by Marina Barata (Master's in Law)
The pandemic outbreak caused by COVID-19 and the government measures taken by several European Union countries to address or mitigate the spread of the disease had, and continue to have, dramatic consequences for the economy.
Individuals and companies were affected by the economic crisis arising from the successive states of confinement, which created situations of default, even if in some cases temporary, of their financial obligations.
This possible and imminent lack of liquidity on the part of debtors would have a devastating impact on credit institutions, since loans defaults would lead to an increase in the number of defaulters and greater and heavier capital requirements for institutions.
For this reason, credit moratoria were implemented broadly by most of the European Union’s Member States.
Traditionally, a moratorium is the granting of an extension of a line of credit’s payment period, whereby the payment of the instalments is suspended for the period during which the moratorium lasts and the deadline for their full payment is extended for the same period. In the expression of the law, the moratorium is the deferment of the fulfilment of the beneficiaries’ obligation towards the banking system.
These moratoria have arisen by private initiative of several credit institutions from the Member States of the European Union, and have assumed different forms depending on the jurisdiction, therefore is important to clarify and harmonise the applicable rules.
In Portugal, the legal regime for the moratorium as established through Decree-Law 10-J/2020 of 26 March, which was successively amended by subsequent rules, some merely interpretative, others with significant changes.
The concept of moratorium is intricately connected to the concept of forbearance and distressed restructuring.
The Regulation (EU) No. No 575/2013 of the European Parliament and of the Council, of 26 June 2013, on prudential requirements for credit institutions and investment firms and amending Regulation (EU) No 648/2012, on article 178 defines what a restructured or defaulted credit is and what its consequences or effects are, both for the bank client and for the banking or financial institutions. Under the terms of this provision, the classification of the credit is crucial, since for the debtor the access to new credits may be conditioned, while for the banking institutions the credit classification will have relevance mainly at the level of the ratios, and also for the purposes of communication to the central credit registers of the Central Banks.
Thus, it was most important that the moratoria, whether public or private, created in the context of the COVID-19 pandemic did not fall within the scope of Article 178 of the said Regulation.
In this context, on 2 April 2020, the European Banking Authority (hereinafter EBA) issued the Guidelines on legislative and non-legislative moratoria on loan repayments applied in the light of the COVID-19 crisis.
These guidelines aim to clarify the following points in the context of the COVID-19 pandemic: (i) the criteria that payment moratoria must fulfil not to trigger forbearance classification, (ii) the application of the prudential requirements in the context of these moratoria and (iii) ensuring the consistent treatment of such measures in the calculation of own funds requirements.
According to EBA guidelines, for a moratorium applied to a credit not to fall within the concept of a forbearance, it must meet certain conditions:
- First, the moratorium had to be presented in response to the COVID-19 pandemic. Whether public or private, it will have to have been announced and implemented by 31 March 2021.
- The measure must be broadly implemented or applied by the institutions that are part of the banking sector. The EBA wanted to ensure and encourage that, regardless of the nature or origin of the moratorium, there is a coordination effort within the financial system of the various Member States. It is worth saying that a private initiative within a credit institution, in an isolated manner, will not fall within the concept of moratorium, since it is a “tailor-made solution” and therefore Article 178 of Regulation 575/2013 shall apply.
- The moratorium should be applied to a general group of debtors, and not necessarily to defaulting debtors. However, the EBA clarifies that where a debtor has already been classified as “in default” for the purposes of Article 178, that classification shall be maintained. It is important to note that the application of a moratorium is not compulsory, but always depends on a request by the debtor, which does not imply an evaluation by the banking institution of the debtor’s credit capacity or solvency.
- The same moratorium should offer the same conditions to all clients, although they may choose to include some and not others. The conditions offered by banking institutions should be standardised and accessible to all debtors affected by the pandemic. However, the EBA still provides that different moratoria may apply to different segments or debtors. For example, different moratoria can apply to private individuals or SMEs, or to specific production sectors or products, such as moratoria applied only to mortgage credit. The important aspect is to ensure that the moratorium is widely applied.
- The moratoria should only provide for payment schedules, and may suspend, extend or reduce the payment (of principal, interest or both). However, it cannot affect or change other conditions of the loan, such as interest rates, unless such change serves to compensate the institution for losses incurred during the deferred period.
- The moratorium will not apply to loans granted after its launch. According to the EBA guidelines, the use of pre-existing credit lines or the renewal of revolving loans should not be considered new credit, and a moratorium should only be considered new if it substantially alters the purposes and scope of previous moratoria.
For the reasons set out above is possible to conclude that the EBA’s role was fundamental in this context. It served to clarify the classification of the moratorium and to remove them from the scope of Regulation 575/2013 of the European Parliament and of the Council, with the necessary prudential consequences that ensued for both institutions and individuals.
It was also an important step towards harmonising the financial systems of the various Member States, which could be tempted to use this measure in a decentralised manner, possibly creating more problems in the financial system than the ones intended to solve.
However, EBA makes clear in its guidelines that financial institutions should continue to conduct careful risk analysis, and a judicious application of prudential rules, keeping a close eye on the performance or creditworthiness of creditors in general.
But what about the binding force of the recommendations issued by this European body?
EBA, the European Banking Authority, was created and acts within the scope of the powers conferred by Regulation No. 1093/2010 of the European Parliament and of the Council of 24 November 2010, and its main objective is to protect the public interest by contributing to the short, medium and long-term stability and effectiveness of the financial system, for the benefit of the Union’s economy, its citizens and businesses (Article 1(5) of the Regulation).
Within its powers and whenever the legislation in force is not being complied with or if the situation does so require, the EBA may issue guidelines and recommendations addressed to the competent authorities of the respective Member States or directly to financial institutions (Article 16 of Regulation 1093/2010). However, regarding soft law, the respective central banks of the Member States shall inform EBA whether they intend to comply with those guidelines, stating the reasons for their decision.
The Authority shall publish the fact that a Member State does not comply or does not intend to comply with a guideline or a recommendation and inform the European Parliament, the Commission, and the Council, stating how it intends to ensure that competent authorities will follow its recommendations and guidelines in the future.
Finally, it should be noted that in Portugal the EBA guidelines on public and private moratoria applied to credit operations in the context of the COVID-19 pandemic were implemented through Circular Letter no. CC/2020/00000022 approved by the Board of Directors of Banco de Portugal on 8 April 2020 and addressed to credit institutions, credit finance companies, factoring companies, mutual guarantee companies, investment companies and leasing companies.
Pictures credits: Piggy Bank by QuinceCreative.