Banks in Europe and beyond could use some wiggle room in the fight against the coronavirus. The China-centred health crisis, which has spread to some 80 countries, risks creating an economic slump. Banks can help by relaxing credit terms for firms. But the relief will be more effective if regulators also ease up on recently beefed-up bad-debt rules.
Monetary easing is already underway. The US Federal Reserve cut interest rates on Tuesday, and the European Central Bank is considering offering more cheap funds to banks. These might improve lenders' margins. But they won't directly address the core issue: preventing solvent employers going bust.
Banks could collectively allow sound companies now finding themselves in difficulties, especially small businesses, to lengthen loan repayment periods or skip payments. This would temporarily hit banks' net interest income but allow clients to survive and avert a deep economic downturn. In Italy, Europe's worst-hit country, such joint steps to facilitate credit repayment have helped nearly half a million firms since 2009, the local banking association says.
Global regulators have a critical role to play. They have been tightening the definition of sour loans since the 2008 financial crisis. In Europe, the ECB has spurred a massive cleanup exercise that has halved a 1 trillion euro dud-loan mountain. That's good, but protecting growth is now a more pressing need.
Under new accounting standards for credit loss recognition, for instance, lengthening the life of a loan can push it into an underperforming category that requires more bank capital. If payment is skipped for more than 90 days, that credit is classified as non-performing, requiring even more capital. These charges would typically be between 10% and 60% of face value, bank analysts say, depending on collateral and riskiness. Meanwhile, rules due to launch in Europe next year imply that if more than 1% of credit related to a single client goes sour, the entire exposure could be treated as non-performing.
Given the emergency, global regulators may decide that a clearly timed suspension of loan payments offered to otherwise healthy companies does not count as non-performing, thus easing capital charges. They may also delay implementation of upcoming stricter norms. Some clear action is needed to prevent companies from needlessly failing.
The European Central Bank is preparing possible measures to provide liquidity to businesses hit by the economic fallout of the coronavirus outbreak, Reuters reported on March 3, citing sources familiar with the discussions.
The most prominent measure under discussion is targeted longer-term refinancing operations directed at small- and medium-sized enterprises in the 19-country euro zone, who may be hit hardest by the downturn, Reuters added.
Italian banks including Intesa Sanpaolo and UniCredit have started to apply forbearance to loans and mortgages issued to companies and families most affected by the coronavirus epidemic, which has infected some 2,500 people in Italy.
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