LONDON (Reuters) – Rules requiring banks to provision for losses on degraded loans should not be treated as strict and swift when it comes to dealing with the fallout from the coronavirus pandemic, the International Accounting Standards Board (IASB).

Banks have said that without relief, the rule known as IFRS 9 will lead to increased provisions for loans that go sour as business activity declines because the coronavirus shuts down large parts of economies around the world. .

Provisions directly affect profits and eat away at capital.

The IASB has echoed messages from the European Union and UK regulators that banks should exercise judgment and consider a bigger picture when applying the rule to a loan in the face of a temporary shock like the outbreak coronavirus.

“IFRS 9 requires the exercise of judgment and both requires and allows entities to adjust their approach to determining expected credit losses under different circumstances,” said the board of directors, which drafts the accounting rules used in more than 150 countries but not the United States, which has its own body.

“A number of assumptions and underlying links to how the expected credit losses have been implemented to date may no longer hold in the current environment. “

Governments have invested billions of euros in relief programs for businesses and individuals, such as ‘holidays’ on mortgage payments, to mitigate the impact of the coronavirus.

Such holidays should not automatically mean that banks have to further fund a loan due to a repayment gap, the IASB said in its statement.

Three US banking regulators, including the Federal Reserve, said on Friday that banks could ignore the capital implications of the US expected loss accounting rule for two years, going deeper than their counterparts in Europe.

Reporting by Huw Jones; Editing by Jon Boyle and Pravin Char

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