After most European Union (EU) countries went into a month-long lockdown, the EU Commission, itself emerging from its first 100 days of office, announced on April 15, 2020¹, a “Roadmap”² and pre-conditions to be fulfilled in order to permit a return to what will be the new normal. This Roadmap is accompanied by a series of recommendations agreed with and addressed to the EU-27 Member States. The aim of this approach is to ensure a gradual, consolidated and coordinated exit from the lockdown across the entire EU, even as some states have started tentatively easing local measures in order to jump-start their economies.³;

This Client Alert should be read in conjunction with our recent coverage of the EU’s “Spring 2020 fiscal support and regulatory relief measures”⁴ as well as further publications in this series that look at additional legislative relief efforts proposed by the EU to help the banking sector support the real economy.

The EU sets out its key principles 

The Commission’s Roadmap aims to coordinate the lifting of the lockdown by the EU’s Member States as well as the efforts of those states in the “EU’s neighborhood” – including those that may be at the start of the accession process to join the EU. The EU plans to battle the pandemic and push reopening with a bundle of self-reinforcing and coordinated measures at the EU level, and ambitiously aims to corral efforts taken unilaterally at the national level. 

The Roadmap communicates three sets of criteria that the EU Commission would consider necessary to be fulfilled in order for Member States to begin to relax the confinement; these are to be set at the national level at states’ discretion, but include:

1. Epidemiological criteria: showing that the spread of the disease has “significantly decreased and stabilized for a sustained period of time. This can, for example, be indicated by a sustained reduction in the number of new infections, hospitalizations and patients in intensive care.” There is no clarity as to what the EU considers to be an appropriate time-bound threshold. 
2. Sufficient health system capacity, which looks at the:
   1. Capacity in terms of an adequate number of hospital beds, access to pharmaceutical products required in intensive care units (ICUs), the restocking of equipment for vulnerable groups, the availability of primary care structures, as well as sufficient staff with appropriate skills to care for patients discharged from hospital or maintained at home (i.e. beyond just COVID-19 containment measures), and
   2. Usage in terms of occupancy rates for ICUs.
3. Appropriate monitoring capacity: including large-scale testing capacity to detect and monitor the spread of the disease, combined with contact tracing and possibilities to isolate people in case of the reappearance and further spread of infection. They should also be able to measure acquired immunity. This includes efforts both to continue to support front-line diagnostic testing capacity for vulnerable persons, those that are symptomatic or in close contact with confirmed cases, as well as to boost the roll out of serological testing to assess acquired immunity. The Commission also has stated that it may consider, “once properly validated and their reliability ensured”, the roll out of self-testing kits.

These three criteria are based upon the following basic principles:

1. Action should be based on science and have public health at the center of responses.
2. Action should be coordinated between the Member States.
3. Respect and solidarity between Member States remains essential.
4. Exit action will be gradual, and in particular, “sufficient time should be left between the steps (e.g. one month) as the effect of their lifting can only be measured over time”. Measures should start focusing on those with a local impact and then expand to a wider geographic scope, while allowing flexibility to “…rapidly re-impose restrictions as necessary, if a high number of new cases occurs (e.g. introducing a cordon sanitaire)”. The reopening of internal and external borders should be phased to restore the normal functioning of the Schengen Area prior to reopening the EU’s external borders and access of non-EU residents in a second stage. These measures will be subject to continued review, including on the need for restricting “non-essential travel to the EU”.
5. General measures should progressively be replaced by targeted ones. This includes: 
   1. Protecting “vulnerable groups” for a longer period of time;
   2. Quarantining and treating adequately those who are diagnosed with mild symptoms;
   3. Replacing general states of emergency “with exceptional emergency powers for governments” with more targeted interventions to ensure democratic accountability and to guarantee fundamental rights and the rule of law;
   4. Reintroducing a phased return to the workplace, with efforts first focusing on jobs with low interpersonal contact, job roles that are suitable for remote working arrangements, and a continued use of rotating shifts of workers. The Commission is clear that occupational health and safety rules imposed by the pandemic should continue to be observed. Phased reintroductions of commercial activity (retail), with possible phased extensions in the number of people permitted in a retail venue, as well as at a later stage in restaurants, cafes etc., and entertainment events such as festivals, concerts etc. will return to normal over time, along with the normalization of public transport.

Issues around adequacy and consistency of testing are of course an issue that, in the absence of the EU having a direct mandate in healthcare⁵, rest within the hands of national healthcare systems, which besides being in need of funding, will need to move from triaging to sustained eradication. This is a challenge not only for healthcare systems but also for financial markets in assessing how the disease develops within domestic borders and the corresponding likelihood of loosening. The EU Commission has also committed itself to create a “rapid alert function” to identify supply and value chain disruptions, which will also rely on work by existing networks such as the Enterprise Europe network, chambers of commerce and trade associations, as well as the work of small-to-medium sized enterprise “Envoys”. The aim of this is to support the return to normal operating conditions above in a safe manner. 

