COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT AND THE COUNCIL Commission Interpretative Communication on the application of the accounting and prudential frameworks to facilitate EU bank lending Supporting businesses and households amid COVID-19
Date: 2020-04-28
Institutions: Directorate-General for Financial Stability, Financial Services and Capital Markets Union, European Commission
Subjects: aid to undertakings, banking supervision, credit policy, economic consequence, economic recession, economic situation, epidemic, financial solvency, household income, infectious disease

EN 

  EN 

   EUROPEAN COMMISSION  Brussels, 28.4.2020  COM(2020) 169 final  COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT AND THE COUNCIL Commission Interpretative Communication on the application of the accounting and prudential frameworks to facilitate EU bank lending        Supporting businesses and households amid COVID-19  
 
 
Commission Interpretative Communication on the application of the accounting 
and prudential frameworks to facilitate EU bank lending  

Supporting businesses and households amid COVID-19 

1.  Introduction and context 

The  severe  economic  shock  caused  by  the  COVID-19  pandemic  and  the  exceptional 
containment  measures  are  having  a  far-reaching  impact  on  both  the  supply  and 
demand side of the economy. Businesses are facing disruption in supply chains, temporary 
closures and reduced demand, while households are confronted with unemployment and a fall 
in income. 

The  most  acute  part  of  the  economic  contraction  will  be  felt  in  the  coming  months. 
Households  and  solvent  undertakings  should  be  supported  to  withstand  this  slowdown  in 
economic activity and the liquidity shortages that it will cause.  

1.1. Banks’ role in mitigating the economic impact of COVID-19 

Unlike the global financial crisis, the economic shock caused by the COVID-19 outbreak 
does not originate from  the banking sector or the wider financial system.  Banks in  the 
EU are today much more resilient than they were in 2008. Capital ratios and liquidity buffers 
have  improved  significantly,  and  banks’  leverage  and  reliance  on  short  term  funding  have 
decreased. The stress tests exercises coordinated by the European Banking Authority (EBA) 
have shown that the EU banking sector is resilient enough to withstand a severe recession in a 
broad range of scenarios. Meanwhile, the wider financial system has also coped well with the 
stressed conditions linked to the Covid-19 crisis. 

The solidity of banks in the Union should enable them to play a key role in managing 
the economic shock that stems from COVID-19 and preparing for a swift recovery, even 
though  banks  will  inevitably  also  be  adversely  affected  by  the  difficulties  experienced  by 
their clients and by the increased volatility in financial markets. Banks can play this role by 
maintaining the flow of credit to their most affected clients, in particular small and medium-
sized enterprises (SMEs).  

Public  authorities  and  bodies  at  Union,  Member-State  and  international  levels  have 
taken  swift  and  decisive  actions  to  provide  banks  with  the  necessary  measures  to 
effectively channel funds to businesses and households.  

-  Central banks have stepped up their liquidity support to banks with a view to promote 
bank lending to those affected most by the COVID-19 crisis, and have expanded their 
asset purchase programmes to  ensure even more supportive financing conditions  for 
all sectors of the economy. 

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-  Bank supervisors in the EU have provided temporary capital, liquidity and operational 
relief to banks to ensure that they can continue to fulfil their role in funding the real 
economy in  a more challenging environment1. Also, at  international  level,  the Basel 
Committee  on  Banking  Supervision  (BCBS)  has  announced  a  one-year  delay  in  the 
internationally agreed deadline to implement the final Basel III standards2 in order to 
free up the operational capacity of banks and supervisors, and has agreed to provide 
banks  with  greater  flexibility  when  phasing  in  the  regulatory  treatment  of  expected 
credit losses (ECL) accounting to limit the impact on their regulatory capital3.  

-  The  European  Commission,  as  part  of  a  coordinated  EU  response  to  counter  the 
economic  impact  of  the  COVID-19  crisis4,  has  used  the  full  flexibility  of  the  State 
Aid5 and Stability and Growth Pact6 frameworks to allow Member States to provide a 
decisive and  coordinated fiscal  response. Availing of this flexibility, Member States 
have  implemented  relief  measures,  notably  in  the  form  of  government-backed  loan 
guarantees  or payment deferral  schemes (“moratoria”), which provide incentives for 
banks  to  continue  lending  amid  the  current  uncertainty  and  relieve  the  immediate 
financial pressure on businesses and households. 

These  comprehensive  monetary,  regulatory  and  fiscal  measures  give  banks  the 
necessary  resources  and  flexibility  to  support  the  EU  economy  during  the  COVID-19 
crisis. Banks must now use the capital and liquidity that have been liberated to channel funds 
to  those  undertakings  and  private  households  that  are  directly  affected  by  the  sudden 
contraction  in  economic  activity,  within  the  limits  of  prudentially  sound  behaviour.  In  this 
way,  the  extent  of  damage  to  the  EU  economy  can  be  contained  and  recovery  will  come 
sooner and stronger. 

