The EBA is supportive of various economic measures applied by numerous states with the intention of overcoming short-term liquidity issues and other economic consequences of the COVID-19 pandemic. Payment moratoria have been deemed an effective tool to address short-term liquidity difficulties caused by the limited or suspended operations of many businesses and individuals.
New EBA/GL/2020/02 (afterwards amended EBA/GL/2020/08 and EBA/GL/2020/15), containing guidelines issued pursuant to Article 16 of Regulation (EU) No 1093/20103, aims to clarify the following points in the context of the COVID-19 pandemic:
- the criteria that general payment moratoria must fulfil not to trigger forbearance classification
- the application of the prudential requirements in the context of these moratoria
- ensuring the consistent treatment of such measures in the calculation of own funds requirements
Naturally, this brings up the all-important question, “How are the current rules affected or impacted by current moratoria?”, or to which extent we can exclude eligible exposures from the forbearance and default recognition process? If the measure is to be considered as the general payment moratoria, following conditions must be met:
- launched in response to the COVID-19 pandemic, the scope and timeframe of the application of EBA/GL/2020/02 are limited only to measures taken in response to the situation caused by COVID-19 applied before 31st of March 2021.
- broadly applied, Legislative moratoria apply to all institutions within a given jurisdiction, a similarly broad scope also has to be ensured for the non-legislative moratoria, ensuring the same treatment to all form of measures with the similar economic substances.
- applied to a broad range of obligors, moratorium has to be applied to a predefined scope of customers regardless of their financial situation, if such measures were to be only applied to the endangered borrowers, this would fall under the forbearance definition.
- the same moratorium offers universal conditions, even if financial institution defines different types of moratorium for a different group of borrowers (based on business segment, product type etc.) conditions must always apply to a wide range of borrowers.
- The moratorium changes the schedule of repayments only, other conditions of the contract i.e, interest rate, must remain the same
- does not apply to new loans granted after the launch of the moratorium, a moratorium should only be considered new if it covers a new scope of exposures not considered by a previous moratorium. If a moratorium has a different set of conditions but applies to a similar set of exposures to a previous moratorium, this should be treated as a modification of the existing moratorium.
- payments may be postponed, suspended, or reduced up to a total of 9 months, since the first version of EBA/GL/2020/02 two amendments were published updating the deadline for the application of general payment moratoria, starting from 30th of June in the GL/2020/02, GL/2020/08 extended deadline to the 30th of September, and with the latest amendment GL/2020/15 published on 2nd of December 2020, deadline has been extended till the 31st of March 2021 with additional condition limiting payment moratoria to 9 months at most. Resulting from these updates, three types of payment moratoria have been defined depending on the start date and duration:
- All payment moratoria with a length less than 9 months granted before the 30th of September 2020, can be extended up to 9 months in total, in case of 6-month moratorium it can be extended by another 3 months
- Moratoriums granted before the 30th of September 2020 for a period longer than 9 months will not be affected by the new amendment
- All new payment moratoria granted after the 30th of September have to fulfill all above presented criteria to be excluded from the forbearance process
Since the latest update of EBA guidelines has been published on the 2nd of December 2020, the question is how we should approach the measures taken in October and November 2020. Following the above defined rules, all payment moratoria granted after the 30th of September 2020, that fulfill the presented conditions for exclusion from the forbearance process, resulting in a change of classification (FB/Default) can be revisited and potentially written off in accordance with the treatment set out in the EBA Guidelines 2020/02.
Even if the payment moratoria fulfil all the conditions, financial institutions must continue with the assessment of the borrower’s creditworthiness and apply the standard forbearance procedure in case the liquidity issue cannot be solved in a short-term. Additionally, after the end of the application of the payment moratoria institutions should reassess the unlikeliness to pay of their obligors, prioritizing the cases:
- where obligors experience payment delays shortly after the end of the moratorium
- where any forbearance measures are applied shortly after the end of the moratorium
Due to the continuous monitoring of the COVID crisis by the EBA, all institutions have to report to the national competent authorities, while authorities report to the EBA about loans which have been granted general payment moratoria. Some of the mandatory information are start date of payment moratoria, selected criteria for exposure subject to moratorium, number of obligors and exposure amount within the scope of moratorium, offered conditions, distribution of borrowers with applied moratorium across the rating grades etc.