By Huw Jones
LONDON (Reuters) - The European Union's banking watchdog published guidance on Thursday to help banks avoid having to step up provisioning for loans to companies temporarily hit by the coronavirus crisis.
Several EU countries have introduced stop-gap "moratoria" such as repayment holidays for companies and individuals as large parts of the economy are in lockdown and unemployment rockets.
"The EBA sees the payment moratoria as effective tools to address short-term liquidity difficulties caused by the limited or suspended operation of many businesses and individuals," the European Banking Authority said in a statement.
Under mandatory accounting rules, banks must step up provisioning, which eats into profits and capital, if the repayment on a loan is missed.
Banks had called for more detailed guidance from EBA on how moratoria can in practice avoid having to reclassify - and therefore increase provisioning - for a loan when a repayment is missed for whatever reason.
Banks are called on to roll over working capital loans for businesses on a daily basis and wanted to know what to do if a repayment was missed, a banking industry official said.
"Do we say 'sorry', no money?" the official added.
Bankers said the moratoria were introduced piecemeal by national governments across the bloc rather than a single measure under EU law, creating legal uncertainties.
In a bid to reassure lenders they are on solid legal territory in following the guidance, EBA sets out the legal basis in EU law for its advice.
EBA said a payment moratoria does not lead to reclassifying a loan if it was launched in response to Covid-19 and is being broadly applied to a wide range of borrowers, adding it only changes the schedule of payments. It does not apply to new loans granted after the moratorium was launched, EBA said.
The guidelines will apply to moratoria introduced before 30 June, 2020, but this could be extended, if considered necessary.
In the meantime, banks should collect information for their regulator about the scope and effects of the use of the moratoria, EBA said.
"Institutions are expected to make use of the general payment moratoria in a transparent manner, providing relevant information to their competent authorities, while specific disclosure requirements to the public will be published at a later point in time," EBA said.
But banks must continue to apply provisioning rules where borrowers face longer-term financial difficulties, and identify where short-term "payment challenges" may lead to insolvency and therefore need to be adequately capitalised, EBA said.