The  Commission  acknowledges  and  welcomes  the  efforts  of  banks  to  help  households 
and  businesses  to  weather  this  unprecedented  crisis7.  Given  the  scale  of  the  crisis,  the 

1 See for instance the measures announced by the ECB on 12 March, available at: 
https://www.bankingsupervision.europa.eu/press/pr/date/2020/html/ssm.pr200312~43351ac3ac.en.html.  
2 See press release “Governors and Heads of Supervision announce deferral of Basel III implementation to increase 
operational capacity of banks and supervisors to respond to Covid-19”, 27 March 2020, available at: 
https://www.bis.org/press/p200327.htm. 
3 See press release “Basel Committee sets out additional measures to alleviate the impact of Covid-19”, 3 April 2020, 
available at: https://www.bis.org/press/p200403.htm. 
4  Communication  from  the  Commission  to  the  European  Parliament,  the  European  Council,  the  Council,  the  European 
Central  Bank,  the  European  Investment  Bank  and  the  Eurogroup  on  Coordinated  economic  response  to  the  COVID-19 
Outbreak, COM(2020) 112 final of 13.03.2020. 
5  Communication  from  the  Commission  on  Temporary  Framework  for  State  aid  measures  to  support  the  economy  in  the 
current COVID-19 outbreak, COM(2020) 1863 final of 19.03.2020, as amended by COM(2020) 2215 final of 3.4.2020. 
6  Communication  from  the  Commission  to  the  Council on  the  activation of  the  general  escape  clause  of  the  Stability  and 
Growth Pact, COM (2020) 123 final of 20.03.2020. 
7 Banks and national banking associations have notably implemented deferrals of rental payments for vulnerable families, of 
corporate loan repayments and leasing contracts and on consumer loans for clients affected by COVID-19. Banks have also 
made  additional  credit  lines  immediately  available  to  SMEs  and  the  self-employed  and  brought  forward  unemployment 
benefits. Banks also play a vital role in processing applications for and passing on promotional loans granted in relation to 
COVID-19.  Moreover,  banks  have  increased  the  limit  for  contactless  payments  to  facilitate  secure  payment  methods  for 
consumers and retailers. 

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banking sector and the wider financial system are expected to be fully engaged in supporting 
the public policy response. The economic challenges posed by the COVID-19 pandemic can 
only  be  overcome  with  close  cooperation  between  public  and  private  actors.  The  European 
Parliament, in its Resolution of 17 April8, insisted on a proactive role for the banking sector 
in  this  crisis,  while  the  EU  ministers  of  finance,  in  their  Statement9  adopted  on  16  April, 
called on the banking sector to support households and corporates affected by the COVID-19 
outbreak, with the aim of ensuring business continuity.   

1.2. Flexibility within the regulatory framework amid the COVID-19 crisis 

The  regulatory  framework  for  banks  offers  ample  leeway  for  public  and  private 
initiatives  to  promote  continued  lending  to  clients  affected  by  the  COVID-19  crisis, 
while  maintaining  a  prudent  approach.  The  Commission  encourages  banks  to  make  full 
use of the flexibility that is  embedded in  the existing accounting10  and prudential11 rules to 
support the EU economy  in the  exceptional  circumstances of the COVID-19 outbreak. The 
application of relief measures alone, which are designed to bridge short-term liquidity needs, 
should  not  automatically  lead  to  a  harsher  accounting  or  prudential  treatment  where  the 
financial situation does not otherwise deteriorate. 

At  the  same  time,  it  is  crucial  that  banks  continue  to  measure  risks  in  an  accurate, 
consistent  and  transparent  manner,  as  this  is  necessary  to  monitor  the  effects  of  the 
COVID-19  crisis  on  the  EU  economy  and  provides  the  foundation  for  a  resilient  banking 
sector. This means that banks must continue to identify situations where borrowers may face 
financial  difficulties  that  could  impact  their  capacity  to  repay  their  loan  obligations  in  the 
longer  term.  Banks  must  equally  continue  to  apply  sound  underwriting  and  know-your-
customer standards as required by EU legislation. 

1.3. Need for a coordinated response 

In its Communication on a coordinated economic response to the COVID-19 crisis12, the 
Commission  invited  prudential  and  accounting  authorities  to  further  specify  how  to 
make best use of the flexibility provided for in the existing regulatory framework. The 
EBA13,  the  European  Central  Bank  Banking  Supervision  (ECB)14,  the  European  Securities 

8  European Parliament  resolution of  17  April  2020  on  EU  coordinated  action  to  combat  the  COVID-19  pandemic  and  its 
consequences (2020/2616(RSP)). 
9 Statement of EU ministers of finance on continuing bank lending and on maintaining a well-functioning insurance sector 
amid the COVID-19 pandemic, 16 April 2020. 
10  Commission  Regulation  (EU)  2016/2067  of  22  November  2016  amending  Regulation  (EC)  No  1126/2008  adopting 
certain  international  accounting  standards  in  accordance  with  Regulation  (EC)  No  1606/2002  of  the  European  Parliament 
and of the Council as regards International Financial Reporting Standard 9. 
11 Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements 
for credit institutions and Directive 2013/36/EU of the European Parliament and of the Council of 26 June 2013 on access to 
the activity of credit institutions and the prudential supervision of credit institutions. 
12  Communication  from  the  Commission  to  the  European  Parliament,  the  European  Council,  the  Council,  the  European 
Central  Bank,  the  European  Investment  Bank  and  the  Eurogroup  on  Coordinated  economic  response  to  the  COVID-19 
Outbreak, COM(2020) 112 final of 13.03.2020. 
13 See EBA Statement on the application of the prudential framework regarding Default, Forbearance and IFRS9 in light of 
COVID-19 measures, 25 March 2020. 

