Coronavirus (COVID-19)—ESRB issues recommendation on restricting distributions during crisis

Coronavirus (COVID-19)—ESRB issues recommendation on restricting distributions during crisis

The European Systemic Risk Board has published a recommendation dated 27 May 2020 on the restriction of distributions during the coronavirus (COVID-19) pandemic (ESRB/2020/7), which will apply until at least 1 January 2021. The Bank of England (BoE) and the Prudential Regulation Authority (PRA) have issued a joint statement acknowledging the ESRB’s recommendation.

ESRB recommendation

The ESRB recommends that, until at least 1 January 2021, relevant authorities ask financial institutions under their supervisory remit (excluding branches) to refrain from taking any of the following actions where to do so would reduce the quantity or quality of own funds at the EU group level (or at the individual level where the financial institution is not part of an EU group) and, where appropriate, at the sub-consolidated or individual level:

• making a dividend distribution or giving an irrevocable commitment to make a dividend distribution

• buying back ordinary shares

• creating an obligation to pay variable remuneration to a material risk taker

There is an exemption where a financial institution is legally obliged to undertake one of the actions listed above.

The recommendation also sets out criteria for its implementation by the relevant authorities, including general criteria which apply to the recommendation as a whole (such as taking account of proportionality, avoiding regulatory arbitrage, and regularly assessing the impact of the restrictions), and specific criteria which apply to dividend distributions and buy-backs of ordinary shares.

The addressees of the recommendation are required to notify the European Parliament, the Council of the EU, the European Commission and the ESRB of the actions undertaken in response to the recommendation, or to substantiate any inaction. Those communications must be sent by submitting the form set out in the annex to the recommendation by 31 July 2020.

The General Board of the ESRB will assess the actions and justifications sent to it by the addressees and may decide that the recommendation has not been followed and an addressee has failed to provide adequate justification for its inaction.

BoE and PRA joint statement

The BoE and PRA’s joint statement, published on 8 June 2020, acknowledges the recommendation made by the ESRB and confirms that, in the context of the UK’s withdrawal from the EU, the recommendation applies to UK authorities during the transition period.

The statement highlights a number of measures previously announced by the BoE and the PRA to ‘ensure the resilience of the financial system and financial market infrastructures, support banks’ lending through this period and maintain the safety and soundness of firms’, which it says are consistent with the objectives of the ESRB’s recommendation. The BoE and PRA say they do not consider it necessary to extend this guidance further at this time.

Sources: Recommendation of the European Systemic Risk Board of 27 May 2020 on restriction of distributions during the COVID-19 pandemic (ESRB/2020/7)

Joint statement by the Bank and PRA on the ESRB recommendations for the restriction of distributions during the COVID-19 pandemic

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