Continued prioritization of prevention

In order to ensure that a return to normality can occur in a safe manner, the EU has stated that its Joint Research Centre and the EU’s Center for Disease Control (ECDC) could step up and play a more active role in centralizing data collection and modelling work. It will equally support the gathering and sharing of national and subnational data in a harmonized manner. Perhaps more pressingly, the ECDC is assessing various types of testing kits and continuing to align approaches to test performance at an EU level. 

The EU Commission has equally committed to advance infrastructure solutions within its existing narrow healthcare mandate and has communicated that the ECDC is planning to press ahead with a network of COVID-19 reference laboratories across the EU, together with a supporting platform. In addition, the EU is centralizing the coordination of collection and allocation of available personal protective equipment and medical supplies. It has set up a ‘Clearing House for Medical Equipment’ that identifies available supplies, including testing kits, and matches their demand from the Member States. This entails collaborating with industry to increase production by existing manufacturers, as well as facilitating imports and activating alternative ways of producing equipment. The Commission has announced that it will set up a reporting system for Member States to specify their needs for medical equipment, including geographical mapping. 

The Commission also plans to support new market entrants for protective equipment with dedicated guidance documents. It will share information on the availability and capacity of conformity assessment bodies with market operators. Moreover, the Commission is centralizing the emergency stockpiling of medical equipment via rescEU. Together with the Member States, the Commission has also already stepped up its efforts by launching joint procurement actions for various medical supplies, including testing kits. It also issued guidance on April 1, 2020, on the options available under the EU public procurement framework for the purchase of the supplies, services, and works needed to address the crisis. 

These efforts regarding medical supplies will be supplemented by the increased use of digital tools. The latter may provide opportunities for financial services firms, including in repurposing their own data and tech.

Tech to tackle tracing?

Equally, the EU expects to support the sensible use of contact tracing apps, while also protecting citizens. This may present an opportunity for FinTech firms and indeed builds off the EU’s recent request for proposals for app providers seeking funding. This suggests a scenario in which multiple apps, whether funded or supported by the EU or otherwise, may be in circulation and possibly in competition with one another. This may be reinforced if linkages between app providers and health insurance providers develop new products. 

The EU expects and encourages Member States to embrace contact tracing and warning apps as a complementary measures to combat COVID-19’s spread.⁶ Consequently, the use of such mobile applications should, in the EU Commission’s view:

• National health authorities should be involved in the design of the system – this raises the question as to how these might communicate but possibly also “compete” with one another in cross-border situations and for EU residents located in other Member States. It is also yet unclear how to balance this during the various stages of moving from confinement to a return to full free movement; 
• The app should be voluntary for individuals, based on users’ consent and fully respecting European privacy and data protection rules;
• Users should remain in control of their data and tracing close proximity between mobile devices should be allowed only “on an anonymous and aggregated basis, without any tracking of citizens, and names of possibly infected persons should not be disclosed to other users”; 
• Mobile tracing and warning apps should be time bound and should be subject to “demanding transparency requirements” and “deactivated as soon as the COVID-19 crisis is over and any remaining data erased”; and
• Apps should be interoperable, although the EU Commission is appealing for this to be a market-led measure that looks to “take into account network effects, the widespread take-up of a pan-EU reference app, or at least interoperability and sharing of results between such apps, would allow for a more effective warning of people concerned and a more efficient public health policy follow-up”. 

On April 8, 2020, the Commission published a Recommendation⁷ for developing a “Toolbox” which includes digital methods that empower citizens to take effective and targeted social distancing measures, a smarter use of symptom checkers and a uniform way of social contact tracing, as well as addressing cybersecurity, data security and privacy concerns in a coordinated way. This effort falls under the EU’s Digital Single Market strategy but also interrelates with other non-COVID-19 policy work. It also seeks to address new areas that have emerged as a result of this shifting environment, including the prevention of digital financial crime or wider “pandemic profiteering”.⁸

While the approach in the measures above is a sensible start, it raises questions about how the EU will police and possibly enforce these points, let alone which apps it will decide to prioritize. Protecting privacy versus promoting the practical and pragmatic usage of the apps is unlikely to move to the fore during the road to exit. This affects not only consumers but will undoubtedly also influence FinTech firms, as well as financial market participants more generally. The Commission has highlighted that it will work on this in close consultation with the European Data Protection Supervisor and the European Data Protection Board, which coordinates national data protection authorities. As a first priority, the Toolbox for a pan-European approach for COVID-19 mobile applications aimed to set out, by mid-April 2020, a common framework, and Member States will need to report to the Commission on their actions taken pursuant to the Recommendation by May 31, 2020, with periodic reporting for so long as the COVID-19 crisis continues. 

