Forbearance definitions and upcoming
work
Introduction
On 21 October 2013 the EBA released two definitions as amendments of the common
EU-wide IFRS Supervisory reporting framework (FINREP)
 Definition of Forbearance (FBE)
 Definition of Non-Performing Exposures (NPE)
In the process of being endorsed by the EU Commission (first reporting: 30/09/2014)
 Definitions used on a best effort basis during the AQRs (cf EBA Recommendation and ECB 23
October Note on Comprehensive Assessment).
In parallel, the EBA has been and will be involved in other activities to promote sound
credit risk practices and appropriate implementation of accounting standards as
regards financial instruments
 Basel Committee work on problem asset classification and valuation
 Development and implementation of IFRS 9 Phase 2
EBA definitions of Forbearance and Non-performing exposures
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Why developing these definitions? (1)
Before the ITS, no EU harmonised definitions of forbearance and non-performing
exposures
 9 EU jurisdictions have their national definitions of non-performing exposures in their
supervisory framework, more or less connected to existing concepts of impairment or default
or with broader supervisory credit classification scheme – explicit definition (BG, CY, CZ, FI, IE,
PL, PT)
 11 EU jurisdictions do not have a definition of non-performing exposures in their supervisory
framework and use instead the definitions of default, impairment (IFRS or GAAP) or various
categories in supervisory or accounting classification schemes – implicit definition (AT, BE, DE,
DK, EL, FR, HU, LU, NL, SK, SI)
 Most EU jurisdictions identify in the accounting or regulatory framework exposures modified
due to difficulties of the debtor (but forbearance concept never used)
 Banks may use their own definitions of forbearance/non-performing exposures
Similar situation in EU and non-EU CESEE (2012 Vienna initiative report)
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Why developing these definitions? (2)
Following the financial and sovereign crises in the EU, concerns have arisen about
forbearance policies and non-performing exposures management across the EU
 Forbearance: concerns on potential misuse to avoid recognition of impairments
 Non-performing: concerns about under-recognition/lack of timely recognition due to
forbearance and optimistic valuation
Due to various national and bank definitions, lack of comparability of reported figures
for forbearance and non-performing exposures
 Hindered the assessment of risks/achievement of common understanding of the issue and
implementation of solving strategies by banks/supervisors (especially for cross border groups)
 Fuelled concerns in markets about asset quality in EU banks
This situation called for definitions aimed to provide convergence within the EU
around the notions of Forbearance and Non-performing exposures
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Why developing these definitions? (3)
Call for more harmonised definitions of forbearance and non-performing exposures
 ESRB: need for better and more consistent data to help supervisors ensure that forbearance is
accompanied by appropriate provisioning (September 2012)
 ESMA: statement on the definition of forbearance practices, their impact on the impairment
of financial assets and disclosures on forbearance activities (December 2012) , banks should
define the notion of NPL used in their financial statements (November 2013)
 Vienna Initiative: Efforts to harmonize NPL definition across jurisdictions would facilitate their
understanding and avoid misinterpretation of risk levels (March 2012)
To develop harmonised definitions, the existing accounting and regulatory frameworks
were useful starting points but had to be complemented
 IFRS use neither forbearance nor non-performing (except in an implementation
guidance) and tie modifications of loans to the identification of impairment
 The definitions of impairment and default are implemented differently (national
options and industry practices)
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Why developing these definitions? (4)
Definitions provide for a common framework across the EU to accommodate and
harmonize differing national practices but no change accounting and regulatory
standards
Drivers for differences for the definition of forbearance
 Name: jurisdictions/institutions use “modified”, “restructured” etc, and the definition provides
for a common name
 Practices: different transactions can be understood as forbearance in different jurisdictions
and the definition provides for various forbearance situations
 Exit: different exit practices that are harmonised by the definition
Drivers for differences for the definitions of non-performing exposures
 Entry and exit criteria: use of different past-due thresholds for different exposures, use of
qualitative criteria, use of collateral are harmonised by the definition
 Debtor vs transactions: while practices may vary, the definition sets a common approach
 Consideration of forborne exposures: identification as NPE differs in various jurisdictions
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Overview of the definitions
Performing
Non-performing
Fully perfoming
Generic criteria:
past due more than 90 days and / or unlikely
to pay
All other non-defaulted and non-impaired loans and debt
securities and off-balance sheet exposures meeting the generic
criteria
Loans and debt securities that are not past-due and
without risk of non-repayment and performing off-balance
sheet items
Performing assets past due below 90 days
Loans and debt securities between 1-30 days
past due
Forbearance
Loans and debt securities between 61-90 days
Fair value option
Impaired Fair value through other comprehensive
Loans and debt securities between 31-60 days
past due
