To minimize the medium- and long-term economic impacts resulting from the COVID-19 pandemic, Member States have implemented a broad range of measures, including some forms of moratorium on payments of credit obligations, to support the operational and liquidity challenges faced by borrowers. Notwithstanding being vested of different forms, moratoria generally have the same economic substance: suspension or postponement of payments within a specified period of time, after which the debtors return to regular payments.
In this context, the European Banking Authority (“EBA”) clarified a number of aspects in relation to the use of public and private (legislative and non-legislative) payment moratoria in its statement dated of 25 March 2020.
In last 2 April, EBA has published the “Guidelines on legislative and non-legislative moratoria on loan repayments applied in the light of the COVID-19 crisis” (EBA/GL/2020/02), aiming to clarify the legal effect the moratoria have on the current prudential framework, especially the application of the “default” definition and the classification as “forbearance” (“Guidelines”).
With these Guidelines, EBA provides further detail on legislative and non-legislative moratoria applied before 30 June 2020, without prejudice of such term being later extended if deemed necessary by the European Authority.
The Guidelines shall be applicable in Portugal as of the date of its translation to Portuguese, which has not yet occurred.
B. Classification of Exposures
1. Classification of exposures under the definition of forbearance and default
According to article 47b(1) of Capital Requirements Regulation – Regulation (EU) no. 575/2013 (“CRR”), forbearance measure is a concession by a credit institution towards a specific obligor that is experiencing or is likely to experience difficulties in meeting its financial commitments. Such concession is tailored made to the specific circumstances of the obligor, being granted after the individual assessment of the debtor’s repayment capacity by the institution, and may consist (i) in a total or partial refinancing of a debt obligation or (ii) in a modification of the terms and conditions of a debt obligation (thus, including a temporarily postpone capital and/or interest payments of a loan).
Differently, the moratoria schemes that have been implemented as a response to the COVID-19 pandemic are, as a general rule, preventive and not borrower specific.
The existing regulatory and legal framework on risk measurement and capital requirements shall continue to be applied (at the European level, it is particular relevant the CRR and the Commission Delegated Regulation (EU) 2018/171 on the materiality threshold for credit obligations past due, but should also be taken into account EBA Guidelines on the application of the definition of default under Article 178 of CRR (EBA/GL/2016/07)).
Hence, credit institutions shall continue to categorize the exposures as performing or non-performing in accordance with the applicable requirements. As so, classifications as forbearance measures previous to the application of moratoria should not be changed. EBA also clarifies that new classifications shall take into account the difference between a general moratorium and any form of individual measures and renegotiation of the loans based on the obligor’s specific situation:
- The application of a general moratorium is not a forbearance measure, nor should be considered distressed restructuring and, consequently, shall not be deemed as a diminishment of the financial obligation, thus as an indication of unlikeliness to pay (for the purposes of considering the obligor in default under CRR);
- The application of some form of individual measures and renegotiation of the loans based on the obligor’s specific situation shall be classified as forbearance if it meets the definition criteria set out in CRR (case by case approach).
2. General payment moratoria
According to EBA, general payment moratoria have to fulfil the following criteria in order not to be considered forbearance:
- The moratorium was launched in response to the COVID-19 pandemic.
- The moratorium has to be broadly applied.
- The moratorium has to be applicable to a broad range of debtors.
- The same moratorium offers the same conditions for the debtors subject to the moratoria.
- The moratorium only changes the payments schedule.
- The moratorium does not apply to new loans granted after the launch of the moratorium.