The Basel Committee on Banking Supervision has introduced additional measures (pdf) to alleviate the impact of COVID-19 on the global banking system. These measures, titled "Measures to reflect the impact of Covid-19" (the "COVID-19 Measures") are intended to ease or defer certain restrictions so as to facilitate lending to the real economy and to increase the operational capacity of banks and supervisors so that they may address urgent priorities regarding financial stability. These changes have been received positively by OSFI (Office of the Superintendent of Financial Institutions).
These newly announced additional measures summarized below, complement the earlier measures announced on March 27, 2020 which either extend or defer the implementation date of the outstanding Basel III standards by one year. With these extensions and deferrals, the implementation date of the Basel III standards (finalized in December 2017) is now January 1, 2023 with accompanying transitional arrangements for the output floor extended to January 1, 2028. The implementation date of the revised market risk framework (finalized in January 2019) is now January 1, 2023 and Pillar 3 disclosure requirements (finalized in December 2018) is now January 1, 2023.
Technical Clarifications for Extraordinary Support Measures
Included in the COVID-19 Measures are technical clarifications for banks regarding the extraordinary support measures taken by governments in many jurisdictions around the world. Some of these government measures include government guarantee programs for bank loans and payment moratoria. The measures taken by Canadian actors, including the federal government, various agencies, and Crown corporations, have been covered in a previous Financial Services bulletin: COVID-19 Economic Response: Measures Impacting Banks.
The Basel Committee published these technical clarifications to ensure that banks reflect the risk-reducing effect of these measures when determining capital requirements. The clarifications provide guidance on:
- the risk-based capital treatment of loans that are subject to government guarantees that have been made in response to COVID-19;
- the capital treatment of loans subject to payment moratoria initiated in response to COVID-19;
- how the Committee's guidance on non-performing assets should be applied in relation to loans subject to the above-noted payment moratoria; and
- how the Committee's guidance on exposures subject to forbearance should be applied in relation to loans subject to relief measures, such as the above-noted payment moratoria or public guarantees.
Expected Credit Loss Accounting
The Basel Committee amended its transitional arrangements for the regulatory capital treatment of Expected Credit Loss ("ECL") accounting. In doing so, the Committee intends to provide greater flexibility for governments "deciding whether and how to phase in the impact of expected credit losses on regulatory capital."
In the press release, the Basel Committee reiterated "the importance of ECL accounting frameworks as a forward-looking measure of credit losses, and expects banks to continue to apply the relevant frameworks for accounting purposes." The Committee stressed that banks should take advantage of the "flexibility inherent in ECL frameworks to take account of the mitigating effect" COVID-19 governmental support measures.
Margin Requirements for Non-Centrally Cleared Derivatives
The Basel Committee and the International Organization of Securities Commissions extended the deadline for completing the final two implementation phases of the margin requirements for non-centrally cleared derivatives by one year. The final implementation phase will now take place on September 1, 2022.
The deadline extension reflects the reality that, in response to COVID-19, firms have been required to adjust to the displacement of staff and to centralize their resources on managing risks arising out of current market volatility.
Global Systemically Important Banks Annual Assessment
The Basel Committee made the decision to alleviate burdens on global systemically important banks ("G-SIB"). While the Committee will conduct the 2020 G-SIB assessment exercise based on 2019 year-end data, the Committee will not collect any memorandum data included in the data collection template. Additionally, the Committee postponed the implementation of the revised G-SIB framework from 2021 to 2022.
As the financial and economic impacts of COVID-19 have evolved, domestic and international regulators have responded with measures to alleviate the negative effects on financial systems. Domestic banking regulators, including OSFI, have been supportive of this recent guidance from the Basel Committee. As COVID-19 continues to spread, one can expect financial regulators to continue to enact measures to attempt to ensure the stability of the global financial system while also helping institutions facilitate the flow of goods and services in the real economy.