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Law360, London (December 2, 2020, 12:35 PM GMT) -- The European Union's banking regulator said on Wednesday that it will allow lenders across the bloc to resume granting repayment breaks to borrowers struggling with the second wave of COVID-19 lockdowns, but set out conditions to ensure that they are not crippled by defaults.
The banking regulator has revived relief measures for borrowers struggling to repay loans and mortgages after national lockdowns closed many businesses. (iStock)
The regulator said it has reactivated its guidelines on payment breaks in response to the second wave of coronavirus cases across the bloc, which has led to more national lockdowns and restrictions.
Payment holidays will be subject to restrictions to protect banks against the risk that borrowers will default, the watchdog said. Customers can benefit from repayment holidays for nine months in total; and the new guidelines oblige lenders to assess whether loans are likely to default.
"The role of banks to ensure the continued flow of lending to clients remains of utmost importance and, with the reactivation of these guidelines, the EBA recognizes the exceptional circumstances of the second COVID-19 wave," the EU authority said Wednesday.
The revised guidelines "include additional safeguards against the risk of an undue increase in unrecognized losses on banks' balance sheet," the authority added.
The provisions will ensure that the payment holidays are used only as a short-term solution to bridge any lack of liquidity that account-holders face during lockdown, the authority said.
Without the measures from the EBA, lenders would need to set aside extra capital for every loan that customers did not repay 90 days after it was due. This would hit the pool of money that banks have available to lend to the economy during the pandemic.
The EBA said in November that lenders had granted repayment freezes on loans totaling €870 billion ($1 trillion) by the end of June. Approximately half of the loans that have been paused or frozen were due to expire before September this year, the regulator said. Another 85% were due to expire before December.
The EBA has encouraged lenders to collect information on the losses they have racked up from granting borrowers repayment breaks during the coronavirus crisis, even if the fall in profits does not mean they have to hold greater reserves of capital.
--Additional reporting by Lucia Osborne-Crowley. Editing by Ed Harris.
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