20 March 2020

Bank of England announces supervisory and prudential policy measures to address the challenges of Covid-19

The Bank of England and PRA announced a number of measures aimed at alleviating operational burdens on PRA-regulated firm and Bank-regulated financial market infrastructures in the wake of the Covid-19 outbreak.

Cancellation of the Bank’s 2020 annual stress test – the annual cyclical scenario (ACS)

• The decision to cancel the 2020 stress test for the eight major UK banks and building societies is intended to help lenders focus on meeting the needs of UK households and businesses via the continuing provision of credit.

Amendments to the biennial exploratory scenario (BES) timetable

• Liquidity: The Bank had been due to publish the results of the 2019 BES on liquidity in mid-2020. In order to alleviate burdens on core treasury staff at banks, the Bank has paused this exercise until further notice.
• Climate risk: The Bank published a discussion paper on the 2021 BES on the financial risks from climate change on 18 December 2019. The Bank will take stock of the responses as well as the evolving situation with a view to announcing the way forward for this exercise in the summer.

Bank statement on IFRS 9 and Covid-19

• The Bank and the PRA recognise the importance of IFRS9 as a forward-looking measure of losses, which were previously not considered in IAS39.
• The Bank and PRA also note the very high levels of uncertainty around how Covid-19 will impact the economy.  Under the Capital Requirements Directive, the PRA can consider whether firms’ provisioning under applicable accounting standards is flowing through into its regulatory capital position in an appropriate way.  The PRA reminds firms that forward-looking information used to incorporate the impact of Covid-19 on borrowers into the expected credit loss (ECL) estimate needs to be both reasonable and supportable for the purposes of IFRS9. 
• The Bank continues to consider the potential interaction of Covid-19 with IFRS9, including through discussion with relevant bodies domestically and internationally, and expects to provide further guidance to firms regarding our approach next week, with a view to assisting firms to adopt consistent approaches in the face of the prevailing uncertainty.

Postponement of the joint Bank / Financial Conduct Authority (FCA) survey into open-ended funds

• The planned survey covering c.300 funds has been delayed until further notice, with a subsequent impact on the FCA consultation that would have followed.

With respect to supervisory engagement with firms and FMIs:

• Supervisory programmes for individual firms and FMIs: Bank and PRA supervisors will review their work plans so that non-critical data requests, on-site visits and deadlines can be postponed, where appropriate. This includes pausing the skilled persons Section 166 reviews relating to the reliability of banks’ regulatory returns that were announced in October 2019.
• Senior Manager Function (SMF) applications: The PRA will review its approach for considering and processing applications with a view to reducing the burdens involved during current events.
• Operational Resilience Policy Development: The deadline for responses to the current Bank and PRA consultations on “Building Operational Resilience: Impact tolerances for important business services” and the PRA consultation on “Outsourcing and third party risk management” will, in line with the FCA, be extended to 1 October 2020.
• Internal Ratings Based (IRB) models: Implementation of the proposals related to the Definition of Default, Probability of Default, and Loss Given Default estimation, will be delayed by one year to 1 January 2022. The move to ‘hybrid’ IRB models will also be delayed until the same date, 1 January 2022.
• Financial Services Regulatory Initiatives Forum (RIF): The Bank, PRA, FCA and other authorities have now agreed that the first meeting will take place as soon as possible in April 2020 to assist co-ordination of the regulatory initiatives.
• Basel 3.1: The Government has announced that it will be introducing legislation that will enable the implementation of Basel 3.1 in the UK and HM Treasury anticipates a central role for UK regulators in designing and implementing Basel 3.1 requirements that will apply to firms. The PRA acknowledges that the existing Basel timetable may prove to be challenging, and is coordinating internationally to ensure that implementation will happen alongside other major jurisdictions.

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