Charlotte Hill


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Daniel Hirschfield

Senior Counsel – Knowledge

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Clare Reynolds

Senior Counsel

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Charlotte Hill


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Daniel Hirschfield

Senior Counsel – Knowledge

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Clare Reynolds

Senior Counsel

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1 June 2021

COVID-19: how the European financial regulators are responding


The European Central Bank (ECB), the European Systemic Risk Board (ESRB), and the European Supervisory Authorities (ESAs) are closely monitoring the COVID-19 situation and have taken measures to seek to protect markets and consumers and to ensure firms have adequate contingency plans in place. Additionally, on 14 July 2020, the European Commission published a document setting out best practices in relation to the relief measures offered to consumers and businesses in the context of the COVID-19 crisis. The best practices cover measures discussed below, such as the credit payment moratoria and best practices for insurers, and is the product of meetings with a range of stakeholders including the ESAs.

This webpage sets out the measures taken by the EU financial regulators to date and key points firms should be aware of. Please see our separate webpage on the measures taken by the UK financial services regulators in response to COVID-19 here.

European Central Bank

In line with other central banks, the ECB announced a €750bn (subsequently extended to €1,850bn) Pandemic Emergency Purchase Programme (PEPP) to buy public (including Italy and Greece) and private sector debt across the eurozone. The ECB has decided to continue with net asset purchases under the Pandemic Emergency Purchase Plan until at least the end of March 2022 or until it judges that the coronavirus crisis phase is over. Further, the ECB announced measures providing added flexibility to banking supervision to ensure that its directly supervised banks can continue to fulfil their role to fund households and corporations. To this extent it introduced supervisory flexibility to its treatment of non-performing loans and encouraged banks to avoid excessive procyclical effects when applying the IFRS 9 international accounting standard (an approach consistent with ESMA). The ECB also activated capital and operational relief measures already announced amounting to €120 billion, which could be used to absorb losses or potentially finance up to €1.8 trillion of lending.

The Economic Bulletin published on 24 September  2020 summarises that these measures are necessary to support the economic recovery and to safeguard medium-term price stability. The strength of the recovery remains surrounded by significant uncertainty, as it continues to be highly dependent on the future evolution of the pandemic and the success of containment policies.

On 27 March 2020, the ECB released a statement advising banks to be prudent when deciding dividend payments and share buyback schemes. It stated that banks should be forward-looking and preserve liquidity to support households and businesses. The ECB provided further guidance in its recommendations published on 28 July 2020 on dividend distributions, in which it extended its recommendation to banks that no dividend distributions are paid out and to refrain from share buy-backs until 1 January 2021. Similarly, on 28 July 2020, the ECB published a letter addressed to banks discussing remuneration policies. The ECB highlighted the principle of proportionality in implementing the supervisory expectations and stated it expects banks to adopt extreme moderation with regard to variable remuneration payments until 1 January 2021.

On 16 April 2020, the ECB announced a temporary reduction in capital requirements for market risk by allowing banks to reduce a supervisory measure, the qualitative market risk multiplier, to adjust for the market volatility and retain market liquidity.

The ECB published an opinion on 20 May 2020, on the proposed Regulation containing amendments to the Capital Requirements Regulation (575/2013) (CRR) as regards adjustments in response to the COVID-19 pandemic. The ECB provided its general comments on the proposals and specific observations on each of the key reforms introduced.

On 7 July 2020, the ECB published a blog post by Kerstin af Jochnick, ECB Supervisory Board Member, sharing her thoughts as an ECB policymaker on maintaining effective supervisory engagement with banks in the short term and designing the new normal of the European banking sector in the medium term as the coronavirus crisis slowly fades away. Ms af Jochnick noted that the COVID-19 shock is likely to accelerate some of the trends that were already under way before the crisis (for example digitisation and strengthening crisis management and resolution frameworks) and as such, planning what the business of banking will look like post-COVID-19 should start now. The ECB also published the results of its vulnerability analysis of banks directly supervised within the Single Supervisory Mechanism. The results show that the Results show euro area banking sector can withstand pandemic-induced stress, but if the situation worsens, depletion of bank capital would be material.

On 28 July 2020, the ECB published a letter addressing the operational capacity to deal with distressed debtors in the context of the COVID-19 pandemic. The ECB states that banks should provide sustainable solutions or support in an efficient and timely manner which also requires them to have effective risk management practices. Additionally, banks should take timely action to minimise any cliff effects as the moratoria measures expire. The ECB also expects banks to clearly understand the risks they are facing and devise an appropriate strategy, with both a short and medium-term focus.

On 16 September 2020, the ECB adopted a Decision on the temporary exclusion of certain exposures to central banks from the total exposure measure, in view of the exceptional circumstances presented by the COVID-19 pandemic. The ECB explained in a related press release that these measures are aimed at easing the implementation of monetary policy by allowing euro area banks under its direct supervision to exclude certain central bank exposures from the leverage ratio.

On 23 September 2020, the ECB published the following:

  • an opinion on the Commissions' proposals for regulations amending the Union securitisation framework in response to the COVID-19 pandemic. The ECB generally welcomes the proposed regulations, which contain targeted amendments to the Union securitisation framework to facilitate the use of securitisation in the Union’s recovery through two measures, namely: the introduction of a framework for simple, transparent and standardised balance-sheet synthetic securitisation; and the removal of regulatory obstacles to the securitisation of non-performing exposures. 
  • an article examining automatic fiscal stabilisers in the euro area and their ability to provide economic stabilisation during the COVID-19 crisis. The article concludes that in normal times automatic fiscal stabilisers are generally sizeable in the euro area and play an important role for macroeconomic stabilisation. The effectiveness of automatic fiscal stabilisers in cushioning the economy is less apparent during the COVID-19 crisis, especially during the lockdown phase. Looking ahead, there are strong arguments for efficient second generation automatic fiscal stabilisers to play a more prominent role.
  • an article stating that the propensity of households to save has reached unprecedented levels in response to COVID-19. The increase in household savings may be due to the lockdown measures imposed to contain the virus prohibited households from consuming a large share of their normal expenditure basket, leading to savings; and the sudden outbreak of the pandemic caused uncertainty regarding future income, and in particular, the risk of future unemployment, to shoot up, leading to precautionary savings. 

