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Banks Get BOE Relief on Accounting Rules for Souring Loans (1)

March 26, 2020, 9:14 AM

The Bank of England gave banks extra flexibility on accounting rules for bad loans and urged them not to tie up money that could be used to lend through the coronavirus pandemic.

In its latest step to keep credit flowing, the BOE’s Prudential Regulation Authority said banks should keep in mind that borrowers can access huge government support and payment holidays before deciding whether loans will sour. The accounting rules require banks to set aside provisions for expected losses, using a standard that bankers around the world have warned could exacerbate the crisis.

Sam Woods, the deputy BOE governor and chief executive of the PRA, said the measures announced on Thursday “are aimed at ensuring that banks are able to continue to lend to households and businesses, support the real economy, and provide robust and consistent market disclosures.”

Lenders should consider waiving a company’s breach of a loan covenant rather than automatically treating it as a default, which would require higher provisions, the BOE said.

The BOE also said it is considering further relief and guidance on the accounting standards known as IFRS 9 and is working with counterparts around the world to agree how firms should assess the economy and its toll on borrowers.

“Some of the assumptions that we have all been making no longer hold so it is important that we tread carefully and think through things afresh and in detail, in the context of the current unprecedented situation,” Woods said.

The BOE intervention follows similar relief from the European Central Bank and European Banking Authority, which coordinates standards across the region.

“While there are still many open questions regarding where provisioning does end up, banks clearly have a good degree of flexibility, which should help protect capital adequacy at this critical time,” said John Cronin, an analyst at Goodbody in Dublin.

(Adds detail on PRA measures from second paragraph)

--With assistance from Ruth McGavin.

To contact the reporter on this story:
Silla Brush in London at sbrush@bloomberg.net

To contact the editors responsible for this story:
Ambereen Choudhury at achoudhury@bloomberg.net

Marion Dakers, James Hertling

© 2020 Bloomberg L.P. All rights reserved. Used with permission.

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