EU Tells Banks To Be Flexible In Reflecting Loan Defaults

Law360, London (March 25, 2020, 1:15 PM GMT) -- Banks must take a flexible approach when they reflect loans that have not been repaid in their accounts during the coronavirus outbreak, European Union regulators said Wednesday as they sought to stop lenders setting aside too much cash during the crisis.

The European Securities and Markets Authority told EU lenders that a 2018 accounting standard, known as IFRS 9, provides flexibility for banks as they seek to reflect the impact of the COVID-19 outbreak in their books.

This means they will not have to make large increases in the next financial year to their provisioning, which is the amount they set aside for future expenses.

International Financial Reporting Standard 9, published by the International Accounting Standards Board, forces financial companies to recognize financial losses from permanent hits to their assets, known as impairment losses, at an early stage.

Europe’s banks have been concerned that they will be forced, by the global accounting rules, to set a large amount of money aside to deal with the fallout from the coronavirus. Regulators have put in place measures to cushion loan defaults, such as introducing repayment holidays, but lenders are unsure what this means for their accounts.

But ESMA said Wednesday that IFRS 9 “includes sufficient flexibility to faithfully reflect the specific circumstances of the COVID-19 outbreak and the associated public policy measures.”

The EBA echoed this, calling for “flexibility and pragmatism” among banks in the way they classify defaults in their accounts.

“When applying the IFRS 9 international accounting standard, institutions are expected to use a certain degree of judgment and distinguish between borrowers whose credit standing would not be significantly affected by the current situation in the long term, from those who would be unlikely to restore their creditworthiness,” the banking authority said in a statement.

But the EBA added that banks must continue to ensure that they prioritize protection for consumers when examining which customers are likely to default on payments during the pandemic.

Mortgage lenders in the U.K. have backed the government’s promise to deliver mortgage payment holidays of up to three months to help homeowners weather the economic impact of the virus.

Lenders owned by the Lloyds Banking Group and the Royal Bank of Scotland have all confirmed they will offer to defer mortgage payments from borrowers affected by the virus outbreak.

--Additional reporting by Joanne Faulkner. Editing by Ed Harris.

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

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