EBA’s Guidelines on Payment Moratoria to be Phased Out

The Guidelines

The high degree of disturbance caused by the COVID-19 pandemic generated a broad range of responses both in the public and private sectors, including, in particular, moratoria on payments of certain credit obligations, with the aim of supporting borrowers in the face of operational and liquidity challenges.  

Under the current rules set out under the Capital Requirements Regulation 575/2013 (“CRR”), delays in the repayment of credit obligations can trigger the regulatory definition of “default” and lead to higher own funds requirements for banks. This led to questions on the legal effect of the moratoria on the current regulatory capital framework, and in particular the classification of forbearance under Article 47b of CRR and the definition of default under Article 178 CRR.

While the EBA clarified a number of aspects in relation to the use of payment moratoria in its statement of 25 March 2020, it subsequently published the Guidelines on 2 April 2020 to clarify:

• the criteria that payment moratoria have to fulfil not to trigger forbearance classification;
• the application of the prudential requirements in the context of these moratoria; and
• ensuring the consistent treatment of such measures in the calculation of own funds requirements.

As initially drafted, the Guidelines applied to moratoria applied before 24 June 2020, however this date was extended to 30 September 2020 pursuant to amending guidelines.

The EBA also published questions and answers on the Guidelines in its Report on the Implementation of Selected Covid Policies, on 7 July 2020, which it updated on 7 August 2020.

The Statement

According to the Statement (here), the EBA has been closely monitoring the developments of the COVID-19 pandemic and, considering the progress made so far, will phase out its Guidelines in accordance with its end of September deadline.  While the Guidelines helped banks to effectively manage the large amounts of requests from customers wishing to participate in payment holidays, the EBA considers it “opportune to return to the practice that any rescheduling of loans should follow a case-by-case approach”.

In order to avoid a cliff-edge effect, the regulatory treatment set out in the Guidelines will continue to apply to all payment holidays granted under eligible payment moratoria prior to 30 September 2020.

Comment

The Guidelines were adopted in response to an exceptional event at a time where there was a widespread demand for moratoria and banks were expected to respond to this demand quickly, without being in a position to carry out a case-by-case assessment of each application. As observed by the EBA’s Chairperson, in a speech delivered on 21 September 2020 (here), we are now moving to a normalisation of the situation, where banks will still be able to grant moratoria, but must follow the regular rules when doing so.  This means that banks will have to look at credit indicators and ensure proper risk assessments are carried out, thus preventing the build-up of unrecognised non-performing loans in the banking system.

In his speech, the Chairperson also commented on lessons learnt from the crisis. According to the Chairperson, while the Guidelines were intended to provide a harmonised approach to the prudential treatment of moratoria, the relevant moratoria measures taken differed in many aspects with “payment moratoria and public guarantee schemes launched with little or no coordination, different deadlines, coverage and conditionality.” In the Chairperson’s view, “we should do better in the future in order to preserve the single market.”