In a speech published on 6 October 2020,  Philip R. Lane, a member of the Executive Board of the ECB, stated that the euro area economy is still operating far below its pre-pandemic level The monetary policy challenge since the onset of the crisis can be divided into two stages. In the first stage, the challenge for the ECB is to counter the negative inflation shock. The central element in this first stage has been the introduction of the PEPP. The second stage is to ensure that, once the economy returns to the pre-pandemic inflation path, the monetary policy stance is appropriately calibrated to ensure timely and robust convergence to the ECB's medium-term inflation aim.

On 8 October 2020, Yves Mersch, a member of the Executive Board of the ECB and Vice-Chair of the Supervisory Board of the ECB, gave a speech on early lessons regarding European economic governance from the COVID-19 crisis. He observed that, for the first time in its history, the EU is taking on common debt to help finance a recovery. He further stated that the response to the crisis has underlined the importance of a common approach to common problems and may be the reason for a broader review of the allocation of competences across the different governance layers in the supranational community.

On 29 October 2020, Kerstin af Jochnick, Member of the Supervisory Board of the ECB, delivered a speech on supervision in times of uncertainty. The speech discusses the challenges that the COVID-19 pandemic has posed for banks and banking supervisors alike, and also highlights the instrumental role that internal auditors can play in navigating the crisis. 

On 2 November 2020, Yves Mersch gave a speech on the legal aspects of the ECB’s response to the COVID-19 pandemic. The ECB has exclusive but narrow competence to define the EU monetary policy for the purpose of maintaining price stability. Moreover, the European Court of Justice has consistently held that, as the ECB enjoys broad discretion, the Court must be able to control the discretion. The ECB is also bound by certain established legal principles, such as ensuring that measures introduced are proportionate to the ECB’s legitimate objectives. The speech also discussed the legality of the PEPP and the temporary collateral easing measures.

On 12 November 2020,  Luis de Guindos, the Vice-President at the ECB, delivered a speech on building the banking union and capital markets union after COVID-19. He said that the COVID-19 pandemic continues to have a major disruptive impact on the economic and financial environment. In the face of the major crisis, the integration of EU capital markets is crucial to enable a robust and uniform recovery across the economies. Therefore, he called for a heightened level of political will and ambition from all sides in the EU so that the ECB can complete the banking union and build a fully fledged capital markets union. 

On 19 November 2020, Isabel Schnabel, a Member of the Executive Board at the ECB delivered a speech on the lessons for the future following the liquidity crisis of non-banks in light of COVID-19. The speech notes that the current regulatory landscape needs to better reflect the fact that credit intermediation increasingly takes place outside the banking sector. The current policy framework needs to be developed further with a view to strengthening the ability of authorities to limit the build-up of systemic risk in the non-bank financial sector and curb stress. 

On 24 November 2020, Isabel Schnabel, a Member of the Executive Board of the ECB, delivered a speech discussing the prevailing challenges faced by the ECB in light of COVID-19. More specifically, the speech discusses how the ECB should think about price stability when inflation is low, how monetary policy affects output and prices in the vicinity of the effective lower bound, and how the ECB designs and calibrates instruments.

On 24 November 2020, the ECB published the Financial Stability Review Issue 2 which discusses financial stability considerations arising from the interaction of COVOD-19-related policy measures. The Review analyses the synergies between the enacted policies, cross-country heterogeneity and financial stability considerations related to the phasing-out of relief measures. To emphasise the cross-country differences in the policy responses, the Review focuses on the five largest euro area economies (France, Germany, Italy, the Netherlands and Spain).

On 28 November 2020, the ECB published an interview with Luis de Guindos, the Vice-President of the ECB. In the interview, he acknowledged that the fourth quarter of 2020 will be marked by the measures taken by euro area governments to deal with the new wave of COVID-19 infections that started after the summer. The main tools that the ECB will continue to employ are the targeted longer-term refinancing operations (TLTRO), which is an instrument to inject liquidity into the banking sector, and the PEPP. When asked whether the PEPP has supported the real economy and households, he answered that calming the situation in the sovereign debt markets also brought reassurance to other markets, which has had a positive impact on the financing conditions that banks offer to their clients, households and companies.

On 4 December 2020, the ECB published a letter from Andrea Enria, the Chair of the Supervisory Board at the ECB, to banks. Mr Enria specified that the purpose of the letter is to provide banks with additional guidance on credit risk identification and measurement in the context of COVID-19. The letter states that the ECB expects significant institutions to pay attention to what the ECB considers to be sound credit risk management. The letter also has an Annex 1, which sets out more details on what the ECB considers to be sound practices.

On 10 December 2020, the ECB announced that it will offer four additional pandemic emergency longer-term refinancing operations on a quarterly basis during 2021. Each operation will have a tenor of approximately one year. These operations will serve as a liquidity backstop to the euro area banking system and contribute to preserving the smooth functioning of money markets during the extended pandemic period.

