A major anti-crisis measure agreed at the European level at the outbreak of the pandemic was the possibility of claiming a moratorium on the repayment of loans raised with financial institutions by businesses and individuals, under more favourable regulatory treatment for banks.
In everyday circumstances a loan moratorium is an ordinary measure that may be agreed between a bank and a customer who is temporarily unable to repay a loan. An agreement of this type gives a borrower who for temporary reasons is unable to regularly repay credit liabilities the chance to extend or postpone the repayment of the loan. At the same time it ensures that the bank receives repayment of the loan, albeit over a slightly longer time horizon. In light of the increased risks in connection with individual exposures, banks are required to appropriately reclassify customers (and to create additional impairments and provisions as necessary), which entails a decline in their available capital. When the loan is repaid or begins to be repaid normally, the effect on capital is merely temporary.
The essence of the anti-crisis measure that was agreed at European level within the framework of the European Banking Authority (EBA) (of which Banka Slovenije is a member) is that while the measure is in force (until the end of November of this year), banks are exempted from the requirement to create impairments and provisions for approved moratoria. The purpose of the measure is therefore to retain bank capital amid awareness of the temporary nature of the shock: because banks are not using their capital to create impairments and provisions for approved moratoria, they can earmark it for new lending to businesses and households, thereby contributing to the economic recovery.
In its anti-crisis packages adopted last year, the Slovenian government followed the EBA guidance. The Act on Emergency Measures to Assist in Mitigating the Consequences of the Second Wave of the Covid-19 Epidemic (the ZIUPOPDVE or PKP7) made it mandatory for banks to approve loan moratoria. As stated, banks are not required to create additional impairments and provisions for the approved moratoria. Applications for a loan moratorium may be submitted until 26 February 2021.
It should however be emphasised that allowing loan moratoria under more favourable regulatory requirements is, like other such measures, fit only for addressing temporary liquidity difficulties caused by an emergency. It is not a viable long-term solution that can resolve firms’ solvency difficulties, or individuals’ sustained inability to make loan repayments. Should the measure remain in force for too long, the build-up of non-performing claims at banks could threaten the stability of the entire banking system, and also hinder borrowers in making debt repayments. When a borrower’s financial difficulties are longer-term in nature, it is therefore necessary to take a different, more individually-tailored approach to restructuring financial liabilities, and simultaneously recognising the increased risks on bank balance sheets (impairments and provisions, capital).
A decision was therefore taken in November of last year under the aegis of the EBA that after being extended once, the measure should expire at the end of February, which means that the final moratoria approved under the measure will expire in November of this year.
Banka Slovenije’s assessment is that the measure has achieved its purpose in Slovenia, having aided borrowers whose difficulties are limited to the time of the crisis, while also helping to maintain relatively high capital adequacy at banks. The bank capital figures show that the total capital ratio increased over 2020 to stand at 20.0% at the end of the year, above the euro area average.
Banks will still have the possibility of agreeing a loan moratorium with a borrower on an individual basis even after the current measure expires. Our expectation is that banks will provide individual treatment for the customers hit longest by the crisis, and will work with them to find appropriate solutions for restructuring their loans within the framework of the ordinary legal possibilities and regulatory treatment. Ultimately this treatment by banks is also made possible by their adequate capital levels.
Here it should be reiterated that all solutions that were and still are in effect in Slovenia are comparable to the arrangements applying in other euro area countries. This has ensured that banks operating in Slovenia and their customers enjoy a level playing field with those elsewhere in the euro area. This is a principle that Banka Slovenije will follow in the future.
Banka Slovenije therefore expects banks to take an active approach to any difficulties faced by their customers. In so doing they can draw on the experience of the previous economic and financial crisis, when certain approaches were developed and established that would be of great relevance again today.