The Bank of England has told mortgage lenders that they don’t necessarily have to write off loans if people stop paying because the coronavirus pandemic has left them unable to work.
The U.K. central bank’s Prudential Regulatory Authority published guidance on Friday clarifying that banks should exercise judgment about expected credit losses in cases where people were using state programs allowing them to skip payments. The bank issued the guidance as the Financial Conduct Authority said it was extending a mortgage holiday for pandemic-affected borrowers by three months, to Oct. 31.
- Skipping payments in these circumstances doesn’t automatically result in “a significant increase in credit risk,” for the lender, or trigger a default for accounting purposes, the central bank said.
- The bank noted that its guidance was directed to mortgage products, but added that it expected it “to be broadly relevant to similar government-endorsed schemes, and similar measures by lenders, to respond to the adverse economic impact of the virus.”
- Banks must normally set aside money for likely loan losses when credit conditions worsen, a requirement that threatens a bad debt explosion as people stop work because of the pandemic. The International Accounting Standards Board said in March that government aid meant banks didn’t necessarily have to write off debts that weren’t being paid because of the virus.