On 15 December 2020, the ECB published a recommendation, stating that banks should exercise extreme prudence on dividends and share buy-backs. Banks should consider not distributing any cash dividends or conducting share buy-backs, or limiting the distributions, until 30 September 2021. The ECB stated that due to continuing uncertainty over the economic impact of the COVID-19 pandemic, it expects dividends and share buy-backs to remain below 15% of the cumulated profit for 2019-20 and not higher than 20 basis points of the common equity tier 1 (CET1) ratio, whichever is lower. Banks should continue to use their capital and liquidity buffers for lending purposes and loss absorption. The ECB will not require banks to start replenishing their capital buffers before the peak in capital depletion is reached. 

On 16 December 2020, the ECB published a letter to banks regarding their remuneration policies in the context of the COVID-19 pandemic. In the ECB's view, as banks continue to face uncertainty to forecast their medium-term capital needs, they should continue to focus primarily on maintaining a suitable amount of capital to absorb potential losses and to support the real economy.The ECB reiterated its expectation that banks will continue to adopt extreme moderation in respect of variable remuneration until 30 September 2021. 

On 17 and 18 December 2020, the ECB published two working papers on COVID-19: a daily tracker of global economic activity and a paper outlining survey evidence on consumption from six EU countries. In the ECB's view, the daily tracker will benefit an investor who is weighing a portfolio as the tracker allows for daily real-time knowledge of international business conditions. On the other hand, the survey shows that fears of the financial consequences of the pandemic induce a significant reduction in nondurable consumption. 

On 18 December 2020, the ECB published a podcast titled "Building a bridge towards economic recovery". The topics covered include how policy makers have adapted to the new challenges, what is the role of the ECB’s monetary policy and what are the other items on the ECB's agenda. 

In the economic bulletin published on 4 January 2021, the ECB provided numerical analysis regarding the impact of COVID-19 on the tourism sector. The bulletin states that there is a slump in tourism and travel, reflecting restrictions and uncertainties related to people’s movement across borders (e.g. owing to quarantine measures). As a result, there is a collapse in consumption by non-residents.

The economic bulletin of 19 March 2021 highlighted that the best practices for financial market infrastructures involves setting up a crisis management team and designing a plan for business continuity around it.

On 19 May 2021, the ECB published its Financial Stability Review, which showed that financial stability risks caused by the pandemic are unevenly distributed between sectors, institutions and geographies.  As summarised in the accompanying press release, the financial stability risks resulting from COVID-19 appear to be concentrated in specific sectors and countries. In particular, although market sentiment towards banks seems to be improving, profitability of banks remains weak, and countries with economies that are more reliant on service industries are more vulnerable as a result of the pandemic.


European Systemic Risk Board

The ESRB published a recommendation, dated 6 May 2020, on liquidity risks in investment funds. The ESRB recommended that ESMA should co-ordinate with national competent authorities to undertake a focused piece of supervisory work with investment funds. The ESRB concluded that the sharp fall in asset prices observed at the onset of the COVID-19 pandemic was accompanied by significant redemptions from certain investment funds and a significant deterioration in financial market liquidity.

On 14 May 2020, the ESRB published a press release highlighting the first set of actions to address the impact of COVID-19 as discussed at the extraordinary meeting of the General Board of the ESRB. The General Board aims to use the flexibility in the existing EU regulatory standards to ensure adequate capital and liquidity resources are available, as well as sustaining a stable Single Market through equivalent policy responses across sectors and Member States. The actions are in five key priority areas:

  • implications for the financial system of guarantee schemes and other fiscal measures to protect the real economy
  • market illiquidity and implications for asset managers and insurers
  • impact of large-scale downgrades of corporate bonds on markets and entities across the financial system
  • system-wide restraints on dividend payments, share buybacks and other pay-outs
  • liquidity risks arising from margin calls.

The ESRB published its second set of actions to address the impact of COVID-19 on 8 June 2020, following the extraordinary meeting of the General Board on 27 May 2020. This set of actions includes:establishing an EU-wide framework to monitor debt moratoria, guarantee schemes and other fiscal measures put in place by member states:

  • establishing a liquidity monitoring framework for (re)insurers and  enhancing the Pillar 2 provisions in the Solvency II regulatory regime in the medium term to enable supervisors to require individual (re)insurers to hold a liquidity buffer
  • introducing restrictions on dividend payments, share buybacks and other pay-outs for certain financial institutions, including banks and insurers  (similar to measures taken by the UK regulators)
  • introducing measures to address liquidity risks arising from margin calls issued by central counterparties.

On 22 June 2020, the ESRB published its decision on the on the cancellation of certain reports on actions and measures taken pursuant to Recommendation ESRB/2014/1 (relating to guidance for setting countercyclical buffer rates) and Recommendation ESRB/2015/2 (addresses the cross-border effects of macro-prudential measures). The reports, which were due by 30 June 2020, are no longer required to be submitted, however, the submission of subsequent reports is not affected.

On 1 October 2020, the General Board of the ESRB had a meeting to discuss the consequences of the COVID-19 pandemic. A few key takeaways are:

  • The comprehensive policy measures that have been taken to protect the real economy from the effects of COVID-19 have so far prevented the economic crisis also becoming a financial crisis.
  • It is important that consequences of the support measures ending are well understood, in particular given the potential cliff effects that could arise if several measures expire at the same time.
  • It is important to address a range of systemic risks and vulnerabilities related to non-bank financial intermediation, including from interconnectedness, liquidity and leverage, especially in relation to the risks in investment funds.
  • There is a need for establishing a legal framework regulating the use of legal entity identifier in the EU and a coherent implementation across all sectors of the economy would maximise the benefits arising from the use of legal entity identifier.

The General Board will continue the COVID-19-related work in the priority areas  identified earlier this year and suggested in a letter to the European Commission and the ESMA medium-term actions, which could be undertaken with regard to external credit ratings.

