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Covid-19: EU eases prudential banking regulations

20th May 2020
Partner Lebrau & Partners Ltd.
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In a bid to alleviate the immediate economic impacts of Covid-19, the European Commission has announced a relaxation of banking accounting regulations in order to enable banks to continue to lend and absorb losses related to coronavirus. In April 2020 the Commission announced the package, which aims to support lenders in maximising their ability to extend loans to companies struggling during the Covid-19 crisis, by temporarily amending the EU's prudential banking rules. That package was adopted by the UK on April 28, 2020. 

Temporary relief measures include moratoria on repayment of loans, adaptation of the timeline of the application of international accounting standards on banks' capital, having public guarantees granted during this crisis treated more favourably, postponing the date of application of the leverage ratio buffer and modifying the way certain exposures are excluded from the calculation of the leverage ratio. Among the measures also includes the proposal to advance the date of application of several already-agreed-upon measures to incentivise banks to finance employees, SMEs and infrastructure projects, in an effort to bolster the national economy and avoid national fragmentation.

While dubbed ‘quick fix’ approaches to the greater economic problems brought about by Covid-19, the measures are expected to encourage greater flexibility in approach by all banking institutions and lenders, by inviting them to apply the EU’s accounting and prudential rules more flexibly.

The Commission has explicitly stated, however, that it does not wish the relief measures to lead to a harsher accounting treatment of respective loans - rather that they should help bridge short-term liquidity needs, such as delays in the repayment of loans. The relief package states that the temporary inability of households or businesses to pay back loans due to the global coronavirus pandemic should by no means automatically translate to banks significantly increasing their calculations of expected credit loss ECL provisions, in accordance with IFRS 9. The temporary reductions in provisioning for loans in arrears can be used by unions of all sizes, if they choose to do so. An ‘interpretative communication’ has also been published by the Commission, confirming the suggested approaches on using flexibility within accounting rules such as those made by the Basel Committee of Banking Supervision, the European Banking Authority (EBA) and the European Central Bank, amongst others.

The measures could not come at a better time.

Between dropping commodity prices, workforce and education reductions, decreased government spending, and decreased consumption and capital productivity, the economic impacts of Covid-19 are already being felt around the world. The European Union is anticipated to see a drop of US$290,315 million in GDP in 2020, and early estimates predict that most major economies will lose at least 2.4 percent of the value of their GDP over 2020, forcing economists to reduce their 2020 forecast of global economic growth down from 3.0 percent to 2.4 percent. The travel and tourism industry will be impacted especially: global revenue will be an estimated US$447.4 billion in 2020 - a decrease of around 34.7 percent from the previous year and significantly lower than the original 2020 forecast of around US$712 billion. The economic data in Europe is grim. Germany and France have already reported major slumps in industrial production and the UK has said its economic output would plummet by 14 percent this year alone. The loss in global business travel revenue due to COVID-19 will be around US$810.7 billion and the euro zone is set for a record recession in the wake of the pandemic. Some are saying the economic impacts will be felt for decades

But amidst the panic, a list of UK stockbrokers have said that while the economy and corporate profits will worsen over coming months, stocks will likely rebound in the near future. In fact, the industry is convinced there will be a surge in customers seeking out brokers as a quick fix in the wake of widespread job losses and business closures, and that brokers need to be ready in order to leverage those opportunities. 

Stockbrokers are optimistic right around the world - with Australia’s FBAA managing director Peter White also convinced that business will soon be thriving. 

“We must be ready to guide our clients to lenders who can help them in their time of financial hardship; therefore, it is vital we know what each lender is offering in terms of support,” he said. “Due to the financial, social and emotional value of the family home and small businesses, our industry is on the front line of any economic shift.”

“But firstly, every broker must have the technology and knowledge to be able to transition to an online model. With Skype, Zoom, FaceTime, Facebook Messenger and numerous other platforms available, this is easy and inexpensive,” he added. “Brokers who are not prepared to go online will be impacted financially, as less consumers will seek face to face meetings in the current environment.”

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