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COVID-19 – ECB bank capital relief measures – Austrian legal perspective

19/03/2020

In its press release of 12 March 2020, the ECB (in line with the EBA's statement of the same day) committed itself to two major capital related measures. According to the ECB, banks 

•    can fully use capital buffers, including Pillar 2 Guidance (P2G);
•    will benefit from relief in the composition of capital for Pillar 2 Requirements (P2R). 

Use of capital buffers - legal/regulatory impediments

As if it had been a premonition of current events, the Basel Committee reiterated its view "that banks ... should view the capital buffers set out in the Basel III framework as usable in order to absorb losses" on 31 October 2019. The ECB now seems to have (re-)adopted this original Basel III rationale in its press release of 12 March 2020. This is not fully in line with previous regulatory developments in this area and certain provisions of the legal framework as it stands. The following is intended to highlight areas where Austrian banks may not be able to (fully) benefit from the ECB relief measures in the short term even where regulators are willing to support them. 

Maximum Distributable Amount (MDA)

Lowering the MDA line: Reducing the Countercyclical Buffer (CCyB) is not an option for Austrian exposures, because the buffer rate has already been set at zero (and the Austrian Financial Market Stability Board recommended to maintain the zero rate beyond 1 July 2020 in its 10 March 2020 meeting). 

Compliance with the MDA as such: In line with Art 141 CRD, where Austrian institutions do not meet the Combined Buffer Requirement (CBR), they will be prohibited from making (full) distributions on CET1 / AT1 (and certain variable remuneration) when operating below the MDA line. (Different from the intended M-MDA under BRRD II) the legal framework does not provide for discretion to be exercised or a formal waiver to be applied by the competent authority in this respect. In other words: At this stage, there does not seem to be a legal basis for making relevant payments (including distributions on AT1) in full as long as the CBR has not been fully restored. This could undermine efforts to "allow" institutions to draw down on their capital buffers.

Documentation: In respect of payout restrictions, major Austrian AT1 documentation is (inter alia) referring to compliance with MDA restrictions or applicable MDA not to be exceeded. Therefore, even where institutions were "allowed" to draw down on their capital buffers by regulators, they would be bound by their terms and conditions (subject to potential room for interpretation available).

Capital buffers

Compliance with the CCB: Even if relevant regulatory bodies (such as the Basel Committee) and now the ECB (in line with the EBA) seem to "allow" institutions to draw down on "their" CCB, the basic legal concept seems to remain an obligation to comply with buffer requirements. Under the current framework, institutions do not seem to be free to choose not to make any effort to fill up the CCB (and to simply accept MDA payout restrictions). This is in line with usual considerations related to recovery capacity as a core matter of most recovery plans (see also below). i.e. with the obligation to restore the full pre-recovery capital situation as soon as practicable. Whereas the ECB capital relief measures seem to imply that buffer usage would be acceptable for a limited period of time, it might still be doubtful whether banks concerned are really in compliance with the relevant legal provisions (even if not subject to regulatory sanctions or action). In any event, so we believe, banks should be able to demonstrate that temporary buffer usage is part of their reasoned capital planning. 

Interaction with recovery plans

Recovery indicators: Where losses (or a deterioration of RWAs) affected an institution's capital to the extent that their recovery indicators where breached, it cannot be seen how "allowing banks to operate temporarily below the level of capital defined by ... P2G [or] the capital conservation buffer" could prevent recovery plans from being triggered. Under the current ECB relief measures, this could hit institutions having set their recovery indicators within P2G in the first place, but may also apply to institutions with recovery indicators at the upper end of the CBR or within the CBR.

Institutions bound by their recovery planning: Legally, institutions should be considered as being bound by their own recovery planning as has been accepted by the competent authority. Unless enough flexibility has been structured into recovery plans themselves (or indicators have been set at a rather low level, contrasting with recent regulatory practice), they may wish to seek modifications to their plans (and have them accepted by competent authorities) in order to make use of the ECB capital relief measures.

Regulatory background: This situation is a result of the ECB having continuously aimed at recovery indicators set at or above the CBR whereas, under the original Basel III concept, capital buffers were meant to be used up in times of a downturn (as now seems to be the rationale of the ECB relief measures).

P2G 

MDA: In line with the concept of P2G laid down in Art 104b of the revised CRD, P2G should not be MDA relevant so that the ECB capital relief approach would seem to be more effective in this area rather than within the CBR. Potential recovery plan indicators might, however, be breached, depending on where they were set.

Related people

Walter Gapp
Partner
Vienna