ECB announced further measures to ensure that the banks it directly supervises can continue to fulfill their role to fund households and corporations amid the COVID-19 economic shock. These measures to mitigate credit risk come in addition to the capital and operational relief measures announced on March 12, 2020. ECB also released frequently asked questions (FAQs) that provide further details on supervisory measures taken this week and last week. ECB has introduced supervisory flexibility regarding the treatment of non-performing loans (NPLs), in particular to allow banks to fully benefit from guarantees and moratoriums put in place by public authorities to tackle the current distress.
ECB supports all initiatives aimed at providing sustainable solutions to temporarily distressed debtors in the context of the current outbreak:
- Within their remit and on a temporary basis, supervisors will exercise flexibility regarding the classification of debtors as “unlikely to pay,” when banks call on public guarantees granted in the context of COVID-19. The supervisor will also exercise certain flexibility regarding loans under the public moratorium related to COVID-19.
- Loans that become non-performing and are under public guarantees will benefit from preferential prudential treatment in terms of supervisory expectations about loss provisioning.
- Supervisors will deploy full flexibility when discussing with banks the implementation of NPL reduction strategies, taking into account the extraordinary nature of current market conditions.
In addition, excessive volatility of loan-loss provisioning should be tackled at this juncture to avoid excessive procyclicality of regulatory capital and published financial statements. Within its prudential remit, ECB recommends that all banks avoid procyclical assumptions in their models to determine provisions and that the banks that have not done this so far opt for the IFRS 9 transitional rules.
Keywords: Europe, EU, Banking, Credit Risk, COVID 19, NPLs, Regulatory Capital, IFRS 9, FAQs, ECB
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