Defaulted
Forborne loans and debt
securities (and eligible off-balance
sheet commitments)
income
performing or non-performing
Amortised cost
Refinancing
past due
Performing assets that have been renegotiated
Loans and debt securities which renegotiation or refinancing did
not qualify as forbearance
Modifications of
terms and
conditions
Other
off-balance sheet items:
Loan commitments given
Financial guarantees given (except derivatives)
Other commitments given
The definitions of Forbearance and Non-performing exposures seek to ensure
harmonisation across accounting, regulatory and business practices
EBA definitions of Forbearance and Non-performing exposures
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Definition of forbearance (1)
Forbearance measures are concessions towards a debtor facing or about to face
financial difficulties (loans, debt securities, commitments – no trading exposures)
 Modification of the terms and conditions of the contract that would not have been granted
had the debtor not been in financial difficulties (judgment in identifying of financial difficulties)
• For example more favourable terms than the previous terms of the contract or than the terms of
other debtors with a similar risk profile, use of embedded forbearance clauses
 Total or partial refinancing of an exposure that would not have been granted had the debtor
not been in financial difficulties
• For example total or partial repayment of a debt contract with the proceeds from another debt
contract
Safety nets: mandatory classification as forborne when
 The modified/refinanced contract is or would have been non-performing without modification
or refinancing or embedded forbearance clauses are used by a non-performing debtor
 Repayment is done on a non-performing contract close in time to the granting of additional
debt
 Modification lead to a total or partial cancellation through write-off
 The modified/refinanced contract is or would have been 30 days past-due (rebuttable)
EBA definitions of Forbearance and Non-performing exposures
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Definition of forbearance (2)
Forbearance measures may or may not lead to a loss upon application.
 Exposures need not being non-performing/past-due for a modification/refinancing to qualify
as forbearance when granted.
 Exposures with forbearance measures may be performing or non-performing (broader scope
than exposures currently considered as impaired or defaulted).
Classification is discontinued when some conditions are met (probation regime):
 The exposure is performing and no other exposure to the debtor is more than 30 days pastdue,
 2 years have passed since the date the exposure has been considered as performing
(probation period – separate identification of probation exposures in reporting template),
 More than insignificant repayments (principal or interests) have been made during at least half
of the probation period),
 Forbearance of a non-performing exposures (separate monitoring): stricter exit criteria out of
the non-performing category lengthen the identification period as forborne exposure (not
possible to become performing only through forbearance).
EBA definitions of Forbearance and Non-performing exposures
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Definition of forbearance (3)
EBA definitions of Forbearance and Non-performing exposures
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Definition of forbearance (4)
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Definition of forbearance (5)
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Definition of non-performing exposures (1)
A non-performing exposure is an exposure that is:
 90 days past-due (material exposure) or unlikely to be repaid in full without collateral
realisation (irrespective of any past-due amount or of the number of days past-due), or
 Impaired or defaulted according to the applicable accounting or regulatory frameworks.
 Linkage with impairment to be reviewed when IFRS 9 is endorsed
Classification as non-performing for the gross outstanding amount without
consideration of collateral (creditworthiness rather than incurred loss approach).
Scope: banking book loans, debt securities, loans commitments, financial guarantees
 Commitment: non-performing if its use would lead to an exposure unlikely to be repaid
without collateral realisation.
 Financial guarantees: non-performing when at risk of being called, in particular when the
guaranteed exposure is non-performing.
Exposure can be non-performing on an individual or debtor basis but all exposures to
a debtor are non-performing when on-balance sheet exposures more than 90 days
past-due > 20% of the on-balance sheet exposures to the debtor.
EBA definitions of Forbearance and Non-performing exposures
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Definition of non-performing exposures (2)
Exposures are considered to have ceased being non-performing when all the following
conditions are met:
 The exposure has met the exit criteria out of the impaired and defaulted categories,
 An improvement in the situation of the debtor makes the full repayment according to the
original or modified conditions likely,
 The debtor does not have any amount past-due by more than 90 days.
Exposures can stay non-performing even though they are not anymore considered as
impaired or defaulted.
Non-performing exposures that are extended forbearance measures cease being nonperforming (stricter for now than other non-performing forborne exposure):
 When forbearance does not lead to the recognition of impairment or default,
 A one-year period has passed since the extension of forbearance measures,
 There are no past-due amounts or concerns on the solvability of the debtor (the past-due or
written-off amounts have been repaid via regular payments according to the new conditions).
