Bank of England announces supervisory and prudential policy measures to address the challenges of Covid-19

Today the Bank of England made some important announcements this morning, impacting a number of areas.

Cancellation of 2020 annual stress test (ACS) and postponement of liquidity and climate risk in relation to biennial exploratory scenario (BES) and Basel 3 IRB model changes

SUMMARY

The 8 major UK banks and building societies will no longer have to complete the ACS, this is not a postponement, this is a cancellation. The liquidity and climate risk exercises are postponed until further notice.

In addition, there are delays in the implementation of the proposals related to the Definition of Default, Probability of Default, Loss Given Default estimation, and ‘hybrid’ IRB models to 1 January 2022.

IMPACT

The rationale is clear, it’s so Bank’s can focus on supporting UK households and businesses, meaning the attention must be given to getting money out the door to businesses and implementing sympathetic collections strategies.

With regards to the IRB changes, many firms are well underway with development and will have to consider their capacity to continue, given other more immediate priorities, understanding that the new deadline does not necessarily ‘buy more time’. Stopping projects now could result in requiring complete redevelopment when they come to be looked at again, which is unlikely to be desirable for any institution.

IFRS 9 UPDATE

SUMMARY

The PRA have stated that ‘forward-looking information used to incorporate the impact of Covid-19 on borrowers into the expected credit loss (ECL) estimate needs to be both reasonable and supportable for the purposes of IFRS 9’, given the new and evolving nature of the crisis it is unlikely that the information available today meets that criteria and any forecasts should at present reflect the expected temporary shock.

There has also been a clarification that Payment Holidays (PH) for mortgages should not ‘all things being equal’ be an indication of Stage 2.

RATIONALE

Although Covid-19 has the potential to impact finances of UK households and businesses, the Government, the BoE and Banks are working closely together to limit this impact through updates to Fiscal policy, Monetary policy and Customer Treatments. If these work in unison, it has the potential to limit defaults to zero and assuming the shock is temporary Banks could already be seeing the recovery of individual assets in their forecasts.

IMPACT

Although the direction on PH has been focused on mortgages only at the moment, given the evolving nature, thought will have to be given to other lending products. Consumers and businesses will still need access to leased vehicles (nurses and teachers to get to work and delivery companies to distribute food) and consumers access to funds to buy food and Bank’s will have to consider addressing those needs. Unlike in GFC (2007-2008) the government is providing more support to consumers and businesses and in some cases, directly utilising infrastructure Banks have in place. As a result of this and by employing careful consideration on customer treatment, Bank’s have an opportunity to really support the nation in trying times.

It will be important for banks to understand customer’s evolving situation and record this systematically throughout the coming months. This will involve capturing customer’s reasons for needing a payment holiday, identifying if payment holiday is the optimal outcome and advising customers appropriately. It will also enable enhanced triage when considering how to exit customers from payment holidays and other forbearance.

If you have any questions, please contact Phil at phillip.dransfield@4-most.co.uk