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and  Markets  Authority  (ESMA)15  and  the  Committee  of  European  Audit  Oversight  Bodies 
(CEAOB)16 have clarified how the ample flexibility embedded in the current accounting and 
prudential  frameworks  allows  the  exceptional  measures  taken  in  response  to  this 
unprecedented situation to be managed in a robust but non-disruptive way. The Commission 
also  welcomes  the  recent  statements  by  the  BCBS17  and  the  International  Accounting 
Standards Board (IASB)18.  

It  is  imperative  that  all  authorities  continue  to  act  in  a  coordinated  and  consistent 
manner  when  specifying  how  to  use  the  flexibility  embedded  in  their  respective  rules, 
with  a  view  to  provide  maximum  clarity  and  ensure  a  level  playing  field  within  the 
Single Market. The single rulebook applies to all banks in the EU and the shock caused by 
the  pandemic  should  not  result  in  differentiated  application  of  rules  across  Member  States. 
Guarantees or payment moratoria granted in the context of COVID-19, for instance, that have 
the  same  features,  should  be  treated  in  the  same  way  by  supervisors  across  the  Union. 
Ensuring that flexibility in the rules applies in a consistent way contributes to preserving the 
integrity  of  the  Single  Market,  which  is  essential  for  moving  towards  faster  recovery.  The 
Commission invites the EBA to take stock of how public guarantees provided in response to 
the  COVID-19  crisis  should  be  treated  for  risk  mitigation  purposes,  and  provide  further 
guidance, as appropriate.   

Several relief measures adopted by EU and national authorities have effectively used the 
flexibility  embedded  in  the  rules  to  maximise  banks’  lending  capacity.  Supervisory 
authorities  have  allowed  banks  to  temporarily  make  use  of  liquidity  and  capital  cushions, 
whereas national designated authorities have lowered several macro-prudential capital buffer 
requirements,  de  facto  freeing  a  substantial  amount  of  capital  from  regulatory  constraints. 
These are welcome relief measures that reflect the rationale underpinning prudential buffers, 
and  the  importance  of  allowing  their  release  to  ensure  their  usability  when  needed.  Banks 
should use the capital buffers in order to maintain lending to the real economy and markets 
should not attach any stigma to their use under the present circumstances. The Commission 
encourages  the  ESRB  to  coordinate  an  EU-wide  approach  as  regards  the  use  of 
macroprudential buffers in the crisis and recovery phase.   

To ensure that banks can play their key role in supporting the EU economy during the 
COVID-19 crisis, this Communication confirms the flexibility highlighted by the EBA19, 

14  See  Press  release  “ECB  Banking  Supervision  provides  further  flexibility  to  banks  in  reaction  to  coronavirus”  and 
accompanying FAQs, 20 March 2020. 
15 See ESMA Statement on Accounting implications of the COVID-19 outbreak on the calculation of expected credit losses 
in accordance with IFRS 9, 25 March 2020. 
16 See CEAOB Statement emphasising areas that are of high importance in view of Covid-19 impact on audits of financial 
statements, 25 March 2020. 
17 See BCBS, Measures to reflect the impact of Covid-19, 3 April 2020. 
18  See  IASB  Statement  on  IFRS  9  and  Covid-19  -  Accounting  for  expected  credit  losses  applying  IFRS  9  Financial 
Instruments in the light of current uncertainty resulting from the covid-19 pandemic, 27 March 2020. 
19 See EBA Statement on the application of the prudential framework regarding Default, Forbearance and IFRS9 in light of 
COVID-19  measures,  25  March  2020;  EBA  Guidelines  on  legislative  and  non-legislative  moratoria  on  loan  repayments 
applied in the light of the COVID-19 crisis, 2 April 2020. 

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the ECB20, the ESMA21 and the CEAOB22, as well as the BCBS23 and the IASB24 with a 
view  to  give  as  much  certainty  to  the  matter  as  possible  at  the  current  juncture.  This 
Communication recalls the main features of the guidance issued by those authorities, with the 
aim to reinforce the collective commitment towards consistent and concerted application of 
the  flexibility  embedded  in  the  Union’s  regulatory  framework  (sections  2  and  3).  The 
Communication furthermore emphasises the key role that the EU banking sector is expected 
to play, alongside the public sector, in limiting the economic impact of the COVID-19 crisis, 
as well as in promoting a rapid recovery after the crisis, and highlights areas where banks are 
invited  to  act  responsibly  (section  4.).  Finally,  the  Communication  highlights  the  need  for 
targeted changes to specific aspects of the prudential framework to maximise banks’ capacity 
to continue lending to businesses and households whilst monitoring how banks use the freed-
up resources to contribute to the supply of bank credit (section 5). 

2.  Flexibility embedded in IFRS 9 - Financial instruments 

At the request of the Financial Stability Board (FSB) and the G20, the IASB introduced 
a  more  forward-looking  approach  to  loan-loss  provisioning  via  the  International 
Financial Reporting Standard (IFRS) 9. IFRS 9 is a response to one of the lessons learnt 
from the last financial crisis, when many banks had too little loan-loss provisions to absorb 
losses  when  borrowers  defaulted.  Concerns  have  been  raised  that  the  application  of  the 
expected  credit  loss  (ECL)  approach  under  IFRS  9  would  automatically  result  in  a  sudden 
and significant increase in banks’ credit loss provisions and that this would, in turn, reduce 
their capacity to lend to clients. 

