EBA Guidelines on legislative and non-legislative moratoria – An Update

Background

The Member States of the European Union have seen their governments and their regulatory authorities implement a broad range of support measures for businesses and individuals whose financial position has been adversely affected due to the Covid-19 pandemic (the “Pandemic”). Repayment delays by borrowers can trigger defaults in their loans. Where loans are classified as defaulted loans under the EU Capital Requirements Regulation (the “CRR”), banks are subject to higher own funds requirements. Due to differing approaches across the EU in the nature and implementation of supports for economies and borrowers, the EBA published guidelines on legislative and non-legislative moratoria (the “Guidelines”). The Guidelines clarify the application of the definition of default under Article 178 of the CRR and the classification of forbearance under Article 47b of CRR in the context of the Pandemic and varying support initiatives taken by banks across the EU.

Announcement – 18 June 2020

The European Banking Authority (the “EBA”) announced on 18 June 2020 that in light of the continuing impact of the Pandemic on EU economies, it will extent the application date of the Guidelines from 30 June 2020 to 30 September 2020. The Guidelines clarify that short term payment moratoria do not trigger forbearance classification and the assessment of distressed restructuring if they are based on the applicable national law or on an industry or sector-wide private initiative agreed and applied broadly by banks. The purpose of the extension is to allow banks across the EU to grant payment holidays to those customers impacted by the Pandemic.

Updated Guidelines – 25 June 2020

The EBA updated the Guidelines on 25 June 2020 to recognise ongoing economic developments arising from the impact of the Pandemic, including the ongoing liquidity issues facing personal and business (including SME) borrowers. The purpose of the Guidelines is to clarify, in the context of short term Pandemic related difficulties, how loans are determined to be in default and to classify what constitutes forbearance for the purpose of the CRR. Notwithstanding the continued impact of the Pandemic, banks are required to identify borrowers in longer term financial difficulty in the normal way to ensure that banks are and continue to be adequately capitalised.

The Guidelines and the Conditions

Typically where forbearance measures are provided to borrowers, it is considered a distressed restructuring for the purpose of separate EBA guidelines on the application of the definition of default. However, where borrowers have the benefit of moratoria meeting the conditions of the Guidelines, this measure does not fall within the standard definition of forbearance and is not classified as a distressed restructuring. Banks are nonetheless still obliged in the context of individually negotiated arrangements to consider whether such measures fall within the standard EBA definitions of default and forbearance.

In order for the alternative treatment of forbearance to apply, the conditions provided in the Guidelines must apply. These conditions are, in summary:

1. The moratorium was launched in response to the Pandemic and is announced and applied prior to 30 September 2020. The moratorium must be based on the applicable national law (legislative moratorium) or on a non-legislative payment relief initiative as part of an industry or sector wide moratorium scheme agreed or coordinated within the relevant country’s banking industry.

2. The moratorium is broadly applied (i.e. banks generally apply the same approach in a generally co-ordinated manner in respect of a broad range of obligors regardless of their creditworthiness).

3. The same moratorium offers the same conditions. It is recognised that the similarity of conditions will be conditional on the nature of obligor; for example, SME and private individuals may be treated differently.

4. The moratorium changes only the schedule of payments designed to address systemic short-term liquidity shortages. Other terms of the underlying should not be amended.

5. The moratorium applied to loans existing at the time of the outbreak of the Pandemic and does not apply to new loans provided after the introduction of the moratorium.

Conclusion

The Guidelines bolster the broad economic support and forbearance provided by banks and governments across the EU by alleviating banks capital requirements (in the limited circumstance of Pandemic related payment holidays meeting the conditions of the Guidelines) for loans that may be otherwise categorised as being in default. The time extension to 30 September 2020 provides clarity in the context of the continuing Pandemic enabling banks to provide ongoing short term financial support to borrowers across the EU without the application of augmented capital requirements.

Notwithstanding the clarity provided by the Guidelines, banks are not absolved of their obligation to continually monitor the performance of their loans and to correctly classify borrowers that are in or are potentially in longer term financial difficulty.

Dillon Eustace July 2020