Following up from the statement made by the European Banking Authority (EBA) relating to the temporary capital and operation relief provided to credit institutions, the EBA has issued a further statement to clarify the application of this framework. This statement addresses specifically the classification of loans in default, the identification of forborne exposures and their accounting treatment.

In relation to the provision of general moratoria by national governments and EU bodies, the EBA emphasised that it is vital for the classification of exposures to reflect any deterioration of asset quality in a timely and acccurate manner. The EBA also states that when applying the IFRS9 international accounting standard, credit and financial institutions are expected to use judgment and distinguish between borrowers whose credit standing would not be significantly affected by the current situation in the long term, and those who would be significantly affected.

Furthermore, the EBA clarified that generalised payment delays do not lead to an automatic classification in default or unlikeliness to pay. Assessments on the likelihood of payment should be made on an individual basis, using the institution's risk-based approach.

As with other sectors of financial services bodies, the EBA emphasises on the need to adopt measures to ensure consumer protection, particularly in respect of temporary measures relating to consumer and mortgage loans. Nevertheless, any such measures taken must be in compliance with EU legislation.

Lastly, the EBA emphasises on the orderly functioning of payment services across the EU banking sector. In this respect, it recommends use of contactless payments and encourages consumers and merchants to take precautionary measures and consider all payment options when paying in-store.

The full circular may be accessed through the following link: https://www.mfsa.mt/wp-content/uploads/2020/03/Circular-to-credit-and-financial-institutions-on-the-EBA%E2%80%99s-clarity-on-the-application-of-the-prudential-framework-in-light-of-coronavirus-COVID-19-measures-.pdf

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