Katia D’Hulster
Overview paper objectives
a.
NPL definition comparison
b.
Interactions with IFRS
c.
Good practice and further work
Countries covered in the overview paper
 Host countries: Albania, Bosnia Herzegovina,
Bulgaria, Croatia, Czech Republic, Estonia,
Hungary, Georgia, Kosovo, Latvia, Lithuania,
Macedonia, Montenegro, Poland, Romania,
Serbia, Slovakia, Slovenia
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Home countries: Austria, Denmark, France,
Germany, Italy, Greece, Norway and Sweden
Basis for classification
 World Bank survey 2011-2012
 Desk review of regulation
 Expert judgment where needed
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Comments and suggestions on individual
country classifications welcome
I.
NPL definition comparison
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“..payment of principal and interest past due for
more than 90 days”
“..interest payments equal to 90 days interest or
more have been capitalized, refinanced or rolled
over..”
“…in addition, NPLs should also include those
loans with payments less than 90 days past due
that are recognized as non performing under the
national supervisory guidance. That is, evidence
exists to classify a loan as non performing even
in the absence of the 90 days past due …”
Source: Financial Soundness Indicators:
Compilation Guide
Dimensions analyzed
1. Asset classification systems
2. Defining non performing loans
3. Loan forbearance
4. Multiple loans to a single borrower
5. Collateral valuation
6. Write offs
Other dimensions
1. Exposure measurement
2. …
The majority of the 26 countries in the survey have an asset
classification system
Do you have an asset
classification system?
No,
28%
Yes,
72%
Government exposures are generally
included in the asset classification
system
Of those that have an asset
classification system, 72 % have a
system that covers government
exposures.
Asset classification systems
are more common in host
countries
14 out of the 18 countries
in the survey have an asset
classification system, while
only 4 out of the 7 home
countries have one.
Generally: five buckets and worst three buckets:
substandard, doubtful and loss are generally NPL
…but difficult to draw conclusions
90 days past due or unlikely to pay
Unlikely to pay, with or without realization of collateral?
Materiality thresholds, grace periods…
Very little guidance on exit criteria
2. Defining non performing loans
Number of days past due for
classification as substandard
other, 15% 30 days,
23%
90 days,
31%
60 days,
31%
Number of days past due for
classification as loss
other, 31%
365 days,
31%
180 days ,
38%
Number of days past due for
classification as doubtful
other, 15%
270 days,
16%
180 days,
23%
90 days ,
40%
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Generally referred to as “restructuring”
Wide variety in the definitions
Generally 2 components: change in contract
terms and financial difficulty of the borrower
“Embedded” forbearance clauses
Sometimes reduction in cash flows or loss
required
Forborne loans not always non performing
loans
Do regulations require forborne loans
to be classified as non performing ?
No , 17%
Yes , 83%
Review of credit
worthiness
45% of the surveyed
countries require a review
of the credit worthiness of
the borrower before it can
be
upgraded
to
performing exposures.
Are banks allowed to upgrade the
classification of a loan immediately
after it has been forborne ?
other , 5%
yes , 32%
no, 63%
Host countries are stricter
than home countries
10 host countries out of 15
do not allow immediate
upgrade while 2 out of 4
home
countries
allow
immediate
upgrade
after
forbearance.
Are multiple loans to a single borrower
all classified as non performing?
Not
specified,
4%
No, 22%
Yes , 74%
EBA position on product vs
customer view
The EBA proposes to assess
NPL
exposures
on
an
individual basis (transaction
approach), or when more
than 20% of the retail
borrower’s total exposure is
non performing, based on
the debtor’s approach.
Do the provisioning requirements
allow the value of collateral to be
deducted from the amount of the
loan before provisioning is applied?
Not
specified,
39%
Of those countries that consider
collateral, is there any differentiation
between prime and other collateral ?
No, 30%
Yes , 56%
Yes , 70%
No, 5%
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Some countries allow exposure upgrades
because of the existence of good quality
collateral
e.g. 120 days past due can be upgraded
into 90 days past due because of prime
collateral.
Other countries allow split of exposure into
collateralized part and uncollateralized part
e.g. collateralized part: substandard
uncollateralized part: doubtful
Do regulators require banks to write off non
performing loans after a specific time
period ?
Yes , 10%
Good practice for write offs
It is good practice to
require the Board to review
the NPL portfolio every 6
months and to decide if
exposures need to be
written off.
