COVID-19: Impact for the Banking Sector

A variety of announcements from the Central Bank of Ireland (CBI) and the European Central Bank (ECB) have been issued in the last number of weeks dealing with the ongoing COVID-19 crisis. These cover a wide range of issues from payment services, LIBOR transition and accounting implications of the pandemic under IFRS 9. We take a quick look at a selection of these.

Countercyclical capital buffer

The ECB has acknowledged that for as long as containment measures last, economic activity will continue to decline. Therefore, monetary policies will play a vital role in alleviating the decline in economic activity. On 12 March 2020, the ECB announced that banks can fully use capital and liquidity buffers so that banks can continue financing households and corporates experiencing temporary difficulties.

This enabled the CBI to reduce the countercyclical capital buffer, or CCyB, from 1% to 0% no later than 2 April 2020. The CCyB in basic terms is a safety mechanism designed to ensure banks retain sufficient capital in times of economic crisis.

Releasing the buffer, by reducing it to zero, is designed to assist the banking system to both absorb COVID-19 related losses and support the economy. According to the Governor of the Central Bank, the capacity for new lending could range from €10–16 billion if this mechanism was used entirely for that purpose. According to the Irish Minister for Finance, this could support approximately €13 billion of restructured lending to borrowers. Either figure is a significant amount of money when viewed in the context that new lending to Irish residents amounted to about €30 billion in 2019.

Basel III

In addition, the Basel Committee on Banking Supervision, a group of which comprises Central Bank governors and heads of supervision, recently announced the deferral of the implementation of Basel III. This deferral was implemented in order to increase the operational capacity of banks and supervisors to respond to COVID-19. This includes deferring, by one year, the implementation dates of the:

• Basel III standards with accompanying transitional arrangements for the output floor also extended to 1 January 2028
• Revised market risk framework pushed out to 1 January 2023
• Revised Pillar 3 disclosure requirements pushed to 1 January 2023

Long-term refinancing operations

The ECB announced on 12 March that the conditions of the Targeted Long Term Refinancing Operations (TLTRO) programme would be modified to stimulate credit supply and incentivise lending from banks to the private sector. These programmes are designed to funnel the monetary easing associated with negative rates to firms and households that rely on access to bank credit, especially now when credit is desperately needed to bridge a prolonged period of economic inactivity. The ECB’s Bank Lending Survey, published at the end of April, reports that banks across Europe are using liquidity gained from the TLTRO programme to grant loans to the non-financial private sector, which is positive news for the ‘real economy’. The CBI forecasts that Irish banks could potentially borrow approximately €20 billion through one of these operations.

The ECB also decided to introduce seven additional LTROs, called Pandemic Emergency Longer-Term Refinancing Operations (PELTROS). These will provide liquidity support by providing a backstop after expiry of the bridge LTROs conducted since March 2020.

Bank dividend freeze

To preserve liquidity, the ECB had requested Eurozone banks to conserve capital and freeze dividend payments for 2019 and 2020, as well as halting the practice of share buy-backs.

This maintains maximum capital preservation and space to absorb capital losses. In response, both AIB and Bank of Ireland announced the deferral of dividend payments to shareholders and the situation will not be revisited until October 2020.

Bank customer considerations

A variety of measures were announced by the Irish Minister of Finance after consultation between the CBI, Banking & Payments Federation Ireland (BPFI) and major banks. BPFI members include the five main retail banks, together with non-bank lenders and specialist lenders as well as credit servicing firms. These measures supplement the existing protections made available to customers, which remain in place and unchanged.

At the end of April it was announced that Irish banks and non-bank lenders would be able to extend payment breaks, initially made available to impacted bank customers in March, from 3 to 6 months. Any customer facing potential difficulties in making loan repayments because of COVID-19 is advised to contact their bank or credit servicer as early as possible. If a lender agrees to a payment break with no payments at all, then no “missed payments” will be recorded on the Central Credit Register during this period. Similarly, the Irish Credit Bureau has advised its members that there should be no impact on the credit records of borrowers availing of the six month payment break. The outstanding balance will not decrease during the period of the payment break and will increase to take account of the payments not made during the payment break period.

BPFI CEO, Brian Hayes, recently confirmed that 28,000 mortgage payment breaks had been processed or were in the middle of being processed; just over one week after the initial payment break initiative had been announced on 18 March. That figure continues to increase. Over 65,000 mortgage payment breaks have been processed by BPFI members to the end of April, as well as 22,000 SME payment breaks.

As a general rule, the CBI expects banks to act in the best interest of consumers and to take a customer-focused approach when decisions are being made with existing protections for customers continuing to apply. In particular, the messaging from the Central Bank to date, both for individual consumers and SMEs, is that lenders will be expected to work on and offer longer term sustainable restructuring solutions to borrowers who will still be under financial pressure at the end of the 6-month period. The Central Bank has also re-emphasised that all of the typical protections afforded in legislation and the relevant codes of conduct will continue to apply to borrowers facing difficulties and regardless of whether or not they avail of any payment breaks during the crisis.

From the banks’ perspective, it will be important that they assess the impact that the payment breaks and overall impairment on borrowers’ ability to repay loans according to terms will have on their own balance sheets and capital buffers.

SBCI Covid-19 Working Capital Loan Scheme

The Strategic Banking Corporation of Ireland (SBCI) has also initiated a working capital scheme in partnership with government departments and with the financial backing of the European Union’s Horizon 2020 programme for research and innovation.

These are loans made available through Bank of Ireland, AIB and Ulster Bank, to address future working capital requirements or to fund innovation or adaption of businesses to mitigate the impact of the crisis. Loans are available from €25,000 to €1.5 million at a maximum interest rate of 4% over 1-3 years and may be unsecured up to €500,000. Optional interest-only repayments may be available at the start of the loans.

Viable micro, small and medium sized enterprises (SMEs) and Small MidCap enterprises that meet the eligibility criteria may apply, so long as:

(1) They are impacted by the COVID-19 virus such that turnover/profitability is reduced by 15% due to Covid 19, and

(2) The loan satisfies one of the “innovation criteria” set out in the SBCI / Horizon conditions, including that 80% of the loan will be spent on research and innovation activities associated with the business response to the Covid-19 challenge, which appears to be a reasonably broad criteria.

This is one of several government led capital initiatives to supplement SME’s through the SBCI, Enterprise Ireland and Microfinance Ireland.

In addition, the Government announced on 2 May that the SBCI Credit Guarantee Scheme would be repurposed, and the Irish Government will guarantee up to €2 billion of loans granted by Irish banks to small and medium size enterprises. The State will guarantee the banks against 80% of losses. The banks will be responsible for the other 20%. The details will need to be clarified as currently information available from different sources on this proposal are not consistent. See our dedicated insight available here

Conclusion

We expect that the next few months will bring a lot of challenges to banks and their customers. Consumer spending will decline creating acute strains on the cash flow of companies. Staff at all levels will become ill and unavailable for work and unknown logistical issues arising from telecommunications network failure or system outages may also await.

Banks and other market participants have implemented their contingency plans and their effectiveness will be severely tested. The Government will continue to try to intervene in various sectors, e.g. HBFI’s new Momentum Fund, which may have further direct and indirect impacts on banks and their customers.

For expert guidance on the unique regulatory and operational issues facing banks and credit institutions during these challenging times, contact a member of our Financial Services team.

The content of this article is provided for information purposes only and does not constitute legal or other advice.