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On 2 April 2020, the European Banking Authority (EBA) published guidelines on legislative and non-legislative moratoria on loan repayments in light of COVID-19 (EBA/GL/2020/2) (the Guidelines). The Guidelines were updated by a supplementary supervisory statement addressing the treatment of securitised exposures subject to payment moratoria, issued on 22 April 2020.
The supplementary supervisory statement addressing securitised exposures establish where legislative and non-legislative moratoria should not trigger default or forbearance classifications for regulatory capital purposes and where actions taken under payment moratoria will not be considered a breach of the prohibition of ‘implicit support’.
In response to the COVID-19 crisis, regulators and governments across the European Union have adopted measures to address the economic fallout. Payment moratoria have been widely deployed for those businesses and private individuals affected by looming liquidity shortages. In order to encourage the use of payment moratoria, divergent approaches have emerged, with some Member States using the legislative framework, whilst others use non-legislative means.
The use of payment moratoria creates delays in the repayment of credit obligations, raising concerns that large sections of loan books will fall into default for accounting and regulatory purposes. This, in turn, will lead to increased capital requirements for many credit institutions. The Guidelines seek to clarify a number of aspects relating to the use of payment moratoria and the application of the definition of default and classification of forbearance in these circumstances.
The supplementary supervisory statement set out how the Guidelines apply to securitisations and whether payment moratoria will qualify as ‘implicit support’, which is prohibited under article 250 of Regulation (EU) 575/2013 (the CRR).
The Guidelines set out the conditions a payment moratorium must meet in order to come within their scope and qualify as a general payment moratorium. Where a general payment moratorium applies to all of the exposures of an institution within the scope of the Guidelines, the moratorium should not alter the classification of exposures under the definition of forbearance or change whether they are treated as distressed restructuring. The payment moratorium will not constitute a distressed restructuring for the purposes of the regulator’s definition of default.
As a result, the use of a payment moratorium should not lead to a reclassification of the exposures as forborne, which may attract higher capital requirements, unless that exposure was already classified as forborne at the time the moratorium was applied. A general payment moratorium will lead to a change in the days past due calculation for the purposes of the definition of default. Institutions should count the days past due on the basis of the revised schedule of payments resulting from the moratorium (i.e. the days past due will commence from the date the moratorium ends).
The EBA has clarified that the Guidelines apply to all of the exposures of an institution within the scope of the moratorium and such exposures should be understood as follows:
- In traditional securitisations – any underlying exposure remaining on the originator institution’s balance sheet or which the originator has not excluded from its calculation of risk-weighted exposure amounts and expected loss amounts.
- In synthetic securitisations – any underlying exposure where the transfer of risk to third parties is achieved through credit derivatives or guarantees, and the exposure being securitised remains on the originator institution’s balance sheet, notwithstanding its treatment for the calculation of risk-weighted exposure amounts.
Moratoria schemes involve changes to payment schedules by suspending, postponing, or reducing payments of principal amounts, interest or full instalments for a predetermined period. Pools of securitised assets may comprise assets that fall within the scope of payment moratoria. The Guidelines provide that where Member States have instituted legislative moratoria, the servicer will be required to defer collection of payments for such assets until the moratorium expires. The payment moratoria will not trigger an event of default. Where non-legislative moratoria are employed, the servicer may defer collection of payments depending on the non-legislative mechanisms, and this also would not trigger an event of default.
The Guidelines provide that when institutions calculate the regulatory capital requirements on the securitisation positions they hold, the underlying securitised exposures should be classified in accordance with the Guidelines if the exposures are subject to a general payment moratorium. Consequently, a general payment moratorium should not automatically lead to reclassifying securitised exposures as in default or in forbearance for the purposes of calculating the underlying credit risk weighting for the portfolio, if they were not classified as exposures in default or forbearance prior to entrance into the payment moratorium.
Article 250 of the CRR and the Implicit Support Guidelines3 provide that implicit support is prohibited where the relevant support exceeds the originator’s or sponsor’s contractual obligations (as defined in the contractual documents governing the securitisation) and the support’s purpose is to ‘reduce the potential or actual losses to investors’.
The Guidelines provide that suspension, postponement or reduction of payments due under securitised assets as per a general payment moratorium (legislative or non-legislative) will not automatically be regarded as prohibited implicit support under article 250 of the CRR.
The supplementary supervisory statement set out additional circumstances that will not automatically be regarded as prohibited implicit support involving the originator, sponsor institutions or the servicer, such as restructuring or amending the contractual documentation governing the securitised assets as appropriate or necessary to implement or comply with a general payment moratorium.
Institutions are expected to make use of general payment moratoria in a transparent manner, providing relevant information to their competent authorities. Specific requirements for public disclosure will be published at a later point in time. The EBA has also reminded institutions that they must continue to comply with ongoing obligations to make assessments of risk in a true and accurate manner, identifying those situations where short-term payment challenges may turn into long-term financial difficulties.
- An exposure securitised via traditional or synthetic securitisation in accordance with articles 243 and 244 of the CRR.
- An exposure to a securitisation as defined in article 4(1)(62) of the CRR
- EBA/GL/2016/08 – Guidelines on implicit support for securitisation transactions