These efforts tie into the wider conversation in the EU on tech sovereignty and independent capabilities of European tech providers versus their global peers, in addition to the debate on whether to use centralized versus decentralized data gathering and analysis frameworks. All of this matters not only for policy, but also for the power of individual (often likely to be competing) apps that require a certain percentage of uptake amongst the data population to achieve their stated aims. Uptake will be key. This raises the question as to whether and how to repurpose data held by existing financial services market participants, and whether in addition to supporting pandemic funding channels, there is another more fundamental role for these to play. 

Financial services market participants will need to remain vigilant

Particular threats for financial services generally and market participants specifically may require that they, as in previous pandemics, remain vigilant to the impact on a firm, and its operating environment, in the event that a “second wave”⁹ or other further adverse circumstances or “black swan” events arise. These could, regardless of what stage a jurisdiction and/or the EU as a whole might be in its economic recovery, cause a return to lockdowns. 

As part of this preparedness, it is expected that the EU Commission may publish further principles for non-financial corporations on increased cash conservation, as well as financial and more general operational resilience. These measures may build off a range of supervisory expectations already communicated by the European Central Bank, as well as EU authorities, such as the EBA, ESMA and EIOPA, to a range of financial services firms.¹⁰

Financial services firms will equally want to take note of pressures on their own financial planning, as well as on their counterparties and clients, to improve their capital reserves and funding channels as more frequent and prolonged pandemics and epidemics may require increased preparedness.¹¹ Some of this may include looking at counterparty (credit) risk in a way that also factors in pandemic risks and resilience measures. For some firms this may merit careful navigation of what is permitted within the existing pre-COVID-19 legislative and regulatory framework, as amended by pandemic relief and support measures, to undertake business. Other measures may require consideration as to whether firms should assess immunity and/or pandemic susceptibility as part of product sales i.e., loan origination, insurance and a range of other financial products and if so, with what safeguards. 

Even if there is a return to more normal operating conditions, many counterparties and consumers are likely to still be focused on amassing cash to prevent becoming cash-strapped. This may also include tapping available or looking to procure new funding channels, which could be complicated by additional new COVID-19 related covenants. Financial services firms will need to remain cognizant of the stresses on both sides of the funding channels that could lead to possible liquidity slowdowns and ultimately stresses. Some firms may have  ̶  building on existing inventories of clients and relationship types, possibly even creating a “single counterparty/customer view” ̶ gone a step further to triage possible liquidity needs of clients based on their resilience to differing scenarios. This may go beyond most baseline risk models.

Equally, listed companies may need to consider their communication strategy in light of announcements by regulators, as the effects of monetary policy, lower market interest rates, impact of yield curves on net interest and income may be further accentuated. Equally, firms are required to be frank in describing the risk trends, whether direct or indirect, as a result of the pandemic and economic impact affecting issuers. This may require more frequent ad-hoc notifications, including updating previous disclosures to the extent information becomes materially inaccurate.

While the EU level authorities have temporarily suspended and provided regulatory relief on certain rules, notably on provisioning of non-performing loans and exposures (NPLs), the wave of debt and other exposures that may require refinancing and/or may become unsustainable is likely to grow. While the EU is discussing plans to potentially acquire NPLs, possibly through an EU-wide asset management company, to reduce banks’ NPL balance sheet burdens through a centralized solution, this raises questions over how to deal with new exposures that may become COVID-19 vintages of NPLs. These developments reinforce the need for a real debate on NPL Transaction Platforms.¹² These NPLs come in addition to the issues that several EU Member States face in terms of debt sustainability, with some of the heaviest hit states running at public debt levels near to or over 100 percent of GDP. 

Given the resistance among some more fiscally sound Member States to discuss mutualization of new debt to refinance and restructure legacy sovereign debt, this will mean the European Central Bank’s and the European Stability Mechanism’s balance sheets are likely to continue to grow at a rapid pace. Financial services firms will need to remain agile in an environment where, absent joint action coordinated at the EU level, there is a risk of distorted competition, with certain actors backed by domestic support which is financed at the EU level. Such an environment of ringfencing state aid and channeling subsidies for domestic interests first and foremost, could erode the level playing field but may also provide interesting investment opportunities for distressed companies. 

