EU Watchdog To Monitor Risks Caused By Loan Holidays

By Najiyya Budaly
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Law360, London (June 9, 2020, 2:36 PM BST) -- The European Systemic Risk Board has said it will monitor the risks to lenders caused by loan payment breaks introduced by member state governments in response to the coronavirus outbreak, in a move to prop up the financial sector during the crisis.

Governments across the European Union have introduced loan holidays, although the measure creates risks for lenders, including the risk of loan defaults. (AP)

The board, established in 2010 to help ward off financial risk in the European Union, said Monday that it will establish a blocwide framework to monitor the threat posed to financial stability by payment moratoria and other fiscal measures that member states have introduced.

Payment holidays allow consumers who might be struggling after losing their jobs or falling ill to freeze loan repayments for up to three months. Governments across the bloc have introduced the measure but it creates risks for lenders, including the possibility of loan defaults.

"While these programs target the nonfinancial sector, i.e. the liquidity and solvency of firms and households, they have implications for the financial system as a whole," the ESRB said Monday. "The ESRB intends to complement and enhance what is being done at the national level by fostering the exchange of experiences and the early identification of cross-sectoral and cross-border issues."

The EU watchdog said that member states must share information on their fiscal measures during the crisis, which also include introducing loans guaranteed by their national government. This is because different measures implemented by countries across the bloc to support their economies may have an impact on other nations, given how interconnected the EU is.

The ESRB's framework to monitor payment holidays, agreed on by the regulator's general board, is part of the second set of actions that the ESRB has announced since the COVID-19 crisis began hitting the economy.

The ESRB in May said it will work with the European Securities and Markets Authority to assess the level of liquidity and risk sitting in investment funds. It also encouraged national authorities to work together and warned that the pandemic could cause a wave of credit downgrades across the financial system.

The European Banking Authority has already set out temporary reporting requirements on payment moratoria that banks in the European Union must follow during the COVID-19 crisis. This will help the EBA to monitor the impact of the pauses on lenders.

--Additional reporting by Lucia Osborne-Crowley. Editing by Rebecca Flanagan.

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