In response to the persistent health crisis due to the outbreak of the Covid‑19 pandemic, the European Banking Authority (EBA) decided on 2 December 2020 to revise and reactivate its guidelines on legislative and non-legislative moratoria on loan repayments (EBA/GL/2020/02, originally issued on 2 April 2020) (the “Guidelines“). The purpose of this decision is to allow credit institutions to relax their criteria for granting moratoria and to ensure that loans can benefit from repayment moratoria if this had not previously been the case. They also add certain safeguards against the risk of an undue increase in unrecognized losses on the banks’ balance sheets.

Under normal circumstances, a loan that is not repaid after three months is automatically considered non-performing. The bank must then make a provision in its accounts. Thanks to these guidelines, banks can grant additional moratoriums without affecting their balance sheet, provided that certain conditions detailed in the Guidelines are met, in particular: (i) the moratorium was launched in response to the Covid-19 pandemic; (ii) it has to be broadly applied and (iii) has to apply to a broad range of obligors, regardless of their credit assessment; (iv) the same moratorium shall offer the same conditions; (v) only the schedule of payments can be modified and (vi) it does not apply to new loans granted after the launch of the moratorium.

However, this new derogation regime runs the risk of simply postponing the moment when banks will face effective defaults and thus non-performing loans, which they will no longer be able to deal with. A risk already identified by the European Central Bank (ECB), which has invited banks to remain cautious and to prepare themselves accordingly for future defaults.

The challenge is therefore to limit such risk through two safeguards introduced by the EBA to limit the effects of these measures to liquidity shortages and to ensure that there are no operational constraints on the continuous availability of credit:

• only loans that have been subject to moratoria of less than nine months (including previously granted payment holidays) and that have been suspended, postponed, or reduced in this context will benefit from this temporary relaxation of the rules (excluding those granted before 30 September 2020); and
• credit institutions are required to document to the supervisory authorities their plans to assess and monitor that exposures subject to a general payment moratorium do not become unlikely to pay.

Should this prove necessary, these measures will enable supervisors to take steps to ensure appropriate loss recognition.

These amended guidelines apply as of 2 December2020 and will continue to apply until 31 March 2021 while in the initial version of 2 April 2020, they were applicable to payments due before 30 September 2020. Between that date and 2 December 2020, banks could continue to apply these measures but on a case-by-case basis.