The ECL approach under IFRS 9 requires the application of judgement and flexibility. 
As  indicated  by  the  IASB,  banks  (and  other  companies)  are  not  expected  to  mechanically 
apply their existing ECL approaches to determine the amount of provisions in an exceptional 
situation such as the COVID-19 crisis. The Commission expects banks to fully use judgement 
and  flexibility  within  the  confines  of  IFRS  9  to  mitigate  any  unwarranted  impact  of  the 
COVID-19 crisis on banks’ ECL provisions without undermining investors’ confidence. 

Assessment of a Significant Increase in Credit Risk  

Banks’ assessment of a significant increase in credit risk (SICR) should be based on the 
remaining  lifetime  of  the  financial  assets  concerned.  Sudden  punctual  increases  in  the 
probability  of  default  (PD)  caused  by  the  COVID-19  crisis,  which  are  expected  to  be 
temporary, should not lead to a significant increase in the lifetime PD. Therefore, they should 

20 See ECB Banking Supervision FAQs on ECB supervisory measures in reaction to the coronavirus, 20 March 2020; ECB 
Banking Supervision  letter to significant institutions “IFRS 9 in the context of the coronavirus (COVID-19) pandemic”, 1 
April 2020. 
21 See ESMA Statement on Accounting implications of the COVID-19 outbreak on the calculation of expected credit losses 
in accordance with IFRS 9, 25 March 2020. 
22 See CEAOB Statement emphasising areas that are of high importance in view of Covid-19 impact on audits of financial 
statements, 25 March 2020. 
23 See BCBS, Measures to reflect the impact of Covid-19, 3 April 2020.  
24  See  IASB  Statement  on  IFRS  9  and  Covid-19  -  Accounting  for  expected  credit  losses  applying  IFRS  9  Financial 
Instruments in the light of current uncertainty resulting from the covid-19 pandemic, 27 March 2020. 

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not reasonably lead to a significant increase of credit risk compared to expected PD over the 
next twelve months.  

In  assessing  if  a  SICR  has  occurred,  banks  should  give  sufficient  weight  to  scenarios 
based  on  long-term  stable  macro-economic  outlooks.  IFRS  9  uses  a  point-in-time 
reference (the reporting date) to assess if a SICR has occurred. Given the unique character of 
the COVID-19 crisis, it is difficult for banks to obtain sufficiently reasonable and supportable 
information  to  prepare  reliable  forward-looking  scenarios  for  determining  SICR.  Instead  of 
simply extrapolating current uncertainty over the years to come, banks should give sufficient 
weight to scenarios based on long-term stable macro-economic outlooks as recommended by 
the  ECB25.  The  ECB  has  set  out  in  a  letter  to  significant  institutions  how  they  should  use 
ECB  staff  macro-economic  projections  for  their  IFRS  9  SICR  assessment  and  ECL 
provisioning26.  

Use of moratoria and determination of modifications and SICR 

It  is  unlikely  that  temporary  relief  measures  related  to  the  COVID-19  crisis,  such  as 
private  or  statutory  moratoria,  constitute  substantial  “modifications”27  under  IFRS  9. 
Banks  should  use  quantitative  and  qualitative  judgement  and  take  into  account  the  specific 
characteristics  of  the  moratoria,  to  determine  whether  moratoria  would  result  in  a 
“modification”  under  IFRS  9  or  whether  a  modification  is  “substantial”  and  would  lead 
therefore to a de-recognition of the loan. The Commission concurs with ESMA’s statement 
that, if the support measures are temporary and related to the COVID-19 outbreak, and if the 
net  economic  value  of  the  loan  is  not  significantly  affected,  it  is  unlikely  that  the 
modifications will be substantial.  

Loans  should  not  automatically  be  considered  to  have  suffered  a  SICR  simply  due  to 
becoming subject to private or statutory moratoria. Moratoria reset the date compared to 
which the ‘days past due’ of borrowers should be calculated28. Moratoria do therefore impact 
the  30-days  rebuttable  assumption  to  consider  a  SICR,  as  well  as  the  90  days  past  due  to 
consider  a  default  of  the  borrower.  However,  loans  which  performed  well  prior  to  the 
COVID-19 crisis and which are subject to a temporary private or statutory moratorium would 
not automatically result in significantly higher expected ECL provisions under IFRS 9.  

The  statements  published  by  EBA  and  ESMA  on  25  March29  clarified  that  support 
measures do not automatically lead to a SICR under IFRS 9. In addition, the IASB issued 
on 27 March a document on the application of IFRS 9 in the context of the COVID-19 crisis 

See 

25  See  Press  release  “ECB  Banking  Supervision  provides  further  flexibility  to  banks  in  reaction  to  coronavirus”  and 
accompanying FAQs, 20 March 2020. 
26 See ECB letter to significant institutions “IFRS 9 in the context of the coronavirus (COVID-19) pandemic”, 1 April 2020. 
27 As defined in IFRS 9 paragraph 5.4.3 (Annex to Commission Regulation (EU) 2016/2067 of 22 November 2016). 
28 
default, 
https://eba.europa.eu/sites/default/documents/files/documents/10180/1597103/004d3356-a9dc-49d1-aab1-
3591f4d42cbb/Final%20Report%20on%20Guidelines%20on%20default%20definition%20(EBA-GL-2016-07).pdf. 
29 See https://eba.europa.eu/eba-provides-clarity-banks-consumers-application-prudential-framework-light-covid-19-
measures; and https://www.esma.europa.eu/sites/default/files/library/esma32-63-
951_statement_on_ifrs_9_implications_of_covid-19_related_support_measures.pdf 

application 

guidelines 

definition 

available 

EBA 

the 

the 

on 

at: 

of 

of 

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confirming  the  flexibility  in  IFRS  9  and  referring  explicitly  to  the  statements  of  the  ECB, 
EBA  and  ESMA30.  The  Commission  concurs  with  the  various  statements  from  authorities 
that, if the support measures are temporary and related to the COVID-19 crisis, it is unlikely 
that the modifications will be substantial.  

