BNR’s Supervisory Committee clarify how banks should apply the regulations amid COVID-19

Aurel Constantin 26/03/2020 | 12:57

The National Bank of Romania’s Supervisory Committee convened, on March 25th, in an emergency meeting to clarify the manner in which banks and non-bank financial institutions (NBFIs) in Romania should apply the regulations in force amid the COVID-19 pandemic.

Specifically, the BNR will use the flexibilities in the legislative framework so that individuals and companies with outstanding loans could be helped by banks and IFNs in the period ahead.

Payment delays (as a result of a general measure or based on direct negotiations with clients) generated by the current state of affairs should not be associated with the notion of borrower’s financial distress. Therefore, the loan should not be reclassified and credit institutions should not set up provisions for loans, as a result of restructuring.

Specifically, although the definition of default implies any loan restructuring and should be associated with the notion of financial distress, in the case of a private or public moratorium (payment delay), such an operation is not seen as a restructuring measure because it did not result from the borrower’s financial distress.

The regulations in force allow lenders (banks and IFNs) to delay payments of the loans of any individual affected by the COVID-19 pandemic, without applying the provisions set forth by BNR Regulation No. 17/2012 on certain lending conditions, as subsequently amended, as concerns the level of indebtedness, the loan-to-value limit and the maximum maturity of consumer credit.

With regard to credit institutions, the National Bank of Romania states that the measures to support borrowers will be reflected in banks’ statements similarly with the EU-wide practices, by applying in a uniform manner the European regulatory framework in the prudential and accounting fields.

The prudential regulatory framework comprises a series of specially designed tools for situations such as that we are currently experiencing, in order to ensure the conditions for overcoming the difficult times while preserving banks’ financial soundness.

Specifically, in the previous periods, banks built up capital buffers according to European and national regulations adopted by the National Bank of Romania based on the recommendations of the National Committee for Macroprudential Oversight.

Given the current context, BNR decided to allow banks to temporarily use the previously built capital buffers (up to a date that will be subsequently communicated), while also keeping in place the legal requirements for such flexibilities. Adapting capital buffers to the new conditions helps banks preserve their support role for the real economy.

Furthermore, according to the regulatory framework, banks built and maintained liquidity reserves that may be used to deal with an increased demand for liquidity during times of crisis. Thus, in line with the actions taken to this end at European level, the NBR allows banks not to comply with the minimum liquidity ratio, for the purpose of using these reserves to contribute to the smooth functioning of the banking sector and to help banks ensure sufficient liquidity to firms and households.

Credit institutions will be informed of the manner in which they can use the flexibility of the prudential framework to reflect payment delay measures in a way that is also aimed at preserving the financial soundness of the banking sector so that the latter can further support the real economy.

Whenever a credit institution negotiates a payment delay measure, on an individual basis, which is not linked to the COVID-19 pandemic, this operation should be classified as restructuring. Credit institutions should continue to adequately assess the quality of all exposures from loans in order to identify all indications of unlikeliness to pay.

In its turn, BNR will constantly assess the situation of each bank and will take the necessary measures depending on the evolution of the impact generated by the COVID-19 pandemic.

These interpretations of default amid the COVID-19 pandemic are based on EBA Guidelines GL/2016/07, being agreed upon with the European Banking Authority (EBA). They lay the groundwork for supporting clients with outstanding loans and facilitating access to new credit lines, while preserving the creditworthiness of financial institutions within acceptable limits.

As for non-bank financial institutions (IFN), the National Bank of Romania confirms to these lenders that the restructuring of loans granted to individuals affected negatively by the COVID-19 pandemic through suspending/freezing the outstanding payments for a determined period of time does not automatically require for specific credit risk provisions to be set up, considering that this mechanism will not involve the build-up of overdue days for the payment of loan instalments.

Moreover, in the case of non-bank financial institutions entered in the Special Register, which are subject to additional prudential requirements with regard to the restructured loans regime, the central bank confirms to these lenders that the restructuring of loans granted to individuals affected by the COVID-19 pandemic does not entail the automatic classification of said loans into a lower risk bucket, nor, implicitly, additional provisioning requirements.

The National Bank of Romania, in its capacity as supervisory authority for non-bank financial institutions entered in the Special Register, confirms to these entities that, in terms of capital adequacy, if the temporary non-compliance with credit exposure limits, pursuant to NBR Regulation No. 20/2009 on non-bank financial institutions, as subsequently amended, stems from the lender implementing measures to support debtors or to stimulate lending in the context of the COVID-19 pandemic, it is a duly justified exceptional case for which, according to regulations, the affected NBFIs will notify the NBR in order to agree on a period for complying again with the limits provided by the specific legal framework.

The National Bank of Romania will send information letters to all lenders (credit institutions and non-bank financial institutions) confirming the possibility to restructure debtors’ loans and the manner of applying the regulations in effect, according to the aforementioned.

With regard to government support in the form of guarantees for further supporting lending, the National Bank of Romania will cooperate with government authorities to ensure that the said guarantees meet the conditions of the bank prudential regulations applicable at EU level in order to lower capital requirements, so that credit institutions’ lending potential may increase.

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