On 18 December 2020, the ESRB published a press release summarising discussions at the 40th regular meeting of its General Board, during which the General Board of the ESRB  discussed the impact of the COVID-19 pandemic on the EU economy and the financial system. Among others, while the General Board acknowledged the reduced uncertainty in macroeconomic projection, the recovery path of the economy is still facing important challenges. It therefore decided to revise and extend its recommendation on restriction of distributions. The General Board recommended that relevant authorities request banks, investment firms, insurance companies and reinsurance companies to refrain from distributions which have the effect of reducing the quantity or quality of own funds, unless these financial institutions apply extreme caution in carrying out distributions and the resulting reduction does not exceed the conservative threshold set by their competent authority.

On 16 February 2021, the ESRB published a report, providing the first assessment of the financial stability implications of COVID-19-related fiscal measures across 31 ESRB member countries.  The report shows that the fiscal response designed to support the real economy has stabilised lending and that the financial system has continued to function. However, as risks still lie ahead, the report also identifies policy priorities when designing the fiscal measures, which include enhanced transparency and preparedness for further adverse scenarios. The report also states that the longer the crisis lasts and the weaker the economic recovery, the greater the risk that losses in the non-financial sector could spill over into the financial sector.

European Securities and Markets Authority

European Securities and Markets Authority (ESMA) published an initial public statement on 11 March 2020 highlighting the ongoing priority of ensuring business continuity, and making various recommendations to financial market participants. The recommendations include specific reminders to issuers of the need to disclose any relevant significant information concerning the impacts of COVID-19 on their fundamentals, prospects or financial situation as soon as possible in accordance with the Market Abuse Regulation (MAR), and providing transparency in any financial reporting disclosures. Further, on 20 March 2020, ESMA extended the response date for all ongoing consultations due to close on, or after, 16 March 2020 by four weeks to allow institutions to focus on their core operations.

ESMA has also issued a public statement on the recording requirements of telephone conversations pursuant to MiFID II. ESMA acknowledges that recording may not be practicable in certain circumstances, but it expects firms to mitigate any potential risks and to use all possible efforts to restore recording of telephone conversations as soon as possible.

In its updated webpage, on 11 May 2020 ESMA stated that it is continuously engaging with Credit Rating Agencies (CRAs), as the single EU direct supervisor of CRAs. Its focus is on business continuity and compliance with key regulatory requirements (e.g. conflicts of interest, internal controls, transparency and governance).

On 20 May 2020, ESMA published a public statement addressing the implications of COVID-19 on the half-yearly financial reports of listed issuers. In the statement, ESMA reminds issuers to not unduly delay their reports and to ensure compliance with their obligations under MAR. The statement also sets out specific guidance on the preparation of half-yearly financial statements and makes recommendations on the detailed and entity specific disclosures it expects issuers to include in their interim management reports.

ESMA's 14 Edition Newsletter was published on 27 May 2020. The newsletter noted that ESMA continues to closely monitor the impact of COVID-19 and provided an update on ESMA's recent activities related to COVID-19. It also highlighted deadlines for closing consultations next month and catch up on the full list of publications from April and May.

On 10 June 2020, ESMA issued a decision renewing the temporary requirement to natural or legal persons who have net short positions to temporarily lower the notification thresholds in relation to the issued share capital of companies whose shares are admitted to trading on a regulated market to notify the national competent authorities (NCAs) if the position reaches or exceeds 0.1% of the issued share capital after the entry into force of the decision. The decision entered into force on 17 June 2020 and applies until 17 September 2020.

ESMA published a statement on 11 June 2020 on open access provisions for exchange traded derivatives (ETDs) under the Markets in Financial Instruments Regulation (600/2014) (MiFIR) in the light of COVID-19. In the statement, ESMA explained that as of 4 July 2020, trading venues (TVs) and central counterparties (CCPs) offering the trading and clearing of ETDs will be subject to the open access regime for trading and clearing ETDs under MiFIR. The high degree of uncertainty and volatility driven by COVID-19, may increase TVs and CCPs operational risk. These increased risks, combined with limited capacity for assessing access requests and managing the migration of transactions flows, may impact the orderly functioning of markets or financial stability.

On 15 June 2020, ESMA published a revised work programme in response to the significant resources diverted in its responses to COVID-19. ESMA's focus has been on maintaining markets that are open and orderly and that allow prices to adjust and liquidity to be provided. To appropriately deal with COVID-19 a full assessment of ESMA activities for 2020 was undertaken and each originally planned workstream was assessed and classified into high, medium or low priority. The result of the assessment formed the basis of the revised work programme.

On 9 July 2020, ESMA published a statement in the context of the COVID-19 pandemic in relation to the prohibition of providing external support to money market funds (MMFs) within the meaning of Article 35 of Regulation (EU) 2017/1131 (MMF Regulation). In the statement ESMA clarifies that MMFs may enter into transactions with third parties, including affiliated or related parties, provided the requirements of Article 35 of the MMF Regulation are met.

In a press release on 28 July 2020, ESMA announced it is working on a proposal to possibly further delay the entry into force of the Central Securities Depositories Regulation (909/2014) (CSDR) settlement discipline regime until 1 February 2022 due to COVID-19, and upon the request of the European Commission.

On 2 September 2020, ESMA published the second Trends, Risks and Vulnerabilities (TRV) Report of 2020 which analyses the impact of COVID-19 on financial markets. In this report, ESMA maintained its risk assessment that the market environment remains fragile. ESMA also raised the question of the sustainability of the current market rebound.  The report further provides in-depth look at specific risk issues in four articles, namely:

  • model risk in Collateralised Loan Obligations
  • interconnectedness and spillovers in the EU fund industry
  • MiFID II Research Unbundling
  • costs and performance of closet index funds.

