ECB temporarily relaxes NPL regulation

The European Central Bank announced measures today (March 20) to lower regulatory requirements in the treatment of new non-performing loans under public guarantee during the Covid-19 crisis.

The ECB will allow banks to resort to guarantees and moratoriums offered by authorities to tackle the crisis. Specifically, “loans which become non-performing and are under public guarantees will benefit from preferential prudential treatment in terms of supervisory expectations about loss provisioning,” says the ECB in a statement.

“Supervisors will deploy full flexibility when discussing with banks the implementation of NPL [non-performing loan] reduction strategies, taking into account the extraordinary nature of current market conditions.”

The Single Supervisory Mechanism cautions the stock of NPLs accumulated before the Covid-19 crisis is not the focus of these measures. Nonetheless, the central bank says it “is fully aware that current market conditions may make the agreed reduction targets difficult to attain and somewhat unrealistic.”

As a result, joint supervisory teams will be flexible regarding the implementation of NPL strategies on a case-by-case basis.

Additionally, ECB supervisors will be temporarily more lenient in the classification of debtors as “unlikely to pay” once banks call on public guarantees offered to tame the effect of the crisis. The SSM will also apply these principles to loans under Covid-19 related public moratoriums.

Lower capital requirements

The ECB has activated the lower capital requirements it first announced on March 12. Back then, the SSM said it will allow banks to operate temporarily below the level of capital defined by the Pillar 2 guidance, the capital conservation buffer and the liquidity coverage ratio.

The central bank estimates this capital relief entails €120 billion ($128 billion) more available for major banks in the eurozone to provide credit. “This relief is available for banks to absorb losses without triggering any supervisory actions or to potentially finance up to €1.8 trillion of loans to households and corporate customers in need of extra liquidity,” says the ECB.