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Law360, London (July 7, 2020, 3:17 PM BST) -- The European Banking Authority encouraged lenders on Tuesday to collect information on the losses they have racked up from granting customers repayment breaks during the coronavirus crisis, even if the fall in profits does not mean they have to hold greater reserves of capital.
The EBA said that banks and other lenders should monitor the losses in their loan portfolios to ensure they do not become unmanageable. The authority has backed the so-called payment holidays introduced by member states to help businesses and individual borrowers who have fallen ill or lost their jobs during the COVID-19 pandemic.
But the measure creates risks for lenders, including the possibility of loan defaults.
The European Union regulator has warned that it expects banks to cope with a growing number of nonperforming loans — a debt which a borrower fails to pay installments on after more than 90 days. But lenders should keep an eye on their losses, even if they do not need to be classified as nonperforming or reach levels that require them to hold additional capital, the EBA said.
"Payment holidays under a broad moratorium ... do not remove the responsibility of institutions to continue loan monitoring and ensure that credit issues, both in the prudential, but also accounting framework, are recognized," the authority said in a report published Tuesday.
The EBA said that lenders must ensure that they identify risks accurately and spot where borrowers are facing longer-term financial difficulties. They must classify these loans as being in default where appropriate.
"This is crucial to provide true information about the quality of banks' portfolios to market participants, and to ensure that institutions are adequately capitalized," the EBA said in its report.
The banking authority has already set out reporting requirements on repayment holidays that lenders must follow. The temporary reports are meant to ensure that banks spot gaps in the supervisory data that they hand to national regulators.
Banks will report information every three months to national regulators on their use of payment moratoria and the quality of the credit that they hold. They must also detail any new loans they approve that are guaranteed by their member state government.
--Editing by Ed Harris.
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