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On 13 March 2020, the Austrian Government announced a comprehensive package of measures to combat Covid19 (“Corona virus”), which is to come into force on 16 March 2020. The following initial overview therefore addresses some of the key issues that this will raise for banks – but also for other financial service providers:
Questions and answers
Do the emergency measures concerning Covid-19, which will apply from 16 March 2020, provide for Special rules for Banks and other financial service providers?
Banks, as part of the critical infrastructure, are exempted from the ordered closure of shops. Bank branches are therefore allowed to keep open, which probably also had the purpose to prevent a “bank-run” last Friday. Other financial service providers, such as insurance companies, pension funds, investment firms and insurance brokers are not subject to these exemptions. So far, there are no other specific regulations for financial service providers known regarding the new emergency measures. Here, however, the final text of the law remains to be seen.
Has the Financial Market Authority already announced measures?
In a letter dated 13 March 2020, the FMA announced that it will switch to teleworking itself, except for critical functions, and that visits to the FMA should therefore be avoided. However, the availability of the FMA will remain guaranteed.
In addition, the “local presence during inspections” will be suspended (which probably means that for the time being, there will be no on-site inspections, but inspections will be conducted via telecommunications). However, the FMA has announced that it will closely monitor further developments.
Moreover, the FMA has not yet published any specific guidelines on the current situation.
The EU Regulation (No 236/2012) on short sales allows national supervisory authorities to temporarily prohibit short sales of financial instruments in the event of a significant price decline. In Italy, Spain and the UK, the supervisory authorities have imposed temporary bans on short selling in response to the sharp fall in the prices of several company shares – which is associated with the Covid-19 crisis. The FMA has not taken any such measures to date.
What measures are available at the EU level?
In a statement of 12 March 2020 on the Covid-19 crisis, the European Banking Authority (EBA) announced two key points:
- EU-wide stress testing of banks will be postponed until 2021 to allow banks to focus on the current situation.
- Where appropriate, the competent supervisory authorities should make the greatest possible use of the flexibility provided by supervisory laws.
This appears to be intended to prevent markets from being impaired by funding constraints due to the excessively strict application of, inter alia, capital adequacy and liquidity requirements. On the other hand, the EBA is keen to ensure that deteriorations in asset quality are correctly reflected. However, this should be done in close dialogue between the supervisory authorities and the banks.
The current economic situation will of course also have an impact on banks’ balance sheets. For example, loan defaults by borrowers who have run into difficulties as a result of the crisis or losses on trading positions due to stock market developments may have an impact on banks’ capital ratios, which could fall below the minimum requirements in an emergency.
In this context, the European Central Bank (ECB), which also supervises the systemically important Austrian banks, announced corresponding relief for banks in a on 12 March 2020:
- Banks should be able to make full use of the capital and liquidity buffers intended for times of crisis. The ECB allows banks to temporarily operate below the capital level defined by the Pillar 2 recommendation, the capital maintenance buffer and the liquidity coverage ratio.
- In addition, the ECB allows banks to use additional Tier 1 or Tier 2 capital in addition to common equity Tier 1 capital to meet its Pillar 2 requirements.
- The ECB also plans operational flexibility in the implementation of supervisory measures on a case-by-case basis. The ECB will coordinate individual measures with the banks it supervises (such as postponing on-site inspections or extending deadlines for non-urgent supervisory measures).
All these measures are positive in our view, although it remains to be seen how far the flexibility of the supervisory authorities will actually extend in practice.
What are the implications for teleworking (home office)?
The government has called on companies to enable teleworking for employees where possible from 16 March 2020. This is not a mandatory measure (probably also for budgetary reasons due to the potential claims for compensation that could arise from a mandatory order). However, many banks and other financial service providers have already sent most of their employees to their home office or enabled teleworking on request.
From a compliance point of view, the question naturally arises as to whether this is compatible with supervisory due diligence requirements, particularly with regard to
- risk management,
- the monitoring of the employees,
- IT security,
- the protection of banking secrecy and data protection, and
- the market abuse rules (prevention of insider trading and market manipulation).
Although the FMA has not yet issued a public statement on this issue, the German Federal Financial Supervisory Authority (BaFin) stated in an Information dated 12 March 2020 on the admissibility of trading activities in the home office that the corresponding strict rules can be temporarily relaxed for a home office solution due to the crisis. This is justifiable from a banking supervisory point of view, if not even necessary – as part of an emergency concept – in crisis situations. In the absence of access to office and trading premises, it is necessary to create an alternative in order to maintain business operations. However, if institutions had previously excluded this possibility, they would have to explicitly lift the ban and lay down clear work instructions. From the point of view of BaFin, all required security measures and controls can be implemented electronically.
This approach, which is also in line with EBA’s demand for flexibility, is also applicable for Austria. Even though teleworking is not mandatory, it is useful for ensuring the functionality of financial service providers (avoiding staff shortages due to illness) and is also recommended by the federal government. The various supervisory regulations are usually also flexible to the extent that the principles of proportionality and appropriateness must generally be taken into account. For example, the organisational requirements for banks pursuant to Article 39 para. 6 BWG provide, among other things, that “taking into account the nature, scope and complexity of their business activities, appropriate principles and procedures shall be laid down in writing, regularly updated and continuously complied with, which are designed to “minimise the risks of possible non-compliance” with supervisory laws. To a certain extent, this therefore permits a balancing of interests, which is the case here for the home office. Of course, corresponding service instructions and control measures will be necessary, but these could also be implemented electronically – as is the case with BaFin.
Are emergency plans to be readjusted?
In view of the spread of the Corona virus, the EBA wants to review the emergency plans of European banks. The focus will be on reviewing their ability to ensure the continuation of business.
The Covid-19 crisis should therefore be taken as an opportunity to review the suitability of existing contingency plans and, if necessary, to review them on the basis of the current situation.