On 22 September 2020, the ESAs issued their first joint risk assessment report of the financial sector since the outbreak of the COVID-19 pandemic. The ESAs highlighted the need to:

  • monitor risks and perform stress testing
  • foster flexibility where and when needed
  • support the real economy (capital relief should be used in support of continued lending to the real economy in the downturn)
  • stay prepared, in particular, EU financial institutions need to be well prepared for any disruptions they and their clients may face at the end of the UK’s transition period of leaving the EU)
  • supervise digital transformation.

On 2 October 2020, ESMA published its 2021 Work Programme setting out its priorities and areas of focus for the next 12 months in support of its mission to enhance investor protection and promote stable and orderly financial markets. The key areas of focus are:

  • promoting supervisory convergence
  • assessing risks to investors, markets and financial stability
  • completing a single rulebook for EU financial markets
  • directly supervising specific financial entities. 

On 9 October 2020, Verena Ross, an Executive Director at ESMA, delivered a speech covering the impact of COVID-19 on the financial markets. The financial system has recently shown a good level of robustness to withstand shocks. While the short term focus will be preparing for possible further market volatility and disruptions, the longer term focus should be:

  • building an efficient capital markets union that works for the European economy
  • supports the recovery, green transition and digital transformation, and
  • supports competitiveness but at the same time provides adequate protection to investors.

Effective regulation and supervision of the financial markets through further development and consistent implementation of MiFID and MAR frameworks will be important in making the capital markets union project a success. 

The speech by Steven Maijoor, the Chair of ESMA, on 12 October 2020 outlined ESMA's achievements over the last 12 months in the pursuit of its objectives of enhancing investor protection and promoting stable and orderly financial markets in the EU. In particular, ESMA has intensified its engagement and dialogue with its directly supervised entities, which was of importance in view of an increased number of downgrades in credit ratings over a very short period of time He also pointed out that one area in which the regulatory framework was not capable of responding adequately to the pandemic stresses was in the money market funds sector. The exceptional interventions of central banks were in fact decisive in ensuring that these funds would continue to meet regulatory requirements.

On 28 October 2020, ESMA issued its annual Public Statement on European Common Enforcement Priorities which sets out the priorities that EEA corporate reporting enforcers will consider when examining listed companies’ 2020 annual financial reports. Additionally, ESMA expects issuers to consider its COVID-19 related recommendations from March on the implications for the calculation of expected credit losses, and its May Statement on half-yearly financial reports (see above).

On 6 November 2020, ESMA published a speech by Verena Ross, the Executive Director at ESMA, in which she considered the key challenges in the credit ratings industry and explained what ESMA is doing to meet these challenges. Ms Ross identified COVID-19 as one of the key challenges for credit ratings agencies. How the agencies take into account (i) the impact of the COVID-19 pandemic; and (ii) the associated government support measures, in their analysis is a matter that has far-reaching effects throughout the economy. Ms Ross also stated that the wave of downgrades that followed the onset of the COVOD-19 crisis has sparked a renewed debate on the role of and reliance on credit ratings in the financial system.

On 12 November 2020, ESMA published a report in response to the ESRB's recommendation on liquidity risks in investment funds (mentioned above). To foster supervisory convergence amongst NCAs in how they supervise firms’ compliance with their obligations, ESMA will follow up with NCAs regarding (i) ongoing supervision of the alignment of the funds’ investment strategy, liquidity profile and redemption policy; (ii) ongoing supervision of liquidity risk assessment; and (iii) the supervision of valuation processes in a context of valuation uncertainty. More generally, ESMA supports further initiatives to develop a macro-prudential toolkit for investment funds that could be developed by the ESRB in conjunction with ESMA and NCAs.

On 13 November 2020, Steven Maijoor, the Chair of ESMA, delivered a speech on EU funds’ resilience in the COVID-19 era. Mr Maijoor referred to the ESRB recommendation published last May (mentioned above), and discussed the priority areas. He said that, in light of the challenges presented by COVID-19, ESMA has reinforced its coordination role. Since March, ESMA has organised frequent exchanges with national competent authorities to discuss market developments and supervisory risks linked to the COVID-19 crisis, focusing in particular on liquidity issues in asset management. Additionally, he also reiterated his support to the development of a macroprudential framework for investment funds.

On 16 December 2020, ESMA published its final report on guidelines on MMF stress tests under the Money Market Funds Regulation (MMFR). The updated guidelines take account of MMFs recent experience during March 2020, particularly in relation to redemption scenarios. Because of COVID-19, risks have increased for MMFs and the money market instruments in which they invest. The guidelines will now be translated into the official EU languages and subsequently published on ESMA’s website. They will become applicable two months after the publication of the translations. The new 2020 parameters set out in the updated guidelines will have to be used for the purpose of the first reporting period following the start of the application of the updated guidelines.

On 17 December 2020, ESMA published a decision renewing its decision to temporarily require the holders of net short positions in shares traded on any EU regulated market, to notify the relevant NCA if the position reaches, exceeds or falls below 0.1% of the issued share capital. The decision was reached after considering the forecast from the European Commission and the information on the risk of decoupling between asset valuations and fundamentals in light of the uncertain due to the COVID-19 crisis. The measure applies from 19 December 2020 and will expire on 19 March 2021.


European Banking Authority

On 12 March 2020 the European Banking Authority (EBA) released a public statement announcing its decision to postpone the EU-wide stress test exercise to 2021 to allow banks to prioritise supporting their customers and address the key operational challenges they may be facing. The EBA also reminded NCAs and banks of the flexibility in capital and liquidity regulations.

