On 4 June 2020, the PRA issued a Dear CEO letter providing further guidance as regards the application in the context of COVID-19 of the definition of default in the Capital Requirements Regulation (CRR) and of the expected credit loss accounting (ECL) requirements of International Financial Reporting Standard 9 (IFRS 9). The Dear CEO letter follows an earlier Dear CEO letter published on 26 March 2020.
The Dear CEO letter in March related to payment holidays, moratoria or deferrals (payment deferrals). The first payment deferrals are coming to an end and the FCA has issued updated guidance on how lenders should treat retail mortgage borrowers at the end of the initial deferral period. Firms are now assessing the capital and accounting treatment of the various ways in which the initial payment deferrals might end. The purpose of the latest Dear CEO letter is to address exits from initial payment deferrals.
The detailed guidance in the Dear CEO letter is set out in the annex. In summary the PRA’s view is as follows:
- When there has been a payment deferral, counting of days past due should be based on the agreed schedule for the purposes of the ECL backstops and for the CRR definition of default. But loans that are not past due can still have suffered a significant increase in credit risk, credit impairment or default.
- Eligibility for, and use of, COVID-19 related initial and further payment deferrals taken up in accordance with the FCA’s guidance on the subject does not on its own automatically result in a loan: (i) being regarded as having suffered a significant increase in credit risk or being credit-impaired for ECL, (ii) triggering a default under CRR. Firms will need to consider other indicators to determine the appropriate treatment.
- Firms are likely to have limited borrower-specific information to make the determinations on an individual borrower-basis. Firms will need to make holistic assessments that look beyond past-due information and use of payment deferrals in order to treat such loans appropriately for accounting and regulatory purposes.
- The PRA does not envisage that the holistic assessments for accounting and CRR purposes will be made at the time when a payment deferral is taken up, as the FCA guidance does not require such information to be available at that time. The assessments are expected to be made subsequently and be based on the information available at the next and subsequent reporting dates.