• Question ID: 2020/0024
• Date of publication: 15/05/2020
• Subject matter: General clarifications

Question

The coronavirus (COVID-19) crisis has triggered the implementation of relief measures in support of companies around the world. Those measures have typically taken the form of debt moratoria and public guarantees.

Granular datasets play an important role when it comes to carrying out detailed analysis of the magnitude and impact of those measures. That is particularly true of the AnaCredit initiative to the extent that relief measures fall within its scope. It should be noted in this regard that loans which are covered by COVID-19 relief measures are subject to the same reporting guidance as other loans, with no special treatment for such loans under the reporting methodology for AnaCredit. Banks should continue to apply the prudential framework in relation to the classification of loans in default and the identification of forborne exposures, reporting information to AnaCredit in accordance with the requirements set out in the AnaCredit Regulation and taking note of the clarifications provided in the AnaCredit Reporting Manual/Q&As.

Answer

Instruments that are reportable to AnaCredit may be subject to COVID-19 relief measures. Such measures may take various forms. The most common measures include public guarantees and legislative and non-legislative (private) debt moratoria, although some types of measure may not exist in all countries. Other forms of support measure include (i) the option for individual debtors to ask their credit institutions to reschedule payment obligations as a result of the COVID-19 crisis, (ii) restrictions imposed by governments on credit institutions’ ability to revoke credit lines during the COVID-19 pandemic, (iii) the automatic extension of certain protections in line with the postponement of loan repayments, (iv) subsidised loan programmes and (v) loan programmes with government guarantees covering some or all of the credit risk.

Loans covered by COVID-19 relief measures are subject to the same requirements as any other instrument that is reported to AnaCredit. Consequently, reporting agents should continue to comply with the existing requirements set out in the AnaCredit Regulation and take note of the clarifications provided in the AnaCredit Reporting Manual.

Nevertheless, while there is no specific guidance regarding the reporting of loans covered by COVID-19 relief measures, some of the measures applied to such loans do have an impact on data that are subject to AnaCredit reporting, so additional guidance is provided here in order to facilitate consistent and harmonised reporting. In particular, these clarifications seek to ensure the consistency and comparability of risk metrics across all reporting agents, since monitoring of the provision of credit and credit risk is especially important in the context of the current crisis. Moreover, as emphasised by the European Banking Authority (EBA), while national governments and EU bodies are proposing and adopting measures aimed at addressing the adverse systemic economic impact of the COVID-19 pandemic, the main principle underlying the accounting methodology, the identification of forborne exposures and the definition of default in the prudential framework is the need to ensure the effective identification of credit-impaired assets on banks’ balance sheets.

Loans subject to debt moratoria

Many different types of legislative and non-legislative debt moratoria have been implemented in the various Member States. One common feature of such moratoria is the fact that they lead to a change in the schedule of payments, suspending, postponing or reducing payments (principal, interest or both) – typically for a limited period of time. This affects the whole of the payment schedule and may lead to increased payments after the end of the moratorium or an increase in the duration of the loan. In order to achieve this, the initial contract is modified, with the terms and conditions of the loan being adjusted accordingly. It should be noted, in this regard, that the application of debt moratoria in response to the COVID-19 crisis may be visible in specific data attributes reportable to AnaCredit (such as the type of amortisation, the payment frequency, the end dates of interest-only periods, or the legal final maturity date where payment of the scheduled final instalment of the loan is postponed). AnaCredit datasets and attributes should be reported accordingly, accurately reflecting the actual situation as at the reference date for reporting. For example, if a debt moratorium involves changes to the schedule of payments, such that payments are rescheduled to a date after the original maturity date, the legal final maturity date needs to be updated accordingly. Likewise, the reporting agent should also assess whether the change entails modifications to the amortisation schedule or the end date of the interest-only period (which is particularly relevant if the moratorium suspends payments of principal).

Overall, reporting agents need to think carefully about the data attributes that are affected by the application of a debt moratorium and should follow AnaCredit’s reporting instructions consistently. The guidance below outlines a number of considerations which are particularly important with regard to the identification of (i) renegotiated loans, (ii) forborne exposures and (iii) loans in default. At the same time, it should be noted that, where relevant, AnaCredit is aligned with the EBA’s implementing technical standards on the identification of forborne instruments and defaulted instruments and counterparties and the corresponding guidelines, and the clarifications below should be interpreted accordingly.

