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Covid-19 - EBA Report on Implementation of Guidelines on Payment Moratoria - Ireland

  • Ireland
  • Coronavirus
  • Financial services and markets regulation - Briefings and articles

21-07-2020

The European Banking Authority (“EBA”) has confirmed that interest may be suspended, postponed or reduced during the period of a payment break which meets EBA Guidelines without having to re-classify the underlying loan as non-performing.

The Central Bank of Ireland has set out its supervisory expectations in relation to how payment breaks should operate and how the end of those payment breaks should be managed.

Introduction

The European Supervisory Authorities have so far been supportive of steps introduced in EU Member States to address the adverse economic impacts of the COVID-19 Pandemic in the form of payment breaks on corporate and household debt. These steps were introduced either by Governments (“legislative moratoria”) or by industry representative bodies (“non-legislative moratoria”). 

Statistics published by the Central Bank of Ireland (“CBI”) in early July 2020 note that almost 160,000 payment breaks, representing €20.1 billion in loans, have been granted to Irish borrowers so far during the COVID-19 pandemic. This represents 9.6% of the entire value of Irish mortgages, 6.6% of the entire value of personal loans, 17% of the entire value of corporate loans and 28% of the entire value of SME loans. According to the CBI, “the significant scale of payment breaks speaks to the unprecedented breadth of the shock triggered by COVID-19. These payment break data demonstrate clearly that the impact has been widespread covering all categories of borrowers and all sectors of the economy”.

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”) in April 2020. The Guidelines were updated in June 2020. The aim of the Guidelines is to clarify the requirements for legislative and non-legislative moratoria, which if fulfilled, would avoid the requirement for exposures the subject of such moratoria to be re-classified under the existing definitions of forbearance under Article 47b of the Capital Requirements Regulation (“CRR”) or default under Article 178 of the CRR. 

On 7 July 2020, the EBA issued a report on the implementation of selected COVID-19 policies (the “Report”). The aim of the Report is: (a) to provide a follow up on the implementation issues around COVID-19 relief measures (and in particular the Guidelines); and (b) to monitor how such measures are implemented. 

The Report provided clarification on a number of questions raised in the context of the Guidelines. In particular, the EBA has clarified that payments of interest may be suspended, postponed or reduced during the period of a payment moratorium on a particular exposure without that exposure having to be reclassified under the CRR.

The Report also includes considerations of criteria that regulated financial institutions should adopt with regard to operational risk in the context of COVID-19 (with a view to reducing inconsistencies in capital requirement calculations related to operational risk).

The clarification from the EBA that interest payments may be suspended, postponed or reduced during the period of a payment moratorium has caused some controversy in an Irish context. The policy of Irish banks has been to continue to charge interest during the payment moratorium with some interest groups and politicians arguing that banks should discontinue that policy in light of the EBA clarification. However, any change in policy would have a significant cost implication for the banks concerned in an already uncertain economic environment.

Background

General Payment Moratorium 

In order for a legislative or non-legislative moratorium to be considered as a “general payment moratorium” under the Guidelines (and avoid the triggering of a reclassification of the exposures the subject of that moratorium), a number of conditions must be met including the following:

  • the moratorium must have been launched in response to the COVID-19 pandemic and announced and applied before 30 June 2020 (now 30 September 2020); 
  • the moratorium must be based on the applicable national law or issued by an institution as part of an industry or sector-wide private initiative agreed and applied broadly within the banking industry; 
  • the moratorium must offer the same conditions for the changes to payment schedules across all exposures and must apply to a large number of borrowers of any institution;
  • the moratorium must be applied to a wide range of predefined borrowers (eg by referring to their industry sector or geographical location), regardless of the assessment of their creditworthiness and should not be limited only to those borrowers who experienced financial difficulties before the outbreak of the COVID-19 pandemic;
  • the moratorium must only affect the payments schedule (ie by suspending, postponing or reducing principal or interest payments (or both)) for a predefined limited period of time. No other terms and conditions of the loans (in particular the interest rate) should be amended; and
  • the moratorium should not apply to new loans granted after the date of announcement of the moratorium. 

EBA Report on Implementation of Selected COVID-19 Policies

Key Clarifications

The Report provides clarification on three key aspects of the Guidelines with a view to ensuring absolute clarity on the requirements to be satisfied for any legislative or non-legislative moratorium to be classified as a “general payment moratorium” as follows:

(i) the requirement for a moratorium to be broadly applied, to ensure that the moratoria are similar in economic substance, regardless of whether they are legislative or non-legislative;

(ii) the condition that a moratorium should change only the schedule of payments; and

(iii) the selection criteria in the moratorium (which determine the conditions under which borrowers are allowed to benefit from the moratorium). 

Moratoria to be Broadly Applied 

The Report clarifies that when assessing whether the individual payment relief measures can be considered similar, they should be assessed in the broader context rather than by focusing on stand-alone elements. Firstly, any assessment must ascertain that the payment relief measures do not include borrower-specific criteria, in particular in relation to financial difficulties. Secondly, any assessment must also take into account all relevant aspects to determine whether the relief offered under individual schemes can be considered similar. 

The Report helpfully confirms that certain differences in individual elements, such as the duration of the payment extension or the extent of the relief measure (only principal or principal and interest) may be permitted as long as they do not undermine the similarity of the measures.

