On 3 April 2020, the EBA published a final report containing guidelines on legislative and non-legislative moratoria on loan repayments as a result of the COVID-19 pandemic (EBA/GL/2020/02). These guidelines seek to clarify the six criteria to be met for any payment moratorium (whether legislative or non-legislative) (i) not to be classified as a forbearance and (ii) not to trigger the prudential framework applicable to credit impaired assets on bank balance sheets.
Background
On 25 March 2020 the EBA issued a statement supporting the individual measures (in the form of general moratorium, payment holidays from public institutions or industry-wide payment relief initiatives by credit institutions) taken by national governments and EU bodies against the adverse systemic economic impact of the COVID-19 pandemic. In this context, the EBA has decided to clarify certain aspects of the existing prudential framework related to (i) the classification of loans in default, (ii) the identification of forborne exposures and (iii) the accounting treatment of any moratorium. In summary, the objective of these rules is to ensure a correct and consistent identification of credit impaired assets on bank balance sheets.
In addition, the EBA published on 3 April 2020 a final report containing detailed guidance on the treatment of legislative and non-legislative moratoria with a view to ensure a consistent application and treatment of the measures.
Criteria
According to the guidelines, any payment moratorium (whether legislative or non-legislative) will not be classified as a forbearance1 if the following conditions are met:
- the moratorium is based on the applicable national law or issued by an institution as part of an industry or sector-wide private initiative agreed and applied broadly within the banking industry;
- the moratorium is applied to a wide range of predefined obligors (e.g. by referring to their industry sector or geographical location), regardless of the assessment of their creditworthiness and should not be limited only to those obligors who experienced financial difficulties before the outbreak of the COVID-19 pandemic;
- the measures only affect the payments schedule (i.e. by suspending, postponing or reducing payments) for a predefined limited period of time. No other terms and conditions of the loans not directly related to the change in the schedule of payments should be amended;
- the moratorium offers the same conditions for the changes to payment schedules across all exposures, even if the application thereof is not compulsory. The moratorium has to apply across the board and to a large number of obligors of any institution;
- the moratorium should not apply to new loans granted after the date of announcement of the moratorium. The EBA has clarified that the utilisation of existing credit lines or the renewal of revolving loans shall not be considered as a new loan; and
- the measures were launched in response to the COVID-19 pandemic and were announced and applied before 30 June 2020. Depending on the development of the current situation, this deadline could be extended by the EBA.
The EBA further indicates that, even if a specific payment moratorium is not classified as a forbearance measure, institutions must continue to identify situations where borrowers are unlikely to pay and cause a default (e.g. taking into account any rescheduling of payments as a result of any payment moratorium). The requirements for identification of forborne exposures and defaulted obligors shall remain in place2.
Regarding the definition of “default”, any payment moratorium complying with the above conditions will cause the number of days for any sum to become due, to be increased in order to reflect the relevant payment moratorium.
Finally, when a non-legislative moratorium is put in place, a notification by the relevant national authorities shall be required, which will in turn, will notify the EBA.
Any payment moratorium should be used in a transparent manner. In order to monitor effectively the consequences of the COVID-19 pandemic, institutions are required to collect information about the scope and effects of the use of any moratorium and provide the relevant information to their competent authorities.
Next steps
- Application of these guidelines from the date of translation of the guidelines into all EU languages; and
- specific disclosure requirements to the public will be published at a later point in time.
Notes
1. As defined by Article 47b of Regulation (EU) 575/2013
2. Articles 47(b) and 178(3)(d) of Regulation (EU) No 575/2013 and EBA Guidelines on the application of the definition of default under Article 178 of Regulation (EU) No 575/2013 (EBA/GL/2016/07)
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