The European Commission has announced a relaxation of banking accounting rules to ensure that lenders can continue to extend loans to companies struggling during the Covid-19 crisis, in a bid to ensure a coordinated EU response and avoid national fragmentation
The proposals include what the Commission has dubbed as a few targeted ‘quick fix’ amendments to the EU's banking prudential rules (the capital requirements regulation) in order to maximise the ability of banks to lend and absorb losses related to coronavirus.
The Commission is putting forward a number of exceptional temporary measures to alleviate the immediate impact of Coronavirus-related developments, by encouraging greater flexibility in approach.
These include adapting the timeline of the application of international accounting standards on banks' capital, treating more favourably public guarantees granted during this crisis, by postponing the date of application of the leverage ratio buffer and modifying the way of excluding certain exposures from the calculation of the leverage ratio.
The Commission also proposes to advance the date of application of several agreed measures that incentivise banks to finance employees, SMEs and infrastructure projects.
In addition, the Commission has published an ‘interpretative communication’ confirming the recent statements on using flexibility within accounting and prudential rules, such as those made by the Basel Committee of Banking Supervision, the European Banking Authority (EBA) and the European Central Bank, amongst others.
These include the flexibility available in EU rules when it comes to the classification of non-performing loans in the context where relief measures such as guarantee schemes and moratoria have been provided either by member states or by banks.
The interpretative communication clarifies that the application of relief measures alone which banks or member states grant households and businesses to bridge short-term liquidity needs, such as delays in the repayment of loans, should not automatically lead to a harsher accounting treatment of the respective loans.
It states that the temporary inability of households or businesses to pay back their loans because of the coronavirus pandemic should not mean that banks have to automatically significantly increase their expected credit loss ECL provisions under IFRS 9.
Instead, banks are to use their own judgment when determining if expected credit losses are required to be recognised.
The Commission also states that banks should ‘act responsibly’, for example by refraining from making dividend distributions to shareholders or adopting a conservative approach to the payment of variable remuneration.
Valdis Dombrovskis, executive vice-president for an economy that works for people, said: ‘We are supporting households and businesses as much as we can to deal with the economic fallout of the coronavirus.
‘The banking sector can do a lot to help here. We are using the full flexibility of the EU's banking rules and proposing targeted legislative changes to enable banks to keep the liquidity taps turned on, so that households and companies can get the financing they need.
‘I will soon also be launching roundtable discussions bringing together consumer and business groups with the financial sector so that we can address the most urgent needs of our citizens and companies.’
European Commission interpretative communication is here: Commission Interpretative Communication on the application of the accounting and prudential frameworks to facilitate EU bank lending (Supporting businesses and households amid COVID-19)
Amendments to prudential requirements is here: Proposal to amend Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms