Covid-19 | Measures in banking law at European level and in France

AT EUROPEAN LEVEL

1.    Measures implemented by the European Banking Authority (EBA)

 Key message for banking supervisors: more flexibility in the application of credit institutions’ prudential obligations

In its statement of 12 March, the European Banking Authority (EBA) recommends that supervisory authorities (such as the European Central Bank (ECB) or the Autorité de Contrôle Prudentiel et de Résolution (ACPR)) plan their supervisory activities, including on-site inspections, in a more pragmatic and flexible manner, and potentially postpone those that can be deemed non-essential. In this respect, the ECB has stated that it is extending the deadlines for the implementation of corrective measures deriving from recent inspections and investigations of internal models.

The EBA also advocates that the competent authorities should be more flexible with regard to deadlines for the submission of regulatory information by regulated institutions as part of their reporting obligations.

Lastly, supervising authorities are asked to be more flexible in monitoring compliance with regulatory requirements regarding non-performing exposures.

For further information, please refer to the EBA statement of 12 March 2020, “EBA statement on actions to mitigate the impact of COVID-19 on the EU banking sector”, accessible here.

Postponement of European stress tests to 2021

In response to the current health crisis, the EBA has decided to postpone to 2021 the stress-testing exercise that was to take place this year. In the meantime, the EBA will ensure that, for 2020, the information provided by banks on their exposure and the quality of their assets is up to date.

The EBA normally organises an annual EU-wide stress test simulation to assess the resilience of credit institutions, i.e. their ability to withstand unexpected losses in the event of an economic and financial crisis.

By taking such a decision, the EBA wants to ensure that banks can fully concentrate on their core business and in particular on granting credit, especially to companies.

For further information, please refer to the EBA statement of 12 March 2020, “EBA statement on actions to mitigate the impact of COVID-19 on the EU banking sector”, accessible here. (https://eba.europa.eu/eba-statement-actions-mitigate-impact-covid-19-eu-banking-sector).

2. European Central Bank (ECB) measures: relaxed own capital requirements

The ECB has decided to temporarily ease the regulatory capital requirements for banks to ensure the economy stays appropriately financed during the coronavirus pandemic.

In order to comply with the Pillar 2 Requirement (P2R), banks will no longer be obliged to use only ordinary shares; they will also be able to use instruments in their Additional Tier 1 capital (AT1 capital) and/or Tier 2 capital. It should be noted here that P2R applies on top of Pillar 1 minimum regulatory capital requirements and is intended to cover risks that may have been underestimated or that are not covered by the minimum regulatory requirements. The level of additional own funds under Pillar 2 shall be determined for each credit institution by its competent supervisory authority.

In addition, banks will be allowed to stand temporarily below the level of capital defined in the Pillar 2 Guidance (P2G), the capital conservation buffer and the liquidity coverage ratio (LCR).

For further information, please refer to the EBA statement of 12 March 2020, “EBA statement on actions to mitigate the impact of COVID-19 on the EU banking sector”, accessible here.

IN FRANCE

Relaxation of the countercyclical bank capital buffer to zero

In response to the Covid-19 crisis, the Haut Conseil de la Stabilité Financière (France’s Higher Council for Financial Stability, or HCSF) announced in a press release published on 18 March 2020 that it had decided to “fully relax the counter-cyclical bank capital buffer”, which had previously been set at 0.25% of risk-weighted assets on credit institutions’ French exposures, and which was due to rise to 0.5% on 2 April. The countercyclical capital buffer is now set at 0% until further notice^[1].

The countercyclical capital buffer was introduced by the Basel Committee following the 2008 subprimes crisis and requires credit institutions to build up additional capital reserves during periods of economic growth. This capital buffer can then, if necessary, be used to absorb unexpected losses in times of stress or economic crisis.

By exempting credit institutions from having to build up these reserves, the HCSF hopes that credit institutions will be able to fully devote themselves to granting credit, particularly to small and medium-sized enterprises (SMEs) that are heavily reliant on bank financing. This measure should make it possible to inject nearly EUR 8 billion into the economy.

