Governor Makhlouf’s pre-budget letter published

On 1 September 2021 the Central Bank of Ireland published the pre-budget letter from Governor Gabriel Makhlouf to Minister for Finance, Paschal Donohoe, ahead of Budget 2022.

The main takeaways are:

  • government supports should facilitate post-pandemic structural adjustments in the way we live, work and travel
  • a credible path to a lower debt ratio over the medium term is needed
  • there is a need to focus on planning for the impact of longer-term structural challenges facing the economy, including an ageing population and the need to finance the digital and carbon transitions

"Our commitment to price stability remains as strong as ever, as does our ability to fight unsustainable euro area inflation" - Governor Makhlouf

On 17 September 2021, Governor Makhlouf spoke about the ECB strategy review at the DEW Annual Economic Policy Conference 2021.

The main points of Governor Makhlouf's address were:

  • The outlook for Ireland for the rest of the year is very positive in the aggregate, although there remains considerable uncertainty about the trajectory of the pandemic and its knock-on effects are not uniform across the economy.
  • Fears of excessive euro area inflation are overstated and current price pressures reflect transitory factors that will fade out over time. Nevertheless, there are also indications that the current supply bottlenecks could be prolonged so we need to continue to be vigilant to risks.
  • The macroeconomic response deployed by European and euro area institutions and governments to the pandemic has been more coherent and impactful than in the years following the global financial crisis. Reforms are needed to ensure that similar appropriate coordination is achieved systematically and not episodically.


EBA’s study shows that EU banks’ funding plans are poised to return gradually to a pre-pandemic funding composition by 2023

On 6 September 2021 the European Banking Authority (EBA) published its annual update on EU banks’ funding plans, which helps EU supervisors assess the sustainability of banks’ main sources of funding. The results of the funding plans assessment show the impact the pandemic had on EU banks’ funding composition. The plans point to a gradual ‘normalisation’ of banks’ sources of funding over the next three years. This implies in particular a partial replacement of central bank funding with market-based funding. Despite the market turbulence in the first half of 2020, banks reported a decline in their market-based funding costs in 2020. In 2021, most banks expect funding conditions to remain very benign and costs to decline even further.

SRB: No time to waste in completing the Banking Union

On 9 September 2021, the Single Resolution Board (SRB) published a statement highlighting the urgent work needed to move towards a fully integrated system that delivers better crisis management, depositor protection and a stronger banking sector. The SRB notes that, while we have a common deposit insurance framework in the EU through the Deposit Guarantee Scheme Directive, we lack a common deposit insurer. The SRB states that a mutualised central fund will be more efficient than many smaller funds, and reduce the risks faced by deposit guarantee schemes. It would also help address the bank sovereign nexus, strengthen cross-border financial integration, which in turn strengthens financial stability, by boosting diversification in the banking sector.

ECB: Monetary policy decisions

On 9 September 2021, the ECB released a statement based on a joint assessment of financing conditions and the inflation outlook. The Governing Council judges stated that favourable financing conditions can be maintained with a moderately lower pace of net asset purchases under the pandemic emergency purchase programme (PEPP) than in the previous two quarters. Addressed in particular are:

  • key ECB interest rates - interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will remain unchanged at 0.00%, 0.25% and -0.50% respectively
  • the asset purchase programme (APP) - net purchases under the APP will continue at a monthly pace of €20bn
  • PEPP - the Governing Council will continue to conduct net asset purchases under the PEPP with a total envelope of €1,850bn until at least the end of March 2022 and, in any case, until it judges that the coronavirus crisis phase is over
  • refinancing operations - in particular, the third series of targeted longer-term refinancing operations (TLTRO III) remains an attractive source of funding for banks, supporting bank lending to firms and households

EBA publishes final guidance to assess breaches of the large exposure limits

On 15 September 2021, the EBA published final guidelines specifying the criteria to assess the exceptional cases when institutions exceed the large exposure limits and the time and measures to return to compliance. The guidelines aim to support competent authorities in their assessment of the breaches of the large exposure limits set in the Capital Requirements Regulation, and ensure the regulation is applied in a simple, prudent and harmonised manner in order to level the playing field across the Single Market. The guidelines will apply from 1 January 2022.

EBA publishes revised guidelines on the stress tests of deposit guarantee schemes (DGSs)

On 15 September 2021, the EBA published revised guidelines on the stress tests conducted by national DGSs under the Deposit Guarantee Schemes Directive (DGSD). The revised guidelines extend the scope of the DGS stress testing, by requiring more tests than previous guidelines and by covering all the legal mandates entrusted to the DGSs. The revisions aim to consolidate depositors’ confidence about the ability of their national DGS(s) to promptly repay their funds in case of banking failure. The revised framework also strives to achieve greater harmonisation and comparability of stress test results, which will enable the EBA to carry out a robust peer review of national DGS stress tests in 2025.

