EBA guidelines on legislative and non-legislative moratoria on loan payments applied in the light of the COVID-19 crisis

The COVID-19 pandemic has triggered several response measures across the globe, which consequently ripple into considerable economic stress, particularly for small businesses and households that find themselves faced with liquidity struggles in paying their financial commitments on time. On the other side of the spectrum, credit defaults or payment delays may affect banks, which would, in turn, need to increase their own funds. In order to mitigate the credit and systematic risks caused by liquidity and operational difficulties being faced by borrowers, Member States have issued a wide number of support measures, including moratorium on payments of credit obligations.

In this respect, the European Banking Authority (“EBA”) has issued guidelines on legislative and non-legislative moratoria on loan payments (the “Guidelines”), primarily to clarify the following matters:

1. The criteria which moratoria must fulfil not to trigger forbearance classification under Regulation (EU) 575/2013 as amended by Regulation (EU) 2019/630 (collectively referred to as “CRR”);
2. The application of the prudential requirements in the context of loan moratoria; and
3. The importance of consistency in the treatment of moratorium measures in the calculation of own funds requirements.

Criteria for the classification of moratoria as forbearance

As of today, the term ‘forbearance’ under CRR refers to a concession, be it in the form of postponement of payment capital and/or interest of a credit facility, granted by a bank to a borrower which they identify as being in financial distress. While the EBA clarified that the application of a general payment moratorium which abides by the Guidelines would not lead to reclassification under the definition of ‘forbearance’, banks are still to categorise such exposures as performing or non-performing in accordance with the applicable requirements.

Furthermore, the EBA stipulates that prior to providing a forbearance measure, banks should assess on an individual basis, the borrower’s repayment capacity and grant tailored measures, if necessary. In the event that credit institutions apply some form of individual measures and renegotiate the loans taking into account the specific situation of individual obligors, they are to analyse whether such measures would fall under the definition of ‘forbearance’ under Article 47b CRR and if so, consider them as ‘distressed restructuring’ under Article 178(3)(d) CRR, which in turn suggests the unlikeliness to pay if it leads to a diminished financial obligation.

The conditions that the general moratoria must fulfil not to be considered forbearance, as according to the Guidelines, include:

1. The moratorium must have been launched specifically in response to the COVID-19 pandemic and therefore it should be announced and applied before 30 June 2020. This time limit may be extended in the future depending on how the situation develops.
2. The moratorium must have broad applicability. Given the different structures of the banking industries that exist in different countries, this condition is a flexible one. Hence, institutions are encouraged to coordinate actions as much as possible, despite that a single non-legislative moratorium might not be possibly applied to all credit institutions within a specific Member State.
3. The moratorium must apply to a broad range of borrowers. If the moratorium were to be addressed to specific obligors, the definition of forbearance and the consequences thereto would kick in. Since the measure is supposed to be a short-term course of action, the selection criteria must be adequately wide.
4. The same moratorium measures are to offer the same conditions which must apply to all clients subject thereto. Notwithstanding, the Guidelines allow for different types of moratoria to apply to different segments of exposures or obligors.
5. The moratorium should not affect other conditions of the credit facility but should only change the schedule of payments, be it through suspension, postponement or reduction of payments within a period of time. It is key to note that public guarantees are not deemed as being a change in the terms of the loan, and may, therefore, accompany some general payment moratoria.
6. New facilities granted after the launch of the moratorium are not to fall under the scope of the same moratorium measure.

As explained, if these conditions are successfully met, then the measures in question should not change the classification of exposures under the definition of forbearance in accordance with CRR or change whether they are treated as distressed restructuring. Unless an exposure has already been classified as forborne at the moment of the application of the moratorium, the application of the general payment moratorium in itself should not lead to reclassification of the exposure as forborne.

The EBA further clarifies that institutions still have the obligation to thoroughly assess the credit quality of exposures benefiting from these measures and identify any circumstances in which borrowers are unlikely to fulfil their payment obligations for the purposes of the definition of default. For the purpose of enabling the effective monitoring of the consequences and implications of the COVID-19 pandemic and of the application of response measures, the institutions must collect information about the aim and effects of the use of the moratoria. Subsequently, the national competent authorities should notify the EBA about the use of such moratoria in their jurisdiction in order to allow pan-European coordination and monitoring. The necessary information that should be collected includes an identification of all obligors and exposures subject to the moratorium, and an identification of potential economic losses and impacts on financial statements that the institution may experience because of the application of the moratorium.

These guidelines will start applying from the date of the translation of the guidelines into all EU languages.

The author would like to thank Yasmine Ellul, student trainee at Ganado Advocates, for her valuable input and assistance in the drafting of this article.