The HCSF’s decision to relax the countercyclical buffer may not be the only measure to combat the crisis, since the body responsible for ensuring financial stability in France stated that it was “ready to take any measure within its remit that is necessary to guarantee financial stability, in coordination with national and European supervisors and authorities”.

For further information, please refer to the HCSF press release dated 18 March 2020.

The State acts as guarantor for loans granted to companies under certain conditions

In order to make it easier for credit institutions and finance companies to grant loans to businesses and, in particular, to enable them to cover their cash requirements, the French state, through Bpifrance Financement S.A., has committed to guarantee bank loans under certain conditions.

This is the first measure of its kind implemented in Europe and approved by the European Commission as part of the management of the health crisis.

Broadly speaking, any loan granted by a credit institution or financing establishment will be eligible for a State guarantee if it complies with the following specifications:

• the loan is granted between 16 March 2020 and 31 December 2020 ;
• the loan is granted to a company, whether a legal or natural person (including craftsmen, traders, farmers, freelancers and micro-entrepreneurs), or to an association or foundation with an economic activity, excluding property companies, credit institutions, financing companies and businesses in the midst of collective proceedings (safeguard, receivership or judicial liquidation);
• the loan does not enjoy any other guarantee or security;
• no repayment of the loan is required within the first twelve months and, at the end of the first year, the borrower must have the possibility of amortising the loan over a further one to five years;
• when the loan is granted to a company employing fewer than 5,000 employees in France and posting a turnover under EUR 1.5 billion, the loan is notified to Bpifrance Financement S.A. “via a single dedicated and secure system based on a standardised file format” that will be made available to the lending institution by Bpifrance Financement S.A. ;
• the loan does not exceed an amount equal to 25% of the borrower’s 2019 turnover or, where applicable, of the last year available. Exceptionally, innovative companies may benefit from a loan of a maximum amount equal to twice the France 2019 payroll if this amount is higher than the ceiling calculated on the basis of turnover; similarly, for companies incorporated as of 1 January 2019, this amount is capped at two years of estimated France payroll.

The State does not guarantee the entire loan, rather a percentage of the outstanding principal, interest and ancillary costs of the loan. This percentage varies according to the size of the company:

• 90% for companies with fewer than 5,000 employees in France, and a turnover of under EUR 1.5 billion;
• 80% for companies with a turnover of between EUR 1.5 and 5 billion;
• 70% for other companies

  Lastly, the Bpifrance Financement S.A. guarantee is not granted free of charge. It is subject to a commission (the scale of which varies according to the size of the company and the maturity of the loan) that the lending institution must collect, in the name and on behalf of the State, from the borrowing company.

  For further information, please refer to the order dated 23 March 2020 providing the State’s guarantee to credit institutions and financing establishments in application of article 4 of Law no. 2020-289 dated 23 March 2020, amending the 2020 finance act.

• Broadening the scope of private loans from the Banque de France for VSEs & SMEs

  So that banks can grant additional financial facilities to SMEs, the Banque de France has indicated that it will broaden the scope of private loans available to 16,000 SMEs and VSEs.

For further information, please refer to the Banque de France press release dated 13 March 2020.
____

[1] In accordance with Article L. 511-41-1 A of the French Monetary and Financial Code, “The Haut Conseil de la Stabilité Financière provided for in Article L. 631-2-1 sets the counter-cyclical capital buffer rate, applicable to exposures located in France, on a quarterly basis. This rate shall be taken into account in determining the specific countercyclical capital buffer requirement mentioned in 1° of II”.

This legal update is not intended to be and should not be construed as providing legal advice. The addressee is solely liable for any use of the information contained herein and the Law Firm shall not be held responsible for any damages, direct, indirect or otherwise, arising from the use of the information by the addressee.

>> Click here to read the legal updates of Gide’s multidisciplinary taskforce set up to answer all your legal issues relating to Covid-19.