布鲁盖尔-When-and-how-to-unwind-COVID-support-measures-to-the-banking-system__25页_513kb

Summary: When and How to Unwind COVID- Support Measures to the Banking System?

Core Content

This document by Alexander Lehmann from Bruegel examines the regulatory and supervisory measures that supported the euro-area banking system during the initial phase of the COVID-19 pandemic in 2020. It evaluates the implications of withdrawing these support measures and provides recommendations for a smooth transition to normal lending and risk management practices.

Main Points

1. Context of the 2020 Credit Expansion

• The euro-area banking system played a critical role in stabilizing economies during the first lockdowns in 2020.
• Credit standards eased, and credit expanded significantly, particularly benefiting SMEs.
• This expansion helped prevent premature economic scarring and insolvencies due to liquidity issues rather than solvency problems.

2. Support Measures Implemented

• Moratoria and Public Guarantee Schemes:
  • Moratoria (payment holidays) and public guarantees were widely used to maintain liquidity.
  • By end-2020, moratoria covered 6.4% of corporate loans and a larger share of SME loans.
  • Public guarantees covered between 1 and 8% of GDP in the four largest euro-area countries.
• Capital Relief and Liquidity Support:
  • The ECB and national central banks expanded liquidity operations, including TLTRO III and PEPP.
  • Capital buffers were released, and dividend restrictions were imposed, increasing capital headroom.
  • Banks had up to €300 billion in headroom for household loans and €900 billion for enterprise loans by end-2020.

3. Regulatory and Supervisory Flexibility

• Regulatory flexibility allowed for:
  • Delayed recognition of defaults and non-performing loans (NPLs).
  • Lower provisioning requirements for loans under moratoria or public guarantees.
  • Easier application of IFRS 9 for expected credit losses.
• These measures were introduced to prevent a credit crunch and support economic recovery.

4. Risks of Phasing Out Support

• Cliff-Edge Risks:
  • Abrupt withdrawal of support could lead to sudden recognition of defaults and NPLs, causing a sharp increase in loan loss provisions.
  • This may erode bank capital and lending capacity, potentially leading to a credit crunch.
• Impact on Asset Quality Reporting:
  • Flexible interpretations of default and forbearance criteria may have undermined the transparency and accuracy of asset quality reporting.
  • Banks may not have adequately assessed individual borrower risks, leading to potential misclassification of loans.

5. Challenges in Transition

• Accounting Standards:
  • The IFRS 9 framework was not fully implemented during the pandemic, with banks maintaining lower provisions than would be expected under normal conditions.
  • This may lead to inconsistencies in asset quality reporting once the measures are phased out.
• NPL Management:
  • Banks had not fully scrutinized credit risk in individual borrowers, leading to a lag in risk assessments.
  • The ECB's updated guidance in December 2020 called for stricter scrutiny of NPL management, which was delayed.

6. Proposals for Withdrawal

• Gradual Withdrawal:
  • Support measures should be phased out gradually to avoid sudden shocks to the banking system.
  • The end of the Temporary Framework for public guarantees is expected in December 2021.
• Transparent Reporting:
  • Maintaining clear and consistent definitions of default and forbearance is essential to preserve the credibility of asset quality reporting.
• Revisiting NPL Targets:
  • NPL reduction targets should be re-evaluated in light of current market conditions and restructuring outcomes.
  • Banks should be encouraged to use long-term macroeconomic forecasts in their risk assessments.

Key Information

• Moratoria:
  • Covered 6.4% of corporate loans and a larger share of SME loans in the euro area by end-2020.
  • Payment relief was typically granted for 6–9 months, with some cases extending to 18 months.
  • Moratoria were allowed until end-March 2021 under revised EBA guidelines.
• Public Guarantees:
  • Covered up to 22% of GDP in some countries, with actual usage ranging from 1% to 9%.
  • The Temporary Framework for public guarantees was set to expire in December 2021.
• IFRS 9 and Capital Requirements:
  • The Capital Requirements Regulation (CRR) was amended to provide capital relief and extend the transitional period for IFRS 9.
  • The transitional period for IFRS 9 was extended to 2024, delaying the recognition of expected credit losses.
• ECB Supervision:
  • The ECB supported moratoria and public guarantees to prevent defaults and loan losses.
  • It emphasized the need for banks to assess individual borrower creditworthiness and to report on their NPL strategies.

Conclusion

The paper concludes that while supportive measures were necessary during the pandemic, they risk undermining the integrity of asset quality reporting and risk management practices. A careful and gradual withdrawal of these measures is essential to ensure the banking system can adapt without causing instability. The ECB and EU regulators should maintain transparency, revisit NPL targets, and ensure that banks are prepared to reclassify loans and manage credit risk effectively as the economy recovers.