Use of loan guarantees and ECL provisioning under IFRS 9 

Loan guarantees neither increase nor reduce the default risk of the borrower, but they 
reduce the amount of credit losses if a default of the borrower actually occurs. Where a 
government  or  other  entity  provides  guarantees  for  bank  loans  to  borrowers,  banks  need  to 
take into account these loan guarantees when calculating the amount of expected credit loss. 
Consequently, the amount of expected credit losses will be lower because a part of the losses 
will be compensated by the guarantee.  

Banks  should  provide  insightful  disclosures  on  the  determination  of  expected  credit 
losses under IFRS 9, including information on the downside scenarios. Banks should also 
disclose in the notes specific accounting policies adopted in relation to the COVID-19 crisis. 
Such disclosures allow market participants to make informed assessments on the credit risk 
exposures of banks.  

External auditors are expected to take into account the statements issued by the BCBS, 
EBA31, ESMA32, the ECB33, the IASB34 and in this Communication in their audit work. 
This  means  that  they  are  expected  to  consider  banks’  judgement  and  their  use  of  the 
flexibility embedded in IFRS 9 in line with such guidance when forming their audit opinion. 
Further impacts of the COVID-19 crisis on statutory audit of financial statements in general 
are included in CEAOB’s statement35.   

Transitional arrangement in the Capital Requirements Regulation 

Banks  are  encouraged  to  implement  the  IFRS  9  transitional  arrangements  that  will 
reduce  the  impact  of  IFRS  9  ECL  provisioning  on  banks’  regulatory  capital36.  The 
Capital  Requirements  Regulation  (CRR)  contains  a  transitional  arrangement37  that  allows 
banks to add back to their Common Equity Tier 1 (CET1) capital any increase in provisions 

30 See https://cdn.ifrs.org/-/media/feature/supporting-implementation/ifrs-9/ifrs-9-ecl-and-coronavirus.pdf?la=en   
31 See EBA Statement on the application of the prudential framework regarding Default, Forbearance and IFRS9 in light of 
COVID-19  measures,  25  March  2020;  EBA  Guidelines  on  legislative  and  non-legislative  moratoria  on  loan  repayments 
applied in the light of the COVID-19 crisis, 2 April 2020. 
32 See ESMA Statement on Accounting implications of the COVID-19 outbreak on the calculation of expected credit losses 
in accordance with IFRS 9, 25 March 2020. 
33 See ECB Banking Supervision FAQs on ECB supervisory measures in reaction to the coronavirus, 20 March 2020; ECB 
Banking Supervision  letter to significant institutions “IFRS 9 in the context of the coronavirus (COVID-19) pandemic”, 1 
April 2020. 
34  See  IASB  Statement  on  IFRS  9  and  Covid-19  -  Accounting  for  expected  credit  losses  applying  IFRS  9  Financial 
Instruments in the light of current uncertainty resulting from the covid-19 pandemic, 27 March 2020. 
35 See CEAOB Statement emphasising areas that are of high importance in view of Covid-19 impact on audits of financial 
statements, 25 March 2020. 
36  The  ECB  recommends  that  all  banks  within  its  prudential  remit  use  the  transitional  arrangements  and  declared  its 
readiness to process in a timely fashion all applications received in this context, see FAQs on ECB supervisory measures in 
reaction to the coronavirus, 20 March 2020. 
37 Article 473a of the CRR. 

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due to IFRS 9 ECL accounting38. As of the second quarter of 2018, only 56% of EU banks in 
the  EU  used  the  transitional  arrangements39.  In  the  Euro  area,  only  34  banks  under  direct 
ECB supervision have used this option. Banks that opted not to use the IFRS 9 transitional 
arrangements  in  2018  could  reverse  that  decision  subject  to  prior  approval  from  their 
competent authority.   

Competent authorities should duly consider the current exceptional circumstances and 
should process in a timely fashion applications by banks to opt for the application of the 
IFRS 9 transitional arrangements provided in the CRR40. To limit the possible volatility 
of regulatory capital that may occur if the COVID-19 crisis results in a significant increase in 
ECL, the BCBS has agreed on amendments to the existing transitional arrangements. These 
amendments would allow resetting the 5-year transition period and adjusting the calibration 
of the arrangements for adding back provisions to CET1 capital. The Commission is adopting 
today a legislative proposal to implement these amendments in Union law41. 

3.  Flexibility embedded in the prudential rules on the classification of non-performing 

loans 

The  prudential  rules  on  the  classification  of  non-performing  loans  (NPLs)  can 
accommodate relief measures such as guarantees and private or statutory moratoria. In 
this regard, the EBA42 and the ECB43 have issued statements and guidance  with  the aim of 
providing  clarity  on  how  to  handle  in  a  consistent  manner  aspects  related  to  (i)  the 
classification of loans in default and (ii) the identification of forborne exposures. 

