The Basel Committee on Banking Supervision has published a consultation document on how banks should treat non-performing loans under Basel III.

The consultative document (Prudential treatment of problem assets - definitions of non-performing exposures and forbearance) calls for comment by 15 July 2016. It addresses one of the three key risks in the EU financial system, as defined by the Joint Committee of the European Supervisory Authorities (ESAs).

It says that there are no consistent international standards for banks to categorise problem loans in different jurisdictions and there are significant differences in how banks identify and report their asset quality. To address this problem, the Basel Committee has proposed some definitions of two important measures of asset quality, with the aim of promoting consistency in supervisory reporting and disclosures by banks. The committee's proposed definitions are as follows:

(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.

According to the Basel Committee's statement, the proposed definitions 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.

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CTMfile Take: This directly affects bank loans to corporates so treasurers would be well advised to read up on these proposed definitions.