European Systemic Risk Board Announces Further Actions to Combat Impact of COVID-19

The European Systemic Risk Board has announced a series of further actions designed to combat the impact of COVID-19 on European financial markets. The actions relate to the five priority areas already identified by the ESRB as requiring particular focus in the context of the COVID-19 pandemic, as follows:

• Implications for the financial system of guarantee schemes and other fiscal measures to protect the economy: the ESRB has published a Recommendation introducing minimum requirements for national monitoring of the financial stability implications of the various debt moratoria and guarantee schemes introduced by Member States to support economies through COVID-19 (Recommendation A); national regulators are also advised to regularly report information on these schemes to the ESRB in accordance with reporting templates to be published by the ESRB by June 30, 2020 (Recommendation B); national regulators implicated by the Recommendation should communicate the actions they have taken, or intend to take, in response to the Recommendation A by July 31, 2020 and Recommendation B by December 31, 2020;
• Market illiquidity and implications for asset managers and insurers: the ESRB has written to the Chairman of the European Insurance and Occupational Pensions Authority urging improved monitoring of liquidity risks in the insurance sector through the finalization of the industry's proposed liquidity monitoring framework; the Pillar II provisions in the Solvency II regulatory regime should also be enhanced;
• Impact of large-scale downgrades of corporate bonds on markets and entities across the financial system: the ESRB continues to monitor corporate bond markets, including the implications of large-scale corporate bond downgrades;
• System-wide restraints on dividend payments, share buybacks and other pay-outs: the ESRB has issued a Recommendation on the restriction of distributions during COVID-19, recommending that financial institutions (which include credit institutions or investments firms as defined under the Capital Requirements Regulation and central counterparties as defined under the European Market Infrastructure Regulation) refrain from making dividend distributions, buy-backs of ordinary shares or creating obligations to pay variable remuneration to a material risk-taker which has the effect of reducing the quantity or quality of own funds at the EU group level (and sub-consolidated or individual level, where appropriate), until at least January 1, 2021; the ESRB has also published a report on system-wide restraints on dividend payments, share buybacks and other pay-outs; and
• Liquidity risks arising from margin calls: in line with the ESRB's previously stated concerns about the pressure that significant increases in margin calls may put on already strained financial markets, the ESRB has published a series of Recommendations on the liquidity risks arising from margin calls, focusing on margin collection by CCPs, as follows:
  • Recommendation A: national regulators should ensure that CCPs analyze the performance of their policies on margin and that clearing members and financial and non-financial counterparties apply risk management policies prudently in a way that does not result in sudden cliff effects in margin calls;
  • Recommendation B: ESMA should review its draft technical standards on liquidity risk controls under EMIR to require CCPs to include default of any two entities that provide services to the CCP and that could materially affect the liquidity position of CCPs in their stress scenarios and, in the meantime, national regulators should ensure that stress scenarios do include such a default;
  • Recommendation C: national regulators should ensure that CCPs and clearing members avoid creating unnecessary liquidity constraints when issuing margin calls and collecting margins; and
  • Recommendation D: national regulators should contribute to international discussions on ways to mitigate the pro-cyclicality of margin and haircut practices in exchange traded and over-the-counter derivatives services and the European Commission should consider proposing EU legislation to implement any global standards arising from such discussions.

National regulators should report on their implementation of these Recommendations by: November 30, 2020 for Recommendation A, B and C. ESMA should report on its implementation of Recommendation B by December 31, 2021. National regulators should report on their implementation of Recommendation D by December 31, 2021, while the Commission should report on its implementation of Recommendation D by December 31, 2022. The ESRB has also published a report on liquidity risks arising from margin calls, which focuses on actions that national regulators may take with respect to CCPs, banks and other relevant market participants to address liquidity risks.

View the ESRB's latest proposed actions.

View details of the ESRB's actions of May 14, 2020.

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

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