No, 90%
Requiring prompt write offs of fully provided and uncollectable loans
is an area where prudential supervisors and tax authorities can
provide the right incentives to banks.
II.
Prudential impact of IFRS
implementation
1.
2.
3.
4.
5.
Basel: Expected and unexpected losses
Basel vs IFRS
Provisioning
Accrued interest
Other issues when transitioning
Basel - Expected Losses
IAS 39 - Incurred losses
Anticipated
Forward looking
Trigger event
Objective evidence of impairment
One year horizon
Lifetime of the loan
Averages of the economic cycle
Or stressed conditions
Current economic conditions
Definition of “default” is
generally 90 days past due (Basel
II para 452 and 453)
Breach of contract
Economic loss
Carrying value of loan minus PV
of cash flow discounted at
effective rate
Exposure at default includes
future draws
Exposure is balance sheet
amount
Expected losses and incurred losses - overlaps
Expert judgment layer
Historical data
Segmentation
IFRS 9 from 2018
Stage 1: 12 months ECL
Stage 2: lifetime ECL
Stage 3: lifetime ECL
Relative assessment of risk
Rebuttable assumption of default at 90d past
due
Are there minimum levels of specific
provisions set by the supervisor?
No, 48%
Yes , 52%
Substandard provisioning levels
> 20%
Doubtful provisioning levels
>50%, 15%
< 20%
< 50%,
39%
50%, 46%
20%
Loss provisioning levels
< 100%, 15%
100%, 85%
Does accrued unpaid interest enter the
income
statement
whileenter
the the
loan is
Does
accrued
unpaid interest
income
statement
whileperforming?
the loan is
classified
as non
classified as non performing?
Not specif.,
Not specif.,
21%
21%
No,No,
53%53%
Yes , 26%
Yes , 26%
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How to deal with the “excess” regulatory
provisions when starting IFRS?
Asset classification systems generally
compliant with IFRS
..but regulatory provisioning may have to be
revisited
Adjust using capital ratio (Pillar 2) or
implement regulatory provisioning by
retained earnings when under-provided
III. Good practices and areas for
further work
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Include government exposures in asset
classification and provisioning framework
Require banks to clearly flag and report
forborne loans, including keeping track of the
number of forbearances for each loan
Report non performing loans using the gross
value of the loan, not amount overdue, the
value net of provisions or collateral
Include maturity extensions and embedded
forbearance clauses in the regulatory
definitions of forbearance
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Perform in depth assessment of bank’s statistical
provisioning methodologies and, where
applicable, understand the differences with the
risk inputs used for the regulatory capital
calculation
Include clear qualitative criteria in the definition
of default
Define clear criteria for regulatory provisions, not
just minimum percentages
Consider incentives to establish prompt write
offs of fully provided and uncollectable loans
…
Deeper understanding
Regional cooperation
Sharing of knowledge
Regional data collection and benchmarking
IFRS – With discounting effects
A bank extends a two year loan for 100 Euro (1) on 1 January X0. The
principal is to be repaid in two equal installments, at 31 December X0 and
X01. No commissions are taken at loan origination, thus the contractual
interest rate equals the effective interest rate.
At year-end, interest is accrued at 10% (2)
On 1 January X1, the loan is identified as impaired. The book value of the loan at
the time of impairment amounts to 110 Euro (100 principal + 10 accrued
interest). The bank assesses the recoverable amount of the loan at 66 Euro, to be
received on 31 December X1. The present value of the recoverable amount is 60
Euro (66/(1+10%)=60). The provision to be created is 50 Euro (3)(110 – 60 Euro).
At the end of the second year, the
interest accrued is 10% on the net
book value of the loan principal,
which is now 6 (60x10%).
No discounting effects
A bank extends a two year loan for 100 Euro (1) on 1 January X0. The principal
is to be repaid in two equal installments, on 31 December X0 and X1.
At year-end, interest is accrued at 10% (2)
On 1 January X1, the loan is identified as impaired. The book value of the loan at
the time of impairment amounted to 110Euro (100 principal+10 accrued interest).
The bank assesses the recoverable amount of the loan at 66 Euro, to be received
on 31 December X1. The provision to be created is 44Euro (3)(110–66 Euro).
On 31 December X1, the
interest accrued is 10% on the
net book value of the loan
principal, which is now 6.6
(66X10%).
Regulatory adjustment is required: 27.4 + 6.6 = 34
This is exactly the result IAS 39 gave, without regulatory adjustment.