Featured Product

    PRA Guides Further on Treatment of Payment Deferrals in CRR and IFRS 9

    June 04, 2020

    PRA published a "Dear CEO" letter from Sam Woods, its Deputy Governor and CEO, to update the March guidance on treatment of COVID-19-related payment deferrals under IFRS 9 and the Capital Requirements Regulation (CRR). The letter, which is addressed to the chief executive officers of deposit takers in UK, is in response to the updated FCA guidance on retail mortgage payment deferrals. The aim of the updated guidance is to address the treatment of exits from the initial payment deferrals.

    Much of the March guidance related to payment holidays, moratoria, or deferrals (collectively, payment deferrals). The first payment deferrals are now coming to an end and earlier this week the FCA published an updated guidance on how lenders should treat retail mortgage borrowers at the end of the initial deferral period. As a consequence, firms are assessing the capital and accounting treatment of the various ways in which those initial payment deferrals might end. The purpose of this letter is to update the March guidance to address exits from initial payment deferrals. The guidance in this letter is considered to be consistent with IFRS and CRR. However, PRA also recognizes that it is the responsibility of firms to satisfy themselves that they have prepared their annual and interim financial reports in accordance with the applicable reporting frameworks and for auditors to reach their own audit or review conclusions about those reports. Similarly, it is for firms to ensure they comply with the requirements of CRR.

    The Annex to this letter sets out the detailed guidance, which can be summarized as follows:

    • When there has been a payment deferral, counting of days past due should be based on the agreed schedule for the purposes of the expected credit loss (ECL) backstops and for the CRR definition of default. However, loans that are not past due can still have suffered a significant increase in credit risk or SICR, credit impairment, or default.
    • Eligibility for, and use of, COVID-19 related initial and further payment deferrals taken up in accordance with the FCA guidance on the subject does not on its own automatically result in a loan (a) being regarded as having suffered a significant increase in credit risk or being credit-impaired for ECL, or (b) triggering a default under CRR. Firms will, therefore, need to consider other indicators to determine the appropriate treatment. For example, for CRR purposes, firms will need to assess whether the deferral should be considered a distressed restructuring; in cases where it is likely to result in a diminished financial obligation, this may be an indication of default.
    • Firms are likely to have limited borrower-specific information to make the determinations on an individual borrower basis. Firms will, therefore, need to make holistic assessments that look beyond past-due information and use of payment deferrals to treat such loans appropriately for accounting and regulatory purposes.
    • It is not envisaged that these holistic assessments for accounting and CRR purposes will be made at the time when a payment deferral is taken up, as the FCA guidance does not require such information to be available at that time. These assessments are expected to be made subsequently and be based on the information available at the next and subsequent reporting dates.

    PRA recognizes that distinguishing between different types of payment or other financial difficulty is not easy in the current environment, given the extraordinary level of economic uncertainty and the complex interactions between various public-sector and private-sector COVID-19 related support measures. PRA encourages firms to make well-balanced and consistent decisions that take into account the information they have regarding the borrower, the potential impact of COVID-19, and the unprecedented level of support provided by governments and central banks domestically and internationally to protect the economy.

     

    Related Links

    Keywords: Europe, UK, Banking, IFRS 9, ECL, COVID-19, CRR, Credit Risk, Loan Moratorium, SICR, Guidance, FCA, PRA

    Featured Experts
    Related Articles
    News

    EC to Defer Application of SFDR Standards Till July 2022

    The European Commission (EC) announced plans to defer the application of 13 regulatory technical standards under the Sustainable Finance Disclosure Regulation (2019/2088) by six months, from January 01, 2022 to July 01, 2022.

    July 23, 2021 WebPage Regulatory News
    News

    BoE Consults on Approach to Setting MREL, Publishes Bail-In Guidance

    The Bank of England (BoE) published a consultation paper on approach to setting minimum requirement for own funds and eligible liabilities (MREL), an operational guide on executing bail-in, and a statement from the Deputy Governor Dave Ramsden.

    July 22, 2021 WebPage Regulatory News
    News

    EBA Seeks Views on Proportionality Assessment Methodology

    The European Banking Authority (EBA) is seeking preliminary input on standardization of the proportionality assessment methodology for credit institutions and investment firms.

    July 22, 2021 WebPage Regulatory News
    News

    US Agencies Propose Changes to Call Reports and Instructions

    Certain regulatory authorities in the US are extending period for completion of the review of certain residential mortgage provisions and for publication of notice disclosing the determination of this review until December 20, 2021.

    July 22, 2021 WebPage Regulatory News
    News

    PRA Finalizes Rulebook Definition of Higher Paid Material Risk-Taker

    The Prudential Regulation Authority (PRA) published the policy statement PS18/21, which introduces an amendment in the definition of "higher paid material risk taker" in the Remuneration Part of the PRA Rulebook.

    July 21, 2021 WebPage Regulatory News
    News

    EBA Examines Asset Encumbrance in Banking Sector

    The European Banking Authority (EBA) published its annual report on asset encumbrance in banking sector.

    July 21, 2021 WebPage Regulatory News
    News

    EBA Publishes Methodological Guide to Mystery Shopping

    The European Banking Authority (EBA) published a methodological guide to mystery shopping.

    July 21, 2021 WebPage Regulatory News
    News

    APRA Issues Update on Capital Reform Policy Settings for Banks

    The Australian Prudential Regulation Authority (APRA) released a letter to authorized deposit-taking institutions to provide an update on key policy settings for the capital framework reforms, which will come into effect from January 01, 2023.

    July 21, 2021 WebPage Regulatory News
    News

    CPMI-IOSCO Assess Continuity Planning of Market Infrastructures

    The Committee on Payments and Market Infrastructures (CPMI) and the International Organization of Securities Commissions (IOSCO) published a report that assesses the business continuity planning activities of financial market infrastructures or FMIs.

    July 21, 2021 WebPage Regulatory News
    News

    ESMA Responds to Proposal Related to Sustainability Standards Board

    The European Securities and Markets Authority (ESMA) has responded to the IFRS consultation on targeted amendments to the IFRS Foundation constitution to accommodate an International Sustainability Standards Board (ISSB) to set IFRS Sustainability Standards.

    July 21, 2021 WebPage Regulatory News
    RESULTS 1 - 10 OF 7283