On 20 March 2020, the European Central Bank (ECB) announced further measures to ensure that directly supervised banks can weather the coronavirus related economic shock.

The ECB has introduced supervisory flexibility regarding the treatment of non-performing loans (NPLs), in particular to allow banks to fully benefit from guarantees and moratoriums put in place by public authorities to tackle the current distress.

On a temporary basis ECB supervisors will exercise flexibility regarding the classification of debtors as “unlikely to pay” when banks call on public guarantees granted in the context of coronavirus. Supervisors will also exercise certain flexibility regarding loans under COVID-19 related public moratoriums. Also, loans that become non-performing and are under public guarantees will benefit from preferential prudential treatment in terms of supervisory expectations about loss provisioning. Supervisors will also deploy full flexibility when discussing with banks the implementation of NPLs reduction strategies, taking into account the extraordinary nature of current market conditions.

The ECB also notes that excessive volatility of loan loss provisioning should be tackled at this juncture to avoid excessive procyclicality of regulatory capital and published financial statements. Within its prudential remit, the ECB recommends that all banks avoid procyclical assumptions in their models to determine provisions and that those banks that have not done this so far opt for the IFRS 9 transitional rules.