Tue. Dec 7th, 2021


European regulators will investigate whether lenders have reduced the potential cost of bad loans during the pandemic by circumventing new accounting rules on when provision should be made against whole industries.

The European Banking Authority, which sets rules for lenders in the block, said that loan loss provisions could have been “significantly affected” by their failure to use the “collective assessment” method included in accounting standards introduced three years ago.

Under collective assessment, entire groups of borrowers are moved into a category with higher loan loss costs, known as Phase 2, because they are all considered to be at risk due to the same negative factors. Banks can avoid this if they can show that they have the ability to analyze all the loans individually or have another method that is just as robust.

“We were surprised that the collective assessment was no longer used,” said Delphine Reymondon, a division head at the EBA, about the finding that just over a third of banks had used the benchmark since June 2020. “The question is that if you do not use it during this [pandemic] period, when do you use it then? ”

In its report on the implementation of the new accounting standards, which generally led to the earlier recognition of loan loss costs, the EBA quoted “commerce” as to whether the failure of some banks to use collective assessment to a delay led in lenders. moved to Phase 2 and said that it “significantly affected” the final loan loss provisions.

The EBA added that the lack of collective assessment “did not appear to be justified” and was a “point of attention for supervisors and regulators”.

Reymondon told the Financial Times that banks may be “reluctant” to use collective assessment because “an entire portfolio is being shifted”. [of loans] after stage 2 leads to a high impact [on expected losses]”. The relatively low use of collective assessment will be an “important area of ​​further investigation for supervisors,” she added.

European and American banks made large provision for loan losses earlier in the pandemic as they considered mass defaults while economies were closed. Unprecedented support packages from governments kept the worst of the losses away, enabling banks to release some of those provisions late in 2020.

However, some argue that banks will not feel the full impact of losses associated with Covid-19 until the crisis comes to an end and support measures are withdrawn, creating the scene for difficult decisions as banks calculate their final provisions for 2021.



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