Shearman & Sterling LLP | FinReg | European Systemic Risk Board Actions on Five COVID-19 Priority Areas
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  • European Systemic Risk Board Actions on Five COVID-19 Priority Areas

    The European Systemic Risk Board has established five priority areas on which it intends to take action to combat the impact of COVID-19 on the EU financial system. In determining its actions, the ESRB hopes to ensure an effective response to the pandemic across the EU that prevents individual Member State actions from negatively impacting the EU Single Market and to take advantage of flexibility in regulatory standards to support financial institutions in providing financial services and liquidity.

    The ESRB's five priority areas are:
    1. Implications of COVID-19 for guarantee schemes and other fiscal measures: the ESRB is undertaking a review of EU measures designed to support firms and households through the pandemic; it is also setting up a framework to monitor the wider implications of those measures across the EU and has written to the President of the Economic and Financial Affairs Council describing the ESRB's work and encouraging coordination between fiscal and macroprudential authorities as well as national regulators, with information being disclosed by national regulators to the ESRB;
    2. Market illiquidity and implications for asset managers and insurers: the onset of the COVID-19 pandemic resulted in a fall in asset prices accompanied by significant redemptions from some investment funds; funds with exposures to corporate debt and real estate have been identified by the ESRB as areas of particular concern; the ESRB has published a Recommendation to the European Securities and Markets Authority to coordinate with national regulators to assess the preparedness of such funds for future adverse shocks and significant redemptions, and to report to the ESRB on its findings by October 31, 2020;
    3. Impact of large-scale downgrades of corporate bonds: the ESRB has published a note on liquidity in the corporate bond and commercial paper markets, the pro-cyclical impact of ratings downgrades and the implications of downgrades for asset managers and insurers;
    4. System-wide restraints on dividend payments, share buybacks and other pay-outs: the ESRB supports the action taken by Member States and the European Banking Authority, European Central Bank and European Insurance and Occupational Pensions Authority to restrain voluntary pay-outs including dividends, bonuses and share buybacks; and
    5. Liquidity risks arising from margin calls: the ESRB has observed the financial stability risks associated with recent oil market disruptions triggering a sharp drop in asset prices and related margin calls across centrally cleared and non-centrally cleared markets; the ESRB is particularly concerned about a potential increase in already high volumes of margin calls; in this context, the ESRB is stressing the importance of mitigating pro-cyclicality linked to the provision of clearing services and exchange of margin in bilaterally cleared markets, enhancing central counterparty stress test scenarios assessing liquidity needs and limiting excessive liquidity constraints related to margin collection.

    View the ESRB's five priority areas.

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

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