EU regulators are mulling a temporary suspension of part of the IFRS 9 accounting standards that requires banks to book losses on risky loans earlier than before, Bloomberg News reported March 25.
The move is among several options being considered by authorities to provide relief to banks struggling with nonperforming loans due to the coronavirus pandemic, the news agency said, citing a document prepared by the European Commission, the ECB, the European Banking Authority and the European Securities and Markets Authority.
Temporarily suspending the rules will provide banks with short-term relief, but could result in investors losing confidence in lenders if the move is perceived to be hiding the actual risk on their balance sheets, according to the document.
Regulators are also considering extending a transition period agreed before IFRS 9 became effective in 2018, which could limit volatility in banks' capitalization and allow them more breathing room before triggering automatic constraints on distributions for shareholders, the document said.
ESMA said the same day that the IFRS 9 regulation "includes sufficient flexibility to faithfully reflect the specific circumstances of the COVID-19 outbreak and the associated public policy measures," and that banks should distinguish between measures that have an impact on credit risk over the expected life of loans and those aimed at addressing borrowers' temporary liquidity constraints.
Meanwhile, the EBA clarified that loan repayment delays due to legislative initiatives do not result in any automatic classification in default, forborne or unlikeliness to pay, noting that individual assessments of likeliness to pay should be prioritized.
Earlier in March, the ECB recommended that banks use the IFRS 9 transitional rules to avoid part provisioning for loan losses upfront, while assuring lenders that it would be flexible in treating bad loans covered by state guarantees or moratoria put in place in response to the pandemic. The central bank previously gave banks a capital boost of €100 billion that they can use for lending.