Explainer: The transatlantic divide on how banks handle coronavirus loans

LONDON (Reuters) – The United States has given banks a two-year break from provisions for loans soured by the coronavirus pandemic, seeking to keep credit flowing while borrowers struggle to stay afloat as economic activity grinds to a halt.

FILE PHOTO: The U.S. Federal Reserve Board building on Constitution Avenue, Washington, U.S., March 19, 2019. REUTERS/Leah Millis/File Photo

Europe, meanwhile, is taking a less accommodating stance as the authorities on opposite sides of the Atlantic follow different paths, in contrast with the close global cooperation aimed at rebuilding resilience in the aftermath of the financial crisis a decade ago.

The following explains the rules banks are governed by when it comes to accounting for losses and how they are being amended temporarily to ride out the coronavirus crisis.

HOW DID WE GET HERE?

In the run up to the financial crisis banks did not provision for loans until a repayment was missed or a borrower defaulted – far too late to raise capital in market meltdowns.

Taxpayers ended up bailing out lenders, prompting world leaders to call for reforms that require banks to provision for potential losses when a loan is first made, long before any problems emerge.

These provisions dent bank profits and eat into capital, making the reform unpopular with lenders even before the coronavirus sparked fresh calls for less harsh requirements.

WHAT IS THE RULE?

There is no single global rule.

The International Accounting Standards Board (IASB) writes mandatory accounting rules for more than 150 countries, including Britain and those in the European Union. The United States has its own Financial Accounting Standards Board (FASB).

Those two bodies, however, were unable to agree on a common approach to provisions for loan losses.

From January 2018, banks under the IASB’s rules have been required to make provisions in stages under a rule know as IFRS 9. Some provisions are made up front, with more added when risks increase, such as after a late repayment.

The FASB’s rule on current expected credit losses (CECL), meanwhile, requires full provisioning at the start of a loan. It entered into force for big banks last December.

WHAT’S THE RESPONSE TO CORONAVIRUS?

In a huge win for U.S. lenders, the country’s financial authorities on Friday offered banks a delay until 2022 to the capital hit from CECL. And after 2022, banks have three years to phase in the hit that would have occurred during the two-year delay.

The IASB, regulators and central banks in Europe have so far stuck with the IFRS 9 rule and merely asked banks to be “flexible” when it comes to calculating provisions.

The financial shock from the pandemic should be viewed as temporary, they say, pointing to other measures being implemented.

Regulators are granting loan repayment holidays and allowing banks to use some of their capital buffers, while governments are pumping billions of euros into economies and offering loan guarantees.

This all cuts down on provisioning, European regulators have said, though IFRS 9 remains in force.

European banking officials say the EU guidance on IFRS 9 remains conceptual while U.S. authorities have been blunter and more forceful.

Given that the U.S. rule is barely in its first year, it was easier to roll it back, whereas IFRS 9 is more established, said Philippa Kelly, a director at the ICAEW accounting body.

WRIGGLE ROOM

Despite what might be perceived in some quarters as intransigence from European authorities, they have left themselves room to manoeuvre.

“We continue to monitor the situation and the enforcement of existing flexibility to consider next steps,” a European Commission official said.

“Our objective is to provide as much operational relief as possible to banks, within the existing framework … needless to say that the Commission is participating in discussions at international level.”

WHAT DOES IT ALL MEAN?

The U.S. measures will make life easier for its banks compared with European rivals in the short term, said Nicolas Veron, senior fellow at the Bruegel economics think tank in Brussels and at the Peterson Institute for International Economics in Washington.

However, the unprecedented intervention in the United States could undermine the independence of U.S. accounting rules over time and helps to portray the EU as a guardian of multilateral bodies such as the IASB, Veron added.

It also points to fraying of global regulatory coordination that was already coming under pressure from President Trump’s America First agenda to ease regulatory burdens.

Reporting by Huw Jones; Editing by David Goodman

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