EU Eyes Banks' Resilience To Virus-Linked Market Crash

By Joanne Faulkner
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Law360, London (March 10, 2020, 1:57 PM GMT) -- The European Banking Authority is studying coronavirus contingency plans at major European Union banks as the outbreak continues to test the resilience of the world financial system.

A spokesperson for the regulator said Tuesday the EBA was "closely monitoring the evolution of risks in banks as a consequence of the coronavirus epidemic," and was in discussion with lenders on the developments and necessary steps, they need to take.

"Our current focus is on banks' contingency plans and their ability to ensure business continuity, which is of utmost importance at this stage," the spokesperson said.

The EBA declined to provide details of how it was probing contingency plans but in typical stress test scenarios the EBA looks at whether lenders have the required capital buffers to survive severe shocks to the financial system. 

Other European regulators have said they will work with banks and financial institutions under their supervision to make sure they can meet their regulatory obligations despite the outbreak of the COVID-19 virus, which first appeared in late 2019 in Wuhan, China.

This week the spread of the virus caused the U.K. and and other major stock markets to suffer their sharpest drops since the 2008 financial crisis. Pressure is growing on Europe's central banks and financial regulators to introduce measures to support economies. Some have already announced steps, while others are taking a "wait and see" approach.

On Tuesday, the Swedish Central Bank said it was "prepared to act" to shore up the financial system against the "negative effects" of the coronavirus outbreak. The Riksbank said that maintaining liquidity was the most important thing and that it could introduce more generous loans to bank and direct purchases of securities.

"I feel confident that the Riksbank can act to stabilize the Swedish economy in the threat of a crisis," said Deputy Gov. Anna Breman. "The Riksbank's toolbox can be used to the full."

The Bank of England and Britain's financial market watchdog have already said they plan to review contingency plans penned by banks and insurers in response to the new virus which has so far infected more than 300 people in the U.K.

The Financial Conduct Authority said it is reviewing contingency plans at a wide range of financial companies to assess the operational risks posed by the outbreak. It will check that banks, insurers and asset managers can continue to operate and serve their customers in spite of the virus.

FCA boss Andrew Bailey has said that companies could soon expect help to mitigate the impact of supply chain disruption through coordinated action with the Treasury.

Britain's new financial minister will unveil a new budget on Wednesday, which is expected to introduce new measures to protect companies through the worse of the outbreak amid widespread panic on financial markets.

Elsewhere, finance ministers from the Group of Seven leading economies, known as the G-7, have said they are prepared to consider tax relief to aid those affected by the crisis. Bank capital relaxations might also be considered.

And Italy — which has the highest number of cases in Europe and, on Monday, took the step to lock down the entire country — is considering a state guarantee scheme to support banks.

Eyes are also the European Central Bank which is due to meet on Thursday to calibrate its own response to the crisis and to instruct the eurozone banks what approach they should take. 

The crisis is close to home for the ECB, which announced on Monday that a staff member had been diagnosed with the new coronavirus. The regulator is asking its employees to work from home and nonessential travel has also been prohibited. Physical meetings have been canceled.   

--Additional reporting by Najiyya Budaly. Editing by Katherine Rautenberg.

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