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Law360, London (April 3, 2020, 6:05 PM BST) -- Lenders granting repayment holidays to struggling businesses and individuals, as per national guidance, will not have to shore up additional capital, Europe's banking watchdog has said, providing clarity to banks on their accounting obligations during the COVID-19 outbreak.
The European Banking Authority on Thursday told the bloc's banks that following payment moratoria during the coronavirus crisis will not force them to make large increases in the next financial year to their provisioning, which is the amount they set aside for future expenses.
Governments across the globe are allowing banks to put in place repayment holidays for retail customers who are struggling from the economic damage of the coronavirus. In the U.K, 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.
The EBA has previously said that banks can be flexible in how they reflect unpaid loans in their books, but Thursday's guidance provides clarity for lenders during the uncertainty caused by the pandemic.
"The EBA sees the payment moratoria as effective tools to address short-term liquidity difficulties caused by the limited or suspended operation of many businesses and individuals resulting from the impact of COVID-19," the EU authority said in a statement. "The guidelines clarify that payment moratoria do not trigger classification as forbearance or distressed restructuring if the measures taken are based on the applicable national law."
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.
Under the International Financial Reporting Standard 9, financial companies must recognize financial losses from permanent hits to their assets at an early stage and set aside more money to cushion themselves from this.
Europe's banks had been concerned that they would be forced, by the global accounting rules published in 2018, to set a large amount of money aside to deal with the fallout from the coronavirus.
The European Security and Markets Authority, along with the EBA, on March 25 attempted to reassure banks, saying that IFRS 9 includes flexibility to reflect the specific circumstances of the outbreak.
--Additional reporting by Joanne Faulkner. Editing by Alyssa Miller.
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