After closely monitoring the developments of the COVID-19 pandemic and, in particular, the impact of the second COVID-19 wave and the related government restrictions taken in many EU countries, the European Banking Authority (EBA) has decided to reactivate its Guidelines on legislative and non-legislative moratoria. This reactivation will ensure that loans, which had previously not benefitted from payment moratoria, can now also benefit from them. The role of banks to ensure the continued flow of lending to clients remains of utmost importance and with the reactivation of these Guidelines, the EBA recognises the exceptional circumstances of the second COVID-19 wave. The EBA revised Guidelines, which will apply until 31 March 2021, include additional safeguards against the risk of an undue increase in unrecognised losses on banks’ balance sheet.

With the continued unfolding of the COVID-19 pandemic, it is crucial that banks continue to provide lending to the real economy while recognising any solvency issues in order to ensure that problematic loans are well reflected in their balance sheets. Consequently, as part of the re-activation of its Guidelines on legislative and non-legislative moratoria, the EBA has introduced two new constraints to ensure that the support provided by moratoria is limited to bridging liquidity shortages triggered by the new lockdowns and that there are no operational restraints on the continued availability of credit.

• Only loans that are suspended, postponed or reduced under general payment moratoria not more than 9 months in total, including previously granted payment holidays, can benefit from the application of the Guidelines.
• Credit institutions are requested to document to their supervisor their plans for assessing that the exposures subject to general payment moratoria do not become unlikely to pay. This requirement will allow supervisors to take any appropriate action.

The EBA is continuously monitoring the use of moratoria and the evolution of credit quality for loans benefitting from the use of such moratoria. Together with the inclusion of the requirement for banks to document their plans on assessing the unlikeliness to pay of exposures under moratoria, these measures will allow supervisors, if necessary, to take action to ensure appropriate recognition of losses. Furthermore, the EBA has enhanced the disclosure requirements related to the use of public moratoria and will soon release, as part of its annual EU-wide Transparency Exercise, additional information on the use of moratoria across the EU banking sector.

Background

The EBA Guidelines on legislative and non-legislative loan repayments moratoria were published on 2 April 2020 to ensure that banks, while maintaining comparable metrics, would be able to grant payment holidays to customers avoiding the automatic classification of exposures under the definition of forbearance or as defaulted under distressed restructuring. This regulatory measure, which was triggered by the disruption caused by the COVID-19 pandemic, acknowledged the crucial role played by banks in supporting ongoing liquidity and the challenges faced by European businesses.

With the unfolding of the COVID-19 pandemic, in June 2020, the EBA extended the application date of its Guidelines by three months, from 30 June to 30 September 2020, and on the 21 September, communicated its phasing-out.