Payment breaks provided substantial and rapid relief to allow households and businesses to absorb the shock and impact of COVID-19. In April the European Banking Authority (EBA) published guidelines which provided regulatory flexibility to banks who offered borrowers a temporary payment break due to COVID-19. These guidelines were originally applicable until 30 June 2020 and their application was subsequently extended to 30 September 2020. Recently the EBA announced that there would be no further extension to the guidelines.
The guidelines were put in place to ensure banks could effectively manage the large volume of requests for payment breaks anticipated the beginning of the pandemic. Following the 30 September deadline, the pre COVID-19 standards will apply whereby banks consider requests from borrowers on a case by case basis.
The expiry of the guidelines do not prevent banks from engaging with customers who continue to experience difficulty beyond the deadline and all applicable consumer protections remain in place. Borrowers who cannot return to full repayments following the conclusion of their payment break should engage with their lender as early as possible. The Central Bank expects lenders to take a consumer-focused approach at this worrying time for some of its customers.
Covid-19 related payment breaks provided under the industry led moratorium fall under the EBA guidelines which require that such loans are not automatically classified as defaulted. The Central Bank calculated that the number of Irish mortgage accounts with payment breaks provided by lenders was over 73,000 up to 29 May.
The longer term impact of COVID- 19 on bank capital levels will take some time to materialise however some increase in non performing loans is to be expected. The key retail Banks announced a significant increase in their provisioning for the first half of 2020 and this can be attributed to the deterioration in macroeconomic outlook due to COVID-19 and the potential risk that some loans may not be repaid.
However, it is important to note the efforts undertaken by the Central Bank of Ireland and the EU institutions to ensure that banks can absorb losses and continue to lend into the economy. The Central Bank have reduced the Countercyclical Capital Buffer (CCyB) from 1% to 0% and they estimate this will free up about €940 million of capital across the Irish retail banks to facilitate lending or help banks absorb losses. At an EU level, a number of support measures have already taken place. The European Central Bank announced that banks can temporarily operate below the Capital Conservation Buffer (CCB). Member States also passed a package of temporary measures known as the ‘Capital Requirements Regulation (CRR) quick fix’ which are designed to mitigate the economic consequences of COVID-19 and ensure that banks have sufficient capacity to lend.
I had a constructive meeting with the five CEOs of our retail banks and with Banking and Payments Federation Ireland (BPFI) yesterday, Monday 28 September. This discussion focused on payment breaks, the options available to borrowers once payment breaks expire and also on the level of credit and lending in the economy.