European Commission proposes changes to IFRS9 and Leverage Ratio but fails to exempt government bonds

Coronavirus response: Banking Package to facilitate bank lending- Supporting households and businesses in the EU

Changes to IFRS9

The application of IFRS 9 during the Coronavirus pandemic may lead to a sudden significant increase in the Expected Credit Loss (ECL) provisions of banks, which would result in an erosion of their capital, and therefore their ability to continue lending at a time when businesses and households need it most. To mitigate the potential negative impact of this, the Commission has proposed an extension of the current transitional arrangements in the CRR by two years, in line with the international agreement of the Basel Committee. This would allow banks to add back to their regulatory capital any increase in new expected credit losses provisions that they recognise in 2020 and 2021 for their financial assets, which have not defaulted.

To ensure that the additional relief is related to the exceptional circumstances of the Coronavirus pandemic, only provisions incurred as of 1 January 2020 would be eligible.

Delay of Leverage Ratio Buffer

The last revision of the CRR introduced a leverage ratio buffer requirement on global systemically important institutions (G-SIIs). The date of application of this new leverage ratio buffer requirement was originally set for 1 January 2022. In the context of the Coronavirus pandemic and in line with the revised implementation timeline agreed by the Basel Committee, the date of application is proposed to be deferred by one year to 1 January 2023.

Non-Performing Loans (NPLs)

It is proposed to temporarily extend this preferential treatment to NPLs guaranteed by the public sector in the context of measures aimed at mitigating the economic impact of the Coronavirus pandemicin accordance with EU State aid rules. This would recognise the similar characteristics shared by export credit agencies guarantees and Coronavirus related guarantees.

Temporary exemption of central bank assets from the Leverage Ratio

The last revision of the CRR introduced a capital requirement based on the leverage ratio that will become applicable on 28 June 2021.In line with the Basel framework, the CRR provides a discretion to temporarily exclude central bank reserves from a bank’s leverage ratio calculation in exceptional circumstances. The exemption may be granted by competent authorities for a limited period of time not exceeding one year. Any impact of the exclusion is fully offset via a mechanism that increases a credit institutions’ individual leverage ratio requirement in a proportionate manner.

To enhance the flexibility to act appropriately during possible future crises, the proposal modifies the offsetting mechanism. In particular, a bank that would exercise the discretion would still be required to calculate the so-called “adjusted leverage ratio”, but unlike under the existing rule, it would be required to calculate it only once at the moment it exercises the discretion. The adjusted leverage ratio would not change throughout the full period during which the discretion is exercised.

The full press release is available at https://ec.europa.eu/commission/presscorner/detail/en/QANDA_20_757

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