Prudential treatment of problem assets - definitions of non-performing exposures and forbearance

The Basel Committee on Banking Supervision has today issued for consultation Prudential treatment of problem assets - definitions of non-performing exposures and forbearance.

At present, banks categorise problem loans in a variety of ways and there are no consistent international standards for categorising problem loans. The definitions proposed by the Basel Committee aim to foster harmonisation in the measurement and application of two important measures of asset quality and thereby promote consistency in supervisory reporting and disclosures by banks.

(i) The definition of non-performing exposures introduces criteria for categorising loans and debt securities that are centred around delinquency status (90 days past due) or the unlikeliness of repayment. It also clarifies the consideration of collateral in categorising assets as non-performing. The definition also introduces clear rules regarding the upgrading of an exposure from "non-performing" to "performing" as well as for the interaction between non-performing status and forbearance.

(ii) Forbearance refers to concessions, such as a modification or refinancing of loans and debt securities, that are granted as a result of a counterparty's financial difficulty. The proposed definition sets out criteria for when a forborne exposure can cease being identified as such and emphasises the need to ensure a borrower's soundness before the discontinuation.

The proposed definitions complement the existing accounting and regulatory framework in relation to asset categorisation. They are intended to be used, for example, in the supervisory monitoring of a bank's asset quality as well as by banks in their credit risk management and as part of their internal credit categorisation systems.

The Committee welcomes comments from the public on all aspects of the proposals described in this document. Comments on the proposals should be uploaded here by Friday 15 July 2016. All comments will be published on the Bank for International Settlements website unless a respondent specifically requests confidential treatment.