BPCE - Risk Report - Pillar III 2020

KEY FIGURES

REGULATORY CHANGES

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Regulatory changes 1.2

2020 : A flexible regulatory framework and resilient banks despite the crisis

The regulatory relaxations (legislative “quick fixes” and supervisory practices) in response to the Covid-19 crisis focused in particular on expanding the capital eligible for the P2R add-on, neutralizing central bank reserves when determining the leverage ratio, temporary tolerance for non-compliance with certain requirements (P2G; leverage ratio buffers for G-SIBs; LCR), and tolerance for “market” moratoria (by the EBA) without automatic reclassification of the exposures concerned under default. The full effect of these relaxations was felt in the second half of 2020 in a context of uncertainty, where banks have shown their capacity to withstand shocks. In addition, the proposals made by the EBA as part of the European Commission’s quick-fix securitization (Capital Markets Recovery Package, July 2020) to recognize synthetic

securitization in the STS label as well as the securitization of non-performing loans aimed at reducing banks’ balance sheets. The European Commission, Parliament and Council are currently in discussions to finalize a text by the end of the year. On December 2, the EBA reactivated its guidelines on legislative and non-legislative moratoria that expired last September, with effect until March 31, 2021, by introducing new restrictions to ensure that the support provided by the moratoria is limited to addressing liquidity shortages. As the support measures may lead to the financing of insolvent companies, the authorities are seeking to prevent this economic crisis from turning into a financial crisis, given the lack of visibility over the length of this second epidemic wave.

2021 : A year of transition

2021 will be a year of regulatory transition in which the flexibility granted by the authorities during the first wave will no longer necessarily apply, especially since the CRR2 quick fix has already set the expiry dates of the temporary measures and those of the provisions set out in the CRR2/CRD5 package. The Commission is expected to publish its proposal for the transposition of the Basel Accord in the first half of 2021. The main challenges regarding the Basel III transposition for French banks, and for Groupe BPCE in particular, are to apply the output floor at the highest level of consolidation, to preserve the risk sensitivity of the regulatory framework and maintain fair

competition between institutions and jurisdictions, with a focus on the relaxations “offered” by CRR2 and from which certain institutions could benefit (calculation and reporting of a simplified NSFR). As the Governor of the Banque de France, François Villeroy de Galhau, stressed at the ACPR annual conference on November 27, the appeal of French banks and, more broadly, European banks must be protected. While the solvency of the main French banks is higher than that of their European or American counterparts (14.6% on average, +56 basis points), the cost of risk has doubled during this crisis.

Is the Banking Union being challenged?

The Covid crisis has accentuated banking fragmentation in the European Union. The proliferation of frameworks in terms of moratoriums and state-guaranteed loans illustrates this. In this context, the French authorities’ advocacy for a single resolution regime, regardless of the systemic nature of the banks, is a priority. The demand from “small banks” for a separate liquidation regime, without any MREL requirement, would increase the fragmentation of the banking union and constitute an obvious obstacle to banking consolidation in Europe, which is, however, called for by supervisors. It will nevertheless be difficult to counter. Forging ahead with the third

pillar of the Banking Union (European Deposit Insurance Scheme, EDIS) must be clearly conditional on the preservation of the second pillar (Resolution). Finalizing Pillar III of the Banking Union now seems risky when Pillar II seems to lead to a “renationalization” of the management of deposit protection schemes. Creating a European fund that would potentially be able to intervene as a preventive measure to safeguard banks that have remained under national supervision would constitute a major moral hazard.

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RISK REPORT PILLAR III 2020 | GROUPE BPCE