April has seen a mixed result of some positive developments of the EU Commission and EU Member States, according to Dentons’ EU Banking and Finance Regulatory newsletter from its Frankfurt-based Eurozone Hub.
Some of these developments include a set of relief and support measures to help the EU economy and a way forward on how to look past the lockdown and reopen economies.
In the European Central Bank’s (ECB) press conference on 30 April, it was emphasised that the euro area is facing an economic contraction of magnitude and speed that are unprecedented in peacetime.
Measures to contain the spread of COVID-19 have largely halted economic activity in all the countries of the euro area and across the globe.
Dentons highlighted that Q1 saw the biggest drop in Q1 GDP for the euro area since 1995.
According to the global law firm, operating conditions are rapidly requiring translation to a more “digital and agile environment” regardless of an anticipated return to normalisation during the recovery phase, including as supported by the EU’s announced Recovery Fund.
Since the end of March, the ECB has been conducting purchases under the new pandemic emergency purchase programme (PEPP), which has an overall envelope of €750 billion and Dentons’ Eurozone Hub predicts this could be expanded further as the ECB continues to pledge to do “whatever it takes”.
The ECB also decided to recalibrate targeted lending operations to further support the real economy.
The central bank stated that for the period from 24 June 2020 to 23 June 2021 the interest rate on all TLTRO III operations will now be 50 basis points below the average rate applied in the Eurosystem’s main refinancing operations over the same period.
Additionally, the ECB discussed new pandemic emergency longer-term refinancing operations.
As such, the ECB said it would conduct a new series of seven additional longer-term refinancing operations, called pandemic emergency longer-term refinancing operations (PELTROs), to provide liquidity support to the euro area financial system.
Dentons outlined that while some of these measures were to be expected to support the rulemaking side and banking sector, further support efforts are not yet quite there in other areas of financial markets.
Dentons commented: “When taken together these measures aim to provide support against a range of scenarios during the recovery phase and return to normalisation. The ECB and the EU Commission are clear that much depends on the success of on-going containment efforts.”
“Moreover, financial markets are still looking to the EU Commission and the Member States looking to finalise the (re-)financing of the breadth of announced measures that are in various stages of operationalisation across Europe and where the debate will land on ‘innovative financial instruments’’ which is the blanket term that may cover Corona Bonds.”
It was also noted that financial markets and their clients continue to face unwelcome challenges from compliance with some of these new supervisory expectations even where there is temporary relief (but not repeal) of rules that existed pre-COVID 19 gripping Europe, Dentons’ Eurozone Hub affirmed.
It said it expects the type and amount of temporary adjustments to rules will continue to gather pace, as well as the use of EU supervisory authorities of certain communications to national competent authorities and the firms they supervise to communicate ‘no-action’ on certain points.
“These welcome efforts, however, may also carry with them confusion, which we continue to cover to provide clarity on issues and opportunities for firms and their clients,” Specifically, Dentons’ Eurozone Hub and the wider Financial Institutions Regulatory Europe Team and other colleagues are dealing with client enquiries from financial institutions and non-financial corporations on the multitude of temporary relief, financial support and fiscal support measures.
Various programmes have different access conditions and/or are in different stages of operationalisation across the EU-27.
Equally, Dentons Eurozone Hub pointed to some of the challenges that may be on the horizon in dealing with a new wave of non-performing exposures and loans (NPLs) that come at a time when many financial institutions are still embedding compliance programmes to meet relatively new ECB and EU rules and supervisory expectations on those matters.
This is further complicated by new rules on credit servicing and loan origination standards, according to Dentons.
Equally, while most rulemaking reliefs have focused on banks, other areas of financial services may still require more coordinated action and support from the EU Commission, notably in the asset management sector, which has an active and important role to play in the road to recovery in Europe’s real economy.
To support clients’ needs, Dentons has also created a free Global COVID-19 Hub, offering clients insights, guidance and counsel in addressing COVID-19 related issues across the 75 countries in which Dentons operates.