• Status of forbearance and renegotiation

Modifications to an instrument’s terms and conditions are captured by the AnaCredit data attribute “status of forbearance and renegotiation”, which indicates whether modified instruments qualify as renegotiated loans or forborne loans or are neither forborne nor renegotiated. The “date of the forbearance and renegotiation status” should be updated accordingly.

In line with the prudential framework, as well as the EBA’s Guidelines on legislative and non-legislative moratoria on loan repayments applied in the light of the COVID‑19 crisis, the application of a debt moratorium does not automatically lead to a loan being classified as in default, forborne or unlikely to be repaid. Nevertheless, credit institutions are still required to assess the credit quality of instruments benefiting from such measures (bearing in mind the modified schedule of payments) and identify any situation where a debtor is unlikely to pay. In particular, if that assessment leads to the identification of forbearance in accordance with the prudential framework, the relevant forbearance status should be reported under the AnaCredit data attribute “status of forbearance and renegotiation”. The EBA guidelines set out the criteria that general payment moratoria have to fulfil in order to be regarded as not meeting the definition of forbearance. It should be noted, however, that if an instrument has already been subject to forbearance measures prior to the application of such a moratorium, that classification should not be changed.

Otherwise, if that assessment does not result in the identification of forbearance, consideration should be given to whether the modified loan fulfils the definition of a renegotiated instrument. The key principle here is that a change to a contract resulting exclusively from a debt moratorium which, rather than being the result of a bilateral negotiation between the bank and the borrower, is instead applied to a broad range of borrowers or products (the requirement that general payment moratoria have to fulfil in order not to meet the definition of forbearance), is not regarded as a renegotiation. This is particularly important for monetary analysis, which is reliant on the accurate identification of renegotiation, as reflected in MFI interest rate statistics (where renegotiation requires the debtor to be actively involved in the adjustment of the terms and conditions of an existing loan or deposit contract – see the definition of “renegotiation” in the Manual on MFI interest rate statistics). For example, instruments which are not subject to forbearance, but whose terms and conditions have been modified by the application of debt moratoria in response to the COVID-19 crisis without any active involvement of the debtor with the aim of renegotiating the terms and conditions of the contract, should be reported as “not forborne or renegotiated”. Conversely, instruments which are not subject to forbearance, but whose financial conditions have been modified with the active involvement of the debtor with the aim of moving to a different treatment or a treatment going beyond what is covered by a debt moratorium, are considered to have been renegotiated and should be reported as a “renegotiated instrument without forbearance measures” (AnaCredit Reporting Manual, Part II, page 155, lines 15-18). Please note that the above explanations apply accordingly to cases where the “status of forbearance and renegotiation” was already “renegotiated instrument without forbearance measures” prior to the application of the debt moratorium. Specifically, while the status itself remains essentially unchanged, the “date of the forbearance and renegotiation status” is updated only if the instrument’s conditions are modified with the active involvement of the debtor.

Moreover, when creditors lend new funds to existing clients during the application of the moratorium (whereby that new lending should follow the normal credit policies and be based on an assessment of the clients’ creditworthiness), new contracts are created and new instruments are issued, potentially replacing or complementing existing ones. Here, too, the AnaCredit requirements and clarifications regarding the “status of forbearance and renegotiation” apply accordingly – particularly the clarifications provided in Part II of the AnaCredit Reporting Manual (pages 155 and 156, lines 38-43 and 1-20 respectively). In addition, the clarifications provided in Q&A 2020/0013 apply in respect of the purpose of a newly created loan that replaces an existing loan – i.e. the purpose of the new loan is, in principle, the same as the purpose of the replaced loan.

