) have been postponed so that the first reference date will be set at September 30, 2021 (as opposed to Q1 2021);
    • the Supervisory Review and Evaluation Process: the EBA is considering changes for the 2020 SREP to focus on the most material risks and vulnerabilities relevant to the COVID-19 crisis, while allowing firms to rely on previously assigned assessments for those SREP elements not directly affected by the pandemic;
    • recovery planning: firms should review and update their recovery plans on an ad hoc basis throughout the crisis, report any breaches of recovery plan indicators to national regulators in a timely fashion, even if they do not trigger recovery actions, and analyze how COVID-19 stress might evolve for their particular institution; however, the EBA does accept that the submission of some elements of recovery plans could be postponed for 2020, particularly elements that are relatively stable, e.g. business-as-usual governance, description of the entities covered by a group recovery plan and the communication plan;
    • digital operational resilience and ICT risk: the EBA expects firms to ensure they have adequate internal governance and control frameworks for operational resilience (covering business continuity, ICT and security risk management), take necessary measures to ensure their IT systems support their most critical functions, remain vigilant in cyber security monitoring and ensure business continuity plans are up to date and adapted; the EBA also requests that national regulators work closely with firms to prioritize supervisory actions effectively and apply reasonable supervisory flexibility where appropriate; and
    • securitization: the EBA has clarified how its guidelines on legislative and non-legislative moratoria on loan repayments apply to securitizations, the appropriate regulatory capital treatment for securitized exposures subject to payment moratoria and the implications of permitted payment moratoria on the classification of implicit support in securitizations.

    View the EBA's guidance on prudential flexibility measures.

    View details of the EBA's guidelines on legislative and non-legislative moratoria on loan repayments.

    Details of other regulatory responses to COVID-19 are available on our COVID-19 Research Center.
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