Use of guarantees and the definition of default 

The  prudential  rules  do  not  require  a  bank  to  automatically  consider  an  obligor  in 
default  when  it  calls  on  a  guarantee.  While  the  CRR44  requires  considering  whether  an 
obligor  has  become  unlikely  to  pay  without  recourse  to  a  guarantee,  making  recourse  to  a 
guarantee  in  itself  does  not  trigger  the  classification  as  defaulted45.  At  the  same  time,  a 
guarantee  does  not  preclude  that  an  obligor  is  classified  as  defaulted.  Irrespective  of  the 

38 Over a five-year period (from 1 January 2018 to 31 December 2022), the amount that banks can add back to their CET1 
capital gradually decreases. The potential impact on CET1 capital can be reduced by 70% in 2020, 50% in 2021 and 25% in 
2022. 
39  EBA  Report  “First  observations  on  the  impact  and  implementation  of  IFRS 9  by  EU  institutions”,  20  December  2018. 
This number may have changed in the meantime as banks are allowed to reverse their initial decision on whether or not to 
apply the transitional arrangement once. 
40See the EBA’s recommendation in its statement of 25 March 2020. On 20 March 2020, the ECB recommended that all 
banks within its prudential remit implement the transitional arrangements and declared its readiness to process in a timely 
fashion all applications received in this context. 
41 See below 5. Monitoring and follow-up. 
42 See EBA Statement on the application of the prudential framework regarding Default, Forbearance and IFRS9 in light of 
COVID-19  measures,  25  March  2020;  EBA  Guidelines  on  legislative  and  non-legislative  moratoria  on  loan  repayments 
applied in the light of the COVID-19 crisis, 2 April 2020. 
43 See ECB Banking Supervision FAQs on ECB supervisory measures in reaction to the coronavirus, 20 March 2020; ECB 
Banking Supervision  letter to significant institutions “IFRS 9 in the context of the coronavirus (COVID-19) pandemic”, 1 
April 2020. 
44 Article 178(1)(a) of the CRR. 
45 See also the FAQs issued by the ECB on 20 March 2020. 

8 

 
 
                                                           
existence  of  a  guarantee,  the  bank  has  to  form  an  opinion  as  to  whether  the  obligor  is  in  a 
position to meet his obligations. 

At this stage of the COVID-19 crisis, many borrowers face temporary problems to meet 
their  obligations.  When  assessing  a  borrower's  capabilities  to  meet  its  obligations,  banks 
should  take  into  account  the  long-term  prospects  of  the  borrower,  paying  attention  to 
situations where temporary problems are most likely to transform into longer-term difficulties 
and eventually lead to insolvency.  

Use of payment moratoria and the definitions of forbearance and default 

The  public  and  private  moratoria  schemes  introduced  in  response  to  the  COVID-19 
crisis  do  not  automatically  lead  to  a  reclassification  of  an  exposure  as  “forborne”, 
“performing” or “non-performing forborne”. Under the definition of forbearance46 banks 
typically  offer  specific  measures  (e.g.  to  temporarily  suspend  principal  and/or  interest 
payments of a loan) to help individual borrowers who are experiencing or likely to experience 
temporary  financial  difficulties  with  their  repayment  obligations.  If  a  forbearance  measure 
leads to a diminished financial obligation (so-called “distressed restructuring”), this indicates 
that  the  borrower  is  unlikely  to  pay  its  obligation47.  However,  the  public  and  private 
moratoria  schemes  introduced  in  response  to  the  COVID-19  crisis  have  a  predominantly 
preventive and general nature. They aim to address systemic risks and alleviate potential risks 
that may occur in the wider EU economy in the future. They are not borrower-specific, as the 
length  of  the  delays  in  payments  is  fixed  for  every  borrower  irrespective  of  the  borrower’s 
specific  financial  circumstances48.  For  these  reasons,  they  could  be  considered  as  not 
affecting  the  classification  of  the  loans  concerned.  Public  and  private  moratoria  should  be 
treated similarly to the extent they have the same purpose and similar characteristics.  

The  EBA  guidelines  of  2  April  2020  on  payment  moratoria49  specify  under  which 
conditions  public  or  private  payment  moratoria  do  not  trigger  the  classification  as 
forbearance. Where the repayment of an obligation is suspended because of a moratorium, 
the counting of the ‘days past due’50 is suspended and any delays are counted based on the 
modified  schedule  of  payments51.  While  banks  are  still  obliged  to  assess  the  obligor’s 
unlikeliness to pay on a case-by-case basis, this assessment refers to the modified schedule of 
payments,  and  where  there  are  no  concerns  in  that  regard  the  exposure  may  remain  in 
performing status.  

46 Article 47b of the CRR. 
47 Article 178(3)(d) of the CRR. 
48 See EBA Statement on the application of the prudential framework regarding Default, Forbearance and IFRS9 in light of 
COVID-19  measures,  25  March  2020;  EBA  Guidelines  on  legislative  and  non-legislative  moratoria  on  loan  repayments 
applied in the light of the COVID-19 crisis, 2 April 2020. 
49 Guidelines on legislative and non-legislative moratoria on loan repayments applied in the light of the COVID-19 crisis, 
available 
at:  https://eba.europa.eu/regulation-and-policy/credit-risk/guidelines-legislative-and-non-legislative-moratoria-
loan-repayments-applied-light-covid-19-crisis. 
50 Article 178(1)(b) of the CRR. 
51 See EBA “Statement on the application of the prudential framework regarding Default, Forbearance and IFRS9 in light of 
COVID-19  measures”,  25  March  2020,  available  at:  https://eba.europa.eu/eba-provides-clarity-banks-consumers-
application-prudential-framework-light-covid-19-measures . 