SRB approach to prior permissions regime: update

On 16 September, the SRB published an update to information on its approach to prior permissions for eligible liabilities, in line with the draft regulatory technical standards. The communication complements the SRB's guidance published on 28 July 2021 and aims to raise awareness of the requirements and how to report on them, pending the final endorsement of the standards as a Delegated Regulation.

EBA sees rapid growth in the use of digital platforms in the EU’s banking and payments sector and identifies steps to enhance the monitoring of market developments

On 21 September 2021, the EBA published a report on the platformisation of the EU banking and payments sector. The EBA identifies a rapid growth in the use of digital platforms to ‘bridge’ customers and financial institutions, a trend expected to accelerate in line with the wider trend toward the digitisation of the EU financial sector. Platformisation presents a range of potential opportunities for both EU customers and financial institutions. However, new forms of financial, operational, and reputational interdependencies are emerging and the EBA identifies steps to strengthen supervisory capacity to monitor market developments.

In addition, the EBA proposes to continue its efforts to foster the sharing of supervisory knowledge and experience about digital platforms and enablers on a sectoral and multi-disciplinary basis, to enhance effective dialogue between authorities responsible for financial sector supervision, consumer protection, data protection and competition, including via actions under the coordination of the EBA’s FinTech Knowledge Hub.

Firms and banks to benefit from early adoption of green policies, ECB’s economy-wide climate stress test shows

On 22 September 2021, the ECB published the results of its economy-wide climate stress test. The exercise tested the impact of climate change on more than four million firms worldwide and 1,600 euro area banks under three different climate policy scenarios. The results show that firms and banks clearly benefit from adopting green policies early on to foster the transition to a zero-carbon economy. The exercise also reveals that the impact of climate risk is concentrated in certain regions. In particular, firms located in regions most exposed to physical risk could face very severe and frequent natural disasters, which would in turn affect their creditworthiness.

Three takeaways are as follows:

  1. firms and banks to be severely affected if climate change issues not addressed
  2. orderly and swift transition to minimise costs and maximise benefits outweighs short-term cost of transition to zero-carbon economy over medium to longer term
  3. investment in sectors and regions heavily exposed to climate risk set to suffer most

EBA launches 2021 EU-wide transparency exercise

On 21 September 2021, the EBA launched its regular EU-wide transparency exercise and results are expected to be published at the beginning of December. This exercise is exclusively based on supervisory reporting data, including data will cover capital positions, profitability, financial assets, risk exposure amounts, sovereign exposures and asset quality. This year the EBA will provide additional pieces of information on the exposures under EBA compliant moratoria and public guarantee schemes, which will allow public to have more comprehensive assessment of the impact of the COVID-19 crisis on the banking sector. Transparency exercises are conducted on an annual basis and are part of the EBA's efforts to monitor risks and vulnerabilities and to reinforce market discipline.

Frank Elderson: Integrating the climate and environmental challenge into the missions of central banks and supervisors

On 23 September, Frank Elderson, Member of the Executive Board of the ECB and Vice-Chair of the Supervisory Board of the ECB addressed the 8th Conference on the Banking Union at Goethe University. Mr Elderson spoke about the challenge of climate change and environmental degradation and the importance of considering these risks in the missions of central banks and supervisors. Mr Elderson stated that the conclusion of the strategy review marks the ECB connecting the final, crucial dots to confirm its commitment to incorporating systematically and consistently the climate and environmental crisis in carrying out its tasks and fulfilling its responsibilities.

Written overview ahead of the exchange of views of the Chair of the Supervisory Board of the ECB with the Eurogroup on 4 October 2021

On 28 September 2021, ahead of its exchange of views with the Eurogroup on 4 October 2021, the ECB published a short overview of its banking supervision activities in the areas of:

  • credit risk related to the coronavirus (COVID-19) pandemic
  • emerging risks
  • the structural transformation of the banking sector
  • digitalisation and climate risk as drivers of structural business model adjustments

Overall, the ECB states that the economic outlook is improving and the September ECB staff macroeconomic projections indicate that real GDP will surpass pre-crisis levels by the end of 2021. Challenges facing banks include digitalisation and climate risk, which will continue to be two important drives of banking business model adjustments. It is also noted that there are avenues to support deeper cross-border integration of financial and banking markets, within the current legal framework. One possible avenue is to design safeguards, such as intragroup guarantees introduced in recovery plans, to give greater room for managing liquidity at group level when cross-border business within the banking union is developed mainly through subsidiaries.

EBA publishes its regular monitoring Report on Basel III full implementation in the EU

On 29 September 2021, the EBA published its regular monitoring report of the full implementation (in 2028) of the final Basel III reforms in the EU. According to this assessment, which is carried out using the same methodology as the one applied by the Basel Committee on Banking Supervision, full Basel III implementation would result in an average increase of 13.7% on the current Tier 1 minimum required capital of EU banks. To comply with the new framework, EU banks would need €3.1bn of additional Tier 1 capital. The overall impact reflects the economic impact of the COVID-19 pandemic on participating banks that materialised up to December 2020, the reference date of this report.