Recommendation on restriction of distributions during the COVID-19 pandemic (ESRB/2020/7)

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

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

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

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25/01/2021

25/01/2021

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02020Y0626(01) — EN — 25.01.2021 — 001.001

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RECOMMENDATION OF THE EUROPEAN SYSTEMIC RISK BOARD

of 27 May 2020

on restriction of distributions during the COVID-19 pandemic

(ESRB/2020/7)

(OJ C 212 26.6.2020, p. 1)

Amended by:

Official Journal

No

page

date

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RECOMMENDATION OF THE EUROPEAN SYSTEMIC RISK BOARD of 15 December 2020 2021/C 27/01

C 27

1

25.1.2021

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RECOMMENDATION OF THE EUROPEAN SYSTEMIC RISK BOARD

of 27 May 2020

on restriction of distributions during the COVID-19 pandemic

(ESRB/2020/7)

2020/C 212/01

SECTION 1

RECOMMENDATION

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Recommendation A – Restriction of distributions

It is recommended that relevant authorities request financial institutions under their supervisory remit (

1

) to refrain until 30 September 2021 from undertaking any of the following actions:

(a)

make a dividend distribution or give an irrevocable commitment to make a dividend distribution;

(b)

buy-back ordinary shares;

(c)

create an obligation to pay variable remuneration to a material risk taker,

which has the effect of reducing the quantity or quality of own funds, unless the financial institutions apply extreme caution in carrying out any of those actions and the resulting reduction does not exceed the conservative threshold set by their competent authority. Competent authorities are recommended to engage in discussions with financial institutions prior to financial institutions taking either of the actions referred to in points (a) or (b).

This Recommendation applies 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.

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SECTION 2

IMPLEMENTATION

Definitions

For the purposes of this Recommendation the following definitions apply:

(a)

‘relevant authority’ means:

(i)

a competent authority;

(ii)

an authority entrusted with the adoption and/or activation of macroprudential policy measures, including but not limited to:

a designated authority pursuant to Chapter 4 of Title VII of Directive 2013/36/EU of the European Parliament and of the Council (

2

) or Article 458(1) of Regulation (EU) No 575/2013 of the European Parliament and of the Council (

3

);

a macroprudential authority with the objectives, arrangements, tasks, powers, instruments, accountability requirements and other characteristics set out in Recommendation ESRB/2011/3 (

4

);

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(b)

‘competent authority’ means the competent or supervisory authority as defined in point (40) of Article 4(1) of Regulation (EU) No 575/2013 or in Article 13(10) of Directive 2009/138/EC of the European Parliament and of the Council (

5

), as applicable;

(c)

‘financial institution’ means any of the following undertakings that have their head office or registered office in the Union:

(i)

an institution as defined in point (3) of Article 4(1) of Regulation (EU) No 575/2013;

(ii)

an insurance undertaking as defined in of Article 13(1) of Directive 2009/138/EC;

(iii)

a reinsurance undertaking as defined in Article 13(4) of Directive 2009/138/EC;

(d)

‘material risk taker’ means a member of a category of staff whose professional activities have a material impact on the financial institution’s risk profile, including a member of a category of staff referred to in Article 92(2) of Directive 2013/36/EU or point (c) of Article 275(1) of Commission Delegated Regulation (EU) 2015/35 (

6

), as applicable;

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(e)

‘resolution authority’ means the authority as defined in point (18) of Article 2(1) of Directive 2014/59/EU (

7

).

Exemptions

Relevant authorities may exempt a financial institution from the restriction to undertake any of the actions in points (a) to (c) of Recommendation A if that financial institution is legally obliged to undertake that action.

Criteria for implementation

The following criteria apply to the implementation of this Recommendation by the relevant authorities:

(a)

due regard should be paid to the principle of proportionality, taking into account, in particular, the nature of financial institutions and their ability to contribute to the mitigation of systemic risk to financial stability that arises from the COVID-19 crisis and to the economic recovery;

(b)

regulatory arbitrage should be avoided;

(c)

relevant authorities should regularly assess the impact of restrictions on distributions they have imposed in light of the objectives of this Recommendation.

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1a.

