Banks have the flexibility to avoid a huge rise in provisioning for non-payment of loans during the coronavirus outbreak, the European Union's securities and banking watchdogs said on Wednesday.
Banks have warned they face mounting provisions as businesses and households they lent money to struggle to repay loans during the outbreak. EU states have approved measures to offer some relief to businesses such as repayment holidays on loans.
But lenders have been unsure whether a payment holiday would technically constitute a failure to pay and therefore trigger increased provisioning as required under a global accounting rule known as IFRS 9. Higher provisioning would eat into a bank's capital.
"In ESMA's view, the principles-based nature of IFRS 9 includes sufficient flexibility to faithfully reflect the specific circumstances of the COVID-19 outbreak and the associated public policy measures," the European Securities and Markets Authority said in a statement. ESMA's banking counterpart, the European Banking Authority (EBA) also sought to reassure lenders on Wednesday.
"The EBA calls for flexibility and pragmatism in the application of the prudential framework and clarifies that, in case of debt moratoria, there is no automatic classification in default, forborne, or IFRS9 status," EBA said in a separate statement.