EBA provides clarity for banks and consumers on the application of the regulatory framework with regard to COVID 19 measures

Following its request of 12 March 2020 to the competent authorities to make full use of the discretionary powers available under the existing regulatory framework, the European Banking Authority (“EBA”) issued a further statement in which EBA explained a number of additional interpretative aspects on the functioning of the supervisory framework in relation to the classification of loans in default, the identification of forborne exposures and their accounting treatment. These clarifications should help to ensure consistency and comparability of risk measures across the EU banking sector, which are crucial for monitoring the impact of the current crisis. EBA also reminds financial institutions of their consumer protection obligations, temporarily suspends some reporting obligations for payment service providers and calls on them to raise their contactless payment thresholds to the legal limit.

Call for flexible application of the supervisory regime

EBA calls for flexibility and pragmatism in the application of the prudential framework and clarifies that there is no automatic classification into default, prohibition or IFRS 9 status in the event of debt moratoria. EBA also supports the measures taken and proposed by national governments and EU bodies to combat the negative systemic economic impact of coronavirus in the form of general moratoria. The EBA statement clarifies the impact of moratoria on the supervisory and accounting treatment of exposures, but reiterates that it is essential that the classification of exposures accurately and timely reflects any deterioration in asset quality.

In particular, EBA clarified that general payment delays due to legislative initiatives and addressed to all borrowers do not lead to automatic classification in default, forborne or unlikeness to pay. However, EBA nevertheless insists on the importance of adequate risk measurement and expects institutions to give priority to the individual assessment of the probability of obligors’ likeliness to pay wherever possible.

Application of IFRS 9

EBA also stressed out that institutions are expected to use a degree of judgement in applying IFRS 9 (“Financial Instruments”) and should distinguish between borrowers whose credit standing would not be significantly affected by the current situation in the long term, and those who would be unlikely to restore their creditworthiness. In this context, it should be noted that the European Securities and Markets Authority (“ESMA”) has also issued a statement providing further guidance on the accounting implications of the economic support and relief measures adopted by EU Member States in response to the COVID 19 crisis. The two statements are consistent as regards financial reporting.

Consumer protection remains indispensable even in times of crisis

While EBA ensures maximum flexibility on the supervisory side to support generalised payment delays, it nevertheless stressed out that there is no flexibility in relation to consumer protection. All lenders are encouraged to act in the interest of consumers. To that end, without prejudice to any conditions imposed by legally mandated moratoria, EBA

• calls on financial institutions to ensure that they act in the interest of the consumer, in particular when engaging with customers regarding temporary measures for consumer and mortgage loans in identified cases;
• reminds financial institutions to grant such measures in compliance with EU law, in particular the importance of full information disclosure, especially of any potential charges and costs, and the transparency and clarity of terms and conditions;
• notes the importance of careful consideration from a legal and reputational perspective of any new and additional charges specifically introduced in relation to contingency measures, which are ostensibly designed to alleviate the pressure on consumers and businesses, and any cross selling of products to consumers; and
• calls on financial institutions offering general temporary measures to note that, given that such measures may not automatically lead to loan reclassification from a prudential perspective, the acceptance of temporary measures should not automatically lead to negative implications for the consumer’s credit rating.

Increase of the limit of contactless payments

Finally, EBA pointed out the importance of orderly payment services during this period. In its view, well-functioning payment services are vital at this time. For this reason, EBA recommended the use of contactless payments up to EUR 50 and encouraged consumers and merchants to take sanitary measures and consider all payment options when paying in stores.

Further actions to support banks’ focus on key operations

As a follow-up to its decision to support banks’ focus on key operations and to limit any non-essential requests in the short term, EBA has reviewed all ongoing activities requiring inputs from banks in the next months and decided

• to extend the deadlines of ongoing public consultations by two months. This concerns the following consultations:

• Discussion Paper on the future changes to the EU-wide stress test: Original deadline 30 April 2020, now 30 June 2020.
• Consultation paper to update the identification methodology of global systemically important institutions (G-SIIs) (EBA/CP/2020/03): Original deadline 5 June 2020, now 5 August 2020.
• Draft Guidelines on the appropriate subsets of sectoral exposures to which competent or designated authorities may apply a systemic risk buffer in accordance with Article 133 (5)(f) of Directive 2013/36/EU (EBA-CP-2020-02): Original deadline 12 May 2020, now 13. July 2020.
• Draft Guidelines under Articles 17 and 18(4) of Directive (EU) 2015/849 on customer due diligence and ML/TF risk factors (JC 2019 87) (JC 2019 87): Original deadline 5 May 2020, now 6 July 2020.
• Consultation Paper on draft RTS on the treatment of non-trading book positions subject to foreign-exchange risk or commodity risk (EBA-CP-2020-01): Original deadline 10 April 2020, now 10 June 2020.

• to postpone all public hearings already scheduled to a later date and run them remotely via teleconference or similar means. This concerns the following public hearings:

• Public Hearing on the EBA Consultation Paper on draft GLs on the appropriate subsets of exposures in the application of the systemic risk buffer: Initial deadline 24 April 2020, proposed new date 6 May 2020.
• Public Hearing on the EBA RTS concerning the identification methodology for GSIIs and related ITS and EBA Guidelines on reporting and disclosure requirements: Initial deadline 24 April 2020, proposed new date 6 May 2020.
• Public Hearing on draft revised ML/TF Risk Factors Guidelines: Initial deadline 23 April 2020, proposed new date 15 May 2020.

• to extend the remittance date for funding plans data by two months.
• in coordination with the Basel Committee on Banking Supervision (“BCBS”), to extend the remittance date for the Quantitative Impact Study (“QIS”) based on December 2019 data by two months.

Please note: This newsletter merely provides general information and does not constitute legal advice of any kind from Binder Grösswang Rechtsanwälte GmbH. The newsletter cannot replace individual legal consultation. Binder Grösswang Rechtsanwälte GmbH assumes no liability whatsoever for the content and correctness of the newsletter.