The EBA subsequently released two statements on 25 March 2020, providing clarity on the functioning of the prudential framework and addressing consumer and payment issues in light of COVID-19. The ECB called for flexibility and pragmatism in the application of the prudential framework and clarified that, in case of debt moratoria, there is no automatic classification in default, forborne, or IFRS9 status. Nonetheless, it asked institutions to ensure adequate risk management measures are in place, to use the measures in compliance with EU law and ensuring consumer protection remains a priority. The EBA also emphasised the importance of contactless payments and encouraged payment services providers to use the maximum thresholds available.

Following on from the EBA's statement on the prudential framework, on 3 April 2020, the EBA published a final report containing guidelines on the legislative and non-legislative moratoria on loan repayments. It clarified that the payment moratoria do not trigger classification as forbearance or distressed restructuring if the measures are taken based on market led initiatives. The EBA also recognised the importance of accurate and transparent monitoring and recording of the scope and effects of COVID-19 on the market, and urged institutions to consider the longer term financial difficulties that may be faced.

On 22 April 2020, the EBA released a statement on the application of the prudential framework to mitigate the impact of COVID-19 on the EU banking sector. The statement addressed the following: a postponement of the revised market risk reporting requirements (Fundamental Review of the Trading Book (FRTB)), a deferral to the implementation of the final two phases of the framework for margin requirements for non-centrally cleared derivatives and flexibility under the CRR to mitigate the increase in aggregated amounts of additional valuation adjustments (AVAs). In conjunction, the EBA also published a final report on the proposed amendments to the regulatory technical standards (RTS) on prudent valuation under the CRR.

On 2 June 2020, the EBA published its final report on guidelines on reporting and disclosure of exposures subject to measures applied in response to COVID-19. The guidelines follow the implementation of a broad range of measures, such as legislative moratoria on loan repayments and public guarantees in Member States, with the aim to support the operational and liquidity challenges faced by borrowers. The guidelines have been developed to address data gaps associated with such measures to ensure an appropriate understanding of institutions’ risk profile and the asset quality on their balance sheets both for supervisors and the wider public.

In a press release published on 18 June 2020, the EBA announced its decision to extend the application date of its Guidelines on legislative and non-legislative moratoria to 30 September 2020 (initially 30 June 2020). The Guidelines allowed banks to grant payment holidays to customers, under either legislative or non-legislative moratoria. As a result of the continued impact of COVID-19, the EBA has stressed the crucial role of banks in providing financing and this extension can ensure the adequate treatment of borrowers across the EU.

On 7 August 2020, the EBA published an updated report on the implementation of selected COVID-19 policies. The report provides clarification on questions raised in the context of the EBA’s monitoring of the implementation of COVID-19 policies. The report is structured in four key parts: (i) the first part provides a follow-up on the implementation and monitoring issues around COVID-19 credit risk policy relief measures, (ii) section two focuses on the implementation issues around the Guidelines on legislative and non-legislative moratoria on loan repayments, (iii) section three focuses on common criteria that institutions should follow for the identification and treatment of operational risk events and losses, through the provision of a dedicated ‘risk classification schema’ and (iv) section four provides technical clarifications in response to implementation questions raised by supervisors and institutions since the report was first published in July.

The EBA published a statement on 9 July 2020, on resolution planning in light of the COVID-19 pandemic. The statement identified the need to further specify key elements of the resolution authorities’ toolbox and aims to re-affirm that resolution planning is crucial in time of uncertainty to ensure that resolution is a credible option in case of failure. In particular, the statement provided an update of resolution plans, an update of minimum requirement for own funds and eligible liabilities decisions, the progress in removing impediments to resolvability and the activation of resolution colleges.

On 23 July 2020, the EBA published guidelines establishing a special procedure for the 2020 supervisory review and evaluation process (SREP) in light of COVID-19. The guidelines put forward a risk‐driven approach building on the existing requirements of the Capital Requirements Directive and the SREP GL and adapting them to the exceptional circumstances of the COVID‐19 pandemic. They focus on four key aspects of SREP: focus of the pragmatic SREP, overall SREP assessment and scoring, supervisory measures, and conduct of the SREP in cross-boarder contexts.

On 10 August 2020, the EBA published final reports on draft implementing technical standards (ITS) and guidelines on supervisory reporting and disclosures, both relating to amendments to the CRR made by Regulation (EU) 2020/873 (Quick Fix Regulation) relating to own funds, the non-performing exposures backstop and the leverage ratio. 

The EBA published a revised 2020 programme on 14 August 2020, which has been amended to reflect the projects postponed due to COVID-19 to alleviate the immediate operational burden for banks. The revised work programme also includes the EBA's prioritisation principles for the revision of the work plan including, freezing the publication of new consultations papers (unless critical) and limiting the interaction with the industry.

On 1 September 2020, the EBA published the Annual Report on resolution colleges for 2019. The report highlights the main areas that the EBA will monitor in 2020, which primarily address responses to the effects of COVID-19. In particular, for the 2020 cycle of resolution college meetings, the EBA intends to monitor engagement on the extent to which colleges undertake reviews of ‘Business Reorganisation Plans’ to assess if changes are required in response to the economic effects of COVID-19.

On 21 September 2020, the EBA published a statement that it will phase out its guidelines on legislative and non-legislative loan repayments moratoria in accordance with its end of September deadline. The regulatory treatment set out in the guidelines will continue to apply to all payment holidays granted under eligible payment moratoria before 30 September 2020, thus avoiding having to reclassify existing loans abruptly at a later stage. Banks can continue supporting their customers with extended payment moratoria also after 30 September 2020, such loans should be classified on a case-by-case basis according to the usual prudential framework.

