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

The Basel Committee on Banking Supervision has today released the final guidance on the Prudential treatment of problem assets - definitions of non-performing exposures and forbearance.

The definitions promote harmonisation in the measurement and application of two important measures of asset quality, thereby fostering consistency in supervisory reporting.

The definition of non-performing exposures:

• introduces harmonised criteria for categorising loans and debt securities that are centred on delinquency status (90 days past due) or the unlikeliness of repayment.

• clarifies the consideration of collateral in categorising assets as non-performing.

• introduces clear rules regarding the upgrading of a non-performing exposure to performing and the interaction between forbearance and non-performing status.

The definition of forbearance:

• provides a harmonised view on the modification or refinancing of loans and debt securities that result from a borrower's financial difficulty.

• allows forborne exposures to be categorised as performing or non-performing.

• sets out criteria for discontinuing the forbearance categorisation and emphasises the need to ensure a borrower's financial soundness before the discontinuation.

These guidelines complement the existing accounting and regulatory framework for asset categorisation. They harmonise the scope, recognition criteria and level of application of both terms, promoting a better understanding of the terms, improving identification and monitoring, and promoting consistency in supervisory reporting and disclosures by banks.