• Default status

By the same token, reporting agents should continue to report information on loans’ default status in accordance with Article 178 of the Capital Requirements Regulation and the corresponding EBA guidelines. That assessment should be conducted on the basis of the modified schedule of payments, with the exposure continuing to be regarded as “performing” if there are no concerns in that respect. Thus, even if loans and debtors are subject to debt moratoria, credit institutions are still required to assess (in accordance with their regular policies and practices governing the assessment of unlikeliness to pay) whether economic losses are going to be incurred in such cases, albeit that assessment should be carried out on the basis of the modified schedule of payments (looking, for example, at whether, despite the suspension of payments, the debtor is still likely to have difficulty repaying the loan – for instance, because its payment capabilities are going to be affected even after the COVID‑19 pandemic is over). That assessment can result in a loan being categorised as “unlikely to pay” despite no amounts being due on account of the modified repayment schedule. It should also be noted that the EBA guidelines on the application of the definition of default under Article 178 of Regulation (EU) No 575/2013 state that where repayment of an obligation is suspended because of a law allowing this option or other legal restrictions, the counting of days past due should also be suspended during that period. However, the EBA has also clarified that in cases where the moratorium applies to instruments that were already classified as being in default at the time of the application of the moratorium, that classification must be maintained. In the same vein, credit institutions should continue to assess exposures in accordance with the applicable requirements to see whether they are performing or non-performing and should report that information to AnaCredit accordingly.

• Days past due and arrears

The application of a debt moratorium results in changes to the schedule of payments. Consequently, the amount of arrears should be calculated on the basis of the amended/new payment schedule, and the AnaCredit attributes “date of past due for the instrument” and “arrears for the instrument” should be reported accordingly. Please note that this also affects the definition of default via the 90 days past due criterion, as delays should be calculated on the basis of the modified schedule of payments (see the above clarifications regarding default status).

Loans covered by public/government guarantees offered in response to the COVID-19 crisis

As regards loans covered by public/government guarantees offered in response to the COVID-19 pandemic (whereby such guarantees typically concern newly issued loans, with the government agreeing, for example, to guarantee all eligible loans granted after the onset of the COVID-19 pandemic), reporting agents should continue to fulfil the requirements set out in Sections 8 and 9 of Part II of the AnaCredit Reporting Manual in respect of the reporting of protection to AnaCredit. Thus, there are no special requirements in relation to loans covered by public guarantees. By the same token, there are no specific reporting requirements which allow public guarantees issued in response to the COVID-19 pandemic to be clearly distinguished from other guarantees. Overall, reporting agents should think carefully about the loans and data attributes that are affected by the issuance of state guarantees (both in the context of COVID-19 and more generally), complying with the requirements set out in the AnaCredit Regulation and taking note of the clarifications provided in the AnaCredit Reporting Manual in that regard.

In particular, the following general guidance applies to loans secured by public/government guarantees issued in response to the COVID-19 pandemic:

All public guarantees (i.e. guarantees securing reportable loans) and collateral that are offered to reporting agents in response to the COVID-19 pandemic should be reported to AnaCredit as credit risk mitigants as soon as they are provided to the institution in question. The “date of original protection value” should be the date as of which the bank regards the protection as securing the loan.

Reporting agents should continue to apply the normal credit policies when it comes to the valuation of protection measures (be it individual guarantees or portfolio guarantees) and their allocation to specific instruments. In particular, protection values may be based on the amount of outstanding credit (e.g. 70% or 80% of outstanding debt), so they can vary over time.

As regards the reporting of the protection provider’s identity in the “protection received” dataset, the general AnaCredit guidance applies – i.e. reporting agents should identify the guarantor and report its data accordingly. The guarantor may be the state/government itself or a government-related entity. In particular, in line with the definition of a protection provider in Article 1(13) of the AnaCredit Regulation, the protection provider should be the counterparty that is obliged to make payments to the creditor if the debtor fails to fulfil the obligation to make repayments that arises under the instrument secured by the guarantee (AnaCredit Reporting Manual, Part II, page 211, lines 4-9). That counterparty may be different from the entity that manages and administrates the public guarantee, which is not subject to AnaCredit reporting as the administrator of the protection item (AnaCredit reporting only requires protection providers of protection items). Reporting agents should, in this regard, ensure that counterparty reference data include both information about the protection provider and information about the relevant immediate and ultimate parent undertakings.