FIN-FSA issued a statement to clarify certain regulatory issues related to payment restructuring events. The COVID-19 pandemic and the resulting economic downturn are posing extraordinary challenges to the repayment capacity of clients and the credit processes of credit institutions. The clarifications in the statement mainly relate to credit process, capital adequacy, and consumer protection in the context of payment restructuring.
Credit Process and Capital Adequacy
- Risk-based prioritization. To manage the operational challenges due to a substantial number of changes to the payment plans, credit institutions are allowed to apply a risk-based approach in their credit processes on a temporary basis, as described in a release and statement published by EBA on March 25, 2020.
- Temporary liquidity constraints due to the COVID-19 pandemic do not automatically mean a significant increase in credit risk. In its credit process, a credit institution should consider whether the reason underlying the customer's need for relief is a permanent problem, potentially manifesting itself already before the COVID-19 crisis, or a temporary liquidity issue. In accordance with the statement published by ESMA on March 25, 2020, a significant increase in credit risk is not automatically deemed to have occurred if the forbearance is only based on a temporary liquidity constraint.
- Not all changes to payment plans are classified as forbearance, but the classification decision may not be based on the duration of the grace period. A change to the payment plan is a forbearance referred to in Article 47b of the Capital Requirements Regulation (CRR) in situations where the obligor is experiencing or is likely to experience difficulties in meeting its financial commitments. Hence, the assessment is not based on the duration of an agreed grace period. However, duration of the grace period has an impact on calculation of the value of the exposure when assessing the distressed restructuring of the credit obligation referred to in Article 178(3)(d) of the CRR.
- Adoption of a transitional provision under CRR may be used to mitigate the impact of expected credit-loss provisioning under IFRS 9 on common equity tier (CET1). Where a credit institution has not previously applied the transitional provision under Article 473a of CRR, the transitional provision can still be adopted until the end of 2022, subject to approval from the competent authority. The transitional provision allows credit institutions, subject to certain preconditions provided in the Article, to add-back a part of the impact of expected credit losses provisioned under IFRS 9 to their CET1 capital. The amendments proposed, by EC on April 28, 2020, to CRR2 extend the scope of application of the transitional provision further to consider the growth in expected credit losses under IFRS 9 due to the COVID-19 situation.
Consumer Protection in Context of Payment Restructuring
- Loan payment delay events. FIN-FSA is reminding lenders about good lending practices under the consumer protection regulation. In accordance with the law, in these events, a lender must provide a consumer with information and advice to prevent the emergence or worsening of payment difficulties and to manage insolvencies as well as take a responsible stance toward payment restructuring.
- Granting of grace periods. FIN-FSA considers that the granting of grace periods offered by lenders represents a responsible stance as referred to in the law toward consumers’ payment difficulties caused by the COVID-19 pandemic. However, in particular situations, bank may apply discretion in terms of whether to grant a grace period to its customer. In considering various forbearance options, it should be borne in mind that, according to legislation on consumer credit, bank may not unilaterally change the interest on a contract to the detriment of a consumer.
Related Link: Press Release
Keywords: Europe, Finland, Banking, COVID-19, Regulatory Capital, IFRS 9, ECL, CRR, Credit Risk, Loan Moratorium, Basel, FIN-FSA
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