9 

 
 
                                                           
However, the EBA guidelines on payment moratoria clarify that banks should continue 
to  apply  in  a  risk-based  manner  their  usual  policies  for  assessing  unlikeliness  to  pay. 
Banks  are  expected  to  apply  a  risk-based  approach  to  assess  the  credit  risk  of  obligors 
benefitting from a payment moratorium. Even where payment moratoria are not classified as 
forbearance  measures,  banks  have  to  carefully  assess  the  credit  quality  of  their  exposures 
benefiting  from  these  measures  and  identify  any  situations  of  unlikeness  to  pay  of  obligors 
for  the  purpose  of  the  definition  of  default52.  This  means  that  banks  should  pay  particular 
attention  and  prioritise  the  assessment  of  those  obligors,  who  are  most  likely  to  experience 
payment difficulties. 

4.  Role and responsibility of the banking sector 

To be effective, the economic support and relief measures adopted by public authorities 
need  effective  transmission  channels  and  the  full  collaboration  of  the  banking  sector. 
Therefore, banks need to work with each other and together with public authorities to ensure 
there  is  adequate  liquidity  to  secure  lending  across  the  Union.  Support  measures  by  public 
authorities have channelled additional liquidity into the sector and released individual banks’ 
liquidity  buffers  to  reinforce  banks’  capacity  to  serve  the  Single  Market.  Banks  are 
responsible for keeping liquidity flowing and should continue to assume their collective duty 
to preserve interbank lending. It is therefore crucial that banks continue to lend to households 
and businesses and across the Union.  

Banks  should  accelerate  the  digital  transformation  of  their  businesses  and  remain 
vigilant as regards fraud53. In the context of social distancing imposed by public authorities, 
digital  banking  will  gain  ever  more  ground  as  a  way  to  ensure  continuity  of  banking 
services54.  

The  various  supervisory  measures  releasing  banks  temporarily  from  certain  capital, 
liquidity  and  operational  requirements  create  better  conditions  for  the  banking  sector 
to contribute to the collective effort and ensure, through its essential social and economic 
role,  the  transmission  of  public  support  measures.  The  support  measures  are  preventive  in 
nature aiming at addressing the immediate impact of the COVID-19 crisis and the difficulties 
of  foreseeing  the  likely  pace  of  recovery.  Banks,  although  substantially  recapitalised  and 
much better equipped to sustain adverse scenarios than during the financial crisis of 2008/9, 
need nonetheless to  prepare  for  a worsening economic outlook that will inevitably increase 
the risks they face and related costs. Banks have to act prudently to make sure they preserve 
or reinforce their capital base and implicitly their capacity to continue lending.  

In  the  current  exceptional  situation,  retention  of  dividends  represents  a  prudent 
adjustment  to  banks’  distribution  policies.  Supervisors  have  called  on  banks  to  refrain 

52 Article 178(1)(a) of the CRR. 
53 See EBA statement on actions to mitigate financial crime risks in the COVID-19 pandemic, 31 March 2020. 
54 See the Commission consultation on a new digital finance strategy for Europe  

10 

 
 
 
                                                           
from distributing dividends and making share buy-backs during the COVID-19 crisis55. The 
ever-growing  number  of  banks  that  have  decided  to  suspend  dividend  payments  is 
commendable  and  all  banks  in  the  Union  are  urged  to  refrain  from  making  dividend 
distributions and carrying out share buy-backs aimed at remunerating shareholders during the 
period of the COVID-19 crisis. The banking sector would thus send a strong signal that it is 
collectively committed to play its part in dealing with the emergency. 

In the current circumstances, banks are also invited to adopt a conservative approach 
to  the  payment  of  variable  remuneration.  The  EBA  and  the  Chair  of  the  ECB’s 
Supervisory Board have encouraged banks to exercise moderation regarding bonuses, and a 
number of national supervisors have already taken some actions in this regards. In the current 
context, it is of paramount importance that all resources available to banks, including those 
allocated for bonuses are, as much as possible, mobilised to reinforce banks’ robustness, their 
lending  capacity  and  so  ultimately  support  their  clients.  For  the  banks,  moderating  the 
amount  of  bonuses  paid  out  to  senior  management  and  high  earners  in  these  challenging 
times is also a way to express solidarity with those affected by the outbreak of COVID-19. 

5.  Monitoring and follow-up  

The EU has demonstrated its ability to respond to the crisis swiftly. The EBA, the ECB 
and  national  competent  authorities  have  adopted  relief  measures  to  free  banks’  operational 
resources  and  provided  guidance  for  banks  to  use  the  full  flexibility  of  the  regulatory 
framework.  

The Commission welcomes these measures and encourages banks to use this flexibility. 
These measures were taken with the clear objective of supporting banks so they can play their 
role in dealing with the COVID-19 crisis. The Commission, together with the ECB, the EBA 
and national authorities, will monitor how banks will use the flexibility and freed-up capital 
and assess to what extent the relief measures contribute to the supply of bank credit. This will 
include  monitoring  of  lending  volumes  as  well  as  lending  standards,  such  as  banks’ 
underwriting  criteria,  to  assess  whether  the  current  crisis  has  a  tightening  impact  on  the 
supply of credit.  