Finally, given the prolonged pandemic measures, a number of firms may double down on embracing digital transformation journeys. They may do this at a much more rapid pace so as to remain competitive in terms of client-facing activity but also in much more fundamental depth so as to reflect new ways of working and collaboration. This may prove to be easier to implement across certain business and operating units. It also redefines for many the three lines of defense model, as financial services firms now need to focus on many more fronts. COVID-19 is not only redefining how firms do business and engage with counterparties and clients, but is also introducing new challenges to how compliance, legal, risk, governance, audit and other control functions operate under prolonged pandemic preparedness conditions.

Consequently, firms will want to be agile in modeling and understanding the implications of various degrees of lockdown loosening (and possible re-confinements) on earnings, revenue and potential credit losses. They should also consider macro-economic, fiscal stimulus and/or monetary policy measures. This may, in addition to allocating additional resources, require working with external counsel to navigate both near-term tactical and longer-term strategic solutions to mitigate risks, improve resilience and seize opportunities, including the invariable return of heightened regulatory risk once relief measures are themselves reduced. 

Outlook

While the EU’s principles above aim to establish a common set of criteria to support an EU-wide strategy, as healthcare is beyond the EU Commission’s mandate, the real power to decide and then to exit the lockdown remains at the national level. Member States need to assess “their” actions and impact on national and cross-border linkages that enable the free movement of people, goods and services and thus: “The integrated nature of the Single Market should therefore be kept in mind when lifting these measures”. 

Regardless of its Recommendation, the EU Commission may need to invest much more political and economic capital to stop unilateral measures from some Member States, even if these measures are “shared” with other Member States and the Commission. If anything, the pandemic has put pressure on the Commission to ascertain its role as an authority as certain Member States feel more confident to strike their own path. 

For financial services institutions that benefit from greater legal and regulatory certainty in market operating conditions and a level playing field, if left unchecked, this development could fuel fragmentation and thus greater costs and risks for their operations and how they engage with counterparties, clients and consumers across the communities they serve. The Commission summarizes this risk as: “A lack of coordination in lifting restrictive measures risks having negative effects for all Member States and is likely to give rise to political friction between Member States”. This risk is also possibly a wake-up call for the need to give the Commission greater executive powers over areas not within its mandate at a time when it faces the real risk of the Recommendations becoming unenforceable, even though they were prepared at the request of the EU-27 Member States. The Commission will now need Member States to come together as one Union. The opportunity to do so might arise at the latest at the EU’s planned conference on “the Future of Europe”, which also looks at financial services, originally scheduled for May 9 and now postponed until September or perhaps much later. 

If you would like to receive more a detailed analysis in relation to the topics discussed above, or in relation to the financial support measures, expansion of collateral eligibility standards and asset purchase programs, scope of regulatory reliefs or supervisory expectations, please get in touch with any of our Eurozone Hub key contacts. 

1. This plan was originally supposed to be announced on April 8, especially given announcements from Austria and Denmark on April 6, 2020, in terms of their own exit plans. ↩
2. Available here with further information available here. ↩
3. It is quite conceivable that the EU will need to revise its own “New Industrial Strategy for Europe” which was published in March 10, 2020, and which complements the European Green Deal and the European Digital Single Market Strategy, including on digital finance. ↩
4. See coverage from our Eurozone Hub available here. ↩
5. The EU does not have powers in the founding treaties to define health policies, nor the organization and provision of health services and medical care. Instead, its limited mandate is to promote action that serves to complement national policies and to support cooperation between member countries in the field of public health, as well as the accessibility to and sustainability of systems, as well as early warning of serious cross-border threats to health. All of these are areas in which the EU Commission is, following the firefighting part of the current COVID-19 crisis, likely to look to create new powers that go beyond just those of coordinating national responses. ↩
6. See also coverage from Dentons available here↩
7. Available here.↩
8. See March 2020 report from Europol available here↩
9. It is important to note that the Spanish Influenza, which affected a very different Europe from 1918 through to 1920, infected an estimate of 500 million worldwide over that period, a quarter of the world’s population and killed an estimate of between 25 million and 150 million people worldwide. The pandemic spread in four waves, the spring of 1918, the second and most deadly wave from September 1918 to January 1919, and the third from February 1919 through the remainder for that year, with some countries having a fourth wave in 1920. Crucially during 1918 and 1919 most European countries were either still fighting war or rebellion or dealing with dissolution (including currency union dissolution), notably the multiethnic Austro-Hungarian Empire, which tore itself apart, leading to populism, widespread economic failure and famine, and ultimately fueling the rise of fascism. For an overview of currency union dissolutions see also the following Working Paper.↩
10. See coverage from our Eurozone Hub available here.↩
11. Please see our coverage on prolonged pandemic preparedness available here↩
12. Dentons’ Frankfurt Financial Institutions Regulatory Team and its Eurozone Hub is one of the few firms involved in the legal workstreams of the EU Commission tasked with developing NPL Transaction Platforms.↩