Germany: Supervisory and regulatory schemes as a reaction to the Coronavirus crisis

Banking supervision relaxes capital and liquidity requirements for credit institutions to promote loans to real economy companies

The European Central Bank (ECB) as well as the German Federal Financial Supervisory Authority (BaFin) have decided on various schemes to relief the banking industry from regulatory capital and liquidity requirements as a reaction to the COVID-19-pandemic. Funds from the capital and liquidity buffers of the institutions shall be released to support loans to the real economy during the crisis.

Capital requirements

In its continuously updated FAQ regarding supervisory and regulatory schemes as a reaction to the COVID-19-pendemic, BaFin has made clear that it is possible for the institutions to use the capital contained in the capital buffers build up in the past years, especially for the purposes of granting loans in the current situation.

This primarily pertains to the capital conservation buffer (CCB), the Pillar 2 Capital Guidance (P2G) as well as the countercyclical capital buffer (CcyB). Regarding the consequences of a shortfall distinctions must be made:

• A shortfall in the capital conservation buffer will, amongst others, entail distribution restrictions.
• A shortfall in the P2G does not have an immediate effect (at least up to the capital conservation buffer). The reason is that the P2G, against which the capital conservation buffer is offset, is – unlike, for example, the so-called SREP (Supervisory Review and Evaluation Process) capital add-on according to Section 10 (3) of the German Banking Act (Kreditwesengesetz) – no hard regulatory requirement, but reflects an expectation of BaFin, namely on the minimal capital an institution should additionally maintain from a supervisory point of view in order to be able to comply with the SREP overall capital requirement over the medium-term, taking into account potential losses in stress phases. Shortfalls should result in a closer supervision only. However, as from a BaFin perspective there is currently unequivocally such a stress phase, there are no further requirements for the institutions for the time being. Only when the amount covered by the capital conservation buffer is used, the distribution restrictions associated with the use of the buffer will apply.
• A shortfall in the CCyB has – at least momentarily – also no immediate effect since the ECB urged the national supervisory authorities to lower the CCyB by a reasonable rate in order to support the ECB measures. Consequently, BaFin lowered the CCyB, which had been raised only recently to 0.25% in Germany, back to 0 % effective from 1 April 2020. The buffer shall now remain at 0 % at least until 31 December 2020.

Even a shortfall associated with the individual capital buffers of the combined capital buffer requirement pursuant to Section 10i of the German Banking Act in the view of BaFin does not constitute a violation of regulatory minimum capital requirements in the current situation. Moreover, such a shortfall constitutes a purposeful and appropriate use of available equity and therefore there is no reason for the competent supervisory authorities to query or object this purposeful and appropriate use of the capital buffers. This applies particularly since the statutory provisions already today provide for institutions to rebuild this capital buffer over an extended period of time after a crisis. However, the legal payout restrictions pursuant to Section 10i of the German Banking Act remain unaffected. Furthermore, the institution is obliged to inform the competent supervisory authority immediately of such a shortfall and to discuss further capital planning to restore the combined capital buffer requirements.

On the European level for significant institutions (SIs) supervised directly by the ECB under the Single Supervisory Mechanism (SSM), the ECB has decided to frontload parts of the capital and liquidity requirements according to the recent amendment of the Capital Requirements Directive (CRD V – Directive (EU) 2019/878 dated 20 May 2019) instead of only upon expiry of the implementation period on 28 December 2020. Thus, institutions shall be allowed to frontload the new and less strict requirements regarding the composition of the Pillar 2 Requirements (P2R). To meet the P2R, institutions may now partially also use capital instruments which do not count as Common Equity Tier 1 (CET1), such as instruments of Additional Tier 1 capital (AT1) and Tier 2 capital (T2). Consequently, according to ECB’s calculation, approx. EUR 30 bn. of additional CET1 would be released. Furthermore, the ECB also allowed a shortfall in the P2G-buffers for SIs, which would result in a further EUR 90 bn. of additional CET1 to be released. As such, in view of the ECB, a total of approx. EUR 120 bn. of additional CET1 would be available Europe-wide to institutions for lending.

Liquidity requirements

BaFin also emphasised in its FAQ that during stress periods institutions may use the liquid assets held in compliance with the liquidity coverage requirement (LCR) (Article 412 of the CRR). The utilisation of the liquidity buffers in the current situation may be possible without pre-approval of the competent supervisory authority. A current or imminent shortfall of the LCR minimum requirements must merely be notified to the competent authorities without delay (Article 414 of the CRR).

In this case, however, specific information requirements must be agreed between the supervisory authority and the institution until the LCR minimum requirement is met again. Additionally, a less significant institution (LSI) shall always notify the supervisory authority of a further decrease of the LCR to levels of less than 90 %, 80%, 70% etc. immediately. Taking into consideration this additional information requirement, the supervisory authorities will generally waive the requirement for LSIs to submit daily liquidity reports under the Implementing Regulation (EU) 680/2014. The SIs on the other hand shall notify the supervisory authorities daily of liquidity differences as well as internal planning regarding liquid asset management.

At that point, a restoration of the minimum LCR is only expected once the economic situation has improved again, whereby BaFin generally has set a generous approach in prospect in assessing the institutions’ plans to restore the minimum LCR.

No deferral from new demands arising from CRD V/CRR II

However, a deferral from the statutory application dates set out in CRD V and CRR II (Directive (EU) 2019/876 dated 20 May 2019) is currently not planned on behalf of the supervisory authorities in Germany. BaFin emphasised that such an approach must be decided uniformly at the European level. Without respective amendments of the European directives, the implementation periods and application dates specified at the European level were binding at a national level.

Conclusion: Banking supervision surges ahead, banking industry needs to follow

With the release of capital buffers and the authorisation to fall under the LCR minimum requirement – also significantly – the European and national supervisory authorities have given ample leeway to the institutions to preserve the liquidity in the financial system and to expand lending to the real economy, poignantly demanded by all sides. As a result, the substantial increase in demand in loans in the Coronavirus crisis should be served better and affected companies helped through the crisis. How long the institutions can actually operate below the general P2G, CCB and LCR-requirements will manifest in the further course of economic recovery. Also, further easing measures by the supervisory authorities cannot be ruled out.