On 30 September 2020, the EBA published its annual work programme for 2021, describing the activities and tasks for the coming year and highlighting its key strategic areas of work. In 2021, the EBA will focus on six strategic areas:

  • supporting the deployment of the risk reduction package and the implementation of effective resolution tools
  • reviewing and upgrading the EU-wide EBA stress testing framework
  • becoming an integrated EU data hub; (iv) contributing to the sound development of financial innovation and operational resilience in the financial sector
  • building the infrastructure in the EU to lead, coordinate and monitor AML/CFT supervision
  • providing the policies for factoring in and managing environmental, social and governance risks.

The EBA will also continue establishing a culture of sound and effective governance and good conduct in financial institutions, and particularly focus on addressing the aftermath of COVID-19.

On 12 October 2020, José Manuel Campa, the EBA Chairperson, delivered a speech stating that EU banks have entered the outbreak of the pandemics on a relatively strong footing. The strong capitalisation and liquidity profile of the banks and the EBA's swift actions in promoting flexibility and frontloading some policy measures have contributed to the financial resilience of the region. There remains need to address overcapacity, review business models and advance with banking sector consolidation and the EBA’s EU-wide 2021 bank stress test will play an important role in this regard.

On 20 November 2020, the EBA published a first assessment of the use of COVID-19 moratoria and public guarantees across the EU banking sector. COVID-19 related moratoria and public guarantees provided breathing space to borrowers and allowed banks to provide new lending to many companies impacted by COVID-19. Loans under moratoria on loan repayments were significant in many countries and were particularly widespread for loans to SMEs. While public guarantees were used to a lesser extent, they allowed banks to provide new lending to many companies impacted by the COVID-19. The EBA will be closely monitoring the evolution of moratoria and public guarantee schemes in the following quarters.

On 15 December 2020, the EBA published its report on the implementation of Basel III in the EU. The report was published in response to the EU Commission’s call for advice, requesting the EBA to update its impact assessment after taking into account the potential impact of the COVID-19 pandemic. The report presents the updated quantitative impact assessment of the final Basel III reforms and a complementary analysis of the potential impact of the COVID-19 pandemic. The report concludes that the EBA will continue to support the full implementation of the final Basel III standards in the EU, which, in the EBA's view, will contribute to the credibility of the EU banking sector and ensure a well-functioning global banking market. 

On 16 December 2020, the EBA published a press release welcoming the European Commission’s comprehensive action plan to tackle the expected rise of non-performing loans (NPLs) on banks’ balance sheets following the outbreak of the COVID-19 pandemic. The action plan requests the EBA’s support to improve data quality and comparability, enhance transparency and market discipline under Pillar 3 rules, and address regulatory impediments to NPL purchases. The EBA stated that it will act swiftly to support the initiatives while continuing its wider regulatory and supervisory work on NPLs in the EU.

On 16 December 2020, the EBA published a press release calling on banks to apply a conservative approach to dividends and other distributions in the light of the COVID-19 pandemic. The EBA stated that banks should refrain from distributing capital outside the banking system when deciding on dividends and other distribution policies, including share buybacks, unless they apply extreme caution. In the EBA's view, continuing to apply conservative distribution policies is fundamental to ensure the preservation of sound capital levels within the European banking sector and forms the basis to provide the needed support to the economy. The EBA also stated that, to achieve an appropriate alignment with risks stemming from the COVID-19 pandemic, a larger part of the variable remuneration of material risk takers should be deferred for a longer period and a larger proportion should be paid out in instruments. The EBA further stated that it will promote co-ordination among competent authorities as appropriate to ensure a level playing field within the EU.

On 21 December 2020, the EBA updated its report on the implementation of selected COVID-19 policies. The report clarifies questions raised in the context of the EBA’s monitoring of the implementation of COVID-19 policies, including in relation to the general payment moratoria, credit risk policy relief measures, reporting and disclosure as well as operational risk. The EBA may update the report in the future to reflect further issues that may arise.

On 29 January 2021, the EBA published additional clarifications on the application of the prudential framework in response to issues raised as a consequence of the COVID-19 pandemic. The EBA updated the FAQ section of the EBA Report on COVID-19 implementation policies, which provides clarity on the implementation of (i) the EBA Guidelines on moratoria and (ii) the EBA Guidelines on COVID-19 reporting and disclosure.

The EBA has decided to revise its Guidelines on recovery plan indicators and published its consultation paper on 18 March 2021.  The key message from the paper is that the temporary suspension of supervisory measures for situations such as the COVID-19 pandemic should not result in the automatic recalibration of regulatory recovery indicators. This paper is open for comments until 18 June 2021.

On 27 May 2021, the EBA published a thematic report titled Differences in provisioning practices in the United States and the European Union.  The core conclusions were: that loan loss provisions of EU banks tend to be less volatile than those of US banks; that the initial higher increase in unemployment followed by the faster economic recovery in the US helps to explains the sharper reaction in "Cost of Risk"; and that US banks appear to have a riskier loan portfolio than EU banks.


European Insurance and Occupational Pensions Authority

On 17 March 2020, the European Insurance and Occupational Pensions Authority (EIOPA) published a statement on actions to mitigate the impact on the EU insurance sector. They emphasised the need for insurers to take steps for business continuity and urged national authorities to give flexibility and offer operational relief. Similarly, EIOPA stated insurance companies should preserve their solvency capital positions (under Solvency II) to protect the industry and the insured. To ensure EIOPA's priorities are consistent, it has extended or delayed projects where input from NCAs and/or the industry is foreseen. In a statement on 2 April 2020, the EIOPA also urged all (re)insurers to temporarily suspend all discretionary dividend distributions and any planned share buy backs. It stated that in the current turbulent market it is prudent for insurers to protect their capital position.

On 18 May 2020, EIOPA published its updated Risk Dashboard based on the fourth quarter 2019 Solvency II data. While the report does not capture the latest market developments resulting from COVID-19, it showed that insurers face very high market risk but the general market perceptions and imbalances remained at a medium level.

