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Basel Committee issued draft guidelines on prudential treatment of problem assets

Basel Committee issued draft guidelines on prudential treatment of problem assets

Basel Committee on Banking Supervision has revealed that there are no consistent international standards for categorising problem loans. Not only do the practices vary across jurisdictions but also in various layers of definitions within jurisdictions. The differences have been detected in the definitions used in the accounting (the concept of impairment) and regulatory frameworks (the definition of default used for modelling purposes). Moreover, many jurisdictions have established local/national supervisory definitions for asset categorisation different from accounting purposes and definition of default for prudential regulation purposes in order to achieve consistency in supervisory reporting and disclosure on asset quality. It is appropriate to remind, that the local Czech rules for the assessment of assets and asset categorization are part of the Decree 163/2014 Coll. (see Part Four, Title IV, Article 79 and the following).

In order to promote harmonisation, the Basel Committee issued on the 14 April 2016 for consultation a draft of new guidelines Prudential treatment of problem assets - definitions of non-performing exposures and forbearance. The comments on the proposal may be delivered to Basel Committee by Friday 15 July 2016.

The document introduces the definitions for two important terms – “non-performing exposures” and “forbearance”. The definition of non-performing exposures shall complement the current categories of “past due” and “defaulted” in the Basel framework. It is based uniformly on a standard 90 days past due (DPD) threshold and/or unlikeliness to pay criterion. Collateralisation plays no role in the categorisation of non-performing exposures. Forbearance is a concession granted to counterparty for reasons of financial difficulties that would not be otherwise considered by the lender. The Basel document brings the list of examples of financial difficulties and concessions. The definition of forbearance covers exposures of performing and non-performing status before the granting of forbearance measures.

The definitions should be used in the supervisory monitoring of a bank's asset quality or in the bank's credit risk management and as part of internal credit categorisation systems. They should complement (and not to replace) existing accounting definitions and existing definitions of default used in Internal Ratings-Based (IRB) approach or proposed standardised approach for credit risk.

19 May 2016