Featured Product

    FSI Examines Financial Stability Implications of Payment Deferrals

    May 28, 2020

    FSI published a brief note that examines challenges facing the banking sector as a result of the payment deferral programs put in place to support borrowers affected by the COVID-19 pandemic. The note also presents an overview of payment deferral programs and their accounting treatment, before moving on to discuss the associated practical considerations related to these payment deferrals. While analyzing the financial stability implications of implementation of these programs by the prudential regulators, FSI emphasizes the importance of timely classification and measurement of credit risk by banks.

    The note highlights that prudential authorities are caught "between a rock and a hard place" as they encourage banks—through various relief measures—to provide credit to solvent, but cash-strapped borrowers, while keeping in mind the longer-term implications of these measures for the health of banks and national banking systems. In navigating these tensions, banks and supervisors face a daunting task as borrowers that may be granted payment holidays have varying risk profiles. Distinguishing between illiquid and insolvent borrowers—amid an uncertain outlook—should help guide banks' efforts to support viable borrowers, while preserving the integrity of their reported financial metrics. 

    IFRS 9 allows banks to recognize interest income on these missed payments, raising prospective risks if borrowers are ultimately unable to repay. In addition, if the payment moratorium is lengthy, the deferred interest payments that are added to a borrower’s loan balance and the corresponding amount that are recognized in banks’ interest income accounts will increase, accentuating medium-term risks for borrowers and banks. The extent to which these risks materialize and how they affect the accounting classification and measurement of loans, depends on two factors: first is the ability of borrowers to repay the debt once the deferral period ends and second is the availability of collateral support, including the existence of public guarantees that back the underlying exposures.

    The note concludes that payment deferral programs provide an indispensable lifeline to consumers and businesses affected by COVID-19, but they could also increase future risks to the banking system. Therefore, their design will be critical in balancing the short-term needs of borrowers with longer-term financial stability considerations. The financial stability implications of payment deferral programs will be driven by the extent to which borrowers will be able and willing to repay their debt obligations once the payment holidays expire, particularly in the absence of a public guarantee. The cumulative impact of COVID-19 and payment deferral programs on bank balance sheets depends on many factors and will only become apparent over time. Therefore, the timely classification and measurement of credit risk is critical for banks to provide confidence to supervisors and their stakeholders on their financial health. Delaying loss recognition until the tide goes out may leave banks and supervisors with fewer options for dealing with the repercussions.

     

    Related Links

    Keywords: International, Banking, Loan Moratorium, Loan Guarantee, Credit Risk, IFRS 9, Accounting, COVID-19, Financial Stability, FSI

    Featured Experts
    Related Articles
    News

    APRA Finalizes Guidance on Management of Climate Change Risks

    The Australian Prudential Regulation Authority (APRA) released the final Prudential Practice Guide on management of climate change financial risks (CPG 229) for banks, insurers, and superannuation trustees.

    November 26, 2021 WebPage Regulatory News
    News

    European Council Adopts Position on Digital Finance Package Proposals

    The European Council adopted its position on two proposals that are part of the digital finance package adopted by the European Commission in September 2020, with one of the proposals involving the regulation on markets in crypto-assets (MiCA) and the other involving the Digital Operational Resilience Act (DORA).

    November 25, 2021 WebPage Regulatory News
    News

    PRA Proposes Rulebook Changes; BoE Extends BEEDS Testing Window

    The Prudential Regulation Authority (PRA) is proposing, via the consultation paper CP21/21, to apply group provisions in the Operational Resilience Part of the PRA Rulebook (relevant for the Capital Requirements Regulation or CRR firms) to holding companies.

    November 25, 2021 WebPage Regulatory News
    News

    EC Proposes New Measures Under Capital Markets Union Package

    The European Commission (EC) has adopted a package of measures related to the Capital Markets Union.

    November 25, 2021 WebPage Regulatory News
    News

    EBA Publishes Standards to Calculate Risk-Weights of CIUs Under CRR

    The European Banking Authority (EBA) published the final report on draft regulatory technical standards for the calculation of risk-weighted exposure amounts of collective investment undertakings or CIUs, in line with the Capital Requirements Regulation (CRR).

    November 24, 2021 WebPage Regulatory News
    News

    FED Outlines Lending Conditions and Supervisory Activities in H1 2021

    The Board of Governors of the Federal Reserve System (FED) published a report that summarizes banking conditions in the United States, along with the supervisory and regulatory activities of FED.

    November 24, 2021 WebPage Regulatory News
    News

    APRA Expects Boards to Strengthen Ability to Oversee Cyber Resilience

    The Australian Prudential Regulation Authority (APRA) recently completed two pilot initiatives in its 2020-2024 Cyber Security Strategy, which was published in November 2020.

    November 23, 2021 WebPage Regulatory News
    News

    FSB Updates List of Global Systemically Important Banks

    The Basel Committee on Banking Supervision (BCBS) published further information related to its 2021 assessment of global systemically important banks (G-SIBs), with additional details to help understand the scoring methodology.

    November 23, 2021 WebPage Regulatory News
    News

    FASB Proposes Improvements to Credit Losses Standard

    The Financial Accounting Standards Board (FASB) is consulting on an Accounting Standards Update and the associated taxonomy improvements for requirements on troubled debt restructurings and vintage disclosures under the credit losses standard (for financial instruments) topic 326.

    November 23, 2021 WebPage Regulatory News
    News

    US Agencies Issue Statement on Crypto-Asset Policy Initiatives

    US Agencies issued a statement that summarizes the work undertaken during the interagency policy sprints focused on crypto-assets and provides a roadmap of future work related to crypto-assets.

    November 23, 2021 WebPage Regulatory News
    RESULTS 1 - 10 OF 7733