The announcement of an Italy-wide suspension on debt repayments has triggered new concern about Italian banks’ revenues and capital, including whether they will need to reclassify borrowers as higher-risk.
On Tuesday, the morning after Italy announced a national quarantine, deputy economy minister Laura Castelli told local radio station that a payment holiday would apply to residential mortgage borrowers throughout the country.
On Sunday, the Italian Banking Association (ABI) had also unveiled an agreement with local trade bodies to offer debt moratoria to small and medium-sized enterprises (SMEs) affected by the coronavirus.
Industry sources say the authorities in Italy and elsewhere in Europe are wary of triggering another banking crisis and could design the payment holidays to help the banks.
Hugo Cruz, banks analyst at KBW, even compares it to the US cash-for-clunkers programme to assist carmakers after the 2008 financial crisis.
The ABI and trade bodies are also pushing for more supervisory tolerance on provisioning to go alongside the SME moratorium. A new European Central Bank (ECB) calendar for provisioning of non-performing loans (NPLs) has previously been a source of some anger in Italy.
Bankers in Italy add they do not expect that a moratorium on household or corporate debt would automatically result in the borrower being classed as non-performing.
The hope is that the government will further offset the economic damage of the coronavirus by offering state guarantees on forborne loans. This could go hand-in-hand with a new and more attractive targeted longer-term refinancing operation (TLTRO) from the ECB
Elsewhere in Europe, too, there is a rising debate about regulatory forbearance in the banking sector, as a means to prevent the economic downturn triggered by the coronavirus from turning into a financial crisis.
According to reports, officials in Germany are discussing the possibility of alleviating risk-weighted asset (RWA) inflation required for rises in non-performing assets under the new IFRS 9 accounting rules.
Meanwhile, in France, finance minister Bruno Le Maire has suggested banks should have longer than the normal 90 days of non-payment before they have to classify a loan as non-performing.