24.03.2020

Practice Areas: Finance

COVID-19 impact review by the Finance Law team

Has the impact of the COVID-19 outbreak on financial markets been regulated by the competent authorities?

The COVID-19 outbreak has been the subject of the attention of European and national regulating entities, which have issued recommendations and determined the implementation of measures to supervised entities for the purpose of mitigating the impact of the outbreak on financial markets.

I. Credit Institutions

On 12 March 2020, the European Banking Association (EBA) issued a statement regarding actions for mitigating the impact of COVID-19 on the European banking sector. In particular: 

  • It ordered the postponement of the European stress test for 2021, allowing banks to focus on the continuity of their core activities;
  • It recommends that competent entities postpone supervisory activity including on-site inspections considered non-essential;
  • It recommends the use of the flexible means provided in the existing regulation, in relation to capital and liquidity balances and capital requirements.

EBA recommendations can be found in English at https://eba.europa.eu/eba-statement-actions-mitigate-impact-covid-19-eu-banking-sector

Significant credit institutions

For significant institutions, subject to joint supervision by the European Central Bank (ECB) and the Bank of Portugal, the ECB issued the implementation of the following measures on 12 March:

  • It rules that banks may make use of their liquidity and capital reserves (Pillar 2 Guidance);
  • It determines that banks may temporarily operate below the capital requirements for Pillar 2 and benefit from a flexibility in their assets (a measure that has been brought forward, as it was scheduled to enter into effect in January 2021, with the revision of CRD V (Capital Requirements Directive);
  • It states that the ECB will consider operational flexibility in the implementation of supervisory measures specific to each bank, including the adjustment of applicable deadlines and processes, in particular on-site inspections and the implementation of stress tests.

The ECB notes that the measures defined above are designed to strengthen the economy and not to increase the distribution of dividends or variable remuneration.


The announced measures can be found in greater detail in English at https://www.bankingsupervision.europa.eu/press/pr/date/2020/html/ssm.pr200312~43351ac3ac.en.html.

These measures follow the recommendations issued by the ECB on 3 March 2020, at a time when the classification of the Covid-19 outbreak as a pandemic was still being considered, based on which the ECB recommended that supervised entities take into account the risk of a pandemic in their contingency strategies and should review their business continuity plans considering the measures that could be taken in order to mitigate the risks of a pandemic. Focus was given to possible contingencies related to the inability of bank employees, or third-party service providers, to perform their functions. In view of the identified risks, the ECB recommended that institutions establish measures to control the spread of the virus in the workplace, determine the impact of a pandemic in their contingency plans, analyse how quickly these could be implemented in a pandemic scenario and confirm the existence of remote work alternatives for key functions that ensure business continuity, by testing the IT infrastructure, among others, encouraging institutions to contact the authority overseeing relevant developments. These recommendations can be found at the same website as above.

Less significant credit institutions

Following the ECB's measures for significant institutions, on 16 March 2020, the Bank of Portugal published a Circular Letter CC/2020/00000017 disclosing measures to relax regulatory and supervisory requirements to alleviate the contingency situation resulting from the COVID-19 outbreak.
In particular, the following measures were taken:

  • Allow less significant credit institutions subject to their supervision to operate on a temporary basis, at a lower level than the Pillar 2 Guidance on own equity and the combined reserve of own funds, and with liquidity levels below the required liquidity coverage ratio ("LCR");
  • Suspend ongoing stress tests;
  • Postpone or cancel all initiatives of behavioural and prudential inspection and in the area of prevention of money laundering and terrorist financing, except in situations of greatest criticality or where it is possible to continue to carry out work remotely;
  • Postpone the requests for information necessary for the purposes of the Supervisory Analysis and Evaluation Process (SREP), the rescheduling of which will be made in conjunction with the ECB for all credit institutions, whether significant or not;
  • Postpone or suspend certain reports (such as the internal control report, Money Laundering/Terrorist Financing prevention report, financing and capital plan) and others detailed further in the Circular Letter;
  • Extend the deadline for handling complaints submitted directly to the Bank of Portugal, including the deadline for responding to requests for additional information. The Banco de Portugal notes that this does not change the response period in the context of complaints submitted in the Complaints Book, which is outside its powers, but it does ensure that it will not fail to take into account the current situation in the exercise of sanctioning powers in the event of non-compliance thereof;
  • Make the requirements more flexible for opening a bank account by videoconference.

In addition, the Banco de Portugal issues recommendations to entities qualified to receive deposits regarding the need to analyse contingency and business continuity plans, in terms similar to those proposed by the ECB for significant credit institutions, in order to mitigate the potential adverse effects of the spread of COVID-19, including:

  • Ensure that prevention measures associated with worker safety and business continuity take into account the risks associated with a potential pandemic;
  • Immediately report to the Banco de Portugal if they identify significant deficiencies as a result of the procedures for verifying their state of preparedness mentioned in the preceding paragraphs;
  • Immediately report to the Banco de Portugal the occurrence of events related to COVID-19 with relevant negative impact on the institution;
  • Communicate to the Banco de Portugal plans for closing/limiting the normal opening of branches.
    The Circular Letter can be found at https://www.bportugal.pt/cartacircular/cc202000000017.

II. Financial intermediaries

On 11 March 2020, the European Securities and Markets Authority (ESMA) published certain recommendations addressed to financial market participants, taking into account the current situation and the contingency measures taken by the competent national authorities. The ESMA therefore recommends that participants be prepared to implement contingency plans in order to allow the continuity of their business, to disclose relevant information to the market on the impact of the outbreak on their activity and financial situation, as well as within the context of their financial reports. With regard to fund management, the ESMA recommends that management companies continue to implement risk management measures. Moreover, it states that it continues to monitor the development of financial markets as a result of the outbreak, and it is prepared to use its powers to ensure the proper functioning of markets, financial stability and investor protection.
Recommendations are available in English, at https://www.esma.europa.eu/press-news/esma-news/esma-recommends-action-financial-market-participants-covid-19-impact).

In addition, on 16 March 2020, the ESMA determined the need for any entity holding a net short position for shares listed on a regulated market to notify the competent authority with the details of that position if it reaches at least 0.1% of the issued share capital, given the current situation of the financial markets with an outbreak of Covid-19. The decision can be consulted at https://www.esma.europa.eu/press-news/esma-news/esma-requires-net-short-position-holders-report-positions-01-and-above. In Portugal, this report should be made to the Portuguese Securities Market Commission (CMVM).

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