EBA definitions of Forbearance and Non-performing exposures
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AQRs and the definitions of FBE and NPE (1)
A common understanding of forbearance and NPE is the starting point to compare
the credit quality of portfolios across banks and countries
Definitions of Forbearance (FBE) and Non-performing exposures (NPE) were used on a
best effort basis (or simplified approach) using the core harmonisation features
Simplified approach (ECB):
 Every material exposure that is 90 days past-due even if it is not recognised as defaulted or
impaired
 Every exposure that is impaired (GAAP or IFRS) without taking collateral into consideration or
defaulted
 Exposures classified as non-performing on a transaction basis (for retail) and on a debtor basis
for non-retail
Non-SSM jurisdictions:
 Use of simplified approach for subsidiaries of SSM banks
 Use of proxies (national definitions when stricter, banks’ own definitions when close)
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AQRs and the definitions of FBE and NPE (2)
The use of the EBA definitions has allowed to:
 Draw the same line for all institutions between performing and non-performing exposures
 Compare asset quality in a homogeneous and comparable way across EU institutions
• Will improve discussions about risks and risks tackling strategies (enhancement of provisioning for
instance) in colleges as risk assets will now be identified in a similar way
• Improve starting point data of the stress tests
EBA definitions of Forbearance and Non-performing exposures
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Upcoming work – Basel activities
The EBA takes part to the Basel Committee work on the identification of problematic
loans by banks and supervisors
 “Problematic loan”: generic term to designate a loan where there is evidence of credit
deterioration so that any portion of the amounts due (principal, interests, fees, others) raise
concerns about their full collectability.
 Problematic loans can be named, defined and classified differently in different jurisdictions by
supervisors and banks alike
• Supervisory classification systems inspired from the International Institute of Finance in force in some
jurisdictions (Standard, Watch, Substandard, Doubtful and Loss) but definitions of categories vary
between jurisdictions
• Other jurisdictions do not have supervisory classification systems outside default/impaired
Study about the range of practices for the definition and use of credit classification
schemes by banks and their supervisors, and the causes and consequences of
differences
 Specific focus on “non-performing loan”, “loss”, “write-off” and “forbearance”
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Upcoming work - IFRS 9
• The EBA regularly comments on the IASB’s proposals. Financial instruments
proposals are closely followed (EBA has sent comment letters to the IASB’s
Exposure Drafts on Classification and Measurement, Impairment, General hedge
accounting and recently on the Discussion Paper on Macro-Hedging)
• The IASB has recently published IFRS9 (July 2014) which replaces the current IAS 39
• Next step: Endorsement in the EU – IASB requires the application by 1 January 2018
• One of the main aspects of IFRS 9 is the introduction of a new impairment model:
move from an “incurred” loss model to an “expected loss” model.
• It aims at
• Achieving more prudent and timely provisioning (ending the “too little, too late”
aspect of the incurred loss model under IAS 39)
• Aligning more closely the accounting for impairment on business practices
• The EBA supports the IASB’s “expected loss” model.
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Upcoming work – IASB’s Impairment model
Main aspects of the IASB’s expected loss model are:
 Applies to all financial instruments at amortised cost and debt instruments at fair value
through OCI
 Differentiates between different stages of credit deterioration:
•
For assets in stage 1 (i.e. good book): recognition of 12 month expected loss (12 month PD)
•
For assets that there has been a significant increase in credit risk, i.e. stage 2 and 3: recognition of
lifetime expected losses
 Need to consider historical, current and forward-looking information
 Some practical expedients: an entity may assume that credit risk has not increased
significantly for low credit risk assets (‘investment grade’). Rebuttable presumption that credit
risk has increased significantly for assets that are more than 30 days past due
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Upcoming work – IASB’s Impairment model
The next stage is to achieve a robust and consistent implementation of the model
 One of the criticism of the current IAS 39 model was the divergent practices in its application
 The standard may be subjective or lead to different interpretations in some areas:
•
Criteria to determine a significant increase of credit risk
•
Use of forward looking information
•
Definition of default
 Use of practical expedients facilitates the application of the model but it may lead to a delay in
the recognition of allowances
 Banks will need to start the implementation of the new “expected loss” model sufficiently in
advance
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Upcoming work – IASB’s Impairment model
Accounting and prudential Expected losses:
 The IASB notes that some entities may be able to use some of the regulatory measures as a
basis for the calculation of expected losses. However, there are some differences (e.g. point in
time versus through the cycle PDs) and, therefore, this may require some adjustments.
Interaction between the accounting Expected Losses under IFRS and the regulatory
Expected Losses under the CRR
 Treatment of Regulatory expected losses under CRR (IRB approach):
• CET1 is reduced by the negative difference between accounting allowance and regulatory EL (when
EL are higher than accounting allowance)
• Tier 2 is increased (with a cap) by the positive difference accounting allowance and regulatory EL
(when accounting allowance are higher than regulatory EL)
 Under IFRS 9, EL model allowances are expected to increase. This could result in more
circumstances where accounting allowances are higher than regulatory EL.
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Conclusion
Important step has been made in the EU with the production of harmonised
definitions of Forbearance and Non-performing exposures.
Enhanced monitoring of asset quality issues will be made possible
 Efficient valuation
 Vigilant provisioning
 Comparability of institutions and better coordination of supervisory actions
Two main axes for the EBA:
 Sound implementation of accounting standards to achieve correct identification, valuation and
impairment of assets
 Supporting harmonisation in asset quality concepts
In these two areas, cooperation at the international level is essential
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