6.1 The covered bond legislation reduces the valuation of loans which are more than 30 days or more than 90 days in arrears to 50% and 0% respectively. If loans for which a bank grants a payment extension have to be recorded as in arrears, what impact will this have on the covered bond valuation?

• The Royal Decree of 11 October 2012 - Koninklijk besluit betreffende de uitgifte van Belgische covered bonds door kredietinstellingen naar Belgisch recht stipulates in Article 3, § 6 that exposures which defaulted should not be included in the covered pool and according to Article 6, § 7 the coverage of these exposures is valued at 0. In addition, according to Article 6, §7 exposures which are past due for more than 30 days can only be accounted for 50% of the coverage value as determined in Article 6. The days past due should be counted based on the revised schedule of payments, resulting from the application of the moratorium. If the moratorium is applied to an exposure which is in arrears at the time the moratorium is applied, and

• only future payments and not the existing arrears are adjusted, the days past due will continue to be counted as long as these amounts remain due and unpaid
• future payments are adjusted and existing arrears are suspended, the counting of the days past due will be frozen on the day following the application of the moratorium. After the expiry of the moratorium, the counting of the days past due will be resumed.

• The mortgage and business loan payment extension charters state that a payment extension can only be obtained for future monthly repayments. As a result, (i) for a loan which is not in arrears at the time the moratorium is applied, the days past due counter will remain at zero during the payment extension period and (ii) for a loan which is in arrears at the time the moratorium is applied, the days past due will continue to be counted until the existing arrears are cleared. The valuation rules set out in Article 6 of the Royal Decree of 11 October 2012 on the issuance of Belgian covered bonds by credit institutions governed by Belgian law will be applied in accordance with this calculation of the days past due.

The days past due should be counted based on the revised schedule of payments, resulting from the application of the moratorium.

The EBA report clarifies in the answer to question 23 in the second section that the way in which the days past due are counted depends on how the schedule of payments is modified. There are three scenarios: the moratorium:

(1) changes only future payments,

(2) changes future payments and suspends repayment of existing arrears

(3) changes both future and existing arrears. 

If the exposure is already in arrears when the moratorium is applied, and

1. scenario 1 applies, the days past due will continue to be counted as long as these amounts remain due and unpaid. 
2. scenario 2 applies, the counting of the days past due will be frozen on the day following the application of the moratorium. After the expiry of the moratorium, the counting of the days past due will be resumed.
3. scenario 3 applies, it is possible that there will be no more arrears the day after the moratorium was applied (days past due = 0). The counting is resumed if the borrower is again in arrears based on the revised schedule of payments. It is possible that under scenario three there may still be arrears at the time the payment schedule is changed (e.g. the moratorium does not apply to all the borrower’s loans), in which case the days past due counter should not be set to zero.   

Institutions are still obliged to assess the debtor’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.

Accurate and timely measurement of risks is not waived by the moratorium. Hence, the normal application under IRB still applies. Losses that might appear, even under the moratorium framework, should be considered for LGD. With regard to the PD, there is no direct link with the PD and the moratorium, as new observed defaults cannot appear under the moratorium but only afterwards.

Paragraphs 11-13 of EBA Guidelines EBA/GL/2020/02 mention three prudential consequences:

• No automatic classification as a forborne exposure, unless an exposure has already been classified as forborne at the moment of the application of the payment moratorium;
• No automatic reclassification as distressed restructuring;
• The days past due are counted based on the revised schedule of payments, resulting from the application of the moratorium.

The non-legislative moratorium on business loans (cf. Febelfin charter - first version and second version) and the legislative moratoria on mortgage loans (cf. Febelfin charter - first version and second version ‑, Royal Decree no. 11 dated 22 April 2020 and Articles 60-62 of the Law of 20 December 2020) and consumer loans meet these conditions. The third Charter for business credit deferral does not, however, meet these conditions (see the last paragraph of this answer).

It should be stressed, however, that if these moratoria are applied after 31/03/2021, they will no longer meet the conditions to be considered as general moratoria, unless this date is further postponed by the EBA. In addition, condition (e) of Article 10 of the EBA Guidelines states that general moratoria cannot be applied to new loans granted after the date when the moratorium was announced. The EBA Guidelines (EBA/GL/2020/15) and in particular paragraph 14 clarify that moratoria on mortgages and corporate loans as defined in the second version of the Febelfin charters should not be considered new but as modifications of the existing moratorium. Consequently, it is not possible to grant a payment extension in the form of a general moratorium on loans falling under the guarantee schemes.

The final report of the EBA Guidelines on payment moratoria (published on 2 December 2020) introduced an additional constraint for new moratoria or extensions of existing moratoria granted after 30 September 2020. According to Article 10(bis) of the EBA Guidelines (EBA/GL/2020/15), the overall length of a payment extension granted under the moratoria referred to above should not exceed 9 months. This additional constraint, which applies at the level of each individual loan, should ensure that the EBA Guidelines on payment moratoria allow banks to address short-term liquidity issues while reducing the risk of belatedly identified or unidentified issues with borrowers’ (long-term) insolvency. 

The moratorium on leasing contracts does not meet condition (d) of paragraph 10 of the EBA Guidelines as this moratorium does not impose the same conditions for changes to the schedule of payments on all exposures subject to the moratorium, even though its application is not compulsory for obligors. On its website, the Belgian Leasing Association (Belgische Leasingvereniging/Association belge de leasing) specifies in this respect that every leasing company can decide for itself how to implement this.

The third Charter for business credit deferral allows an additional payment extension for credits that already benefited from an overall 9-month payment extension under the first and/or second Charter for business credit deferral. Therefore, this moratorium does not meet the condition set out in Article 10(a) of the EBA Guidelines (EBA/GL/2020/02 - consolidated version of 2 December 2020) and will not be considered as a general payment moratorium.