Temporary relaxation of banking accounting rules

Temporary relaxation of banking accounting rules Share

As many banks and institutions hastily roll out process changes in light of the coronavirus outbreak, the European Commission has also announced a temporary relaxation of banking accounting rules. It aims, by making the move, to ensure that lenders can continue to extend loans to organisations struggling during the Covid-19 crisis, in a bid to ensure a coordinated EU response and avoid national fragmentation.

The proposals tabled last week include a few targeted ‘quick fix’ amendments to the EU’s banking prudential rules (the capital requirements regulation) in order to maximise the ability of banks to lend and absorb losses related to coronavirus.

Mitigating impact

A number of exceptional temporary measures aimed at alleviating the immediate impact of Coronavirus-related developments – by encouraging greater flexibility in approach – have also been proposed by the European Commission.

These include adapting the timeline of the application of international accounting standards on banks’ capital, treating more favourably public guarantees granted during this crisis, by postponing the date of application of the leverage ratio buffer and modifying the way of excluding certain exposures from the calculation of the leverage ratio.

The Commission is also proposing to advance the date of application of several agreed measures that incentivise banks to finance employees, SMEs and infrastructure projects.

Increased flexibility

In what could be further welcome news to accountants, the Commission has published an ‘interpretative communication’ confirming the recent statements on using flexibility within accounting and prudential rules, such as those made by the Basel Committee of Banking Supervision, the European Banking Authority (EBA) and the European Central Bank, amongst others.

These include the flexibility available in EU rules when it comes to the classification of non-performing loans in the context where relief measures, such as guarantee schemes and moratoria, have been provided either by member states or by banks.

The published communication document clarifies that the application of relief measures alone – which banks or member states grant households and businesses to bridge short-term liquidity needs, such as delays in the repayment of loans – should not automatically lead to a harsher accounting treatment of the respective loans.

It further states that the temporary inability of households or businesses to pay back their loans due to the coronavirus pandemic should not mean that banks have to automatically increase their expected credit loss ECL provisions under IFRS 9.

Instead, banks should use their own judgment when determining whether expected credit losses are required to be recognised.

Responsibility

The Commission also specifically recommends that banks should ‘act responsibly’ at this time, providing examples such as refraining from making dividend distributions to shareholders or adopting a conservative approach to the payment of variable remuneration.

Valdis Dombrovskis, executive vice-president at the European Commission, said: ‘We are supporting households and businesses as much as we can to deal with the economic fallout of the coronavirus.

‘The banking sector can do a lot to help here. We are using the full flexibility of the EU’s banking rules and proposing targeted legislative changes to enable banks to keep the liquidity taps turned on, so that households and companies can get the financing they need.

The Commission has further announced a series of roundtable discussions to bring together consumer and business groups with the financial sector in order to address urgent needs.

For those of you who’d like to read the full European Commission interpretative communication, that can be found here. And if you’d like some further stimulating reading at this time, why not also digest the Proposal to amend Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms.

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