The European Commission has issued a proposed package of measures aimed at granting banks across the bloc temporary relief from the full impact of accounting and regulatory rules during the coronavirus pandemic.

The Commission hopes the move, which has yet to be approved by lawmakers in Brussels and member states, will improve the transmission of monetary policy to the wider European economy.

Valdis Dombrovskis, the Commission’s executive vice president responsible for financial regulation, said: “We are using the full flexibility of the EU’s banking rules and proposing targeted legislative changes to enable banks to keep the liquidity taps turned on, so that households and companies can get the financing they need.”

Among the proposals is a change to the transitional arrangements governing the introduction of International Financial Reporting Standard 9, Financial instruments.

The Commission said it “expects banks to fully use judgement and flexibility within the confines of IFRS 9 to mitigate any unwarranted impact of the COVID-19 crisis on banks’ [expected-credit loss] provisions without undermining investors’ confidence.”

Once the measures are adopted, banks will be able to look through any deterioration in credit and effectively assume the loan will be recoverable over its lifetime.

“Sudden punctual increases in the probability of default (PD) caused by the COVID-19 crisis, which are expected to be temporary, should not lead to a significant increase in the lifetime PD,” the Commission said.

The IFRS 9 concessions also allow banks to avoid treating loan forbearance measures such as a repayment holiday as if it were a significant increase in credit risk (SICR).

This proposed treatment of SICR builds on earlier statements by both European Securities and Markets Authority (ESMA) and the Europeam Banking Authority (EBA) on 25 March.

Finally, the Commission proposal also grants banks the right to reduce credit losses in line with any corresponding loan guarantee.

The European Commission, Brussels

The European Commission’s proposal also grants banks the right to reduce credit losses in line with any corresponding loan guarantee

Significantly, the EC noted in an accompanying Q&A document that banks are “encouraged to implement the IFRS 9 transitional arrangements that will reduce the impact of IFRS 9 ECL provisioning on banks’ regulatory capital.”

From 1 January 2018, EU-based banks have been permitted to add back a proportion of their credit losses under the IFRS 9 ECL model to ease their shift to upfront recognition of a proportion of their potential loan losses.

In March 2017, IPE reported that EBA had warned that the transition proposals could result in banks recognising lower loan-loss allowances than under the accounting standard that IFRS 9 replaces.

A footnote to the Q&A notes that the European Central Bank (ECB) “recommends that all banks within its prudential remit use the transitional arrangements” and is ready to “process in a timely fashion all applications received in this context.”

Green Party MEP and ECON committee member Sven Giegold said more stringent controls needed to be placed on the banks. “If the banks now get equity relief, then they have to do everything they can to maintain their equity. Intervention by the state during this crisis cannot be a one-way street,” he said.

“Not only must bonuses, dividend distributions and share buybacks stop, but so too must coupon payments on AT1 instruments. Legislators must make this clear and not leave decisions on distributions to the banks,” he added.

“Not only must bonuses, dividend distributions and share buybacks stop, but so too must coupon payments on AT1 instruments”

Sven Giegold, Green Party MEP and ECON committee member

Meanwhile, former ECON committee chair Sharon Bowles gave the measures a cautious welcome. She said: “Delaying the impact of future provisions on liquidity is now partially providing release of the macroprudential buffer effect.

“I agree with Sven Giegold’s point about restricting distributions and bonuses, and I can also see the sense in including AT1 restrictions – halting coupon payments on those is a half-way measure before a full trigger of conversion.”

However, she added: “But where I differ is that I support allowing all countries to guarantee loans. We are in unprecedented times and all countries need that facility. Yes, it does exacerbate the sovereign-banking nexus, but if it is prohibited, then it will exacerbate and increase other macroeconomic imbalances, which have not been addressed.”

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