Definitions of non-performing exposures and forbearance

Definitions of non-performing exposures and forbearance

The Basel Committee has issued a consultation paper on the definitions of non-performing exposures and forbearance. Comments are due by 15 July. The purpose of this paper is straightforward – to achieve greater harmonisation in the measurement, application, supervisory reporting and Pillar 3 disclosures of these two important measures of asset quality.

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The Basel Committee has issued a consultation paper (PDF 915 KB) on the definitions of non-performing exposures and forbearance. Comments are due by 15 July.

The proposed definitions are also intended to be used in the supervisory monitoring of a bank's asset quality, and by banks in their credit risk management and as part of their internal credit categorisation systems.

Major banks in the European banking union have already been through a harmonisation process as part of the European Central Bank’s Asset Quality Review, so should be reasonably well prepared to adapt to the proposed definitions, and many countries already use similar definitions. 

Nevertheless, there are likely to be issues of detail in aligning these proposed definitions with the many related interfaces, such as the (unchanged) Basel Committee definition of default, IFRS 9 (International Financial Reporting Standard), COREP (Common Reporting), FINREP (Financial Reporting) and the European Banking Authority’s 2014 Implementing Technical Standard on Supervisory Reporting (Forbearance and non-performing exposures).

The proposed definition of non-performing exposures introduces criteria for categorising loans and debt securities based on delinquency status (90 days past due) or the unlikeliness of repayment. It clarifies the consideration of collateral in categorising assets as non-performing and introduces clear rules for upgrading an exposure from non-performing to performing – and for the interaction between non-performing status and forbearance.

The proposed definition of forbearance sets out criteria for when a forborne exposure (where concessions, such as a modification or refinancing of loans and debt securities, has been granted as a result of a counterparty's financial difficulty) can cease being identified as such, with an emphasis on  the need to ensure a borrower's soundness before discontinuation. 

Meanwhile, the European Commission is consulting (as part of the Capital Markets Union initiative) on possible changes to debt restructuring and insolvency law, in part to make it easier for banks in some countries to take action on non-performing exposures.

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