On 8 July 2020, EIOPA provided clarification on its supervisory expectations on product oversight and governance (POG) requirements in the context of COVID-19, to ensure fair and consistent consumer outcomes through a product’s lifecycle. EIOPA expects insurance manufacturers to identify their products affected as a result of COVID-19, assess possible unfair treatment of customers for these products and consider proportionate remedial measures. The assessment should be on a medium to longer term basis with any remedial measures mitigating the situation and preventing further occurrences of detriment.

EIOPA published a supervisory statement on 20 July 2020, discussing the treatment, for Solvency II purposes, of schemes based on reinsurance implemented by Member States within the temporary framework for state aid measures with regard to COVID-19. As EIOPA has noticed significant differences in the implementation of national measures, to ensure a consistent and level playing field, it has outlined several supervisory recommendations for NCAs. On 27 July 2020, EIOPA published another statement on Solvency II discussing the supervisory reporting. It stated that insurance and reinsurance undertaking should now be able to comply with the deadlines provided in the Solvency II framework.

On 17 August 2020, EIOPA published the updated Risk Dashboard based on the first quarter of 2020 Solvency II data. The results show that, due to COVID-19, insurers are particularly exposed to very high levels of macro risk, while market, credit, profitability and solvency risks are at high level.

On 30 September 2020, EIOPA published its priorities for 2021-2023. EIOPA's main focus will be COVID-19 crisis management, risk mitigation and active support to the recovery of the European economy. In particular, consumer protection will remain a key strategic priority in light of increasing risks emerging from the pandemic.

On 9 November 2020, EIOPA published its updated Risk Dashboard based on the second quarter of 2020 Solvency II data. The results show that the risk exposures of the EU insurance sector slightly reduced, compared to the July risk assessment. Insurers are particularly exposed to very high levels of macro risk, while market, credit, profitability and solvency risks decreased to medium level. However, the risk assessment does not account for the outbreak of the second wave of the pandemic.

On 23 December 2020, EIOPA published a consultation on the Supervisory Statement on Own Risk Solvency Assessment (ORSA) in the context of COVID-19. The statement promotes convergence by guiding undertakings through common supervisory expectations on the ORSA in the current situation triggered by the pandemic, taking into account their specific risk profile. In EIOPA's view, the current situation calls for an ad-hoc ORSA in cases where the pandemic impacts the risk profile of the undertaking materially, in particular in cases where the performance of the regular ORSA has not allowed the undertaking to assess and to take into account the impact of the pandemic. 

On 29 January 2021, EIOPA published the Consumer Trends Report 2020 outlining the impact of the COVID-19 crisis on the insurance and pension sector from a consumer protection perspective as of 30 June 2020. The report states that the COVID-19 crisis highlighted a heterogeneous landscape in relation to the treatment of pandemics, with differences ranging across markets, products and undertakings. While pandemics may be rightly excluded from certain products, the patchy landscape raises concerns of possible consumer detriment. The report concludes that risks emerged in relation to exclusions may require further work to promote product and contract simplicity. However, a careful balance between simplicity and avoiding too much standardisation should be drawn, with the aim of ensuring that target markets find the coverage they need.

On 12 February 2021, EIOPA published a staff paper on measures to improve the insurability of business interruption risk in light of the pandemic. The highlights of the paper include:

  • By promoting prevention measures, insurers can improve society’s capacity to reduce losses.
  • To improve society’s capacity for bearing business interruption risk beyond traditional insurance mechanisms, capital markets can provide an additional layer of risk transfer and diversification.
  • While pandemic-specific schemes are being discussed, the option to introduce future-focused multi-peril pools should be considered.


European Commission Proposes Changes to MiFID II due to COVID-19

On 24 July 2020, the European Commission published a legislative proposal for a directive amending MiFID II as part of a capital markets recovery package with the aim to facilitate the economic recovery following the COVID-19 crisis by facilitating investments in the real economy and freeing up resources for both firms and investors. The amendments are to remove administrative burdens that result from documentation and disclosure rules that are not counterbalanced by corresponding increases in investor protection. More specifically, the areas the Commission has targeted for change relate to client information and product governance requirements, the energy derivatives markets, and the rules on paying for research on small and mid-cap issuers and on fixed income instruments.


The European Parliament's Committee on Economic and Monetary Affairs (ECON) published a draft report on 29 October 2020 and announced that it has adopted a report on 22 September 2020.


On 25 November 2020, the European Parliament adopted its position at first reading on the proposed directive and published a provisional edition of the adopted text, which reflects the Parliament's amendments to the proposed directive.

On 9 December 2020, the European Parliament announced that its Economic and Monetary Affairs Committee (ECON) and the Council of the EU have reached political agreement on the proposed directive amending MiFID II. The changes include:
  • professional clients will no longer receive information on costs and charges
  • ex-post information on costs and charges should be supplied without delay and clients should be able to receive this information. The client should also be given a breakdown of the costs before concluding a transaction.
  • retail clients will be able to receive information in digital format instead of on paper
  • certain product governance requirements will no longer apply to corporate bonds with "make-whole clauses"
  • some changes to the position limits regime for commodity derivatives.

A press release published on 16 December 2020 stated that the Parliament and the Council will formally adopt the amendments without further discussion, possibly in February 2021.

On 25 January 2021, the European Parliament updated its procedure file on the proposed directive amending the MiFID II Directive, indicating that the Parliament will consider the proposed Directive during its plenary session to be held from 8 to 11 February 2021.

On 15 February 2021, the Council announced that it has adopted the proposed directive on 11 February 2021. The Council has also published the adopted text of the directive. The directive is expected to be published in the Official Journal of the European Union before the end of February 2021 and will enter into force on the day after its publication.

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