View from Brussels - April 2020

Just as countries around the globe have introduced measures to mitigate the impact of Covid-19, on 28 April the European Commission announced a banking package to facilitate lending to households and businesses in the EU. It acknowledges that EU banks are more resilient than they were during the 2008 financial crisis and are therefore well-placed to support recovery this time round. The Commission pays tribute to firms for offering payment deferral schemes to customers.

Banks and supervisory authorities are encouraged by the Commission to make use of the flexibility in the EU's accounting and prudential frameworks in line with the recent statements of the European Banking Authority (EBA) and the European Central Bank. It notes, for example, that loans subject to private or statutory moratoria should not be regarded as automatically constituting a significant increase in credit risk. In a similar vein, because these temporary measures are generally applicable rather than specific to an individual borrower, such loans should not in prudential terms, be classified as forbearance in line with EBA guidelines published earlier this month (usual rules apply to non Covid-19 related delinquent loans).

The Commission urges banks to refrain from making dividend payments to shareholders and adopt a conservative approach to bonuses. In a sign that the EU executive will take a close interest in customer outcomes, Commission Executive Vice President Valdis Dombrovskis said that the EU would launch a “dialogue” with industry to consider best practice in support households and businesses. This exercise would “involve banks, but also non-bank lenders, insurance companies, fintech companies and other financial market participants.” This follows criticism in some EU countries that banks have raised interest rates and fees and introduced more stringent requirements for customers applying for Covid-19 forbearance.

The UK industry and regulators have been amongst the more proactive countries in the measures they have introduced in support of their customers. There are suggestions in Brussels that unless standards across the EU reach similar levels then a “code of responsible conduct” for banking, insurance and capital markets could be on its way alongside perhaps legislative measures.  

Published 30 Apr 2020