EU Watchdog Sets Out Plans To Bolster Economy Amid Crisis

By Lucia Osborne-Crowley
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Law360, London (May 15, 2020, 4:50 PM BST) -- A European regulator has announced a new set of blocwide measures to prop up the financial sector as it recovers from the damage inflicted by the COVID-19 crisis.

The European Systemic Risk Board said Thursday it will enact new rules to protect the European economy from a macroprudential perspective — meaning the level of risk that builds up in the system as a result of the crisis.

The board said it will begin by taking stock of the action taken so far by member states to prop up their financial systems.

"The COVID-19 pandemic and the resulting containment measures are a severe shock to European economies," the board said. "National and EU authorities have swiftly taken a range of decisive measures to support the liquidity and solvency of firms and to protect household incomes."

The board urged national authorities and macroprudential bodies to work together to build a complete picture of the measures taken until now.

The ESRB will also work with the European Securities and Markets Authority — the bloc's securities watchdog — to assess the level of liquidity and risk sitting in investment funds.

ESMA said Thursday it supports this recommendation and will work with the board to assess the state of investment funds.

"The pandemic, in combination with high volatility and inherent valuation issues that it has triggered, has led to large market corrections and a deterioration of liquidity risks," ESMA said in a statement. "It is prudent to assess the preparedness of the investment fund sector to further liquidity stress episodes."

The board also warned that the pandemic could cause a wave of credit downgrades across the financial system.

It announced a coordinated analysis with the European Supervisory Authorities — a regulatory group made up of the European Banking Authority, the European Insurance And Occupational Pensions Authority and the European Securities and Markets Authority — to assess how a large-scale credit downgrade would affect the economy.

The ESRB also encouraged banks and lenders to withhold voluntary payouts, such as shareholder dividends, during the crisis.

The European Central Bank told banks in March not to pay out dividends until October at the earliest and avoid launching share buyback programs to preserve capital to lend during the coronavirus pandemic.

In Britain, the Financial Conduct Authority said in April that banks must ensure the payments they make are "prudent" given the market circumstances. Lenders may have to cut back on share buybacks and on paying out dividends and bonuses, the FCA said.

--Additional reporting by Joanne Faulkner and Najiyya Budaly. Editing by Marygrace Murphy.

For a reprint of this article, please contact reprints@law360.com.

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