Moratoria Should Only Change the Schedule of Payments – No other Terms Should be Changed 

Paragraph 10(c) of the Guidelines allows for the payment of interest to be suspended, postponed or reduced during the length of the moratorium. The Report notes that while such treatment of interest will trigger a reduction in the net present value (“NPV”) of the cash flows associated with the exposure, it will not be considered a distressed restructuring under the Guidelines and the usual NPV assessment does not need to be made.1

Selection Criteria

The Guidelines provide (as stated above) that moratoria should apply to a large group of borrowers predefined on the basis of broad criteria which should allow those borrowers the ability to take advantage of the moratorium without reference to the creditworthiness or payment capacity of the borrower. 

The Report, however, makes it clear that institutions should still perform the assessment of unlikeliness to pay based on the most up-to-date schedule of payment, in accordance with the normal timeline for such assessment. Where the assessment concludes that the borrower is unlikely to repay the underlying exposure, a default shall be considered to have occurred. The Report notes that it is therefore possible that an exposure subject to a moratorium will not be considered forborne (because the criteria for relevant moratorium are met) but that exposure will still be classified as defaulted based on an assessment of unlikeliness to pay. 

Dear CEO Letter 

Prior to the issue of the Report, on 8 June 2020, the Central Bank of Ireland (the “CBI”) issued a “Dear CEO” letter to regulated firms the purpose of which was to set out the CBI’s supervisory expectations on how COVID-19 payment breaks extended under the Irish non-legislative moratorium should operate and how the end of those payment breaks should be managed. Of particular note was the confirmation that the CBI has identified a risk that the proposed application of certain payment breaks may not be in compliance with the Guidelines in relation to non-retail exposure classes (larger SME/corporate/commercial borrowers) and this will be an area of supervisory focus. 

The letter set out the CBI’s expectation that:

1. Regulated firms must act in a way that protects the best interests of borrowers and in line with the relevant codes and regulatory requirements. 

2. Regulated firms must give appropriate support to borrowers whose incomes and affordability have been affected by COVID-19. 

3. Payment breaks should be a generally available option to affected borrowers, including those borrowers’ already in financial distress, forbearance and/or in an Alternative Repayment Arrangement (ARA). 

4. There should be a substantial level of consistency in the application of temporary supports across firms and borrower types.

5. Regulated firms must be operationally ready and prepared to engage with borrowers during, or at expiry of, the six-month payment break in order to identify whether or not the borrower requires further support, and if so, to consider appropriate and sustainable solutions, as soon as possible.

6. Regulated firms must be fully transparent and clear to borrowers as to what will happen after the term of the payment break, including setting out the available options to repay the loan and the full costs of the payment break. 

7. Regulated firms must have board approved plans to deliver an assessment of all borrowers on payment breaks to ensure that appropriate and sustainable solutions are identified in a timely manner for those borrowers who are not able to return to paying full capital and interest at the end of the payment break. 

8. The prioritisation of borrower engagement, assessment and determination of an appropriate and sustainable solution should be determined by the risk profile of the borrower.

9. The level of distress in the regulated firms’ loan books should be prudently considered and be reflected in provisioning levels, notwithstanding that provisions may not yet be taken at an individual borrower level and noting that this expectation is confined to existing regulatory frameworks.

10. Sufficiently granular and timely reporting of the take-up of payment breaks across borrower type and sector should be readily available and used to inform key decision-making processes in regulated firms.

The CBI sought confirmation from regulated firms (within two weeks) of their adherence to the supervisory expectations set out in the Dear CEO letter. 

In addition, regulated firms must provide the CBI with:

(a) a board-approved strategic plan to deliver an assessment of all borrowers on payment breaks to ensure that appropriate and sustainable solutions are identified in a timely manner for those borrowers who are not able to return to paying full capital and interest at the expiry of the payment break; and 

(b) a board-approved operational plan to support strategy detailing, at a granular-level, the proactive steps currently underway and planned in the near-term, including the approach and objectives regarding the effective governance, management and approach to those borrowers unable to return to performing status following the payment break, for each portfolio.

The CBI has emphasised that all regulated firms communicate with borrowers in a fully transparent and clear manner, ensuring that all relevant information is provided at the appropriate time. 

Conclusion

The Report contains some helpful clarifications on the criteria for legislative and non-legislative moratoria to be considered as “general payment moratoria” for the purpose of the Guidelines. The Report also provides clarification on a number of operational questions posed by regulated financial services providers.

In addition, the “Dear CEO” letter issued by the CBI has set the supervisory expectations in relation to the conduct of regulated lenders during the period of the relevant payment moratoria and beyond.

The CBI expects that firms will engage with borrowers well before their payment breaks end and, in circumstances where borrowers continue to experience difficulties following the expiry of their payment break, the CBI expects regulated firms to ensure appropriate solutions are available.

It is clear that this area is of significant supervisory importance to the CBI and regulated firms will need to evidence clear adherence to the strategic and operational plans submitted in relation to the management of borrowers both during and after the period of any payment break.   


1 Under EBA Guidelines on the application of the definition of default under Article 178 of the CRR, where a distressed restructuring is likely to result in a “diminished financial obligation” the borrower should be classified as defaulted.  These guidelines contain a formula based on NPV of the cash flows associated with the underlying exposure to determine a “diminished financial obligation”.