Banks should continue to apply sound underwriting standards, pursue adequate policies regarding the recognition and coverage of non-performing exposures, and conduct solid capital and liquidity planning and robust risk management.
These actions follow a sent on 3 March 2020 to all significant banks to remind them of the critical need to consider and address the risk of a pandemic in their contingency strategies. Banks were asked to review their business continuity plans and consider what actions could be taken to enhance preparedness to minimise the potential adverse effects of the spread of the coronavirus. ECB Banking Supervision will engage with banks to ensure the continuity of their critical functions. The ECB Supervisory Board is monitoring developments; these measures will be revised as necessary.
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- Banks need to have own funds in sufficient quantity and quality on the liabilities side of their balance sheet to be able to .
- European banking law defines three elements of own funds. Common Equity Tier 1 capital (CET1) is the highest quality of own funds and is mainly composed of shares and retained earnings from previous years. Additional Tier 1 capital (AT1) and Tier 2 capital can be equity or liability instruments and are of lower quality.
- Pillar 2 capital consists of two parts. One is the Pillar 2 Requirement or P2R, covering risks which are underestimated or not sufficiently covered by Pillar 1. The other is the Pillar 2 Guidance or P2G, which indicates to banks the adequate level of capital to be maintained in order to have sufficient capital as a buffer to withstand stressed situations, in particular as assessed on the basis of the adverse scenario in the supervisory stress tests.
- Under the new Capital Requirements Directive V (CRDV) banks can fulfil Pillar 2 Requirements with a minimum 56.25% CET1 as a general principle. The remaining P2R can be filled with Additional Tier 1 and Tier 2 instruments. This law was initially scheduled to come into effect in January 2021 as part of the latest revision of the CRDV.
- There are also capital buffers mitigating specific risks, such as the capital conservation buffer (CCB) and the countercyclical capital buffer (CCyB) (the latter being set by the national macroprudential authorities). These capital buffers are designed to absorb losses in times of stress.
- In case of banks' capital falling below the combined buffer requirement (CCB, CCyB and systemic buffers), banks can make distributions only within the limits of the maximum distributable amount (MDA) as defined by EU law.