In calibrating the conservative threshold, competent authorities should pay due regard to:

(a)

the objectives of this Recommendation, in particular the need for financial institutions to maintain a sufficiently high level of capital - including taking into account their capital trajectory - in order to mitigate systemic risk and to contribute to economic recovery, taking into account the risks of a deterioration of the solvency position of corporations and households in view of the pandemic;

(b)

the need to ensure that the overall level of distributions of financial institutions under their supervisory remit is significantly lower than in the recent years prior to the COVID-19 crisis;

(c)

the specificities of each sector within their remit.

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The following specific criteria apply to the implementation of Recommendation A(a) and (b): In assessing whether it is appropriate to apply the restrictions at sub-consolidated or at individual level, relevant authorities are recommended to adhere to the following principles:

(a)

Principle 1: Whilst taking into account the need to prevent or mitigate systemic risk to financial stability in their Member State and in the Union, relevant authorities should support the smooth functioning of the internal market and recognise the need for the financial sector to provide a sustainable contribution to economic growth in Member States and the Union as a whole.

(b)

Principle 2: Relevant authorities should ensure that any restriction does not entail disproportionate adverse effects on the whole or parts of the financial system in other Member States or in the Union as a whole.

(c)

Principle 3: Relevant authorities should closely cooperate with each other and with the relevant resolution authorities, including in colleges, where applicable.

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Timeline for the follow-up

In accordance with Article 17(1) of Regulation (EU) No 1092/2010 addressees must communicate to the European Parliament, the Council, the Commission and to the ESRB the actions undertaken in response to this Recommendation or substantiate any inaction. Each addressee is requested to deliver a report on the implementation of Recommendation A by 15 October 2021.

Amendments to this Recommendation

Prior to 30 September 2021, the General Board will decide if and when this Recommendation needs to be amended, taking into account, inter alia, macroeconomic developments and new data on the stability of the financial system.

▼B

Monitoring and assessment

The General Board will assess the actions and justifications communicated by the addressees and, where appropriate, may decide that this Recommendation has not been followed and that an addressee has failed to provide adequate justification for its inaction.

The methodology set out in the Handbook on the assessment of compliance with ESRB recommendations, which describes the procedure for assessing compliance with ESRB recommendations will not apply.

▼M1

The ESRB Secretariat will assist the addressees by ensuring the coordination of reporting and the provision of relevant templates, and detailing, where necessary, the procedure and the timeline for the follow-up.

▼M1 —————

(

1

) This does not include branches of financial institutions.

(

2

) Directive 2013/36/EU of the European Parliament and of the Council of 26 June 2013 on access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms, amending Directive 2002/87/EC and repealing Directives 2006/48/EC and 2006/49EC (OJ L 176, 27.6.2013, p. 338).

(

3

) Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms and amending Regulation (EU) No 648/2012 (OJ L 176, 27.6.2013, p. 1).

(

4

) Recommendation ESRB/2011/3 of the European Systemic Risk Board of 22 December 2011 on the macro-prudential mandate of national authorities (OJ C 41, 14.2.2012, p. 1).

(

5

) Directive 2009/138/EC of the European Parliament and of the Council of 25 November 2009 on the taking-up and pursuit of the business of Insurance and Reinsurance (Solvency II) (OJ L 335, 17.12.2009, p. 1).

(

6

) Commission Delegated Regulation (EU) 2015/35 of 10 October 2014 supplementing Directive 2009/138/EC of the European Parliament and of the Council on the taking-up and pursuit of the business of Insurance and Reinsurance (Solvency II) (OJ L 12, 17.1.2015, p. 1).

(

7

) Directive 2014/59/EU of the European Parliament and of the Council of 15 May 2014 establishing a framework for the recovery and resolution of credit institutions and investment firms and amending Council Directive 82/891/EEC, and Directives 2001/24/EC, 2002/47/EC, 2004/25/EC, 2005/56/EC, 2007/36/EC, 2011/35/EU, 2012/30/EU and 2013/36/EU, and Regulations (EU) No 1093/2010 and (EU) No 648/2012, of the European Parliament and of the Council (OJ L 173, 12.6.2014, p. 190).

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