All material subject to strictly enforced copyright laws. © 2021 Euromoney Institutional Investor PLC group
FIGRegulatory Capital

Banks call for regulatory forbearance over Covid-19 stress


Market participants are calling on European financial authorities to help banks deal with the impact of Covid-19. Forbearance could come in the shape of state guarantees or in the form of the relaxation of certain elements of bank capital requirements.

Much of the focus is on Italy, which is in total lockdown as it deals with more than 9,000 confirmed cases of Covid-19 and the death toll to 631.

Nearly all Italian banks have offered borrowers of long term loans affected by the virus an opportunity to suspend their payment obligations for up to a year.

They are acting in accordance with a voluntary agreement struck between the Italian banking association and about a dozen other national trade associations.  

But there are concerns in the market that any delays in loan repayments could weigh heavily on bank capital levels.

The EU’s Capital Requirements Regulation requires lenders to make additional capital provisions for any non-performing loans, in order to reach full coverage within three years for unsecured exposures and within nine years for secured debt.

At the same time, the IFRS 9 accounting standard requires banks to cover for expected rather than actual credit losses, leading to earlier impacts on revenues when asset quality deteriorates.

Given the extraordinary impact that a full-country quarantine is having on Italian corporations, ABI has argued that national and European authorities should modify bank capital rules to make it easier for financial institutions to extend or suspend loan deadlines for firms affected by Covid-19.

“Supervisors should not be as harsh with banks as they would have been had the institutions triggered these problems from their own reckless lending,” agreed a banking sector analyst. “They are getting hit by the virus, not their own poor practice.”

“I would expect some forbearance at the level of the single supervisory mechanism,” he added.

The analyst said that NPL provisioning rules would likely remain in place in Europe, given that they are enshrined in legislation.

But he said that the supervisors tasked with upholding these rules still had plenty of room to act within their mandates to cushion the impact of Covid-19 on the banking sector.

The European Central Bank, for example, could alleviate the pressure on banks by tweaking their additional capital requirements, known as Pillar 2.

Pillar 2 capital requirements account for the risks faced by individual institutions and can be tailored to reflect the potential evolution of bank balance sheets.

At a more local level, national competent authorities might elect to remove capital buffers enacted to ensure that financial institutions refrain from risky lending during calm economic conditions.

Germany, for instance, is reported to be considering lowering the counter-cyclical capital buffer for banks from 0.25% of risk-weighted capital requirements to 0%.

Other market participants have focused on the role of governments in helping the banking sector, rather than supervisory authorities.

Italy is expected to announce a new series of emergency measures on Wednesday, designed to help its economy through the Covid-19 epidemic.

European Commission president Ursula von der Leyen told a press conference on Tuesday that she had been in discussions with Italian prime minister Giuseppe Conte about potential avenues of support.

Media reports suggest that the Italian government is looking at providing a state guarantee against bank exposures to certain virus-stricken sectors of the economy, like SMEs.

This could be capped at a percentage of overall loans.

Erik Nielsen, group chief economist at UniCredit, said that lowering the counter-cyclical buffer or extending government guarantees to bank exposures would be healthy “ways of delivering liquidity to ailing firms in affected areas”.

“[A] suspension of mark-to-market rules is potentially a troublesome route to take, not least following the great success of many bank in bringing down their NPLs,” he said.

We use cookies to provide a personalized site experience.
By continuing to use & browse the site you agree to our Privacy Policy.
I agree