Legal Updates

 Banking and Capital MarketsApril 17, 2020

COVID-19: Range of Banking Measures announced due to the Pandemic

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Introduction

Ireland’s five retail banks (AIB, Bank of Ireland, Permanent TSB, KBC and Ulster Bank), together the Banking and Payments Federation Ireland (“BPFI”), the representative body for the banking and payments industry, the Irish Government and the Central Bank of Ireland (“CBI”) have recently announced a series of measures as part of a coordinated approach to assist businesses and personal customers impacted by the COVID-19 pandemic. In this article, we examine those measures and other key actions being implemented by the EU, the CBI and other market participants with a view to assisting businesses and individuals who are experiencing financial difficulties during the pandemic.

Support for borrowers

The range of measures agreed between the Irish retail banks and the Government are as follows:

1. Three month payment moratorium – banks, credit unions, retail credit and credit servicing firms will introduce three-month payment breaks on mortgages, personal loans and business loans for business and personal customers who are experiencing financial difficulties caused by COVID-19. This will be subject to ongoing reviews reflecting changing circumstances and the scale and extent of the situation. Customers seeking to avail of this support should contact their respective banks as early as possible, and the banks are working to achieve a straightforward application process to assist in this regard.

2. Support for buy-to-let customers with affected tenants – flexible repayment arrangements will be made available to buy-to-let customers with tenants affected by COVID-19, including a mortgage payment break of up to three months, which will allow landlords to afford a due level of forbearance to their tenants.

3. Deferral of court proceedings – legal proceedings including repossessions will be deferred for three months. At the time of writing, it is unclear whether this applies to the issuing of new proceedings and/or refraining from progressing or staying existing proceedings.

4. Extensive supports for SME customers – the banks are working to ensure that a wide range of measures are made available to businesses who are trying to manage the financial pressures arising from COVID-19. The measures include the provision of cash flow and credit facilities as well as supply chain supports. The deferral of loan repayments for up to three months will also be available to SMEs.

5. A customer focused approach – banks have committed to providing suitable tailored supports for business including the extension of credit lines, risk guarantees and trade finance.

The supports outlined above complement the range of government supports available through the Strategic Banking Corporation of Ireland.

Payment breaks and the European Banking Authority (“EBA”)

The EBA has expressed that they see the payment break as an effective tool to address short-term liquidity issues caused by the impact on COVID-19 on the economy, particularly due to business closure or reduced output. Given the array of approaches taken by the various EU Member States, the EBA published guidelines on 2 April 2020 with an aim to clarify the criteria that the implementation of the payment break agreed by the Irish banks must meet to avoid a reclassification of the loans to as “forborne” normally associated with measures granted by a credit institution to aid a borrower who is experiencing temporary difficulties with repayment obligation.

Payment breaks and the Central Credit Register (“CCR”)

The CBI has confirmed that a customer’s credit record on the CCR will not be impacted should they avail of payment breaks of up to three months for mortgages and other loans due to COVID-19 and no ‘missed payments’ will be submitted to the CCR during the relevant period.

Credit servicing firms and non-bank lenders

The main credit servicing firms and non-bank mortgage lenders have confirmed their intention to support the measures announced by the five retail banks as they too wish to assist their customers who have been affected by the pandemic. In this regard, they plan to introduce three-month payment breaks and to defer court proceedings for three months. The BPFI signaled that these firms will require guidance from the CBI in respect of a number of matters including customer documentation and processes, the operation of the CCR, the possible impact on securitisation together with time to deal with various operational issues.

Countercyclical Capital Buffer

The CBI made the decision to reduce the Countercyclical Capital Buffer, from 1% to 0%. The Countercyclical Capital Buffer is a capital buffer that banks are required to hold in order support the continued provision of credit to households and businesses. This buffer is intended to dampen lending in good economic conditions by requiring higher capital requirements, while building a reserve that can be drawn when economic conditions take a downturn. This measure will free up to €1 billion in banking capital which will allow for more credit to be provided and will assist in the restructuring and extension of up to €13 billion in restructured lending for personal customers and SMEs. This, combined with the relaxation of Pillar 2 guidance and the Capital Conservation Buffer by the European Central Bank, will ensure significant resources are at the banks’ disposal to support borrowers. The Minister for Finance has also made the decision to defer the introduction of the Systemic Risk Buffer, intended to add resilience against economic shocks which are unlikely to occur but would significantly impact the economy and financial system if they did (so called "tail risks"), during this time.

Classification of Loans

The European Central Bank has introduced supervisory flexibility regarding the treatment of non-performing loans (“NPLs”). Supervisors will implement flexibility in respect of the classification of debtors as “unlikely to pay” when banks call on public guarantees granted in the context of COVID-19. Supervisors will also exercise certain flexibilities regarding loans under COVID-19 related public moratoriums. Furthermore, loans which become non-performing and are under public guarantees will benefit from preferential prudential treatment as regards supervisory expectations about loss provisioning. Irish lenders are closely watching the impact of COVID-19 on their levels of NPLs as there is an increase in contacts from customers potentially facing financial difficulties.

European Union Level

The European Investment Bank has recently confirmed that it will mobilise €40 billion in financing to alleviate constraints caused by the spread of COVID-19, calling on European countries to establish additional guarantees for SMEs. The financing package will be used towards bridging loans, credit holidays and other measures “designed to alleviate liquidity and working capital constraints for SMEs and mid-caps”. The proposed financing package consists of:

1. Dedicated guarantee schemes to banks based on existing programmes for immediate deployment, mobilising up to €20 billion in financing;

2. Dedicated liquidity lines to banks to ensure additional working capital support for SMEs and mid-caps of €10 billion; and

3. Dedicated asset-backed securities purchasing programmes to allow banks to transfer risk on portfolios of SME loans, mobilising another €10 billion of support.

European Ministers of Finance also endorsed the establishment of a €25 billion guarantee fund that will support up to €200 billion of finance for companies, with a special focus on SMEs, through the European Investment Bank, in addition to that €40 billion financing package.

Conclusion

Through these measures, the EU, the CBI, the EBA, the banks, the main non-bank mortgage lenders and credit servicers have sought to act quickly with a view to addressing some of the societal and economic challenges that Ireland now faces due to the COVID-19 pandemic. It is anticipated that financial market participants will continue to monitor the situation and implement additional measures, if necessary in order to alleviate the financial pressures arising from COVID-19.

DISCLAIMER: This document is for information purposes only and does not purport to represent legal advice. If you have any queries or would like further information relating to any of the above matters, please refer to the contacts above or your usual contact in Dillon Eustace.

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