At  the  same  time,  the  Commission  will  continue  to  contribute  to  an  internationally 
coordinated  response  at  the  G20,  G7  and  FSB  level  including  with  the  international 
standard-setting  bodies,  such  as  the  BCBS,  the  FSB  and  the  IASB.  Thanks  to  global 
regulatory action in the wake of the 2008/2009 financial crisis, the global banking system has 
significantly  higher  levels  of  capital  and  liquidity  today  compared  to  the  beginning  of  that 
crisis.  Therefore,  banks  are  in  a  stronger  position  to  absorb  the  shock  of  the  global  health 
crisis  and  ensure  continued  financing  of  the  economy.  As  the  pandemic  is  global,  and  as 
banking operations often extend beyond national borders, the regulatory response once again 

55 See ECB Recommendation from 27 March 2020 on dividend distributions during the COVID-19 pandemic; and the EBA 
statement  from  31  March  2020  on  dividends  distribution,  share  buybacks  and  variable  remuneration.  National  competent 
authorities have equally issued similar statements. 

11 

 
 
 
                                                           
needs  to  be  coordinated  at  the  global  level.  In  this  respect,  the  G20  has  issued  at  its 
Ministerial meeting of 15 April an Action Plan providing a broad response to the COVID-19 
crisis and its economic consequences, including actions in the sphere of financial regulation 
and supervision. The Commission’s work at the global level includes (i) sharing information 
on  measures  that  the  EU  is  taking,  (ii)  contributing  to  the  global  policy  response  and  (iii) 
facilitating  the  implementation  of  globally  agreed  measures  in  the  EU.  The  Commission 
welcomes the decisions by the BCBS of 27 March56 and 3 April57, respectively, to delay the 
implementation of the final elements of the Basel  III reform by one  year, and to extend the 
transitional  arrangements  for  the  regulatory  capital  treatment  of  ECL  accounting.  The 
Commission furthermore welcomes the FSB’s announcement of 2 April58 to re-prioritise its 
work  programme  to  maximise  the  value  of  its  work  for  the  COVID-19  response.  The 
Commission plans to postpone the adoption of its legislative proposal on the final elements of 
the Basel III framework, but to still adopt in time for the outstanding Basel III standards to be 
effectively implemented in the EU by January 2023. The Commission will take into account 
the impact of the COVID-19 crisis on banks’ financial situation in the impact assessment that 
will accompany that proposal.  

Regulatory  and  supervisory  actions  have  demonstrated  that  ample  flexibility  exists  to 
promote continued lending to clients affected by the COVID-19 crisis within the limits 
of the Union’s regulatory framework. Broad changes are not advisable in this situation and 
they would rather increase banks’ operational burden as banks would need to adjust to them. 
Moreover, sudden changes to the EU’s accounting and prudential frameworks in the midst of 
a crisis could erode the public’s trust in EU banks.  

At the same time, targeted changes to specific aspects of the prudential framework are 
necessary  to  enable  banks  to  play  their  critical  role  in  supporting  people  and  the 
economy.  Therefore,  the  Commission  is  adopting,  together  with  this  Interpretative 
Communication  a  legislative  proposal59  to  implement  the  amendments  to  the  existing 
transitional  arrangements  for  ECL  accounting  and  the  deferral  of  the  new  leverage  ratio 
buffer  requirement  put  forward  by  the  BCBS  as  well  as  some  limited  changes  to  specific 
elements of the CRR to maximise banks’ capacity to absorb losses related to the COVID-19 
outbreak  and  to  continue  lending  to  businesses  and  households,  while  still  ensuring  their 
continued resilience.  

Measures  to  help  consumers  may  also  need  to  be  reinforced,  because  the  decline  in 
households’ disposable income linked to job losses or decreased economic activity is likely to 
increase  over-indebtedness  in  the  EU.  These  issues  will  be  considered  in  the  review  of  the 
Consumer  Credit  Directive  (2008/48/EC)  and  the  Mortgage  Credit  Directive  (2014/17/EU), 
foreseen in 2021. 

56 See https://www.bis.org/press/p200327.htm  
57 See https://www.bis.org/press/p200403.htm. 
58 See https://www.fsb.org/work-of-the-fsb/addressing-financial-stability-risks-of-covid-19/  
59 Proposal for a Regulation of the European Parliament and of the Council amending Regulations (EU) No 575/2013 and 
(EU) 2019/876 as regards adjustments in response to the COVID-19 pandemic, COM(2020)310 of 28.04.2020. 

12 

 
 
                                                           
Going forward, the Commission will further engage with the European financial sector 
on its role in the fight against the coronavirus and its socio-economic impacts, and the 
support  of  a  sustainable  economic  recovery.  The  response  must  be  a  European  one, 
avoiding national fragmentation and uncoordinated action. 

For  this  purpose,  the  Commission  will  launch  a  dialogue  with  the  European  financial 
sector  and  other  relevant  stakeholders  (businesses  and  consumers  representatives)  to 
explore  ideas  on  how  the  sector  should  participate  in  efforts  to  support  citizens  and 
businesses  through  the  crisis  period  and  during  the  subsequent  recovery,  based  on  best 
practices  and, going forward, facilitate a sustainable economic recovery  based on the green 
and  digital  transitions  in  the  context  of  the  forthcoming  renewed  EU  sustainable  finance 
strategy. To this end, the Commission will work closely with all relevant stakeholders in the 
financial sector to support their role and engagement in supporting European businesses and 
households.  

13